SEC proposes rules on shareholder approval of executive compensation, golden parachute payments

Corporate Governance Alert


The SEC has proposed rules to implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) relating to shareholder approval of executive compensation and “golden parachute” compensation arrangements. The SEC’s release proposing the new rules can be found here.

The proposed rules, announced last week, require companies, pursuant to Section 951 of the Act,  to seek shareholder approval of a non-binding advisory resolution to “approve the compensation of executives, as disclosed pursuant to” Item 402 of Regulation S-K, not less frequently than once every three years, and a separate nonbinding advisory resolution on the frequency of that vote (every one, two or three years) at least once every six years.

The new rules also require companies to provide a non-binding advisory vote on compensation paid to named executive officers in connection with an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all of the company’s assets in a business combination transaction, and provide additional disclosure requirements relating to golden parachute compensation arrangements in disclosure documents relating to such transactions. The deadline for submitting comments to the SEC on the proposed rules is November 18, 2010.

Mandatory “say-on-pay” on compensation of executives

Both the initial shareholder vote on the compensation of executives and the initial vote on the frequency of votes on executive compensation must be included in proxy statements relating to the company’s first annual or other meeting of the shareholders occurring on or after January 21, 2011, whether or not the SEC has adopted the proposed rules. Note that any proxy statement, whether in preliminary or definitive form, for meetings occurring after this date, must include these proposals.

Proposed Rule 14a-21(a) would require companies to provide a separate shareholder advisory vote in proxy statements to approve the compensation of executives. The shareholder vote on executive compensation is only required when proxies are solicited for meetings for which the related proxy statement is required to include executive compensation disclosure. Shareholders would vote to approve the compensation of named executive officers, as such compensation is disclosed in Item 402 of Regulation S-K, “including the Compensation Discussion and Analysis (the ’CD&A’), the compensation tables and other narrative executive compensation disclosures required by Item 402.” The proposed rule does not require companies to use any specific language or form of resolution to be voted on, but the SEC is soliciting comment on whether specific language should be mandated. In any case, the shareholder vote must “relate to all executive compensation disclosure set forth pursuant to Item 402 of Regulation S-K,” not simply to compensation policies and procedures or some other subject matter.  Compensation of directors and the disclosures relating to the company’s compensation policies and practices as they relate to risk management would not be subject to the shareholder advisory vote, except to the extent the company discloses risk considerations for executive compensation in the CD&A.

The shareholder vote for smaller reporting companies that are not required to include a CD&A, would be to approve the compensation of the named executive officers as disclosed under Items 402(m) through (q) applicable to such companies.  Thus, the proposed rules would not alter the existing scaled disclosure for smaller reporting companies.

The proposed rules also require that companies disclose in their CD&A whether they have considered the results of previous say-on-pay votes, and, if so, how they have considered such results in determining compensation policies and decisions.

Frequency of the vote

Under proposed Rule 14a-21(b), companies would be required to provide the separate shareholder vote on the frequency of the say-on-pay vote in proxy statements for the first annual or other such meeting of shareholders occurring on or after January 21, 2011.  Pursuant to the rule, shareholders must be given the choice of whether the shareholder vote on executive compensation will occur every one, two or three years, or to abstain from voting on the matter.  The staff noted that it would expect that the board of directors would make a recommendation as to how shareholders should vote on the frequency of shareholder votes on executive compensation, but if the board does make such a recommendation, the company must make clear that the vote is for the four choices (every one, two or three years, or abstain) and not on the board’s recommendation.

Because the shareholder vote on frequency is advisory and non-binding, the SEC has also proposed to require a company to disclose its decision regarding how frequently it will conduct shareholder advisory votes on executive compensation, in the Form 10-Q or Form 10-K covering the period in which the advisory vote is taken.  The purpose of this disclosure is to notify shareholders on a timely basis whether the company’s determination on frequency will follow the results of the shareholder vote on that issue.

The staff has also proposed amendments to Rule 14a-4, which provides requirements as to the form of proxy, to require companies to present four choices to their shareholders.  The rule will permit proxy cards to reflect the choice of one, two or three or abstain, for the vote on frequency of say-on-pay proposals.  The vote will be determined on a plurality of the votes cast. The staff has requested comment on whether transfer agents and data processing firms will be able to accommodate four choices for a single line item on a proxy card and to advise about technical and processing difficulties that may arise.  The comments in response to these questions will provide information about the feasibility of this set of rules, which are still subject to implementation issues that are not yet resolved. 

