CORPORATE GOVERNANCE AND SECURITIES LAWS IN THE UNITED STATES A Public Company Handbook 2013 Edition

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2 CORPORATE GOVERNANCE AND SECURITIES LAWS IN THE UNITED STATES A Public Company Handbook 2013 Edition Updated through May 2013 Curtis, Mallet-Prevost, Colt & Mosle LLP Lawrence Goodman Valarie A. Hing Raymond T. Hum Jeffrey N. Ostrager

3 Copyright 2013 Curtis, Mallet-Prevost, Colt & Mosle LLP (No claim to original U.S. Government works) All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the author and publisher. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that this publication does not constitute legal, accounting or other professional advice. If legal advice or other expert assistance is required, the services of a professional should be sought. Printed in the United States of America.

4 ABOUT THIS HANDBOOK This handbook is intended to serve as a general reference guide for public company officers and directors on key U.S. securities law and corporate governance requirements applicable to public companies. Although this handbook reviews the critical requirements of the areas covered, our coverage of these areas is not exhaustive and is necessarily incomplete. In addition, many of these areas are subject to changes in statutory and case law, as well as interpretive positions of the U.S. Securities and Exchange Commission and stock exchanges. Although this handbook may provide information concerning potential legal issues, it is not a substitute for legal advice from qualified counsel. This handbook is not created or designed to address the unique facts or circumstances that may arise in any specific instance, and no person or entity is authorized to rely on it as a source of legal, accounting or other professional advice. This handbook does not create any attorney-client relationship between any person or entity and Curtis, Mallet-Prevost, Colt & Mosle LLP. The opinions expressed in this publication are those of the individual authors and contributors and do not necessarily reflect the views of Curtis, Mallet-Prevost, Colt & Mosle LLP. ABOUT THE AUTHORS The authors are partners or counsel in the Public Company and Corporate Governance practice group at Curtis, Mallet-Prevost, Colt & Mosle LLP. The following additional current and former Curtis lawyers were instrumental in the preparation of this handbook: Martin Brown, Ryan Hansen, Kreg W. Katoski, Ellen McGrath, Danny Phillips, Holly Sawyer, Andrew Smith and Shawna-Gay White. The authors thank them for their invaluable assistance. ABOUT CURTIS, MALLET-PREVOST, COLT & MOSLE LLP About Curtis Founded in 1830, Curtis, Mallet-Prevost, Colt & Mosle LLP is an international law firm headquartered in New York. Curtis provides a full range of legal services to clients that include publicly traded and privately owned multinational companies, international financial institutions, governments and state-owned entities, and high-net-worth individuals. Curtis core practices of Corporate Law, Litigation and Arbitration, Restructuring and Insolvency, and Tax are complemented by various specialty practice areas, including Environmental, Intellectual Property, International Trade, Maritime, Real Estate, and Trusts & Estates. With 15 offices in the United States, Latin America, Europe, the Middle East and Central Asia, we are located in the key business centers in which our clients need us most. Curtis prides itself on providing more than just high-quality legal counsel. Our lawyers work to forge strong business partnerships with our clients. In addition, our knowledge of the commercial and

5 strategic aspects of our clients industry sectors provides us with a clear understanding of each matter s particular economic drivers, risks and opportunities. Clients value our ability to offer creative, sophisticated, yet pragmatic solutions to their many challenges. Our client teams, led by a relationship partner, are made up of lawyers who collectively have the requisite skill set and experience to meet the client s needs. Matters are staffed efficiently and cost-effectively with teams comprised of both senior and junior lawyers who leverage the firm s collective capabilities and international platform, while deploying the most current and secure communications technology. Clients receive updates on legal developments in a variety of ways, including in-house seminars, client alerts and blogs. Our culture emphasizes respectful and constructive collaboration and communication not only with our clients, but also with counterparties and their advisors. Curtis lawyers strive to ensure the success of complex, fast-moving transactions and high-stakes disputes that typify today s global business environment. For over 180 years, our dedication and commitment have earned us the confidence and trust of our clients, many of which have been turning to the firm for advice for decades. Public Company and Corporate Governance The Curtis Public Company and Corporate Governance practice is dedicated to advising our public company clients on U.S. securities regulatory and stock exchange compliance matters, as well as all aspects of corporate governance. The range of services provided by the group includes: Preparation of periodic reports under the Securities Exchange Act; Preparation of registration statements and proxy and information statements in connection with acquisitions, spin-offs and business combinations; Advice on directors fiduciary duties and directors and officers responsibilities under the securities laws, including advising special committees; Advice on board governance best practices, including proxy advisory firm and institutional shareholder policies; Advice on board committee matters, including committee composition, committee charters and responsibilities; Advice on codes of business conduct and ethics and related party transaction policies; Advice on risk management programs; Advice on preparing for and holding of shareholders meetings and compliance with the proxy requirements under the Securities Exchange Act; -ii-

