New Compensation and Corporate Governance Rules (Post 3 of 8)

Over the last week I discussed clawbacks (Post 1 of 8), say-on-pay voting requirements and a new prohibition on certain votes from brokers (Post 2 of 8) under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Act"), signed into law by President Obama on July 21, 2010.  As stated in those prior posts, the Act contains significant executive compensation and corporate governance rules that apply to most public companies.  This Post 3 of 8 discusses a new requirement under the Act relating to golden parachute payments.

New Disclosure and Vote Requirement on Golden Parachute Payments

In addition to the new say-on-pay requirement discussed in a prior post (Prior Post), certain payments to named executive officers ("NEOs") in mergers and acquisitions must be adequately disclosed in the proxy or consent solicitation materials and submitted to the shareholders for their approval in the form of a non-binding shareholder resolution.  The disclosure must:

  • Describe in clear and simple terms any compensation arrangements with NEOs that are related to the transaction.
  • Describe the aggregate amount of all compensation that will or could be paid to the NEOs (including any conditions to payments).  AND
  • Include a separate non-binding advisory vote to approve the payments (though a separate vote is not required if the arrangements were previously subject to a say-on-pay vote).

Effective Date

The above disclosure and vote requirements apply to shareholder meetings that occur after January 21, 2011.

Issues to Consider

Some of the issues a company should consider when implementing the above include:

  • Consider reviewing current payment arrangements with NEOs to determine whether any golden parachute payments are aligned with the company's current compensation philosophy.  This should include a review of all prospective payments, including payments derived from employment agreements, incentive plans, bonus programs, etc.
  • Once a list of prospective payments is compiled, the next step is to ensure the payments will be adequately disclosed in accordance with rules to be issued by the SEC.  It may be that the disclosure rules will resemble current requirements under Item 402(j) of Regulation S-K.
  • Once the SEC issues disclosure rules, a determination should be made as to whether any prospective golden parachute payments should be disclosed and submitted to the shareholders for a say-on-pay vote prior to any known merger or acquisition.  Such prior disclosure and vote could avoid having to obtain additional disclosure and vote at the time of a merger or acquisition.

Over the next few months the SEC will likely provide guidance on the above disclosure and voting rules.  Until then, stay tune for more posts on the Act (Posts 4 through 8)!

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