Shareholder Approval of Executive Compensation and Golden Parachute Compensation, 6010-6047 [2011-1971]
Download as PDF
6010
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 229, 240 and 249
[Release Nos. 33–9178; 34–63768; File No.
S7–31–10]
RIN 3235–AK68
Shareholder Approval of Executive
Compensation and Golden Parachute
Compensation
Securities and Exchange
Commission.
ACTION: Final rule.
AGENCY:
We are adopting amendments
to our rules to implement the provisions
of the Dodd-Frank Wall Street Reform
and Consumer Protection Act relating to
shareholder approval of executive
compensation and ‘‘golden parachute’’
compensation arrangements. Section
951 of the Dodd-Frank Act amends the
Securities Exchange Act of 1934 by
adding Section 14A, which requires
companies to conduct a separate
shareholder advisory vote to approve
the compensation of executives, as
disclosed pursuant to Item 402 of
Regulation S–K or any successor to Item
402. Section 14A also requires
companies to conduct a separate
shareholder advisory vote to determine
how often an issuer will conduct a
shareholder advisory vote on executive
compensation. In addition, Section 14A
requires companies soliciting votes to
approve merger or acquisition
transactions to provide disclosure of
certain ‘‘golden parachute’’
compensation arrangements and, in
certain circumstances, to conduct a
separate shareholder advisory vote to
approve the golden parachute
compensation arrangements.
DATES: Effective Date: April 4, 2011.
Compliance Date: April 4, 2011,
except that issuers must comply with
Exchange Act Section 14A(b) and Rule
14a–21(c) and the amendments to Item
5 of Schedule 14A, Item 3 of Schedule
14C, Item 1011 of Regulation M–A, Item
11 of Schedule TO, Item 15 of Schedule
13E–3, and Item 8 of Schedule 14D–9
for initial preliminary proxy and
information statements, Schedules TO,
13E–3, and 14D–9 and Forms S–4 and
F–4 filed on or after April 25, 2011.
Companies that qualify as ‘‘smaller
reporting companies’’ (as defined in 17
CFR 240.12b–2) as of January 21, 2011,
including newly public companies that
qualify as smaller reporting companies
after January 21, 2011, will not be
subject to Exchange Act Section 14A(a)
and Rule 14a–21(a) and (b) until the first
annual or other meeting of shareholders
emcdonald on DSK2BSOYB1PROD with RULES4
SUMMARY:
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
at which directors will be elected and
for which the rules of the Commission
require executive compensation
disclosure pursuant to Item 402 of
Regulation S–K (17 CFR 229.402)
occurring on or after January 21, 2013.
FOR FURTHER INFORMATION CONTACT:
Scott Hodgdon, Attorney-Adviser, at
(202) 551–3430, Anne Krauskopf, Senior
Special Counsel, at (202) 551–3500, or
Perry Hindin, Special Counsel, at (202)
551–3440, Division of Corporation
Finance, U.S. Securities and Exchange
Commission, 100 F Street, NE.,
Washington, DC 20549–3628.
SUPPLEMENTARY INFORMATION: We are
adopting new Rule 14a–21 and
amendments to Rules 14a–4,1 14a–6,2
14a–8 3 and a new Item 24 and
amendments to Item 5 of Schedule
14A 4 and amendments to Item 3 of
Schedule 14C 5 under the Securities
Exchange Act of 1934 (‘‘Exchange Act’’).6
We are also adopting amendments to
Item 402 7 of Regulation S–K,8 Item
1011 9 of Regulation M–A,10 Item 15 of
Schedule 13E–3,11 Item 8 of Schedule
14D–9,12 Item 11 of Schedule TO,13 and
amendments to Item 5.07 of Form
8–K.14
Table of Contents
I. Background and Summary
II. Discussion of the Amendments
A. Shareholder Approval of Executive
Compensation
1. Rule 14a–21(a)
a. Proposed Rule
b. Comments on the Proposed Rule
c. Final Rule
2. Item 24 of Schedule 14A
a. Proposed Amendments
b. Comments on the Proposed
Amendments
c. Final Rule
3. Amendments to Item 402(b) of
Regulation S–K
a. Proposed Amendments
b. Comments on the Proposed
Amendments
c. Final Rule
B. Shareholder Approval of the Frequency
of Shareholder Votes on Executive
Compensation
1. Rule 14a–21(b)
a. Proposed Rule
b. Comments on the Proposed Rule
1 17
CFR 240.14a–4.
CFR 240.14a–6.
3 17 CFR 240.14a–8.
4 17 CFR 240.14a–101.
5 17 CFR 240.14c–101.
6 15 U.S.C. 78a et seq.
7 17 CFR 229.402.
8 17 CFR 229.10 et seq.
9 17 CFR 229.1011.
10 17 CFR 229.1000 et seq.
11 17 CFR 240.13e–100.
12 17 CFR 240.14d–101.
13 17 CFR 240.14d–100.
14 17 CFR 249.308.
2 17
PO 00000
Frm 00002
Fmt 4701
Sfmt 4700
c. Final Rule
2. Item 24 of Schedule 14A
a. Proposed Amendments
b. Comments on the Proposed
Amendments
c. Final Rule
3. Amendment to Rule 14a–4
a. Proposed Amendments
b. Comments on the Proposed
Amendments
c. Final Rule
4. Amendment to Rule 14a–8
a. Proposed Amendments
b. Comments on the Proposed
Amendments
c. Final Rule
5. Amendment to Form 8–K
a. Proposed Amendments
b. Comments on the Proposed
Amendments
c. Final Rule
6. Effect of Shareholder Vote
C. Issues Relating to Both Shareholder
Votes Required by Section 14A(a)
1. Amendments to Rule 14a–6
a. Proposed Amendments
b. Comments on the Proposed
Amendments
c. Final Rule
2. Broker Discretionary Voting
3. Relationship to Shareholder Votes on
Executive Compensation for TARP
Companies
D. Disclosure of Golden Parachute
Arrangements and Shareholder Approval
of Golden Parachute Arrangements
1. General
2. Item 402(t) of Regulation S–K
a. Proposed Amendments
b. Comments on the Proposed
Amendments
i. General Comments on the Proposed Item
402(t) Table
ii. Comments on the Elements of
Compensation and Presentation of the
Proposed Item 402(t) Table
iii. Comments on Individuals Subject to
Item 402(t) Disclosure
iv. Comments on Item 402(t) Disclosure in
Annual Meeting Proxy Statements
c. Final Rule
i. Item 402(t) Table and Narrative
Requirements
ii. Elements of Compensation and
Presentation of Item 402(t) Table
iii. Individuals Subject to Item 402(t)
Disclosure
iv. Item 402(t) Disclosure in Annual
Meeting Proxy Statements
3. Amendments to Schedule 14A, Schedule
14C, Schedule 14D–9, Schedule 13E–3,
Schedule TO, and Item 1011 of
Regulation M–A
a. Proposed Amendments
b. Comments on the Proposed
Amendments
c. Final Rule
4. Rule 14a–21(c)
a. Proposed Rule
b. Comments on the Proposed Rule
c. Final Rule
i. Scope of Rule 14a–21(c) Shareholder
Advisory Vote
ii. Exceptions to Rule 14a–21(c)
Shareholder Advisory Vote
E. Treatment of Smaller Reporting
Companies
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
F. Transition Matters
III. Paperwork Reduction Act
A. Background
B. Summary of the Final Rules
C. Summary of Comment Letters and
Revisions to Proposals
D. Revisions to PRA Reporting and Cost
Burden Estimates
IV. Cost-Benefit Analysis
A. Introduction
B. Comments on the Cost-Benefit Analysis
C. Benefits
D. Costs
V. Consideration of Impact on the Economy,
Burden on Competition, and Promotion
of Efficiency, Competition, and Capital
Formation
VI. Final Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the
Proposed Action
B. Legal Basis
C. Significant Issues Raised by Public
Comments
D. Small Entities Subject to the Final
Amendments
E. Reporting, Recordkeeping, and Other
Compliance Requirements
F. Duplicative, Overlapping, or Conflicting
Federal Rules
G. Significant Alternatives
VII. Statutory Authority and Text of the
Amendments
I. Background and Summary
emcdonald on DSK2BSOYB1PROD with RULES4
On October 18, 2010, we proposed a
number of amendments to our rules
relating to the shareholder approval of
executive compensation and golden
parachute compensation.15 We
proposed these rules to implement
Section 951 of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (the ‘‘Act’’).16 As discussed in detail
below, we have taken into consideration
the comments received on the proposed
amendments and are adopting several
amendments to our rules.17
The Act amends the Exchange Act by
adding new Section 14A. New Section
14A(a)(1) requires that ‘‘[n]ot less
frequently than once every 3 years, a
proxy or consent or authorization for an
annual or other meeting of the
shareholders for which the proxy
solicitation rules of the Commission
require compensation disclosure shall
include a separate resolution subject to
shareholder vote to approve the
15 See Release No. 33–9153 (October 18, 2010) [75
FR 66590] (the ‘‘Proposing Release’’).
16 Public Law 111–203 (July 21, 2010).
17 The public comments we received on the
Proposing Release are available on our Web site at
https://www.sec.gov/comments/s7-31-10/
s73110.shtml. In addition, to facilitate public input
on the Act, the Commission provided a series of
e-mail links, organized by topic, on its Web site at
https://www.sec.gov/spotlight/
regreformcomments.shtml. The public comments
we received on Section 951 of the Act are available
on our Web site at https://www.sec.gov/comments/
df-title-ix/executive-compensation/executivecompensation.shtml.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
compensation of executives,’’ 18 as
disclosed pursuant to Item 402 of
Regulation S–K, or any successor to
Item 402 (a ‘‘say-on-pay vote’’). The
shareholder vote to approve executive
compensation required by Section
14A(a)(1) ‘‘shall not be binding on the
issuer or the board of directors of an
issuer.’’ 19
Section 951 of the Act also adds new
Section 14A(a)(2) to the Exchange Act,
requiring that, ‘‘[n]ot less frequently
than once every 6 years, a proxy or
consent or authorization for an annual
or other meeting of the shareholders for
which the proxy solicitation rules of the
Commission require compensation
disclosure shall include a separate
resolution subject to shareholder vote to
determine whether [the say-on-pay vote]
will occur every 1, 2, or 3 years.’’ 20 As
discussed below, this shareholder vote
‘‘shall not be binding on the issuer or the
board of directors of an issuer.’’ 21
In addition, Section 951 of the Act
amends the Exchange Act by adding
new Section 14A(b)(1), which requires
that, in any proxy or consent solicitation
material for a meeting of shareholders
‘‘at which shareholders are asked to
approve an acquisition, merger,
consolidation, or proposed sale or other
disposition of all or substantially all the
assets of an issuer, the person making
such solicitation shall disclose in the
proxy or consent solicitation material,
in a clear and simple form in
accordance with regulations to be
promulgated by the Commission, any
agreements or understandings that such
person has with any named executive
officers of such issuer (or of the
acquiring issuer, if such issuer is not the
acquiring issuer) concerning any type of
18 Exchange Act Section 14A(a)(1). Section 951 of
the Act includes the language ‘‘or other meeting of
the shareholders,’’ which is similar to
corresponding language in Section 111(e)(1) of the
Emergency Economic Stabilization Act of 2008, or
EESA, 12 U.S.C. 5221. As noted in the Proposing
Release, we have previously considered this
language in connection with companies required to
provide a separate shareholder vote on executive
compensation so long as the company has
outstanding obligations under the Troubled Asset
Relief Program, or TARP. See Shareholder Approval
of Executive Compensation of TARP Recipients,
Release No. 34–61335 (Jan. 12, 2010) [75 FR 2789]
(hereinafter, the ‘‘TARP Adopting Release’’). We
continue to view this provision to require a separate
shareholder vote on executive compensation only
with respect to an annual meeting of shareholders
for which proxies will be solicited for the election
of directors, or a special meeting in lieu of such
annual meeting. Similarly, Rules 14a–21(a) and (b)
are intended to result in issuers conducting the
required advisory votes in connection with the
election of directors, the proxy materials for which
are required to include disclosure of executive
compensation.
19 Exchange Act Section 14A(c).
20 Exchange Act Section 14A(a)(2).
21 Exchange Act Section 14A(c).
PO 00000
Frm 00003
Fmt 4701
Sfmt 4700
6011
compensation (whether present,
deferred, or contingent) that is based on
or otherwise relates to the acquisition,
merger, consolidation, sale or other
disposition of all or substantially all of
the assets of the issuer[* * *].’’ 22 These
compensation arrangements are often
referred to as ‘‘golden parachute’’
compensation. Such disclosure must
include the aggregate total of all such
compensation that may be paid or
become payable to or on behalf of such
named executive officer, and the
conditions upon which it may be paid
or become payable.23 Under Section
14A(b)(2), ‘‘unless such agreements or
understandings have been subject to
[the periodic shareholder vote described
in Section 14A(a)(1)],’’ 24 a separate
shareholder vote to approve such
agreements or understandings and
compensation as disclosed is also
required.25 As with the say-on-pay vote
and the shareholder vote on the
frequency of such votes, this
shareholder vote ‘‘shall not be binding
on the issuer or the board of directors
of an issuer.’’ 26
In addition to their non-binding
status, none of the shareholder votes
required pursuant to Section 14A is to
be construed ‘‘as overruling a decision
by such issuer or board of directors.’’ 27
These shareholder votes also do not
‘‘create or imply any change to the
fiduciary duties of such issuer or board
of directors’’ 28 nor do they ‘‘create or
imply any additional fiduciary duties
for such issuer or board of directors.’’ 29
Further, these votes will not be
construed ‘‘to restrict or limit the ability
of shareholders to make proposals for
inclusion in proxy materials related to
executive compensation.’’ 30 Section
14A also provides that ‘‘the Commission
may, by rule or order, exempt an issuer
or class of issuers’’ from the shareholder
22 Exchange
Act Section 14A(b)(1).
Act Section 14A(b)(1).
24 Exchange Act Section 14A(b)(2).
25 Exchange Act Section 14A(b)(2).
26 Exchange Act Section 14A(c).
27 Exchange Act Section 14A(c)(1).
28 Exchange Act Section 14A(c)(2).
29 Exchange Act Section 14A(c)(3).
30 Exchange Act Section 14A(c)(4). In addition,
Exchange Act Section 14A(d) provides that every
institutional manager subject to Exchange Act
Section 13(f) [15 U.S.C. 78m(f)] shall report at least
annually how it voted on any shareholder vote
required by Section 951 of the Act, including the
shareholder vote on executive compensation, the
shareholder vote on the frequency of shareholder
votes on executive compensation, and the golden
parachute compensation vote, unless such vote is
otherwise required to be reported publicly by rule
or regulation of the Commission. Amendments to
our rules to implement this requirement were
proposed in a separate rulemaking. See Reporting
of Proxy Votes on Executive Compensation and
Other Matters, Release No. 34–63123 (Oct. 18, 2010)
[75 FR 66622].
23 Exchange
E:\FR\FM\02FER4.SGM
02FER4
emcdonald on DSK2BSOYB1PROD with RULES4
6012
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
advisory votes required by Section
14A.31 In determining whether to make
an exemption, the Commission is
directed to take into account, among
other considerations, whether the
requirements of Section 14A(a) and (b)
disproportionately burden small
issuers.32
Section 14A(a)(3) requires that both
the initial shareholder vote on executive
compensation and the initial vote on the
frequency of votes on executive
compensation be included in proxy
statements ‘‘for the first annual or other
meeting of the shareholders occurring
after the end of the 6-month period
beginning on the date of enactment’’ of
the Act.33 Thus, the statute requires
separate resolutions subject to
shareholder vote to approve executive
compensation and to approve the
frequency of say-on-pay votes for proxy
statements relating to an issuer’s first
annual or other meeting of the
shareholders occurring on or after
January 21, 2011, whether or not the
Commission has adopted rules to
implement Section 14A(a). Because
Section 14A(a) applies to shareholder
meetings taking place on or after
January 21, 2011, any proxy statement
that is required to include executive
compensation disclosure pursuant to
Item 402 of Regulation S–K, whether in
preliminary or definitive form, even if
filed prior to this date, for meetings
taking place on or after January 21,
2011, must include the separate
resolutions for shareholders to approve
executive compensation and the
frequency of say-on-pay votes required
by Section 14A(a) without regard to
whether the amendments in this release
are in effect by that time.34
With respect to the disclosure of
golden parachute arrangements in
accordance with Commission
regulations in merger proxy statements
required by Section 14A(b)(1), we note
that the statute similarly references a 6month period beginning on the date of
enactment of the Act. However, because
the statute requires such disclosure to
be ‘‘in accordance with regulations to be
promulgated by the Commission,’’ 35 the
golden parachute compensation
arrangements disclosure under
proposed new Item 402(t) and a separate
resolution to approve golden parachute
compensation arrangements pursuant to
Rule 14a–21(c) will not be required for
merger proxy statements relating to a
31 Exchange
Act Section 14A(e).
Act Section 14A(e).
Act Section 14A(a)(3).
34 See Section II.E below for a discussion of a
temporary exemption for smaller reporting
companies.
35 Exchange Act Section 14A(b)(1).
32 Exchange
meeting of shareholders until the
effective date of our rules implementing
Section 14A(b)(1). The rule amendments
we adopt today with respect to new
Rule 14a–21(c) and the amendments to
the disclosure requirements in Item 5 of
Schedule 14A, Item 3 of Schedule 14C,
Item 1011 of Regulation M–A, Item 11
of Schedule TO, Item 15 of Schedule
13E–3, and Item 8 of Schedule 14D–9,
are effective for initial filings on or after
April 25, 2011.
We received over 60 comment letters
in response to the proposed
amendments. In addition, we received
over a dozen letters relating to Section
951 of the Act.36 These letters came
from corporations, pension funds,
professional associations, trade unions,
law firms, consultants, academics,
individual investors, and other
interested parties. In general, the
commentators supported the proposed
amendments that would implement
Section 951 of the Act. Some
commentators, however, opposed some
of the proposed amendments and
suggested modifications or alternatives
to the proposals.
We have reviewed and considered all
of the comments that we received
relating to the proposed amendments.
The adopted rules reflect changes made
in response to many of these comments.
We discuss our revisions with respect to
each proposed rule amendment in more
detail throughout this release.
We are adopting Rule 14a–21 to
provide a separate shareholder vote to
approve executive compensation, to
approve the frequency of such votes on
executive compensation and to approve
golden parachute compensation
arrangements in connection with certain
extraordinary business transactions. We
are also adopting a new Item 24 of
Schedule 14A to provide disclosure
regarding the effect of the shareholder
votes required by Rule 14a–21, such as
whether each vote is non-binding. In
addition, our amendments to Item 5 of
Schedule 14A, Item 3 of Schedule 14C,
Item 1011 of Regulation M–A, Item 8 of
Schedule 14D–9, and Item 15 of
Schedule 13E–3 will require additional
disclosure regarding golden parachute
arrangements in connection with certain
extraordinary business transactions,
Rule 13e–3 37 going-private transactions
and tender offers.
We are also adopting amendments to
Item 402 of Regulation S–K to require
disclosure of an issuer’s consideration
of the say-on-pay vote in its
33 Exchange
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
36 These comment letters were received prior to
publication of the Proposing Release. See note 17
above.
37 17 CFR 240.13e–3.
PO 00000
Frm 00004
Fmt 4701
Sfmt 4700
Compensation Discussion and Analysis,
and to prescribe disclosure about golden
parachute compensation arrangements
in new Item 402(t). In addition, we are
adopting an instruction to Rule 14a–8 to
clarify the treatment of shareholder
proposals relating to the shareholder
advisory votes required by Rule 14a–21.
Finally, we are adopting amendments to
Form 8–K to facilitate disclosure of the
results of the shareholder advisory vote
on the frequency of say-on-pay votes,
and to require disclosure about whether
and how the issuer will implement the
results of the shareholder advisory vote
on the frequency of say-on-pay votes.
II. Discussion of the Amendments
A. Shareholder Approval of Executive
Compensation
1. Rule 14a–21(a)
Proposed Rule 14a–21(a) would
require issuers,38 not less frequently
than once every three years, to include
in their proxy statements a separate
shareholder advisory vote to approve
the compensation of executives. We are
adopting the rule substantially as
proposed with some changes in
response to comments.
a. Proposed Rule
Under our proposed rule, an issuer
would be required, not less frequently
than once every three years, to provide
a separate shareholder advisory vote in
proxy statements to approve the
compensation of its named executive
officers, as defined in Item 402(a)(3) 39
of Regulation S–K. Rule 14a–21(a), as
proposed, would specify that the
separate shareholder vote on executive
compensation is required only when
proxies are solicited for an annual or
other meeting of security holders for
which our rules require the disclosure
of executive compensation pursuant to
Item 402 of Regulation S–K. Proposed
Rule 14a–21(a) would require a separate
shareholder vote to approve the
compensation of executives for the first
annual or other such meeting of
shareholders occurring on or after
January 21, 2011, the first day after the
end of the 6-month period beginning on
the date of enactment of the Act.
In accordance with Section 14A(a)(1),
shareholders would vote to approve the
compensation of the issuer’s named
38 Our rules as adopted apply to issuers who have
a class of equity securities registered under Section
12 [15 U.S.C. 78l] of the Exchange Act and are
subject to our proxy rules. Foreign private issuers,
as defined in Rule 3b–4(c) [17 CFR 240.3b–4(c)], are
not required under Section 14A or the rules we are
adopting today to conduct a shareholder advisory
vote on executive compensation nor a shareholder
advisory vote on the frequency of such votes.
39 17 CFR 229.402(a)(3).
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
executive officers, as such
compensation is disclosed pursuant to
Item 402 40 of Regulation S–K, including
the Compensation Discussion and
Analysis (‘‘CD&A’’), the compensation
tables and other narrative executive
compensation disclosures required by
Item 402. We also proposed an
instruction to Rule 14a–21 to specify
that the rule does not change the scaled
disclosure requirements for smaller
reporting companies and that smaller
reporting companies would not be
required to provide a CD&A in order to
comply with Rule 14a–21.
emcdonald on DSK2BSOYB1PROD with RULES4
b. Comments on the Proposed Rule
Commentators were generally
supportive of the proposal. Many
commentators agreed with the
approach, as proposed, not to designate
specific language to be used or require
issuers to frame the shareholder vote to
approve executive compensation in the
form of a standard resolution.41 Some
commentators indicated that issuers
should have flexibility in drafting the
resolution.42 Commentators noted that
flexibility would permit issuers to tailor
the resolution to the issuer’s individual
circumstances.43 Others stated that we
should designate specific language for
the resolution 44 or at least establish
clear, minimum guidelines,45
principles-based guidelines,46 or model
language,47 while other commentators
40 We proposed that if disclosure of golden
parachute compensation arrangements pursuant to
proposed Item 402(t) is included in an annual
meeting proxy statement, such disclosure would be
included in the disclosure subject to the
shareholder advisory vote under Rule 14a–21(a).
Such disclosure under Item 402(t), however, would
not be required to be included in annual meeting
proxy statements.
41 See, e.g., letters from American Federation of
State, County and Municipal Employees
(‘‘AFSCME’’), Center on Executive Compensation
(‘‘Center on Exec. Comp.’’), Compensia
(‘‘Compensia’’), Davis Polk & Wardwell LLP (‘‘Davis
Polk’’), the Financial Services Roundtable (‘‘FSR’’),
Pfizer Inc. (‘‘Pfizer’’), Protective Life Corporation
(‘‘Protective Life’’), and United Brotherhood of
Carpenters (‘‘UBC’’).
42 See, e.g., letters from Business Roundtable
(‘‘Business Roundtable’’) and Towers Watson
(‘‘Towers Watson’’).
43 See letter from Business Roundtable.
44 See, e.g., letters from National Association of
Corporate Directors (‘‘NACD’’), PGGM Investments
(‘‘PGGM’’), Public Citizen (‘‘Public Citizen’’), and
WorldatWork (‘‘WorldatWork’’).
45 See, e.g., letters from Boston Common Asset
Management (‘‘Boston Common’’), First Affirmative
Financial Network, LLC (‘‘First Affirmative’’), Glass
Lewis & Co. (‘‘Glass Lewis’’), Social Investment
Forum (‘‘Social Investment’’), and Walden Asset
Management (‘‘Walden’’).
46 See, e.g., letters from International Corporate
Governance Network (‘‘ICGN’’) and Teachers
Insurance and Annuities Association of America
and College Retirement Equities Fund (‘‘TIAA–
CREF’’).
47 See, e.g., letter from Calvert Group, Ltd.
(‘‘Calvert’’).
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
suggested we include language for a
resolution in the form of non-exclusive
examples 48 or a safe harbor.49
Commentators indicated that it would
be helpful to have an example of
resolution language that would comply
with the rule 50 and that sample
language would simplify the drafting
process for issuers and promote
efficiency.51
Many commentators agreed with our
proposed approach not to exempt
smaller reporting companies from Rule
14a–21(a) and Exchange Act Section
14A(a)(1).52 Some commentators did
suggest that smaller reporting
companies should be exempt from the
say-on-pay vote 53 or required to
conduct a say-on-pay vote on a triennial
basis beginning in 2013.54
Some commentators suggested that
we clarify the relationship between the
federally created right and state law
voting rights.55 Most commentators,
however, indicated there was no need
for the Commission to adopt rules as to
which shares are entitled to vote.56 One
commentator asserted that the issue as
to which shares are entitled to vote is
traditionally a state law matter that we
do not need to address in our
rulemaking.57
c. Final Rule
After considering the comments, we
are adopting Rule 14a–21(a)
substantially as proposed with some
modifications. Under the final rule,
issuers will be required, not less
frequently than once every three years,
to provide a separate shareholder
advisory vote in proxy statements to
approve the compensation of their
named executive officers, as defined in
Item 402(a)(3) of Regulation S–K. Rule
14a–21(a) specifies that the separate
shareholder vote on executive
compensation is required only when
proxies are solicited for an annual or
other meeting of security holders for
48 See, e.g., letters from Society of Corporate
Secretaries and Governance Professionals (‘‘Society
of Corp. Sec.’’) and Sullivan & Cromwell LLP
(‘‘Sullivan’’).
49 See, e.g., letters from The Boeing Company
(‘‘Boeing’’) and Pearl Meyer & Partners (‘‘PM&P’’).
50 See letter from Society of Corp. Sec.
51 See letter from Sullivan.
52 See, e.g., letters from California Public
Employees Retirement System (‘‘CalPERS’’), Council
of Institutional Investors (‘‘CII’’), Glass Lewis, ICGN,
PGGM, and the State Board of Administration of
Florida (‘‘SBA of Florida’’).
53 See, e.g., letters from NACD and UBC.
54 See letter from the Committee on Federal
Regulation of Securities, Section of Business Law of
the American Bar Association (‘‘ABA’’).
55 See, e.g., letter from the ABA.
56 See, e.g., letters from Business Roundtable,
FSR, Pfizer, PGGM, and Protective Life.
57 See letter from Business Roundtable.
PO 00000
Frm 00005
Fmt 4701
Sfmt 4700
6013
which our rules require the disclosure
of executive compensation pursuant to
Item 402 of Regulation S–K. We have
modified the proposal to clarify in the
rule that the shareholder vote on
executive compensation required by
Exchange Act Section 14A(a)(1) and
Rule 14a–21(a) is required with respect
to an annual meeting of shareholders at
which proxies will be solicited for the
election of directors, or a special
meeting in lieu of such annual
meeting.58 In addition, we have
modified the rule to clarify that a sayon-pay vote is required at least once
every three calendar years.
Commentators expressed the view that
as proposed, the rule would have
required a say-on-pay vote within three
years of the date of the most recent sayon-pay vote, which in some cases could
have required a say-on-pay vote more
frequently than once every three
calendar years.59
As adopted, Rule 14a–21(a) requires a
separate shareholder vote to approve the
compensation of executives for the first
annual or other meeting of shareholders
occurring on or after January 21, 2011,
the first day after the end of the 6-month
period beginning on the date of
enactment of the Act. In accordance
with Section 14A(a)(1), shareholders
would vote to approve the
compensation of the issuer’s named
executive officers, as such
compensation is disclosed pursuant to
Item 402 60 of Regulation S–K, including
the CD&A, the compensation tables and
other narrative executive compensation
disclosures required by Item 402.61 We
have included an instruction to Rule
14a–21 to specify that Rule 14a–21 does
not change the scaled disclosure
requirements for smaller reporting
companies and that smaller reporting
companies will not be required to
provide a CD&A in order to comply with
Rule 14a–21. We understand that
smaller reporting companies may wish
to include supplemental disclosure to
facilitate shareholder understanding of
58 See
the discussion in Note 18 above.
letter from ABA.
60 If disclosure of golden parachute compensation
arrangements pursuant to Item 402(t) is included in
an annual meeting proxy statement, such disclosure
would be included in the disclosure subject to the
shareholder advisory vote under Rule 14a–21(a).
Such disclosure under Item 402(t), however, is not
required to be included in all annual meeting proxy
statements.
61 While not required, our rules ‘‘would not
preclude an issuer from seeking more specific
shareholder opinion through separate votes on cash
compensation, golden parachute policy, severance
or other aspects of compensation.’’ See Report of the
Senate Committee on Banking, Housing, and Urban
Affairs regarding The Restoring American Financial
Stability Act of 2010, S. Rep. No. 111–176 at 133
(2010).
59 See
E:\FR\FM\02FER4.SGM
02FER4
6014
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
emcdonald on DSK2BSOYB1PROD with RULES4
their compensation arrangements in
connection with say-on-pay votes.62 We
do not believe, however, that this
possibility supports exempting smaller
reporting companies from the say-onpay votes. As more fully discussed in
Section II.E below, in order to ease
compliance burdens for smaller
reporting companies, we are adopting a
two-year temporary exemption before
these companies are required to conduct
a shareholder advisory vote to approve
executive compensation to permit these
companies additional time to prepare
for the new shareholder advisory votes.
As noted in the Proposing Release,
consistent with Section 14A, the
compensation of directors, as disclosed
pursuant to Item 402(k) 63 or Item
402(r) 64 is not subject to the shareholder
advisory vote. In addition, if an issuer
includes disclosure pursuant to Item
402(s) 65 of Regulation S–K about the
issuer’s compensation policies and
practices as they relate to risk
management and risk-taking incentives,
these policies and practices will not be
subject to the shareholder advisory vote
required by Section 14A(a)(1) as they
relate to the issuer’s compensation for
employees generally. We note, however,
that to the extent that risk
considerations are a material aspect of
the issuer’s compensation policies or
decisions for named executive officers,
the issuer is required to discuss them as
part of its CD&A,66 and therefore such
disclosure would be considered by
shareholders when voting on executive
compensation.
Though we have considered the views
of commentators that prescribed
language would be helpful, the final
rule does not require issuers to use any
specific language or form of resolution
to be voted on by shareholders. This is
consistent with the approach taken by
the Commission in adopting Rule
14a–20 to implement the shareholder
advisory vote on executive
compensation for companies subject to
the Emergency Economic Stabilization
Act of 2008, or EESA. We believe that
issuers should retain flexibility to craft
the resolution language. As we noted in
the Proposing Release, however, the
shareholder advisory vote must relate to
all executive compensation disclosure
62 See letter from Society of Corp. Sec., which
notes that smaller reporting companies may ‘‘feel
compelled to include CD&A to provide additional
disclosure so as to reduce the potential for an
unfavorable shareholder vote.’’
63 17 CFR 229.402(k).
64 17 CFR 229.402(r).
65 17 CFR 229.402(s).
66 See Proxy Disclosure Enhancements, Release
No. 33–9089 (Dec. 16, 2009) [74 FR 68334] at note
38.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
disclosed pursuant to Item 402 of
Regulation S–K. Section 14A(a)(1) of the
Exchange Act requires that the
shareholder advisory vote must be ‘‘to
approve the compensation of
executives, as disclosed pursuant to
[Item 402 of Regulation S–K] or any
successor thereto.’’ 67 We have added an
instruction to Rule 14a–21(a) to indicate
that this language from Section
14A(a)(1) should be included in an
issuer’s resolution for the say-on-pay
vote and to provide a non-exclusive
example of a resolution that would
satisfy the applicable requirements.68 A
vote to approve a proposal on a different
subject matter, such as a vote to approve
only compensation policies and
procedures, would not satisfy the
requirement of Section 14A(a)(1) or final
Rule 14a–21(a). We note that issuers are
not limited to the required shareholder
advisory vote under Rule 14a–21(a) and
may solicit shareholder votes on a range
of compensation matters to obtain more
specific feedback on the issuer’s
compensation policies and programs.
2. Item 24 to Schedule 14A
We proposed a new Item 24 to
Schedule 14A, to require disclosure in
any proxy statement in which an issuer
is providing a separate shareholder vote
on executive compensation to briefly
explain the general effect of the vote,
such as whether the vote is non-binding.
We are adopting this amendment to
Schedule 14A as proposed with some
modifications.
a. Proposed Amendments
Pursuant to proposed new Item 24 of
Schedule 14A, issuers would be
required to disclose in a proxy
statement for an annual meeting (or
other meeting of shareholders for which
our rules require executive
compensation disclosure) that they are
providing a separate shareholder vote
on executive compensation and to
briefly explain the general effect of the
vote, such as whether the vote is nonbinding.69 This was similar to the
approach taken by the Commission in
connection with disclosure
67 Exchange
Act Section 14A(a)(1).
to Rule 14a–21(a) provides the
following non-exclusive example that would satisfy
Rule 14a–21(a): ‘‘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.’’
69 Section 14A(a) does not require additional
disclosure with respect to the non-binding nature
of the vote. We proposed to require additional
disclosure so that information about the advisory
nature of the vote is available to shareholders before
they vote. We continue to believe this information
should be available to shareholders.
68 Instruction
PO 00000
Frm 00006
Fmt 4701
Sfmt 4700
requirements about the shareholder vote
on executive compensation for
companies subject to the EESA.70
b. Comments on the Proposed
Amendments
Commentators were generally
supportive of proposed Item 24 of
Schedule 14A. We requested comment
regarding whether any additional
disclosures should be provided by
issuers that would be useful to
shareholders. Two commentators
indicated that we should amend the
proposal to require disclosure of the
results of previous votes on executive
compensation.71 Another commentator
suggested that we should remove the
reference to the ‘‘general effect’’ of the
vote as it would lead to boilerplate
disclosure and remove the word
‘‘whether’’ from the rule given the nonbinding nature of the vote.72
c. Final Rule
After considering the comments, we
are adopting Item 24 to Schedule 14A as
proposed with some modifications.73
Though we agree that the disclosure of
previous results would be useful to
shareholders, these results are required
to be disclosed pursuant to Item 5.07 of
Form 8–K immediately following the
votes. Consequently, we do not believe
it is necessary to mandate such
disclosure in Item 24 of Schedule 14A.
As discussed below, we have modified
the proposal to require disclosure of the
current frequency of say-on-pay votes
and to require disclosure of when the
next say-on-pay vote will occur.
Item 24 is consistent with the
approach taken by the Commission in
Item 20 of Schedule 14A in connection
with disclosure requirements about the
shareholder advisory vote on executive
compensation for companies subject to
EESA. Based on our experience with
these votes, we believe that such
requirements will lead to disclosure of
useful information about the nature and
effect of the vote for shareholders to
consider, such as whether the vote is
non-binding. We note that although not
required, issuers may choose to provide
additional disclosure in their proxy
materials.
3. Amendments to Item 402(b) of
Regulation S–K
Item 402 requires the disclosure of
executive compensation and includes
70 See Item 20 of Schedule 14A; TARP Adopting
Release, supra note 18, at 75 FR 2790.
71 See letters from ICGN and PGGM.
72 See letter from ABA.
73 See discussion of the modification to the
proposed Item 24 relating to the frequency of sayon-pay votes below at Section II.B.2.c.
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
requirements prescribing narrative and
tabular disclosure, as well as separate
scaled disclosure requirements for
smaller reporting companies.74 Item
402(b) 75 contains the requirement for
CD&A, which is intended to be a
narrative overview that puts into
context the executive compensation
disclosure provided elsewhere in
response to the requirements of Item
402. The CD&A disclosure requirement
is principles-based, in that it identifies
the disclosure concept and provides
several non-exclusive examples. Under
Item 402(b)(1), issuers must explain all
material elements of their named
executive officers’ compensation by
addressing mandatory principles-based
topics in their CD&A.76 Item 402(b)(2) of
Regulation S–K sets forth certain nonexclusive examples of the kind of
information that an issuer should
address in its CD&A, depending upon
the facts and circumstances.
In connection with our
implementation of Section 14A(a)(1), we
proposed amendments to require
disclosure in CD&A regarding how
issuers have considered the results of
previous say-on-pay votes required by
Section 14A and Rule 14a–20.77 After
reviewing comments on this proposal,
we are adopting amendments to Item
402(b)(1) as proposed, with some
modifications in response to concerns
raised by commentators.
emcdonald on DSK2BSOYB1PROD with RULES4
a. Proposed Amendments
We proposed to amend Item 402(b)(1)
to add to the mandatory CD&A topics
whether, and if so, how an issuer has
considered the results of previous
shareholder votes on executive
compensation required by Section 14A
or Rule 14a–20 in determining
compensation policies and decisions
and, if so, how that consideration has
74 Item 402 also includes requirements to disclose
director compensation (Items 402(k) and 402(r)) and
the issuer’s compensation policies as they relate to
risk management (Item 402(s)).