6 Design of compensation plans and programs, including governance and institutional shareholder considerations; Advice on compliance programs, including insider trading compliance and compliance with Section 16 of the Securities Exchange Act; Advice on issuer repurchase programs; Advice on disclosure policies, including compliance with Regulation FD and Regulation G; Advice on compliance with the Sarbanes-Oxley Act, including disclosure controls and procedures and internal control over financial reporting; and Advice on conducting registered and unregistered offerings of equity, debt and other securities. The Curtis Public Company and Corporate Governance practice is supported by our firm s complementary practices in various areas including Capital Markets, Finance, Tax, Mergers and Acquisitions, Executive Compensation, Intellectual Property, Environmental Law, and Litigation. In addition, the Public Company and Corporate Governance practice group works with lawyers from our international offices to provide counsel on the regulatory and compliance aspects of cross-border transactions. In keeping with the firm s international focus, our Public Company and Corporate Governance practice group has substantial expertise in representing foreign private issuers that have accessed or seek to access the U.S. capital markets. Criminal Defense and Government Investigations Attorneys in the Curtis Criminal Defense and Government Investigations practice group represent clients in criminal and civil investigations and enforcement actions by federal and state prosecutors and regulators. Our clients include public companies, hedge funds, private equity firms, accounting firms, broker-dealer firms, public officials, executives and other individuals. Our representations cover a range of matters, including investigations of possible accounting fraud, securities fraud, bribery, perjury and false statements, tax fraud, antitrust violations, healthcare fraud, false claims, FDA violations, immigration fraud and environmental crimes, and enforcement actions involving similar claims. The Curtis Criminal Defense and Government Investigations practice group, which is based in New York and Washington, D.C., serves clients in venues throughout the United States. With a group of attorneys that includes several former prosecutors and regulators, Curtis brings decades of experience to its defense of clients facing government probes or enforcement actions. The Criminal Defense and Government Investigations practice group has extensive experience representing clients in investigations and proceedings conducted by the Department of Justice, state attorneys general, SEC, Financial Industry Regulatory Authority (FINRA), Commodity Futures -iii-

7 Trading Commission (CFTC), state accountancy boards, and other agencies and has a proven track record of conducting thorough investigations, whatever the business situation. Securities Litigation The Curtis Securities Litigation practice group represents clients in the defense of complex cases in both federal and state court. Our clients include domestic and international corporations, investment banks, hedge funds and other financial institutions, as well as accounting firms, law firms and individuals. The range of services provided by the group includes: Defense of securities class action lawsuits; Defense of shareholder derivative lawsuits; and Defense of actions against issuers and underwriters of securities. Our Securities Litigation practice group is based in our New York and Washington, D.C. offices and brings a sophisticated understanding of securities markets to matters across the country. Best known for their trial skills, Curtis litigators also recognize the need for early and favorable resolutions, and have a track record of successfully obtaining dismissals, summary judgments and denials of class certification on behalf of their clients. Familiarity with the leading firms of the plaintiffs bar provides our lawyers a strong grasp of the strategies and tactics of plaintiff s counsel and allows them to negotiate settlements from a position of strength. The group also works closely with the firm s Criminal Defense and Government Investigations group in the representation of clients under investigation for violations of the securities laws. The Securities Litigation group frequently draws upon the industry experience and insights of our Public Company and Corporate Governance practice group to develop comprehensive strategies that address all the legal and factual aspects of each securities-related matter. -iv-

8 CORPORATE GOVERNANCE AND SECURITIES LAWS IN THE UNITED STATES A Public Company Handbook 2013 Edition TABLE OF CONTENTS Page # INTRODUCTION... 1 THE DODD-FRANK ACT... 3 SEC Implementation Schedule...4 Say-on-Pay...9 Introduction...9 Say-on-Pay Votes and Frequency of Say-on-Pay Votes...9 Golden Parachute Disclosures and Golden Parachute Say-on-Pay Votes...11 Say-on-Pay Litigation...14 Investment Manager Reporting of Proxy Votes on Executive Compensation...14 Proxy Access and Private Ordering for Proxy Access...15 Compensation Committee Independence and Authority to Retain Advisers...15 Compensation Committee Independence...15 Compensation Committee Charters...18 Authority to Retain Advisers...18 Compensation Consultant and Adviser Independence...18 Executive Compensation Disclosures...20 Pay versus Performance...20 Pay Equity...20 Incentive Compensation Clawback Policy...21 Director and Employee Hedging Policy...22 Board Leadership Structure...23 Whistleblower Incentives and Protections...23 Broker Voting...25 Conflict Minerals, Mine Safety and Extractive Industries Disclosures...26 Use of Conflict Minerals...26 Mine Safety...28 Payments by Resource Extraction Issuers...28 Filing Deadlines for Schedule 13D and Form Auditor Attestation Exemption for Smaller Reporting Companies and Non- Accelerated Filers...30 THE JOBS ACT IPO On-Ramp for Emerging Growth Companies v-

