ON Securities : Securities Lawyer & Attorney for Corporate Governance & Executive Compensation Matters

Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (848-page PDF) requires that any public company, at its first shareholders meeting on or after January 21, 2011, hold two shareholder votes:

• a shareholder advisory (non-binding) vote on the executive compensation disclosed in the proxy statement (Say-on-Pay), which must be held no less frequently than once every three years, and
• a separate resolution “to determine whether Say-on-Pay votes will occur every 1, 2 or 3 years”.

The latter resolution has been called the Say-on-Pay frequency vote, or “Say When on Pay”. The Say When on Pay vote must be held no less frequently than once every 6 years. The SEC may adopt rules to exempt certain companies (including smaller companies) from these requirements.

The mechanics of implementing of the Say-on-Pay requirement are pretty clear. The shareholders get a yes-or-no advisory vote on all executive compensation disclosed in the proxy statement, which includes the compensation discussion and analysis section and the compensation tables.

The Say When on Pay vote raises a lot more mechanical issues and has created fierce debate among corporate lawyers. For example:

• The language of the statute requires that all three choices (i.e., one, two or three years) be presented to shareholders. Can a vote with three choices (as opposed to a vote for or against a resolution) be accomplished consistent with state corporate law and the bylaws of particular companies?
• If all three choices are presented, no one choice may get a majority. Can the bylaws specify  a plurality vote, just as director elections are decided?
• Rule 14a-4(b) under the Securities Exchange Act of 1934 requires that a public company proxy card allow shareholders to specify approval, disapproval or an abstention with respect to each matter being voted on, other than elections to office. Does this rule prohibit a single vote on all three choices and if so, will the SEC amend the rule to allow for such a vote?
• Can a company consistent with the Act adopt a “default” frequency for Say-on-Pay in its bylaws (e.g., every three years) and provide that this frequency can only be overridden by a majority vote for one of the other alternatives?

The SEC may clarify the situation, but public companies should start reviewing their bylaws and state corporate law and think about how to deal with the Say When on Pay vote. As the SEC weighs in or there are further developments, I will report them here. Companies should also consider what frequency they are going to recommend for Say-on-Pay votes – annual, biennial or triennial. This issue needs to be considered carefully, as I will discuss in a future post.

Of course, there could be more interesting ways to decide among choices of “1, 2 or 3” than to have a shareholder vote. If only annual meetings could be held on the old “Let’s Make a Deal” set, with costumed shareholders being given the chance to select Door Number 1, 2 or 3 to decide Say When on Pay:

You don’t need to watch the whole seven minute video to get the idea – but if you don’t, you’ll miss some great 1970s-era prizes, like a refrigerator with a built-in tape player!
 

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On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (final text of the Act, 848-page PDF). As previously reported, the Act includes numerous governance and compensation provisions that will affect all public companies, as well as comprehensive reform of the nation’s financial system.

I have updated the ON Securities Cheat Sheet (PDF) to reflect the final provisions of the Dodd-Frank Act. The front page of the Cheat Sheet now includes a complete summary of the governance and compensation provisions of the Act. For each provision summarized, the Cheat Sheet provides the section number for reference to the full section.

The back page of the Cheat Sheet includes a summary of some other provisions of the Dodd-Frank Act that affect many public companies or otherwise have an impact on the securities laws, including a whistleblower “bounty” program and an exemption, effective immediately, for smaller issuers from the attestation report requirements under Section 404(b) of the Sarbanes-Oxley Act. The back page also summarizes the SEC’s previously proposed proxy access rules, as well as some of the important changes in the SEC compensation and corporate governance rules adopted in 2009.

An up-to-date version of the Cheat Sheet will always be available by clicking on the box at the right side of the ON Securities Blog home page. I’ll continue to update the document to reflect the waves of SEC rulemaking that we can expect over the next few months. If you have any suggestions for ways to make the Cheat Sheet more useful or for other resources that might be helpful, please post a comment below or send me an e-mail.

Over the next few weeks, I will be posting on the various new requirements of the Act and the steps public companies should be taking to prepare for the new requirements. 

Note: If you want to print out the pages of the Act that contain the governance and compensation provisions, print out pages 466-496 and 524-540 in the PDF file.

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The Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act today and sent it to President Obama for his signature, expected next week. The Act includes numerous governance and compensation provisions that will affect all public companies, as well as comprehensive reform of the nation’s financial system.

In the Wall Street Journal, Kara Scannell reported this week that the SEC is gearing up for a heavy dose of rulemaking. In a story titled “SEC Enters Overdrive to Prepare for Overhaul” (subscription required for entire article), Scannell reported that the SEC is “on a tight deadline to write more than 90 new rules and complete nearly 20 studies.”

The story reports that the rulemaking process will be “burdensome” and will delay other initiatives the SEC considers important. For example, the SEC staff was engaged in a comprehensive review of public companies’ disclosure requirements, a process that will likely have to be put on hold. However, SEC officials say that they “remain committed” to adopt the proposed proxy access rules, as well as dozens of rules for which the timing is mandated by the Act. To prepare for the rulemaking, “ . . . the SEC’s divisions have assembled teams to tackle the various issues, and 50 to 100 staffers are involved in the preparations.”

