There were a number of important developments in 2009 in the areas of public company disclosure, executive compensation and corporate governance, in large part triggered by the current financial crisis. The key items companies should consider as they enter the 2010 proxy season include:
- Newly adopted amendments to SEC rules governing executive compensation and corporate governance disclosures in proxy statements and other documents filed with the SEC, which will be effective for the 2010 proxy season.
- The amendment of NYSE Rule 452 to eliminate discretionary broker voting in uncontested director elections.
- Amendments to the Delaware General Corporation Law providing explicit statutory authority for bylaws requiring Delaware corporations to reimburse proxy solicitation expenses incurred by a stockholder nominating the stockholder’s own director(s), and to include stockholder-proposed nominees for director in the corporation’s proxy materials under certain circumstances.
- Guidance from SEC staff regarding executive compensation disclosure in 2009 and what companies should expect from the SEC’s comment process in 2010.
- Significant updates to RiskMetrics Group voting policies.
- Other amendments to existing NASDAQ and NYSE rules.
The SEC also proposed rules in 2009 which would, under certain circumstances, require a company to include shareholder nominees for director in the company’s proxy materials (i.e., “proxy access”). The SEC’s proposing release is available here. The SEC has indicated that it will likely act on the proposed rules in early 2010 in connection with its broader review of the proxy voting process (at times referred to as the “proxy plumbing”). While it appears that the proposed proxy access rules will not be effective for the 2010 proxy season, companies should continue to monitor this development closely.
Requiring companies to provide shareholders with an annual advisory vote on executive compensation (“say-on-pay”) was also a hot topic in 2009. While no say-on-pay requirements have become applicable to public companies generally, certain financial institutions that received government assistance in connection with the current financial crisis were required to include non-binding say-on-pay proposals in their proxy statements for annual meetings beginning in 2009, and a number of companies, including Intel Corporation, The Goldman Sachs Group, Inc. and Occidental Petroleum Corporation, announced agreements to voluntarily hold advisory say-on-pay shareholder votes. In addition, numerous pieces of financial industry reform legislation were introduced in Congress in 2009.1 Reforms proposed include proposals to require all public companies to hold non-binding say-on-pay votes at their annual meetings, mandate proxy access, board chair independence and majority election of directors, and eliminate classified boards. While it is too soon to predict whether any of these bills will become law, and if so, what form they will ultimately take, these topics are likely to be the focus of much attention in 2010.
Proxy Disclosure Enhancements
On December 16, 2009, the SEC approved amendments to its rules governing executive compensation and corporate governance disclosures in proxy statements and other documents filed with the SEC. The new rules will become effective on February 28, 2010 and require, among other things, new or additional disclosure regarding the effect of compensation policies on risk taking, equity grant reporting, director qualifications, board oversight of risk, and independence of compensation consultants. The SEC release adopting the final rules is available here. These rules will require reporting companies to take a number of actions promptly, including updating their D&O questionnaires and engaging in discussions with their directors regarding a number of topics, including risk oversight. For a review of the new rules and suggestions for preparing your company's upcoming proxy statement, read our Corporate Update dated December 29, 2009, available here.
Elimination of Broker Discretionary Voting in Uncontested Director Elections
In July 2009, the SEC approved an amendment to NYSE Rule 452, which governs discretionary voting by brokers of shares held in street name when the beneficial owners have not provided instructions regarding how the shares should be voted. As amended, Rule 452 provides that uncontested director elections (except those at registered investment companies) are non-routine matters. Therefore, brokers can no longer vote shares in these elections in favor of management’s slate without specific instructions from the beneficial owner. The amendment is effective for all shareholder meetings held on or after January 1, 2010. It applies to all brokers; thus, its impact is not limited to NYSE-listed companies. For an analysis of the significant potential effects of this development on public company director elections, read our Corporate Update dated July 1, 2009, available here.
DGCL Amendments Regarding Proxy Access and Expense Reimbursement Bylaws
Effective in August 2009, new Sections 113 and 112 of the Delaware General Corporation Law were adopted. These Sections provide explicit statutory authority, respectively, for bylaws requiring Delaware corporations to (i) reimburse proxy solicitation expenses incurred by a stockholder nominating the stockholder’s own director(s), and (ii) include stockholder-proposed nominees for director in the corporation’s proxy materials, in each case under certain prescribed circumstances. The new provisions are enabling only and do not mandate adoption of bylaws requiring reimbursement and access as described. They do, however, eliminate any doubt as to the validity under the DGCL of such bylaws. Stockholders in Delaware corporations may well be encouraged by these new provisions to propose expense reimbursement and proxy access bylaws in the 2010 proxy season, in order to more easily participate in director elections. For more information about the new provisions, see our Corporate Update dated April 16, 2009, available here.
