SEC Issues Proposed Rules on "Say-on-Pay" Under Dodd-Frank

02 November 2010 Publication
Authors: Joshua A. Agen Patrick G. Quick John K. Wilson

Legal News Alert: Transactional & Securities

On October 18, 2010, the SEC proposed rules to implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) mandating advisory shareholder votes on executive compensation (the so-called “say-on-pay” and “say-when-on-pay” votes) and golden parachute arrangements.1 Comments on the proposed rules are due by November 18, 2010, and the SEC has indicated it expects to adopt final rules between January and March 2011. Some highlights:

  • Say-on-pay and say-when-on-pay do not require filing of preliminary proxy materials, and that relief is available now
  • Some companies will need to prepare proxy materials and hold votes on these subjects before the rules become final
  • The scope of say-on-pay is the compensation of the company’s named executive officers, as such compensation is disclosed pursuant to Item 402 of Regulation S-K, and the scope does not include director pay or compensation-related risks
  • The rules would not dictate a required vote for approval of say-on-pay or say-when-on-pay proposals, as discussed further below
  • Troubled Asset Relief Program (TARP) companies do not need to comply with the new say-on-pay or say-when-on-pay requirements while they continue to have TARP status
  • All the votes are advisory rather than binding
  • The SEC is proposing some relief from Rule 14a-8 shareholder proposals on say-on-pay and say-when-on-pay


Dodd-Frank requires publicly traded companies to include in their proxy statements for shareholder meetings, at least once every three years, a separate resolution subject to shareholder vote to approve the compensation of their named executive officers as disclosed under Item 402 of the SEC’s Regulation S-K. This requirement applies to shareholder meetings held on or after January 21, 2011.

The SEC proposes to implement the Dodd-Frank say-on-pay provisions through a new rule (Rule 14a-21) that would require the say-on-pay vote to be included in the first solicitation relating to a meeting of shareholders on or after January 21, 2011 for which Item 402 disclosure of executive compensation is required and at least once every three years thereafter. Under the rule, no required form is specified for the shareholder resolution. The release indicates that shareholders would vote to approve the compensation of the issuer’s named executive officers, as such compensation is disclosed pursuant to Item 402 of Regulation S-K, including the Compensation Discussion & Analysis (CD&A), the compensation tables, and other narrative executive compensation disclosures required by Item 402. The vote would not address the issuer’s disclosure concerning director compensation or the issuer’s assessment of compensation-related risks that is not part of the CD&A. The rule would not preclude issuers from seeking additional shareholder votes on specific aspects of their pay programs.

The rules would not specify a voting standard to be used for determining whether a say-on-pay proposal has been approved. The advisory nature of the vote may mean that the voting standard is less important than the margin of passage, but as is customary for advisory votes to ratify the selection of independent auditors, companies may use a state law standard to determine whether the proposal has been approved. However, a small margin of passage — for example, approval by a vote of 51 percent in favor and 49 percent opposed — may result in pressure on the issuer to modify its pay practices in response to the significant vote in opposition despite the fact that the say-on-pay proposal was approved as measured by applicable voting standards. 

The proposed rules also would require the CD&A section of the proxy statement to address whether the issuer has considered the results of previous shareholder advisory votes on executive compensation (as well as previous votes on golden parachutes, which are discussed below) and, if so, how it has considered such results and the effect of such consideration on its executive compensation decisions and policies.


Dodd-Frank also requires issuers to include in their proxy statements, consents or authorizations for shareholder meetings an additional separate resolution subject to shareholder vote to determine whether the say-on-pay vote will occur every one, two, or three years. This say-when-on-pay vote must occur at the first shareholder meeting held after January 20, 2011 and at least once every six years thereafter.

In the release setting forth its proposed rules, the SEC clarifies that the say-when-on-pay vote, like say-on-pay, would be non-binding despite Dodd-Frank’s description of the vote as “determin[ing]” frequency of say-on-pay. The SEC’s proposed rules would require that shareholders be given four choices as part of say-when-on-pay: to vote that say-on-pay occur every one, two, or three years, or to abstain. The issuer’s board of directors would be permitted to recommend one of the first three alternatives to shareholders, but would still require that all four be clearly presented to shareholders and would require disclosure that shareholders are not voting to approve or disapprove the recommendation.

In the release, the SEC did not prescribe a voting standard for determining which alternative shareholders have approved, stating that it does not believe it is necessary to do so since the vote is advisory. Under the proposed rules, however, issuers that implement the say-when-on-pay alternative receiving a plurality of votes would be able to exclude certain shareholder proposals under Rule 14a-8 as described below.

Other Matters Relating to Say-on-Pay and Say-When-on-Pay

No Preliminary Proxy Statement Required
The SEC proposes to eliminate the requirement to file a preliminary proxy statement because the proxy statement includes say-on-pay or say-when-on-pay. The SEC also indicated that, until it adopts final rules, it will not object if issuers do not file preliminary proxy statements for say-on-pay or say-when-on-pay. Accordingly, if a proxy statement includes only matters that are exempt from the preliminary proxy statement filing requirements under current rules, say-on-pay, and say-when-on-pay, a preliminary proxy filing is not required. 