75 17 CFR 229.402(b).
76 These mandatory principles-based topics
require the company to disclose the objectives of
the company’s compensation programs; what the
compensation program is designed to reward; each
element of compensation; why the company
chooses to pay each element; how the company
determines the amount (and, where applicable, the
formula) for each element; and how each element
and the company’s decisions regarding that element
fit into the company’s overall compensation
objectives and affect decisions regarding other
elements.
77 17 CFR 240.14a–20. Pursuant to the EESA,
issuers that have received financial assistance
under the Troubled Asset Relief Program, or TARP,
are required to conduct a separate annual
shareholder vote to approve executive
compensation during the period in which any
obligation arising from the financial assistance
provided under the TARP remains outstanding.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
affected its compensation policies and
decisions. We did not propose to add a
specific requirement for smaller
reporting companies to provide
disclosure about how previous votes
pursuant to Section 14A or Rule 14a–20
affected compensation policies and
decisions because in our view such
information would not be as valuable
outside the context of a complete CD&A
covering the full range of matters
required to be addressed by Item 402(b),
which smaller reporting companies are
not required to provide.
b. Comments on the Proposed
Amendments
Comments on the proposal were
mixed. Several commentators expressed
support for an amendment to Item
402(b)(1) to require that issuers discuss
the results of the shareholder vote and
its effect, if any, on executive
compensation decisions and policies.78
Many of these commentators agreed
with the proposal that discussion of sayon-pay vote results in CD&A should be
mandatory,79 in some cases noting that
this would provide shareholders a better
understanding of how the board of
directors considered the results of
shareholder advisory votes 80 and
encourage a dialogue between issuers
and shareholders on the topic of
compensation.81 Commentators also
indicated that a mandatory discussion
of the consideration of say-on-pay votes
will aid transparency of issuers’
disclosures on compensation 82 and will
help investors better understand
compensation decisions made by
issuers.83
A number of commentators stated that
it would be more appropriate instead to
include consideration of say-on-pay
votes among the non-exclusive
examples of the kind of information that
should be addressed in CD&A, only if
material given the issuer’s individual
facts and circumstances 84 because this
approach would avoid boilerplate
disclosure and require discussion only
when material,85 and that discussion on
78 See, e.g., letters from CalPERS, Calvert, CII,
Colorado Public Employees’ Retirement Association
(‘‘COPERA’’), ICGN, Meridian Compensation
Partners (‘‘Meridian’’), PGGM, Pensions Investment
Research Consultants (‘‘PIRC’’), SBA of Florida,
Sullivan, and TIAA–CREF.
79 See, e.g., letters from CalPERS, Calvert, CII,
PGGM, PIRC, SBA of Florida, and TIAA–CREF.
80 See letter from CalPERS.
81 See letter from TIAA–CREF.
82 See letter from PIRC.
83 See letter from SBA of Florida.
84 See, e.g., letters from ABA, Boeing, Business
Roundtable, Eaton Corporation (‘‘Eaton’’), FSR,
PM&P, Sullivan, and UnitedHealth Group
(‘‘UnitedHealth’’).
85 See, e.g., letter from UnitedHealth.
PO 00000
Frm 00007
Fmt 4701
Sfmt 4700
6015
a mandatory basis may lead to awkward
and non-substantive disclosure if the
issuer has not made changes to its
compensation program in response to
the shareholder vote.86
Other commentators stated that no
amendment to CD&A is required 87
because the Act does not require
additional CD&A disclosure and it
should not be required by rule,88 the
proposed amendment would add length
to CD&A without providing meaningful
information to shareholders,89 and the
amendment would deem the
consideration of say-on-pay votes
material whether such consideration is
material or not.90 Similarly a number of
commentators who asserted that
amending Item 402(b) is not required
also expressed the view that if the
Commission does adopt an amendment,
such CD&A disclosure should be
required only if material under the
issuer’s individual facts and
circumstances.91
Commentators also disagreed with
respect to which say-on-pay votes
should be covered by the CD&A
discussion. Some favored only the most
recent say-on-pay vote,92 indicating that
mandating discussion of prior votes
would result in extraneous discussion 93
and little benefit.94 Other commentators
indicated that prior votes should also be
required to be addressed.95 These
commentators noted that such
disclosure of prior votes is appropriate
given the long-term process of
determining compensation 96 and that it
would permit investors to evaluate any
trends in the results of say-on-pay
votes.97 One commentator stated that if
CD&A disclosure with respect to say-onpay votes is mandatory, it should be
limited to the most recent vote, but if
not mandatory should not be so
limited.98 Although there was little
response to our request for comment
regarding whether smaller reporting
companies should be required to
disclose their consideration of
86 See
letter from PM&P.
e.g., letters from Center on Exec. Comp.,
Compensia, Davis Polk, Pfizer, Society of Corp.
Sec., and UBC.
88 See, e.g., letter from Center on Exec. Comp.
89 See letter from Davis Polk.
90 See, e.g., letter from Society of Corp. Sec.
91 See, e.g., letters from Compensia, Davis Polk,
and Society of Corp. Sec.
92 See, e.g., letters from ABA, Boeing, Eaton, FSR,
McGuireWoods (‘‘McGuireWoods’’), Meridian,
NACD, Pfizer, Protective Life, and Sullivan.
93 See letter from Sullivan.
94 See letter from McGuireWoods.
95 See, e.g., letters from Chris Barnard (‘‘Barnard’’),
Calvert, PGGM, PIRC, PM&P, and SBA of Florida.
96 See, e.g., letter from PGGM.
97 See, e.g., letter from SBA of Florida.
98 See letter from Boeing.
87 See,
E:\FR\FM\02FER4.SGM
02FER4
6016
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
shareholder advisory votes on executive
compensation, one commentator stated
that our existing disclosure
requirements for these companies are
sufficient.99
c. Final Rule
After considering the comments, we
are adopting amendments to the
disclosure requirements of Item
402(b)(1) substantially as proposed,
with a modification to clarify that this
mandatory topic relates to the issuer’s
consideration of the most recent say-onpay vote. As discussed below, issuers
should address their consideration of
the results of earlier say-on-pay votes, to
the extent material.
The final rule amends Item 402(b)(1)
to require issuers to address in CD&A
whether and, if so, how their
compensation policies and decisions
have taken into account the results of
the most recent shareholder advisory
vote on executive compensation.
Although it is not mandated by Section
951 of the Act, we continue to believe
that including this mandatory topic in
CD&A will facilitate better investor
understanding of issuers’ compensation
decisions. Because the shareholder
advisory vote will apply to all issuers,
we view information about how issuers
have responded to such votes as more
in the nature of a mandatory principlesbased topic than an example. The
manner in which individual issuers may
respond to such votes in determining
executive compensation policies and
decisions will likely vary depending
upon facts and circumstances. We
expect that this variation will be
reflected in the CD&A disclosures.
Following consideration of the
comments received, we have decided to
limit the mandatory topic to whether,
and if so, how the issuer has considered
the results of the most recent say-on-pay
vote in determining compensation
policies and decisions, and if so, how
that consideration has affected the
issuer’s executive compensation
policies and decisions.100 This
modification reflects that, in making
voting and investment decisions,
shareholders will benefit from
understanding what consideration the
issuer has given to the most recent say99 See
letter from ICGN.
companies are currently required to
disclose, pursuant to Item 5.07 of Form 8–K [17
CFR 249.208a], the preliminary results of a
shareholder vote within four business days after the
end of the meeting at which the vote is held and
final voting results within four business days after
the final voting results are known. We are adopting
amendments to require additional disclosure on
Form 8–K regarding the company’s determination
of the frequency of say-on-pay votes. See Section
II.B.5 below.
emcdonald on DSK2BSOYB1PROD with RULES4
100 Reporting
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
on-pay vote. Limiting the mandatory
topic to the most recent shareholder
vote should also focus the disclosure so
there should not be lengthy boilerplate
discussions of all previous votes.
Although we have added issuer
consideration of the most recent say-onpay vote to the mandatory topics, we
believe that, consistent with the
principles-based nature of CD&A,
issuers should address their
consideration of the results of earlier
say-on-pay votes to the extent such
consideration is material to the
compensation policies and decisions
discussed.
Because companies with outstanding
indebtedness under the TARP will
continue to have an annual say-on-pay
vote until they repay all such
indebtedness, these votes should be
addressed by issuers in CD&A as well.
To reflect our treatment of companies
subject to EESA with outstanding
obligations under TARP, we have also
modified the amendment to Item
402(b)(1) as adopted to address issuer
consideration of the results of the most
recent shareholder advisory vote on
executive compensation required by
Section 14A or Rule 14a–20. This
reflects that the vote required pursuant
to the EESA and 14a–20 is effectively
the same vote that would be required
under Section 14A(a)(1).101
Smaller reporting companies are
subject to scaled disclosure
requirements in Item 402 of Regulation
S–K and are not required to include a
CD&A. We are not adding a specific
requirement for smaller reporting
companies to provide disclosure about
how previous votes pursuant to Section
14A affected compensation policies and
decisions because we believe such
information would not be as valuable
outside the context of a complete CD&A
covering the full range of matters
required to be addressed by Item 402(b).
However, we note that pursuant to Item
402(o) of Regulation S–K, 102 smaller
reporting companies are required to
provide a narrative description of any
material factors necessary to an
understanding of the information
disclosed in the Summary
Compensation Table. If consideration of
prior say-on-pay votes is such a factor
for a particular issuer, disclosure would
be required pursuant to Item 402(o).
B. Shareholder Approval of the
Frequency of Shareholder Votes on
Executive Compensation
1. Rule 14a–21(b)
We proposed Rule 14a–21(b) pursuant
to which issuers would be required, not
less frequently than once every six
years, to provide a separate shareholder
advisory vote in proxy statements to
determine the frequency of the
shareholder vote on the compensation
of executives required by Section
14A(a)(1). We are adopting this
amendment substantially as proposed
with slight modifications in response to
comments.
a. Proposed Rule
Under proposed Rule 14a–21(b),
issuers would be required, not less
frequently than once every six years, to
provide a separate shareholder advisory
vote in proxy statements for annual
meetings to determine whether the
shareholder vote on the compensation
of executives required by Section
14A(a)(1) ‘‘will occur every 1, 2, or 3
years.’’ 103 As proposed, Rule 14a–21(b)
would also clarify that the separate
shareholder vote on the frequency of
shareholder votes on executive
compensation would be required only
in a proxy statement for an annual or
other meeting of shareholders for which
our rules require compensation
disclosure. Consistent with Section 14A,
issuers would be required to provide the
separate shareholder vote on the
frequency of the say-on-pay vote for the
first annual or other such meeting of
shareholders occurring on or after
January 21, 2011.
b. Comments on the Proposed Rule
Comments on the proposal were
generally favorable. Many commentators
agreed that the rule did not need to
specify the required language to be used
for the shareholder vote on the
frequency of shareholder votes to
approve executive compensation.104
Some commentators, however,
recommended that the Commission
should specify language or provide nonexclusive examples of resolutions so
issuers would know how the
requirement may be satisfied.105 A
number of commentators also requested
that the Commission clarify whether the
vote should be presented in the form of
a resolution given that shareholders will
have a choice among three frequencies
103 Exchange
101 The
treatment of companies subject to EESA
with outstanding obligations under TARP is
discussed in Section II.C.3 below.
102 17 CFR 229.402(o).
PO 00000
Frm 00008
Fmt 4701
Sfmt 4700
Act Section 14A(a)(2).
e.g., letters from AFSCME, Business
Roundtable, FSR, Protective Life, and Towers
Watson.
105 See, e.g., letters from Boeing, Pfizer, PGGM,
Society of Corp. Sec., and Sullivan.
104 See,
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
or abstaining from the frequency
vote.106 Although some commentators
suggested that we specify which shares
are entitled to vote in the shareholder
vote on the frequency of say-on-pay
votes,107 most commentators indicated
there was no need for the Commission
to address this question.108
We also requested comment regarding
whether a new issuer should be
permitted to disclose the frequency of
its say-on-pay votes in the registration
statement for its initial public offering
and be exempted from conducting sayon-pay votes and frequency votes at its
annual meetings until the annual
meeting for the year disclosed in its
registration statement. Most
commentators indicated that newly
public companies should not be exempt
from the say-on-pay and frequency votes
and should be required to conduct sayon-pay and frequency votes at their first
annual shareholders meeting after the
initial public offering.109 However,
some commentators expressed support
for such an exemption as it would
provide these issuers additional time to
formulate their compensation policies
as a public company before conducting
the shareholder votes required by
Section 14A.110
emcdonald on DSK2BSOYB1PROD with RULES4
c. Final Rule
After reviewing and considering the
comments, we are adopting Rule 14a–
21(b) as proposed with slight
modifications to clarify that the
frequency vote is required at least once
during the six calendar years following
the prior frequency vote.111 Under Rule
14a–21(b), issuers will be required, not
less frequently than once every six
calendar years, to provide a separate
shareholder advisory vote in proxy
statements for annual meetings to
determine whether the shareholder vote
on the compensation of executives
required by Section 14A(a)(1) ‘‘will
occur every 1, 2, or 3 years.’’ 112 After
considering and reviewing comments on
the proposed rule, we do not believe it
is necessary to provide a form of
resolution for the vote required by Rule
14a–21(b). In response to concerns
106 See, e.g., letters from ABA, Pfizer, Society of
Corp. Sec., and Sullivan.
107 See, e.g., letter from the ABA.
108 See, e.g., letters from Business Roundtable,
FSR, Pfizer, PGGM, and Protective Life.
109 See, e.g., letters from AFSCME, CII, CalPERS,
ICGN, Georg Merkl (‘‘Merkl’’), Public Citizen, and
RAILPEN Investments and Universities
Superannuation Scheme (‘‘RAILPEN & USS’’).
110 See, e.g., letters from ABA, Compensia, Davis
Polk, NACD, and Sullivan.
111 As proposed, Rule 14a–21(b) would have
required a frequency vote within the six-year period
from the date of the most recent frequency vote.
112 Exchange Act Section 14A(a)(2).
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
raised by commentators and discussed
below, we are also adopting a temporary
exemption under which smaller
reporting companies will not be
required to conduct a shareholder
advisory vote on the frequency of sayon-pay votes until meetings on or after
January 21, 2013.113
Rule 14a–21(b) will also clarify that
the separate shareholder vote on the
frequency of shareholder votes on
executive compensation will be
required only in a proxy statement for
an annual or other meeting of
shareholders at which directors will be
elected and that such vote is required
only once every six calendar years.
Under Rule 14a–21(b), issuers will be
required to provide the separate
shareholder vote on the frequency of the
say-on-pay vote for the first annual or
other such meeting of shareholders
occurring on or after January 21, 2011.
After reviewing the comment letters, we
continue to believe that the say-on-pay
vote and the frequency vote should be
required of newly public companies in
the proxy statement for such company’s
first annual meeting after the initial
public offering. This will give
shareholders the opportunity to express
a view on these matters while the
company is in the process of
establishing policies that will apply as
a public company and could benefit
from understanding its shareholders’
point of view.
2. Item 24 of Schedule 14A
In order to implement the
requirements of Section 14A(a), we
proposed new Item 24 to Schedule 14A,
to briefly explain the general effect of
the frequency vote, such as whether the
vote is non-binding. We are adopting
this amendment to Schedule 14A as
proposed with a modification.
a. Proposed Amendments
In addition to disclosure regarding the
vote on executive compensation, we
proposed that issuers would be required
to disclose in the proxy statement that
they are providing a separate
shareholder advisory vote on the
frequency of the shareholder advisory
vote on executive compensation.
Proposed Item 24 of Schedule 14A
would also require issuers to briefly
explain the general effect of this vote,
such as whether the vote is non-binding.
b. Comments on the Proposed
Amendments
Commentators generally supported
proposed Item 24 of Schedule 14A as it
relates to the frequency of say-on-pay
113 See
PO 00000
discussion in Section II.E below.
Frm 00009
Fmt 4701
Sfmt 4700
6017
votes.114 One commentator expressed
the view that the proposed amendment
is not needed as it will lead to
boilerplate disclosure.115 Some
commentators also suggested that
issuers should be required to disclose
the current frequency of say-on-pay
votes.116
c. Final Rule
After reviewing and considering the
comments, we are adopting Item 24 of
Schedule 14A as proposed with a
modification. Issuers will be required to
disclose in the proxy statement that they
are providing a separate shareholder
advisory vote on the frequency of sayon-pay votes. Item 24 of Schedule 14A
will also require issuers to briefly
explain the general effect of this vote,
such as whether the vote is nonbinding.117 As noted above, this is
similar to the approach taken by the
Commission in connection with
disclosure requirements about the
shareholder advisory vote on executive
compensation for companies subject to
EESA.118 Based on our experience with
these votes, we believe that such
requirements will lead to useful
disclosure of information about the
nature and effect of the vote for
shareholders to consider, such as
whether the vote is non-binding.
After reviewing comments, we are
also adding a requirement to Item 24 for
issuers to provide disclosure of the
current frequency of say-on-pay votes
and when the next scheduled say-onpay vote will occur,119 in their proxy
materials. We believe this will provide
useful information to shareholders
about upcoming say-on-pay and
frequency shareholder advisory votes.
3. Amendment to Rule 14a–4
In order to implement the
requirements of Section 14A(a)(2), we
also proposed amendments to Rule 14a–
4. After considering comments, we are
adopting the amendments to Rule 14a–
4 as proposed, with slight modification.
114 See, e.g., letters from CalPERS, ICGN, PGGM,
and Protective Life.
115 See letter from Society of Corp. Sec.
116 See, e.g., letters from ICGN and TIAA–CREF.
117 As discussed in Section II.A.2.a, Section
14A(a) does not require additional disclosure with
respect to the non-binding nature of the vote. We
are requiring additional disclosure so that
information about the advisory nature of the vote
is available to shareholders before they vote.
118 See Section II.A.2.a, above.
119 Issuers should disclose the current frequency
as determined by the board following a shareholder
advisory vote. We would not expect disclosure of
either the current frequency or when the next
scheduled say-on-pay vote will occur in proxy
materials for the meeting where an issuer initially
conducts the say-on-pay and frequency votes.
E:\FR\FM\02FER4.SGM
02FER4
6018
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
emcdonald on DSK2BSOYB1PROD with RULES4
a. Proposed Amendments
As noted in the Proposing Release,
Section 14A(a)(2) requires a shareholder
advisory vote on whether say-on-pay
votes will occur every 1, 2, or 3 years.
Thus, shareholders must be given four
choices: Whether the shareholder vote
on executive compensation will occur
every 1, 2, or 3 years, or to abstain from
voting on the matter. In our view,
Section 14A(a)(2) does not allow for
alternative formulations of the
shareholder vote, such as proposals that
would provide shareholders with two
substantive choices (e.g., to hold a
separate shareholder vote on executive
compensation every year or less
frequently), or only one choice (e.g., a
company proposal to hold shareholder
votes every two years). We noted in the
Proposing Release that we would expect
that the board of directors will include
a recommendation as to how
shareholders should vote on the
frequency of shareholder votes on
executive compensation.120 However,
the issuer must make clear in these
circumstances that the proxy card
provides for four choices (every 1, 2, or
3 years, or abstain) and that
shareholders are not voting to approve
or disapprove the issuer’s
recommendation. Accordingly, we
proposed amendments to our proxy
rules to reflect the statutory requirement
that shareholders must be provided the
opportunity to cast an advisory vote on
whether the shareholder vote on
executive compensation required by
Section 14A(a)(1) of the Exchange Act
will occur every 1, 2, or 3 years, or to
abstain from voting on the matter.121
Specifically, we proposed
amendments to Rule 14a–4 under the
Exchange Act, which provides
requirements as to the form of proxy
that issuers are required to include with
their proxy materials, to require that
issuers present four choices to their
shareholders. Absent amendment, Rule
14a–4 requires the form of proxy to
provide means whereby the person
solicited is afforded an opportunity to
specify by boxes a choice between
approval or disapproval of, or
abstention with respect to each separate
matter to be acted upon, other than
elections to office.122 We proposed
amendments to revise this standard to
permit proxy cards to reflect the choice
120 See
Section II.B.3 of the Proposing Release.
the shareholder vote on the frequency
of voting on executive compensation is advisory,
we do not believe that it is necessary to prescribe
a standard for determining which frequency has
been ‘‘adopted’’ by the shareholders.
122 Rule 14a–4(b)(1).
121 Because
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
of 1, 2, or 3 years, or abstain, for these
votes.
b. Comments on the Proposed
Amendments
Comments on the proposal were
generally favorable. Many commentators
expressed support for the proposed
approach where shareholders are given
four choices on the frequency vote.123
Some commentators suggested
alternative approaches including a vote
where shareholders would rank each
choice of frequency or vote separately
for each of 1, 2, and 3 years,124 a vote
where management would choose 1, 2,
or 3 years as the frequency and ask
shareholders to approve or disapprove
its choice,125 and a two-step approach
whereby shareholders would first vote
whether or not they have a preference
as to the frequency of say-on-pay votes
and, if they do have a preference,
subsequently vote on whether such
votes should be conducted every 1, 2, or
3 years.126
In addition, we requested comment in
the Proposing Release as to whether
issuers, brokers, transfer agents, and
data processing firms would be able to
accommodate the four choices for a
single line item on the proxy card.
Commentators indicated that they
would be ready for the vote with four
choices on the proxy card by January 21,
2011.127 One commentator
recommended that we clarify that
issuers may vote uninstructed shares in
accordance with management’s
recommendations so long as they follow
the requirements of Rule 14a–4,128
while another suggested that the
Commission extend the transition
guidance permitting the presentation of
three choices for the frequency vote for
the entire 2011 proxy season and
perhaps require the three-choice
approach for all issuers for 2011 to
allow for uniformity among different
issuers.129
c. Final Rule
After considering the comments, we
are adopting the rule substantially as
proposed with some modifications.
Specifically, we are adopting
amendments to Rule 14a–4 under the
Exchange Act, which provides
123 See, e.g., letters from Calvert, COPERA, ICGN,
Meridian, Merkl, PGGM, and Protective Life.
124 See letter from Keith P. Bishop (‘‘Bishop’’).
125 See letter from UBC.
126 See letter from Society of Corp. Sec.
127 See, e.g., letters from Broadridge Financial
Solutions, Inc. (‘‘Broadridge’’) and Proxytrust
(‘‘Proxytrust’’).
128 See letter from Sullivan.
129 See letter from ABA. For a discussion of
transition matters, see Section II.F below.
PO 00000
Frm 00010
Fmt 4701
Sfmt 4700
requirements as to the form of proxy
that issuers are required to include with
their proxy materials, to require that
issuers present four choices to their
shareholders. Under existing Rule 14a–
4, the form of proxy is required to
provide means whereby the person
solicited is afforded an opportunity to
specify by boxes a choice between
approval or disapproval of, or
abstention with respect to each separate
matter to be acted upon, other than
elections to office. Absent an
amendment, Rule 14a–4 would not
permit proxy cards to reflect the choice
of 1, 2, or 3 years, or abstain. The
amendments revise the rule to permit
proxy cards to reflect the choice of 1, 2,
or 3 years, or abstain, for the frequency
vote.
In response to comment, we note that
issuers may vote uninstructed proxy
cards in accordance with management’s
recommendation for the frequency vote
only if the issuer follows the existing
requirements of Rule 14a–4 to (1)
include a recommendation for the
frequency of say-on-pay votes in the
proxy statement, (2) permit abstention
on the proxy card, and (3) include
language regarding how uninstructed
shares will be voted in bold on the
proxy card.
4. Amendment to Rule 14a–8
In connection with implementing the
requirements of Section 14A(a)(2), we
also proposed a note to Rule 14a–
8(i)(10) relating to shareholder
proposals. After considering the
comments, we are adopting the
amendment to Rule 14a–8 with some
modifications.
a. Proposed Amendments
Our proposed amendment to Rule
14a–8 under the Exchange Act would
add a note to Rule 14a–8(i)(10) to clarify
the status of shareholder proposals that
seek an advisory shareholder vote on
executive compensation or that relate to
the frequency of shareholder votes
approving executive compensation.
Rule 14a–8 provides eligible
shareholders with an opportunity to
include a proposal in an issuer’s proxy
materials for a vote at an annual or
special meeting of shareholders. An
issuer generally is required to include
the proposal unless the shareholder has
not complied with the rule’s procedural
requirements or the proposal falls
within one of the rule’s 13 substantive
bases for exclusion.130 One of the
substantive bases for exclusion, Rule
14a–8(i)(10), provides that an issuer
130 These substantive bases for exclusion are set
forth in Rule 14a–8(i).
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
may exclude a shareholder proposal that
has already been substantially
implemented.
We proposed adding a note to Rule
14a–8(i)(10) to permit the exclusion of
a shareholder proposal that would
provide a say-on-pay vote or seeks
future say-on-pay votes or that relates to
the frequency of say-on-pay votes,
provided the issuer has adopted a policy
on the frequency of say-on-pay votes
that is consistent with the plurality of
votes cast in the most recent vote in
accordance with Rule 14a–21(b). As
noted in Section I above, a ‘‘say-on-pay’’
vote is defined as a separate resolution
subject to shareholder vote to approve
the compensation of executives, as
disclosed pursuant to Item 402 of
Regulation S–K, or any successor to
Item 402.
As proposed, an issuer would be
permitted to exclude shareholder
proposals that propose a vote on the
approval of executive compensation as
disclosed pursuant to Item 402 of
Regulation S–K or on the frequency of
such votes, including those drafted as
requests to amend the issuer’s governing
documents, so long as the issuer has
adopted a policy on the frequency of
say-on-pay votes that is consistent with
the plurality of votes cast in the most
recent vote required by Rule 14a–21(b)
and provides a vote on frequency at
least as often as required by Section
14A(a)(2).
emcdonald on DSK2BSOYB1PROD with RULES4
b. Comments on the Proposed
Amendments
Comments on the proposal were
mixed. Many commentators supported
the proposed amendment to permit
exclusion of shareholder proposals on
frequency and say-on-pay,131 stating
that the amendment would eliminate
redundancy and reduce administrative
burdens and costs.132 Other
commentators disagreed with the
general approach,133 stating that they
believe it would be unwise as a matter
of public policy and would
inappropriately interpret substantial
implementation because the note would
permit exclusion of proposals
requesting a frequency that the issuer
has not implemented.134 Other
commentators asserted that an
amendment is not required because
issuers should be permitted to exclude
131 See, e.g., letters from ABA, Business
Roundtable, Center for Capital Markets
Competitiveness of the U.S. Chamber of Commerce
(‘‘CCMC’’), Eaton, FSR, ICGN, Pfizer, PGGM, and
Protective Life.
132 See, e.g., letter from Business Roundtable.
133 See, e.g., letters from AFSCME, Calvert, Center
on Exec. Comp., CII, Public Citizen, and UBC.
134 See, e.g., letter from AFSCME.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
any shareholder proposals on frequency
as long as the issuer complies with
Section 14A(a)(2).135 Some
commentators suggested that we should
also permit issuers to exclude
shareholder proposals on the frequency
of say-on-pay votes when they adopt a
policy to hold say-on-pay votes more
frequently than the frequency that is
consistent with the plurality of votes
cast in the most recent shareholder
vote 136 to prevent issuers being
penalized for providing shareholders
with more frequent say-on-pay votes.137
Other commentators felt that issuers
should not be required to adopt a
particular policy on the frequency of
say-on-pay votes in order to be
permitted to exclude shareholder
proposals on executive
compensation,138 noting that an issuer
should be permitted to exclude
shareholder proposals on frequency so
long as the issuer provides a reasonable
basis for the frequency chosen to
prevent an annual re-visiting of the
frequency vote by shareholders.139
In addition, some commentators
stated that the proposed note to Rule
14a–8(i)(10) should incorporate a
majority standard rather than the
proposed plurality standard, so that
issuers would need to adopt a policy
consistent with the majority of votes
cast in order to exclude a shareholder
proposal as substantially
implemented,140 noting that the
majority standard would be consistent
with policies that boards should
implement actions recommended by
majority shareholder vote.141 Some
commentators also recommended that
issuers should be permitted to exclude
shareholder proposals for votes on
executive compensation that are
narrower in scope 142 than the say-onpay vote required under Rule 14a–
21(a).143 These commentators expressed
the concern that shareholders could
undermine the non-binding nature of
the frequency vote through more
specific vote proposals.144
135 See
letter from UBC.
e.g., letters from ABA, Davis Polk,
Meridian, Society of Corp. Sec., and Sullivan.
137 See letter from Sullivan.
138 See, e.g., letters from Boeing and Center on
Exec. Comp.
139 See letter from Boeing.
140 See, e.g., letters from CalPERS, CII, and SBA
of Florida.
141 See letter from CII.
142 An example would be a shareholder proposal
for an advisory vote on the Chief Executive Officer’s
compensation as disclosed under Item 402 of
Regulation S–K.
143 See, e.g., letters from Business Roundtable,
Boeing, CCMC, Davis Polk, Pfizer, and Society of
Corp. Sec.
144 See letter from Boeing.
136 See,
PO 00000
Frm 00011
Fmt 4701
Sfmt 4700
6019
Finally, some commentators indicated
that it would be inappropriate to permit
companies to exclude shareholder
proposals on frequency if there have
been material changes in the company’s
compensation program since the prior
frequency vote 145 because shareholders
should be permitted the opportunity to
revisit their decision on the frequency
vote under such circumstances.146 Other
commentators noted that material
changes to an issuer’s compensation
program should not limit the
availability of Rule 14a–8(i)(10) because
shareholders will understand that a
company’s compensation program is
dynamic and factor this into their
frequency voting decisions.147 These
commentators noted that the difficulty
in determining whether changes are
material would erode the benefit of the
note to Rule 14a–8(i)(10), create
uncertainty as to a company’s ability to
exclude shareholder proposals on
frequency,148 and burden the staff with
analyzing materiality on a case-by-case
basis.149
c. Final Rule
After reviewing the comments, we are
adopting the amendment to Rule 14a–
8(i)(10) with some modifications.
We continue to believe that under
certain conditions, an issuer should be
permitted to exclude subsequent
shareholder proposals that seek a vote
on the same matters as the shareholder
advisory votes on say-on-pay and
frequency required by Section 14A(a).
Consequently, consistent with the
proposal, we are adding a note to Rule
14a–8(i)(10) to permit the exclusion of
a shareholder proposal that would
provide a say-on-pay vote, seeks future
say-on-pay votes, or relates to the
frequency of say-on-pay votes in certain
circumstances; however, in response to
comments,150 we are changing the
threshold for exclusion from a plurality
to a majority. Specifically, as adopted,
the note to Rule 14a–8(i)(10) will permit
exclusion of such a shareholder
proposal if, in the most recent
shareholder vote on frequency of sayon-pay votes, a single frequency (i.e.,
one, two or three years) received the
support of a majority of the votes cast
and the issuer has adopted a policy on
145 See, e.g., letters from Boston Common, Calvert,
First Affirmative, ICGN, PIRC, PGGM, RAILPEN &
USS, Social Investment, and Walden.
146 See letter from RAILPEN & USS.
147 See, e.g., letters from ABA, Boeing, Frederic
W. Cook & Co., Inc. (‘‘Frederic Cook’’),
McGuireWoods, Pfizer, PM&P, and Protective Life.
148 See letter from McGuireWoods.
149 See letter from Frederic Cook.
150 See, e.g., letters from CalPERS, CII, and SBA
of Florida.
E:\FR\FM\02FER4.SGM
02FER4
6020
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
emcdonald on DSK2BSOYB1PROD with RULES4
the frequency of say-on-pay votes that is
consistent with that choice.151
In light of the nature of the vote—with
three substantive choices—it is possible
that no single choice will receive a
majority of votes and that, as a result,
there may be issuers that may not be
able to exclude subsequent shareholder
proposals regarding say-on-pay matters
even if they adopt a policy on frequency
that is consistent with plurality of votes
cast. We also recognize, however, that if
no single frequency choice receives the
support of a majority of votes cast, the
choice preferred by the plurality may
not represent the choice preferred by
most of the company’s shareholders. For
example, if 30% of votes support annual
voting, 30% support biennial voting,
and 40% favor triennial voting, no
frequency would have received a
majority of votes cast; therefore, it is not
clear that implementing the plurality
choice would be favored by most of the
company’s shareholders. In that
situation, if the company implemented
triennial voting and the note to Rule
14a–8(i)(10) allowed exclusion of
shareholder proposals seeking a
different frequency, this could prevent
shareholders from putting forth
proposals that seek to request that the
company implement a frequency that
would be preferred by a majority of
shareholders. After considering
commentators’ views, we are concerned
that this approach would
inappropriately restrict shareholder
proposals on this topic, particularly in
light of Section 14A(c)(4)’s directive that
the shareholder advisory votes required
by Sections 14A(a) and (b) may not be
construed ‘‘to restrict or limit the ability
of shareholders to make proposals for
inclusion in proxy materials related to
executive compensation.’’
On the other hand, if a majority of
votes cast favors a given frequency and
the issuer adopts a policy on frequency
that is consistent with the choice of the
majority of votes, then in our view, as
a matter of policy it is appropriate for
Rule 14a–8 to provide for exclusion of
subsequent shareholder proposals that
would provide a say-on-pay vote, seek
future say-on-pay votes, or relate to the
frequency of say-on-pay votes. We
believe that, in these circumstances,
additional shareholder proposals on
frequency generally would
151 For purposes of this analysis, an abstention
would not count as a vote cast. We are prescribing
this voting standard solely for purposes of
determining the scope of the exclusion under the
note to Rule 14a–8(i)(10), and not for the purpose
of determining whether a particular voting
frequency should be considered to have been
adopted or approved by shareholder vote as a
matter of state law.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
unnecessarily burden the company and
its shareholders given the company’s
adherence to the view favored by a
majority of shareholder votes regarding
the frequency of say-on-pay votes.152 As
described above, an issuer would not be
permitted to exclude such shareholder
proposals under the note if no frequency
choice received a majority of the votes
cast.
As a result of this amendment, an
issuer will be permitted to exclude
shareholder proposals that propose a
vote on the frequency of such votes,153
including those drafted as requests to
amend the issuer’s governing
documents. For example, if in the first
vote under Rule 14a–21(b) a majority of
votes were cast for a two-year frequency
for future shareholder votes on
executive compensation, and the issuer
adopts a policy to hold the vote every
two years, a shareholder proposal
seeking a different frequency could be
excluded so long as the issuer seeks
votes on executive compensation every
two years.154
We also believe that a shareholder
proposal that would provide an
advisory vote or seek future advisory
votes on executive compensation with
substantially the same scope as the sayon-pay vote required by Rule 14a–
21(a)—the approval of executive
compensation as disclosed pursuant to
Item 402 of Regulation S–K—should
also be subject to exclusion under Rule
14a–8(i)(10) if the issuer adopts a policy
on frequency that is consistent with the
majority of votes cast. This is consistent
with the proposal, although like
additional frequency votes, the note to
Rule 14a–8(i)(10) would condition
exclusion on the company
implementing the frequency favored by
a majority of shareholders. In this
circumstance, shareholders would be
provided the opportunity to provide
152 We recognize that this approach is different
from the traditional ‘‘substantially implemented’’
standard in Rule 14a–8(i)(10) since the frequency
sought by a shareholder would be different from the
frequency the issuer has implemented. We have
revised the note to avoid confusion in that regard.
A shareholder proposal seeking a frequency that is
the same as that provided by the company would
be excludable under the traditional ‘‘substantially
implemented’’ standards in Rule 14a–8(i)(10)
without regard to the new note, assuming there are
no other differences that would lead to a different
result.
153 No-action requests to exclude shareholder
proposals that seek shareholder advisory votes on
different aspects of executive compensation will be
evaluated on a case-by-case basis by the staff.
154 Issuers seeking to exclude a shareholder
proposal under the note to Rule 14a–8(i)(10) are
required to follow the same shareholder proposal
process with the staff of the Commission as would
be required if the issuer intended to rely on any
other substantive basis for exclusion under Rule
14a–8.
PO 00000
Frm 00012
Fmt 4701
Sfmt 4700
say-on-pay votes on the frequency
preferred by a majority of shareholders
when last polled, and we believe
additional proposals on the same matter
would impose unnecessary burdens on
companies and shareholders.
We are also modifying the note
slightly. To avoid confusion, we are
removing the requirement that an issuer
must provide ‘‘a vote on frequency at
least as often as required by Section
14A(a)(2).’’ We believe this language is
not necessary as issuers are already
required to comply with Section
14A(a)(2) in any event. In addition, we
are removing the language ‘‘as
substantially implemented’’ from the
note to avoid confusion.
