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Memorandum on Say-on-Pay and Other Advisory Vote Requirements Includes Executive Summary and FAQs

(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)

October 28, 2010

Maslon Law Firm has just released our memorandum on the three new shareholder advisory votes required under the Dodd-Frank Act and the SEC’s recently proposed regulations : the Say-on-Pay vote, the frequency vote and the Say-on-Parachutes vote. We took it as a challenge to make the memo as user-friendly as possible for public companies and their advisors. The memo starts with an executive summary about the requirements, and the remainder consists of Frequently Asked Questions about each of the required shareholder votes. Here’s the executive summary:

Key provisions in the Act’s advisory vote requirements, as interpreted by the proposed SEC rules:

Say-on-Pay Vote: Public companies must hold a non-binding shareholder vote on executive compensation (the “Say-on-Pay vote”) at the first annual meeting on or after January 21, 2011. Pursuant to this vote, shareholders will be asked to approve the executive pay described in the proxy statement (including CD&A and the compensation tables). This vote must be held no less frequently than once every three years.

Frequency Vote: Also, at the first annual meeting on or after January 21, 2011, public companies must hold a separate non-binding vote (the “frequency vote”) in which shareholders will express their opinion on whether the Say-on-Pay vote should be held annually, biennially, or triennially. The frequency vote must be held at least once every six years. After their annual meetings, companies must disclose on Form 10-Q whether they will abide by the shareholders’ preference on frequency.

Requirements Not Subject to Adoption of Final SEC Rules: The above requirements to hold the Say-on-Pay vote and frequency vote at the first annual meeting on or after January 21, 2011 are effective regardless of whether the final SEC rules have been adopted.

Parachutes Disclosure and Say-on-Parachutes Vote: The proxy materials to approve any merger, sale of assets or similar transaction must include enhanced disclosure of the golden parachutes compensation to executives related to the transaction, including a table and narrative disclosure. The proxy materials must also include a separate shareholder advisory vote on the parachute compensation (the “Say-on-Parachutes vote”), unless the enhanced disclosure was part of a prior Say-on-Pay vote and there are no new arrangements. The parachutes disclosure and Say-on-Parachutes vote requirements are not effective until the final SEC rules go into effect.

Cheat Sheet Updated

The ON Securities Cheat Sheet has now been updated to include a shorter summary of the advisory vote requirements. The Cheat Sheet also features a summary of all of the Dodd-Frank compensation and governance provisions, and a description of the proxy access rule, Rule 14a-11, the effectiveness of which has been stayed as a result of a legal challenge. True to form, the Cheat Sheet is still only two pages long!

Useful Resource on Risk Assessment

As stated in this previous post, it is important for public companies to focus this year on their assessment of risks related to their compensation programs. The proxy disclosure requirement in Item 402(s) of Regulation S-K is not limited to executive compensation programs, but the assessment need only cover compensation programs that might create a material risk for the company. One of the challenges for compensation committees and compliance officers is the creation of a reasonable process to select the compensation programs to examine and to assess the relationship of the compensation programs to risks that might face the enterprise.

Mike Melbinger, in his Executive Compensation Blog, has posted his comprehensive chart that outlines a very detailed process a public company can use for assessing risk. The chart contains many good ideas, so it is a helpful resource, even if you don’t intend to follow the entire 20-step action plan (for some companies, maybe a “12-step program” will do!).


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