SEC Staff Observations and Other Guidance – Executive Compensation, Corporate Governance and Shareholder Proposals
Companies should review and update their Compensation Discussion & Analysis disclosures and related compensation tables to address noteworthy recent observations by SEC staff and recently published staff guidance, including:
Observations From Deputy Director Parratt. In a November 2009 speech, entitled “Executive Compensation Disclosure: Observations on the 2009 Proxy Season and Expectations for 2010,” Shelley Parratt, Deputy Director of the SEC’s Division of Corporation Finance, discussed her observations regarding 2009 executive compensation disclosures and her thoughts regarding what companies should expect from the SEC’s disclosure review program in 2010.
2009 Disclosures. The two areas on which Ms. Parratt focused her observations regarding 2009 executive compensation disclosures were CD&A analysis and performance targets. Summarized below are a number of Ms. Parratt’s observations regarding these areas:
- Analysis. Discussions of how and why companies made the executive compensation decisions they did have improved, but many companies are using too much detail to describe the framework in which they made compensation decisions, as opposed to explaining the decisions themselves. Stressing that companies need to do more than recite what they or their compensation committees did or did not do, and what tools (e.g., tally sheets, wealth accumulation analyses, and internal pay equity analyses) they used to make their compensation decisions, Ms. Parratt urged companies to discuss how these tools were used to set compensation, and why those decisions were made. If determinations were made based on subjective decisions, companies should clearly state that fact, rather than indicating that the decisions were made “based on unspecified qualitative factors.” Noting that investors are growing ever more frustrated by the increasing length of company CD&As and use of boilerplate language, Ms. Parratt encouraged companies to tighten up their disclosure and delete “unnecessary background and process-oriented information.”
- Performance targets. Ms. Parratt noted that the staff issues more comments on performance targets than on any other item relating to executive compensation disclosure, and reminded companies of the basic rule that if they have determined that specific performance targets are material to their executive compensation policies and decisions, specific (and if applicable, quantitative) disclosure of those targets must be provided unless the disclosure would result in substantial competitive harm. Ms. Parratt also indicated that if a company omits performance targets based on a determination that disclosure would result in competitive harm, it needs to “disclose with meaningful specificity how difficult or likely it would be for the company or executive to achieve the undisclosed target,” providing support for its assertion.
2010 Disclosures and the SEC Comment Process. Perhaps most significantly, Ms. Parratt warned that companies should not wait for an SEC review to force them to comply with the SEC’s disclosure rules, suggesting that the SEC will not be inclined, going forward, to permit companies to comply with comments in future filings. If a company fails materially to comply with the rules, Ms. Parratt stated that it should be prepared to amend its filings based on any SEC comments it receives. Ms. Parratt also encouraged companies to think broadly when preparing the CD&A, providing disclosure that would be material to an understanding of their compensation policies and decisions even if such disclosure would be outside the non-exclusive examples provided by the SEC in Item 402(b) of Regulation S-K. In addition, she emphasized that companies should focus on making disclosure “more meaningful and understandable.” Specific items that companies need to address in the upcoming proxy season include:
- Analysis. When explaining the decision-making processes relating to compensation, be sure to provide an explanation of why the company made the compensation decisions it made.
- Performance Targets. Provide specific disclosure of performance targets if the company has stated in its filing that a material element of executive compensation was determined based on the achievement of such targets (or explain how the disclosure would cause competitive harm if targets are not disclosed, and include meaningful disclosure regarding the difficulty of achieving the undisclosed target).
- Peer Groups. If benchmarking is utilized, disclose the names of peer group members, and discuss how they were selected and where the awards actually ended up as compared to the benchmark.
The full text of Ms. Parratt’s speech is available here.
Updated SEC Staff Guidance.