5. Amendment to Form 8–K
We also proposed amendments to
Form 10–Q and Form 10–K to require
additional disclosure regarding the
issuer’s decision to adopt a policy on
the frequency of say-on-pay votes
following a shareholder advisory vote
on frequency. After considering the
comments, we are not adopting
amendments to Form 10–Q and Form
10–K. Instead, we are adopting a new
Form 8–K Item to require disclosure of
the issuer’s decision on the frequency of
say-on-pay votes.
a. Proposed Amendments
Issuers are currently required to
disclose the preliminary results of
shareholder votes pursuant to Item 5.07
of Form 8–K within four business days
following the day the shareholder
meeting ends and final voting results
within four business days of when they
are known. This item will require
issuers to report how shareholders voted
in the say-on-pay vote and the
frequency of shareholder votes on
executive compensation.
We proposed amendments to Form
10–K and Form 10–Q to require
additional disclosure regarding the
issuer’s decision in light of such vote as
to how frequently the company will
include those say-on-pay votes for the
six subsequent years. Our proposed
amendments to Item 9B of Form 10–K
and new Item 5(c) of Part II of Form 10–
Q would have required an issuer to
disclose this decision in the Form 10–
Q covering the quarterly period during
which the shareholder advisory vote
occurs, or in the Form 10–K if the
shareholder advisory vote occurs during
the issuer’s fourth quarter. In light of the
relevance of this decision to potential
shareholder proposals on the topic, we
proposed this disclosure to notify
shareholders on a timely basis about the
issuer’s decision on how frequently it
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
will provide the say-on-pay vote to
shareholders.
Form 8–K to facilitate reporting the
results of the frequency vote.166
b. Comments on the Proposed
Amendments
c. Final Rule
Comments on the proposal were
mixed. A number of commentators
supported the amendments as proposed
that would require disclosure of an
issuer’s decision as to the frequency of
say-on-pay votes in the Form 10–Q or
Form 10–K for the period during which
the advisory vote occurs 155 as the
requirement would allow shareholders
to readily obtain an issuer’s decision on
the frequency of say-on-pay votes.156
Some commentators questioned
whether the Commission should require
such disclosure of an issuer’s
determination regarding frequency
following the results of a shareholder
advisory vote at all,157 given that the
shareholder vote on the frequency of
say-on-pay votes is only advisory.158
Other commentators suggested that we
should allow issuers additional time to
consider the results of the shareholder
vote 159 and to contact shareholders for
additional feedback,160 particularly if
the shareholders do not express a clear
preference on frequency. These
commentators recommended that we
instead require that disclosure about the
issuer’s decision be included in a later
Form 10–Q or Form 10–K filing,161
Form 8–K filing,162 or on the issuer’s
Web site.163 These commentators
indicated that a requirement for a later
filing would still permit shareholders
adequate time to submit a shareholder
proposal on the frequency of say-on-pay
votes.164
Commentators also noted that Item
5.07 of Form 8–K currently requires
disclosure of the number of votes cast
‘‘for, against or withheld’’ on matters
submitted to a vote of shareholders, but
that the item would not permit
disclosure of the results of the frequency
vote for ‘‘1 year, 2 years, 3 years, or
abstain.’’ 165 These commentators
suggested that we amend Item 5.07 of
After reviewing the comments on this
issue, we have concluded that
disclosure of the issuer’s determination
regarding frequency of say-on-pay votes
should be required, but we are adopting
the disclosure requirement through an
amendment to Item 5.07 of Form 8–K in
lieu of amendments to Form 10–Q and
Form 10–K. We have considered the
position of commentators who were
concerned that the required timing of
disclosure under our proposal would
not permit sufficient time for issuers to
fully consider the results of the vote,
including through board deliberations
and consultation with shareholders as
described above, before the disclosure of
the decision is required.167 In light of
this concern, we are adopting this
disclosure requirement as a Form 8–K
requirement due at a later date, in lieu
of amending Form 10–Q and Form 10–
K, to give issuers additional time to
make their decisions.
Under our final rule, Item 5.07 of
Form 8–K requires an issuer to disclose
its decision regarding how frequently it
will conduct shareholder advisory votes
on executive compensation following
each shareholder vote on the frequency
of say-on-pay votes. To comply, an
issuer will file an amendment to its
prior Form 8–K filings under Item 5.07
that disclose the preliminary and final
results of the shareholder vote on
frequency. This amended Form 8–K will
be due no later than 150 calendar days
after the date of the end of the annual
or other meeting in which the vote
required by Rule 14a–21(b) took place,
but in no event later than 60 calendar
days prior to the deadline for the
submission of shareholder proposals
under Rule 14a–8 for the subsequent
annual meeting, as disclosed in the
issuer’s proxy materials for the meeting
at which the frequency vote occurred.168
166 See
letter from PIRC.
e.g., letters from ABA, Boeing,
Compensia, Davis Polk, Eaton, Frederic Cook,
PM&P, Protective Life, TIAA–CREF, and Time
Warner.
168 Item 5.07 is not among the list of items subject
to the safe harbor from liability in Rules 13a–11 [17
CFR 240.13a–11] and 15d–11 [17 CFR 240.15d–11]
under the Exchange Act. In addition, companies
that fail to file a timely report required by Item 5.07
will lose their eligibility to file Form S–3
registration statements. We are not making a change
to this as a result of our amendments to Item 5.07.
We continue to believe that Item 5.07 does not
require management to make rapid materiality and
similar judgments within the compressed Form 8–
K timeframe. See Additional Form 8–K Disclosure
Requirements and Acceleration of Filing Date,
Release No. 33–8400 (Mar. 16, 2004) [69 FR 15594]
at Section II.E and Proxy Disclosure Enhancements,
167 See,
emcdonald on DSK2BSOYB1PROD with RULES4
155 See,
e.g., letters from CalPERS, ICGN,
Meridian, PGGM, and SBA of Florida.
156 See letter from SBA of Florida.
157 See, e.g., letters from Business Roundtable,
Boeing, Center on Exec. Comp., CCMC, FSR, and
Society of Corp. Sec.
158 See, e.g., letter from Society of Corp. Sec.
159 See, e.g., letters from Compensia, Davis Polk,
Eaton, Frederic Cook, PM&P, and Protective Life.
160 See, e.g., letters from ABA, Boeing, TIAA–
CREF, and Time Warner Inc. (‘‘Time Warner’’).
161 See, e.g., letters from Eaton, Frederic Cook,
Compensia, and PM&P.
162 See, e.g., letters from ABA and Davis Polk.
163 See letter from Business Roundtable.
164 See letter from ABA.
165 See, e.g., letter from Davis Polk.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
PO 00000
Frm 00013
Fmt 4701
Sfmt 4700
6021
In the amended Item 5.07 Form 8–K, the
issuer must disclose its determination
regarding the frequency of say-on-pay
votes.169
We believe the time period specified
for filing the amended Item 5.07 Form
8–K should address commentators’
requests that we revise the proposal to
allow companies additional time to
carefully consider the results of the
frequency vote, including through board
and committee deliberations and
discussions with shareholders, before
disclosure of the decision is required.170
It also should provide enough time for
shareholders to consider whether to
submit a shareholder proposal on sayon-pay votes or on the frequency of sayon-pay votes once the disclosure is
provided.
In addition, in response to
comment,171 we are adopting a
technical amendment to Item 5.07(b) of
Form 8–K to facilitate reporting of
shareholder votes on frequency. Item
5.07 of Form 8–K generally requires an
issuer to ‘‘state the number of votes cast
for, against, or withheld, as well as the
number of abstentions and broker nonvotes as to each such matter * * *.’’ The
amendments we adopt today will clarify
that, with respect to the vote on the
frequency of say-on-pay votes, the issuer
will be required to disclose the number
of votes cast for each of 1 year, 2, years,
and 3 years, as well as the number of
abstentions.172
6. Effect of Shareholder Vote
Although the language in Section 951
of the Act indicates that the separate
resolution subject to shareholder vote is
‘‘to determine’’ the frequency of the
shareholder vote on executive
compensation, in light of new Section
14A(c) of the Exchange Act, we
continue to believe this shareholder
vote, and all shareholder votes required
by Section 951 of the Act, are intended
to be non-binding on the issuer or the
issuer’s board of directors. New Section
14A(c) states that the shareholder votes
referred to in Section 14A(a) and
Section 14A(b) (which includes all votes
Release No. 33–9089 (Dec. 16, 2009) [74 FR 68334]
at Section II.E.
169 Item 5.07(d) of Form 8–K.
170 In this regard, we note the recent guidance
provided by the Division of Corporation Finance
that Regulation FD [17 CFR 243.100 et seq.] does
not prohibit directors from speaking privately with
a shareholder or group of shareholders as described
in that guidance. See Regulation FD CDIs, Question
101.11.
171 See, e.g., letters from Davis Polk and PIRC.
172 We are adopting a conforming technical
change to Instruction 1 to Item 5.07 to carve out
Item 5.07(d) from the four-business day period for
reporting the event. See Instruction 1 to Item 5.07
of Form 8–K.
E:\FR\FM\02FER4.SGM
02FER4
6022
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
under Section 951 of the Act) ‘‘shall not
be binding on the issuer or the board of
directors of an issuer.’’ 173 Though we
received a comment letter asserting that
the shareholder vote on frequency is
binding,174 in our view the plain
language of Exchange Act Section
14A(c) indicates that this vote is
advisory. Accordingly, we are adopting
new Item 24 of Schedule 14A to include
language to require disclosure regarding
the general effect of the shareholder
advisory votes, such as whether the vote
is non-binding.175
C. Issues Relating to Both Shareholder
Votes Required by Section 14A(a)
emcdonald on DSK2BSOYB1PROD with RULES4
1. Amendments to Rule 14a–6
We proposed amendments to Rule
14a–6 to add the say-on-pay and
frequency of say-on-pay votes to the list
of items that do not require the filing of
proxy materials in preliminary form.
After considering comments, we are
adopting the proposed amendments to
Rule 14a–6, with some modification.
a. Proposed Amendments
Rule 14a–6(a) generally requires
issuers to file proxy statements in
preliminary form at least ten calendar
days before definitive proxy materials
are first sent to shareholders, unless the
items included for a shareholder vote in
the proxy statement are limited to
specified matters. During the time
before final proxy materials are filed,
our staff has the opportunity to
comment on the disclosures and issuers
are able to incorporate the staff’s
comments in their final proxy materials.
Absent an amendment to Rule 14a–6(a),
a proxy statement that includes a
solicitation for either the shareholder
vote on the approval of executive
compensation or the approval of the
frequency of the votes approving
executive compensation required by
Sections 14A(a)(1) and 14A(a)(2) would
need to be filed in preliminary form.
Because the shareholder vote on
executive compensation and the
shareholder vote on the frequency of
such shareholder votes are required for
all issuers, we view them as similar to
the other items specified in Rule
14a–6(a) that do not require a
preliminary filing. In the Proposing
Release, we noted our view that a
preliminary filing requirement for the
shareholder votes on executive
173 Exchange
Act Section 14A(c).
letter from Merkl.
175 Even though each of the shareholder advisory
votes required by Section 14A is non-binding
pursuant to the rule of construction in Section
14A(c), as we noted in Note 69 of the Proposing
Release, we believe these votes could play a role in
an issuer’s executive compensation decisions.
174 See
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
compensation and the frequency of such
votes would impose unnecessary
administrative burdens and preparation
and processing costs associated with the
filing and processing of proxy material
that would unlikely be selected for
review in preliminary form.176
We proposed amendments to Rule
14a–6(a) to add the shareholder votes on
executive compensation and the
frequency of shareholder votes on
executive compensation required by
Section 14A(a) to the list of items that
do not trigger a preliminary filing.177 As
proposed, a proxy statement that
includes a solicitation with respect to
either of these shareholder votes would
not trigger a requirement that the issuer
file the proxy statement in preliminary
form, so long as a preliminary filing
would not otherwise be required under
Rule 14a–6(a).
b. Comments on the Proposed
Amendments
Comments on the proposal were
favorable. While one commentator
stated that say-on-pay votes and votes
on the frequency of say-on-pay votes
should trigger the requirement to file in
preliminary form to provide the market
and investors additional time to
consider the executive compensation
disclosures,178 the preponderance of
commentators agreed that no
preliminary proxy should be
required.179 These commentators noted
the similarity in proposals for all issuers
and the likelihood that the
administrative burdens would outweigh
any benefits from a preliminary
filing.180 In addition, one commentator
asserted that we should not require a
preliminary proxy statement for
shareholder advisory votes on the
176 See Section II.C.1 of the Proposing Release.
See also, Proxy Rules—Amendments to Eliminate
Filing Requirements for Certain Preliminary Proxy
Material; Amendments With Regard to Rule 14a–8,
Shareholder Proposals, Release No. 34–25217 (Dec.
21, 1987) [52 FR 48982].
177 In the recent release relating to the similar
shareholder votes for companies subject to EESA
with outstanding indebtedness under the TARP
program, we received comments regarding whether
a preliminary proxy statement should be required
for shareholder votes on executive compensation
for TARP companies. While some commentators
argued that a preliminary proxy statement should
be required, other commentators argued
persuasively that the burdens of such an approach
outweighed the costs. As a result, we decided to
eliminate the requirement for a preliminary proxy
statement for shareholder votes on executive
compensation for TARP companies. See TARP
Adopting Release, supra note 18, at 75 FR 2791.
178 See letter from Brian Foley (‘‘Foley’’).
179 See, e.g., letters from Ameriprise Financial
(‘‘Ameriprise’’), ABA, Business Roundtable,
CalPERS, Center on Exec. Comp., Compensia, Davis
Polk, FSR, ICGN, Pfizer, PGGM, PM&P, Protective
Life, and Society of Corp. Sec.
180 See, e.g., letter from Compensia.
PO 00000
Frm 00014
Fmt 4701
Sfmt 4700
frequency of say-on-pay votes that are
not required by Section 14A so that
issuers would not be required to file in
preliminary form as a result of including
a frequency vote in their proxy materials
voluntarily.181 Other commentators
suggested that no preliminary proxy
statement should be required for any
separate shareholder vote on executive
compensation,182 noting that it would
be inappropriate to require a
preliminary filing for proposals on more
narrow aspects of compensation if a
preliminary filing is not required for
broader proposals.183
c. Final Rule
After considering the comments, we
are adopting the amendments to Rule
14a–6(a) as proposed, with slight
modifications. We are adopting
amendments to Rule 14a–6(a) to add
any shareholder advisory vote on
executive compensation, including
shareholder votes to approve executive
compensation and the frequency of
shareholder votes on executive
compensation required by Section
14A(a), to the list of items that do not
trigger a preliminary filing. As adopted,
a proxy statement that includes a
solicitation with respect to any advisory
vote on executive compensation,
including a say-on-pay vote or a vote on
the frequency of say-on-pay votes,
would not trigger a requirement that the
issuer file the proxy statement in
preliminary form, so long as any other
matters to which the solicitation relates
include only the other matters specified
by Rule 14a–6(a). Finally, in a revision
from the proposal, this amendment will
also encompass an advisory vote on
executive compensation, including a
vote on the frequency of say-on-pay
votes, that is not required by Section
14A. Upon review of the comments, we
are persuaded by commentators’
arguments that our preliminary proxy
filing requirements should not
differentiate between say-on-pay votes
simply because, in one case, the issuer
is required to include the proposal, and,
in the other, the issuer chooses to do so.
2. Broker Discretionary Voting
As noted in the Proposing Release,184
Section 957 of the Act amends Section
6(b) of the Exchange Act 185 to direct the
national securities exchanges to change
their rules to prohibit broker
discretionary voting of uninstructed
shares in certain matters, including
181 See
letter from Business Roundtable.
letters from ABA and ICGN.
183 See letter from ABA.
184 See Section II.C.2 of the Proposing Release.
185 15 U.S.C. 78f(b).
182 See
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
shareholder votes on executive
compensation. The national securities
exchanges have made substantial
progress in amending their rules
regarding broker discretionary voting on
executive compensation matters to
implement this requirement.186 Under
these amended exchange rules, for
issuers with a class of securities listed
on a national securities exchange,
broker discretionary voting of
uninstructed shares is not permitted for
a shareholder vote on executive
compensation or a shareholder vote on
the frequency of the shareholder vote on
executive compensation.187
emcdonald on DSK2BSOYB1PROD with RULES4
3. Relationship to Shareholder Votes on
Executive Compensation for TARP
Companies
Issuers that have received financial
assistance under the Troubled Asset
Relief Program, or TARP, are required to
conduct a separate annual shareholder
vote to approve executive compensation
during the period in which any
obligation arising from the financial
assistance provided under the TARP
remains outstanding.188
Because the vote required to approve
executive compensation pursuant to the
Emergency Economic Stabilization Act
of 2008, or EESA, is effectively the same
vote that would be required under
Section 14A(a)(1), as we indicated in the
Proposing Release,189 we believe that a
shareholder vote to approve executive
compensation under Rule 14a–20 for
issuers with outstanding indebtedness
under the TARP would satisfy Rule
14a–21(a). Consequently, we noted in
the Proposing Release that we would
not require an issuer that conducts an
annual shareholder advisory vote to
approve executive compensation
pursuant to EESA to conduct a separate
shareholder advisory vote on executive
compensation under Section 14A(a)(1)
until that issuer has repaid all
indebtedness under the TARP. Such an
issuer would be required to include a
separate shareholder advisory vote on
186 See, e.g., Notice of Filing and Order Granting
Accelerated Approval of a Proposed Rule Change to
Amend NYSE Rule 452 and Listed Company
Manual Section 402.08 to Eliminate Broker
Discretionary Voting on Executive Compensation
Matters, Release No. 34–62874, SR–NYSE–2010–59
(Sept. 9, 2010); Notice of Filing and Order Granting
Accelerated Approval of Proposed Rule Change to
Prohibit Members from Voting Uninstructed Shares
on Certain Matters, Release No. 34–62992,
SR–NASDAQ–2010–114 (Sept. 24, 2010).
187 Broker discretionary voting in connection with
merger or acquisition transactions also is not
permitted under rules of the national securities
exchanges. See, e.g., NYSE Rule 452.
188 Section 111(e) of the Emergency Economic
Stabilization Act of 2008, 12 U.S.C. 5221. See also
Rule 14a–20.
189 See Section II.C.3 of the Proposing Release.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
executive compensation pursuant to
Section 14A(a)(1) and Rule 14a–21(a) for
the first annual meeting of shareholders
after the issuer has repaid all
outstanding indebtedness under the
TARP. Commentators on this issue
generally expressed support for our
proposed approach to companies with
outstanding indebtedness under
TARP,190 and we have determined to
implement this approach under the
rules as adopted.
Even though issuers with outstanding
indebtedness under the TARP have a
separate statutory requirement to
provide an annual shareholder vote on
executive compensation so long as they
are indebted under the TARP, absent
exemptive relief these issuers would be
required, pursuant to Section 14A(a)(2)
of the Exchange Act, to provide a
separate shareholder advisory vote on
the frequency of shareholder votes on
executive compensation for the first
annual or other such meeting of
shareholders on or after January 21,
2011. In our view, however, because
such issuers have a requirement to
conduct an annual shareholder advisory
vote on executive compensation so long
as they are indebted under the TARP, a
shareholder advisory vote on the
frequency of such votes while the issuer
remains subject to a requirement to
conduct such votes on an annual basis
would not serve a useful purpose. We
expressed these views in the Proposing
Release 191 and, as noted above,
commentators supported our views on
this point.
We have considered, therefore,
whether issuers with outstanding
indebtedness under the TARP should be
subject to the requirements of Section
14A(a)(2) of the Exchange Act. We do
not believe it is necessary or appropriate
in the public interest or consistent with
the protection of investors to require an
issuer to conduct a shareholder advisory
vote on the frequency of the shareholder
advisory vote on executive
compensation when the issuer already
is required to conduct advisory votes on
executive compensation annually
regardless of the outcome of such
frequency vote. Because Section
14A(a)(2) would burden TARP issuers
and their shareholders with an
additional vote while providing little
benefit to either the issuer or its
shareholders, we continue to believe an
exemption by rule is appropriate,
pursuant to both the exemptive
authority granted by Section 14A(e) of
190 See, e.g., letters from ABA, CalPERS, COPERA,
Davis Polk, FSR, PGGM, and RAILPEN & USS.
191 See Section II.C.3 of the Proposing Release.
PO 00000
Frm 00015
Fmt 4701
Sfmt 4700
6023
the Exchange Act 192 and the
Commission’s general exemptive
authority pursuant to Section 36(a)(1) of
the Exchange Act.193 As a result, Rule
14a–21(b), as we are adopting it,
exempts an issuer with outstanding
indebtedness under the TARP from the
requirements of Rule 14a–21(b) and
Section 14A(a)(2) until the issuer has
repaid all outstanding indebtedness
under the TARP. Similar to the
approach for shareholder advisory votes
under Rule 14a–21(a), such an issuer
would be required to include a separate
shareholder advisory vote on the
frequency of shareholder advisory votes
on executive compensation pursuant to
Section 14A(a)(2) and Rule 14a–21(b)
for the first annual meeting of
shareholders after the issuer has repaid
all outstanding indebtedness under the
TARP.
D. Disclosure of Golden Parachute
Arrangements and Shareholder
Approval of Golden Parachute
Arrangements
1. General
Section 14A(b)(1) of the Exchange Act
requires all persons making a proxy or
consent solicitation seeking shareholder
approval of an acquisition, merger,
consolidation or proposed sale or
disposition of all or substantially all of
an issuer’s assets to provide disclosure,
in accordance with rules we
promulgate, of any agreements or
understandings that the soliciting
person has with its named executive
officers (or that it has with the named
executive officers of the acquiring
issuer) concerning compensation that is
based on or otherwise relates to the
192 Exchange Act Section 14A(e) provides that
‘‘the Commission may, by rule or order, exempt an
issuer or class of issuers from the requirement’’
under Sections 14A(a) or 14A(b). Section 14A(e)
further provides that ‘‘in determining whether to
make an exemption under this subsection, the
Commission shall take into account, among other
considerations, whether the requirements under
[Section 14A(a) and 14A(b)] disproportionately
burdens small issuers.’’ In adopting this exemption,
the Commission considered whether the
requirements of Section 14A(a) and (b) as applied
to TARP recipients to conduct a shareholder
advisory vote on the frequency of say-on-pay votes
could disproportionately burden small issuers. As
described further in Section II.E below, we have
also considered whether the provision as a whole
disproportionately burdens small issuers. We note,
in addition, that to the extent a TARP recipient is
a small issuer, it will be subject to the exemption.
193 15 U.S.C. 78mm(a)(1). Exchange Act Section
36(a)(1) provides that ‘‘the Commission, by rule,
regulation, or order, may conditionally or
unconditionally exempt any person, security, or
transaction, or any class of persons, securities, or
transactions, from any provision or provisions of
this title or of any rule or regulation thereunder, to
the extent that such exemption is necessary or
appropriate in the public interest, and is consistent
with the protection of investors.’’
E:\FR\FM\02FER4.SGM
02FER4
6024
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
merger transaction. In addition, Section
14A(b)(1) requires disclosure of any
agreements or understandings that an
acquiring issuer has with its named
executive officers and that it has with
the named executive officers of the
target company in transactions in which
the acquiring issuer is making a proxy
or consent solicitation seeking
shareholder approval of an acquisition,
merger, consolidation or proposed sale
or disposition of all or substantially all
of an issuer’s assets. Section 14A(b)(1)
of the Exchange Act requires the
disclosure to be in a ‘‘clear and simple
form in accordance with regulations to
be promulgated by the Commission’’ and
to include ‘‘the aggregate total of all such
compensation that may (and the
conditions upon which it may) be paid
or become payable to or on behalf of
such executive officer.’’ 194
Under existing Commission rules, a
target issuer soliciting shareholder
approval of a merger is required to
describe briefly any substantial interest,
direct or indirect, by security holdings
or otherwise, of any person who has
been an executive officer or director
since the beginning of the last fiscal year
in any matter to be acted upon.195 In
response to this requirement, target
issuers often include disclosure in their
proxy statements about compensation
arrangements that may be payable to a
target issuer’s executive officers and
directors in connection with the
transaction. In addition, under our
existing rules, issuers are required to
include in annual reports and annual
meeting proxy statements detailed
information in accordance with Item
402(j) of Regulation S–K about
payments that may be made to named
executive officers upon termination of
employment or in connection with a
change in control.196 The Item 402(j)
disclosure is provided based on yearend information and various
assumptions, and generally does not
reflect any actual termination or
termination event.197
194 Exchange
Act Section 14A(b)(1).
5 of Schedule 14A.
196 See Item 402(j) of Regulation S–K [17 CFR
229.402(j)], Item 8 of Schedule 14A, and Item 11 of
Form 10–K. Item 402(j) disclosure is required in
both Annual Reports on Form 10–K and in annual
meeting proxy statements, though such disclosure
is typically provided in annual meeting proxy
statements and incorporated into the Form 10–K by
reference pursuant to General Instruction G(3) of
Form 10–K. References to ‘‘annual meeting proxy
statements’’ in this context are meant to encompass
both locations for the disclosure.
197 See Instruction 1 to Item 402(j), which
requires quantitative disclosure applying the
assumptions that the triggering event took place on
the last business day of the issuer’s last completed
fiscal year, and the price per share of the issuer’s
securities is the closing market price as of that date.
emcdonald on DSK2BSOYB1PROD with RULES4
195 Item
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
2. Item 402(t) of Regulation S–K
We proposed Item 402(t) of
Regulation S–K to require disclosure of
named executive officers’ golden
parachute arrangements in both tabular
and narrative formats. This disclosure
will be required in merger proxies and
other disclosure documents for similar
transactions as described in Section
II.D.3 below. After considering the
comments on this proposal, we are
adopting Item 402(t) as proposed, with
some modifications.
a. Proposed Amendments
We proposed Item 402(t) of
Regulation S–K to require disclosure of
named executive officers’ golden
parachute arrangements in both tabular
and narrative formats. We based our
proposals on Section 14A(b)(1)’s
requirement that disclosure of the
golden parachute compensation in any
proxy or consent solicitation to approve
an acquisition, merger, consolidation or
proposed sale or disposition of all or
substantially all assets be ‘‘in a clear and
simple form in accordance with
regulations to be promulgated by the
Commission’’ and include ‘‘the aggregate
total of all such compensation that may
(and the conditions upon which it may)
be paid or become payable to or on
behalf of such executive officer.’’ 198
Consistent with Section 14A(b)(1) of
the Exchange Act, agreements or
understandings between a target issuer
conducting a solicitation and its named
executive officers would be subject to
disclosure under proposed Item 402(t).
In addition, because golden parachute
compensation arrangements also may
involve agreements or understandings
between the acquiring issuer and the
named executive officers of the target
issuer, we proposed that Item 402(t)
require disclosure of this compensation
in addition to the disclosure mandated
by Section 14A(b)(1). Specifically, to
cover the full scope of potential golden
parachute compensation applicable to
the transaction, we proposed that Item
402(t) require disclosure of all golden
parachute compensation relating to the
merger among the target and acquiring
issuers and the named executive officers
of each.199
Where a triggering event has actually occurred for
a named executive officer who was no longer
serving as a named executive officer of the issuer
at the end of the last completed fiscal year,
Instruction 4 to Item 402(j) requires Item 402(j)
disclosure for that named executive officer only for
that triggering event.
198 Exchange Act Section 14A(b)(1).
199 However, because any agreements between a
soliciting target company’s named executive
officers and the acquiring company are beyond the
scope of the disclosure required by Section
PO 00000
Frm 00016
Fmt 4701
Sfmt 4700
We did not propose to amend the
requirements for golden parachutes
disclosure in annual meeting proxy
statements, although, under our
proposal companies would be permitted
to provide disclosure in annual meeting
proxies in accordance with the new
requirement.200
b. Comments on the Proposed
Amendments
Comments on the proposal were
generally favorable. We requested
comment on a number of aspects of
proposed Item 402(t), which we
describe in more detail below.
i. General Comments on the Proposed
Item 402(t) Table
We proposed that the Item 402(t) table
would present quantitative disclosure of
the individual elements of
compensation that a named executive
officer would receive that are based on
or otherwise relate to the merger,
acquisition, or similar transaction, and
the total for each named executive
officer.
Many commentators agreed that Item
402(t) as proposed would elicit
disclosure of all elements of golden
parachute compensation ‘‘in a clear and
simple form’’ as required by Section
14A(b)(1).201 In addition, some
commentators suggested that Item 402(t)
should be clarified to require disclosure
of only compensation triggered by the
subject transaction so that issuers are
not required to disclose any golden
parachute compensation that would not
be triggered by the subject
transaction.202
ii. Comments on the Elements of
Compensation and Presentation of the
Proposed Item 402(t) Table
As proposed, Item 402(t) would not
have any de minimis exceptions for
compensation below a certain dollar
threshold and would not require
disclosure of previously vested equity
and pension benefits. Some
commentators urged that Item 402(t)
should have de minimis exceptions, like
Item 402(j),203 because, in their view,
the exclusion of such immaterial
amounts would not be inconsistent with
Section 14A(b)(1)’s requirement to
14A(b)(1), we did not propose to subject such
agreements to the Rule 14a–21(c) shareholder
advisory vote required by Section 14A(b)(2) and
Rule 14a–21(c). See discussion of Rule 14a–21(c) in
Section II.D.4 below.
200 See Sections II.D.2 and II.D.4 below.
201 See, e.g., letters from Davis Polk, PGGM, and
WorldatWork.
202 See, e.g., letters from Davis Polk, Society of
Corp. Sec., and Wachtell.
203 See, e.g., letters from Compensia, Davis Polk,
McGuireWoods, PM&P, and Sullivan.
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
disclose the total amount of golden
parachute compensation.204 In addition,
some commentators asserted that we
should amend Item 402(j) rather than
propose a new Item 402(t).205
Most commentators agreed with the
proposed approach to omit previously
vested equity and pension benefits from
the table,206 as including such amounts
in the table could lead to confusion by
overstating the total compensation.207
Other commentators, however,
recommended that such compensation
be disclosed in the table 208 to make the
compensation disclosure more
comprehensive.209
A number of commentators also
requested various other changes to the
proposed table. Some commentators
argued that issuers should have more
flexibility in drafting the table to fit
their individual circumstances,210 or
that issuers should be permitted to
differentiate between cash severance
compensation and cash amounts for
outstanding awards that have been
accelerated.211 With respect to
employment agreements, most
commentators supported our proposed
approach to exclude disclosure of
employment agreements from the Item
402(t) table,212 though some
commentators argued that such
employment agreements should be
quantified and included in the tabular
disclosure to provide more
comprehensive disclosure.213 A number
of commentators supported the footnote
identification of amounts of ‘‘singletrigger’’ and ‘‘double-trigger’’ 214
compensation elements,215 with some
204 See
letter from Compensia.
e.g., letters from Business Roundtable and
Meridian.
206 See, e.g., letters from ABA, Center on Exec.
Comp., Davis Polk, FSR, ICGN, NACD, Pfizer,
PM&P, Protective Life, and WorldatWork.
207 See letter from ABA.
208 See, e.g., letters from Barnard, Glass Lewis,
PGGM, and Senator Levin.
209 See, e.g., letter from Glass Lewis.
210 See letter from ABA.
211 See letter from Towers Watson.
212 See, e.g., letters from ABA, Center on Exec.
Comp., Compensia, Davis Polk, Frederic Cook, FSR,
Hermes, and PGGM.
213 See, e.g., letters from Glass Lewis, NACD, and
PIRC.
214 A ‘‘double-trigger’’ arrangement requires that
the executive’s employment be terminated without
cause or that the executive resign for good reason
within a limited period of time after the change-incontrol to trigger payment. A ‘‘single-trigger’’
arrangement does not require such a termination or
resignation after the change-in-control to trigger
payment.
215 See, e.g., letters from CalPERS, CII, FSR,
Hermes, ICGN, and PGGM.
emcdonald on DSK2BSOYB1PROD with RULES4
205 See,
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
commentators recommending that the
disclosure be included in the main text
rather than in footnotes if an issuer
believes it would be useful to the
presentation.216 One commentator,
however, indicated that identification of
single-trigger and double-trigger
elements should not be required as it
believed this disclosure would not be
useful to investors.217
We also requested comment with
respect to the appropriate measurement
for issuer stock price for tabular
disclosure in proxy statements for
mergers or similar transactions. A
number of commentators agreed with
our proposed approach to calculate such
amounts based on the issuer’s share
price as of the latest practicable date,218
though many other commentators
suggested that the share price
contemplated by the deal should be
used, if available,219 with an alternative
to use the average closing price over the
first five business days following public
announcement of the transaction.220
One commentator expressed a concern
that the share price as of the latest
practicable date could lead to potential
gaming of the price by issuers.221
iii. Comments on Individuals Subject to
Item 402(t) Disclosure
Some commentators indicated that
requiring disclosure under Item 402(t) of
a broader group of individuals than is
required by Exchange Act Section
14A(b)(1) would be potentially
confusing to investors 222 as such
disclosure goes beyond the
requirements of Section 14A and could
lead to as many as three separate
tables.223 Different commentators
supported disclosure of the broader
group of individuals 224 in order to
provide the full picture of compensation
being received in connection with the
transaction.225
Most commentators supported the
proposal that issuers would not be
216 See,
e.g., letters from ABA and NACD.
letter from Protective Life.
218 See, e.g., letters from ABA, Center on Exec.
Comp., and ICGN.
219 See, e.g., letters from Davis Polk, PM&P, and
Sullivan.
220 See letter from PGGM.
221 See letter from PGGM.
222 See, e.g., letters from Center on Exec. Comp.,
Davis Polk, FSR, NACD, Pfizer, PGGM, Protective
Life, Towers Watson, Wachtell, Lipton, Rosen &
Katz (‘‘Wachtell’’), and WorldatWork.
223 See letter from Davis Polk.
224 See, e.g., letters from CalPERS, ICGN, PIRC,
and Senator Carl Levin (‘‘Senator Levin’’).
225 See letter from PIRC.
217 See
PO 00000
Frm 00017
Fmt 4701
Sfmt 4700
6025
required to include Item 402(t)
information with respect to individuals
who would have been among the most
highly compensated executive officers
but for the fact that they were not
serving as an executive officer at the end
of the last completed fiscal year.226 One
commentator, however, argued that
issuers should be permitted to include
disclosure of the compensation of such
individuals to conform to the
presentation of compensation in prior
filings and that we should clarify that
the named executive officers subject to
Item 402(t) is determined in the same
manner as under Item 5.02(e) of Form
8–K.227
iv. Comments on Item 402(t) Disclosure
in Annual Meeting Proxy Statements
In the Proposing Release, we did not
propose requiring Item 402(t) disclosure
in annual meeting proxy statements.
Most commentators agreed that the
proposed Item 402(t) narrative and
tabular disclosure should not be
required in annual meeting proxy
statements 228 given the costs and
burdens this would impose on
issuers.229 However, other
commentators recommended that such
disclosure should be required in annual
meeting proxy statements,230 noting that
such information plays a key part in
shareholder evaluation of an issuer’s
compensation program.231
c. Final Rule
After considering comments, we are
adopting Item 402(t) of Regulation S–K
as proposed, with some modifications,
to require disclosure of named executive
officers’ golden parachute arrangements
in both tabular and narrative formats.
i. Item 402(t) Table and Narrative
Requirements
We are adopting the following new
table, as proposed:
226 See, e.g., letters from Davis Polk, ICGN,
PGGM, and PM&P.
227 See letter from ABA.
228 See, e.g., letters from ABA, Center for Exec.
Comp., Compensia, Davis Polk, Frederic Cook, FSR,
Hermes Equity Ownership Services (‘‘Hermes’’),
ICGN, McGuireWoods, PGGM, PM&P, and
WorldatWork.
229 See, e.g., letter from Frederic Cook.
230 See, e.g., letters from AFSCME, Protective Life,
and Public Citizen.
231 See letter from AFSCME.
E:\FR\FM\02FER4.SGM
02FER4
6026
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
GOLDEN PARACHUTE COMPENSATION
Name
Cash
($)
Equity
($)
Pension/
NQDC
($)
Perquisites/
benefits
($)
Tax reimbursement
($)
Other
($)
Total
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
PEO ..............................
PFO ..............................
A ...................................
B ...................................