9 Qualification as an Emerging Growth Company...31 Accommodations for Emerging Growth Companies...32 Removal of Restrictions on General Solicitation and Advertising...34 New Section 4(6) Securities Act Offering Exemption for Crowdfunding...36 New Small Issuer Exemption Regulation A Increased Threshold for Registration under Section 12(g) of the Exchange Act...37 PERIODIC AND CURRENT REPORTING UNDER THE EXCHANGE ACT Reporting Forms...39 Annual Reports on Form 10-K...39 Quarterly Reports on Form 10-Q...40 Current Reports on Form 8-K...40 Categories of Public Companies...41 Large Accelerated Filers...41 Accelerated Filers...42 Smaller Reporting Companies...42 Non-Accelerated Filers...42 Asset-Backed Issuers...43 Filing Deadlines; Failure to Timely File a Required Report...43 Form 10-K...44 Summary of Selected Items...46 Signatures...49 XBRL Requirements...49 Form 10-Q...50 Signatures...51 Form 8-K...51 Section 1 Business and Operations...52 Section 2 Financial Information...52 Section 3 Securities and Trading Markets...52 Section 4 Matters Related to Accountants and Financial Statements...53 Section 5 Corporate Governance and Management...53 Section 6 Asset-Backed Securities...54 Section 7 Regulation FD...54 Section 8 Other Events...54 Section 9 Financial Statements and Exhibits...54 Summary of Selected Items...55 Iran Related Activities...62 SEC Comment Letter Trends...64 Cybersecurity...64 Eurozone Issues...64 Overseas Cash and Tax Consequences...65 Emerging Growth Companies...65 Confidential Treatment Requests vi-

10 Disclosure Controls and Procedures...66 ANNUAL PROXY STATEMENT AND ANNUAL REPORT DISCLOSURES AND PROCESS Overview of Annual Proxy Statement Disclosure Requirements...67 Summary of Selected Items...70 Executive and Director Compensation...70 Shareholder Proposals...75 Annual Meetings The Solicitation and Voting Process...78 Annual Reports to Shareholders...79 Broker Voting...80 SMALLER REPORTING COMPANIES Determining Smaller Reporting Company Status...81 Eligible Companies...81 Eligibility Determination...82 Entering and Exiting the Smaller Reporting Company Regime...83 Scaled Disclosure Requirements for Smaller Reporting Companies...83 Regulation S-K...84 Regulation S-X...88 Form 8-K Unregistered Sales of Equity Securities...89 Extended Filing Deadlines for Periodic Reports...89 Dodd-Frank Act Accommodations for Smaller Reporting Companies...90 Say-on-Pay...90 Compensation Committee Independence...91 Emerging Growth Company Accommodations for Qualifying Smaller Reporting Companies...91 REGULATION OF ANALYST COMMUNICATIONS AND OTHER VOLUNTARY DISCLOSURES The Pre-Regulation FD Framework...94 Regulation FD...94 What Disclosure is Covered by Regulation FD?...95 Communications Excluded From Regulation FD...95 Timing of Public Disclosure...96 Satisfying the Public Disclosure Requirement...96 What is Material Information?...98 Public and Nonpublic Statements...99 The Consequences of Violating Regulation FD The Importance of Compliance Programs Regulation G and Related Rules What Does Regulation G Require? What are Non-GAAP Financial Measures? vii-

11 What Types of Disclosures Does Regulation G Cover? Non-GAAP Measures in SEC Filings The Consequences of Violating Regulation G Form 8-K Requirements Conducting a Regulation FD/Regulation G Compliant Earnings Call THE SARBANES-OXLEY ACT Audit Committee Standards and Independence Listed Company Audit Committee Requirements Audit Committee Financial Expert Management Accountability for the Quality and Accuracy of Financial Reporting and Other Public Disclosures Disclosure Controls and Procedures and Internal Control over Financial Reporting Section 302 Certification Section 906 Certification Prohibition Against Improper Influence on Company Audits Forfeiture of Certain Bonuses and Profits Following Accounting Restatements Code of Ethics Disclosure Addressing Potential Conflicts of Interests Prohibition on Loans to Directors or Officers Regulation BTR Blackout Trading Restriction Accelerated Reporting by Section 16 Insiders Auditor Oversight and Independence PCAOB Oversight Auditor Independence Enhanced Disclosure Requirements Off-Balance Sheet Transactions and Contractual Obligations Conditions for Use of Non-GAAP Financial Measures Real-Time Disclosure of Information Whistleblower Protections Attorney Reporting And Related Conduct Rules Form of Section 302 Certification STOCK EXCHANGE LISTING REQUIREMENTS NYSE Rules Corporate Governance Shareholder Approval of Corporate Action; Shareholder Meetings Review of Related Party Transactions Public Disclosure and NYSE Notification NASDAQ Rules Corporate Governance Exemption for Foreign Private Issuers Communications and Disclosure viii-

