Friday, January 28, 2011

Say on Pay Final Rules

If you're a follower of executive compensation issues, you undoubtedly know that Dodd-Frank Wall Street Reform and Consumer Protection Act became law last year. It made sweeping changes for most public companies. With regard to the executive compensation issues, the Securities and Exchange Commission (SEC) generally is responsible for interpreting the statute and writing the rules. In fact, they issued final rules for Shareholder Say on Pay (SSOP) and Shareholder Say on Golden Parachutes (SSOGP) earlier this week.

WARNING: This is really technical stuff and if you want the really technical version, you can read the briefings that virtually every major law firm is doing or already has done on this.

BENEFITS OF READING THIS INSTEAD: I think this is a pretty good summary of what's in there though. You may laugh a little bit, which probably won't happen if you read the law firm versions (I just have to pick on lawyers once in a while). I don't use fancy legal terms unless I have to. So, you won't see anything like estoppel, res ipse locutur, or aberemurdo.

I'm going to address them, hopefully from a practical standpoint, here, but first, as is my prerogative, I digress. This is a bad name for a law. It has no useful acronym. Back in the 70s and 80s, we got useful names for laws. They had great acronyms like ERISA, TEFRA, COBRA, and ERTA. I can pronounce all those things. I cannot for the life of me pronounce DFWSRCPA. Maybe you are more proficient with new diphthongs than I, but my tongue is twisted. And, yesterday, Congress showed they can still do it. A bill to enact medical malpractice reform was introduced with the catchy acronym of HEALTH Act. It's too bad that it has the full name of Help Efficient Accessible Low-Cost Timely Healthcare Act of 2011, but it last I can say the acronym.

OK, back to serious stuff. What are the differences between the Dodd-Frank final rules and the proposed rules and what stays the same?


Say on Pay

  • SSOP votes are required only at meetings where directors are being elected. The vote may be more frequent, but it must occur no less frequently than once every three years.
  • The only required vote is on the executive compensation of named executive officers (NEOs). Don't despair, though, companies may choose to solicit shareholder opinion on other compensation issues. Here's a guess that most companies won't do that.
  • Companies with share value available to be traded by the public of less than $75 million (some people refer to this as the float) get a 2-year delay in needing to comply.
Say on Frequency of vote (SSOF)
  • Again, these are required only with respect to annual or special meetings at which directors are being elected, and not less frequently than every six years. Is it ironic that votes on frequency do not need to occur frequently?
  • Companies with a float of less than $75 million get a two-year delay here as well.
  • Not less than 150 days after the annual meeting and not less than 60 days before shareholder proposals for the next annual meeting are due, the company must file an 8-K explaining how often it will hold SSOP votes in light of the results of the SSOF vote.
  • If one of the three frequency alternatives (annual, biennial, triennial) gets a majority of the shareholder vote (more than 50% as compared to a plurality which is simply the largest vote-getter), and the company chooses to adopt that frequency of vote, then the company may reject any shareholder proposal calling for a SSOP or SSOF vote.
  • Proxy statements must disclose the frequency and next occurrence of SSOP votes.
Say on Golden Parachutes
  • Smaller companies (float < $75 million) get a 2-year delay
  • These rules apply to any filings after April 24, 2011
The Song Remains the Same

These items are significant, IMHO, but unchanged, or largely unchanged from the proposed rules issued last October.

Say on Pay
  • There is no specific language requirement. Companies should just make sure they do not mislead shareholders.
  • Director compensation need not be voted on in the SSOP.
  • The result of the SSOP vote must be disclosed to shareholders within 4 days after the meeting.
  • The vote is non-binding. The proxy statement must disclose that it is non-binding. Editorially, of the shareholders who actually read the proxy information, I wonder how many will not realize that the non-binding nature is simply following the law, and will have a "why are they doing this" moment.
  • In the next Compensation Discussion and Analysis (CD&A), companies must discuss whether and how they considered the most recent SSOP vote, and how that vote has affected their executive compensation, as well as their policies and decisions with respect to that compensation.
  • Institutional investors are required to file their SSOP voting record with the SEC.
  • Companies still under the auspices of TARP are exempt from these rules (until they have fully repaid and been released from TARP), but they are subject to the TARP SSOP rules.
Say on Frequency
  • The same 8-K 4-day rule as applies for SSOP applies here.
  • This is non-binding and the proxy must disclose such non-binding nature.
  • There are no specific language requirements.
  • Four and only four choices must be presented for the SSOP vote in the SSOF vote (I wonder what would happen if the majority vote were abstain. If that were the case, would the company by somehow adopting abstain be allowed to ignore shareholder SSOP and SSOF proposals? I don't even know what that means.):
    • Annual
    • Biennial
    • Triennial
    • Abstain
Say on Golden Parachutes
  • The information already provided in the proxy entitled "Potential Payments upon Termination of Employment or Change in Control" (Item 402(t)) does not satisfy the Dodd-Frank requirement. However, they still have to provide that other information. Talk about overkill ...
  • Item 402(t) disclosure is required whenever a proxy solicits change-in-control approval, whether or not the company is required to have a SSOGP vote
  • Disclosure for the SSOGP vote must be in both tabular and narrative form. This way, both the verbally and the mathematically challenged get a second bite at the apple.
    • Here are the goesintaz (that's what must go in) for the tables. The comeoutaz (what the executives get may be pretty massive). There is no de minimis exception:
      • cash payments
      • value of accelerated payments and stock awards
      • payments in cancellation of options and stock awards
      • enhancements to pension and nonqualified deferred compensation arrangements
      • perqs and other personal benefits
      • health and welfare benefits
      • tax reimbursements and gross-ups
      • any other comeoutaz (see above for what this means) that don't fit into any other category
      • The aggregate amount
      • Footnotes
        • other pertinent information
        • single or double trigger
    • The narrative must disclose the specifics of the events that would trigger these payments, who would make the payments, whether they will be made in lump sums, installments, or some other way, and any restrictive covenants (such a fancy name for a non-compete or non-solicitation agreement) that apply.


  1. Under the "Say on Golden Parachutes" section of "The Song Remains the Same," you mention that smaller companies (float < $75 million) get a 2-year delay. I don't think this is accurate. Section II.E. (located on p. 90 of the final rules on the SEC site) says "this temporary exemption for smaller reporting companies does not apply to the requirement of Section 14A(b)(2) and Rule 14a-21(c) to provide a shareholder advisory vote on golden parachute compensation in connection with mergers or other extraordinary transactions." Am I reading this correctly?

  2. Anonymous (I wish I knew who you were), I think that you are reading the rules correctly to the specific situation that you reference. I was intending to be more general (it's difficult to summarize all this "stuff" in a page or 2). Note, however, that this is a change to the proposed rule that I noted as such.

    If you'd like to go 'off-line' on this, you can e-mail me by clicking on view my profile where there is an e-mail link.

    Thanks for your feedback and for reading.