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Say-on-Pay Provision of the Dodd-Frank Act Raises Many Questions

(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.)

July 8, 2010

As I reported previously, the House-Senate Conference Committee has agreed on the final provisions of the Dodd-Frank Act (including the corporate governance and compensation provisions starting on page 207 of Title IX of the Act). The provision that will probably have the greatest immediate impact on public companies is the requirement for regular shareholder advisory votes on executive compensation (Say-on-Pay).

In a pair of posts on his Proxy Disclosure Blog at, Mark Borges of Compensia provided a great analysis of the Say-on-Pay requirements. He also discussed some open questions about how practical effect of the requirements. Borges’ blog is a subscription service, but he gave me permission to provide excerpts from his posts:

. . . New Section 14A(e) gives the Commission the authority, by rule or order, to exempt an issuer or class of issuers from the "Say on Pay" requirement. . . . . I don't expect the SEC to unilaterally exempt smaller reporting companies from the "Say on Pay" requirement without first soliciting input from the public; particularly the investor community. Consequently, this may be an issue that's assigned a low priority between now and year-end. . . .

This requirement [for Say-on-Pay] is to become effective for the first annual meeting of shareholders occurring after the end of the six month period beginning on the date the Act is signed into law. . . . As long as it is signed into law by Labor Day, the requirement will be in effect for the 2011 proxy season.

. . . One question that has surfaced is whether the advisory vote will necessitate the filing of a preliminary proxy statement. . . . Currently, Exchange Act Rule 14a-6 does not require the filing of a preliminary proxy statement in connection with a "Say on Pay' vote, but only in the case of a company subject to . . . [TARP]. While I expect the SEC to amend the rule to exempt the votes under Exchange Act Section 14A(a) from the preliminary proxy statement filing requirement, we'll have to wait and see how things unfold . . . .

While we've had plenty of time to consider the effects of the "Say on Pay" vote itself, the decision of the House-Senate Conference Committee to let shareholders determine the frequency of the vote - annually, biennially, or triennially - presents a host of questions that will play out over the next several months. Starting with the 2011 proxy season, companies will be required to conduct a shareholder vote to determine how often the "Say on Pay" vote will be held and, thereafter, to resolicit shareholder input on this matter at least once every six years. . . . It seems to me that, in drafting the resolution for shareholder consideration, a company should be permitted to structure the vote to be a choice between an annual vote and a periodic vote (that is, either every two or three years, in the company's discretion). In other words, the resolution should be a choice between two alternatives, since I'm not sure that the difference between a vote every two years or every three years is as significant as the difference between an annual vote and a less frequent vote.

However, the plain language of Section 14A(a)(2) appears to require that companies permit shareholders to choose between holding the vote every one, two, or three years. That is, I expect that the SEC Staff, if it chooses to address the question, is likely to require that shareholders be presented with all three choices. While that appears to be consistent with Congressional intent, it raises the possibility that the decision will be made by a plurality of shareholders (meaning that a majority of shareholders may not favor the choice that ultimately prevails). . . . As a reader pointed out, in many (perhaps most) states [including Delaware], the decision with respect to the frequency of the "Say on Pay" vote will require majority approval of the shareholders. . . . [W]hat happens if none of the three choices receive a majority? Proposed new Section 14A(a)(2) doesn't provide a default resolution. . . .

And, as Marty Rosenbaum of Maslon Edelman Borman & Brand has pointed out, it's not entirely clear whether the frequency vote (unlike the "Say on Pay" vote itself) is intended to be a binding vote - although it appears that it should be (otherwise it's pointless). If it is, then some sort of technical amendment (or SEC rulemaking) will be required as proposed new Section 14A(c) provides that the "shareholder vote referred to in subsections (a) and (b) shall not be binding on the issuer or the board of directors of an issuer . . . ." As presently drafted, this language encompasses both of the votes described in proposed new Section 14A(a), not just the general "Say on Pay" vote contained in Section 14A(a)(1).

There you have it. Borges’ posts contained ten times as much useful information as LeBron James’ television program on Thursday evening announcing his new team. And you didn’t have to spend an hour watching it.


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