12 TRADING IN ISSUER STOCK Trading on the Basis of Material Nonpublic Information Insiders and Theories of Liability Meaning of on the Basis of What is Material Information? Insider Trading Policies and Programs Trading Windows b5-1 Plans and Procedures Resales of Restricted and Control Securities Rule Sales of Restricted Securities Outside of Rule Issuer Stock Repurchases Rule 10b Key Considerations Prior to Initiating Stock Repurchase Programs Recent Developments Scrutiny of Rule 10b5-1 Plan Trades OWNERSHIP AND TRADING REPORTS BY MANAGEMENT AND LARGE SHAREHOLDERS Sections 13(d) and (g) of the Exchange Act Schedule 13D Schedule 13G Violations of Sections 13(d) or (g) Section 16 of the Exchange Act Section 16 Insiders Section 16 Beneficial Ownership Equity Securities Section 16(a): Reporting Transactions by Insiders Section 16(b): Liability for Short-Swing Profits Section 16(c): Prohibition of Short Sales by Insiders FOREIGN PRIVATE ISSUER REPORTING AND COMPLIANCE Determining Foreign Private Issuer Status Exchange Act Registration Exchange Act Reporting and Other Obligations Annual Report on Form 20-F Current Reports on Form 6-K Beneficial Ownership Reporting on Schedules 13D or 13G Sarbanes-Oxley Act Provisions Enhanced Audit Committee Standards and Audit Protections Management Certifications, Evaluations and Reports Financial Restrictions Applicable to Company Insiders Enhanced Disclosure Requirements ix-

13 Dodd-Frank Act Provisions Corporate Governance Whistleblower Protections Extractive Industries, Conflict Minerals and Mine Safety Disclosures Application of the JOBS Act to Foreign Private Issuers Other Key Accommodations For Foreign Private Issuers Foreign Private Issuer Deregistration Equity Securities Debt Securities Rule 12g3-2(B) Exemption x-

14 INTRODUCTION Companies whose securities are publicly traded or publicly held in the United States (also known as public companies ) are subject to an extensive and complex regulatory regime under U.S. federal securities laws and stock exchange listing rules. This handbook provides an overview of the securities law and stock exchange reporting, disclosure and corporate governance requirements applicable to public companies and their officers, directors and large shareholders. Throughout this handbook, we use the terms public company and issuer interchangeably. In addition to outlining the applicable laws, regulations and rules, this handbook seeks to provide practical guidance reflecting, among other things, interpretive guidance issued by the U.S. Securities and Exchange Commission (SEC), general industry practice and the authors experience. Lawmakers and regulatory agencies have responded to the financial crisis of 2008 through 2010 and the subsequent recession with extensive reforms aimed at addressing the perceived causes of the crisis and creating incentives and accommodations to reverse their effects. Many of these reforms involve significant changes to the U.S. federal securities laws and regulations and affect the obligations of, or provide certain benefits to, public companies and other companies seeking to access the U.S. capital markets. In this regard, the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law by U.S. President Barack Obama on July 21, While much of the Dodd-Frank Act is concerned specifically with the banking sector and derivatives markets, the Act also contains significant reforms applicable to public companies generally. These reforms are discussed in the section of this handbook entitled The Dodd-Frank Act. On April 5, 2012, President Obama signed into law the U.S. Jumpstart Our Business Startups Act (JOBS Act), which provides for a number of significant reforms to U.S. federal securities laws to facilitate capital raising by small and medium-sized companies. While the SEC has adopted final rules relating to most of the provisions of the Dodd-Frank Act that relate to public companies, its Dodd-Frank Act and JOBS Act rulemaking efforts continue. Notably, the SEC has not yet proposed rules addressing the additional disclosure requirements for executive pay versus performance and pay equity or incentive compensation clawback policies under the Dodd-Frank Act. In addition, some of the Dodd-Frank Act rules adopted by the SEC have been challenged and, in one instance, vacated. See the sections of this handbook entitled The Dodd-Frank Act and The JOBS Act. At the same time, the SEC and other enforcement agencies have stepped up their enforcement efforts in certain areas of perceived securities and capital market laws abuse. For example, in recent years, both the SEC and the U.S. Department of Justice (DOJ) have intensified their focus on insider trading abuses. This has led to some particularly high-profile convictions, including the 2011 conviction of Raj Rajaratnam, former manager of the Galleon Group hedge fund, on 14 counts of conspiracy and securities fraud charges and his sentencing to 11 years in prison (the longest prison sentence ever imposed for insider trading violations). In a related development, the Wall Street Journal examined records of thousands of insider transactions that were entered into within five days of the release of material information and found that even with the restrictions imposed under 10b5-1 trading plans, insiders trading in their companies stock were able to perform statistically better than non-insiders. See Trading in Issuer Stock Recent Developments.

15 The Dodd-Frank Act, the JOBS Act and other U.S. federal securities rules and regulations adopted in recent years reflect a shifting regulatory landscape to which public companies must continue to adjust. Given this shifting landscape, it has never been more important for public company officers and directors and the professionals who advise them to ensure that their companies have in place robust processes to consider the impact of these developments on their companies and to take the necessary actions to update and enhance their disclosure and governance practices. In addition, recent enforcement activity, particularly in respect of insider trading, highlights the need for public companies to continue to focus on adequate and appropriate policies and procedures to ensure compliance with existing laws and regulations. -2-