C ...................................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
emcdonald on DSK2BSOYB1PROD with RULES4
The table presents quantitative
disclosure of the individual elements of
compensation that an executive would
receive that are based on or otherwise
relate to the merger, acquisition, or
similar transaction, and the total for
each named executive officer.232 As
proposed and adopted, elements that
will be separately quantified and
included in the total will be any cash
severance payment (e.g., base salary,
bonus, and pro-rata non-equity
incentive plan 233 compensation
payments) (column (b)); the dollar value
of accelerated stock awards, in-themoney option awards for which vesting
would be accelerated, and payments in
cancellation of stock and option awards
(column (c)); pension and nonqualified
deferred compensation benefit
enhancements (column (d)); perquisites
and other personal benefits and health
and welfare benefits (column (e)); and
tax reimbursements (e.g., Internal
Revenue Code Section 280G tax grossups) (column (f)). Consistent with the
proposal, we are adopting an ‘‘Other’’
column of the table for any additional
elements of compensation not
specifically includable in the other
columns of the table (column (g)). This
column, like the columns for the other
elements, will require footnote
identification of each separate form of
compensation reported. The final
column in the table requires disclosure,
for each named executive officer, of the
aggregate total of all such compensation
(column (h)).234 We are adopting the
table as proposed, with a requirement
for separate footnote identification of
amounts attributable to ‘‘single-trigger’’
arrangements and amounts attributable
to ‘‘double-trigger’’ arrangements, so that
shareholders can readily discern these
amounts.
232 Item
233 As
402(t)(2) of Regulation S–K.
defined in Item 402(a)(6)(iii) of Regulation
S–K.
234 Exchange Act Section 14A(b)(1) requires
disclosure of ‘‘the aggregate total of all such
compensation that may (and the conditions upon
which it may) be paid or become payable to or on
behalf of such executive officer.’’
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
As proposed and adopted, the tabular
disclosure required by Item 402(t)
requires quantification with respect to
any agreements or understandings,
whether written or unwritten, between
each named executive officer and the
acquiring company or the target
company, concerning any type of
compensation, whether present,
deferred or contingent, that is based on
or otherwise relates to an acquisition,
merger, consolidation, sale or other
disposition of all or substantially all
assets. The table will quantify cash
severance, equity awards that are
accelerated or cashed out, pension and
nonqualified deferred compensation
enhancements, perquisites, and tax
reimbursements. In addition, the table
requires disclosure and quantification of
the value of any other compensation
related to the transaction.235
However, as adopted, Item 402(t) will
require tabular and narrative disclosure
in a proxy statement soliciting
shareholder approval of a merger or
similar transaction or a filing made with
respect to a similar transaction only of
compensation that is based on or
otherwise relates to the subject
transaction.236 We agree with
commentators that it would not be
useful to shareholders to require
disclosure of amounts that would not be
paid or payable in connection with the
transaction subject to shareholder
approval.
To implement the statutory mandate
to disclose the conditions upon which
the compensation may be paid or
become payable, as proposed and
adopted, Item 402(t) 237 requires issuers
to describe any material conditions or
235 Consistent with our proposals, we have
adopted Instruction 3 to Item 402(t)(2) to provide,
like Instruction 1 to Item 402(j), that in the event
uncertainties exist as to the provision of payments
and benefits, or the amounts involved, the issuer is
required to make a reasonable estimate applicable
to the payment or benefit and disclose material
assumptions underlying such estimate in its
disclosure. Unlike Item 402(j), Item 402(t) does not
permit the disclosure of an estimated range of
payments.
236 Instruction 1 to Item 402(t)(2).
237 Item 402(t)(3) of Regulation S–K.
PO 00000
Frm 00018
Fmt 4701
Sfmt 4700
obligations applicable to the receipt of
payment, including but not limited to
non-compete, non-solicitation, nondisparagement or confidentiality
agreements, their duration, and
provisions regarding waiver or
breach.238 We are also adopting a
requirement, as proposed, to provide a
description of the specific
circumstances that would trigger
payment,239 whether the payments
would or could be lump sum, or annual,
and their duration, and by whom the
payments would be provided,240 and
any material factors regarding each
agreement.241 These narrative items are
modeled on the narrative disclosure
required with respect to termination and
change-in-control agreements.242
ii. Elements of Compensation and
Presentation of Item 402(t) Table
In response to commentators’ requests
for greater flexibility to facilitate clear
presentation, we note that under our
final rule issuers are permitted to add
additional named executive officers,
and additional columns or rows to the
tabular disclosure, such as to disclose
cash severance separately from other
cash compensation or to distinguish
‘‘single-trigger’’ and ‘‘double-trigger’’
arrangements, so long as such disclosure
is not misleading.
As noted in the Proposing Release,243
we considered whether making the
disclosure requirements in Item 402(j)
applicable to transactions enumerated
in Section 14A(b)(1), rather than
adopting a new disclosure item for
purposes of Section 14A(b)(1), would be
an appropriate approach to satisfy the
requirements of the Act. However,
certain elements required by Section
238 Item
402(t)(3)(iii) of Regulation S–K.
402(t)(3)(i) of Regulation S–K.
240 Item 402(t)(3)(ii) of Regulation S–K.
241 Item 402(t)(3) of Regulation S–K. Such
material factors would include, for example,
provisions regarding modifications of outstanding
options to extend the vesting period or the posttermination exercise period, or to lower the exercise
price.
242 Item 402(j) of Regulation S–K.
243 See Section II.D.2 of the Proposing Release.
239 Item
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
14A(b)(1) are not included in Item
402(j). Specifically, Item 402(j) does not
require disclosure about arrangements
that do not discriminate in scope, terms
or operation in favor of executive
officers and that are available generally
to all salaried employees,244 permits
exclusion of de minimis perquisites and
other personal benefits,245 and does not
require presentation of an aggregate total
of all compensation that is based on or
otherwise relates to a transaction.246
Despite the views of some
commentators, we continue to believe
that Item 402(t) should not permit
exclusion of de minimis perquisites and
other personal benefits because
exclusion of these amounts would be
inconsistent with Section 14A(b)(1),
which requires disclosure of ‘‘the
aggregate total of all such compensation
that may [* * *] be paid or become
payable [* * *].’’ Moreover, we
continue to believe that the Section
14A(b)(1) requirement to disclose the
information ‘‘in a clear and simple form’’
is best satisfied through the use of
tabular disclosure, which Item 402(j)
does not require.
Item 402(t), like Item 402(j),247 does
not require separate disclosure or
quantification with respect to
compensation disclosed in the Pension
Benefits Table and Nonqualified
Deferred Compensation Table. Item
402(t), as proposed and adopted, also
does not require disclosure or
quantification of previously vested
equity awards because these award
amounts are vested without regard to
the transaction. We agree with the views
expressed by some commentators that
previously vested equity awards are not
compensation ‘‘that is based on or
otherwise relates to’’ the transaction.
Similarly, after reviewing the
comments, we continue to believe that
we should not require tabular disclosure
and quantification of compensation
from bona fide post-transaction
employment agreements to be entered
into in connection with the merger or
acquisition transaction. We agree with
the views expressed by many
244 Instruction
5 to Item 402(j).
Instruction 2 to Item 402(j), which permits
exclusion of perquisites and other personal benefits
or property if the aggregate amount of such
compensation will be less than $10,000.
246 As proposed, we are adopting conforming
changes to Item 402(a)(6)(ii) [17 CFR
229.402(a)(6)(ii)] and Item 402(m)(5)(ii) [17 CFR
229.402(m)(5)(ii)] of Regulation S–K to clarify that
information regarding group life, health,
hospitalization, or medical reimbursement plans
that do not discriminate in scope, terms or
operation, in favor of executive officers or directors
of the company and that are generally available to
all salaried employees must be included in
disclosure pursuant to proposed Item 402(t).
247 See Instruction 3 to Item 402(j).
emcdonald on DSK2BSOYB1PROD with RULES4
245 See
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
commentators that future employment
arrangements are not compensation
‘‘that is based on or otherwise relates to’’
the transaction.248
Under the final rule, where Item
402(t) disclosure is included in an
annual meeting proxy statement,249 the
price per share amount will be
calculated based on the closing market
price per share of the issuer’s securities
on the last business day of the issuer’s
last completed fiscal year, as
proposed,250 consistent with
quantification standards used in Item
402(j). However, in response to
comments, we have modified how the
issuer stock price will be measured for
calculating dollar amounts for the
tabular disclosure required by Item
402(t) in connection with a transactional
filing. In a proxy statement soliciting
shareholder approval of a merger or
similar transaction or a filing made with
respect to a similar transaction, Item
402(t)’s tabular quantification of dollar
amounts based on issuer stock price will
be based on the consideration per share,
if such value is a fixed dollar amount,
or otherwise on the average closing
price per share over the first five
business days following the first public
announcement of the transaction.251
iii. Individuals Subject to Item 402(t)
Disclosure
We continue to believe that Item
402(t) disclosure should cover a broader
group of individuals than is required by
Section 14A(b). Because compensation
arrangements may involve agreements
or understandings between the
acquiring issuer and the named
executive officers of the target issuer,
Item 402(t), as proposed and adopted,
requires disclosure of the full scope of
golden parachute compensation
applicable to the transaction. We agree
with commentators and continue to
believe that shareholders may find
disclosure about these arrangements
that are not otherwise required to be
disclosed by Section 14A(b) informative
to their voting decisions.
As both proposed and adopted, we
have included an instruction providing
that Item 402(t) disclosure need not be
provided for persons who are named
248 Information regarding such future
employment agreements is subject to disclosure
pursuant to Item 5(a) and Item 5(b)(xii) of Schedule
14A to the extent that such agreements constitute
a ‘‘substantial interest’’ in the matter to be acted
upon.
249 A company may choose to include the
disclosure in the annual meeting proxy statement
in order for the Section 14A(a)(1) shareholder vote
to satisfy the exception from the merger proxy
separate vote. See Section II.D.4 below.
250 Instruction 2 to Item 402(t)(2).
251 Instruction 1 to Item 402(t)(2).
PO 00000
Frm 00019
Fmt 4701
Sfmt 4700
6027
executive officers because they would
have been among the most highly
compensated executive officers but for
the fact that they were not serving as an
executive officer at the end of the last
completed fiscal year.252 However, in
response to comments, we are clarifying
that where Item 402(t) disclosure is
provided in a proxy statement soliciting
shareholder approval of a merger or
similar transaction or a filing made with
respect to a similar transaction, this
instruction will be applied with respect
to the named executive officers for
whom disclosure was required in the
issuer’s most recent filing requiring
Summary Compensation Table
disclosure.253
iv. Item 402(t) Disclosure in Annual
Meeting Proxy Statements
We are not requiring Item 402(t)
disclosure in annual meeting proxy
statements. We agree with the views
expressed by most commentators that
the proposed Item 402(t) narrative and
tabular disclosure should not be
required in annual meeting proxy
statements given the costs and burdens
this would impose on issuers. We
believe that the requirements of Item
402(j) provide sufficient information to
shareholders in that context, and note
that issuers may also include disclosure
pursuant to Item 402(t) voluntarily if
they believe it would permit
shareholders to gain a better
understanding of their compensation
programs.
An issuer seeking to satisfy the
exception from the separate merger
proxy shareholder vote under Section
14A(b)(2) and Rule 14a–21(c) by
including Item 402(t) disclosure in an
annual meeting proxy statement
soliciting the shareholder vote required
by Section 14A(a)(1) and Rule 14a–
21(a) 254 will be able to satisfy Item
402(j) disclosure requirements with
respect to a change-in-control of the
issuer by providing the disclosure
required by Item 402(t).255 The issuer
252 Instruction 1 to Item 402(t), which requires
Item 402(t) disclosure for individuals covered by
Items 402(a)(3)(i), (ii) and (iii), and for smaller
reporting companies, the individuals covered by
Items 402(m)(2)(i) and (ii). Item 402(t) disclosure
will not be required for individuals for whom Item
402(t) disclosure otherwise is required by Item
402(a)(3)(iv), and for smaller reporting companies,
by Item 402(m)(2)(iii).
253 Instruction 1 to Item 402(t)(2) and Instruction
2 to Item 1011(b). This is similar to the approach
used in Instruction 4 to Item 5.02 of Form 8–K.
254 This exception and the comments we received
on the exception are discussed in Section II.D.4
below.
255 We note also that one example of material
information to be addressed in CD&A is the basis
for selecting particular termination or change-in-
E:\FR\FM\02FER4.SGM
Continued
02FER4
6028
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
must still include in an annual meeting
proxy statement disclosure in
accordance with Item 402(j) about
payments that may be made to named
executive officers upon termination of
employment.
emcdonald on DSK2BSOYB1PROD with RULES4
3. Amendments to Schedule 14A,
Schedule 14C, Schedule 14D–9,
Schedule 13E–3, Schedule TO, and Item
1011 of Regulation M–A
We proposed amendments to require
that the disclosure set forth in Item
402(t) of Regulation S–K be included in
merger proxies as well as filings for
other transactions not referenced in the
Act. After considering the comments
received, we are adopting the
amendments to Schedule 14A, Schedule
14C, Schedule 14D–9, Schedule 13E–3,
and Item 1011 of Regulation M–A as
proposed with slight modifications to
Item 1011 of Regulation M–A. We are
also adopting an amendment to
Schedule TO to clarify that the Item
402(t) disclosure is not required in
third-party bidders’ tender offer
statements, so long as the transactions
are not also Rule 13e–3 going-private
transactions.
a. Proposed Amendments
We proposed amendments to Items
5(a) and (b) of Schedule 14A under the
Exchange Act, as well as conforming
changes to Item 3 of Schedule 14C, Item
1011(b) of Regulation M–A, Item 15 of
Schedule 13E–3 and Item 8 of Schedule
14D–9. These proposals were intended
to implement the disclosure
requirements in Section 14A(b)(1) as
well as to extend the new disclosure
requirements to similar transactions by
requiring that the disclosure set forth in
Item 402(t) of Regulation S–K be
included in any proxy or consent
solicitation material seeking shareholder
approval of an acquisition, merger,
consolidation, or proposed sale or other
distribution of all or substantially all the
assets of the issuer. Our proposals
would require such disclosure not only
in a proxy or consent solicitation
relating to such a transaction, as
required by the Act, but also in the
following:
• Information statements filed
pursuant to Regulation 14C;
• Proxy or consent solicitations that
do not contain merger proposals but
require disclosure of information under
Item 14 of Schedule 14A pursuant to
Note A of Schedule 14A;
• Registration statements on Forms
S–4 and F–4 containing disclosure
control events as triggering payment (e.g., the
rationale for providing a single trigger for payment
in the event of a change-in-control). See Item
402(b)(2)(xi) of Regulation S–K.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
relating to mergers and similar
transactions;
• Going private transactions on
Schedule 13E–3; and
• Third-party tender offers on
Schedule TO and Schedule 14D–9
solicitation/recommendation
statements.
We also proposed amendments to
Item 1011(b) of Regulation M–A that
would require the bidder 256 in a thirdparty tender offer to provide
information in its Schedule TO about a
target’s golden parachute arrangements
only to the extent the bidder has made
a reasonable inquiry about the golden
parachute arrangements and has
knowledge of such arrangements. In
addition, we proposed exceptions to
both the disclosure requirement under
Item 1011(b) for both bidders and targets
in third-party tender offers and filing
persons in Rule 13e–3 going-private
transactions where the target or subject
company is a foreign private issuer, and
to the disclosure obligation under Item
402(t) with respect to agreements and
understandings with senior
management of foreign private issuers
where the target or acquirer is a foreign
private issuer.
b. Comments on the Proposed
Amendments
Comments on the proposal were
generally favorable. A number of
commentators expressed support for our
proposed approach to require disclosure
of golden parachute arrangements in
connection with other transaction not
specifically referenced in the Act.257
One commentator objected that the
proposal goes beyond the scope of the
statute by requiring disclosure of golden
parachute compensation in connection
with tender and exchange offers.258 One
commentator also questioned whether
such disclosure should be required in
third-party tender offers, given the
difficulty bidders may face in obtaining
accurate information regarding a target
company’s golden parachute
arrangements.259 Commentators also
supported excluding foreign private
issuers from Item 402(t) disclosure
requirements for bidders and target
companies in third-party tender offers
and filing persons in Rule 13e–3 goingprivate transactions.260
c. Final Rule
After considering the comments, we
are adopting the amendments to
256 ‘‘Bidder’’ is defined in Rule 14d–1(g)(2) [17
CFR 240.14d–1(g)(2)].
257 See, e.g., letters from ICGN and PGGM.
258 See letter from Wachtell.
259 See letter from ABA.
260 See, e.g., letters from ABA, ICGN, and PGGM.
PO 00000
Frm 00020
Fmt 4701
Sfmt 4700
Schedule 14A, Schedule 14C, Schedule
14D–9, Schedule 13E–3, and Item 1011
of Regulation M–A as proposed, with
slight modifications to Item 1011 of
Regulation M–A. We are also adopting
an amendment to Schedule TO to
provide that bidders in third-party
tender offers are not required to provide
the disclosure required by Item 1011(b)
of Regulation M–A.
Issuers could structure transactions in
a manner that avoids implicating
Section 14(a) of the Exchange Act (e.g.,
tender offers and certain Rule 13e–3
going-private transactions), while still
effectively seeking the consent of
shareholders with respect to their
investment decision (e.g., whether or
not to tender their shares or approve a
going-private transaction, in instances
where such going-private transactions
are not subject to Regulation 14A). For
these reasons, we continue to believe
that requiring Item 402(t) disclosure in
all such transactions furthers the
purposes of Section 14A(b) of the
Exchange Act and would minimize the
regulatory disparity that might
otherwise result from treating such
transactions differently. Thus, we are
adopting amendments that would
require the Item 402(t) disclosure in
various transactions, whether a merger,
acquisition, a Rule 13e–3 going-private
transaction or a tender offer.261
In addition, we note that acquiring
companies may solicit proxies to
approve the issuance of shares or a
reverse stock split in order to conduct
a merger transaction, and that such
proxy statements are required to include
disclosure of information required
under Item 14 of Schedule 14A
pursuant to Note A of Schedule 14A.
Thus, we are also adopting amendments
that would require the Item 402(t)
disclosure in those proxy statements
that are required to include disclosure
of information required under Item 14 of
Schedule 14A pursuant to Note A of
Schedule 14A.262 The shareholder
advisory vote required by Section
14A(b)(2), however, will not be
extended to transactions beyond those
specified in that section.
We have revised the final rule in
response to comments to provide that
261 As adopted, companies filing solicitation/
recommendation statements on Schedule 14D–9 in
connection with third-party tender offers will be
obligated to provide this additional disclosure. See
Item 8 of Schedule 14D–9. However, as explained
below, bidders filing offer statements on Schedule
TO will not have a similar obligation. See Item 11
of Schedule TO.
262 See Item 5(a)(5) and Item 5(b)(3) of Schedule
14A, which will require acquiring companies to
include the Item 402(t) disclosure with respect to
each named executive officer of both the acquiring
issuer and the target issuer.
E:\FR\FM\02FER4.SGM
02FER4
emcdonald on DSK2BSOYB1PROD with RULES4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
bidders in third-party tender offers will
not be required to comply with Item
1011(b), which calls for Item 402(t)
disclosure. We are persuaded that
bidders may face difficulties in
obtaining the information necessary to
provide such disclosure 263 and that it is
not necessary to require a bidder to
provide this information since the target
companies will be required to provide
the Item 402(t) golden parachute
compensation disclosure in Schedule
14D–9 filed by the tenth business day
from the date the tender offers are first
published, sent or given to security
holders.264 We believe this revision to
the proposal will alleviate a potential
burden that bidders in third-party
tender offers may encounter while still
accomplishing our goal of minimizing
the regulatory disparity that might
otherwise result from treating thirdparty tender offers differently than other
transactions described in this section by
retaining the disclosure requirement in
Schedule 14D–9. However, we did not
adopt a similar revision to the proposed
changes to Schedule 13E–3; therefore,
the disclosure of golden parachute
arrangements will be required in thirdparty tender offers that are also Rule
13e–3 going-private transactions.265 In
light of the revision to the proposal, we
are not adopting the instruction to Item
1011(b) of Regulation M–A that would
have allowed bidders to provide the
disclosure only to the extent the
information was known after making a
reasonable inquiry. Therefore, Item
1011(b), as adopted, does not include
the proposed instruction.
In addition, we are adopting as
proposed an exception to the disclosure
requirement under Item 1011(b) for
targets in third-party tender offers and
filing persons in Rule 13e–3 goingprivate transactions where the target or
subject company is a foreign private
issuer. Consistent with the proposal, we
are also adopting an exception to the
disclosure obligation under Item 402(t)
with respect to agreements and
understandings with senior
management of foreign private issuers
where the target or acquirer is a foreign
private issuer.266 We agree with
commentators and believe such
accommodations are appropriate in light
of our long-standing accommodation to
263 See
letter from ABA.
are adopting an amendment to Schedule
TO to avoid imposing on bidders the obligation to
provide such disclosure. See Item 11 of Schedule
TO.
265 See Item 15 of Schedule 13E–3.
266 Instruction 2 to Item 402(t).
264 We
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
foreign private issuers regarding
compensation disclosure.267
4. Rule 14a–21(c)
Section 14A(b)(2) generally requires a
separate shareholder advisory vote on
golden parachute compensation
arrangements required to be disclosed
under Section 14A(b)(1) in connection
with mergers and similar transactions. A
separate shareholder advisory vote
would not be required on golden
parachute compensation if disclosure of
that compensation had been included in
the executive compensation disclosure
that was subject to a prior advisory vote
of shareholders under Section 14A(a)(1)
of the Exchange Act.
We proposed Rule 14a–21(c) to
implement these requirements. We are
adopting this rule substantially as
proposed with some minor changes in
response to comments.
a. Proposed Rule
Proposed Rule 14a–21(c) would
require issuers to conduct a separate
shareholder advisory vote in proxy
statements for meetings at which
shareholders are asked to approve an
acquisition, merger, consolidation, or
proposed sale or other disposition of all
or substantially all assets, consistent
with Section 14A(b)(2). This
shareholder advisory vote would be
required only with respect to the golden
parachute agreements or understandings
required to be disclosed by Section
14A(b)(1), as disclosed pursuant to
proposed Item 402(t) of Regulation S–K.
We proposed Rule 14a–21(c) to require
a shareholder advisory vote only on the
golden parachute compensation
agreements or understandings for which
Section 14A(b)(1) requires disclosure
and Section 14A(b)(2) requires a
shareholder vote. Consistent with
Section 14A(b)(2), as proposed, issuers
would not be required to include in the
merger proxy a separate shareholder
vote on golden parachute compensation
disclosed in accordance with Item 402(t)
of Regulation S–K if Item 402(t)
disclosure of that compensation had
been included in the executive
compensation disclosure that was
subject to a prior vote of shareholders
under Section 14A(a)(1) of the Exchange
Act and Rule 14a–21(a).
b. Comments on the Proposed
Amendments
Comments on the proposal were
generally positive. As noted above,
some commentators indicated that
267 See, e.g., Item 402(a)(1) of Regulation S–K, and
Items 6.B and 6.E.2 of Form 20–F [17 CFR
249.220f].
PO 00000
Frm 00021
Fmt 4701
Sfmt 4700
6029
requiring disclosure under Item 402(t) of
a broader group of individuals than
would be covered by the Rule 14a–21(c)
shareholder advisory vote would be
potentially confusing to investors 268 as
such disclosure goes beyond the
requirements of Section 14A and could
lead to as many as three separate
tables.269
Most commentators agreed with our
proposed approach that if golden
parachute arrangements were modified
or amended subsequent to being subject
to the annual shareholder vote under
Rule 14a–21(a), a separate shareholder
vote in the merger proxy should be
required to cover only the changes to
such arrangements,270 given that full
disclosure of the full set of arrangements
will also be provided.271 Some
commentators, however, believed that
in this circumstance the subsequent
vote should cover the entire set of
golden parachute arrangements, not just
the changes, so that shareholders have
the opportunity to vote on the full
complement of compensation that
would be payable.272
In addition, some commentators
recommended that certain changes to
golden parachute arrangements that
were altered or amended subsequent to
being subject to the shareholder
advisory vote under Rule 14a–21(a)
should be exempt from a separate
shareholder advisory vote in a merger
proxy. In their view, there should be an
exemption for certain routine, nonsubstantive changes, such as where the
same compensation arrangements apply
to new named executive officers who
were not included in the prior
disclosure that was subject to the
shareholder vote,273 subsequent grants
in the ordinary course of additional
awards subject to the same acceleration
terms that applied to awards covered by
a previous vote,274 routine changes in
salary subsequent to the prior vote,275
and changes that result in a reduction in
compensation value.276 Other
268 See, e.g., letters from Center on Exec. Comp.,
Davis Polk, FSR, NACD, Pfizer, PGGM, Protective
Life, Towers Watson, Wachtell, Lipton, Rosen &
Katz (‘‘Wachtell’’), and WorldatWork.
269 See letter from Davis Polk.
270 See, e.g., letters from ABA, Frederic Cook,
McGuireWoods, NACD, PGGM, Protective Life, and
WorldatWork.
271 See, e.g., letter from ABA.
272 See, e.g., letter from CII.
273 See, e.g., letters from McGuireWoods, PM&P,
Protective Life, Steve Quinlivan (‘‘Quinlivan’’), and
Sullivan.
274 See, e.g., letters from Business Roundtable,
Compensia, FSR, McGuireWoods, PM&P, Protective
Life, Sullivan, and Wachtell.
275 See letter from McGuireWoods.
276 See, e.g., letters from Frederic Cook, Meridian,
and Protective Life.
E:\FR\FM\02FER4.SGM
02FER4
6030
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
commentators stated that there should
be no exceptions and that a new golden
parachute vote should be required if
there have been any changes since the
arrangements were subject to the Rule
14a–21(a) shareholder advisory vote.277
emcdonald on DSK2BSOYB1PROD with RULES4
c. Final Rule
After considering the comments, we
are adopting Rule 14a–21(c) as
proposed, with some modifications.
Consistent with the proposal, our rule
does not require issuers to use any
specific language or form of resolution
to be voted on by shareholders. In
addition, we note that, as provided in
Section 14A(c), this shareholder vote
will not be binding on the issuer or its
board of directors.
i. Scope of Rule 14a–21(c) Shareholder
Advisory Vote
Under Rule 14a–21(c), issuers will be
required to provide a separate
shareholder advisory vote in proxy
statements for meetings at which
shareholders are asked to approve an
acquisition, merger, consolidation, or
proposed sale or other disposition of all
or substantially all assets, consistent
with Section 14A(b)(2). However,
issuers are not required to provide a
separate shareholder advisory vote in
proxy statements for meetings at which
shareholders are asked to approve other
proposals, such as an increase in
authorized shares or a reverse stock
split, which may be necessary for the
issuer to effectuate a transaction. A vote
under Rule 14a–21(c) is required only if
the shareholders are voting to approve
the transaction and the transaction and
golden parachute arrangements come
within those covered by Section 14A(b).
Consistent with the proposal, this
advisory vote will be required only with
respect to the golden parachute
agreements or understandings required
to be disclosed by Section 14A(b)(1), as
disclosed pursuant to proposed Item
402(t) of Regulation S–K.
Section 14A(b)(1) requires disclosure
of any agreements or understandings
between the soliciting person and any
named executive officer of the issuer or
any named executive officers of the
acquiring issuer, if the soliciting person
is not the acquiring issuer. When a
target issuer conducts a proxy or
consent solicitation to approve a merger
or similar transaction, golden parachute
compensation agreements or
understandings between the acquiring
issuer and the named executive officers
of the target issuer are not within the
scope of disclosure required by Section
14A(b)(1), and thus a shareholder vote
277 See,
e.g., letters from Glass Lewis and PGGM.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
to approve arrangements between the
soliciting target issuer’s named
executive officers and the acquiring
issuer is not required by Exchange Act
Section 14A(b)(2). Consequently,
consistent with the proposal, Rule 14a–
21(c) as adopted requires a shareholder
advisory vote only on the golden
parachute compensation agreements or
understandings for which Section
14A(b)(1) requires disclosure and
Section 14A(b)(2) requires a shareholder
vote. As described in Section II.D.2.c.iii
above, however, disclosure of all golden
parachute arrangements will be
required, even though a vote on the
arrangements will not be required.
ii. Exceptions to Rule 14a–21(c)
Shareholder Advisory Vote
Consistent with Section 14A(b)(2) and
our proposal, issuers will not be
required to include in the merger proxy
a separate shareholder vote on the
golden parachute compensation
disclosed under Item 402(t) of
Regulation S–K if Item 402(t) disclosure
of that compensation had been included
in the executive compensation
disclosure that was subject to a prior
vote of shareholders under Section
14A(a)(1) of the Exchange Act and Rule
14a–21(a). In this regard, we note that
Section 14A(b)(2) requires only that the
golden parachute arrangements have
been subject to a prior shareholder vote
under Section 14A(a)(1); such
arrangements need not have been
approved by shareholders.
For issuers to take advantage of this
exception, however, the executive
compensation disclosure subject to the
prior shareholder vote must have
included Item 402(t) disclosure of the
same golden parachute arrangements.
Even if the annual meeting proxy
statement provided some disclosure
with respect to golden parachute
arrangements,278 the annual meeting
proxy statement must include the
disclosure required by Item 402(t) in
order for the annual meeting
shareholder vote under Section
14A(a)(1) and Rule 14a–21(a) to satisfy
the exception from the merger proxy
separate shareholder vote under Section
14A(b)(2) and Rule 14a–21(c).
Consequently, we would expect that
some issuers may voluntarily include
Item 402(t) disclosure with their other
executive compensation disclosure in
annual meeting proxy statements
soliciting the shareholder vote required
by Section 14A(a)(1) and Rule 14a–21(a)
278 See CD&A and Item 402(j) of Regulation S–K,
and for smaller reporting companies see Item
402(q)(2) of Regulation S–K for the disclosure
requirements applicable to annual meeting proxy
statements.
PO 00000
Frm 00022
Fmt 4701
Sfmt 4700
so that this exception would be
available to the issuer for a potential
subsequent merger or acquisition
transaction. We also expect that some
issuers may choose to include the new
disclosure for other reasons, such as
investor interest in the information.
The exception will be available only
to the extent the same golden parachute
arrangements previously subject to an
annual meeting shareholder vote remain
in effect, and the terms of those
arrangements have not been modified
subsequent to the Section 14A(a)(1)
shareholder vote. As proposed and
adopted, if the disclosure pursuant to
Item 402(t) has been updated to change
only the value of the items in the
Golden Parachute Compensation Table
to reflect price movements in the
issuer’s securities, no new shareholder
advisory vote under Section 14A(b)(1)
will be required. New golden parachute
arrangements, and any revisions to
golden parachute arrangements that
were subject to a prior Section 14A(a)(1)
shareholder vote will be subject to the
separate merger proxy shareholder vote
requirement of Section 14A(b)(2) and
Rule 14a–21(c).279
Additionally, we agree with certain
commentators 280 that changes that
result only in a reduction in value of the
total compensation payable should not
require a new shareholder vote. If the
shareholders have had an opportunity to
vote on a more highly valued
compensation package, then we do not
believe issuers should be required to
provide a separate vote on a change that
results only in a compensation package
that has been reduced in value.
We believe that the other examples of
changes cited by commentators,
including changes in compensation
because of a new named executive
officer, additional grants of equity
compensation in the ordinary course,
and increases in salary, are significant
changes to the golden parachute
compensation disclosure and, consistent
with Section 14A(b)(2), should be
subject to a shareholder vote. Because a
shareholder vote would already have
been obtained on portions of the
arrangements, however, only the new
arrangements and revised terms of the
arrangements previously subject to a
Section 14A(a)(1) shareholder vote will
be subject to the merger proxy separate
279 For example, we would view any change that
would result in an IRC Section 280G tax gross-up
becoming payable as a change in terms triggering
such a separate vote, even if such tax gross-up
becomes payable only because of an increase in the
issuer’s share price.
280 See, e.g., letters from Frederic Cook, Meridian,
and Protective Life.
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
shareholder vote under Section
14A(b)(2) and Rule 14a–21(c).
Consistent with the proposal, issuers
providing for a shareholder vote on new
arrangements or revised terms will need
to provide two separate tables under
Item 402(t) of Regulation S–K in merger
proxy statements.281 One table will
disclose all golden parachute
compensation, including both
arrangements and amounts previously
disclosed and subject to a say-on-pay
vote under Section 14A(a)(1) and Rule
14a–21(a) and the new arrangements or
revised terms. The second table will
disclose only the new arrangements or
revised terms subject to the vote, so that
shareholders can clearly see what is
subject to the shareholder vote under
Section 14A(b)(2) and Rule 14a–21(c).
Similarly, in cases where Item 402(t)
requires disclosure of arrangements
between an acquiring company and the
named executive officers of the
soliciting target company, issuers will
need to clarify whether these
agreements are included in the
shareholder advisory vote by providing
a separate table of all agreements and
understandings subject to the
shareholder advisory vote required by
Section 14A(b)(2) and Rule 14a–21(c), if
different from the full scope of golden
parachute compensation subject to Item
402(t) disclosure.282
emcdonald on DSK2BSOYB1PROD with RULES4
E. Treatment of Smaller Reporting
Companies
Section 951 of the Act establishes a
new Section 14A(e) of the Exchange
Act, which provides that we may, by
rule or order, exempt an issuer or class
of issuers from the requirements of
Section 14A(a) and (b). In determining
whether to make an exemption under
this subsection, we are directed to take
into account, among other
considerations, whether the
requirements of Sections 14A(a) and
14A(b) disproportionately burden small
issuers.
In the Proposing Release, we did not
propose to exempt small issuers or
smaller reporting companies 283 from
the requirements of Sections 14A(a) and
14A(b). Comments on this issue were
mixed. Many commentators agreed that
the requirements of Section 14A should
be applied to all issuers and that there
should be no exemptions for smaller
281 See Instruction 6 to Item 402(t)(2) of
Regulation S–K.
282 Instruction 7 to Item 402(t)(2). As discussed
above, such agreements are not required to be
subject to the Rule 14a–21(c) shareholder advisory
vote, but issuers may voluntarily subject them to
such a vote.
283 ‘‘Smaller reporting company’’ is defined in
Rule 12b–2 under the Exchange Act.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
reporting companies,284 while a number
of other commentators asserted that
smaller reporting companies should be
exempt from the requirements of
Exchange Act Section 14A and our
proposed rules.285 Among those
opposed to applying the requirements to
smaller reporting companies, in
addition to stating that these
requirements would be a burden to
smaller reporting companies,286 some
commentators asserted that smaller
reporting companies may feel
compelled to include additional
disclosure beyond the scaled
requirements otherwise applicable to
smaller reporting companies, including
a CD&A, because of such votes,287
which would impose significant
burdens on these issuers. One
commentator urged that, if we do not
exempt smaller reporting companies, we
should at least delay implementation of
the proposed rules for smaller reporting
companies so that smaller companies
would have the opportunity to observe
how larger companies conduct the vote
and respond to the disclosure
requirements.288
After reviewing and considering these
comments, we are adopting a temporary
exemption for smaller reporting
companies so that these issuers will not
be required to conduct either a
shareholder advisory vote on executive
compensation or a shareholder advisory
vote on the frequency of say-on-pay
votes until the first annual or other
meeting of shareholders occurring on or
after January 21, 2013.289 We do not
believe that smaller reporting
companies should be permanently
exempt from the say-on-pay vote,
frequency of say-on-pay votes and
golden parachute disclosure and vote
because we believe investors have the
same interest in voting on the
compensation of smaller reporting
companies and in clear and simple
disclosure of golden parachute
compensation in connection with
mergers and similar transactions as they
have for other issuers. However, after
reviewing comments on the potential
284 See, e.g., letters from AFSCME, Boston
Common, CalPERS, Calvert, CII, First Affirmative,
Glass Lewis, ICGN, Merkl, PGGM, Public Citizen,
RAILPEN & USS, SBA of Florida, Senator Levin,
Social Investment, and Walden.
285 See, e.g., letters from American Bankers
Association (‘‘Am. Bankers’’), Independent
Community Bankers of America (‘‘ICBA’’), NACD,
Society of Corp. Sec., and Virginia Bankers
Association (‘‘VBA’’).
286 See, e.g., letters from ABA, Am. Bankers, and
VBA.
287 See, e.g., letters from ABA and Society of
Corp. Sec.
288 See letter from ABA.
289 Rules 14a–21(a) and (b).
PO 00000
Frm 00023
Fmt 4701
Sfmt 4700
6031
burdens on smaller reporting
companies, we believe it is appropriate
to provide additional time before
smaller reporting companies are
required to conduct the shareholder
advisory votes on executive
compensation and the frequency of sayon-pay votes.
