On January 25, 2011, the Securities and Exchange Commission (SEC) officially adopted final rules implementing Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This so-called “Say-on-Pay” provision establishes three new shareholder-voting requirements for large companies subject to federal proxy rules. First, such companies must provide shareholders with a non-binding vote on executive compensation at least once every three years. Second, large companies must give shareholders a non-binding vote establishing the frequency with which they engage in the say-on-pay vote at least once every six years. Finally, shareholders must be given a separately held advisory vote on “golden-parachute” arrangements and understandings in connection with mergers and acquisitions and other transactions, including going-private transactions and third-party tender offers.
For large reporting companies, the non-binding vote on executive compensation as well as the non-binding vote on frequency must be had at the first shareholder meeting after January 21, 2011. However, smaller reporting companies are not required to hold a say-on-pay or frequency vote until the first shareholder meeting to occur after January 21, 2013. New regulations regarding golden-parachute votes and disclosures will become effective after April 25, 2011.
Interestingly, preliminary results of S&P 500 companies show shareholders voting in favor of annual say-on-pay votes. Air Products, Costco, Jacobs Engineering Group, Johnson Controls, and Monsanto shareholders all voted in favor of annual voting, despite all five companies proposing triennial voting in their proxy materials. In response, both Costco and Monsanto have already announced that they will yield to the wishes of their shareholders and hold annual say-on-pay votes. Bucking the trend, Tyson Foods stockholders voted overwhelmingly in favor of a triennial vote. However, this is likely because a single insider holds 69.8% of Tyson Foods voting power. Thus far, it appears that the only companies to succeed in achieving a triennial vote are small, highly controlled companies.
In addition to frequency voting, two companies have held say-on-pay votes since the passage of the new regulations. Atlanta-based Beazer Homes USA and California-based Jacobs Engineering Group both submitted executive compensation schemes for voter approval, only to be met with opposition. 53.7 percent of Jacobs’ shareholders voted against the company’s compensation practices. Neither firm has announced a response to the advisory votes.
These frequency and say-on-pay results demonstrate the importance of a company effectively communicating and persuading shareholders of the soundness of its proposed vote frequency and executive compensation plan. The law firm of Fenwick & West has issued a client advisory making recommendations for companies preparing 2011 proxy materials. In order to accomplish this goal it is imperative that companies create proxy materials that inform voters of how the compensation decision was determined, and persuade voters that the decision is sound. Finally, the proxy materials must include persuasive rationales for voting frequency.
Michael Perez And the SEC Issues Final Say-On-Pay Rules, Berkeley Bus L.J.. Network (February 19, 2011), http://thenetwork.berkeleylawblogs.org/2011/02/19/sec-issues-final-say-on-pay-rules/