Final SEC Rules on Say-on-Pay Voting and Disclosures

» Compensation of the issuer’s NEOs disclosed pursuant to Item 402 (CD&A, tables and narratives).

Expressly Excluded

» Non-employee director compensation; and

» Item 402(s) disclosure regarding risk management and risk-taking incentives (unless included in the CD&A).

New Item 24 to Schedule 14A requires issuers to:

» Disclose they are holding a separate shareholder vote on executive compensation; and

» Briefly explain the general effect of the vote (including its non-binding nature).

New Item 24 to Schedule 14A requires issuers to:

» Disclose they are holding a separate shareholder vote on executive compensation;

» Briefly explain the general effect of the vote (including its non-binding nature); and

» Disclose (1) the current frequency of the say-on-pay vote and (2) when the next say-on-pay vote will occur.

   » This disclosure is not required for the first year.

» Whether and, if so, how an issuer has considered the results of previous shareholder votes in determining compensation policies and decisions; and

» If so, how the consideration has affected the issuer’s executive compensation policies and decisions.

» Earlier votes need be addressed only to the extent material to the compensation policies and decisions discussed in the CD&A.

» Briefly explain the general effect of the vote (including its non-binding nature).

If a board recommendation is included, the proxy statement must clarify that shareholders are voting to approve the actual frequency and not the board of directors’ recommendation.

» This disclosure is not required for the first year.

Until the rules become final, issuers are only required to offer three options: “one year,” “two years” or “three years.”

» Include a recommendation for the frequency vote;

» Permit abstentions on the proxy card; and

» Include language regarding how uninstructed shares will be voted in bold on the proxy card.

Say-on-pay and frequency votes are required in the proxy statement for the first annual meeting following an issuer’s IPO.

Say-on-pay and frequency votes are required in the proxy statement for the first annual meeting following an issuer’s IPO.

The Form 8-K is due 150 calendar days following the meeting at which the vote took place, but in no event later than 60 calendar days prior to the deadline for submitting shareholder proposals for the next annual meeting pursuant to Rule 14a-8.

The final rules clarify that TARP entities are subject to the enhanced CD&A disclosure requirements described above.

In addition, no preliminary proxy is required for any advisory vote on executive compensation (including a frequency vote) that is not required by Section 14A.

» Overruling the compensation decisions of the issuer’s board of directors;

» Imposing additional fiduciary duties on the board; or

» Limiting shareholders’ ability to make compensation-related proposals for inclusion in proxy statements.

» The issuer has adopted a policy on the frequency of say-on-pay votes that is consistent with the plurality of votes cast in the most recent frequency vote; and

» The issuer provides a frequency vote at least once every six years.

» In the most recent frequency vote one alternative (1, 2 or 3 years) received the support of a majority of the votes cast; and

» The issuer adopts a frequency policy consistent with the majority vote.

Item 402(t) disclosure is not required for individuals who are NEOs because they would have been among the most highly compensated executives but for the fact that they were not serving as an executive officer at the end of the last completed fiscal year.

Item 402(t) disclosure is required for individuals treated as NEOs because they served as the principle executive or financial officer during the last completed year, even if such individuals are no longer employed at the time of the solicitation.

The final rules clarify that:» NEOs are determined based on the most recent SEC filing for which Item 402(c) disclosure was required; and

» Issuers are permitted to add additional NEOs.

» Cash severance payments;

» Stock awards and in-the-money stock options for which vesting is accelerated and cash payments made upon cancellation of stock and option awards;

» Pension and non-qualified deferred compensation benefit enhancements;

» Perquisites and other personal benefits (e.g., health and welfare), even if de minimis;

» Tax gross-ups;

» Other compensation; and

» The total of the above amounts.

The final rules clarify that issuers may add additional columns or rows to the table to distinguish forms of compensation (e.g., cash severance from other cash payments or single and double trigger payments) as long as the disclosure is not misleading.