We believe that a delayed effective
date for the say-on-pay and frequency
votes for smaller reporting companies
should allow those companies to
observe how the rules operate for other
companies and should allow them to
better prepare for implementation of the
rules. We also believe that delayed
implementation for these companies
will allow us to evaluate the
implementation of the adopted rules by
larger companies and provide us with
the additional opportunity to consider
whether adjustments to the rule would
be appropriate for smaller reporting
companies before the rule becomes
applicable to them. We believe a
temporary exemption by rule is
appropriate, under the exemptive
authority granted by Section 14A(e) of
the Exchange Act 290 and also under the
Commission’s general exemptive
authority pursuant to Section 36(a)(1) of
the Exchange Act, in the public interest
and consistent with the protection of
investors.291
This temporary exemption for smaller
reporting companies does not apply to
the requirements of Section 14A(b)(2)
and Rule 14a–21(c) to provide a
shareholder advisory vote on golden
parachute compensation in connection
with mergers or other extraordinary
transactions. We view the temporary
exemption as a transition matter that
will facilitate eventual compliance with
the regular, periodic say-on-pay vote
requirement by smaller reporting
290 Exchange Act Section 14A(e) provides that
‘‘the Commission may, by rule or order, exempt an
issuer or class of issuers from the requirement’’
under Sections 14A(a) or 14A(b). Section 14A(e)
further provides that ‘‘in determining whether to
make an exemption under this subsection, the
Commission shall take into account, among other
considerations, whether the requirements under
[Section 14A(a) and 14A(b)] disproportionately
burdens small issuers.’’ In considering whether to
provide an exemption, the Commission considered
whether the requirements of Section 14A(a) and (b)
as applied to smaller reporting companies to
conduct a shareholder advisory vote on executive
compensation and a shareholder advisory vote on
the frequency of say-on-pay votes could
disproportionately burden small issuers.
291 15 U.S.C. 78 mm(a)(1). Exchange Act Section
36(a)(1) provides that ‘‘the Commission, by rule,
regulation, or order, may conditionally or
unconditionally exempt any person, security, or
transaction, or any class of persons, securities, or
transactions, from any provision or provisions of
this title or of any rule or regulation thereunder, to
the extent that such exemption is necessary or
appropriate in the public interest, and is consistent
with the protection of investors.’’
E:\FR\FM\02FER4.SGM
02FER4
emcdonald on DSK2BSOYB1PROD with RULES4
6032
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
companies. We do not believe similar
considerations support an exemption for
the shareholder advisory vote on golden
parachute arrangements in light of the
extraordinary nature of the transactions
involved.
We have also crafted our amendments
to minimize the costs for smaller
reporting companies, while providing
shareholders the opportunity to express
their views on the companies’
compensation arrangements. For
example, once they fully apply to
smaller reporting companies, our
amendments will provide shareholders
of those companies the same voting
rights with respect to executive
compensation as apply to shareholders
of other companies subject to the proxy
rules. We do not believe that Section
14A and our final rules, especially given
the temporary exemption, would
unduly burden smaller reporting
companies. For example, our final rule
does not alter the existing scaled
disclosure requirements set forth in Item
402 of Regulation S–K for smaller
reporting companies, which recognize
that the compensation arrangements of
smaller reporting companies typically
are less complex than those of other
public companies.292 Under the rules
we adopt today, we do not alter the
provision in our rules that smaller
reporting companies are not required to
provide a CD&A. Therefore, the
amendment to Item 402(b) of Regulation
S–K will not apply to smaller reporting
companies, as such companies are not
required to provide a CD&A.
Our amendments will, however,
require quantification of golden
parachute arrangements in merger
proxies. Smaller reporting companies
are not required to provide this
quantification under current Item 402(q)
in annual meeting proxy statements,
and are not required to do so under our
new rules unless they seek to qualify for
the exception for a shareholder advisory
vote on golden parachute compensation
in a later merger transaction. Even
though our rules impose additional
disclosure requirements relating to the
shareholder advisory votes required by
Section 14A, we do not believe our rules
will impose a significant additional cost
or disproportionate burden upon
smaller reporting companies. As noted
above, smaller reporting companies tend
to have less complex compensation
292 See Executive Compensation and Related
Person Disclosure, Release No. 33–8732A (Aug. 29,
2006) [71 FR 53158] (hereinafter, the ‘‘2006
Executive Compensation Release’’) at Section II.D.1.
The scaled compensation disclosure requirements
for smaller reporting companies are set forth in Item
402(1) [17 CFR 229.402(l)] through (r) [17 CFR
229.402(r)] of Regulation S–K.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
arrangements 293 so the additional
disclosures should not add significantly
to their disclosure burden. As a result,
we do not believe the rules we adopt
today place a disproportionate burden
on smaller reporting companies.
F. Transition Matters
As noted above in Section I, Section
14A(a)(3) requires that both the initial
shareholder vote on executive
compensation and the initial vote on the
frequency of votes on executive
compensation be included in proxy
statements relating to an issuer’s first
annual or other meeting of the
shareholders occurring on or after
January 21, 2011. Because Section
14A(a) applies to shareholder meetings
taking place on or after January 21,
2011, any proxy statements, whether in
preliminary or definitive form, even if
filed prior to this date, for meetings
taking place on or after January 21,
2011, must include the separate
resolutions for shareholders to approve
executive compensation and the
frequency of say-on-pay votes required
by Section 14A(a) without regard to
whether our rules to implement Section
14A(a) have become effective by that
time. To facilitate compliance with the
new statute, we addressed certain first
year transition issues in the Proposing
Release. We are now extending those
transition positions as described below.
Before effectiveness of the
amendment to Rule 14a–6(a) adopted in
this release, Rule 14a–6 will continue to
require the filing of a preliminary proxy
statement at least ten days before the
proxy is sent or mailed to shareholders
unless the meeting relates only to the
matters specified by Rule 14a–6(a).
Until the rules we are adopting to
implement Exchange Act Section 14A
become effective, we will not object if
issuers do not file proxy material in
preliminary form if the only matters that
would require a filing in preliminary
form are the say-on-pay vote and
frequency of say-on-pay vote required
by Section 14A(a).
Before the amendment to Rule 14a–4
adopted in this release becomes
effective, Rule 14a–4 provides that
persons solicited are to be afforded the
choice between approval or disapproval
of, or abstention with respect to, each
matter to be voted on, other than
elections of directors. Until
effectiveness of the amendment to Rule
14a–4 adopted in this release, we will
not object if the form of proxy for a
shareholder vote on the frequency of
say-on-pay votes provides means
293 See 2006 Executive Compensation Release,
supra note 292, at Section II.D.1.
PO 00000
Frm 00024
Fmt 4701
Sfmt 4700
whereby the person solicited is afforded
an opportunity to specify by boxes a
choice among 1, 2 or 3 years, or abstain.
In addition, we understand that,
although some commentators indicated
they are prepared for the four-choice
frequency vote, the systems of other
proxy service providers are currently set
up to register at most three votes—for,
against, or abstain—and these providers
may have short-term difficulty in
programming their systems to enable
shareholders to vote among four
choices. As a result, because the
preparedness of these providers may
vary significantly on a firm-by-firm
basis, for any proxy materials filed for
meetings to be held on or before
December 31, 2011, we will not object
if the form of proxy for a shareholder
vote on the frequency of say-on-pay
votes provides means whereby the
person solicited is afforded an
opportunity to specify by boxes a choice
among 1, 2 or 3 years, and there is no
discretionary authority to vote proxies
on the frequency of say-on-pay votes
matter in the event the person solicited
does not select a choice among 1, 2 or
3 years.294
Issuers with outstanding indebtedness
under the TARP are already required to
conduct an annual shareholder advisory
vote on executive compensation until
the issuer has repaid all outstanding
indebtedness under the TARP. Because
such issuers are subject to an annual
requirement to provide a say-on-pay
vote, a requirement to provide a vote on
the frequency of such votes would
impose unnecessary burdens on issuers
and shareholders, and our final rules
provide an exemption from such
requirement. Until the rules we are
adopting to implement Exchange Act
Section 14A become effective, we will
not object if an issuer with outstanding
indebtedness under the TARP does not
include a resolution for a shareholder
advisory vote on the frequency of sayon-pay votes in its proxy statement for
its annual meeting, provided it fully
complies with its say-on-pay voting
obligations under EESA Section 111(e).
Finally, as we discussed above, we are
adopting a temporary exemption for
smaller reporting companies to defer
application of the requirements of
Section 14A(a)(1) and (a)(2) and Rule
14a–21(a) and (b) to conduct
shareholder advisory votes on executive
compensation and the frequency of such
votes. Until the rules we are adopting to
implement Exchange Act Section 14A
294 See Shareholder Communications,
Shareholder Participation in the Corporate
Electoral Process and Corporate Governance
Generally, Release No. 34–16356 (Nov. 21, 1979)
[44 FR 68770].
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
become effective, we will not object if
a smaller reporting company does not
include a resolution for a shareholder
advisory vote on say-on-pay or the
frequency of say-on-pay votes in its
proxy statement for its annual meeting.
As with other issuers, smaller reporting
companies are required to conduct the
shareholder advisory vote on golden
parachute compensation upon
effectiveness of Rule 14a–21(c).
III. Paperwork Reduction Act
A. Background
emcdonald on DSK2BSOYB1PROD with RULES4
Certain provisions of the final
amendments contain ‘‘collection of
information’’ requirements within the
meaning of the Paperwork Reduction
Act of 1995 (‘‘PRA’’).295 We published a
notice requesting comment on the
collection of information requirements
in the proposing release for the rule
amendments, and we submitted these
requirements to the Office of
Management and Budget (‘‘OMB’’) for
review in accordance with the PRA.296
The title for the collection of
information is:
(1) ‘‘Regulation 14A and Schedule
14A’’ (OMB Control No. 3235–0059);
(2) ‘‘Regulation 14C and Schedule
14C’’ (OMB Control No. 3235–0057);
(3) ‘‘Form 8–K’’ (OMB Control No.
3235–0060);
(4) ‘‘Form 10’’ (OMB Control No.
3235–0064);
(5) ‘‘Regulation S–K’’ (OMB Control
No. 3235–0071); 297
(6) ‘‘Schedule 14D–9’’ (OMB Control
No. 3235–0102);
(7) ‘‘Schedule 13E–3’’ (OMB Control
No. 3235–0007);
(8) ‘‘Schedule TO’’ (OMB Control No.
3235–0515);
(9) ‘‘Form S–1’’ (OMB Control No.
3235–0065);
(10) ‘‘Form S–4’’ (OMB Control No.
3235–0324);
(11) ‘‘Form S–11’’ (OMB Control No.
3235–0067);
(12) ‘‘Form F–4’’ (OMB Control No.
3235–0325); and
(13) ‘‘Form N–2’’ (OMB Control No.
3235–0026).
The regulations, schedules, and forms
were adopted under the Securities Act
and the Exchange Act, except for Form
N–2, which we adopted pursuant to the
Securities Act and the Investment
295 44
U.S.C. 3501 et seq.
U.S.C. 3507(d) and 5 CFR 1320.11.
297 The paperwork burden from Regulation S–K is
imposed through the forms that are subject to the
disclosures in Regulation S–K and is reflected in
the analysis of those forms. To avoid a Paperwork
Reduction Act inventory reflecting duplicative
burdens, for administrative convenience we
estimate the burdens imposed by Regulation S–K to
be a total of one hour.
296 44
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
Company Act. The regulations, forms,
and schedules set forth the disclosure
requirements for periodic reports,
current reports, registration statements
and proxy and information statements
filed by companies to help shareholders
make informed voting decisions. The
hours and costs associated with
preparing, filing and sending the form
or schedule constitute reporting and
cost burdens imposed by each collection
of information. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a
currently valid OMB control number.
B. Summary of the Final Rules
As discussed in more detail above, we
are adopting new Rule 14a–21 under the
Exchange Act and new Item 24 of
Schedule 14A. Rule 14a–21 will
implement the requirements of Section
14A of the Exchange Act to provide
separate shareholder advisory votes on
executive compensation, the frequency
of shareholder votes on executive
compensation, and, in connection with
merger and similar transactions, golden
parachute compensation arrangements.
New Item 24 of Schedule 14A will
require disclosure in proxy statements
with respect to each of these
shareholder votes. New Rule 14a–21
and new Item 24 of Schedule 14A will
increase existing disclosure burdens for
proxy statements by requiring:
• New disclosure about the
requirement to provide separate
shareholder votes on executive
compensation, the frequency of
shareholder votes on executive
compensation and golden parachute
compensation arrangements in
connection with merger transactions;
and
• New disclosure of the general effect
of the shareholder advisory votes, such
as whether such votes are non-binding.
As discussed in more detail above, we
are also adopting amendments to Item
402(b) of Regulation S–K. The
amendments to Item 402(b) of
Regulation S–K may increase existing
disclosure burdens for proxy statements
by requiring:
• New disclosure of whether, and if
so, how the issuer has considered the
results of the most recent shareholder
vote on executive compensation
required by Section 14A of the
Exchange Act in determining
compensation policies and decisions,
and, if so, how that consideration has
affected the issuer’s compensation
decisions and policies.
As discussed in more detail above, we
are also adopting new Item 402(t) of
Regulation S–K and amendments to
PO 00000
Frm 00025
Fmt 4701
Sfmt 4700
6033
Item 1011(b) of Regulation M–A, Item 5
of Schedule 14A, Item 3 of Schedule
14C, Item 15 of Schedule 13E–3, Item 11
of Schedule TO, and Item 8 of Schedule
14D–9. These amendments, other than
the amendment to Schedule TO, will
increase existing disclosure burdens for
proxy statements, registration
statements on Form S–4 and F–4,
solicitation/recommendation statements
on Schedule 14D–9, and going-private
schedules by requiring:
• New tabular and narrative
disclosure of understandings and
agreements of named executive officers
with acquiring and target companies in
connection with merger, acquisition,
Rule 13e–3 going-private transactions,
and tender offers,298 and disclosure of
the aggregate total of all compensation
that may be paid or become payable to
each named executive officer.
As discussed in more detail above, we
are adopting amendments to Form 8–K.
The amendments to Form 8–K will
increase existing disclosure burdens for
current reports on Form 8–K by
requiring:
• New disclosure of the issuer’s
decision of how frequently to provide a
separate shareholder vote on executive
compensation in light of a shareholder
advisory vote on the frequency of
shareholder votes on executive
compensation conducted pursuant to
Section 14A(a)(2) of the Exchange Act.
Together, new Rule 14a–21 and new
Item 24 of Schedule 14A and the
amendments to Item 5 of Schedule 14A,
Item 3 of Schedule 14C, Item 402 of
Regulation S–K, Item 1011 of Regulation
M–A, Item 15 of Schedule 13E–3, Item
11 of Schedule TO, and Item 8 of
Schedule 14D–9 will implement and
supplement the requirements under
Section 14A of the Exchange Act and
also will provide additional meaningful
disclosure regarding golden parachute
arrangements and issuers’ consideration
of the shareholder votes and the effect
of such votes on issuers’ compensation
policies and decisions. We believe these
changes will result in more meaningful
disclosure for investors making voting
or investment decisions.
We are adopting an amendment to
Rule 14a–4, which relates to the form of
proxy that issuers are required to
include with their proxy materials, to
require that issuers present four choices
to their shareholders in connection with
the advisory vote on frequency. We are
also adopting an amendment to Rule
298 Companies filing solicitation/recommendation
statements on Schedule 14D–9 in connection with
third-party tender offers will be obligated to provide
this additional disclosure. However, bidders filing
tender offer statements on Schedule TO will not
have a similar obligation.
E:\FR\FM\02FER4.SGM
02FER4
6034
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
emcdonald on DSK2BSOYB1PROD with RULES4
14a–6 to add the shareholder votes on
executive compensation and the
frequency of shareholder votes on
executive compensation required by
Section 14A(a), as well as any
shareholder advisory vote on executive
compensation, to the list of items that
do not trigger the filing of a preliminary
proxy statement. In addition, we are
adopting an amendment to Rule 14a–8,
adding a note to Rule 14a–8(i)(10) to
clarify the status of shareholder
proposals relating to the approval of
executive compensation or the
frequency of shareholder votes
approving executive compensation.
Finally, we are adopting conforming
amendments to Item 402(a) and Item
402(m) of Regulation S–K, clarifying
that the disclosure required by proposed
Item 402(t) includes information
regarding group life, health,
hospitalization, or medical
reimbursement plans that do not
discriminate in scope, terms or
operation, in favor of executive officers
or directors of the registrant and that are
available generally to all salaried
employees. Pursuant to these
conforming amendments, issuers may
continue to omit such information in
connection with disclosure required by
other portions of Item 402 of Regulation
S–K. The amendments to Rule 14a–4,
Rule 14a–6, Rule 14a–8 under the
Exchange Act and Item 402(a) and Item
402(m) of Regulation S–K will not
increase any existing disclosure burden.
We believe these amendments will
merely clarify existing and new
statutory requirements or reduce
burdens otherwise arising from our
proposals. As a result, these
amendments will not affect any existing
disclosure burden.
Compliance with the proposed
amendments by affected U.S. issuers
will be mandatory. Responses to the
information collections will not be kept
confidential and there would be no
mandatory retention period for the
information disclosed.
C. Summary of Comment Letters and
Revisions to Proposals
In the Proposing Release, we
requested comment on the PRA
analysis. We did not receive any
comments that addressed our overall
burden estimates for the proposed
amendments, though our analysis was
cited by one commentator who
discussed our cost-benefit analysis.299
We have made few substantive
modifications to the proposed
amendments. We have adopted an
amendment to Form 8–K to require the
299 See
letter from CCMC.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
disclosure we had proposed to require
in Form 10–Q or Form 10–K. Therefore,
we have adjusted our estimates to reflect
no changes to Forms 10–Q and 10–K
and to estimate the increased burdens
for Form 8–K.
We have also revised our amendments
with respect to Schedule TO to
eliminate the proposed requirement for
bidders in third-party tender offers to
provide Item 402(t) disclosure. We have
adjusted our estimates to reflect no
changes to Schedule TO, as any
increased burden will be reflected in
Schedule 13E–3 because Item 402(t)
disclosure will be required in any
tender offer that is also a Rule 13e–3
going-private transaction.
D. Revisions to PRA Reporting and Cost
Burden Estimates
We anticipate that the disclosure
amendments will increase the burdens
and costs for companies that would be
subject to the proposed amendments.
New Section 14A of the Exchange Act,
as created by Section 951 of the Act, has
already increased the burdens and costs
for issuers by requiring separate
shareholder votes on executive
compensation and the frequency of
shareholder votes on executive
compensation. Section 14A also
requires additional disclosure of golden
parachute arrangements in proxy
solicitations to approve merger
transactions and a separate shareholder
vote to approve such arrangements in
certain circumstances. Our amendments
address the Act’s requirements in the
context of disclosure under the Federal
proxy rules, Regulation S–K and related
forms and schedules, thereby creating
only an incremental increase in the
burdens and costs for such issuers. The
amendments specify how issuers are to
comply with Section 14A of the
Exchange Act and require new
disclosure with respect to comparable
transactions.
For purposes of the PRA, in the
Proposing Release we estimated the
annual incremental paperwork burden
for all companies to prepare the
disclosure that would be required under
our proposals to be approximately
25,192 hours of company personnel
time and a cost of approximately
$8,141,200 for the services of outside
professionals. These estimates included
the time and the cost of data gathering
systems and disclosure controls and
procedures, the time and cost of
preparing and reviewing disclosure by
in-house and outside counsel and
executive officers, and the time and cost
of filing documents and retaining
records. In deriving our estimates, we
recognize that the burdens will likely
PO 00000
Frm 00026
Fmt 4701
Sfmt 4700
vary among individual companies based
on a number of factors, including the
size and complexity of their
organizations, the nature and
complexity of their golden parachute
compensation arrangements, and the
nature of their operations. We believe
that some companies will experience
costs in excess of this average in the first
year of compliance with proposals and
some companies may experience less
than the average costs. As discussed
above, as a result of changes to our
proposed rules, we are slightly reducing
the total PRA burden and cost estimates
that we originally submitted to the OMB
in connection with the proposed
amendments. We estimate the annual
incremental paperwork burden for all
companies to prepare the disclosure that
would be required under our rule
amendments to be approximately 24,942
hours of company personnel time and a
cost of approximately $7,841,200 for the
services of outside professionals.
We derived our new burden hour and
cost estimates by estimating the average
number of hours it would take an issuer
to prepare and review the proposed
disclosure requirements. These
estimates represent the average burden
for all companies, both large and small.
Our estimates have been adjusted to
reflect the fact that some of the
amendments will be required in some
but not all of the above listed
documents depending upon the
circumstances, and would not apply to
all companies.
With respect to reporting companies,
the disclosure required by new Item
402(t) of Regulation S–K will be
required in merger proxy and
information statements, Forms S–4 and
F–4, Schedule 13E–3 and certain
solicitation/recommendation
statements. The disclosure required by
new Item 402(t) may also be included in
annual meeting proxy statements on a
voluntary basis.
The disclosure required by our
amendments to Item 402(b) of
Regulation S–K will be required in
proxy and information statements as
well as Forms 10, 10–K, S–1, S–4, S–11,
and N–2. The proposed amendments to
CD&A will not be applicable to smaller
reporting companies because under
current CD&A reporting requirements
these companies are not required to
provide CD&A in their Commission
filings. Based on the number of proxy
filings that were received in the 2009
fiscal year, we estimate that
approximately 1,200 domestic
companies are smaller reporting
companies that have a public float of
less than $75 million.
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
In the Proposing Release, we based
our annual burden estimates on other
assumptions. We have made some small
adjustments to these estimates to reflect
the revisions we made to the
amendments. First, we continue to
assume that the burden hours of the
amendments will be comparable to the
burden hours related to similar
disclosure requirements under current
reporting requirements, such as the
disclosure required by Item 402(j).
Second, we continue to assume that
substantially all of the burdens
associated with the amendments to Rule
14a–21 and Item 24 will be associated
with Schedule 14A as this will be the
primary disclosure document in which
these items will be prepared and
presented. In the case of our proposed
amendments to Item 402(b) and Item
402(t) of Regulation S–K, we continue to
assume that the burdens associated with
the amendments will be associated with
various disclosure documents as these
items will be included in a number of
forms and statements. We have noted an
additional 1 hour for the amendments to
Form 8–K, and we are no longer
proposing any amendments that would
alter the disclosure burden of Form
10–Q and Form 10–K.
For each reporting company, we
estimate that the amendments will
impose on average the following
incremental burden hours:
• 2 hours for the amendments to
CD&A.
• 1 hour for the amendments to Item
24 of Schedule 14A.
• 1 hour for the amendments to Form
8–K.
• 20 hours for new Item 402(t) of
Regulation S–K.
1. Annual Meeting Proxy Statements
emcdonald on DSK2BSOYB1PROD with RULES4
For purposes of the PRA, in the case
of reporting companies, we estimate the
annual incremental paperwork burden
for annual meeting proxy statements
under the amendments will be
approximately 1 hour per form for
companies that are smaller reporting
companies, and 3 hours per form for
companies that are non-accelerated
filers (and not smaller reporting
companies), accelerated filers, or large
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
accelerated filers.300 The estimated
burden is smaller for smaller reporting
companies as such issuers are not
required to include a CD&A.
2. Exchange Act Current Reports
For purposes of the PRA, we estimate
the annual incremental paperwork
burden for Form 8–K under the
amendments will be approximately 1
hour per form. Our estimates below also
account for the fact that each issuer will
only be required to include additional
disclosure in one amended Form 8–K
each year the issuer conducts a
shareholder advisory vote on frequency.
3. Securities Act Registration Statements
and Exchange Act Registration
Statements
For purposes of the PRA, in the case
of reporting companies, we estimate the
annual incremental paperwork burden
for Securities Act and Exchange Act
registration statements under the
amendments is approximately 2 hours
per form, which represents the
additional burden associated with our
amendments to CD&A.301 In making our
estimates, we note that the additional
burdens in CD&A only apply to issuers
who have conducted a prior shareholder
advisory vote and would not apply, for
example, to issuers making an initial
filing on Form S–1 or Form S–11.
4. Merger Proxies, Tender Offer
Documents and Schedule 13E–3
For purposes of the PRA, in the case
of reporting companies, we estimate the
annual incremental paperwork burden
for merger proxy statements, and
registration statements on Form S–4 and
F–4 to be 21 hours per form, as these
forms will be required to include
300 Our estimate for annual proxy statements is
based upon an estimated burden over a six-year
period during which the shareholder advisory votes
required by Section 14A(a) would not occur
annually. We used a six-year period because issuers
will conduct at least two shareholder advisory votes
on executive compensation and at least one
shareholder advisory vote on the frequency of such
votes in this time period. We then estimated an
average annual burden based on the average burden
over the six-year period.
301 We have assumed that the annual incremental
paperwork burden under the proposed amendments
to Item 402(b) of Regulation S–K would be included
in the annual meeting proxy statement.
PO 00000
Frm 00027
Fmt 4701
Sfmt 4700
6035
additional disclosures under Item 24 of
Schedule 14A and Item 402(t) of
Regulation S–K. We estimate the annual
incremental paperwork burden for
merger information statements, and
tender offer solicitation/
recommendation statements and
Schedules 13E–3 to be 20 hours per
form, as these forms will be required to
include Item 402(t) disclosure but will
not be required to include additional
disclosure under Item 24 of Schedule
14A.
The tables below illustrate the total
annual compliance burden of the
collection of information in hours and
in cost under the proposed amendments
for current reports; proxy and
information statements; Form 10;
registration statements on Forms S–1,
S–4, F–4, S–11, and N–2; and
Regulation S–K.302 The burden
estimates were calculated by
multiplying the estimated number of
responses by the estimated average
amount of time it would take an issuer
to prepare and review the proposed
disclosure requirements. For the
Exchange Act report on Form 8–K, and
the proxy statements we estimate that
75% of the burden of preparation is
carried by the company internally and
that 25% of the burden of preparation
is carried by outside professionals
retained by the issuer at an average cost
of $400 per hour.
For registration statements on Forms
S–1, S–4, F–4, S–11, and N–2, and the
Exchange Act registration statement on
Form 10, we estimate that 25% of the
burden of preparation is carried by the
issuer internally and that 75% of the
burden of preparation is carried by
outside professionals retained by the
issuer at an average cost of $400 per
hour. There is no change to the
estimated burden of the collections of
information under Regulation S–K
because the burdens that this regulation
imposes are reflected in our revised
estimated for the forms. The portion of
the burden carried by outside
professionals is reflected as a cost, while
the portion of the burden carried by the
issuer internally is reflected in hours.
302 Figures in both tables have been rounded to
the nearest whole number.
E:\FR\FM\02FER4.SGM
02FER4
6036
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
TABLE 1—INCREMENTAL PAPERWORK BURDEN UNDER THE AMENDMENTS FOR CURRENT REPORTS; PROXY AND
INFORMATION STATEMENTS
Number of
responses 303
Incremental
burden hours/
form
Total
incremental
burden hours
75%
Company
25%
Professional
Professional
costs
(A)
(B)
(C)=(A)*(B)
(D)=(C)*0.75
(E)=(C)*0.25
(F)=(E)*$400
8–K 304 ......................................................
Form 10 305 ..............................................
DEF 14A 306 .............................................
Accel. Filers .............................................
SRC Filers ................................................
DEF 14C ..................................................
Accel. Filers .............................................
SRC Filers ................................................
Reg. S–K ..................................................
7,212
9
7,212
6,112
1,100
582
482
100
N/A
Total ..................................................
........................
1
2
7,212
18
5,409
4
1,803
14
$721,200
5,600
3
1
18,336
1,100
13,752
825
4,584
275
1,833,600
110,000
2
0
N/A
964
0
N/A
723
0
N/A
241
0
N/A
96,400
0
N/A
........................
27,630
20,713
........................
2,766,800
TABLE 2—INCREMENTAL PAPERWORK BURDEN UNDER THE AMENDMENTS FOR REGISTRATION STATEMENTS, MERGER
PROXY AND INFORMATION STATEMENTS, TENDER OFFER DOCUMENTS AND SCHEDULES 13E–3
Number of
responses 307
Incremental
burden hours/
form
Total
incremental
burden hours
25%
Company
75%
Professional
Professional
costs
(A)
(B)
(C)=(A)*(B)
(D)=(C)*0.25
(E)=(C)*0.75
(F)=(E)*$400
Form S–1 308 ............................................
Form S–11 ...............................................
Form S–4 309 ............................................
Form F–4 .................................................
DEFM 14A ...............................................
DEFM 14C 310 ..........................................
Schedule 14D–9 ......................................
Schedule 13E–3 .......................................
Form N–2 311 ............................................
Reg. S–K ..................................................
485
22
499
27
137
14
77
5
29
N/A
2
2
21
21
21
20
20
20
2
N/A
970
44
10,479
567
2,877
280
1,540
100
58
N/A
243
11
2,620
142
719
70
385
25
14
N/A
727
33
7,859
425
2,158
210
1,155
75
44
N/A
$290,800
13,200
3,143,600
170,000
863,200
84,000
462,000
30,000
17,600
N/A
Total ..................................................
........................
........................
16,915
4,229
........................
5,074,400
IV. Cost-Benefit Analysis
A. Introduction
emcdonald on DSK2BSOYB1PROD with RULES4
We are adopting amendments to
implement and supplement the
303 The number of responses reflected in the table
equals the actual number of forms and schedules
filed with the Commission during the 2009 calendar
year, adjusted to reflect the estimated number of
forms and schedules that would be required to
include additional disclosure under our rules as
proposed. As explained below in notes 304 through
306, we have reduced the number of estimated
filings to reflect that the additional disclosure
requirements will only apply to a smaller number
of the forms filed.
304 We calculated the burden hours for Form
8–K based on the number of proxy statements filed
with the Commission during the 2009 calendar
year. We assumed that there would be an aggregate
equal number of Forms 8–K to disclose the issuer’s
plans with respect to the frequency vote as the
number of proxy statements.
305 The burden allocation for Form 10 uses a 25%
internal to 75% outside professional allocation. We
have reduced the number of estimated Form 10
filings to reflect that approximately 95% of these
forms would not require additional disclosure, as
new disclosure required under Item 402 will only
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
relate to issuers in spin-off transactions that are
disclosing compensation of public parent
companies that have conducted a prior shareholder
vote on executive compensation.
306 The estimates for Schedule 14A and Schedule
14C are separated to reflect our estimate of the
burden hours and costs related to the proposed
amendments to CD&A which will be applicable to
companies that are large accelerated filers,
accelerated filers, and non-accelerated filers (that
are not smaller reporting companies), but will not
be applicable to smaller reporting companies.
307 The number of responses reflected in the table
equals the actual number of forms and schedules
filed with the Commission during the 2009 calendar
year, adjusted to reflect the estimated number of
forms and schedules that would be required to
include additional disclosure under our rules as
proposed. As explained below in notes 308 through
311, we have reduced the number of estimated
filings to reflect that the additional disclosure
requirements will only apply to a smaller number
of the forms filed.
PO 00000
Frm 00028
Fmt 4701
Sfmt 4700
308 We have reduced the number of estimated
Form S–1 and Form S–11 filings to reflect that
approximately 60% of these forms will not require
additional disclosure, as new disclosure required
under Item 402 will only relate to issuers who are
already public companies and have conducted a
prior shareholder vote on executive compensation.
309 We have reduced the number of estimated
Form S–4 and Form F–4 filings to reflect an
approximate 75% of these forms which will not
relate to mergers or similar transactions but will be
other transactions (e.g., holding company
formations and financings) to which the amended
rules will not apply.
310 We have reduced the number of estimated
DEFM 14C filings to reflect an approximate 15% of
these forms, which will not relate to merger
transactions but will involve dissolutions and
similar transactions.
311 We have reduced the number of estimated
Form N–2 filings to reflect that 29 filings were made
by business development companies during
calendar year 2009, because only business
E:\FR\FM\02FER4.SGM
02FER4
emcdonald on DSK2BSOYB1PROD with RULES4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
provisions of the Dodd-Frank Act
relating to shareholder approval of
executive compensation and disclosure
and shareholder approval of golden
parachute compensation arrangements.
Section 951 of the Dodd-Frank Act
amends the Exchange Act by adding
new Section 14A. New Section
14A(a)(1) requires companies to conduct
a separate shareholder advisory vote to
approve the compensation of
executives. Section 14A(a)(2) requires
companies to conduct a separate
shareholder advisory vote to determine
how often an issuer will conduct a
shareholder advisory vote on executive
compensation. In addition, Section
14A(b) requires companies soliciting
votes to approve merger or acquisition
transactions to provide disclosure of
certain ‘‘golden parachute’’
compensation arrangements and, when
such arrangements have not been
included in the shareholder advisory
vote on executive compensation, to
conduct a separate shareholder advisory
vote to approve the golden parachute
compensation arrangements.312
We are adopting new Rule 14a–21 to
implement Section 14A(a)(1) by
providing separate shareholder advisory
votes to approve executive
compensation, to approve the frequency
of such votes on executive
compensation, and to approve golden
parachute compensation arrangements
at shareholder meetings at which
shareholders are asked to approve
merger transactions. In addition to the
votes required by Section 14A, we are
also adopting a new Item 24 of Schedule
14A to elicit disclosure, similar to our
approach with respect to TARP
companies providing shareholder
advisory votes on executive
compensation, regarding the effect of
the shareholder votes required by Rule
14a–21, including whether the votes are
non-binding.
New Item 402(t) of Regulation S–K
implements and supplements the
statutory requirement in Section
14A(b)(1) to promulgate rules for the
clear and simple disclosure of golden
parachute compensation arrangements
that the soliciting person has with its
named executive officers (if the
acquiring issuer is not the soliciting
person) or that it has with the named
executive officers of the acquiring issuer
that relate to the merger transaction. In
development companies will be subject to the
amended disclosure required under Item 402 on
Form N–2.
312 According to the Dodd-Frank Wall Street
Reform and Consumer Protection Act Conference
Report at page 872, Section 951 is ‘‘designed to
address shareholder rights and executive
compensation practices.’’
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
addition, Item 402(t), will supplement
the requirements of Section 14A(b)(1) by
requiring disclosure of golden parachute
compensation arrangements between
the acquiring company and the named
executive officers of the target company
if the target company is the soliciting
person.
Our amendments to Item 5 of
Schedule 14A and Item 3 of Schedule
14C will require disclosure regarding
golden parachute compensation
arrangements in accordance with
Section 14A(b)(1) of the Exchange Act.
We are also adopting amendments to
require that additional disclosure
regarding golden parachute
compensation arrangements be included
in connection with other transactions.
We are adopting amendments to
Regulation M–A, Schedule 14D–9, and
Schedule 13E–3 that will require
additional disclosure regarding golden
parachute compensation arrangements
in connection with Rule 13e–3 goingprivate transactions and tender offers.313
We are also adopting amendments to
Item 402 of Regulation S–K to require
additional Compensation Discussion
and Analysis disclosure about the
issuer’s response to the shareholder vote
on executive compensation and to
provide additional disclosure about
golden parachute compensation
arrangements. We are also adopting
amendments to Form 8–K to require
disclosure regarding the issuer’s action
as a result of the shareholder advisory
vote on the frequency of shareholder
votes on executive compensation.
We are adopting an amendment to
Rule 14a–4, which relates to the form of
proxy that issuers are required to
include with their proxy materials, to
require that issuers present four choices
to their shareholders in connection with
the advisory vote on frequency. We are
also adopting an amendment to Rule
14a–6 to add the shareholder votes on
executive compensation and the
frequency of shareholder votes on
executive compensation required by
Section 14A(a), as well as any
shareholder advisory vote on executive
compensation, to the list of items that
do not trigger the filing of a preliminary
proxy statement. In addition, we are
adopting an amendment to Rule 14a–8,
adding a note to Rule 14a–8(i)(10) to
clarify the status of shareholder
proposals relating to the approval of
executive compensation or the
313 Companies filing solicitation/recommendation
statements on Schedule 14D–9 in connection with
third-party tender offers will be obligated to provide
this additional disclosure. However, bidders filing
tender offer statements on Schedule TO will not
have a similar obligation.
PO 00000
Frm 00029
Fmt 4701
Sfmt 4700
6037
frequency of shareholder votes
approving executive compensation.
The rules we are adopting, which
implement the relevant provisions of
the Dodd-Frank Act, will directly affect
most public companies as well as
potential private acquirers. Our
amended rules implement the
shareholder advisory vote requirements
of Section 14A, promulgate rules for
additional disclosure in accordance
with Section 14A(b)(1), and provide for
additional disclosure, not required by
Section 14A, relating to the shareholder
advisory votes. In addition, our
amended rules expand the required
disclosure of Section 14A(b)(1) to
require disclosure of arrangements
between additional parties, namely
agreements between the acquiring
company and named executive officers
of the target company, and require
disclosure with respect to additional
transactions, including certain tender
offers and Rule 13e–3 going-private
transactions. As discussed below, the
enhanced disclosure required by our
amended rules regarding the
shareholder approval of executive
compensation and companies’
responses to shareholder votes will
provide shareholders and investors with
timely information about such votes that
is consistent with the information
required to be provided under the Act
and that enhance the operation of our
rules pursuant to the Act. The enhanced
disclosure regarding golden parachute
compensation will provide a more
complete picture of the compensation to
shareholders as they consider voting
and investment decisions relating to
mergers and similar transactions.
We are sensitive to the costs and
benefits imposed by the rule and form
amendments we are adopting. The
discussion below focuses on the costs
and benefits of the amendments made
by the Commission to implement the
Act within its permitted discretion,
rather than the costs and benefits of the
Act itself.