- C&DIs. During 2009, the SEC staff updated a number of its Compliance & Disclosure Interpretations, including with respect to certain aspects of Regulation S-K and Form 8-K. The updated C&DIs are available here. Companies should watch for the SEC to update the C&DIs further in light of the recently adopted proxy disclosure enhancement rules, in particular the amendments to Item 402 of Regulation S-K regarding equity grant reporting.
- Shareholder Proposals. In October 2009, the staff of the SEC’s Division of Corporate Finance issued Staff Legal Bulletin No. 14E (CF). SLB 14E provides current guidance regarding the application of Exchange Act Rule 14a-8(i)(7) to shareholder proposals relating to risks, and those focusing on succession planning for company CEOs. In evaluating a no-action request from a company seeking to exclude a shareholder proposal relating to risk, the staff will no longer focus on whether the proposal and the supporting statement as a whole relate to the company engaging in an evaluation of risk (which had previously been viewed by the staff as excludable because it related to a company’s ordinary business operations). Instead, the staff will look to the underlying subject matter to which the risk pertains. A proposal will generally not be excludable under Rule 14a-8(i)(7) if the underlying subject matter “transcends the day-to-day business matters of the company” and raises policy issues that are significant enough to warrant a shareholder vote. The staff notes that proposals focusing on a board’s role in overseeing risk management may fit these criteria, in light of the “widespread recognition” that a board’s risk management oversight role is a significant policy matter relating to corporate governance. The staff also indicates in the Bulletin its view that, going forward, companies generally will not be able to rely on Rule 14a-8(i)(7) to exclude proposals focusing on CEO succession planning. A copy of SLB 14E is available here.
RiskMetrics Group 2010 Voting Policies and 2009 Post Season Report Summary
2010 Voting Policies. In November 2009, RiskMetrics published its 2010 corporate governance policy updates, which will be effective for shareholder meetings held on or after February 1, 2010. Key changes to existing RiskMetrics voting guidelines include policy updates on executive compensation evaluation, voting for directors for the adoption or renewal of non-shareholder approved poison pills, director independence, and greenhouse gas emissions. Companies should familiarize themselves with these policy updates as they prepare for the upcoming proxy season. An executive summary and the complete set of policy updates are available here.
2009 Postseason Report Summary. Companies should also refer to the summary of the Riskmetrics Postseason Report issued in October 2009 for some of the 2009 proxy season trends, as topics that dominated the last proxy season are likely to arise again in the 2010 proxy season and trends seen last year could continue into this year. A copy of the summary is available here.2
What to Expect From Shareholder Proponents in 2010
In light of the current economic and regulatory environment, shareholder proponents may well bring proposals in the 2010 proxy season relating to the following topics:
- mandated proxy access,
- annual shareholder say-on-pay advisory votes,
- mandated majority voting in director elections,
- elimination of staggered boards,
- mandated separation of CEO and board chair roles,
- shareholder ability to call special meetings, and
- DGCL proxy access and reimbursement bylaws.
Amendments to Exchange Rules, Manuals
While the amendment of NYSE Rule 452 represents the most significant modification to Exchange rules in 2009, there were a number of more modest changes both to NASDAQ and NYSE rules during the year.
Amendments to NASDAQ Listing Requirements Related to the Distribution of Annual Reports. In January 2009, NASDAQ filed with the SEC proposed changes to its rules relating to the distribution of annual reports. The rule changes, which were immediately effective upon filing with the SEC, permit listed companies to satisfy their obligations (imposed by NASDAQ rule) to make annual reports available to shareholders by following the requirements related to “Internet Availability of Proxy Materials” contained in Exchange Act Rule 14a-16.
Reorganization of NASDAQ Listing Rules. In March 2009, NASDAQ amended its rules relating to the qualification, listing and delisting of NASDAQ companies found in the Rule 4000 Series of the NASDAQ manual to make the rules more transparent and clear. The rules have been restated in a simpler format in a Rule 5000 Series, and NASDAQ has indicated that the changes were not intended to be substantive. Companies whose D&O questionnaires include references to NASDAQ rules in the 4000 Series should update their questionnaires to refer to the appropriate Rule in the 5000 Series.