Potential Delay in Four Alternatives Requirement for Say-When-on-Pay
With respect to the requirement to present four voting alternatives on say-when-on-pay, the SEC indicated that, if proxy service providers are not able to reprogram their systems to enable four alternatives in time for a shareholder vote, the SEC will not object if the form of proxy provides a means whereby the person solicited is afforded an opportunity to specify by boxes a choice among one, two, or three years and a failure to select any of these three is treated as an abstention.

Possible Exclusion for Shareholder Proposals on Say-on-Pay and Say-When-on-Pay
In connection with its say-on-pay and say-when-on-pay rules, the SEC proposes to amend Rule 14a-8 on shareholder proposals to permit issuers to exclude as “substantially implemented” shareholder proposals seeking say-on-pay or relating to the frequency of say-on-pay if 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 say-when-on-pay vote.

Disclosure of Response to Say-When-on-Pay
The SEC also proposes to amend Forms 10-K and 10-Q to require disclosure for a quarter in which a say-when-on-pay vote occurs of the issuer’s decision on how frequently it will conduct say-on-pay in light of the vote.

Disclosure of Non-Binding Nature of Vote
The proxy rules would require an issuer to briefly explain the general effect of the votes on these matters, including, for example, the non-binding nature of each vote.

Temporary Exemption for TARP Companies
The rules would generally exempt from say-on-pay and say-when-on-pay issuers that are already required to conduct a shareholder vote on executive compensation because they have received financial assistance under the TARP until they are no longer required to conduct such a vote under TARP. In addition, until final rules are adopted, the SEC has indicated that it will not object if companies with outstanding TARP indebtedness do not include a say-when-on-pay resolution, or a separate Dodd-Frank say-on-pay resolution, in its annual meeting proxy materials.

Broker Discretionary Voting
The SEC discusses recent rule amendments that stock exchanges have begun making to prohibit broker discretionary voting of uninstructed shares in matters relating to executive compensation. These amendments are intended to comply with Dodd-Frank requirements to prohibit such discretionary voting. Under the amendments, broker discretionary voting of uninstructed shares would not be permitted for say-on-pay or say-when-on-pay votes. Accordingly, companies will need to focus efforts to get favorable votes on these subjects as well as other matters relating to executive compensation.

Disclosure and Vote on Golden Parachute Compensation Arrangements

Dodd-Frank requires that any proxy solicitation material for a meeting of shareholders occurring on or after January 21, 2011 at which shareholders are requested to approve an acquisition, merger, consolidation, or proposed disposition of all or substantially all the assets of the issuer:

  • Disclose in a clear and simple form in accordance with SEC rules any agreements or understandings that the entity soliciting proxies has with any named executive officers of the issuer (or of the acquirer) concerning any compensation (whether present, deferred, or contingent) that is based on or otherwise relates to the business combination being voted on (i.e., “golden parachute compensation arrangements”), as well as the aggregate total of all such compensation that may be paid or become payable to or on behalf of such executive officer and the conditions under which it may be paid or become payable.
  • Include a separate resolution subject to shareholder vote to approve such agreements or understandings and compensation as disclosed, unless such agreements or understandings have been subject to a say-on-pay shareholder vote. This vote on so-called golden parachutes will not be binding and expressly may not be construed as overruling any of the board's decisions or creating or implying any change or addition to any fiduciary duties.

The SEC’s proposed rules would create a new Item 402(t) of Regulation S-K that would require disclosure with respect to golden parachute compensation arrangements between the target company or the acquiring company, on one hand, and the named executive officers of either the target or the acquirer, on the other hand. This disclosure would be broader than that required by Dodd-Frank in that it would apply to compensation arrangements between the acquirer and the named executive officers of the target even if only the target, and not the acquirer, were the entity soliciting proxies. The shareholder vote under the proposed rules would not include such arrangements if the acquirer were not soliciting proxies.

The required disclosure would consist primarily of a table disclosing amounts payable under golden parachute compensation arrangements. Footnote disclosure would be required to indicate which amounts are attributable to “single-trigger” arrangements and which are attributable to “double-trigger” arrangements.

As noted above, a separate shareholder vote on golden parachute compensation arrangements is required in connection with a transaction only to the extent the arrangements have not already been subject to a say-on-pay vote (regardless of the outcome of that vote). To secure this exemption, however, the disclosure associated with the say-on-pay vote would need to meet the Item 402(t) standards described above, and the arrangements could not have been modified between the say-on-pay vote and the time at which shareholder approval of the transaction is sought. To the extent the arrangements have been modified, the new arrangements or modified provisions must be subject to the separate vote in connection with the transaction.

Smaller Reporting Companies

Smaller reporting companies (generally those with a public float of less than $75 million) would generally be subject to the rules on advisory shareholder votes with the exception of the requirement to discuss in CD&A how prior votes have been considered in determining executive compensation policies and decisions, since such companies are not required to provide CD&A disclosure. The release notes, however, that smaller reporting companies, like other issuers, are required to provide a narrative description of any material factors necessary to an understanding of the information disclosed in the Summary Compensation Table and that, if consideration of prior shareholder votes on executive pay is such a factor, disclosure would be required.


1 The proposing release is available at


Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.

If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:

Patrick G. Quick
Milwaukee, Wisconsin

John K. Wilson
Milwaukee, Wisconsin

Joshua A. Agen
Milwaukee, Wisconsin


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