B. Comments on the Cost-Benefit
Analysis
In the Proposing Release, we
requested qualitative and quantitative
feedback on the nature of the benefits
and costs described and any benefits
and costs we may have overlooked. We
received one comment letter relating to
the cost-benefit analysis in the
Proposing Release.314 The commentator
asserted that we had underestimated the
costs and burdens involved because we
did not take into account the following
additional categories of costs: Costs
314 See
E:\FR\FM\02FER4.SGM
letter from CCMC.
02FER4
6038
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
emcdonald on DSK2BSOYB1PROD with RULES4
associated with proxy advisory firms
and the potential for companies to
retain additional consulting services
relating to their compensation decisions
and say-on-pay votes, additional costs
associated with submitting no-action
letter requests under Rule 14a–8, and
increased costs due to increased
demand for proxy solicitation and other
shareholder communications
services.315
C. Benefits
The amended rules we are adopting
today are intended to implement and
supplement the requirements of Section
14A of the Exchange Act as set forth in
Section 951 of the Dodd-Frank Act. Our
amended rules not only implement the
shareholder advisory votes required by
Section 14A, but also require additional
disclosure addressing whether, and if
so, how issuers have considered these
required shareholder advisory votes,
and if so, how such votes have affected
the companies’ compensation policies
and decisions.
We believe the enhanced disclosures
about the results of the shareholder
advisory vote on the frequency of the
approval of executive compensation
will provide timely information to
shareholders about the issuer’s plans for
future shareholder advisory votes. The
enhanced disclosure and amendments
to the CD&A requirements in Item
402(b) of Regulation S–K about whether,
and if so, how an issuer has considered
the results of a shareholder vote to
approve executive compensation and, if
so, how that consideration has affected
its compensation policies and decisions
will benefit shareholders and other
market participants by providing
potentially useful information for voting
and investment decisions.
Our amended rules will also specify
how the shareholder advisory votes
required by Section 14A(a) relate to
existing shareholder advisory votes
required for issuers with outstanding
indebtedness under TARP. In our view,
because of the similarity of the separate
annual say-on-pay vote requirements, a
company with indebtedness under
TARP need only provide one annual
shareholder advisory vote. As we have
discussed above, we have indicated that
the annual shareholder advisory vote
under EESA would fulfill the
requirements for the shareholder vote
pursuant to Section 14A(a)(1) and Rule
14a–21(a). We believe this benefits such
companies by reducing confusion and
burdens of the two requirements by
specifying that two separate annual
315 See letter from CCMC. See also Section IV.D
below for additional discussion.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
shareholder votes are not required. In
addition, because issuers with
indebtedness under TARP must conduct
an annual shareholder advisory vote on
executive compensation, we have
adopted an exemption from the
frequency vote required by Section
14A(a)(2) and Rule 14a–21(b) until the
issuer repays all indebtedness under
TARP. We believe this benefits such
issuers and their shareholders by
avoiding the cost and confusion of
conducting a vote on the frequency of a
shareholder advisory vote when the
frequency of such a vote is mandated by
another requirement.
After reviewing the comments we
have received, we are also adopting a
temporary exemption for smaller
reporting companies that will delay the
implementation of the shareholder
advisory votes on say-on-pay and
frequency required by Section 14A(a)
and Rule 14a–21(a) and (b) for a twoyear period. We believe that a delayed
effective date for the say-on-pay and
frequency votes will benefit smaller
reporting companies by allowing these
companies to observe how the rules
operate for other companies by
preparing them for implementation of
the rules. We believe that delayed
implementation for these companies
will also allow us to evaluate the
implementation of the adopted rules by
larger companies and provide us with
the additional opportunity to consider
whether adjustments to the rule would
be appropriate for smaller reporting
companies before the rule becomes
applicable to them.
In these amended rules, we also
provide guidance for issuers and
shareholders regarding the interaction of
the shareholder advisory votes required
by Section 14A and shareholder
proposals under Rule 14a–8 by adding
a note to Rule 14a–8(i)(10). The note we
are adopting will reduce potential
confusion among shareholders and
issuers with respect to what may be
excluded under our rules in light of the
new requirements under Section 14A,
while preserving the ability of
shareholders to make proposals relating
to executive compensation.
New Item 402(t) of Regulation S–K
will require narrative and tabular
disclosure of golden parachute
compensation arrangements in the clear
and simple form required by Section
14A(b)(1) of the Exchange Act. Because
Section 14A(b)(1) requires that
disclosure not only be in a clear and
simple form, but also that it include an
aggregate total of all golden parachute
compensation for each named executive
officer, we have adopted Item 402(t) to
require that such disclosure appear in a
PO 00000
Frm 00030
Fmt 4701
Sfmt 4700
table. The tabular format is designed to
provide investors with clear disclosure
about golden parachute compensation
that is comparable across different
issuers and transactions and make the
information more accessible. In addition
to the tabular disclosure, we are also
adopting amendments to require
narrative disclosure to provide
additional context and disclosure not
suitable to the tabular format. Our
approach is similar to the existing
approach to executive compensation
disclosure in Item 402 of Regulation S–
K and provides a focused manner in
which to present and quantify golden
parachute compensation. Narrative
disclosure supplements the tables by
providing additional context and
discussion of the numbers presented in
the table. We believe that the
combination of narrative and tabular
disclosure will provide the clearest
picture of the full scope of golden
parachute compensation in the clear
and simple format required by Section
14A(b)(1).
Because Section 14A(b)(1)’s
disclosure requirements are limited to
agreements or understandings between
the person conducting the solicitation
and any named executive officers of the
issuer or any named executive officers
of the acquiring issuer if the person
conducting the solicitation is not the
acquiring issuer, we have formulated
Item 402(t) to require disclosure, in
addition to the disclosure mandated by
Section 14A(b)(1), of agreements or
understandings between the acquiring
company and the named executive
officers of the target company. Item
402(t) requires disclosure of all golden
parachute compensation relating to the
merger among the target and acquiring
companies and the named executive
officers of each in order to cover the full
scope of golden parachute
compensation applicable to the
transaction. By providing disclosure of
the full scope of golden parachute
compensation, we believe issuers will
provide more detailed, comprehensive,
and useful information to shareholders
to consider when making their voting or
investment decisions.
Likewise, additional disclosure on
golden parachute compensation,
without regard to whether the
transaction is structured as a merger, a
tender offer,316 or a Rule 13e–3 goingprivate transaction that is not subject to
Regulation 14A, will benefit
316 Companies filing solicitation/recommendation
statements on Schedule 14D–9 in connection with
third-party tender offers will be obligated to provide
this additional disclosure. However, bidders filing
tender offer statements on Schedule TO will not
have a similar obligation.
E:\FR\FM\02FER4.SGM
02FER4
emcdonald on DSK2BSOYB1PROD with RULES4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
shareholders and other market
participants by allowing them to timely
and more accurately assess the
transaction and evaluate with greater
acuity the golden parachute
compensation that named executive
officers could expect to receive and the
related potential interests such officers
might have in pursuing and/or
supporting a change in control
transaction. While our existing
disclosure requirements include much
of this disclosure, the specificity and
narrative and tabular format of Item
402(t) will allow for a clear presentation
of the full scope of the information.
Furthermore, by standardizing
disclosure of golden parachute
compensation arrangements across
different transaction structures, our
amended rules will enable shareholders
to compare more easily such
compensation among various types of
change in control transactions and
structures. In addition, our amended
rules will also enable the shareholders
of the acquirer to timely and more
accurately assess the cost of the
acquisition transaction in proxy
statements for which additional
disclosure is required pursuant to Note
A of Schedule 14A where acquirer
shareholders do not vote on the merger
transaction but vote to approve another
proposal such as the issuance of shares
or a stock split.
We have adopted such disclosure
requirements in both tabular and
narrative formats, with disclosure of
aggregate total compensation, in
accordance with the requirement of
Section 14A(b)(1) that such disclosure
be in a clear and simple form. To the
extent investors expect to see
information about all of the economic
benefits that may accrue to an executive
in one location of the proxy statement
(including golden parachute
arrangements and other compensation,
such as future employment contracts),
the benefit of this disclosure may be
limited since the information about
other executive compensation that may
be disclosed in proxy materials does not
need to be included in tabular format
pursuant to Item 402(t) of Regulation
S–K.
Our amended rules will also benefit
issuers by specifying how they must
comply with the requirements of
Exchange Act Section 14A in the
context of the Federal proxy rules. The
amended rules will eliminate
uncertainty that may exist among
issuers and other market participants, if
we did not propose any rules, regarding
what is necessary under the
Commission’s proxy rules when
conducting a shareholder vote required
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
under Exchange Act Section 14A. The
amended rules specify how the statutory
requirements operate in connection
with the Federal proxy rules and
accordingly, we believe the amended
rules promote better compliance with
the requirements of Exchange Act
Section 14A and reduce the amount of
management time and financial
resources necessary to ensure that
issuers comply with their obligations
under both Exchange Act Section 14A
and the Federal proxy rules. This will
benefit issuers, their shareholders and
other market participants.
D. Costs
We recognize that the amendments
we are adopting will impose new
disclosure requirements on companies
and are likely to result in costs related
to information collection.317 The
amendments we are adopting that
require the disclosure of executive
compensation in a tabular format are
likely to result in certain costs. We
expect these costs, however, to be
limited since much of the compensation
required to be disclosed under our
amended rules is currently required to
be disclosed in narrative format in the
existing disclosure regime.
Our analysis of the costs of the
amendments we are adopting today
relates to the incremental direct and
indirect costs arising from the
requirements in our rule amendments.
The analysis below does not reflect any
additional direct or indirect costs
arising from new Exchange Act Section
14A, including the shareholder advisory
votes on say-on-pay, frequency, and
golden parachute compensation, and
any likely additional costs which would
be incurred because of these votes. As
noted above, one commentator asserted
that we had underestimated the costs
and burdens involved because we did
not take into account the following
additional categories of costs: Costs
associated with proxy advisory firms
317 We estimate the annual incremental
paperwork burden for all companies to prepare the
disclosure that would be required under both
Exchange Act Section 14A and our rule
amendments to be approximately 24,942 hours of
company personnel time and a cost of
approximately $7,841,200 for the services of outside
professionals. As noted above in the Comments on
the Cost-Benefit Analysis section, we received one
comment letter relating to the cost-benefit analysis
that asserted that the PRA numbers cited in the
Proposing Release underestimated the costs and
burdens involved. See letter from CCMC. We
acknowledge that the PRA estimates do not reflect
the full magnitude of the economic costs involved,
but are estimates of the collection of information
burden and cost for the limited purpose of the PRA.
In addition to costs arising from our rule
amendments, the PRA estimates include collection
of information-related costs arising from new
Exchange Act Section 14A.
PO 00000
Frm 00031
Fmt 4701
Sfmt 4700
6039
and the potential for companies to
retain additional consulting services
relating to their compensation decisions
and say-on-pay votes, additional costs
associated with submitting no-action
letter requests under Rule 14a–8, and
increased costs due to increased
demand for proxy solicitation and other
shareholder communications
services.318 We do not believe the
additional costs described by the
commentator will arise as a result of our
amendments today as these items relate
to increased costs resulting from the
requirements of Section 14A, including
the say-on-pay vote, the frequency vote,
and the shareholder advisory vote on
golden parachute compensation. With
respect to costs associated with
submitting no-action letter requests and
Rule 14a–8, we note that Section
14A(c)(4) specifically provides that the
Section 14A shareholder advisory votes
may not be construed ‘‘to restrict or limit
the ability of shareholders to make
proposals for inclusion in proxy
materials related to executive
compensation.’’ 319 Although our new
rules include a note advising of one
circumstance when a shareholder
proposal may be excluded, the rules do
not impose any new obligations with
respect to Rule 14a–8.
We are adopting new Item 402(t) to
implement the requirement of Section
14A(b)(1) of the Exchange Act that we
promulgate rules for disclosure of
golden parachute compensation
arrangements in a clear and simple
form, which we believe is best provided
in both narrative and tabular format. In
addition to the required disclosure
under Section 14A(b)(1), we are also
expanding the disclosure to cover
agreements between the acquiring
company and the named executive
officers of a target company in a merger
or similar transaction. Though this
additional disclosure will result in
certain additional costs for issuers
preparing a merger proxy, we believe
that the additional disclosure is
appropriate in order to provide
shareholders information about the full
scope of golden parachute
compensation applicable to the
transaction. If the disclosure provided
by the issuer is not presented in a clear
manner, the disclosure of golden
parachute compensation for both target
and acquirer executives in target and
acquirer proxy statements may be
confusing to investors. In addition,
because parties often have to rely on
each other for the other side’s
information, this reliance may add to
318 See
letter from CCMC.
Act Section 14A(c)(4).
319 Exchange
E:\FR\FM\02FER4.SGM
02FER4
emcdonald on DSK2BSOYB1PROD with RULES4
6040
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
the costs of mergers that are ultimately
born by shareholders. There may also be
certain indirect costs to issuers and
shareholders as a result of our rule
amendments, as the additional
disclosure of golden parachute
compensation may result in increased
transactional expenses in the form of
additional advisers and consultants,
increased time to prepare disclosure
documents, and increased time and
expense to negotiate compensation
arrangements.
Furthermore, companies engaging in
or subject to a Rule 13e–3 going-private
transaction and companies preparing
solicitation/recommendation statements
given their status as targets in thirdparty tender offers may face increased
costs because of the required disclosure
of golden parachute compensation
arrangements, including the required
table and aggregate totals. In addition,
companies soliciting proxies or consents
for transactions for which additional
disclosure is required pursuant to Note
A of Schedule 14A may face increased
costs as well due to the additional
disclosure requirements of Item 5 of
Schedule 14A. We have adopted these
disclosure requirements that go beyond
the requirements of Section 14A(b)(1)
because we believe the rules will reduce
the regulatory disparity that might
otherwise result from treating such
transactions differently from mergers. In
response to commentators, however, we
have eliminated the proposed
requirement for bidders in third-party
tender offers to provide Item 402(t)
disclosure. We believe this change is
appropriate given that target companies
that are the subject of third-party tender
offers will provide the 402(t) disclosure
in their Schedules 14D–9 within ten
days after the commencement of the
offers. We also believe this change
addresses the concern expressed by one
of the commentators that third-party
bidders, particularly in non-negotiated
transactions, may not have access to
reliable information about the golden
parachute arrangements between target
companies and their named executive
officers. By retaining the disclosure
requirement in Schedule 14D–9, we are
still able to minimize the regulatory
disparity that might otherwise result
from treating third-party tender offers
differently than other transactions.
As noted above, there may also be
additional indirect costs relating to such
increased disclosure, as well as costs
associated with obtaining compensation
information from the other parties
involved in a transaction in order to
fulfill the issuer’s disclosure obligations.
The expanded Compensation
Discussion and Analysis disclosure may
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
also result in costs associated with
drafting disclosure that addresses
whether, and if so, how the results of a
shareholder vote on executive
compensation were considered in
determining the issuer’s compensation
policies and decisions and any resultant
effect on those compensation policies
and decisions. Similarly, the revisions
to the current reporting requirements on
Form 8–K may result in costs associated
with assessing the results of a
shareholder vote on the frequency of
shareholder votes to approve executive
compensation and drafting the
additional disclosure regarding the
company’s plans to conduct votes in the
future. Some of these costs could
include the cost of hiring additional
advisors, such as attorneys, to assist in
the analysis and drafting.
We believe that these costs will not be
unduly burdensome given that much of
the disclosure is covered by our preexisting disclosure requirements, even
though we are adopting rules that
require that such disclosure be included
in both narrative and tabular format.
The amendments we adopt exceed the
pre-existing narrative requirements, as
we are adopting tabular disclosure with
an aggregate total and no de minimis
threshold for perquisites. We expect that
there will be incremental costs
associated with drafting the additional
disclosure, but that much of the
information would be readily obtainable
by the parties given existing disclosure
requirements and as part of the due
diligence process prior to drafting the
transaction documents.
In addition to the direct costs
associated with the required disclosure,
the amended rules might create
additional indirect costs for private
companies that may be engaged in
takeovers of public companies. We do
not expect, however, the specific and
detailed disclosure and the shareholder
advisory vote regarding golden
parachutes to diminish the number of
takeover transactions.
The note to Rule 14a–8(i)(10) we are
adopting may also impose certain costs
on shareholders as it would permit
issuers to exclude certain shareholder
proposals that would otherwise not be
excludable under our rules. In addition,
our rule amendments may impose
certain indirect costs on shareholders
who might pursue alternative means to
communicate their positions regarding
the frequency of say-on-pay votes. We
do not believe that the rules we are
adopting today would impose any
additional direct or indirect costs on
issuers because of shareholder
proposals. Any such costs would result
PO 00000
Frm 00032
Fmt 4701
Sfmt 4700
from the shareholder advisory votes
required by Section 14A.
V. Consideration of Impact on the
Economy, Burden on Competition, and
Promotion of Efficiency, Competition
and Capital Formation
Section 23(a)(2) of the Exchange
Act 320 also requires us, when adopting
rules under the Exchange Act, to
consider the impact that any new rule
would have on competition. Section
23(a)(2) prohibits us from adopting any
rule that would impose a burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act. In
addition, Section 2(b) 321 of the
Securities Act and Section 3(f) 322 of the
Exchange Act require us, when engaging
in rulemaking where we are required to
consider or determine whether an action
is necessary or appropriate in the public
interest, to also consider whether the
action will promote efficiency,
competition, and capital formation.
The amendments we are adopting will
implement the Section 14A requirement
for shareholder advisory votes to
approve executive compensation, the
frequency of such votes, and golden
parachute compensation arrangements
in connection with merger and similar
transactions. We also adopting certain
additional disclosure requirements to
provide investors with additional
information about these required votes
and to apply the required disclosure
from Section 14A(b)(1) to certain other
agreements and transaction structures.
We do not believe that the additional
disclosure we are adopting will impose
a burden on competition.
The amendments we are adopting will
not only implement the requirements of
Section 14A of the Exchange Act, but
will also help ensure that shareholders
receive disclosure regarding the
required votes, the nature of an issuer’s
responsibilities to hold the votes under
Section 14A, and the issuer’s
consideration of the results of the votes
and the effect of such consideration on
the issuer’s compensation policies and
decisions. The amendments will also
enhance the transparency of a
company’s compensation policies. As
discussed in greater detail above, we
believe these benefits will be achieved
without imposing any significant
additional burdens on issuers. As a
result, the amendments we are adopting
should improve the ability of investors
to make informed voting and investment
decisions, and, therefore lead to
320 15
U.S.C. 78w(a)(2).
U.S.C. 77b(b).
322 15 U.S.C. 78c(f).
321 15
E:\FR\FM\02FER4.SGM
02FER4
emcdonald on DSK2BSOYB1PROD with RULES4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
increased efficiency and
competitiveness of the U.S. capital
markets.
We believe the amendments we are
adopting will also benefit issuers and
their shareholders by specifying in a
clear and concise fashion how issuers
must comply with the Dodd-Frank Act
requirements, in the context of the
Federal proxy rules and our disclosure
rules. By specifying how issuers must
comply with the shareholder advisory
votes and enhanced disclosure
requirements from Section 14A, our
rules will allow for more consistent
disclosure from all entities and clearer
disclosure for shareholders. By reducing
uncertainty and promoting efficient
presentation of information, our rules
will permit issuers to more efficiently
plan and draft disclosure documents,
including annual meeting proxy
statements, merger proxies, and tender
offer and going-private documents.
Our rules will also provide additional
time before smaller reporting companies
are required to conduct the shareholder
advisory votes on executive
compensation and the frequency of sayon-pay votes. We believe that a delayed
effective date for smaller reporting
companies should allow those
companies to observe how the rules
operate for other companies and will
increase efficiency by allowing them to
better prepare for implementation of the
rules. We also believe that delayed
implementation for these companies
will allow us to evaluate the
implementation of the adopted rules by
larger companies and provide us with
the additional opportunity to consider
whether adjustments to the rule would
be appropriate for smaller reporting
companies before the rules become
applicable to them.
Our rules will require enhanced
disclosure of golden parachute
compensation arrangements in merger
and similar transactions, regardless of
how such transactions are structured.
We believe the uniformity of our
disclosure requirements across different
types of transactions will help
competition as issuers will be able to
structure such transactions as they see
fit, without the additional disclosure
required by Section 14A(b) weighing in
favor of a particular transaction
structure. Though our amended rules
will create additional, incremental
disclosure burdens, we believe that the
rules we are amending will enhance
capital formation by allowing for clearer
disclosure, more informed voting
decisions by investors, and consistency
across different types of transactions.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
VI. Final Regulatory Flexibility Act
Analysis
This Final Regulatory Flexibility
Analysis (FRFA) has been prepared in
accordance with the Regulatory
Flexibility Act.323 This FRFA relates to
revisions to the rules under the
Exchange Act regarding the proxy
solicitation process and related
executive compensation disclosures.
A. Reasons for, and Objectives of, the
Proposed Action
The rule amendments are designed to
implement the requirements of Section
951 of the Dodd-Frank Act, enhance the
disclosure relating to the shareholder
advisory votes required by Exchange
Act Section 14A, and specify how our
proxy rules will apply to such votes.
Specifically, we are adopting
amendments to the proxy rules to
require shareholder advisory votes to
approve executive compensation, to
approve the frequency of shareholder
votes to approve executive
compensation, and to approve golden
parachute compensation arrangements
in connection with merger transactions.
The amendments also require enhanced
disclosure regarding an issuer’s
consideration of these votes and the
impact of such consideration on an
issuer’s compensation policies and
decisions.
B. Legal Basis
We are adopting the amendments
pursuant to Section 951 of the DoddFrank Wall Street Reform and Consumer
Protection Act, Sections 3(b), 6, 7, 10,
and 19(a) of the Securities Act of 1933,
as amended, and Sections 13, 14(a),
14A, 23(a), and 36 of the Securities
Exchange Act of 1934, as amended.
C. Significant Issues Raised by Public
Comments
In the Proposing Release, we
requested comment on any aspect of the
IRFA, including the number of small
entities that would be affected by the
proposed amendments, the nature of the
impact, how to quantify the number of
small entities that would be affected,
and how to quantify the impact of the
proposed amendments. We did not
receive comments specifically
addressing the IRFA. However, several
commentators addressed aspects of the
proposed rule amendments that could
potentially affect small entities. In
particular, some commentators believed
that smaller companies should be
exempted from all or part of the
323 5
PO 00000
U.S.C. 601.
Frm 00033
Fmt 4701
Sfmt 4700
6041
amendments.324 Although we are not
adopting a complete exemption from the
amendments, we have made revisions to
the amendments to phase-in the
requirements for a shareholder advisory
vote on executive compensation and a
shareholder advisory vote on the
frequency of say-on-pay votes for two
full years to give smaller reporting
companies more time to prepare for
implementation of the rules and so that
they can observe how larger companies
conduct the votes. Smaller reporting
companies will be required to conduct
shareholder advisory votes on golden
parachute compensation as required by
Rule 14a–21(c) without a two-year
delay.
D. Small Entities Subject to the Final
Amendments
The amendments will affect some
companies that are small entities. The
Regulatory Flexibility Act defines ‘‘small
entity’’ to mean ‘‘small business,’’ ‘‘small
organization,’’ or ‘‘small governmental
jurisdiction.’’ 325 The Commission’s
rules define ‘‘small business’’ and ‘‘small
organization’’ for purposes of the
Regulatory Flexibility Act for each of
the types of entities regulated by the
Commission. Securities Act Rule 157 326
and Exchange Act Rule 0–10(a) 327
define a company, other than an
investment company, to be a ‘‘small
business’’ or ‘‘small organization’’ if it
has total assets of $5 million or less on
the last day of its most recent fiscal year.
We estimate that there are
approximately 1,210 companies, other
than investment companies, that may be
considered small entities. The proposed
amendments would affect small entities
that have a class of securities that are
registered under Section 12 of the
Exchange Act. An investment company,
including a business development
company,328 is considered to be a ‘‘small
business’’ if it, together with other
investment companies in the same
group of related investment companies,
has net assets of $50 million or less as
of the end of its most recent fiscal
year.329 We believe that certain of the
amendments would affect small entities
that are business development
companies that have a class of securities
registered under Section 12 of the
Exchange Act. We estimate that there
324 See, e.g., letters from Am. Bankers, ICBA,
NACD, Society of Corp. Sec., and VBA.
325 5 U.S.C. 601(6).
326 17 CFR 230.157.
327 17 CFR 240.0–10(a).
328 Business development companies are a
category of closed-end investment companies that
are not required to register under the Investment
Company Act [15 U.S.C. 80a–2(a)(48)].
329 17 CFR 270.0–10(a).
E:\FR\FM\02FER4.SGM
02FER4
6042
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
requirements.330 Under Regulation S–K,
smaller reporting companies are
permitted to provide abbreviated
compensation disclosure with respect to
E. Reporting, Recordkeeping, and Other
the principal executive officer and two
Compliance Requirements
most highly compensated executive
officers for the last two completed fiscal
The disclosure amendments are
years. Specifically, smaller reporting
designed to enhance the disclosure
regarding the shareholder advisory votes companies may provide the executive
compensation disclosure specified in
required by Section 14A of the
Items 402(l) through (r) of Regulation
Exchange Act and provide additional
S–K, rather than the corresponding
disclosure about golden parachute
disclosure specified in Items 402(a)
compensation arrangements. These
through (k) of Regulation S–K. Items
amendments would require small
402(l) through (r) do not require smaller
entities to provide:
reporting companies to provide CD&A.
• Disclosure of the shareholder
Other than the amendments to CD&A,
advisory votes required by Section 14A
the remaining disclosure requirements
and the effects of such votes, including
apply to smaller reporting companies to
whether they are non-binding;
the same extent as larger issuers,
• Disclosure of golden parachute
following the two-year phase-in period
arrangements described by Section
14A(b)(1) of the Exchange Act in merger for say-on-pay votes and votes on the
frequency of say-on-pay votes.
proxies, and additional disclosure not
As noted above, the amendments to
required by Section 14A(b)(1) in
CD&A do not apply to smaller reporting
connection with tender offers and going
companies. We are not expanding the
private transactions; and
existing scaled disclosure requirements
• Disclosure of the issuer’s decision
under Item 402 of Regulation S–K, or
in light of the shareholder vote on the
establishing additional different
frequency of shareholder votes to
compliance requirements or an
approve executive compensation
exemption from coverage of the
required by Section 14A(a)(2) of the
proposed amendments for smaller
Exchange Act as to how frequently the
reporting companies. The amendments
issuer will include a shareholder vote
will provide investors with enhanced
on the compensation of executives.
disclosure regarding the shareholder
votes required by Section 14A of the
F. Duplicative, Overlapping, or
Exchange Act and the issuers’
Conflicting Federal Rules
consideration of the votes.
We believe the amendments would
We are adopting amendments to Item
not duplicate, overlap, or conflict with
5 of Schedule 14A, as well as other
other Federal rules.
forms and schedules, to implement and
supplement the requirement of Section
G. Significant Alternatives
14A(b)(1) to provide disclosure of
The Regulatory Flexibility Act directs golden parachute compensation
us to consider alternatives that would
arrangements in a clear and simple
accomplish our stated objectives, while
form. Under the amendments, all
minimizing any significant adverse
companies will be subject to the same
impact on small entities. In connection
golden parachute disclosure
with the disclosure amendments, we
requirements. As amended, Schedule
considered the following alternatives:
14A will require the disclosure pursuant
• Establishing different compliance or to Item 402(t) of Regulation S–K with
reporting requirements or timetables
respect to golden parachute
that take into account the resources
compensation arrangements for merger
available to small entities;
proxies. Though much of the disclosure
required by our amendment to Item 5 of
• Clarifying, consolidating, or
Schedule 14A is currently required for
simplifying compliance and reporting
all issuers, regardless of size, under our
requirements under the rules for small
amended rules such disclosure will be
entities;
required to be included in a tabular
• Use of performance rather than
format pursuant to Item 402(t) of
design standards; and
• Exempting small entities from all or Regulation S–K, which will include an
aggregate total and specific
part of the requirements.
quantification of various compensation
Currently, small entities that are
elements. All companies, regardless of
smaller reporting companies under
Exchange Act Rule 12b–12 are subject to size, will also be subject to these
some different compliance or reporting
330 Rule
excludes business development
requirements under Regulation S–K and companies12b–2the definition of ‘‘smaller reporting
from
the amendments will not affect these
companies.’’
emcdonald on DSK2BSOYB1PROD with RULES4
are approximately 31 business
development companies that may be
considered small entities.
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
PO 00000
Frm 00034
Fmt 4701
Sfmt 4700
additional disclosure requirements in
connection with other transactions not
required by Section 14A(b)(1), including
certain tender offers and Rule 13e–3
going-private transactions.
In addition, our amendments will
require clear and straightforward
disclosure of issuer’s responses to
shareholder advisory votes, and of
golden parachute compensation
arrangements in connection with
mergers and similar transactions. We
have used design rather than
performance standards in connection
with the amendments because, based on
our past experience, we believe the
amendments will be more useful to
investors if there are specific disclosure
requirements. The amendments are
intended to result in more
comprehensive and clear disclosure. In
addition, the specific disclosure
requirements in the amendments will
promote consistent and comparable
disclosure among all companies.
VII. Statutory Authority and Text of the
Amendments
The amendments described in this
release are being adopted under the
authority set forth in Section 951 of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act, Sections 3(b),
6, 7, 10, and 19(a) of the Securities Act
of 1933, as amended, and Sections 13,
14(a), 14A, 23(a), and 36 of the
Securities Exchange Act of 1934, as
amended.
List of Subjects in 17 CFR Parts 229,
240 and 249
Reporting and recordkeeping
requirements, Securities.
Text of the Amendments
For the reasons set out in the
preamble, the Commission amends title
17, chapter II, of the Code of Federal
Regulations as follows:
PART 229—STANDARD
INSTRUCTIONS FOR FILING FORMS
UNDER SECURITIES ACT OF 1933,
SECURITIES EXCHANGE ACT OF 1934
AND ENERGY POLICY AND
CONSERVATION ACT OF 1975—
REGULATION S–K
1. The general authority citation for
part 229 is revised to read as follows:
■
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j,
77k, 77s, 77z–2, 77z–3, 77aa(25), 77aa(26),
77ddd, 77eee, 77ggg, 77hhh, 777iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n,
78n–1, 78o, 78u–5, 78w, 78ll, 78mm, 80a–8,
80a–9, 80a–20, 80a–29, 80a–30, 80a–31(c),
80a–37, 80a–38(a), 80a–39, 80b–11, and 7201
et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
*
E:\FR\FM\02FER4.SGM
*
*
02FER4
*
*
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
2. Amend § 229.402 by:
a. Revising the last sentence of
paragraph (a)(6)(ii);
■ b. Removing ‘‘and’’ at the end of
paragraph (b)(1)(v);
■ c. Removing the period and adding in
its place ‘‘; and’’ at the end of paragraph
(b)(1)(vi);
■ d. Adding paragraph (b)(1)(vii);
■ e. Revising the last sentence of
paragraph (m)(5)(ii); and
■ f. Adding paragraph (t).
The revisions read as follows:
■
■
§ 229.402 (Item 402) Executive
compensation.
(a) * * *
(6) * * *
(ii) * * * Except with respect to the
disclosure required by paragraph (t) of
this Item, registrants may omit
information regarding group life, health,
hospitalization, or medical
reimbursement plans that do not
discriminate in scope, terms or
operation, in favor of executive officers
or directors of the registrant and that are
available generally to all salaried
employees.
*
*
*
*
*
(b) * * *
(1) * * *
(vii) Whether and, if so, how the
registrant has considered the results of
the most recent shareholder advisory
vote on executive compensation
required by section 14A of the Exchange
Act (15 U.S.C. 78n–1) or § 240.14a–20 of
this chapter in determining
compensation policies and decisions
and, if so, how that consideration has
affected the registrant’s executive
compensation decisions and policies.
*
*
*
*
*
(m) * * *
(5) * * *
(ii) * * * Except with respect to
disclosure required by paragraph (t) of
this Item, smaller reporting companies
may omit information regarding group
life, health, hospitalization, or medical
reimbursement plans that do not
discriminate in scope, terms or
operation, in favor of executive officers
or directors of the smaller reporting
company and that are available
generally to all salaried employees.
*
*
*
*
*
6043
(t) Golden Parachute Compensation.
(1) In connection with any proxy or
consent solicitation material providing
the disclosure required by section
14A(b)(1) of the Exchange Act (15 U.S.C.
78n–1(b)(1)) or any proxy or consent
solicitation that includes disclosure
under Item 14 of Schedule 14A
(§ 240.14a–101) pursuant to Note A of
Schedule 14A, with respect to each
named executive officer of the acquiring
company and the target company,
provide the information specified in
paragraphs (t)(2) and (3) of this section
regarding any agreement or
understanding, whether written or
unwritten, between such named
executive officer and the acquiring
company or target company, concerning
any type of compensation, whether
present, deferred or contingent, that is
based on or otherwise relates to an
acquisition, merger, consolidation, sale
or other disposition of all or
substantially all assets of the issuer, as
follows:
GOLDEN PARACHUTE COMPENSATION
Cash
($)
Equity
($)
Pension/
NQDC
($)
Perquisites/
benefits
($)
Tax
reimbursement
($)
Other
($)
Total
($)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
PEO ..............................
PFO ..............................
A ...................................
B ...................................
C ...................................
emcdonald on DSK2BSOYB1PROD with RULES4
Name
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
........................
(2) The table shall include, for each
named executive officer:
(i) The name of the named executive
officer (column (a));
(ii) The aggregate dollar value of any
cash severance payments, including but
not limited to payments of base salary,
bonus, and pro-rated non-equity
incentive compensation plan payments
(column (b));
(iii) The aggregate dollar value of:
(A) Stock awards for which vesting
would be accelerated;
(B) In-the-money option awards for
which vesting would be accelerated;
and
(C) Payments in cancellation of stock
and option awards (column (c));
(iv) The aggregate dollar value of
pension and nonqualified deferred
compensation benefit enhancements
(column (d));
(v) The aggregate dollar value of
perquisites and other personal benefits
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
or property, and health care and welfare
benefits (column (e));
(vi) The aggregate dollar value of any
tax reimbursements (column (f));
(vii) The aggregate dollar value of any
other compensation that is based on or
otherwise relates to the transaction not
properly reported in columns (b)
through (f) (column (g)); and
(viii) The aggregate dollar value of the
sum of all amounts reported in columns
(b) through (g) (column (h)).
Instructions to Item 402(t)(2).
1. If this disclosure is included in a
proxy or consent solicitation seeking
approval of an acquisition, merger,
consolidation, or proposed sale or other
disposition of all or substantially all the
assets of the registrant, or in a proxy or
consent solicitation that includes
disclosure under Item 14 of Schedule
14A (§ 240.14a–101) pursuant to Note A
of Schedule 14A, the disclosure
provided by this table shall be
PO 00000
Frm 00035
Fmt 4701
Sfmt 4700
quantified assuming that the triggering
event took place on the latest
practicable date, and that the price per
share of the registrant’s securities shall
be determined as follows: If the
shareholders are to receive a fixed dollar
amount, the price per share shall be that
fixed dollar amount, and if such value
is not a fixed dollar amount, the price
per share shall be the average closing
market price of the registrant’s securities
over the first five business days
following the first public announcement
of the transaction. Compute the dollar
value of in-the-money option awards for
which vesting would be accelerated by
determining the difference between this
price and the exercise or base price of
the options. Include only compensation
that is based on or otherwise relates to
the subject transaction. Apply
Instruction 1 to Item 402(t) with respect
to those executive officers for whom
disclosure was required in the issuer’s
most recent filing with the Commission
E:\FR\FM\02FER4.SGM
02FER4
emcdonald on DSK2BSOYB1PROD with RULES4
6044
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
under the Securities Act (15 U.S.C. 77a
et seq.) or Exchange Act (15 U.S.C. 78a
et seq.) that required disclosure
pursuant to Item 402(c).
2. If this disclosure is included in a
proxy solicitation for the annual
meeting at which directors are elected
for purposes of subjecting the disclosed
agreements or understandings to a
shareholder vote under section
14A(a)(1) of the Exchange Act (15 U.S.C.
78n–1(a)(1)), the disclosure provided by
this table shall be quantified assuming
that the triggering event took place on
the last business day of the registrant’s
last completed fiscal year, and the price
per share of the registrant’s securities is
the closing market price as of that date.
Compute the dollar value of in-themoney option awards for which vesting
would be accelerated by determining
the difference between this price and
the exercise or base price of the options.
3. In the event that uncertainties exist
as to the provision of payments and
benefits or the amounts involved, the
registrant is required to make a
reasonable estimate applicable to the
payment or benefit and disclose
material assumptions underlying such
estimates in its disclosure. In such
event, the disclosure would require
forward-looking information as
appropriate.
4. For each of columns (b) through (g),
include a footnote quantifying each
separate form of compensation included
in the aggregate total reported. Include
the value of all perquisites and other
personal benefits or property. Individual
perquisites and personal benefits shall
be identified and quantified as required
by Instruction 4 to Item 402(c)(2)(ix) of
this section. For purposes of quantifying
health care benefits, the registrant must
use the assumptions used for financial
reporting purposes under generally
accepted accounting principles.
