Effective April 4, 2011, the SEC adopted final rules implementing shareholder advisory votes on executive compensation as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Upon enactment smaller reporting companies were given a two-year exemption from the compliance requirements. Smaller reporting companies are defined as entities which, as of the last business day of their second fiscal quarter, have a public float of less than $75 million. Beginning in 2013, that exemption expired and now these smaller reporting companies are required to include say-on-pay voting. Although smaller reporting companies have been subject to the rules for a year now, I still encounter questions from the entities as to their obligations and requirements under the rules.
The say-on-pay rules were implemented by adding Section 14A, which requires companies to conduct a separate shareholder advisory vote to approve the compensation of executives, which pay is disclosed pursuant to Item 402 (the “say-on-pay” vote). 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 (the “say-on-frequency” vote). 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 (the “golden parachute” vote).
Say-on-Pay Vote
A say-on-pay vote is a non-binding advisory vote on whether to approve the company’s compensation for its named executive officers as disclosed pursuant to the SEC’s executive compensation disclosure standards (Item 402 of Regulation S-K).
The vote must be held at least once every three calendar years and is required when there is an annual meeting of shareholders at which proxies are solicited for the election of directors. Companies are required to disclose in the proxy statement that separate say-on-pay (and say-on-frequency votes) are being included, and briefly explain the nature of each vote, including that it is non-binding.  Companies must also disclose the current frequency of the say-on-pay votes and when the next say-on-pay vote will occur.
The vote must cover all executive compensation disclosed pursuant to Item 402 of Regulation S-K, including the compensation discussion and analysis (CD&A), if any, the summary compensation table, and the related tables and narrative sections. Note that smaller reporting companies are not required to include CD&A but may do so voluntarily.
The JOBS Act provides an exemption from the say-on-pay and say on golden parachute requirements for emerging growth companies (EGC). An EGC is defined as a company with total annual gross revenues of less than $1 billion during its most recently completed fiscal year that first sells equity in a registered offering after December 8, 2011. Total revenues are as posted on the company’s income statement prepared in accordance with US GAAP. The registered offering of debt securities prior to December 8, 2011, does not disqualify an otherwise qualifying EGC.
The SEC Division of Corporation Finance Compliance and Disclosure Interpretations (C&DI) has provided guidance on suggested language to include in a proxy to explain the vote. For instance, the SEC has provided examples of phrases that can be used to describe the say-on-pay advisory vote, including:
- To approve the company’s executive compensation
- Advisory approval of the company’s executive compensation
- Advisory resolution to approve executive compensation
- Advisory vote to approve named executive officer compensation
Although the vote is advisory and non-binding, it does provide valuable information regarding shareholder confidence and is often used as a factor in institutional investors’ investing decision making and in third-party proxy advisory firms’ recommendations on whether to vote in favor of or against director nominees.
Say-on-Frequency Vote
A say-on-frequency vote is a vote on whether to hold the say-on-pay vote every one, two or three years. The say-on-frequency vote must be held at least once every six calendar years. Proxy statements must disclose whether a separate say-on-frequency vote is being provided, the current frequency of such votes and when the next such vote will occur. Shareholders must be given four choices: whether the say-on-pay vote will occur every (1) one, (2) two, or (3) three years, or (4) to abstain from voting. Companies may include a recommendation on the frequency, as long as shareholders are presented with all four choices.
A company’s decision as to how frequently it will offer say-on-pay voting must be reported on a Form 8-K, which must be filed no later than 150 calendar days after the meeting, but in no event later than 60 days prior to deadline for submission of shareholder proposals for the next meeting. Companies that adopt a policy to hold the say-on-pay vote in accordance with the frequency selected by a majority of the votes cast, may exclude any subsequent shareholder proposal seeking a different frequency for the say-on-pay vote on the basis that such proposal has been “substantially implemented.”
Golden Parachute Vote
A golden parachute vote is only held in connection with a merger, acquisition or similar extraordinary business transactions.  A company that solicits a proxy with respect to such a transaction must disclose any golden parachute arrangements between it and its named executive officers, or between it and the named executive officers of the acquiring company, if the company soliciting the merger proxy is not the acquiring company. Moreover, unless the golden parachute was already subject to a say-on-pay vote, the company must give shareholders a non-binding advisory vote on such golden parachute arrangement.  If there have been changes or modifications to the golden parachute arrangements since the say-on-pay vote, a new advisory vote must be included in the merger proxy.
The disclosure only applies to golden parachute arrangements, which means any arrangements concerning compensation that is based on or otherwise related to the merger or similar transaction, including accelerated vesting of equity awards and enhanced pension or nonqualified deferred compensation benefits, but excluding previously vested equity awards, compensation previously disclosed in the Pension Benefits or Nonqualified Deferred Compensation tables, and compensation from bona fide post-transaction employment agreements. The disclosure is only required with respect to golden parachute compensation that is actually triggered by the subject transaction. The disclosure applies to golden parachute arrangements between either the target or the acquiring company on one hand, and the named executive officers of either the target company or the acquiring company on the other.
The rules require that the disclosure be in tabular format. Tabular disclosure must be presented in the following form. However, companies are encouraged to expand on or modify the chart to take into account their particular circumstances
Footnotes to the table must identify and quantify (i) each separate form of compensation included in each column (other than the “total” column), and (ii) amounts payable under “single-trigger” arrangements vs. amounts payable under “double-trigger” arrangements included in each column (including the “total” column). In contrast to annual proxy reporting requirements, all perquisites (including perquisites with an aggregate incremental value less than $10,000) must be reported, as must the value of all health and welfare plan benefits (including benefits under plans that do not discriminate in favor of executive officers). The narrative disclosure must describe any material conditions or obligations applicable to golden parachute payments (i.e., restrictive covenant agreements), specific circumstances that trigger payment, the form and source of those payments, and any other material factors concerning each agreement.
When an advisory vote is required in addition to the disclosure, the vote is limited to arrangements between the soliciting company and its named executive officers and not the named executive officers of the target company. In the typical case where a target company solicits the merger proxy, a say-on-golden-parachute vote is not required with respect to any golden parachute arrangements between the acquiring company and the named executive officers of the target company.
General Rules Effecting All Section 14A Votes
Shareholder advisory votes on executive compensation, including the say-on-pay and say-on-frequency votes, do not require the filing of a preliminary proxy with the SEC. Section 14A votes are not subject to broker discretionary votes. That is, brokers may not vote uninstructed shares on the say-on-pay, say-on-frequency votes or the say-on-golden-parachute vote.
The Author
Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com
Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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