As a transition matter, the staff noted that they would not object if, in the period prior to the adoption of final rules,  the form of proxy for a shareholder vote on frequency of say-on-pay votes provides a means by which the shareholder can specify by boxes a choice among one, two or three years or abstain, despite the current requirements of Rule 14a-4. More importantly, the staff has advised that if proxy service providers are not able to reprogram their systems to enable shareholders to vote among the four choices, the staff will not object if the form of proxy provides a means for a shareholder to “specify by boxes a choice among 1, 2 or 3 years and proxies are not voted on the frequency of the say-on-pay votes matter in the event the [shareholder] does not select a choice among 1, 2, or 3 years.”  This interim position will need to be interpreted by proxy service providers and transfer agents, and we expect the comment responses will provide greater clarity about the way a proxy card will be set up to handle this vote.

Also, the SEC has proposed an amendment of Rule 14a-8 to permit the exclusion of a shareholder proposal that would provide a say-on-pay vote or seeks future say-on-pay votes or relates to the frequency of say-on-pay votes, so long as the company adopts a policy on the frequency of say-on-pay votes consistent with the plurality vote cast in the most recent vote in accordance with proposed Rule 14a-21(b).

Preliminary proxy statement requirements

Because the shareholder vote on executive compensation and the shareholder vote on the frequency of such shareholder votes would be required for all companies, the SEC views them as similar to the other items that do not require a preliminary filing of the proxy statement, such as election of directors and the ratification of a company’s audit firm. As a result, under the proposed rules votes on executive compensation and the frequency of shareholder votes on executive compensation will not trigger a preliminary filing.  The SEC has indicated in a section dealing with transition matters that until the SEC takes final action on the proposed rules,  it “will not object” if companies do not file proxy materials in preliminary form if the only matter requiring such a filing would be the say-on-pay and frequency of say-on-pay votes.  Without such a transition provision, all companies would have been required under Rule 14a-6 to file preliminary proxy materials for the annual meeting proxy statements, since these votes are not listed among the exceptions to the preliminary proxy filing requirement, so this staff position provides welcome interim relief.

Broker discretionary voting

Similar to the recent changes eliminating broker discretionary voting in the election of directors, broker discretionary voting of uninstructed shares would not be permitted for a shareholder vote on executive compensation or a shareholder vote on the frequency of the shareholder vote on executive compensation.  Amendments to the exchange rules to reflect this requirement of the Act are pending.

Golden parachute compensation arrangements

The SEC has proposed new Item 402(t) of Regulation S-K to require disclosure with respect to golden parachute compensation arrangements between a target company conducting a solicitation and its named executive officers in connection with an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all assets. In addition, disclosure of agreements or understandings between the acquiring company and the named executive officers of the target company is also required.  Item 402(t) is designed to implement the requirements of new Exchange Act Section 14A(b)(1).  Unlike the say-on-pay and say-on-frequency votes, these provisions will not take effect until the SEC rules are finally adopted.

Disclosure of golden parachute arrangements for named executive officers would be required in both tabular and narrative formats. Here is the proposed golden parachute compensation table:

Golden Parachute Compensation


Cash ($)

Equity ($)

Pension/ NQDC ($)

Perquisites/ Benefits ($)

Tax Reimbursement ($)

Other ($)

Total ($)









































The table presents quantitative disclosure of the individual elements of compensation that an executive would receive that are based on or otherwise related to the change-of-control transaction, and the total for each named executive officer.  Elements to be disclosed in the table should include:

  • any cash severance payment
  • the dollar value of accelerated stock awards, in-the-money option awards for which vesting would be accelerated and payments in cancellation of stock and option awards
  • pension and nonqualified deferred compensation benefit enhancements
  • perquisites and other personal benefits and health and welfare benefits
  • tax reimbursements, and
  • other benefits 

The table would require footnote identification of each separate form of compensation reported, such as base salary, bonus and pro-rata non-equity incentive plan compensation payments for the amount reported in the Cash column.  The amounts attributable to “single-trigger” arrangements and amounts attributable to “double-trigger” arrangements would also be separately disclosed in footnotes to the table. Dollar amounts based on company stock prices in the table are to be based on the closing price per share as of the latest practicable date when this disclosure is included in a proxy statement soliciting approval of a merger or similar transaction. 