5. For each of columns (b) through (h),
include a footnote quantifying the
amount payable attributable to a doubletrigger arrangement (i.e., amounts
triggered by a change-in-control for
which payment is conditioned upon the
executive officer’s termination without
cause or resignation for good reason
within a limited time period following
the change-in-control), specifying the
time-frame in which such termination
or resignation must occur in order for
the amount to become payable, and the
amount payable attributable to a singletrigger arrangement (i.e., amounts
triggered by a change-in-control for
which payment is not conditioned upon
such a termination or resignation of the
executive officer).
6. A registrant conducting a
shareholder advisory vote pursuant to
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
§ 240.14a–21(c) of this chapter to cover
new arrangements and understandings,
and/or revised terms of agreements and
understandings that were previously
subject to a shareholder advisory vote
pursuant to § 240.14a–21(a) of this
chapter, shall provide two separate
tables. One table shall disclose all
golden parachute compensation,
including both the arrangements and
amounts previously disclosed and
subject to a shareholder advisory vote
under section 14A(a)(1) of the Exchange
Act (15 U.S.C. 78n–1(a)(1)) and
§ 240.14a–21(a) of this chapter and the
new arrangements and understandings
and/or revised terms of agreements and
understandings that were previously
subject to a shareholder advisory vote.
The second table shall disclose only the
new arrangements and/or revised terms
subject to the separate shareholder vote
under section 14A(b)(2) of the Exchange
Act and § 240.14a–21(c) of this chapter.
7. In cases where this Item 402(t)(2)
requires disclosure of arrangements
between an acquiring company and the
named executive officers of the
soliciting target company, the registrant
shall clarify whether these agreements
are included in the separate shareholder
advisory vote pursuant to § 240.14a–
21(c) of this chapter by providing a
separate table of all agreements and
understandings subject to the
shareholder advisory vote required by
section 14A(b)(2) of the Exchange Act
(15 U.S.C. 78n–1(b)(2)) and § 240.14a–
21(c) of this chapter, if different from
the full scope of golden parachute
compensation subject to Item 402(t)
disclosure.
(3) Provide a succinct narrative
description of any material factors
necessary to an understanding of each
such contract, agreement, plan or
arrangement and the payments
quantified in the tabular disclosure
required by this paragraph. Such factors
shall include, but not be limited to a
description of:
(i) The specific circumstances that
would trigger payment(s);
(ii) Whether the payments would or
could be lump sum, or annual,
disclosing the duration, and by whom
they would be provided; and
(iii) Any material conditions or
obligations applicable to the receipt of
payment or benefits, including but not
limited to non-compete, nonsolicitation, non-disparagement or
confidentiality agreements, including
the duration of such agreements and
provisions regarding waiver or breach of
such agreements.
Instructions to Item 402(t).
PO 00000
Frm 00036
Fmt 4701
Sfmt 4700
1. A registrant that does not qualify as
a ‘‘smaller reporting company,’’ as
defined by § 229.10(f)(1) of this chapter,
must provide the information required
by this Item 402(t) with respect to the
individuals covered by Items
402(a)(3)(i), (ii) and (iii) of this section.
A registrant that qualifies as a ‘‘smaller
reporting company,’’ as defined by
§ 229.10(f)(1) of this chapter, must
provide the information required by this
Item 402(t) with respect to the
individuals covered by Items
402(m)(2)(i) and (ii) of this section.
2. The obligation to provide the
information in this Item 402(t) shall not
apply to agreements and understandings
described in paragraph (t)(1) of this
section with senior management of
foreign private issuers, as defined in
§ 240.3b–4 of this chapter.
■ 3. Amend § 229.1011 by redesignating
paragraph (b) as paragraph (c) and
adding new paragraph (b) to read as
follows:
§ 229.1011 (Item 1011) Additional
information.
*
*
*
*
*
(b) Furnish the information required
by Item 402(t)(2) and (3) of this part
(§ 229.402(t)(2) and (3)) and in the
tabular format set forth in Item 402(t)(1)
of this part (§ 229.402(t)(1)) with respect
to each named executive officer
(1) Of the subject company in a Rule
13e–3 transaction; or
(2) Of the issuer whose securities are
the subject of a third-party tender offer,
regarding any agreement or
understanding, whether written or
unwritten, between such named
executive officer and the subject
company, issuer, bidder, or the
acquiring company, as applicable,
concerning any type of compensation,
whether present, deferred or contingent,
that is based upon or otherwise relates
to the Rule 13e–3 transaction or thirdparty tender offer.
Instructions to Item 1011(b).
1. The obligation to provide the
information in paragraph (b) of this
section shall not apply where the issuer
whose securities are the subject of the
Rule 13e–3 transaction or tender offer is
a foreign private issuer, as defined in
§ 240.3b–4 of this chapter.
2. For purposes of Instruction 1 to
Item 402(t)(2) of this part: If the
disclosure is included in a Schedule
13E–3 (§ 240.13e–100 of this chapter) or
Schedule 14D–9 (§ 240.14d–101 of this
chapter), the disclosure provided by this
table shall be quantified assuming that
the triggering event took place on the
latest practicable date and that the price
per share of the securities of the subject
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
company in a Rule 13e–3 transaction, or
of the issuer whose securities are the
subject of the third-party tender offer,
shall be determined as follows: If the
shareholders are to receive a fixed dollar
amount, the price per share shall be that
fixed dollar amount, and if such value
is not a fixed dollar amount, the price
per share shall be the average closing
market price of such securities over the
first five business days following the
first public announcement of the
transaction. Compute the dollar value of
in-the-money option awards for which
vesting would be accelerated by
determining the difference between this
price and the exercise or base price of
the options. Include only compensation
that is based on or otherwise relates to
the subject transaction. Apply
Instruction 1 to Item 402(t) with respect
to those executive officers for whom
disclosure was required in the most
recent filing by the subject company in
a Rule 13e–3 transaction or by the issuer
whose securities are the subject of a
third-party tender offer, with the
Commission under the Securities Act
(15 U.S.C. 77a et seq.) or Exchange Act
(15 U.S.C. 78a et seq.) that required
disclosure pursuant to Item 402(c).
*
*
*
*
*
pursuant to § 240.14a–21(b) of this
chapter’’ at the end of the first sentence
of paragraph (b)(1);
■ b. Adding paragraph (b)(3).
The addition reads as follows:
on the frequency of say-on-pay votes that is
consistent with the choice of the majority of
votes cast in the most recent shareholder vote
required by § 240.14a–21(b) of this chapter.
§ 240.14a–4
■
Requirements as to proxy.
*
*
*
*
*
(b) * * *
(3) A form of proxy which provides
for a shareholder vote on the frequency
of shareholder votes to approve the
compensation of executives required by
section 14A(a)(2) of the Securities
Exchange Act of 1934 (15 U.S.C.
78n–1(a)(2)) shall provide means
whereby the person solicited is afforded
an opportunity to specify by boxes a
choice among 1, 2 or 3 years, or abstain.
*
*
*
*
*
■ 7. Amend § 240.14a–6 by:
■ a. Revising paragraph (a)(7); and
■ b. Adding the phrase ‘‘to paragraph
(a)’’ following the words ‘‘Note 1’’, ‘‘Note
2’’, ‘‘Note 3’’ and ‘‘Note 4’’.
The revision reads as follows:
§ 240.14a–6
Filing requirements.
(a) * * *
(7) A vote to approve the
compensation of executives as required
pursuant to section 14A(a)(1) of the
Securities Exchange Act of 1934 (15
PART 240—GENERAL RULES AND
U.S.C. 78n–1(a)(1)) and § 240.14a–21(a)
REGULATIONS, SECURITIES
of this chapter, or pursuant to section
EXCHANGE ACT OF 1934
111(e)(1) of the Emergency Economic
Stabilization Act of 2008 (12 U.S.C.
■ 4. The general authority citation for
5221(e)(1)) and § 240.14a–20 of this
part 240 is revised to read as follows:
chapter, a vote to determine the
frequency of shareholder votes to
Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
approve the compensation of executives
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j,
as required pursuant to Section
78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, 14A(a)(2) of the Securities Exchange Act
78o–4, 78p, 78q, 78s, 78u–5, 78w, 78x, 78ll,
of 1934 (15 U.S.C. 78n–1(a)(2)) and
78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– § 240.14a–21(b) of this chapter, or any
3, 80b–4, 80b–11, and 7201 et seq., 18 U.S.C.
other shareholder advisory vote on
1350, and 12 U.S.C. 5221(e)(3), unless
executive compensation.
otherwise noted.
*
*
*
*
*
*
*
*
*
*
■ 8. Amend § 240.14a–8 by adding Note
■ 5. Amend § 240.13e–100 by revising
to paragraph (i)(10) to read as follows:
Item 15 to read as follows:
*
*
*
*
*
§ 240.14a–8
emcdonald on DSK2BSOYB1PROD with RULES4
§ 240.13e–100 Schedule 13E–3,
Transaction statement under section 13(e)
of the Securities Exchange Act of 1934 and
Rule 13e–3 (§ 240.13e–3) thereunder.
*
*
*
*
*
Item 15. Additional Information
Furnish the information required by
Item 1011(b) and (c) of Regulation
M–A (§ 229.1011(b) and (c) of this
chapter).
*
*
*
*
*
■ 6. Amend § 240.14a–4 by:
■ a. Adding the phrase ‘‘and votes to
determine the frequency of shareholder
votes on executive compensation
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
6045
*
Shareholder proposals.
*
*
(i) * * *
(10) * * *
*
*
Note to paragraph (i)(10): A company may
exclude a shareholder proposal that would
provide an advisory vote or seek future
advisory votes to approve the compensation
of executives as disclosed pursuant to Item
402 of Regulation S–K (§ 229.402 of this
chapter) or any successor to Item 402 (a ‘‘sayon-pay vote’’) or that relates to the frequency
of say-on-pay votes, provided that in the
most recent shareholder vote required by
§ 240.14a–21(b) of this chapter a single year
(i.e., one, two, or three years) received
approval of a majority of votes cast on the
matter and the company has adopted a policy
PO 00000
Frm 00037
Fmt 4701
Sfmt 4700
*
*
*
*
*
9. Add § 240.14a–21 to read as
follows:
§ 240.14a–21 Shareholder approval of
executive compensation, frequency of
votes for approval of executive
compensation and shareholder approval of
golden parachute compensation.
(a) If a solicitation is made by a
registrant and the solicitation relates to
an annual or other meeting of
shareholders at which directors will be
elected and for which the rules of the
Commission require executive
compensation disclosure pursuant to
Item 402 of Regulation S–K (§ 229.402 of
this chapter), the registrant shall, for the
first annual or other meeting of
shareholders on or after January 21,
2011, or for the first annual or other
meeting of shareholders on or after
January 21, 2013 if the registrant is a
smaller reporting company, and
thereafter no later than the annual or
other meeting of shareholders held in
the third calendar year after the
immediately preceding vote under this
subsection, include a separate
resolution subject to shareholder
advisory vote to approve the
compensation of its named executive
officers, as disclosed pursuant to Item
402 of Regulation S–K.
Instruction to paragraph (a):
The registrant’s resolution shall
indicate that the shareholder advisory
vote under this subsection is to approve
the compensation of the registrant’s
named executive officers as disclosed
pursuant to Item 402 of Regulation
S–K (§ 229.402 of this chapter). The
following is a non-exclusive example of
a resolution that would satisfy the
requirements of this subsection:
‘‘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.’’
(b) If a solicitation is made by a
registrant and the solicitation relates to
an annual or other meeting of
shareholders at which directors will be
elected and for which the rules of the
Commission require executive
compensation disclosure pursuant to
Item 402 of Regulation S–K (§ 229.402 of
this chapter), the registrant shall, for the
first annual or other meeting of
shareholders on or after January 21,
2011, or for the first annual or other
E:\FR\FM\02FER4.SGM
02FER4
emcdonald on DSK2BSOYB1PROD with RULES4
6046
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
meeting of shareholders on or after
January 21, 2013 if the registrant is a
smaller reporting company, and
thereafter no later than the annual or
other meeting of shareholders held in
the sixth calendar year after the
immediately preceding vote under this
subsection, include a separate
resolution subject to shareholder
advisory vote as to whether the
shareholder vote required by paragraph
(a) of this section should occur every 1,
2 or 3 years. Registrants required to
provide a separate shareholder vote
pursuant to § 240.14a–20 of this chapter
shall include the separate resolution
required by this section for the first
annual or other meeting of shareholders
after the registrant has repaid all
obligations arising from financial
assistance provided under the TARP, as
defined in section 3(8) of the Emergency
Economic Stabilization Act of 2008 (12
U.S.C. 5202(8)), and thereafter no later
than the annual or other meeting of
shareholders held in the sixth calendar
year after the immediately preceding
vote under this subsection.
(c) If a solicitation is made by a
registrant for a meeting of shareholders
at which shareholders are asked to
approve an acquisition, merger,
consolidation or proposed sale or other
disposition of all or substantially all the
assets of the registrant, the registrant
shall include a separate resolution
subject to shareholder advisory vote to
approve any agreements or
understandings and compensation
disclosed pursuant to Item 402(t) of
Regulation S–K (§ 229.402(t) of this
chapter), unless such agreements or
understandings have been subject to a
shareholder advisory vote under
paragraph (a) of this section. Consistent
with section 14A(b) of the Exchange Act
(15 U.S.C. 78n–1(b)), any agreements or
understandings between an acquiring
company and the named executive
officers of the registrant, where the
registrant is not the acquiring company,
are not required to be subject to the
separate shareholder advisory vote
under this paragraph.
Instructions to § 240.14a–21:
1. Disclosure relating to the
compensation of directors required by
Item 402(k) (§ 229.402(k) of this chapter)
and Item 402(r) of Regulation S–K
(§ 229.402(r) of this chapter) is not
subject to the shareholder vote required
by paragraph (a) of this section. If a
registrant includes disclosure pursuant
to Item 402(s) of Regulation S–K
(§ 229.402(s) of this chapter) about the
registrant’s compensation policies and
practices as they relate to risk
management and risk-taking incentives,
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
these policies and practices would not
be subject to the shareholder vote
required by paragraph (a) of this section.
To the extent that risk considerations
are a material aspect of the registrant’s
compensation policies or decisions for
named executive officers, the registrant
is required to discuss them as part of its
Compensation Discussion and Analysis
under § 229.402(b) of this chapter, and
therefore such disclosure would be
considered by shareholders when voting
on executive compensation.
2. If a registrant includes disclosure of
golden parachute compensation
arrangements pursuant to Item 402(t)
(§ 229.402(t) of this chapter) in an
annual meeting proxy statement, such
disclosure would be subject to the
shareholder advisory vote required by
paragraph (a) of this section.
3. Registrants that are smaller
reporting companies entitled to provide
scaled disclosure in accordance with
Item 402(l) of Regulation S–K
(§ 229.402(l) of this chapter) are not
required to include a Compensation
Discussion and Analysis in their proxy
statements in order to comply with this
section. For smaller reporting
companies, the vote required by
paragraph (a) of this section must be to
approve the compensation of the named
executive officers as disclosed pursuant
to Item 402(m) through (q) of Regulation
S–K (§ 229.402(m) through (q) of this
chapter).
■ 10. Amend § 240.14a–101 by:
■ a. Removing the dash that appears
before paragraph (a) of Item 5 and
adding in its place an open parenthesis;
■ b. Adding paragraph (a)(5) of Item 5;
■ c. Adding the phrase ‘‘to paragraph
(a)’’ following the word ‘‘Instruction’’
that follows new paragraph (a)(5) of
Item 5;
■ d. Adding paragraph (b)(3) of Item 5;
■ e. Adding the phrase ‘‘to paragraph
(b)’’ following the word ‘‘Instruction’’
that follows new paragraph (b)(3) of
Item 5;
■ f. Adding Item 24.
The additions read as follows:
§ 240.14a–101 Schedule 14A. Information
required in proxy statement.
SCHEDULE 14A. INFORMATION
*
*
*
*
*
Item 5. Interest of Certain Persons in
Matters to Be Acted Upon.
(a) * * *
(5) If the solicitation is made on
behalf of the registrant, furnish the
information required by Item 402(t) of
Regulation S–K (§ 229.402(t) of this
chapter).
*
*
*
*
*
(b) * * *
PO 00000
Frm 00038
Fmt 4701
Sfmt 4700
(3) If the solicitation is made on
behalf of the registrant, furnish the
information required by Item 402(t) of
Regulation S–K (§ 229.402(t) of this
chapter).
*
*
*
*
*
Item 24. Shareholder Approval of
Executive Compensation. Registrants
required to provide any of the separate
shareholder votes pursuant to
§ 240.14a–21 of this chapter shall
disclose that they are providing each
such vote as required pursuant to
section 14A of the Securities Exchange
Act (15 U.S.C. 78n–1), briefly explain
the general effect of each vote, such as
whether each such vote is non-binding,
and, when applicable, disclose the
current frequency of shareholder
advisory votes on executive
compensation required by Rule 14a–
21(a) and when the next such
shareholder advisory vote will occur.
■ 11. Amend § 240.14c–101 by adding
paragraph (c) of Item 3 to read as
follows:
§ 240.14c–101 Schedule 14C. Information
required in information statement.
SCHEDULE 14C. INFORMATION
*
*
*
*
*
Item 3. * * *
(c) Furnish the information required
by Item 402(t) of Regulation S–K
(§ 229.402(t) of this chapter).
*
*
*
*
*
■ 12. Amend § 240.14d–100 by revising
Item 11 to read as follows:
§ 240.14d–100 Tender offer statement
pursuant to section 14(d)(1) of the
Securities Exchange Act of 1934.
*
*
*
*
*
Item 11. Additional Information.
Furnish the information required by
Item 1011(a) and (c) of Regulation M–A
(§ 229.1011 of this chapter).
*
*
*
*
*
■ 13. Amend § 240.14d–101 by
amending Item 8 to add the words ‘‘and
(c)’’ after ‘‘Item 1011(b)’’.
PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
14. The general authority citation for
part 249 continues to read as follows:
■
Authority: 15 U.S.C. 78a et seq. and 7201
et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
*
*
*
*
*
15. Amend Form 8–K (referenced in
§ 249.308), Item 5.07, by revising
paragraph (b), adding paragraph (d), and
revising Instruction 1 to read as follows:
■
Note: The text of Form 8–K does not, and
this amendment will not, appear in the Code
of Federal Regulations.
E:\FR\FM\02FER4.SGM
02FER4
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 / Rules and Regulations
Form 8–K
emcdonald on DSK2BSOYB1PROD with RULES4
*
*
*
*
*
Item 5.07. Submission of Matters to a
Vote of Security Holders
*
*
*
*
*
(b) If the meeting involved the
election of directors, the name of each
director elected at the meeting, as well
as a brief description of each other
matter voted upon at the meeting; and
state the number of votes cast for,
against or withheld, as well as the
number of abstentions and broker nonvotes as to each such matter, including
a separate tabulation with respect to
each nominee for office. For the vote on
the frequency of shareholder advisory
votes on executive compensation
required by section 14A(a)(2) of the
Securities Exchange Act of 1934 (15
U.S.C. 78n–1) and § 240.14a–21(b), state
the number of votes cast for each of
VerDate Mar<15>2010
17:29 Feb 01, 2011
Jkt 223001
1 year, 2 years, and 3 years, as well as
the number of abstentions.
*
*
*
*
*
(d) No later than one hundred fifty
calendar days after the end of the
annual or other meeting of shareholders
at which shareholders voted on the
frequency of shareholder votes on the
compensation of executives as required
by section 14A(a)(2) of the Securities
Exchange Act of 1934 (15 U.S.C. 78n–
1), but in no event later than sixty
calendar days prior to the deadline for
submission of shareholder proposals
under § 240.14a–8, as disclosed in the
registrant’s most recent proxy statement
for an annual or other meeting of
shareholders relating to the election of
directors at which shareholders voted
on the frequency of shareholder votes
on the compensation of executives as
required by section 14A(a)(2) of the
Securities Exchange Act of 1934 (15
U.S.C. 78n–1(a)(2)), by amendment to
PO 00000
Frm 00039
Fmt 4701
Sfmt 9990
6047
the most recent Form 8–K filed pursuant
to (b) of this Item, disclose the
company’s decision in light of such vote
as to how frequently the company will
include a shareholder vote on the
compensation of executives in its proxy
materials until the next required vote on
the frequency of shareholder votes on
the compensation of executives.
*
*
*
*
*
Instruction 1 to Item 5.07. The four
business day period for reporting the
event under this Item 5.07, other than
with respect to Item 5.07(d), shall begin
to run on the day on which the meeting
ended. * * *
*
*
*
*
*
By the Commission.
Dated: January 25, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–1971 Filed 2–1–11; 8:45 am]
BILLING CODE 8011–01–P
E:\FR\FM\02FER4.SGM
02FER4
Agencies
[Federal Register Volume 76, Number 22 (Wednesday, February 2, 2011)]
[Rules and Regulations]
[Pages 6010-6047]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-1971]
[[Page 6009]]
Vol. 76
Wednesday,
No. 22
February 2, 2011
Part V
Securities and Exchange Commission
-----------------------------------------------------------------------
17 CFR 229, 240, and 249
Shareholder Approval of Executive Compensation and Golden Parachute
Compensation; Final Rule
Federal Register / Vol. 76, No. 22 / Wednesday, February 2, 2011 /
Rules and Regulations
[[Page 6010]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 229, 240 and 249
[Release Nos. 33-9178; 34-63768; File No. S7-31-10]
RIN 3235-AK68
Shareholder Approval of Executive Compensation and Golden
Parachute Compensation
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: We are adopting amendments to our rules to implement the
provisions of the Dodd-Frank Wall Street Reform and Consumer Protection
Act relating to shareholder approval of executive compensation and
``golden parachute'' compensation arrangements. Section 951 of the
Dodd-Frank Act amends the Securities Exchange Act of 1934 by adding
Section 14A, which requires companies to conduct a separate shareholder
advisory vote to approve the compensation of executives, as disclosed
pursuant to Item 402 of Regulation S-K or any successor to Item 402.
Section 14A also requires companies to conduct a separate shareholder
advisory vote to determine how often an issuer will conduct a
shareholder advisory vote on executive compensation. In addition,
Section 14A requires companies soliciting votes to approve merger or
acquisition transactions to provide disclosure of certain ``golden
parachute'' compensation arrangements and, in certain circumstances, to
conduct a separate shareholder advisory vote to approve the golden
parachute compensation arrangements.
DATES: Effective Date: April 4, 2011.
Compliance Date: April 4, 2011, except that issuers must comply
with Exchange Act Section 14A(b) and Rule 14a-21(c) and the amendments
to Item 5 of Schedule 14A, Item 3 of Schedule 14C, Item 1011 of
Regulation M-A, Item 11 of Schedule TO, Item 15 of Schedule 13E-3, and
Item 8 of Schedule 14D-9 for initial preliminary proxy and information
statements, Schedules TO, 13E-3, and 14D-9 and Forms S-4 and F-4 filed
on or after April 25, 2011.
Companies that qualify as ``smaller reporting companies'' (as
defined in 17 CFR 240.12b-2) as of January 21, 2011, including newly
public companies that qualify as smaller reporting companies after
January 21, 2011, will not be subject to Exchange Act Section 14A(a)
and Rule 14a-21(a) and (b) until the first annual or other meeting of
shareholders at which directors will be elected and for which the rules
of the Commission require executive compensation disclosure pursuant to
Item 402 of Regulation S-K (17 CFR 229.402) occurring on or after
January 21, 2013.
FOR FURTHER INFORMATION CONTACT: Scott Hodgdon, Attorney-Adviser, at
(202) 551-3430, Anne Krauskopf, Senior Special Counsel, at (202) 551-
3500, or Perry Hindin, Special Counsel, at (202) 551-3440, Division of
Corporation Finance, U.S. Securities and Exchange Commission, 100 F
Street, NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: We are adopting new Rule 14a-21 and
amendments to Rules 14a-4,\1\ 14a-6,\2\ 14a-8 \3\ and a new Item 24 and
amendments to Item 5 of Schedule 14A \4\ and amendments to Item 3 of
Schedule 14C \5\ under the Securities Exchange Act of 1934 (``Exchange
Act'').\6\ We are also adopting amendments to Item 402 \7\ of
Regulation S-K,\8\ Item 1011 \9\ of Regulation M-A,\10\ Item 15 of
Schedule 13E-3,\11\ Item 8 of Schedule 14D-9,\12\ Item 11 of Schedule
TO,\13\ and amendments to Item 5.07 of Form 8-K.\14\
---------------------------------------------------------------------------
\1\ 17 CFR 240.14a-4.
\2\ 17 CFR 240.14a-6.
\3\ 17 CFR 240.14a-8.
\4\ 17 CFR 240.14a-101.
\5\ 17 CFR 240.14c-101.
\6\ 15 U.S.C. 78a et seq.
\7\ 17 CFR 229.402.
\8\ 17 CFR 229.10 et seq.
\9\ 17 CFR 229.1011.
\10\ 17 CFR 229.1000 et seq.
\11\ 17 CFR 240.13e-100.
\12\ 17 CFR 240.14d-101.
\13\ 17 CFR 240.14d-100.
\14\ 17 CFR 249.308.
---------------------------------------------------------------------------
Table of Contents
I. Background and Summary
II. Discussion of the Amendments
A. Shareholder Approval of Executive Compensation
1. Rule 14a-21(a)
a. Proposed Rule
b. Comments on the Proposed Rule
c. Final Rule
2. Item 24 of Schedule 14A
a. Proposed Amendments
b. Comments on the Proposed Amendments
c. Final Rule
3. Amendments to Item 402(b) of Regulation S-K
a. Proposed Amendments
b. Comments on the Proposed Amendments
c. Final Rule
B. Shareholder Approval of the Frequency of Shareholder Votes on
Executive Compensation
1. Rule 14a-21(b)
a. Proposed Rule
b. Comments on the Proposed Rule
c. Final Rule
2. Item 24 of Schedule 14A
a. Proposed Amendments
b. Comments on the Proposed Amendments
c. Final Rule
3. Amendment to Rule 14a-4
a. Proposed Amendments
b. Comments on the Proposed Amendments
c. Final Rule
4. Amendment to Rule 14a-8
a. Proposed Amendments
b. Comments on the Proposed Amendments
c. Final Rule
5. Amendment to Form 8-K
a. Proposed Amendments
b. Comments on the Proposed Amendments
c. Final Rule
6. Effect of Shareholder Vote
C. Issues Relating to Both Shareholder Votes Required by Section
14A(a)
1. Amendments to Rule 14a-6
a. Proposed Amendments
b. Comments on the Proposed Amendments
c. Final Rule
2. Broker Discretionary Voting
3. Relationship to Shareholder Votes on Executive Compensation
for TARP Companies
D. Disclosure of Golden Parachute Arrangements and Shareholder
Approval of Golden Parachute Arrangements
1. General
2. Item 402(t) of Regulation S-K
a. Proposed Amendments
b. Comments on the Proposed Amendments
i. General Comments on the Proposed Item 402(t) Table
ii. Comments on the Elements of Compensation and Presentation of
the Proposed Item 402(t) Table
iii. Comments on Individuals Subject to Item 402(t) Disclosure
iv. Comments on Item 402(t) Disclosure in Annual Meeting Proxy
Statements
c. Final Rule
i. Item 402(t) Table and Narrative Requirements
ii. Elements of Compensation and Presentation of Item 402(t)
Table
iii. Individuals Subject to Item 402(t) Disclosure
iv. Item 402(t) Disclosure in Annual Meeting Proxy Statements
3. Amendments to Schedule 14A, Schedule 14C, Schedule 14D-9,
Schedule 13E-3, Schedule TO, and Item 1011 of Regulation M-A
a. Proposed Amendments
b. Comments on the Proposed Amendments
c. Final Rule
4. Rule 14a-21(c)
a. Proposed Rule
b. Comments on the Proposed Rule
c. Final Rule
i. Scope of Rule 14a-21(c) Shareholder Advisory Vote
ii. Exceptions to Rule 14a-21(c) Shareholder Advisory Vote
E. Treatment of Smaller Reporting Companies
[[Page 6011]]
F. Transition Matters
III. Paperwork Reduction Act
A. Background
B. Summary of the Final Rules
C. Summary of Comment Letters and Revisions to Proposals
D. Revisions to PRA Reporting and Cost Burden Estimates
IV. Cost-Benefit Analysis
A. Introduction
B. Comments on the Cost-Benefit Analysis
C. Benefits
D. Costs
V. Consideration of Impact on the Economy, Burden on Competition,
and Promotion of Efficiency, Competition, and Capital Formation
VI. Final Regulatory Flexibility Act Analysis
A. Reasons for, and Objectives of, the Proposed Action
B. Legal Basis
C. Significant Issues Raised by Public Comments
D. Small Entities Subject to the Final Amendments
E. Reporting, Recordkeeping, and Other Compliance Requirements
F. Duplicative, Overlapping, or Conflicting Federal Rules
G. Significant Alternatives
VII. Statutory Authority and Text of the Amendments
I. Background and Summary
On October 18, 2010, we proposed a number of amendments to our
rules relating to the shareholder approval of executive compensation
and golden parachute compensation.\15\ We proposed these rules to
implement Section 951 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Act'').\16\ As discussed in detail below, we have
taken into consideration the comments received on the proposed
amendments and are adopting several amendments to our rules.\17\
---------------------------------------------------------------------------
\15\ See Release No. 33-9153 (October 18, 2010) [75 FR 66590]
(the ``Proposing Release'').
\16\ Public Law 111-203 (July 21, 2010).
\17\ The public comments we received on the Proposing Release
are available on our Web site at https://www.sec.gov/comments/s7-31-10/s73110.shtml. In addition, to facilitate public input on the Act,
the Commission provided a series of e-mail links, organized by
topic, on its Web site at https://www.sec.gov/spotlight/regreformcomments.shtml. The public comments we received on Section
951 of the Act are available on our Web site at https://www.sec.gov/comments/df-title-ix/executive-compensation/executive-compensation.shtml.
---------------------------------------------------------------------------
The Act amends the Exchange Act by adding new Section 14A. New
Section 14A(a)(1) requires that ``[n]ot less frequently than once every
3 years, a proxy or consent or authorization for an annual or other
meeting of the shareholders for which the proxy solicitation rules of
the Commission require compensation disclosure shall include a separate
resolution subject to shareholder vote to approve the compensation of
executives,'' \18\ as disclosed pursuant to Item 402 of Regulation S-K,
or any successor to Item 402 (a ``say-on-pay vote''). The shareholder
vote to approve executive compensation required by Section 14A(a)(1)
``shall not be binding on the issuer or the board of directors of an
issuer.'' \19\
---------------------------------------------------------------------------
\18\ Exchange Act Section 14A(a)(1). Section 951 of the Act
includes the language ``or other meeting of the shareholders,''
which is similar to corresponding language in Section 111(e)(1) of
the Emergency Economic Stabilization Act of 2008, or EESA, 12 U.S.C.
5221. As noted in the Proposing Release, we have previously
considered this language in connection with companies required to
provide a separate shareholder vote on executive compensation so
long as the company has outstanding obligations under the Troubled
Asset Relief Program, or TARP. See Shareholder Approval of Executive
Compensation of TARP Recipients, Release No. 34-61335 (Jan. 12,
2010) [75 FR 2789] (hereinafter, the ``TARP Adopting Release''). We
continue to view this provision to require a separate shareholder
vote on executive compensation only with respect to an annual
meeting of shareholders for which proxies will be solicited for the
election of directors, or a special meeting in lieu of such annual
meeting. Similarly, Rules 14a-21(a) and (b) are intended to result
in issuers conducting the required advisory votes in connection with
the election of directors, the proxy materials for which are
required to include disclosure of executive compensation.
\19\ Exchange Act Section 14A(c).
---------------------------------------------------------------------------
Section 951 of the Act also adds new Section 14A(a)(2) to the
Exchange Act, requiring that, ``[n]ot less frequently than once every 6
years, a proxy or consent or authorization for an annual or other
meeting of the shareholders for which the proxy solicitation rules of
the Commission require compensation disclosure shall include a separate
resolution subject to shareholder vote to determine whether [the say-
on-pay vote] will occur every 1, 2, or 3 years.'' \20\ As discussed
below, this shareholder vote ``shall not be binding on the issuer or
the board of directors of an issuer.'' \21\
---------------------------------------------------------------------------
\20\ Exchange Act Section 14A(a)(2).
\21\ Exchange Act Section 14A(c).
---------------------------------------------------------------------------
In addition, Section 951 of the Act amends the Exchange Act by
adding new Section 14A(b)(1), which requires that, in any proxy or
consent solicitation material for a meeting of shareholders ``at which
shareholders are asked to approve an acquisition, merger,
consolidation, or proposed sale or other disposition of all or
substantially all the assets of an issuer, the person making such
solicitation shall disclose in the proxy or consent solicitation
material, in a clear and simple form in accordance with regulations to
be promulgated by the Commission, any agreements or understandings that
such person has with any named executive officers of such issuer (or of
the acquiring issuer, if such issuer is not the acquiring issuer)
concerning any type of compensation (whether present, deferred, or
contingent) that is based on or otherwise relates to the acquisition,
merger, consolidation, sale or other disposition of all or
substantially all of the assets of the issuer[* * *].'' \22\ These
compensation arrangements are often referred to as ``golden parachute''
compensation. Such disclosure must include the aggregate total of all
such compensation that may be paid or become payable to or on behalf of
such named executive officer, and the conditions upon which it may be
paid or become payable.\23\ Under Section 14A(b)(2), ``unless such
agreements or understandings have been subject to [the periodic
shareholder vote described in Section 14A(a)(1)],'' \24\ a separate
shareholder vote to approve such agreements or understandings and
compensation as disclosed is also required.\25\ As with the say-on-pay
vote and the shareholder vote on the frequency of such votes, this
shareholder vote ``shall not be binding on the issuer or the board of
directors of an issuer.'' \26\
---------------------------------------------------------------------------
\22\ Exchange Act Section 14A(b)(1).
\23\ Exchange Act Section 14A(b)(1).
\24\ Exchange Act Section 14A(b)(2).
\25\ Exchange Act Section 14A(b)(2).
\26\ Exchange Act Section 14A(c).
---------------------------------------------------------------------------
In addition to their non-binding status, none of the shareholder
votes required pursuant to Section 14A is to be construed ``as
overruling a decision by such issuer or board of directors.'' \27\
These shareholder votes also do not ``create or imply any change to the
fiduciary duties of such issuer or board of directors'' \28\ nor do
they ``create or imply any additional fiduciary duties for such issuer
or board of directors.'' \29\ Further, these votes will not be
construed ``to restrict or limit the ability of shareholders to make
proposals for inclusion in proxy materials related to executive
compensation.'' \30\ Section 14A also provides that ``the Commission
may, by rule or order, exempt an issuer or class of issuers'' from the
shareholder
[[Page 6012]]
advisory votes required by Section 14A.\31\ In determining whether to
make an exemption, the Commission is directed to take into account,
among other considerations, whether the requirements of Section 14A(a)
and (b) disproportionately burden small issuers.\32\
---------------------------------------------------------------------------
\27\ Exchange Act Section 14A(c)(1).
\28\ Exchange Act Section 14A(c)(2).
\29\ Exchange Act Section 14A(c)(3).
\30\ Exchange Act Section 14A(c)(4). In addition, Exchange Act
Section 14A(d) provides that every institutional manager subject to
Exchange Act Section 13(f) [15 U.S.C. 78m(f)] shall report at least
annually how it voted on any shareholder vote required by Section
951 of the Act, including the shareholder vote on executive
compensation, the shareholder vote on the frequency of shareholder
votes on executive compensation, and the golden parachute
compensation vote, unless such vote is otherwise required to be
reported publicly by rule or regulation of the Commission.
Amendments to our rules to implement this requirement were proposed
in a separate rulemaking. See Reporting of Proxy Votes on Executive
Compensation and Other Matters, Release No. 34-63123 (Oct. 18, 2010)
[75 FR 66622].
\31\ Exchange Act Section 14A(e).
\32\ Exchange Act Section 14A(e).
---------------------------------------------------------------------------
Section 14A(a)(3) requires that both the initial shareholder vote
on executive compensation and the initial vote on the frequency of
votes on executive compensation be included in proxy statements ``for
the first annual or other meeting of the shareholders occurring after
the end of the 6-month period beginning on the date of enactment'' of
the Act.\33\ Thus, the statute requires separate resolutions subject to
shareholder vote to approve executive compensation and to approve the
frequency of say-on-pay votes for proxy statements relating to an
issuer's first annual or other meeting of the shareholders occurring on
or after January 21, 2011, whether or not the Commission has adopted
rules to implement Section 14A(a). Because Section 14A(a) applies to
shareholder meetings taking place on or after January 21, 2011, any
proxy statement that is required to include executive compensation
disclosure pursuant to Item 402 of Regulation S-K, whether in
preliminary or definitive form, even if filed prior to this date, for
meetings taking place on or after January 21, 2011, must include the
separate resolutions for shareholders to approve executive compensation
and the frequency of say-on-pay votes required by Section 14A(a)
without regard to whether the amendments in this release are in effect
by that time.\34\
---------------------------------------------------------------------------
\33\ Exchange Act Section 14A(a)(3).
