• Executive Compensation and Proxy Disclosure Enhancements
  • February 1, 2010 | Author: Richard S. Roth
  • Law Firm: Jackson Walker L.L.P. - Houston Office
  • On December 16, 2009, the SEC adopted final rules effective February 28, 2010, designed to enhance disclosures in registration statements, annual reports, and proxy statements.  On December 22, 2009, the SEC staff published compliance and disclosure interpretations regarding public companies transitioning to the new rules.  These interpretations indicate that preliminary proxy statements and registration statements filed before February 28, 2010, must comply with the new rules if a public company expects to mail its final proxy statement to shareholders or have its registration statement declared effective on or after that date.  The new rules impact public company disclosures in the following areas:

    Compensation Policies and Practices

    The new rules require public companies to describe their compensation policies and practices for all employees, as they relate to risk management practices and risk-taking incentives, if they create risks reasonably likely to have a material adverse effect on the company.  The SEC adopting release indicates the “reasonably likely” standard is similar to the “known trends and uncertainties” disclosure standard already used in management’s discussion and analysis disclosure.  In the event a public company determines its compensation policies and practices do not create risks reasonably likely to have a material adverse effect, it does not have to make an affirmative statement to that effect.

    Summary Compensation Table and Director Compensation Table

    This table must now disclose the grant date fair value of stock and option awards (based on the probable outcome as of the date of the grant of performance conditions, if any) for the fiscal year in which the award was made instead of the dollar amount recognized for financial statement reporting purposes for the applicable fiscal year.  Unlike salary and bonus amounts in this table, which reflect compensation for services earned in the relevant fiscal year even if paid after the fiscal year end, stock and option fair value disclosure is tied strictly to grants in the relevant fiscal year (i.e., no “performance year” applicability).   

    Director and Nominee Disclosure

    The new rules require disclosure of the particular experience, qualifications, attributes, or skills that led a public company’s board of directors to conclude that each of its members or nominees should serve as a director.  This disclosure is required even if a particular member is not in the class of directors or nominees being elected at the current annual shareholders’ meeting.  Disclosure of whether, and if so how, a nominating committee (or board) considers diversity in identifying nominees for director is also now required.  The SEC does not define “diversity,” and therefore the company is allowed to define diversity in the way it considers appropriate.  In addition, disclosure will be required of directorships at public companies held by each director or nominee at any time during the last five years and of specified legal proceedings involving directors, nominees and executive officers during the previous ten years.  The types of legal proceedings for which disclosure is required was expanded to include those involving mail or wire fraud, violations of securities, commodities, banking or insurance laws, and disciplinary sanctions imposed by stock, commodities, or derivatives exchanges.  Revisions to the officer and director questionnaires used by public companies should be made to address these new rules.

    Board Leadership Structure

    Under the new rules, a public company is required to disclose whether and why it has chosen to combine or separate the principal executive officer and board chairman positions, and the reasons why the company believes its structure is the most appropriate.  If the same person serves as the principal executive officer and board chairman, the company must disclose whether there is a lead director and, if so, the specific role the lead director plays in the leadership of the board of directors.  In addition, disclosure of the board’s role in the oversight of risk is now required.  Whether a board administers its risk oversight function through a risk committee, the audit committee, or the entire board should be disclosed, as well as how information is received from those individuals who supervise the day-to-day risk management responsibilities.

    Compensation Consultants

    In addition to the existing disclosures required regarding compensation consultants, if a consultant who provides executive compensation consulting services also provides in excess of $120,000 of non-executive compensation consulting services to a public company, the company must now also disclose (i) who engaged the consultant (compensation committee or management), (ii) whether the engagement was made or recommended by management and approved by the board, and (iii) the fees paid for executive compensation consulting services and the fees paid for non-executive compensation consulting services.

    Shareholders’ Meeting Voting Results

    The voting results of a shareholders’ meeting must now be reported on Form 8-K within four business days after the end of the meeting at which the vote was held.  If a longer period of time is required to determine the outcome, preliminary voting results must be reported within the four business-day period, and an amended Form 8-K must be filed within four business days after the final voting results are known.