SEC Proposes “Say-on-Pay” and “Say-on-Parachute” Rules

13F Filers to Report Publicly How They Vote on These Issues

October 22, 2010

The Dodd-Frank Act requires every public company to include in the proxy for its first shareholder meeting held on or after January 21, 2011 an advisory “Say-on-Pay” vote on executive compensation, as well as a separate “Say-on-Frequency” vote to determine whether subsequent Say-on-Pay votes will be held annually, or rather at intervals of two or three years. The Act also requires any public company seeking shareholder approval of a merger or acquisition at a meeting held on or after January 21, 2011 to include in its proxy an advisory “Say-on-Parachute” vote on certain “golden parachute” payments to its executive officers. On October 18, 2010, the SEC proposed rules to flesh out the details of these requirements. Comments on the proposed rules are due by November 18, 2010.


Proposed Rule 14a-21(a) would require every public company to include in its annual proxy, at least once every three years commencing with the first meeting on or after January 21, 2011, a non-binding shareholder advisory vote on compensation of executive officers (but not directors), as disclosed in the proxy statement, including in the Compensation Discussion and Analysis (CD&A). No specific language or form of shareholder resolution is required, but companies must explain the consequences of the vote, for instance, that it is non-binding. In CD&As after the first Say-on-Pay vote, companies would be required to describe whether and how they have considered the results of previous Say-on-Pay votes, in determining their compensation policies and decisions.


The proposed rules would require a public company to include a separate non-binding vote in its annual proxy at least every six years, commencing with the first shareholder meeting held on or after January 21, 2011, on whether Say-on-Pay votes should be held every one, two or three years. The proxy card would be required to provide shareholders with four voting choices: annual, every two years, every three years, or abstain. While Boards would be free to include in the proxy statement their recommendation, they must make clear that the vote is strictly among those four alternatives, not whether to approve or disapprove the Board’s recommendation. The proxy must explain the effect of this vote, for instance, that it is non-binding.

Since this vote is non-binding, the SEC concluded that it would not be appropriate to specify a voting standard. In a proposed modification to the shareholder proposal rule (Rule 14a-8), however, the SEC would permit issuers who have adopted the “plurality winner” in a Say-on-Frequency vote to exclude any shareholder proposal calling for more frequent votes. Thus, in addition to adverse publicity, an issuer that disregards the plurality winner in a Say-on-Frequency vote can expect a shareholder proposal the following year, seeking more frequent votes.

Companies would be required to include in the Form 10-Q for the quarter in which a Say-on-Frequency vote is disclosed the Board’s decision on frequency of future Say-on-Pay votes, in light of the voting results.

No Preliminary Proxy

Say-on-Pay and Say-on-Frequency votes will not require the filing of a preliminary proxy. (This was expected, as the SEC also dispensed with this filing in its say-on-pay rules that took effect in February 2010 for companies that received financial assistance under the Troubled Asset Relief Program - TARP.)

Disclosure and Shareholder Vote on Golden Parachute Arrangements

The Dodd-Frank Act will require a company seeking shareholder approval of a merger or acquisition transaction to disclose any agreements or understandings it has with any of its “named executive officers” (or of the acquiror, if the company is not the acquiror) concerning any type of compensation that is based on or otherwise relates to the transaction, and the aggregate total of all such “golden parachute” compensation that may be paid. The proxy must also include a separate vote on approval of that golden parachute compensation, unless it has previously been approved as part of a “Say-on-Pay” vote. Like the Say-on-Pay and Say-on-Frequency votes, however, this “approval” vote is not binding.

The Act does not require disclosure or a vote on golden parachute payments to be made by the acquiror to the named executive officers of a target seeking shareholder approval, but the proposed rules would partially fill that gap by adding any such payments to the required disclosure.

These disclosures would include a new “Golden Parachute Compensation” table with eight columns, itemizing various components of parachute compensation and including a “Total.” Textual disclosures would include footnote quantification of amounts attributable to “double trigger” and “single trigger” arrangements. These disclosure requirements are broader than existing annual proxy requirements as to potential payments to named executive officers upon termination or change-in-control.

If not all of the golden parachute compensation that is required to be disclosed is subject to the shareholder vote (for instance, it includes some payments to be made by the acquiror to the target’s named executive officers), then the target company would be required to include two tables, breaking out that portion of total parachute compensation that is subject to a shareholder vote.

A company wishing to include golden parachute compensation in an annual meeting Say-on-Pay vote, in order to avoid a later approval requirement, would be required to include the expanded disclosures discussed above. If it did, that would obviate the need for later approval, even if a majority of the shareholders voted for disapproval in that Say-on-Pay vote. If, however, there are changes in the golden parachute compensation between that annual meeting and the proxy seeking approval of the merger or acquisition transaction, disclosure and a vote would be required on those changes.

The proposed rules would not require disclosure of bona fide post-transaction employment agreements to be entered into with the target’s executives, since the SEC believes they would not be compensation “based on or related to the transaction.” The proposing release notes, however, that in some cases, these may be picked up by the existing requirement to disclose any “substantial interest” any executive officer of the company has in the transaction.

The proposed rules would extend the golden parachute disclosure requirements to transactions not requiring a shareholder vote, including tender offers and Rule 13e-3 “going private” transactions, since the SEC believes that a shareholder’s decision whether to tender is analogous to the decision a shareholder would face in a merger vote.

Smaller Reporting Companies

As proposed, smaller reporting companies would generally be subject to the new rules, but would continue to be exempt from the requirement to provide a CD&A. The Commission has requested comment on whether smaller reporting companies should be exempted from Say-on-Pay, or, alternatively, whether to phase in the new requirements based on company size. A phase-in of effectiveness in the final rules could result in pushing the date for smaller company compliance to the 2012 proxy season or later. The Commission also requests comment on whether companies going public should be able to state a chosen frequency for their Say-on-Pay votes in their IPO prospectus, e.g., every third year, in which case they would not need to hold their first vote until that year.

TARP Recipients

Companies that have received money under TARP, and thus already hold a similar annual say-on-pay vote, will not be required to hold Say-on-Pay or Say-on-Frequency votes until the first annual meeting after the TARP requirements cease to apply.

13F Filers to Report Publicly How They Vote on Executive Compensation Matters

The SEC has also proposed rules requiring institutional investment managers who are required to file Schedule 13Fs to file annually with the SEC reports of how they voted on Say-on-Pay, Say-on-Frequency and Say-on-Parachute proposals. The 13F filing requirement generally applies to institutional investment managers with investment discretion over certain equity securities having an aggregate fair market value of at least $100 million.

The proposed rules would require a reporting manager to identify the 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. This information would be filed on Form N-PX not later than August 31 of each year, for the most recent 12-month period ended June 30. Form N-PX, which is currently used by registered management investment companies to file their complete proxy voting records with the SEC, would be amended to permit its use by institutional investment managers. The proposal also contemplates joint reporting by institutional investment managers and registered management investment companies to avoid duplicative reporting by multiple entities.


The proposed rules provide guidance on a number of points that have been unclear to companies that are already beginning to work on their 2011 proxies. Companies or investment managers that wish to comment on any aspect of the proposed rules should keep in mind the deadline of November 18, 2010.

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

Michael P. O’Brien

Laurie A. Cerveny

Barry N. Hurwitz

This article was originally published by Bingham McCutchen LLP.