16 THE DODD-FRANK ACT On July 21, 2010, U.S. President Barack Obama signed into law the Dodd-Frank Act. While the Dodd-Frank Act focuses primarily on financial regulatory reform and consumer financial protections in response to the financial crisis of 2008 through 2010, it also contains a number of provisions directed at public companies that address executive compensation, corporate governance and disclosure matters. This section provides an overview of the following key executive compensation, corporate governance and disclosure provisions of the Dodd-Frank Act: say-on-pay and frequency of say-on-pay votes; golden parachute say-on-pay votes; shareholder access to company proxy statements (also known as proxy access ) and private ordering for shareholder access to company proxy statements (also known as private ordering for proxy access ); the independence of compensation committees and their advisers; additional executive compensation disclosures addressing the relationship between the executive compensation paid to executive officers and the financial performance of the company (also known as pay versus performance ) and addressing the ratio of the median of the total annual compensation of all employees other than the CEO and the total annual compensation of the CEO (also known as pay equity ); incentive compensation clawback policies; disclosure regarding employee and director hedging policies; disclosure regarding chairman and CEO structures; whistleblower incentives and protections; broker voting on executive compensation matters; conflict minerals disclosure; mine safety disclosure; disclosure of payments by resource extraction companies; filing deadlines for Schedule 13D and Form 3; and -3-

17 THE DODD-FRANK ACT auditor attestation exemption for smaller reporting companies. A number of these provisions require SEC rulemaking for implementation. Among the provisions requiring SEC rulemaking, some of these provisions impose no deadline for SEC rulemaking, while other provisions impose a deadline for SEC rulemaking of up to 360 days after the Dodd-Frank Act s enactment. While some of the executive compensation, corporate governance and disclosure provisions of the Dodd-Frank Act were already in effect during the 2011 and 2012 proxy seasons, there remain a number of provisions requiring SEC rulemaking that were not in effect by the 2013 proxy season. Following is a schedule identifying the effective date of each provision along with the current status of SEC rulemaking with respect to such provision. SEC Implementation Schedule Dodd-Frank Provision Compliance/Effective Date Status of SEC Rulemaking Say-on-Pay and Frequency of Say-on-Pay Votes (Section 951) Golden Parachute Say-on-Pay Votes (Section 951) Public companies (other than smaller reporting companies, emerging growth companies or foreign private issuers) have been required to hold say-onpay and frequency of say-onpay votes since the first shareholders meeting held on or after January 21, Smaller reporting companies are now required to hold sayon-pay and frequency of sayon-pay votes beginning with the first shareholders meeting held on or after January 21, Emerging growth companies are exempt from the requirement to hold say-onpay and frequency of say-onpay votes. Public companies that cease to be emerging growth companies are subject to a phase-in compliance period. Public companies soliciting votes to approve merger or acquisition transactions have The SEC adopted final rules on January 25, The SEC proposed rules to implement the provisions related to institutional investment managers on October 18, The SEC adopted final rules on January 25, The SEC proposed rules to implement -4-

18 THE DODD-FRANK ACT Dodd-Frank Provision Compliance/Effective Date Status of SEC Rulemaking Proxy Access and Private Ordering for Proxy Access (Section 971) Compensation Committee Independence and Compensation Committee Advisers (Section 952) been required to disclose golden parachute compensation arrangements and hold say-on-golden parachute votes for merger proxy statements initially filed on or after April 25, Emerging growth companies soliciting votes to approve merger or acquisition transactions are exempt from the requirement to hold sayon-golden parachute votes. None specified The NYSE s and NASDAQ s approved rule changes become operative on July 1, A NYSE company will generally need to satisfy the new rules by July 1, It will not need to comply with the new compensation committee independence requirements, however, until the earlier of (i) its first annual meeting after January 15, 2014 and (ii) October 31, the provisions related to institutional investment managers on October 18, The SEC adopted final rules on August 25, 2010 to add a new Exchange Act Rule 14a- 11 to provide for proxy access and to amend Exchange Act Rule 14a-8 to provide for private ordering of proxy access. In July 2011, the U.S. Court of Appeals for the District of Columbia Circuit issued an order vacating Rule 14a-11. The SEC s amendment to Rule 14a-8 became effective on September 20, The SEC adopted final rules on June 20, The SEC approved the NYSE s and NASDAQ s proposed rule changes on January 11,

19 THE DODD-FRANK ACT Dodd-Frank Provision Compliance/Effective Date Status of SEC Rulemaking A NASDAQ company will need to comply by July 1, 2013 with the new rules regarding the authority of the compensation committee to retain advisors, the authority of such advisors, and the responsibility to consider independence factors before selecting such advisors. If permitted by state law, a company may comply with these new rules by passing board resolutions rather than by amending its compensation committee charter. A NASDAQ company will need to comply with the new compensation committee independence requirements, the requirement to amend its compensation committee charter (if necessary), and the requirement to have a compensation committee and adopt a compensation committee charter (in each case if it does not already have one) by the earlier of (i) its first annual meeting after January 15, 2014 and (ii) October 31, Public companies are now required to comply with the new compensation consultant conflicts of interest disclosure requirements in proxy and information statements for their first shareholders meetings held on or after January 1,

