SEC Releases Proposed Rules on Say-on-Pay, Say-on-Frequency and Say-on-Parachutes

On October 18, 2010, the SEC released proposed rules on "Shareholder Approval of Executive Compensation and Golden Parachute Compensation" which address three separate shareholder votes mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act for annual meetings of shareholders conducted on or after January 21, 2011.

Each of the three votes, (1) Say-on-Pay, (2) Say-on-Frequency and (3) Say-on-Parachutes, would be advisory and would apply to all U.S. public companies, including smaller reporting companies.  Say-on-Parachutes votes would apply only to proxy statements for meetings where shareholders are asked to approve a merger or other extraordinary transaction.  Neither the Say-on-Pay nor Say-on-Frequency votes would require companies to file preliminary proxy materials.  While companies would be able to elect to make any vote binding, all companies would have to explain any effects of the vote.

Also, the proposal would permit companies to exclude a Say-on-Pay or Say-on-Frequency shareholder vote if they have adopted a Say-on-Pay or Say-on-Frequency policy consistent with what was favored by a plurality of the votes cast in the most recent Say-on-Pay or Say-on-Frequency vote.  Additionally, because each of Say-on-Pay, Say-on-Frequency and Say-on-Parachutes would be considered an executive compensation matter, brokers will not be able to cast discretionary votes on these items.

The proposal would require companies to conduct a non-binding shareholder vote to approve the compensation of executives. The compensation to be approved would have to be disclosed in Compensation Discussion and Analysis (for all companies except smaller reporting companies), compensation tables, and other executive compensation disclosures in the company’s 2011 proxy materials.

The proposal also would require companies to allow shareholders to vote on how often they would like to cast a Say-on-Pay vote, namely: every year, every other year, or once every three years. Companies would be required to conduct this vote at their 2011 meetings and at least once every six years thereafter.  Companies would also be permitted to include their recommendation with respect to frequency.

In connection with this vote, companies must include in the merger proxy materials narrative and tabular disclosure regarding all transaction-related compensation arrangements between the target and acquiring corporations and their named executive officers.

Companies that have previously disclosed such arrangements in their annual proxy materials would not be required to hold this Say-on-Parachutes vote so long as their previous disclosure meets all of the new requirements, which are substantially more detailed than the existing compensation disclosure requirements with respect to potential payments upon termination or change-in-control.


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