Changes to Rule Regarding Disclosure of Non-Conforming Corporate Governance Practices. In May 2009, NASDAQ amended Rule 5615(a)(3) to reflect changes to the SEC’s Form 20-F that were adopted in September 2008. Form 20-F requires companies that file an annual report on Form 20-F to discuss significant differences in their corporate governance practices compared to the corporate governance practices applicable to domestic companies under the relevant exchange’s listing standards, whereas NASDAQ Rule 5615(a)(3) permitted foreign private issuers to disclose their non-conforming corporate governance practices in their annual reports or registration statements filed with the SEC or on their websites. The amendment deletes the option to disclose non-conforming practices on a company’s website. Additional conforming changes were made to IM-5605-4 to reflect changes made by the SEC in the smaller reporting company amendments which became fully effective in March 2009.
Amendments to Sections 303A and 307.00 of the NYSE Listed Company Manual (Corporate Governance Disclosures). In November 2009, the SEC approved amendments to certain corporate governance disclosure requirements appearing in Sections 303A and 307.00 of the NYSE Listed Company Manual, largely to clarify some of the requirements, codify certain existing interpretations, and eliminate requirements that are duplicative of the requirements of Item 407 of Regulation S-K. For example, the requirements in Section 303A regarding disclosure of a company’s independent directors, the basis on which its board may determine that a director is independent, and (for a controlled company) any exemptions from the independence requirements upon which the company has relied that were similar to existing requirements of Item 407 of Regulation S-K, were eliminated and the applicable Item 407 requirements were incorporated directly into Section 303A. In addition, former Section 307.00, regarding related party transactions, was eliminated as duplicative of Section 314.
MD&A Disclosure. SEC Deputy Director Parratt also provided some comments and suggestions regarding MD&A disclosure for the coming season at a recent conference. Ms. Parratt was reported to have noted that:
- MD&A discussions of liquidity, including the material terms of financial covenants, should be “robust” in light of the current economic environment.
- Companies are likely to be asked about their ability to raise capital, as well as about reserves and loan losses.
- The staff will look closely at a company’s filings if its Form 10-K disclosure appears to conflict with other accounting standards or other public information about the company, or if its content or clarity is deficient. Companies should ensure that the MD&A disclosure is consistent with the rest of the filing and that it presents a full picture of the company’s operations.
- The staff looks carefully at goodwill and impairment of assets, and will ask a company about those topics if the staff sees indicators of an impairment and the company did not take a charge for it in the prior year. Companies may also be asked to disclose their methods for determining fair value and the risks to their key assumptions.
XBRL Mandate. In December 2008, the SEC voted to require specified companies and mutual funds to provide financial statements, notes and schedules to the SEC in an interactive data format which uses eXtensible Business Reporting Language (“XBRL”).3 As we noted last year, large accelerated filers who file using U.S. GAAP and who have a public float above $5 billion were required to make XBRL filings for their first quarterly reports for fiscal periods ending on or after June 15, 2009. All other large accelerated filers who file using U.S. GAAP will be required to make XBRL filings for their first quarterly reports for fiscal periods ending on or after June 15, 2010, and all remaining companies who file using U.S. GAAP (including smaller reporting companies) will be required to make XBRL filings for their first quarterly reports for fiscal periods ending on or after June 15, 2011. Companies reporting in IFRS issued by the International Accounting Standards Board will also be required to submit XBRL filings starting with fiscal years ending on or after June 15, 2011. The SEC’s adopting release is available here. A number of technical corrections were made by the SEC effective April 13, 2009, largely reflecting the correction of typographical errors and incorrect cross-references appearing in the rules adopted in the original release. A copy of the correcting release is available here.
Disclosure Considerations for Non-Accelerated Filers. In October 2009, the SEC approved a six-month extension of the compliance deadline for non-accelerated filers to include in their annual reports an attestation report of their independent auditor on internal control over financial reporting. A non-accelerated filer will now be required to file the auditor’s attestation report with the Form 10-K filed for a fiscal year ending on or after June 15, 2010. The SEC’s final rule release is available here.
See, e.g., the Shareholder Bill of Rights Act of 2009, S. 1074, 111th
Cong. (2009); the Corporate and Financial Institution Compensation Fairness Act of 2009, H.R. 3269, 111th
Cong. (2009); the Shareholder Empowerment Act of 2009, H.R. 2861, 111th
Cong. (2009); and the Corporate Governance Reform Act of 2009, H.R. 3272, 111th
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As adopted, the regulations initially exempt machine readable XBRL data from antifraud claims, so long as the errors were made in good faith. The limited liability provision will be phased out over a two-year period for each company and will be terminated completely on October 31, 2014.