20 THE DODD-FRANK ACT Dodd-Frank Provision Compliance/Effective Date Status of SEC Rulemaking Additional Executive Compensation Disclosures Addressing Pay Versus Performance and Pay Equity (Section 953) Incentive Compensation Clawback Policies (Section 954) Disclosure Regarding Employee and Director Hedging Policies (Section 955) Disclosure Regarding Chairman and CEO Structures (Section 972) Whistleblower Incentives and Protections (Section 922) Broker Voting on Executive Compensation Matters (Section 957) Subject to SEC rulemaking Subject to SEC rulemaking Subject to SEC rulemaking Subject to SEC rulemaking None specified The SEC has yet to propose rules. The SEC has yet to propose rules. The SEC has yet to propose rules. The SEC previously adopted proxy disclosure enhancement rules requiring a similar type of disclosure in December It is uncertain whether the SEC will take any further action in respect of this Dodd- Frank provision. The SEC adopted final rules on May 25, None specified The SEC approved amendments to NYSE Rule 452 on September 9, The SEC approved amendments to NASDAQ Rule 2251 on September 24,

21 THE DODD-FRANK ACT Dodd-Frank Provision Compliance/Effective Date Status of SEC Rulemaking Conflict Minerals Disclosure (Section 1502) Mine Safety Disclosure (Section 1503) Disclosure of Payments by Resource Extraction Companies (Section 1504) Filing Deadlines for Schedule 13D and Form 3 (Section 929R) Public companies are required to comply with the new disclosure requirements for the 2013 calendar year with the first report on Form SD due on May 31, None specified Resource extraction public companies are required to comply with the new rules and form for fiscal years ending after September 30, None specified The SEC adopted final rules on August 22, In October 2012, a lawsuit challenging the SEC s final rules was filed with the Court of Appeals for the District of Columbia Circuit. The lawsuit was subsequently transferred to the U.S. District Court for the District of Columbia where it is currently pending; however, the rule has not been stayed and remains effective. The SEC adopted final rules on December 21, The SEC adopted final rules on August 22, In October 2012, a lawsuit challenging the SEC s final rules was filed with the Court of Appeals for the District of Columbia Circuit. The Court of Appeals dismissed the lawsuit for lack of jurisdiction. The case is now pending in the U.S. District Court for the District of Columbia; however, the rule has not been stayed and remains effective. Section 929R authorizes, but does not require, the SEC to shorten the filing deadlines for Schedule 13D and Form 3. It is uncertain whether the SEC will exercise its authority in respect of this Dodd-Frank provision. -8-

22 THE DODD-FRANK ACT Dodd-Frank Provision Compliance/Effective Date Status of SEC Rulemaking Auditor Attestation Exemption for Smaller Reporting Companies (Section 989G) None specified While SEC rulemaking was not required to implement this provision, in September 2010 the SEC adopted amendments to its rules and forms to reflect the exemption. SAY-ON-PAY Introduction Section 951 of the Dodd-Frank Act added Section 14A to the Securities Exchange Act of 1934 (Exchange Act). Section 14A requires a public company subject to the SEC s proxy rules to conduct a separate shareholder advisory vote to approve the compensation of named executive officers as disclosed pursuant to Item 402 of Regulation S-K (a say-on-pay vote ) and a separate shareholder advisory vote to determine how often the company will conduct say-on-pay votes (a frequency of say-on-pay vote ). Section 14A also requires a public company subject to the SEC s proxy rules soliciting votes to approve merger or acquisition transactions to provide disclosure of golden parachute compensation arrangements and to conduct a separate shareholder advisory vote to approve the golden parachute compensation arrangements (a golden parachute say-on-pay vote ). In addition, Section 14A requires certain institutional investment managers to publicly disclose their votes on such proposals. On January 25, 2011, the SEC adopted final rules to implement Section 951 of the Dodd-Frank Act. In its final rules, the SEC adopted Rule 14a-21 and related amendments to its existing rules, regulations and forms. Say-on-Pay Votes and Frequency of Say-on-Pay Votes Under Rule 14a-21(a), a public company subject to the SEC s proxy rules is required to include a say-on-pay vote in its annual proxy statement (or other proxy statement or consent solicitation statement including executive compensation disclosures) at least once every three years. The vote must relate to all executive compensation disclosed in the proxy statement, whether in the compensation tables, the Compensation Discussion and Analysis or in the narrative to the compensation tables. Non-management director compensation is not required to be subject to a sayon-pay vote. A public company holding a say-on-pay vote is required to briefly explain in its proxy statement the general effect of the vote, including the nonbinding nature of the vote. While the SEC does not mandate specific language that must be used for the say-on-pay vote, the SEC has issued a Compliance and Disclosure Interpretation providing examples of say-on-pay vote descriptions that would be consistent with Rule 14a SEC Compliance and Disclosure Interpretation Exchange Act Rules Question (February 13, 2012) provides as follows: Question: On its proxy card and voting instruction form, how should a company describe the -9-