The proposed amendments would require disclosure of golden parachute payments whether the transaction is structured as merger, an acquisition, a Rule 13e-3 going-private transaction or a tender offer. However, the requirement to obtain shareholder approval of such arrangements would only apply to situations in which shareholders are asked to approve an acquisition, merger, consolidation or sale of the company’s assets.  The voting requirement would not be extended to transactions in which a vote of shareholders is not required, such as a tender offer; however, the bidder in a third-party tender offer would be required to provide the disclosure about a target’s golden parachute arrangements, but only to the extent the bidder knows about such arrangements, after making reasonable inquiry.  This is important, because bidders in non-negotiated transactions may not have current or complete information about these arrangements.  In light of the current frequent use of the tender offer structure in negotiated cash-acquisition transactions, prospective buyers should be cognizant of this new proposed disclosure requirement.  The proposed rules also include an exception to the disclosure obligation with respect to agreements with senior management of foreign private issuers where the target or acquirer is a foreign private issuer.

Companies would not be required to include a separate shareholder vote on golden parachute payments if that compensation had been included in the executive compensation disclosure that was subject to a prior say-on-pay vote of shareholders.  As a result, some companies may voluntarily include Item 402(t) disclosure with their other executive compensation disclosure in annual meeting proxy statements, so that this exception would be available in the event a subsequent merger or acquisition transaction is consummated.  Note, however, that this exception would be available only to the extent that the same golden parachute arrangements previously subject to an annual meeting shareholder vote remain in effect and the terms of those arrangements have not been modified.  Thus, under the proposed rules, only new golden parachute arrangements, and any revisions to golden parachute arrangements that were subject to a prior shareholder vote, would be subject to the separate merger proxy shareholder vote requirement.  Two separate tables would be required in this case, one disclosing all golden parachute compensation and the other disclosing only the new arrangements. 

In the event that a company voluntarily includes the new Item 402(t) disclosure in its annual meeting proxy statement, it would also be satisfying the Item 402(j) disclosure otherwise required in an annual meeting proxy statement with respect to change of control arrangements. The company would still be required to provide Item 402(j) disclosure about payments made to named executive officers in other situations, such as upon termination of employment.  Also, note that the tabular Item 402(t) disclosure would still be required in the proxy statement or tender offer disclosure documents for the change of control transaction; thus, just the advisory vote would be avoided on the compensation previously disclosed and subjected to the say-on-pay vote.  In the event that the Item 402(t) disclosure is included in an annual meeting proxy statement, the amounts disclosed are to be based on the closing market price per share on the last business day of the company’s last completed fiscal year, like the disclosure in Item 402(j), rather than the closing price at the latest practicable date, as required in the merger proxy. 

The SEC is also proposing disclosure of golden parachute compensation arrangements between the acquiring company and the named executive officers of the target, in order to provide the full scope of golden parachute compensation applicable to the transaction. However, proposed Rule 14a-21(c) would only require a separate shareholder advisory vote on such agreements with the acquiring company if the acquiring company is soliciting proxies to approve the merger, because that is what new Exchange Act Section 14A(b)(1) requires.  The SEC is requiring disclosure beyond what is required to be subject to a vote under Section 14A(b)(1) because it believes shareholders may find disclosure about any golden parachute compensation arrangements between the acquiring company and the named executive officers of the target informative to their voting decisions regarding the transaction.  In a case where such disclosure is required, however, companies are required to clarify whether these agreements are included in the shareholder advisory vote, providing a separate table of all agreements subject to the shareholder advisory vote, and could voluntarily subject these arrangements to such vote.  Note also that Item 402(t) would not require disclosure and quantification of compensation from “bona fide post-transaction employment agreements to be entered into in connection with” the acquisition transaction, because the staff does not view these future employment arrangements as compensation that is “based on or otherwise relates to” the transaction.  Information about those agreements is however subject to disclosure under Item 5(a) of Schedule 14A to the extent the agreement constitutes a “substantial interest” in the matter being acted on.  See also Item 5(b)(xii).  The SEC is seeking comment on whether to require any disclosure of employment agreements with the acquiring company for services to be performed in the future. 

The proposed rules would apply the disclosure requirements of new Item 402(t) to smaller reporting companies.

Non-binding advisory vote: proposed new Item 24

As part of the proposed rulemaking, the SEC has also proposed a new Item 24 to Schedule 14A.  Item 24 will require companies to briefly explain the general effect of the votes on say-on-pay, say-on-frequency and on golden parachute arrangements, such as whether the vote is non-binding.  The SEC is requiring this additional disclosure so that information about the advisory nature of the vote is available to shareholders before they vote.


The proposed rules provide important guidance that will permit companies to satisfy their existing obligations regarding say-on-pay votes and say-on-frequency votes.  In addition, the new rules provide significant new disclosure requirements relating to golden parachute arrangements, although these will be mandatory only in the event a company is proposing a merger, or similar transaction. 

This overview of the rules touches on the highlights of the guidance.  To better understanding the details of the evolving rules and their impact on your company, please contact:

Christopher B. Edwards

Sanjay Shirodkar

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