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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Monday, October 18, 2010

SEC Proposes Rules on Say on Pay and Golden Parachutes

The SEC proposed rules that would enable shareholders to cast advisory votes on executive compensation and "golden parachute" arrangements. The rules are called for by Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Under the proposed rules, companies subject to the federal proxy rules would be required to:

  • provide their shareholders with an advisory vote on executive compensation and an advisory vote on the desired frequency of these votes;
  • provide shareholders with an advisory vote on compensation arrangements and understandings in connection with merger transactions, known as "golden parachute" arrangements; and
  • provide additional disclosure of "golden parachute" arrangements in merger proxy statements.

The proposed rules would also require that institutional investment managers report their votes on executive compensation and "golden parachute" arrangements at least annually, unless the votes are otherwise required to be reported publicly by SEC rules.

Shareholder Approval of Executive Compensation
Section 14A(a) of the Exchange Act, which was added under the Dodd-Frank Act, specifies that say-on-pay votes are required at least once every three years beginning with the first annual shareholders' meeting taking place on or after Jan. 21, 2011.  The SEC's proposal requires companies to provide disclosure about the say-on-pay vote in the annual meeting proxy statement, including whether the vote is non-binding. The proposal also would require the company to disclose in the Compensation Discussion and Analysis, or CD&A, whether, and if so, how companies have considered the results of previous say-on-pay votes.

Shareholder Approval of the Frequency of Shareholder Votes on Executive Compensation
Under the proposal, companies also would be required 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.  Shareholders would be allowed to cast this non-binding "frequency" vote at least once every six years beginning with the first annual shareholders' meeting taking place on or after Jan. 21, 2011.  The proposals would require companies to provide disclosure about the frequency vote in the annual meeting proxy statement, including whether the vote is non-binding.

Shareholder Approval and Disclosure of Golden Parachute Arrangements
Under the proposal, companies also would be required to provide additional information about the compensation arrangements with executive officers in connection with merger transactions. Disclosures of these "golden parachute" arrangements would be required of all agreements and understandings that the acquiring and target companies have with the named executive officers of both companies.  This "golden parachute" disclosure also would be required in connection with going-private transactions and third-party tender offers, so that the information is available for shareholders no matter the structure of the transaction.  Further, the proposed rules would require companies to provide a shareholder advisory vote to approve certain "golden parachute" compensation arrangements in merger proxy statements.

Institutional Investment Manager Reporting of Votes
The SEC also proposed rules that would require institutional investment managers to annually file with the SEC their votes on say-on-pay, frequency of say-on-pay votes, and "golden parachute" arrangements.  The proposal would generally apply to every institutional investment manager that manages certain equity securities having an aggregate fair market value of at least $100 million.  The manager would be required to identify securities voted, describe the executive compensation matters voted on, disclose the number of shares over which the manager held voting power and the number of shares voted, and indicate how the manager voted.  The proposal would require institutional investment managers to report these votes annually not later than August 31 of each year, for the twelve months ended June 30.

The SEC will seek public comment on the proposals. The comment period will close on Nov. 18, 2010.

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