In July 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, which primarily revised the national financial regulatory regime.
However, the Act contained a number of provisions that apply to public companies generally, including providing the SEC with authority to implement proxy access, mandating shareholder advisory votes on executive compensation and “golden parachutes,” enhancing compensation committee and adviser independence requirements, mandating executive compensation clawbacks, and increasing disclosure in proxy statements.
Two of these provisions – proxy access and the advisory vote on executive compensation – are expected to significantly change the way public companies interact with their shareholders, beginning with annual shareholder meetings in 2011.
The Act provided express authority for the SEC to issue rules requiring inclusion of shareholder nominees for director in a public company’s proxy statement and establishing the procedures for shareholders and the company to follow with respect to such nominations.
In August 2010, the SEC adopted final rules establishing proxy access, which are expected to be effective in November 2010, except for smaller reporting companies with market capitalizations of less than $75 million for which the rules are not effective for three years.
The SEC rules provide that shareholders (or a group of shareholders) who hold 3 percent of a public company’s voting shares and have held such amount of shares continuously for three years may include in the company’s proxy statement nominees for director.
Shareholders will only be able to include the greater of one nominee or the number of nominees equal to 25 percent of the entire board of directors. To make such nominations, eligible shareholders must provide the company with notice of the nomination no earlier than 150 days and no later than 120 days before the anniversary of the company mailing its proxy statement in the prior year.
The Act requires a public company to include in its proxy statement at least every three years a separate resolution subject to an advisory shareholder vote to approve the compensation of its named executive officers. This so-called “say-on-pay vote” will not be binding and will be applicable for a company’s first shareholder meeting occurring after January 21, 2011.
In addition, at such shareholder meeting, a company must include in its proxy statement an additional separate resolution subject to shareholder vote to determine whether the say-on-pay vote will occur every one, two, or three years. Thereafter, a company must provide shareholders with the opportunity to vote on the frequency of the say-on-pay vote at least once every six years.
These provisions do not require SEC rulemaking to become effective, but it is expected that the SEC will adopt rules clarifying certain matters with respect to holding such votes.
The Act also prohibits discretionary broker voting on executive compensation matters unless the beneficial owner of shares instructs the broker how to vote. This will have the practical impact of making it more difficult for companies to obtain retail shareholder votes for the say-on-pay vote.
Given the significant changes resulting from the enactment of the Dodd-Frank Act, public companies and their boards of directors should begin to act now to prepare for these changes that will apply to their annual shareholder meetings in 2011.
With respect to proxy access, public companies should be proactive in communicating with large shareholders and understanding their concerns to avoid having such shareholders nominate directors.
Companies should also be reviewing and revising their advance notice bylaw provisions and director nomination procedures to work with the shareholder nomination processes in the SEC rules.
To prepare for the say-on-pay vote on executive compensation, companies should review their executive compensation programs for elements that may be controversial to shareholders and be proactive with shareholders in justifying executive compensation.
Companies should also revisit their proxy statement compensation discussion and analysis disclosure in light of the say-on-pay vote. While the say-on-pay vote is only advisory, the results of that vote may impact whether shareholders withhold votes for compensation committee members in director elections, which is of particular note for companies that have adopted majority voting.
Attorney John Wilson is a partner with Foley & Lardner LLP in the firm’s Transactional & Securities Practice in Milwaukee.
