SEC’s Proposed Rules on Say on Pay and Golden Parachutes Limit Flexibility, Expand Disclosure

November 12, 2010

The SEC’s proposed rules implementing shareholder votes under Dodd-Frank go beyond the statutory requirements and make the “frequency vote” effectively binding on companies that seek to minimize shareholder resolutions.  The say on pay requirement takes effect on January 21, 2011, regardless of whether the SEC has finalized implementing regulations. The Commission proposed rules on October 18, with a view toward finalizing the rules by the end of this year.  However, the Commission indicated that the new disclosures and the shareholder vote on “golden parachute” arrangements in merger transactions will not take effect until the Commission’s rules are final.  The rules require:

  • disclosure in the Compensation Discussion and Analysis of whether, and if so, how company compensation policies and decisions have taken into account the results of say on pay votes, regardless of vote outcome;
  • the advisory shareholder “frequency vote” to be a multiple choice vote that includes four alternatives – holding a say on pay vote every 1, 2, or 3 years, or abstain;
  • implementation of the frequency of say on pay votes recommended by shareholders, even though the frequency vote is nonbinding under the statute, if the company wants to exclude shareholder resolutions related to say on pay votes;
  • companies to disclose their chosen frequency of say on pay votes for 2012 and beyond in the 10 Q following the company’s 2011 annual meeting to put shareholders on notice of whether they can file shareholder resolutions; and
  • more detailed tabular disclosure of change-in-control payments in a merger proxy statement beyond the current disclosures for termination payments.

The Center On Executive Compensation will be filing comments with the SEC addressing these issues by the November 18 deadline based on the input of its SEC Disclosure Working Group.