23 THE DODD-FRANK ACT The SEC also amended the executive compensation disclosure rules to require the Compensation Discussion and Analysis to address whether and how the compensation committee has considered the results of say-on-pay proposals and how that consideration affected its compensation policies and practices. Under Rule 14a-21(b), a public company subject to the SEC s proxy rules is required to include the frequency of say-on-pay votes in its annual proxy statement (or other proxy statement or consent solicitation statement including executive compensation disclosures) at least once every six years. In its final rules, the SEC also amended Rule 14a-4 to require companies to allow shareholders to choose from four options: (i) every year, (ii) every two years, (iii) every three years or (iv) abstain. Rule 14a-21(b) clarifies that the vote is advisory (nonbinding on the board of directors). In its final rules, the SEC also amended Form 8-K to require disclosure about how often a public company will conduct say-on-pay votes following each frequency vote on say-on-pay. As with the requirements of the rule relating to the say-on-pay proposal, companies holding the frequency vote need to briefly explain in their proxy statements the general effect of the vote, including the nonbinding nature of the vote. The board of directors of a company can make a recommendation to shareholders about the frequency of the vote, but the recommendation should make it clear that shareholders have the option to select from all of the choices and are not being asked to approve or disapprove the board s recommendation. In addition, although the vote would be nonbinding, a company would be required to disclose in a current report on Form 8-K its decision on how frequently to hold the say-on-pay proposal in light of the results of the frequency vote. As a benefit, companies that adopt a policy on the frequency of say-on-pay votes that is consistent with the vote of the plurality of their shareholders would be able to exclude from their proxy statements any shareholder say-on-pay proposals or shareholder proposals on the frequency of say-on-pay. advisory vote to approve executive compensation that is required by Exchange Act Rule 14a-21? Answer: The following are examples of advisory vote descriptions that would be consistent with Rule 14a-21 s requirement for shareholders to be given an advisory vote to approve the compensation paid to a company s named executive officers, as disclosed pursuant to Item 402 of Regulation S-K. 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 The following is an example of an advisory vote description that would not be consistent with Rule 14a-21 because it is not clear from the description as to what shareholders are being asked to vote on. Shareholders could interpret this example as asking them to vote on whether or not the company should hold an advisory vote on executive compensation, rather than asking shareholders to actually approve, on an advisory basis, the compensation paid to the company s named executive officers. To hold an advisory vote on executive compensation -10-

24 THE DODD-FRANK ACT Public companies (other than public companies that qualify as smaller reporting companies, emerging growth companies or foreign private issuers) have been required to hold say-on-pay and frequency of say-on-pay votes since the first shareholders meeting held on or after January 21, Public companies that qualify as smaller reporting companies are required to hold say-on-pay and frequency of say-on-pay votes at the first shareholders meeting held on or after January 21, Public companies that qualify as emerging growth companies are exempt from the requirement to hold say-on-pay and frequency of say-on-pay votes until they cease to be emerging growth companies and then are subject to a phase-in compliance period. Public companies that qualify as foreign private issuers are not subject to the SEC s proxy rules and therefore are not required to hold say-on-pay and frequency of say-on-pay votes. Practice Tip: Companies should periodically evaluate their shareholder communications programs in light of the say-on-pay vote. In addition, companies should periodically review their compensation programs and consider whether their compensation programs include any features (such as tax gross-ups) that might result in a negative vote recommendation by proxy advisory firms, such as RiskMetrics. Finally, companies should periodically review their compensation disclosures and assure that these disclosures are clear and understandable. In particular, companies should assure that their Compensation Discussion and Analysis discloses the relationship between executive compensation and company performance. It is advisable to include an executive summary in the Compensation Discussion and Analysis section to assist readers. Where applicable, the executive summary should highlight any recent changes made to the company s compensation practices to align with best practices. Golden Parachute Disclosures and Golden Parachute Say-on-Pay Votes As added by the Dodd-Frank Act, Section 14A(b) of the Exchange Act requires public companies seeking the approval of their shareholders for an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all their assets to disclose any compensation arrangements they have with their named executive officers (or with those of the acquiring company, if they are not the acquiring company) that are contingent on or otherwise relate to the transaction. Such arrangements are often referred to as golden parachute arrangements. Public companies are required to submit such arrangements to a nonbinding shareholder vote, unless the arrangements have previously been subject to a vote by the shareholders. As with the say-on-pay vote, the SEC is authorized to exempt an issuer or class of issuers from the golden parachute disclosure and vote requirements. As discussed in the section of this handbook entitled Smaller Reporting Companies, the SEC provided a temporary exemption for smaller reporting companies with regard to the say-on-pay and frequency of say-on-pay voting. This exemption, however, does not apply to the golden parachute disclosure and golden parachute say-onpay vote. -11-

25 THE DODD-FRANK ACT Golden Parachute Disclosures In its final rules, the SEC adopted Item 402(t) of Regulation S-K to address the requirements of Section 14A(b) of the Exchange Act. In its final rules, the SEC also adopted related amendments to the disclosure requirements of other forms (Schedule 14C, Schedule 14D-9, Schedule 13E-3 and Item 1011 of Regulation M-A) in an effort to require comparable golden parachute disclosure in connection with other fundamental corporate transactions, such as going private and certain tender offer transactions. Item 402(t) requires disclosure of any golden parachute arrangements of named executive officers in both tabular and narrative formats. Item 402(t) disclosures must be included in any proxy statement for a meeting of shareholders to approve an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all of a public company s assets. The tabular disclosure requires quantification of any agreements between each named executive officer and the acquiring company or the target company concerning any type of compensation that is contingent on or otherwise related to the transaction. The rules prescribe a specific tabular form for the disclosure of the following categories of compensation: any cash severance payments; the value of accelerated option and stock awards and payments in cancellation of option and stock awards; pension and nonqualified deferred compensation benefit enhancements; perquisites and other personal benefits; health and welfare benefits; tax reimbursements (including tax gross-ups); any other benefit not specifically includable in the other categories; and the aggregate total of all such compensation. The tabular disclosure also requires footnotes for other relevant information, such as whether the arrangements are single trigger (e.g., compensation is paid or accelerated solely as a result of the transaction) or double trigger (e.g., compensation is not paid or accelerated unless the executive is terminated or resigns for good reason within a specified time period following the transaction). There is no exemption permitting the exclusion of de minimis amounts. The narrative disclosure requires issuers to describe any material conditions or obligations applicable to the receipt of payment, provisions regarding waiver or breaches, specific circumstances -12-