The situation reminds me of the time after passage of the Sarbanes-Oxley Act of 2002, when we were waiting for new SEC rules issued every few weeks. The next several months promise to be very interesting.

What’s on a Page? Right Now, Not Much . . .

I’m getting a little tired of dealing with the Dodd-Frank Act (currently available as a 2,323 page PDF file) and various alternative Congressional bills that have been more than 1,000 pages each. Of course, it’s easy to run up a lot of pages when each page has huge margins and one narrow column of text down the middle of the page. Who came up with that system anyway – do people really write lots of margin notes on each of 2,323 pages? Hopefully, after the Act is finally passed, there will be a version with more text on each page. Who knows – maybe it will only take up 800 or 900 pages.

Image: flikr
 

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As I reported previously, the House-Senate Conference Committee has agreed on the final provisions of the Dodd-Frank Act (including the corporate governance and compensation provisions starting on page 207 of Title IX of the Act (PDF)). The provision that will probably have the greatest immediate impact on public companies is the requirement for regular shareholder advisory votes on executive compensation (Say-on-Pay).

In a pair of posts on his Proxy Disclosure Blog at CompensationStandards.com, Mark Borges of Compensia provided a great analysis of the Say-on-Pay requirements. He also discussed some open questions about how practical effect of the requirements. Borges’ blog is a subscription service, but he gave me permission to provide excerpts from his posts:

. . . New Section 14A(e) gives the Commission the authority, by rule or order, to exempt an issuer or class of issuers from the "Say on Pay" requirement. . . . . I don't expect the SEC to unilaterally exempt smaller reporting companies from the "Say on Pay" requirement without first soliciting input from the public; particularly the investor community. Consequently, this may be an issue that's assigned a low priority between now and year-end. . . .

This requirement [for Say-on-Pay] is to become effective for the first annual meeting of shareholders occurring after the end of the six month period beginning on the date the Act is signed into law. . . . As long as it is signed into law by Labor Day, the requirement will be in effect for the 2011 proxy season.

. . . One question that has surfaced is whether the advisory vote will necessitate the filing of a preliminary proxy statement. . . . Currently, Exchange Act Rule 14a-6 does not require the filing of a preliminary proxy statement in connection with a "Say on Pay' vote, but only in the case of a company subject to . . . [TARP]. While I expect the SEC to amend the rule to exempt the votes under Exchange Act Section 14A(a) from the preliminary proxy statement filing requirement, we'll have to wait and see how things unfold . . . .

While we've had plenty of time to consider the effects of the "Say on Pay" vote itself, the decision of the House-Senate Conference Committee to let shareholders determine the frequency of the vote - annually, biennially, or triennially - presents a host of questions that will play out over the next several months. Starting with the 2011 proxy season, companies will be required to conduct a shareholder vote to determine how often the "Say on Pay" vote will be held and, thereafter, to resolicit shareholder input on this matter at least once every six years. . . . It seems to me that, in drafting the resolution for shareholder consideration, a company should be permitted to structure the vote to be a choice between an annual vote and a periodic vote (that is, either every two or three years, in the company's discretion). In other words, the resolution should be a choice between two alternatives, since I'm not sure that the difference between a vote every two years or every three years is as significant as the difference between an annual vote and a less frequent vote.

However, the plain language of Section 14A(a)(2) appears to require that companies permit shareholders to choose between holding the vote every one, two, or three years. That is, I expect that the SEC Staff, if it chooses to address the question, is likely to require that shareholders be presented with all three choices. While that appears to be consistent with Congressional intent, it raises the possibility that the decision will be made by a plurality of shareholders (meaning that a majority of shareholders may not favor the choice that ultimately prevails). . . . As a reader pointed out, in many (perhaps most) states [including Delaware], the decision with respect to the frequency of the "Say on Pay" vote will require majority approval of the shareholders. . . . [W]hat happens if none of the three choices receive a majority? Proposed new Section 14A(a)(2) doesn't provide a default resolution. . . .

And, as Marty Rosenbaum of Maslon Edelman Borman & Brand has pointed out, it's not entirely clear whether the frequency vote (unlike the "Say on Pay" vote itself) is intended to be a binding vote - although it appears that it should be (otherwise it's pointless). If it is, then some sort of technical amendment (or SEC rulemaking) will be required as proposed new Section 14A(c) provides that the "shareholder vote referred to in subsections (a) and (b) shall not be binding on the issuer or the board of directors of an issuer . . . ." As presently drafted, this language encompasses both of the votes described in proposed new Section 14A(a), not just the general "Say on Pay" vote contained in Section 14A(a)(1).

There you have it. Borges’ posts contained ten times as much useful information as LeBron James’ television program on Thursday evening announcing his new team. And you didn’t have to spend an hour watching it.

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