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SEC Releases Proposed Proxy Rule Amendments

July 15, 2009

For a PDF version of this alert, including all exhibits, click here.


Introduction

On July 10, 2009, the U.S. Securities and Exchange Commission released the text of the proposed amendments to the proxy disclosure rules it had previously announced on July 1. The proposals are subject to a comment period expiring September 15, 2009 and are proposed to take effect with respect to annual reports on Form 10-K and proxy disclosure materials filed on or after January 1, 2010. The Commission is also "exploring" other ways proxy disclosures could be improved and has specifically requested comment on a number of other compensation-related disclosure items.

The proposals are highlighted below.

A.    Enhanced Compensation Disclosure (Item 402 of Regulation S-K)

As proposed, a company would be required to include a new section in its Compensation Discussion and Analysis that provides information about how the company's overall compensation policies for employees create incentives that can affect the company's risk and management of that risk. The company would be required to discuss and analyze its compensation policies and practices for employees generally, including non-executive officers, if risks arising from those compensation policies and practices may have a material effect on the company.

A company would also be required to report the aggregate grant date fair value of equity-based awards granted during the fiscal year to named executive officers and directors (as computed in accordance with FAS 123R) as compensation in the Summary Compensation Table and Director Compensation Table, respectively, rather than reporting compensation based on the dollar amount recognized/accrued for financial statement reporting purposes for that fiscal year.

A more detailed summary of the proposal is available in Exhibit A.

B.    Enhanced Director and Nominee Disclosure (Items 401 and 407 of Regulation S-K)

As proposed, a company would be required to disclose the following with regard to its nominees for director:

  • Each director nominee's experience, skills, and attributes that qualify him or her to serve on the board of the company and on any board committee of which he or she is a member;
  • The directorships held at public companies by each director nominee at any time in the past five years — this would expand the current requirement that calls for disclosure of current directorships; and
  • Certain legal proceedings that occurred in the past 10 years with regard to each director nominee — this would expand the current requirement that calls for disclosure of certain legal proceedings for the past 5 years.

A more detailed summary of the proposal is available in Exhibit B.

C.    New Disclosure about Company Leadership Structure and the Board's Role in the Risk Management Process (New Item 407(h) of Regulation S-K)

As proposed, a company would be required to disclose the following with regard to its leadership structure and its risk management process:

  • Whether the company has chosen to combine or split the principal executive officer and chairman positions;
  • Why the company's principal executive officer/chairman structure is best for the company;
  • If the same person serves as the company's principal executive officer and chairman, whether the company has a lead independent director and, if so, the specific role the lead independent director plays in the company's leadership structure; and
  • The board's role in the company's risk management process and the effect that this role has, if any, on the manner in which the company has organized its leadership structure.

With regard to the requested disclosure regarding risk management, the Commission has indicated that it is seeking disclosure regarding "how a company perceives the role of its board and the relationship between the board and senior management in managing the material risks facing the company." Further, it has provided the following specific examples of the information it is seeking:

  • Whether the board implements and manages its risk management function through the board as a whole or through a committee, such as the audit committee;
  • Whether the persons who oversee risk management report directly to the board as whole or to a standing committee of the board (and, if it reports to a standing committee, which committee); and
  • Whether and how the board, or board committee, monitors risk.

A more detailed summary of the proposal is available in Exhibit C.

D.    New Disclosure Regarding Compensation Consultants (Item 407 of Regulation S-K)

If a compensation consultant plays a role in determining or recommending the amount or form of executive or director compensation and that compensation consultant or any of its affiliates performs additional services (such as human resources or benefit plan consulting) for the company or any of its affiliates, the company would be required to describe the nature and extent of the additional services, the fees for the executive or director compensation engagement and the aggregate fees for all the additional services, whether the decision to engage the consultant for the additional services was made or recommended by management, and whether the additional engagement had been approved by the compensation committee or the board.

A more detailed summary of the proposal is available in Exhibit D.

E.    Reporting of Voting Results on Form 8-K (New Item 5.07 to Form 8-K)

As proposed, a company would be required to disclose on a Form 8-K the voting results of any matter submitted to a shareholder vote within four business days after the end of the meeting at which the vote was held. If the vote relates to a contested election of directors and the voting results are not definitively determined at the end of the meeting, the company would be required to file a Form 8-K with the preliminary voting results within four business days after the preliminary voting results are determined. The company would then file an amended Form 8-K — with the final voting results — within four business days after certification of the final voting results.

A more detailed summary of the proposal is available in Exhibit E.

F.    Proxy Solicitation Process

As proposed, the following proxy rules governing the proxy solicitation process would be amended:

  • Exchange Act Rule 14a-2(b)(1) — to provide that an unmarked copy of management's proxy card that is requested to be returned directly to management is not a "form of revocation";
  • Exchange Act Rule 14a-2(b)(1)(ix) — to clarify that a person need not be a security holder of the class of securities being solicited and a benefit need not be related to or derived from any security holdings in the class being solicited to disqualify the person from relying on the exemption in Exchange Act Rule 14a-2(b)(1);
  • Exchange Act Rule 14a-4(d)(4) — to permit a person soliciting in support of nominees who, if elected, would constitute a minority of the board to seek authority to vote for another soliciting person's nominees in addition to or instead of the company's nominees in order to round out its short slate;
  • Exchange Act Rule 14a-4(e) — to provide that reasonable specified conditions under which the shares represented by a proxy will not be voted must be objectively determinable; and
  • Exchange Act Rule 14a-12(a)(1)(i) — to require that participant information be filed under cover of Schedule 14A in a proxy statement or other soliciting materials no later than the time the first soliciting communication is made.

A more detailed summary of the proposal is available in Exhibit F.

G.    Additional Items

In addition to the above proposals, the Commission has requested comment on a number of other compensation-related disclosure issues, including whether compensation disclosures in a company's proxy statement should cover all of the company's executive officers (not just the named executive officers), eliminating the instruction that provides that performance targets may be excluded based on the potential for competitive harm and/or requiring disclosure of the targets after the related performance period has ended, requiring that compensation committee reports be "filed" rather than merely "furnished," requiring disclosure of whether a member of the compensation committee has expertise in compensation matters and whether the committee has the resources to hire its own independent counsel, enhanced disclosures regarding stock holding requirements and claw back provisions, and whether internal pay equity should be addressed (e.g., by requiring a comparison of executive compensation levels or executive to average non-executive compensation levels). While the Commission has not yet proposed any new rules with respect to these items, it is clear the Commission is taking a fresh and wide-sweeping look at its compensation disclosure requirements.