SEC Adopts Final “Say-on-Pay,” “Say-on-Frequency” and “Say-on-Parachute” Rules

The SEC has approved final rules¹ implementing the requirements imposed by the Dodd-Frank Act that every public company include in the proxy statement for its first annual shareholder meeting held on or after January 21, 2011, an advisory “Say-on-Pay” vote on executive compensation, as well as a separate advisory “Say-on-Frequency” vote as to whether subsequent Say-on-Pay votes will be held annually or every two or three years. In addition, any public company seeking shareholder approval of a merger or acquisition at a meeting held on or after April 25, 2011, must include in its proxy statement an advisory “Say-on-Parachute” vote on certain “golden parachute” payments to its executive officers. The rules were adopted substantially as proposed in October 2010², as summarized in our client alert available at www.bingham.com/Media.aspx?MediaID=11416, with only a few notable changes.

The most significant changes from the Say-on-Pay, Say-on-Frequency and Say-on-Parachute rules as they were initially proposed include the following:

• Smaller reporting companies are not subject to the Say-on-Pay and Say-on-Frequency rules until their first annual shareholder meetings held on or after January 21, 2013. Commissioners Casey and Paredes voted against the final rules, in part because they would have permanently exempted smaller reporting companies from these requirements. The SEC did not adopt any similar delay in the effectiveness of the Say-on-Parachute rules for smaller reporting companies.

• Rule 14a-8 under the Securities Exchange Act of 1934, as amended, permits a public company to exclude a shareholder proposal from its proxy materials on several grounds, including the fact that the proposal has already been substantially implemented. As proposed, a change to this rule would have permitted the exclusion of a shareholder proposal relating to Say-on-Frequency if the issuer had already adopted the choice that received a plurality of votes cast in its most recent Say-on-Frequency vote. As adopted, in order to exclude a Say-on-Frequency proposal, a company must have adopted a choice that received a majority of votes cast in its last Say-on-Frequency vote. If no choice received a majority, the company may not exclude the shareholder proposal on this basis. This change was another reason Commissioner Casey voted against the final rules, as she believes it tilts the playing field in favor of the annual vote favored by proxy advisory firms such as Institutional Shareholder Services. As a result of this change, a company that wins plurality, but not majority, approval for its recommendation of a triennial or biennial vote may still face a shareholder proposal the next year calling for an annual vote.

• A public company must disclose within 150 days after an annual meeting with a Say-on-Frequency vote, but at least 60 days before the deadline for shareholder proposals for the next annual meeting, its determination as to how frequently it will provide a Say-on-Pay vote, in light of the results of that Say-on-Frequency vote. This disclosure will be required in an amendment to Item 5.07 of the Current Report on Form 8-K in which the company reported the voting results from its annual meeting.

• Except in “Going Private Transactions,” third parties making tender offers will not have to comply with the Say-on-Parachute rules.

Conclusion

Public companies that are already well into the preparation of their 2011 proxy materials may be relieved to learn that, except for the changes summarized above and some other, less significant, changes, the SEC adopted final Say-on-Pay, Say-on-Frequency and Say-on-Parachute rules largely as they were originally proposed. 

For additional information concerning this alert, please contact your regular Bingham corporate contact or any of the following lawyers:

Michael P. O’Brien
michael.obrien@bingham.com
617.951.8302

Laurie A. Cerveny
laurie.cerveny@bingham.com
617.951.8527

Charles A. Sweet
charles.sweet@bingham.com
202.373.6777

^{1 The adopting release may be found at www.sec.gov/rules/final/2011/33-9178.pdf.
2 The proposing release may be found at www.sec.gov/rules/proposed/2010/33-9153.pdf.}