Final SEC Say on Pay Rules: A Reprieve for Smaller Reporting Companies

January 31, 2011

Overview

On January 25, 2011, the Securities and Exchange Commission adopted final rules for “Say on Pay” and “Say on Frequency” votes under the Dodd-Frank Wall Street Reform and Consumer Protection Act, providing shareholders with an up-or-down non-binding vote on executive compensation and a separate non-binding vote whether to hold “Say on Pay” every one, two or three years. Our prior memo describing the SEC’s initial proposed rules is available here. A major change in the final rules from the proposed rules is that “smaller reporting companies” (those with a public float of less than $75 million) have been given a two-year reprieve.

Effective Date

The new rules will be effective in late March or early April (depending on when they are published in the Federal Register). However, under the Dodd-Frank legislation, all proxy statements relating to annual meetings of shareholders to be held after January 20, 2011 must include a non-binding Say on Pay proposal and a non-binding Say on Frequency proposal for shareholders to vote on whether the Say on Pay proposal should be included every one, two or three years. To the extent there are differences between the final rules and the legislation, companies should be able to rely on the new rules; for example, smaller reporting companies can rely on the two-year reprieve effective immediately (unless they are required to hold Say on Pay under the Troubled Asset Relief Program, a requirement unaffected by Dodd-Frank or the new rules).

Key Differences from Proposed Rules

Key differences in the final rules compared to the proposed rules include:

Smaller Reporting Company Reprieve. Smaller reporting companies were not exempted from Say on Pay/Say on Frequency, but implementation has been deferred until annual meetings occurring after January 20, 2013. In addition, SEC Chair Mary Schapiro stated that the two-year deferral period will enable the SEC to consider whether the rules will disproportionately burden small issuers and adjust the rules, if appropriate, before they apply to smaller reporting companies.
Reporting Frequency Determination. The location and timing of reporting a company’s determination of how frequently to hold a Say on Pay vote has shifted, and is now required to be reported on a Form 8-K by the earlier of (i) 150 days or (ii) 60 days before the deadline for shareholder proposals for the next annual meeting as published in the most recent proxy statement. Under the proposed rules, the frequency determination would have been required in the 10-Q or 10-K for the quarter during which the annual meeting was held.
Effect of Frequency Determination on Future Shareholder Proposals. Future shareholder proposals relating to Say on Pay or frequency may be excluded as being substantially implemented only if the company has adopted a frequency chosen by a majority of votes cast in the most recent Say on Frequency vote. This is a higher standard than the proposed rules, which required acting only in accordance with the plurality vote.

Application to TARP Companies

Companies with outstanding preferred stock under TARP are required to hold an annual Say on Pay vote under the TARP rules. The TARP requirements effectively supersede the SEC and Dodd-Frank requirements. As a result, until their TARP obligations have been repaid, TARP companies cannot choose to hold the Say on Pay vote less frequently than annually, and need not provide a Say on Frequency vote.

What Should Companies Do Now?

Smaller reporting companies not subject to TARP rules can now move forward with their proxy and annual meeting planning knowing Say on Pay and Say on Frequency will not be required until 2013.
All public companies other than smaller reporting companies should prepare to include a Say on Pay and Say on Frequency vote in their 2011 proxy statements (assuming the 2011 annual meeting occurs after January 20, 2011).
Boards of companies subject to the rules for 2011 should consider whether to make a recommendation on Say on Frequency, and if so, what to recommend. In this regard, early data is now available regarding the number of companies recommending one, two, or three years, or providing no recommendation, and the common rationales for each approach. Since the first Say on Pay and Say on Frequency votes have already occurred, early data also is available on voting outcomes. As noted in our prior memo, companies may want to consider whether an annual vote offers some benefits, including more timely feedback from shareholders on compensation policies and practices, higher ratings from proxy advisory firms such as Institutional Shareholder Services (ISS), and the possibility that including a Say on Pay opportunity provides shareholders a non-binding way to register a protest vote, rather than voting against board or compensation committee members and/or compensation plans that may be submitted for shareholder approval.

Conclusion

The SEC has granted a welcome reprieve to smaller reporting companies, but all other public companies must include Say on Pay and Say on Frequency proposals in their 2011 annual meeting proxy statements. We are assisting a variety of companies with these requirements, will continue to closely follow emerging trends and voting outcomes, and will publish further updates on Say on Pay and other Dodd-Frank corporate governance and executive compensation provisions as developments warrant. In the meantime, please contact your usual Graham & Dunn attorney or Casey M. Nault (206.903.4808 or cnault@grahamdunn.com) or Stephen M. Klein (206.340.9648 or sklein@grahamdunn.com) should you have any questions or wish to discuss these issues further.

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Cyber-Graham® is published by Graham & Dunn as a service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the attorneys listed above or the attorney whom you normally consult.