26 THE DODD-FRANK ACT that would trigger payment, whether the payments would or could be lump sum or paid out over time, the duration of payments, and by whom the payments would be provided. Any other material factors regarding each agreement should also be disclosed. Under Item 402(t), the soliciting issuer would be required to disclose all golden parachute arrangements between: the target company and the target company s named executive officers, the target company and the acquiring company s named executive officers, and the acquiring company and the target company s named executive officers. Golden Parachute Say-on-Pay Votes Under Rule 14a-21(c), public companies seeking the approval of their shareholders for an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all their assets are required to conduct a separate shareholder advisory vote on certain golden parachute arrangements. Rule 14a-21(c) does not mandate any specific language or form of resolution for the shareholder advisory vote to be included in the proxy statement. Like the shareholder say-on-pay vote on executive compensation, the shareholder golden parachute vote will be nonbinding and purely advisory to the company and its board of directors. Likewise, the golden parachute vote will not be construed as: overruling a decision of the company or its board of directors; creating, implying or changing the fiduciary duties of the company or its board of directors; or restricting or limiting the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation. The golden parachute say-on-pay vote only applies to arrangements between the soliciting company and its named executive officers (or with the named executive officers of the acquiring company, if it is not the acquirer). Companies are not required to seek shareholder approval of any golden parachute arrangements that had previously been subject to a say-on-pay vote. In order to take advantage of this exception, public companies would need to have included the new tabular and narrative disclosures in their most recent annual proxy statements that included a general say-on-pay proposal. Also, this exception is available only to the extent the parachute arrangements previously subject to the say-on-pay vote remain unchanged from the prior vote. However, a change to reflect price movements in the issuer s securities or changes that result only in a reduction in value of the total compensation payable will not trigger the need for a new vote. -13-

27 THE DODD-FRANK ACT Practice tip: Under the proposed rules, in order to take advantage of the exception to the golden parachute vote, it would not be sufficient for companies to have included only the Regulation S-K Item 402(j) disclosures required by the SEC with respect to compensation payable in connection with a change in control or termination of service, as the new tabular and narrative disclosure requirements for golden parachutes are in addition to and different than the disclosures required under Regulation S-K Item 402(j). Rather, companies would be required to include the additional golden parachute tabular and narrative disclosures in their proxy statements which include say-onpay proposals. In addition, the exception applies only to the extent that such golden parachute arrangements were previously disclosed and had not been modified. If any arrangements were modified or entered into after the last say-on-pay vote where such arrangements were properly disclosed, the modified or new arrangements (but not the previously approved terms or arrangements) would be subject to a golden parachute say-on-pay vote. It is not expected that companies will include the additional disclosures needed to avail themselves of this exception. In particular, the inclusion of such disclosures could be interpreted by investors as an indication that the company is contemplating a change in control transaction. In addition, the inclusion of such disclosures might focus shareholders on a company s golden parachute arrangements when evaluating their regular say-on-pay vote. Say-on-Pay Litigation After several public companies failed to receive majority shareholder approval of their executive compensation, some plaintiffs firms filed lawsuits alleging that directors had breached their fiduciary duties by granting compensation packages that were excessive and not tied to company performance. The vast majority of these claims had been unsuccessful. In 2012, plaintiffs firms tried a new approach by filing lawsuits alleging inadequate proxy disclosure and seeking to enjoin the say-on-pay vote until additional disclosure was made. Given the short time frame that targeted companies have between the filing of the lawsuit and their annual shareholder meetings, these companies are often under significant pressure to settle with the plaintiffs. As this handbook goes to publication, a number of state and federal courts have so far denied plaintiffs requests to enjoin say-on-pay votes, and one federal court also has dismissed the plaintiffs complaint with prejudice. Investment Manager Reporting of Proxy Votes on Executive Compensation As added by the Dodd-Frank Act, Section 14A(d) of the Exchange Act requires every institutional investment manager subject to Section 13(f) of the Exchange Act (i.e., those institutional investment managers exercising investment discretion over $100 million or more of U.S. public company equity securities and certain other securities) to annually disclose their votes on the say-onpay, golden parachute and frequency of say-on-pay proposals. Proposed Rule 14Ad-1 would implement the say-on-pay disclosure provisions of the Dodd- Frank Act with respect to institutional investment managers. The proposed rule would require disclosure on Form N-PX of the Section 14A say-on-pay votes cast by institutional investment -14-