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Say-On-Pay and Say-On-Frequency Votes for Smaller Reporting Companies

01.24.13

About two years ago, the Securities and Exchange Commission adopted rules implementing provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (.PDF) that require public companies subject to the SEC’s proxy ru les to conduct two non-binding shareholder-advisory votes at annual meetings:

  • A vote to approve the compensation of the named executive officers as described in the proxy statement for the meeting (a “say-on-pay vote”); and
  • A vote on whether the company’s say-on-pay vote should be held annually, every second year, or every third year (a “say-on-frequency vote”).

Those votes were first required for most public companies beginning with an annual meeting held on or after January 21, 2011, but the requirement was delayed for smaller reporting companies. Effective for annual meetings held on or after January 21, 2013, however, smaller reporting companies will be required to conduct a say-on-pay vote and a say-on-frequency vote.

Say-on-pay vote:  The say-on-pay vote applies to the description of named executive officer (“NEO”) compensation in the proxy statement. The description of the say-on-pay proposal in the proxy statement must include:

  • A statement that the vote is required by Section 14A of the Securities Exchange Act of 1934;
  • A resolution to approve the NEO compensation as disclosed in the proxy statement as required by Item 402 of Regulation S-K or other SEC rules; and
  • A description of the general effect of the resolution, including that it is non-binding.

In its release adopting the rules, the SEC provided an example of a resolution, but in one of its Compliance and Disclosure Interpretations, Question 169.05, the SEC has acknowledged some flexibility in the wording of the resolution.  A smaller reporting company that does not include (as permitted) a “Compensation Discussion and Analysis” section in its proxy statement under Item 402 of Regulation S-K may wish to revise the reference to Item 402 of Regulation S-K in the SEC’s resolution example to something more general, like “the compensation disclosure rules of the Securities and Exchange Commission.”  The form of proxy must include a corresponding item regarding approval, and in its C&DI Question 169.07, the SEC has approved certain examples of the item for the form of proxy. Otherwise, the SEC’s rules do not require any specific disclosure.

Say-on-frequency vote:  The say-on-frequency vote is whether a say-on-pay vote will be held annually, every second year, or every third year.  The say-on-frequency vote must be held with the first say-on-pay vote and then at least once every six calendar years thereafter.  The description of the say-on-frequency proposal in the proxy statement must include:

  • A statement that the vote is required by Section 14A of the Securities Exchange Act of 1934;
  • A statement of the alternatives — i.e., a say-on-pay vote every year, every second year, or every third year; and
  • A description of the general effect of the vote, including that it is non-binding.

The SEC has confirmed that the proposal for the say-on-frequency vote need not be in the form of a resolution. A smaller reporting company is not required to recommend a frequency of say-on-pay votes to its shareholders. But if no such recommendation is included in the proxy statement, the company’s designated proxy holders may not vote uninstructed proxies received on that matter. Accordingly, the proxy statement of most larger companies that have conducted say-on-frequency votes has included the company’s recommended frequency, with the reasons for that recommendation.  The form of proxy must include a corresponding item regarding approval.  In its C&DI Question 169.06, the SEC has approved language for the proxy item stating either “every 1, 2, or 3 years, or abstain” or “every year, every other year, or every three years, or abstain.”

Reporting on votes and frequency:  Item 5.07 of Form 8-K (.PDF) requires that the results of the say-on-pay and the say-on-frequency votes be disclosed, with the results of other votes at the shareholders’ meeting, on a Form 8-K filed within four business days after the date of the meeting. If not disclosed in that filing, the Item requires that the Form 8-K be amended to state the company’s decision regarding the frequency of subsequent say-on-pay votes (in light of the result of the say-on-frequency vote). That amendment must be filed within 150 days after the date of the shareholders’ meeting or 60 days before the due date for any shareholder proposal to be included in the company’s proxy statement for the next annual meeting, whichever is earlier.

Practices to be considered:  A review of proxy statements of larger public companies that have previously conducted their say-on-pay and say-on-frequency votes reveals the following practices regarding those votes that a smaller reporting company might consider using:

  • Focus the NEO-compensation-related disclosure in the proxy statement on supporting the say-on-pay vote. If a smaller reporting company does not include a CD&A section in its proxy statement, the disclosure corresponding to the say-on-pay resolution should describe or explain, and justify or support, the company’s approach to compensating its NEOs and the types and amounts of their compensation.  If a smaller reporting company typically includes a CD&A section in its proxy statement, the disclosure in that section might be re-oriented toward not merely describing, but also justifying or supporting, the company’s approach to compensating its NEOs. 
  • Emphasize the extent to which NEOs are compensated based on company or personal performance.  A smaller reporting company may wish to include a more detailed description of individual performance goals and achievements. If achieved performance (e.g., resulting in a bonus) is measured by reference to a numerical standard, the company might find it advantageous to use illustrative charts or graphs. Performance need not be subject to quantitative measurement, however. If achieved performance is not measured by reference to a numerical standard, the company may need to include a more extensive description of the standard or the judgment made.
  • If the smaller reporting company includes in its proxy statement a CD&A section complying with Item 402 of Regulation S-K, begin with an executive summary and describe “realizable” or “realized” compensation.  An executive summary might describe the key financial and other business results in the last fiscal year, the effects of those results on NEO compensation, and the significant policies and practices adopted and implemented regarding NEO compensation in the last fiscal year. Because certain of the NEO compensation tables required by Item 402 of Regulation S-K use SEC-specified values (e.g., for equity grants), a smaller reporting company may wish to supplement the required disclosure with statements regarding the “realizable” or “realized” value of the corresponding items of NEO compensation using actual (rather than specified or assumed) values.

OUR TAKE: The requirements regarding the say-on-pay and say-on-frequency votes are not extensive or complicated, but a smaller reporting company should begin to evaluate how best to communicate its NEO compensation policies, practices, and results to its shareholders so that the votes are favorable.

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