» Any material conditions or obligations applicable to the receipt of payment, including restrictive covenants;

» The specific circumstances that would trigger payment;

» Whether the payments will be made in a lump sum or annual installments and the duration of the payments;

» By whom the payments will be provided; and

» Any material factors regarding each agreement (for example, provisions regarding modifications of outstanding options to extend the vesting period or the post-termination exercise period or modify the exercise price).

» Footnote disclosure is required quantifying each separate form of payment and the portion of the payments triggered (1) solely by the transaction (“single trigger”) or (2) upon a termination of employment within a specified period following the transaction (“double trigger”).

» Disclosure of vested pension and non-qualified deferred compensation and previously vested equity awards is not required.

   » But payments made in cancellation of equity awards must be disclosed even if the awards vested independently of the transaction.

» Disclosure must include benefits pursuant to arrangements that are generally available to all salaried employees (such as group health and life insurance).

» No disclosure required with respect to compensation under a bona fide post-transaction employment agreement entered into at the time of the transaction.

» Amounts disclosed will be based upon (1) the per share consideration in the transaction, if it is a fixed dollar amount or (2) the average closing price per share over the first five business days following the first public announcement of the transaction.

» If the 402(t) table is voluntarily included in an annual meeting proxy (see below), assume that the transaction occurred on the last date of the fiscal year and use the closing stock price on that date.

» Information statements filed pursuant to Regulation 14C;

» Proxy or consent solicitations that do not contain merger proposals but require disclosure of information under Item 14 of Schedule 14A;

» Registration statements on Forms S-4 and F-4 containing disclosure relating to mergers and similar transactions;

» Going private transactions on Schedule 13E-3;

» Third-party tender offers on Schedule TO; and

» Schedule 14D-9 solicitation/recommendation statements.

» Disclosure will be required in the target company’s response to the tender offer on Schedule 14D-9.

If the target company is a domestic issuer, disclosure is required even if the acquiror is a foreign private issuer.

The vote is not applicable to the additional transactions described above for which golden parachute disclosure is required.

The final rules clarify that the advisory vote is only required for meetings at which shareholders are asked to approve the transaction itself (as opposed to other proposals in connection with the transaction, such as proposals to increase the number of shares or a reverse stock split).

» But disclosure is required for arrangements between the NEOs and the acquiring company.

» Separate tables will be required.

» Overruling the compensation decisions of the issuer’s board of directors; or

» Imposing additional fiduciary duties on the board.

Compensation arrangements are not subject to the advisory vote on golden parachutes to the extent that:

» The issuer included Item 402(t) disclosure regarding the compensation in an annual or special meeting proxy statement;

» The arrangement was subject to a prior say-on-pay vote; and

» The same arrangements previously subject to the say-on-pay vote remain in effect.

While the golden parachute arrangements must have been subject to a prior say-on-pay vote, there is no requirement that the arrangements received approval.

The Item 402(t) disclosure would replace the Item 402(j) change in control disclosure for the applicable annual meeting proxy.

» Item 402(j) disclosure is still required for termination of employment scenarios.

Modifications and New Arrangements

» Compensation payable pursuant to an arrangement that has been subsequently amended or modified is not deemed “subject to a prior say-on-pay vote” to the extent of such amendment or modification.

» Item 402(t) would require issuers to segregate future disclosure in two tables, each meeting the requirements of new Item 402(t):

» The first covering all arrangements related to the change in control transaction (whether or not subject to a prior say-on-pay vote); and

» The second covering only the new or amended arrangements.

» Only the amounts in the second table would be subject to the vote.

The final rules clarify that:

» Changes that result in only a reduction in value of the total compensation should not require a new shareholder vote.

» Changes in compensation due to (1) a new NEO, (2) additional grants of equity in the ordinary course and (3) increases in salary after a prior say-on-pay vote must be subject to the golden parachute vote.

» Changes to the values in the 402(t) table to reflect price movement in the issuer’s stock will not trigger a new advisory vote.