\34\ See Section II.E below for a discussion of a temporary
exemption for smaller reporting companies.
---------------------------------------------------------------------------
With respect to the disclosure of golden parachute arrangements in
accordance with Commission regulations in merger proxy statements
required by Section 14A(b)(1), we note that the statute similarly
references a 6-month period beginning on the date of enactment of the
Act. However, because the statute requires such disclosure to be ``in
accordance with regulations to be promulgated by the Commission,'' \35\
the golden parachute compensation arrangements disclosure under
proposed new Item 402(t) and a separate resolution to approve golden
parachute compensation arrangements pursuant to Rule 14a-21(c) will not
be required for merger proxy statements relating to a meeting of
shareholders until the effective date of our rules implementing Section
14A(b)(1). The rule amendments we adopt today with respect to new Rule
14a-21(c) and the amendments to the disclosure requirements in Item 5
of Schedule 14A, Item 3 of Schedule 14C, Item 1011 of Regulation M-A,
Item 11 of Schedule TO, Item 15 of Schedule 13E-3, and Item 8 of
Schedule 14D-9, are effective for initial filings on or after April 25,
2011.
---------------------------------------------------------------------------
\35\ Exchange Act Section 14A(b)(1).
---------------------------------------------------------------------------
We received over 60 comment letters in response to the proposed
amendments. In addition, we received over a dozen letters relating to
Section 951 of the Act.\36\ These letters came from corporations,
pension funds, professional associations, trade unions, law firms,
consultants, academics, individual investors, and other interested
parties. In general, the commentators supported the proposed amendments
that would implement Section 951 of the Act. Some commentators,
however, opposed some of the proposed amendments and suggested
modifications or alternatives to the proposals.
---------------------------------------------------------------------------
\36\ These comment letters were received prior to publication of
the Proposing Release. See note 17 above.
---------------------------------------------------------------------------
We have reviewed and considered all of the comments that we
received relating to the proposed amendments. The adopted rules reflect
changes made in response to many of these comments. We discuss our
revisions with respect to each proposed rule amendment in more detail
throughout this release.
We are adopting Rule 14a-21 to provide a separate shareholder vote
to approve executive compensation, to approve the frequency of such
votes on executive compensation and to approve golden parachute
compensation arrangements in connection with certain extraordinary
business transactions. We are also adopting a new Item 24 of Schedule
14A to provide disclosure regarding the effect of the shareholder votes
required by Rule 14a-21, such as whether each vote is non-binding. In
addition, our amendments to Item 5 of Schedule 14A, Item 3 of Schedule
14C, Item 1011 of Regulation M-A, Item 8 of Schedule 14D-9, and Item 15
of Schedule 13E-3 will require additional disclosure regarding golden
parachute arrangements in connection with certain extraordinary
business transactions, Rule 13e-3 \37\ going-private transactions and
tender offers.
---------------------------------------------------------------------------
\37\ 17 CFR 240.13e-3.
---------------------------------------------------------------------------
We are also adopting amendments to Item 402 of Regulation S-K to
require disclosure of an issuer's consideration of the say-on-pay vote
in its Compensation Discussion and Analysis, and to prescribe
disclosure about golden parachute compensation arrangements in new Item
402(t). In addition, we are adopting an instruction to Rule 14a-8 to
clarify the treatment of shareholder proposals relating to the
shareholder advisory votes required by Rule 14a-21. Finally, we are
adopting amendments to Form 8-K to facilitate disclosure of the results
of the shareholder advisory vote on the frequency of say-on-pay votes,
and to require disclosure about whether and how the issuer will
implement the results of the shareholder advisory vote on the frequency
of say-on-pay votes.
II. Discussion of the Amendments
A. Shareholder Approval of Executive Compensation
1. Rule 14a-21(a)
Proposed Rule 14a-21(a) would require issuers,\38\ not less
frequently than once every three years, to include in their proxy
statements a separate shareholder advisory vote to approve the
compensation of executives. We are adopting the rule substantially as
proposed with some changes in response to comments.
---------------------------------------------------------------------------
\38\ Our rules as adopted apply to issuers who have a class of
equity securities registered under Section 12 [15 U.S.C. 78l] of the
Exchange Act and are subject to our proxy rules. Foreign private
issuers, as defined in Rule 3b-4(c) [17 CFR 240.3b-4(c)], are not
required under Section 14A or the rules we are adopting today to
conduct a shareholder advisory vote on executive compensation nor a
shareholder advisory vote on the frequency of such votes.
---------------------------------------------------------------------------
a. Proposed Rule
Under our proposed rule, an issuer would be required, not less
frequently than once every three years, to provide a separate
shareholder advisory vote in proxy statements to approve the
compensation of its named executive officers, as defined in Item
402(a)(3) \39\ of Regulation S-K. Rule 14a-21(a), as proposed, would
specify that the separate shareholder vote on executive compensation is
required only when proxies are solicited for an annual or other meeting
of security holders for which our rules require the disclosure of
executive compensation pursuant to Item 402 of Regulation S-K. Proposed
Rule 14a-21(a) would require a separate shareholder vote to approve the
compensation of executives for the first annual or other such meeting
of shareholders occurring on or after January 21, 2011, the first day
after the end of the 6-month period beginning on the date of enactment
of the Act.
---------------------------------------------------------------------------
\39\ 17 CFR 229.402(a)(3).
---------------------------------------------------------------------------
In accordance with Section 14A(a)(1), shareholders would vote to
approve the compensation of the issuer's named
[[Page 6013]]
executive officers, as such compensation is disclosed pursuant to Item
402 \40\ of Regulation S-K, including the Compensation Discussion and
Analysis (``CD&A''), the compensation tables and other narrative
executive compensation disclosures required by Item 402. We also
proposed an instruction to Rule 14a-21 to specify that the rule does
not change the scaled disclosure requirements for smaller reporting
companies and that smaller reporting companies would not be required to
provide a CD&A in order to comply with Rule 14a-21.
---------------------------------------------------------------------------
\40\ We proposed that if disclosure of golden parachute
compensation arrangements pursuant to proposed Item 402(t) is
included in an annual meeting proxy statement, such disclosure would
be included in the disclosure subject to the shareholder advisory
vote under Rule 14a-21(a). Such disclosure under Item 402(t),
however, would not be required to be included in annual meeting
proxy statements.
---------------------------------------------------------------------------
b. Comments on the Proposed Rule
Commentators were generally supportive of the proposal. Many
commentators agreed with the approach, as proposed, not to designate
specific language to be used or require issuers to frame the
shareholder vote to approve executive compensation in the form of a
standard resolution.\41\ Some commentators indicated that issuers
should have flexibility in drafting the resolution.\42\ Commentators
noted that flexibility would permit issuers to tailor the resolution to
the issuer's individual circumstances.\43\ Others stated that we should
designate specific language for the resolution \44\ or at least
establish clear, minimum guidelines,\45\ principles-based
guidelines,\46\ or model language,\47\ while other commentators
suggested we include language for a resolution in the form of non-
exclusive examples \48\ or a safe harbor.\49\ Commentators indicated
that it would be helpful to have an example of resolution language that
would comply with the rule \50\ and that sample language would simplify
the drafting process for issuers and promote efficiency.\51\
---------------------------------------------------------------------------
\41\ See, e.g., letters from American Federation of State,
County and Municipal Employees (``AFSCME''), Center on Executive
Compensation (``Center on Exec. Comp.''), Compensia (``Compensia''),
Davis Polk & Wardwell LLP (``Davis Polk''), the Financial Services
Roundtable (``FSR''), Pfizer Inc. (``Pfizer''), Protective Life
Corporation (``Protective Life''), and United Brotherhood of
Carpenters (``UBC'').
\42\ See, e.g., letters from Business Roundtable (``Business
Roundtable'') and Towers Watson (``Towers Watson'').
\43\ See letter from Business Roundtable.
\44\ See, e.g., letters from National Association of Corporate
Directors (``NACD''), PGGM Investments (``PGGM''), Public Citizen
(``Public Citizen''), and WorldatWork (``WorldatWork'').
\45\ See, e.g., letters from Boston Common Asset Management
(``Boston Common''), First Affirmative Financial Network, LLC
(``First Affirmative''), Glass Lewis & Co. (``Glass Lewis''), Social
Investment Forum (``Social Investment''), and Walden Asset
Management (``Walden'').
\46\ See, e.g., letters from International Corporate Governance
Network (``ICGN'') and Teachers Insurance and Annuities Association
of America and College Retirement Equities Fund (``TIAA-CREF'').
\47\ See, e.g., letter from Calvert Group, Ltd. (``Calvert'').
\48\ See, e.g., letters from Society of Corporate Secretaries
and Governance Professionals (``Society of Corp. Sec.'') and
Sullivan & Cromwell LLP (``Sullivan'').
\49\ See, e.g., letters from The Boeing Company (``Boeing'') and
Pearl Meyer & Partners (``PM&P'').
\50\ See letter from Society of Corp. Sec.
\51\ See letter from Sullivan.
---------------------------------------------------------------------------
Many commentators agreed with our proposed approach not to exempt
smaller reporting companies from Rule 14a-21(a) and Exchange Act
Section 14A(a)(1).\52\ Some commentators did suggest that smaller
reporting companies should be exempt from the say-on-pay vote \53\ or
required to conduct a say-on-pay vote on a triennial basis beginning in
2013.\54\
---------------------------------------------------------------------------
\52\ See, e.g., letters from California Public Employees
Retirement System (``CalPERS''), Council of Institutional Investors
(``CII''), Glass Lewis, ICGN, PGGM, and the State Board of
Administration of Florida (``SBA of Florida'').
\53\ See, e.g., letters from NACD and UBC.
\54\ See letter from the Committee on Federal Regulation of
Securities, Section of Business Law of the American Bar Association
(``ABA'').
---------------------------------------------------------------------------
Some commentators suggested that we clarify the relationship
between the federally created right and state law voting rights.\55\
Most commentators, however, indicated there was no need for the
Commission to adopt rules as to which shares are entitled to vote.\56\
One commentator asserted that the issue as to which shares are entitled
to vote is traditionally a state law matter that we do not need to
address in our rulemaking.\57\
---------------------------------------------------------------------------
\55\ See, e.g., letter from the ABA.
\56\ See, e.g., letters from Business Roundtable, FSR, Pfizer,
PGGM, and Protective Life.
\57\ See letter from Business Roundtable.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, we are adopting Rule 14a-21(a)
substantially as proposed with some modifications. Under the final
rule, issuers will be required, not less frequently than once every
three years, to provide a separate shareholder advisory vote in proxy
statements to approve the compensation of their named executive
officers, as defined in Item 402(a)(3) of Regulation S-K. Rule 14a-
21(a) specifies that the separate shareholder vote on executive
compensation is required only when proxies are solicited for an annual
or other meeting of security holders for which our rules require the
disclosure of executive compensation pursuant to Item 402 of Regulation
S-K. We have modified the proposal to clarify in the rule that the
shareholder vote on executive compensation required by Exchange Act
Section 14A(a)(1) and Rule 14a-21(a) is required with respect to an
annual meeting of shareholders at which proxies will be solicited for
the election of directors, or a special meeting in lieu of such annual
meeting.\58\ In addition, we have modified the rule to clarify that a
say-on-pay vote is required at least once every three calendar years.
Commentators expressed the view that as proposed, the rule would have
required a say-on-pay vote within three years of the date of the most
recent say-on-pay vote, which in some cases could have required a say-
on-pay vote more frequently than once every three calendar years.\59\
---------------------------------------------------------------------------
\58\ See the discussion in Note 18 above.
\59\ See letter from ABA.
---------------------------------------------------------------------------
As adopted, Rule 14a-21(a) requires a separate shareholder vote to
approve the compensation of executives for the first annual or other
meeting of shareholders occurring on or after January 21, 2011, the
first day after the end of the 6-month period beginning on the date of
enactment of the Act. In accordance with Section 14A(a)(1),
shareholders would vote to approve the compensation of the issuer's
named executive officers, as such compensation is disclosed pursuant to
Item 402 \60\ of Regulation S-K, including the CD&A, the compensation
tables and other narrative executive compensation disclosures required
by Item 402.\61\ We have included an instruction to Rule 14a-21 to
specify that Rule 14a-21 does not change the scaled disclosure
requirements for smaller reporting companies and that smaller reporting
companies will not be required to provide a CD&A in order to comply
with Rule 14a-21. We understand that smaller reporting companies may
wish to include supplemental disclosure to facilitate shareholder
understanding of
[[Page 6014]]
their compensation arrangements in connection with say-on-pay
votes.\62\ We do not believe, however, that this possibility supports
exempting smaller reporting companies from the say-on-pay votes. As
more fully discussed in Section II.E below, in order to ease compliance
burdens for smaller reporting companies, we are adopting a two-year
temporary exemption before these companies are required to conduct a
shareholder advisory vote to approve executive compensation to permit
these companies additional time to prepare for the new shareholder
advisory votes.
---------------------------------------------------------------------------
\60\ If disclosure of golden parachute compensation arrangements
pursuant to Item 402(t) is included in an annual meeting proxy
statement, such disclosure would be included in the disclosure
subject to the shareholder advisory vote under Rule 14a-21(a). Such
disclosure under Item 402(t), however, is not required to be
included in all annual meeting proxy statements.
\61\ While not required, our rules ``would not preclude an
issuer from seeking more specific shareholder opinion through
separate votes on cash compensation, golden parachute policy,
severance or other aspects of compensation.'' See Report of the
Senate Committee on Banking, Housing, and Urban Affairs regarding
The Restoring American Financial Stability Act of 2010, S. Rep. No.
111-176 at 133 (2010).
\62\ See letter from Society of Corp. Sec., which notes that
smaller reporting companies may ``feel compelled to include CD&A to
provide additional disclosure so as to reduce the potential for an
unfavorable shareholder vote.''
---------------------------------------------------------------------------
As noted in the Proposing Release, consistent with Section 14A, the
compensation of directors, as disclosed pursuant to Item 402(k) \63\ or
Item 402(r) \64\ is not subject to the shareholder advisory vote. In
addition, if an issuer includes disclosure pursuant to Item 402(s) \65\
of Regulation S-K about the issuer's compensation policies and
practices as they relate to risk management and risk-taking incentives,
these policies and practices will not be subject to the shareholder
advisory vote required by Section 14A(a)(1) as they relate to the
issuer's compensation for employees generally. We note, however, that
to the extent that risk considerations are a material aspect of the
issuer's compensation policies or decisions for named executive
officers, the issuer is required to discuss them as part of its
CD&A,\66\ and therefore such disclosure would be considered by
shareholders when voting on executive compensation.
---------------------------------------------------------------------------
\63\ 17 CFR 229.402(k).
\64\ 17 CFR 229.402(r).
\65\ 17 CFR 229.402(s).
\66\ See Proxy Disclosure Enhancements, Release No. 33-9089
(Dec. 16, 2009) [74 FR 68334] at note 38.
---------------------------------------------------------------------------
Though we have considered the views of commentators that prescribed
language would be helpful, the final rule does not require issuers to
use any specific language or form of resolution to be voted on by
shareholders. This is consistent with the approach taken by the
Commission in adopting Rule 14a-20 to implement the shareholder
advisory vote on executive compensation for companies subject to the
Emergency Economic Stabilization Act of 2008, or EESA. We believe that
issuers should retain flexibility to craft the resolution language. As
we noted in the Proposing Release, however, the shareholder advisory
vote must relate to all executive compensation disclosure disclosed
pursuant to Item 402 of Regulation S-K. Section 14A(a)(1) of the
Exchange Act requires that the shareholder advisory vote must be ``to
approve the compensation of executives, as disclosed pursuant to [Item
402 of Regulation S-K] or any successor thereto.'' \67\ We have added
an instruction to Rule 14a-21(a) to indicate that this language from
Section 14A(a)(1) should be included in an issuer's resolution for the
say-on-pay vote and to provide a non-exclusive example of a resolution
that would satisfy the applicable requirements.\68\ A vote to approve a
proposal on a different subject matter, such as a vote to approve only
compensation policies and procedures, would not satisfy the requirement
of Section 14A(a)(1) or final Rule 14a-21(a). We note that issuers are
not limited to the required shareholder advisory vote under Rule 14a-
21(a) and may solicit shareholder votes on a range of compensation
matters to obtain more specific feedback on the issuer's compensation
policies and programs.
---------------------------------------------------------------------------
\67\ Exchange Act Section 14A(a)(1).
\68\ Instruction to Rule 14a-21(a) provides the following non-
exclusive example that would satisfy Rule 14a-21(a): ``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.''
---------------------------------------------------------------------------
2. Item 24 to Schedule 14A
We proposed a new Item 24 to Schedule 14A, to require disclosure in
any proxy statement in which an issuer is providing a separate
shareholder vote on executive compensation to briefly explain the
general effect of the vote, such as whether the vote is non-binding. We
are adopting this amendment to Schedule 14A as proposed with some
modifications.
a. Proposed Amendments
Pursuant to proposed new Item 24 of Schedule 14A, issuers would be
required to disclose in a proxy statement for an annual meeting (or
other meeting of shareholders for which our rules require executive
compensation disclosure) that they are providing a separate shareholder
vote on executive compensation and to briefly explain the general
effect of the vote, such as whether the vote is non-binding.\69\ This
was similar to the approach taken by the Commission in connection with
disclosure requirements about the shareholder vote on executive
compensation for companies subject to the EESA.\70\
---------------------------------------------------------------------------
\69\ Section 14A(a) does not require additional disclosure with
respect to the non-binding nature of the vote. We proposed to
require additional disclosure so that information about the advisory
nature of the vote is available to shareholders before they vote. We
continue to believe this information should be available to
shareholders.
\70\ See Item 20 of Schedule 14A; TARP Adopting Release, supra
note 18, at 75 FR 2790.
---------------------------------------------------------------------------
b. Comments on the Proposed Amendments
Commentators were generally supportive of proposed Item 24 of
Schedule 14A. We requested comment regarding whether any additional
disclosures should be provided by issuers that would be useful to
shareholders. Two commentators indicated that we should amend the
proposal to require disclosure of the results of previous votes on
executive compensation.\71\ Another commentator suggested that we
should remove the reference to the ``general effect'' of the vote as it
would lead to boilerplate disclosure and remove the word ``whether''
from the rule given the non-binding nature of the vote.\72\
---------------------------------------------------------------------------
\71\ See letters from ICGN and PGGM.
\72\ See letter from ABA.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, we are adopting Item 24 to Schedule
14A as proposed with some modifications.\73\ Though we agree that the
disclosure of previous results would be useful to shareholders, these
results are required to be disclosed pursuant to Item 5.07 of Form 8-K
immediately following the votes. Consequently, we do not believe it is
necessary to mandate such disclosure in Item 24 of Schedule 14A. As
discussed below, we have modified the proposal to require disclosure of
the current frequency of say-on-pay votes and to require disclosure of
when the next say-on-pay vote will occur.
---------------------------------------------------------------------------
\73\ See discussion of the modification to the proposed Item 24
relating to the frequency of say-on-pay votes below at Section
II.B.2.c.
---------------------------------------------------------------------------
Item 24 is consistent with the approach taken by the Commission in
Item 20 of Schedule 14A in connection with disclosure requirements
about the shareholder advisory vote on executive compensation for
companies subject to EESA. Based on our experience with these votes, we
believe that such requirements will lead to disclosure of useful
information about the nature and effect of the vote for shareholders to
consider, such as whether the vote is non-binding. We note that
although not required, issuers may choose to provide additional
disclosure in their proxy materials.
3. Amendments to Item 402(b) of Regulation S-K
Item 402 requires the disclosure of executive compensation and
includes
[[Page 6015]]
requirements prescribing narrative and tabular disclosure, as well as
separate scaled disclosure requirements for smaller reporting
companies.\74\ Item 402(b) \75\ contains the requirement for CD&A,
which is intended to be a narrative overview that puts into context the
executive compensation disclosure provided elsewhere in response to the
requirements of Item 402. The CD&A disclosure requirement is
principles-based, in that it identifies the disclosure concept and
provides several non-exclusive examples. Under Item 402(b)(1), issuers
must explain all material elements of their named executive officers'
compensation by addressing mandatory principles-based topics in their
CD&A.\76\ Item 402(b)(2) of Regulation S-K sets forth certain non-
exclusive examples of the kind of information that an issuer should
address in its CD&A, depending upon the facts and circumstances.
---------------------------------------------------------------------------
\74\ Item 402 also includes requirements to disclose director
compensation (Items 402(k) and 402(r)) and the issuer's compensation
policies as they relate to risk management (Item 402(s)).
\75\ 17 CFR 229.402(b).
\76\ These mandatory principles-based topics require the company
to disclose the objectives of the company's compensation programs;
what the compensation program is designed to reward; each element of
compensation; why the company chooses to pay each element; how the
company determines the amount (and, where applicable, the formula)
for each element; and how each element and the company's decisions
regarding that element fit into the company's overall compensation
objectives and affect decisions regarding other elements.
---------------------------------------------------------------------------
In connection with our implementation of Section 14A(a)(1), we
proposed amendments to require disclosure in CD&A regarding how issuers
have considered the results of previous say-on-pay votes required by
Section 14A and Rule 14a-20.\77\ After reviewing comments on this
proposal, we are adopting amendments to Item 402(b)(1) as proposed,
with some modifications in response to concerns raised by commentators.
---------------------------------------------------------------------------
\77\ 17 CFR 240.14a-20. Pursuant to the EESA, issuers that have
received financial assistance under the Troubled Asset Relief
Program, or TARP, are required to conduct a separate annual
shareholder vote to approve executive compensation during the period
in which any obligation arising from the financial assistance
provided under the TARP remains outstanding.
---------------------------------------------------------------------------
a. Proposed Amendments
We proposed to amend Item 402(b)(1) to add to the mandatory CD&A
topics whether, and if so, how an issuer has considered the results of
previous shareholder votes on executive compensation required by
Section 14A or Rule 14a-20 in determining compensation policies and
decisions and, if so, how that consideration has affected its
compensation policies and decisions. We did not propose to add a
specific requirement for smaller reporting companies to provide
disclosure about how previous votes pursuant to Section 14A or Rule
14a-20 affected compensation policies and decisions because in our view
such information would not be as valuable outside the context of a
complete CD&A covering the full range of matters required to be
addressed by Item 402(b), which smaller reporting companies are not
required to provide.
b. Comments on the Proposed Amendments
Comments on the proposal were mixed. Several commentators expressed
support for an amendment to Item 402(b)(1) to require that issuers
discuss the results of the shareholder vote and its effect, if any, on
executive compensation decisions and policies.\78\ Many of these
commentators agreed with the proposal that discussion of say-on-pay
vote results in CD&A should be mandatory,\79\ in some cases noting that
this would provide shareholders a better understanding of how the board
of directors considered the results of shareholder advisory votes \80\
and encourage a dialogue between issuers and shareholders on the topic
of compensation.\81\ Commentators also indicated that a mandatory
discussion of the consideration of say-on-pay votes will aid
transparency of issuers' disclosures on compensation \82\ and will help
investors better understand compensation decisions made by issuers.\83\
---------------------------------------------------------------------------
\78\ See, e.g., letters from CalPERS, Calvert, CII, Colorado
Public Employees' Retirement Association (``COPERA''), ICGN,
Meridian Compensation Partners (``Meridian''), PGGM, Pensions
Investment Research Consultants (``PIRC''), SBA of Florida,
Sullivan, and TIAA-CREF.
\79\ See, e.g., letters from CalPERS, Calvert, CII, PGGM, PIRC,
SBA of Florida, and TIAA-CREF.
\80\ See letter from CalPERS.
\81\ See letter from TIAA-CREF.
\82\ See letter from PIRC.
\83\ See letter from SBA of Florida.
---------------------------------------------------------------------------
A number of commentators stated that it would be more appropriate
instead to include consideration of say-on-pay votes among the non-
exclusive examples of the kind of information that should be addressed
in CD&A, only if material given the issuer's individual facts and
circumstances \84\ because this approach would avoid boilerplate
disclosure and require discussion only when material,\85\ and that
discussion on a mandatory basis may lead to awkward and non-substantive
disclosure if the issuer has not made changes to its compensation
program in response to the shareholder vote.\86\
---------------------------------------------------------------------------
\84\ See, e.g., letters from ABA, Boeing, Business Roundtable,
Eaton Corporation (``Eaton''), FSR, PM&P, Sullivan, and UnitedHealth
Group (``UnitedHealth'').
\85\ See, e.g., letter from UnitedHealth.
\86\ See letter from PM&P.
---------------------------------------------------------------------------
Other commentators stated that no amendment to CD&A is required
\87\ because the Act does not require additional CD&A disclosure and it
should not be required by rule,\88\ the proposed amendment would add
length to CD&A without providing meaningful information to
shareholders,\89\ and the amendment would deem the consideration of
say-on-pay votes material whether such consideration is material or
not.\90\ Similarly a number of commentators who asserted that amending
Item 402(b) is not required also expressed the view that if the
Commission does adopt an amendment, such CD&A disclosure should be
required only if material under the issuer's individual facts and
circumstances.\91\
---------------------------------------------------------------------------
\87\ See, e.g., letters from Center on Exec. Comp., Compensia,
Davis Polk, Pfizer, Society of Corp. Sec., and UBC.
\88\ See, e.g., letter from Center on Exec. Comp.
\89\ See letter from Davis Polk.
\90\ See, e.g., letter from Society of Corp. Sec.
\91\ See, e.g., letters from Compensia, Davis Polk, and Society
of Corp. Sec.
---------------------------------------------------------------------------
Commentators also disagreed with respect to which say-on-pay votes
should be covered by the CD&A discussion. Some favored only the most
recent say-on-pay vote,\92\ indicating that mandating discussion of
prior votes would result in extraneous discussion \93\ and little
benefit.\94\ Other commentators indicated that prior votes should also
be required to be addressed.\95\ These commentators noted that such
disclosure of prior votes is appropriate given the long-term process of
determining compensation \96\ and that it would permit investors to
evaluate any trends in the results of say-on-pay votes.\97\ One
commentator stated that if CD&A disclosure with respect to say-on-pay
votes is mandatory, it should be limited to the most recent vote, but
if not mandatory should not be so limited.\98\ Although there was
little response to our request for comment regarding whether smaller
reporting companies should be required to disclose their consideration
of
[[Page 6016]]
shareholder advisory votes on executive compensation, one commentator
stated that our existing disclosure requirements for these companies
are sufficient.\99\
---------------------------------------------------------------------------
\92\ See, e.g., letters from ABA, Boeing, Eaton, FSR,
McGuireWoods (``McGuireWoods''), Meridian, NACD, Pfizer, Protective
Life, and Sullivan.
\93\ See letter from Sullivan.
\94\ See letter from McGuireWoods.
\95\ See, e.g., letters from Chris Barnard (``Barnard''),
Calvert, PGGM, PIRC, PM&P, and SBA of Florida.
\96\ See, e.g., letter from PGGM.
\97\ See, e.g., letter from SBA of Florida.
\98\ See letter from Boeing.
\99\ See letter from ICGN.
---------------------------------------------------------------------------
c. Final Rule
After considering the comments, we are adopting amendments to the
disclosure requirements of Item 402(b)(1) substantially as proposed,
with a modification to clarify that this mandatory topic relates to the
issuer's consideration of the most recent say-on-pay vote. As discussed
below, issuers should address their consideration of the results of
earlier say-on-pay votes, to the extent material.
The final rule amends Item 402(b)(1) to require issuers to address
in CD&A whether and, if so, how their compensation policies and
decisions have taken into account the results of the most recent
shareholder advisory vote on executive compensation. Although it is not
mandated by Section 951 of the Act, we continue to believe that
including this mandatory topic in CD&A will facilitate better investor
understanding of issuers' compensation decisions. Because the
shareholder advisory vote will apply to all issuers, we view
information about how issuers have responded to such votes as more in
the nature of a mandatory principles-based topic than an example. The
manner in which individual issuers may respond to such votes in
determining executive compensation policies and decisions will likely
vary depending upon facts and circumstances. We expect that this
variation will be reflected in the CD&A disclosures.
Following consideration of the comments received, we have decided
to limit the mandatory topic to whether, and if so, how the issuer has
considered the results of the most recent say-on-pay vote in
determining compensation policies and decisions, and if so, how that
consideration has affected the issuer's executive compensation policies
and decisions.\100\ This modification reflects that, in making voting
and investment decisions, shareholders will benefit from understanding
what consideration the issuer has given to the most recent say-on-pay
vote. Limiting the mandatory topic to the most recent shareholder vote
should also focus the disclosure so there should not be lengthy
boilerplate discussions of all previous votes. Although we have added
issuer consideration of the most recent say-on-pay vote to the
mandatory topics, we believe that, consistent with the principles-based
nature of CD&A, issuers should address their consideration of the
results of earlier say-on-pay votes to the extent such consideration is
material to the compensation policies and decisions discussed.
---------------------------------------------------------------------------
\100\ Reporting companies are currently required to disclose,
pursuant to Item 5.07 of Form 8-K [17 CFR 249.208a], the preliminary
results of a shareholder vote within four business days after the
end of the meeting at which the vote is held and final voting
results within four business days after the final voting results are
known. We are adopting amendments to require additional disclosure
on Form 8-K regarding the company's determination of the frequency
of say-on-pay votes. See Section II.B.5 below.
---------------------------------------------------------------------------
Because companies with outstanding indebtedness under the TARP will
continue to have an annual say-on-pay vote until they repay all such
indebtedness, these votes should be addressed by issuers in CD&A as
well. To reflect our treatment of companies subject to EESA with
outstanding obligations under TARP, we have also modified the amendment
to Item 402(b)(1) as adopted to address issuer consideration of the
results of the most recent shareholder advisory vote on executive
compensation required by Section 14A or Rule 14a-20. This reflects that
the vote required pursuant to the EESA and 14a-20 is effectively the
same vote that would be required under Section 14A(a)(1).\101\
---------------------------------------------------------------------------
\101\ The treatment of companies subject to EESA with
outstanding obligations under TARP is discussed in Section II.C.3
below.
---------------------------------------------------------------------------
Smaller reporting companies are subject to scaled disclosure
requirements in Item 402 of Regulation S-K and are not required to
include a CD&A. We are not adding a specific requirement for smaller
reporting companies to provide disclosure about how previous votes
pursuant to Section 14A affected compensation policies and decisions
because we believe such information would not be as valuable outside
the context of a complete CD&A covering the full range of matters
required to be addressed by Item 402(b). However, we note that pursuant
to Item 402(o) of Regulation S-K, \102\ smaller reporting companies are
required to provide a narrative description of any material factors
necessary to an understanding of the information disclosed in the
Summary Compensation Table. If consideration of prior say-on-pay votes
is such a factor for a particular issuer, disclosure would be required
pursuant to Item 402(o).
---------------------------------------------------------------------------
\102\ 17 CFR 229.402(o).
---------------------------------------------------------------------------
B. Shareholder Approval of the Frequency of Shareholder Votes on
Executive Compensation
1. Rule 14a-21(b)
We proposed Rule 14a-21(b) pursuant to which issuers would be
required, not less frequently than once every six years, to provide a
separate shareholder advisory vote in proxy statements to determine the
frequency of the shareholder vote on the compensation of executives
required by Section 14A(a)(1). We are adopting this amendment
substantially as proposed with slight modifications in response to
comments.
a. Proposed Rule
Under proposed Rule 14a-21(b), issuers would be required, not less
frequently than once every six years, to provide a separate shareholder
advisory vote in proxy statements for annual meetings to determine
whether the shareholder vote on the compensation of executives required
by Section 14A(a)(1) ``will occur every 1, 2, or 3 years.'' \103\ As
proposed, Rule 14a-21(b) would also clarify that the separate
shareholder vote on the frequency of shareholder votes on executive
compensation would be required only in a proxy statement for an annual
or other meeting of shareholders for which our rules require
compensation disclosure. Consistent with Section 14A, issuers would be
required to provide the separate shareholder vote on the frequency of
the say-on-pay vote for the first annual or other such meeting of
shareholders occurring on or after January 21, 2011.
---------------------------------------------------------------------------
\103\ Exchange Act Section 14A(a)(2).
---------------------------------------------------------------------------
b. Comments on the Proposed Rule
Comments on the proposal were generally favorable. Many
commentators agreed that the rule did not need to specify the required
language to be used for the shareholder vote on the frequency of
shareholder votes to approve executive compensation.\104\ Some
commentators, however, recommended that the Commission should specify
language or provide non-exclusive examples of resolutions so issuers
would know how the requirement may be satisfied.\105\ A number of
commentators also requested that the Commission clarify whether the
vote should be presented in the form of a resolution given that
shareholders will have a choice among three frequencies
[[Page 6017]]
or abstaining from the frequency vote.\106\ Although some commentators
suggested that we specify which shares are entitled to vote in the
shareholder vote on the frequency of say-on-pay votes,\107\ most
commentators indicated there was no need for the Commission to address
this question.\108\
---------------------------------------------------------------------------
\104\ See, e.g., letters from AFSCME, Business Roundtable, FSR,
Protective Life, and Towers Watson.
\105\ See, e.g., letters from Boeing, Pfizer, PGGM, Society of
Corp. Sec., and Sullivan.
\106\ See, e.g., letters from ABA, Pfizer, Society of Corp.
Sec., and Sullivan.
\107\ See, e.g., letter from the ABA.
\108\ See, e.g., letters from Business Roundtable, FSR, Pfizer,
PGGM, and Protective Life.
---------------------------------------------------------------------------
We also requested comment regarding whether a new issuer should be
permitted to disclose the frequency of its say-on-pay votes in the
registration statement for its initial public offering and be exempted
from conducting say-on-pay votes and frequency votes at its annual
meetings until the annual meeting for the year disclosed in its
registration statement. Most commentators indicated that newly public
companies should not be exempt from the say-on-pay and frequency votes
and should be required to conduct say-on-pay and frequency votes at
their first annual shareholders meeting after the initial public
offering.\109\ However, some commentators expressed support for such an
exemption as it would provide these issuers additional time to
formulate their compensation policies as a public company before
conducting the shareholder votes required by Section 14A.\110\
---------------------------------------------------------------------------
\109\ See, e.g., letters from AFSCME, CII, CalPERS, ICGN, Georg
Merkl (``Merkl''), Public Citizen, and RAILPEN Investments and
Universities Superannuation Scheme (``RAILPEN & USS'').
\110\ See, e.g., letters from ABA, Compensia, Davis Polk, NACD,
and Sullivan.
---------------------------------------------------------------------------
c. Final Rule
After reviewing and considering the comments, we are adopting Rule
14a-21(b) as proposed with slight modifications to clarify that the
frequency vote is required at least once during the six calendar years
following the prior frequency vote.\111\ Under Rule 14a-21(b), issuers
will be required, not less frequently than once every six calendar
years, to provide a separate shareholder advisory vote in proxy
statements for annual meetings to determine whether the shareholder
vote on the compensation of executives required by Section 14A(a)(1)
``will occur every 1, 2, or 3 years.'' \112\ After considering and
reviewing comments on the proposed rule, we do not believe it is
necessary to provide a form of resolution for the vote required by Rule
14a-21(b). In response to concerns raised by commentators and discussed
below, we are also adopting a temporary exemption under which smaller
reporting companies will not be required to conduct a shareholder
advisory vote on the frequency of say-on-pay votes until meetings on or
after January 21, 2013.\113\
---------------------------------------------------------------------------
\111\ As proposed, Rule 14a-21(b) would have required a
frequency vote within the six-year period from the date of the most
recent frequency vote.
\112\ Exchange Act Section 14A(a)(2).
\113\ See discussion in Section II.E below.
---------------------------------------------------------------------------
Rule 14a-21(b) will also clarify that the separate shareholder vote
on the frequency of shareholder votes on executive compensation will be
required only in a proxy statement for an annual or other meeting of
shareholders at which directors will be elected and that such vote is
required only once every six calendar years. Under Rule 14a-21(b),
issuers will be required to provide the separate shareholder vote on
the frequency of the say-on-pay vote for the first annual or other such
meeting of shareholders occurring on or after January 21, 2011. After
reviewing the comment letters, we continue to believe that the say-on-
pay vote and the frequency vote should be required of newly public
companies in the proxy statement for such company's first annual
meeting after the initial public offering. This will give shareholders
the opportunity to express a view on these matters while the company is
in the process of establishing policies that will apply as a public
company and could benefit from understanding its shareholders' point of
view.
2. Item 24 of Schedule 14A
In order to implement the requirements of Section 14A(a), we
proposed new Item 24 to Schedule 14A, to briefly explain the general
effect of the frequency vote, such as whether the vote is non-binding.
We are adopting this amendment to Sched