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U.S. Securities and Exchange Commission

Shareholder Approval of Executive Compensation and Golden Parachute Compensation

A Small Entity Compliance Guide1


On January 25, 2011, the Securities and Exchange Commission adopted amendments to its disclosure rules and forms to implement Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which added Section 14A to the Exchange Act. The new section requires public companies subject to the federal proxy rules to:

  • provide their shareholders with an advisory vote on executive compensation, generally known as “Say-on-Pay” votes;

  • provide their shareholders with an advisory vote on the desired frequency of say-on-pay votes; and

  • provide their shareholders with an advisory vote on compensation arrangements and understandings in connection with merger transactions, known as “golden parachute” arrangements. Such golden parachute arrangements would need to be disclosed in merger proxy statements.

The amendments take effect on April 4, 2011.

What are the Requirements of the New Amendments?

Say-on-Pay Votes

Companies are required to provide an advisory shareholder vote on the compensation of the top executives of the company – typically, the CEO, the Chief Financial Officer (CFO), and at least three other named executive officers. Companies are not required to use any specific language in asking for shareholder approval. Instead, each company has the flexibility to craft the exact language of the non-binding resolution that its shareholders will vote on.

The resolution could simply ask shareholders to approve the compensation of its named executive officers. For example, a resolution might say:

RESOLVED, that the compensation paid to the company’s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion, is hereby APPROVED.

Frequency Votes

Companies are also required to provide an advisory shareholder vote on the frequency of the Say-on-Pay vote. Shareholders will be able to cast a non-binding vote on how often the Say-on-Pay vote should occur: once a year, once every two years, or once every three years. Shareholders may also choose to abstain on the Frequency vote. Thus, including abstentions, shareholders have four choices. Frequency votes must take place at least once every six years.

When Do the Rules on Say-on-Pay and Frequency Votes Take Effect?

All public companies subject to the proxy rules, except smaller reporting companies, must hold Say-on-Pay and Frequency votes at shareholder meetings starting on Jan. 21, 2011. Compliance with the rules for Say-on-Pay and Frequency is delayed for two years for smaller reporting companies. These companies must hold Say-on-Pay and Frequency votes at annual meetings starting on Jan. 21, 2013. As defined in Exchange Act Rule 12b-2, a company qualifies as a “smaller reporting company” if it (1) has a common equity public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter, or (2) is unable to calculate its public float and has annual revenue of $50 million or less, upon entering the system.

New Rules on Golden Parachutes

Golden Parachutes are compensation arrangements with named executive officers concerning any type of compensation (whether present, deferred, or contingent) that is based on or relates to an acquisition, merger, or similar transaction. The new rules require companies to disclose any agreements or understandings that the target company has with its own named executive officers or those of the company that is acquiring the target company (called the acquiring company), as well as any relationships between the acquiring company and its named executive officers and those of the target company. Such disclosures must include the total of all such compensation that may be paid or become payable to, or on behalf of, the named executive officer, and the conditions upon which it may be paid or become payable. The disclosures must be made clearly and simply in the form of both narrative and tables.

When companies seek shareholder approval of a merger or acquisition, they will be required to conduct a separate shareholder advisory vote to approve, in the typical scenario, the disclosed Golden Parachute compensation arrangements between the target company and its own named executive officers or those of the acquiring company. There is one exception to this. The company is not required to conduct such a vote if the Golden Parachute disclosures were included in executive compensation disclosures subject to a prior Say-on-Pay vote.

Companies are required to comply with the Golden Parachute shareholder advisory vote and disclosure requirements in proxy statements to approve a merger or acquisition and similar forms initially filed on or after April 25, 2011.

Vote Results

Companies are required to disclose preliminary vote results within four business days of the completion of the shareholder meeting and final voting results within four business days after those results are known on a Current Report on Form 8-K.

The new rules also require companies to make two more disclosures. First, companies, other than smaller reporting companies, are required to address in the Compensation Discussion and Analysis (“CD&A”) whether and, if so, how their compensation policies and decisions have taken into account the results of the most recent Say-on-Pay vote. Smaller reporting companies are not required to provide a CD&A.

Second, each company must disclose in a Form 8-K its decision about the frequency of future Say-on-Pay votes. This disclosure must be made within 150 calendar days after the shareholder meeting, but no later than 60 calendar days before the deadline for shareholders to submit proposals for the next annual meeting. This deadline allows companies additional time to consider carefully the results of the Frequency vote, including through board and committee deliberations and discussions with shareholders, before the company is required to disclose its decision on the frequency of Say-on-Pay votes.

Other Resources

The adopting release for these amendments can be found on the SEC's website at http://www.sec.gov/rules/final/2011/33-9178.pdf.

The SEC's disclosure forms can be accessed on the Commission's website at http://www.sec.gov/about/forms/secforms.htm.

Compliance and disclosure interpretations related to the amendments are available at http://www.sec.gov/divisions/corpfin/cfguidance.shtml.

Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act can be found at http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf.

Contacting the SEC

The SEC's Division of Corporation Finance is available to assist small companies and others with questions regarding the amendments. You can contact the Division's Office of Chief Counsel for this purpose at (202) 551-3500 or at https://www.sec.gov/forms/corp_fin_interpretive.

Questions on other SEC regulatory matters concerning small companies may be directed to the Division's Office of Small Business Policy through the above online form or by telephone at (202) 551-3460.


1 This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a "small entity compliance guide" under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for any rule itself. Only the rule itself can provide complete and definitive information regarding its requirements.



Modified: 04/01/2011