Michael J. Schobel is partner and Erica E. Bonnett is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.
In preparing the annual proxy statement, much care and attention is appropriately given to discussion of the company’s performance highlights, utilization of governance “best practices,” key compensation program developments, and other matters that are likely to draw investor attention and scrutiny. However, it is important not to forget that the annual proxy statement is also a legal disclosure document that is subject to a myriad of technical requirements set forth in Securities and Exchange Commission (“SEC”) rules and guidance. In our experience, some of the more subtle disclosure requirements are frequently overlooked, including, in particular, the items listed below. Companies should work with legal counsel to confirm that their annual proxy statements comply with all applicable disclosure requirements.
When to Provide GAAP Reconciliation
GAAP reconciliation is not required when disclosing non-GAAP performance targets or actual results relative to performance targets in the Compensation Discussion & Analysis (“CD&A”), provided that the disclosure explains how such values are calculated from the company’s audited financial statements. However, non-GAAP financial measures that are presented in the CD&A or any other part of the annual proxy statement for any other purpose (such as to explain the relationship between pay and performance or to justify certain levels or amounts of pay) are subject to GAAP reconciliation, which may be provided in an annex to the annual proxy statement (provided that the disclosure includes a prominent cross-reference to such annex) or by including a prominent cross-reference to the pages in the company’s annual report on Form 10-K containing the reconciliation.
