July 7, 2009

Say-On-Pay: SEC Proposes Proxy Rules Amendment

Arnold & Porter Advisory

By Julia Vax and Alison E. Wright

On July 1, 2009, the SEC released its initial proposed rules to address the inclusion of "say-on-pay" proposals in the proxy statements of those companies that received federal assistance under the Troubled Assets Relief Program ("TARP"). In accordance with the requirements of Section 111(e) of the Emergency Economic Stabilization Act of 2008, as amended ("EESA"), companies receiving financial assistance under TARP must permit a separate advisory shareholder vote to approve the compensation of their executives. These nonbinding votes are known as "say-on-pay" proposals. The SEC is proposing a new proxy rule, Rule 14a-20 under the Securities Exchange Act of 1934, as amended, and a related amendment to Item 20 under Schedule 14A, to implement this EESA requirement. The following are the highlights of the proposed rules, and the full text of the SEC release can be found under Release No. 34-60218 (July 1, 2009).   

  • "Say-on-pay" proposals would only be required in proxy statements for shareholder meetings where proxies for the elections of directors are solicited. This approach is consistent with the current proxy rules requiring the executive compensation disclosures only in those proxy statements that relate to director elections. 

  • Disclosure of this separate vote and explanation of its effect would be required. The SEC is not proposing to require any specific language or form resolutions to be included with respect to the "say-on-pay" proposals, but Item 20 would require the registrants to specifically disclose that the proxy statement includes a separate vote on executive compensation pursuant to EESA and to provide a brief explanation of its effects, such as whether the vote is nonbinding.  

  • Moving voting results disclosure into Form 8-K. In a separate proposal considered by the SEC on the same date, the results of any vote taken at a shareholder meeting would be required to be disclosed promptly on a Form 8-K, rather than in the next Form 10-Q or Form 10-K as is currently mandated. The "say-on-pay" voting results would be covered by this accelerated disclosure requirement. 

  • Smaller reporting companies would not be required to include CD&A. The proposed Rule 14a-20 would clarify that, despite the general EESA language in that regard, smaller reporting companies that are TARP recipients will continue to be governed by the rules applicable to them and would not be require to include Compensation Discussion and Analysis or any other more burdensome disclosures applicable to larger companies.  

  • Preliminary proxy statement filing required. The SEC specifically declined to include the "say-on-pay" proposals in the list of proposals excluded from the requirement of filing preliminary proxy materials with the SEC. If adopted as proposed, this will impact the scheduling and mailing timing for any TARP recipients' annual meetings of shareholders, and registrants should plan accordingly.

The SEC is soliciting comments during the 60-day period following the publication of the proposed rules in the Federal Register, including with respect to whether the preliminary proxy materials filing should be required.

If you have questions about any of the issues raised in this alert, contact Julia Vax at 415.399.3174, or your usual Howard Rice attorney.

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