SEC ADOPTS CHANGES TO DISCLOSURE REQUIREMENTS EFFECTIVE FOR UPCOMING PROXY SEASON On December 16, 2009, the Securities and Exchange Cmmissin adpted amendments t its disclsure requirements relating t executive cmpensatin and crprate gvernance. The amendments are effective February 28, 2010, and will therefre require mst public cmpanies t cmply with the new requirements in their prxy statements fr their 2010 annual meetings. 1 The amended rules address the fllwing items: The relatinship between a cmpany s cmpensatin plicies and practices and risk management; Cmpensatin cnsultants fees and ptential cnflicts f interest; A requirement that cmpanies reprt the full grant date fair value f stck and ptin awards in their Summary Cmpensatin Tables; The experience and qualificatins f directrs and nminees and their invlvement in legal prceedings; A cmpany s practices with respect t diversity in the selectin f directr nminees; A cmpany s leadership structure, particularly the separatin f the CEO and Chairman psitins and the rle f any lead independent directr; The rle f the bard f directrs in risk versight; and Accelerated reprting f annual meeting vting results. The text f the amendments and related cmmentary by the Cmmissin are set frth in the adpting release, SEC Release Ns. 33-9089, 34-61175, IC-29092 (December 16, 2009). T view the release, click here. PROXY STATEMENT DISCLOSURES RELATING TO COMPENSATION The amended rules require the fllwing new disclsures relating t cmpensatin matters: Disclsure relating t the relatinship between cmpensatin plicies and practices and risk management. Public cmpanies will nw be required t disclse in their prxy r infrmatin 1 The Cmmissin s adpting release did nt address transitin and cmpliance date issues in detail. On December 22, 2009, the staff f the Divisin f Crpratin Finance published a Cmpliance and Disclsure Interpretatin (CDI) clarifying that the new disclsure requirements currently apply t issuers whse fiscal years end n r after December 20, 2009. Such issuers Frms 10-K and definitive prxy statements filed n r after February 28, 2010 must cmply with the new requirements; their preliminary prxy statements, regardless f filing date, must cmply if the issuer expects t file the definitive prxy statement n r after February 28, 2010. Issuers whse fiscal years ended befre December 20, 2009 need nt cmply with the new requirements until they file their Frms 10-K fr fiscal year 2010 and the related prxy statements, even if their 2009 Frms 10-K r related prxy statements are filed after February 28, 2010. Hwever, all cmpanies whse annual meetings ccur after February 28, 2010 must reprt that meeting s vting results in cmpliance with the new Frm 8-K filing requirement. T see the staff s CDI, click here. 1
statements infrmatin abut whether the cmpany s cmpensatin plicies and practices fr emplyees create incentives that may result in risks that are reasnably likely t have a material adverse effect n the cmpany. The adpting release cntains several examples f circumstances in which disclsure might be required under the rule and examples f issues that cmpanies may need t address when discussing cmpensatin plicies and practices that may create material risks. This amendment, as adpted, differs in certain respects frm the versin initially prpsed by the Cmmissin in July 2009. The disclsure threshld has been increased smewhat, frm may have a material effect n the registrant t is reasnably likely t have a material adverse effect n the registrant. In additin, the amendment des nt require that this disclsure be cntained in Cmpensatin Discussin & Analysis, since the disclsure relates t the cmpany s cmpensatin plicies and practices fr its fficers and emplyees generally, while CD&A fcuses n cmpensatin f executive fficers. These new disclsure requirements relating t the relatinship between a cmpany s cmpensatin plicies and practices and risk management d nt apply t smaller reprting cmpanies, defined in the Cmmissin s rules as cmpanies with public flats f less than $75,000,000 as f the last business day f their mst recently cmpleted secnd fiscal quarters. Disclsure abut fees paid t cmpensatin cnsultants fr ther services. The Cmmissin is cncerned that cmpensatin cnsultants, r their affiliates, are ften engaged t prvide a brad range f additinal services t public cmpanies, such as benefits administratin, human resurces cnsulting and actuarial services, smetimes fr fees that exceed the fees earned fr cmpensatin cnsulting services, and that such additinal services may create the appearance, r risk, f a cnflict f interest that may call int questin the bjectivity f the cnsultants cmpensatin recmmendatins. The amended rules require disclsure f fees paid t cmpensatin cnsultants fr cmpensatin cnsulting services and fr ther services in certain circumstances. Specifically, the fee disclsures are required if: the bard f directrs r cmpensatin cmmittee has engaged a cmpensatin cnsultant and such cnsultant prvides ther services t the cmpany fr fees exceeding $120,000 during the fiscal year; r the bard f directrs r cmpensatin cmmittee has nt engaged a cnsultant, and a cmpensatin cnsultant engaged by management prvides ther services t the cmpany fr fees exceeding $120,000 during the fiscal year. The disclsure is nt required if the bard r cmpensatin cmmittee and management have hired separate cmpensatin cnsultants, and nly management s cnsultant prvides ther services t the cmpany. In that circumstance, the bard s ability t rely n the advice f its wn cnsultant alleviates any cncerns abut ptential cnflicts f interest affecting management s cnsultant. In cases where fee disclsure is required because the bard s cnsultant prvides ther services t the cmpany fr fees exceeding $120,000 during the fiscal year, the cmpany is als required t 2
disclse whether the additinal services were recmmended by management and apprved by the bard r cmpensatin cmmittee. The amendments cntain an exceptin fr services prvided nly with respect t brad-based, nndiscriminatry benefit plans, such as 401(k) plans, and fr cnsultants engaged t prvide nly certain peer reprts r surveys that are nt custmized fr the cmpany r are custmized based n parameters nt develped by the cnsultant. This exceptin relating t nn-custmized surveys, as well as the $120,000 threshld, were nt included in the amendments as riginally prpsed. In anther departure frm the riginal prpsal, the amendments as adpted require disclsure nly abut fees paid t cnsultants, and d nt require disclsure f the nature and extent f the additinal services prvided by the cnsultants. Disclsure f full grant date fair values f stck and ptin awards in the Summary Cmpensatin Table. In cnnectin with its cmprehensive revisins t the executive cmpensatin disclsure rules in July 2006, the Cmmissin had required that public cmpanies disclse the full grant date fair values f equity awards in their Summary Cmpensatin Tables, but the Cmmissin reversed curse n this issue in December f that year by replacing that disclsure requirement with the current requirement that the Summary Cmpensatin Table include nly the prtin f the grant date fair value f an award recgnized as cmpensatin expense during the year. The new amendments require that the Summary Cmpensatin Table disclse the full grant date fair value f stck and ptin awards. The Cmmissin has stated that it nw believes such disclsure prvides a mre accurate picture f the cmpensatin a cmpany prvides t an award recipient in the year in which the grant is made. If equity awards are subject t perfrmance vesting requirements, the amended rules require disclsure in the Summary Cmpensatin Table f grant date values based n the mst likely utcme f the perfrmance cnditins, with the maximum value f the award being disclsed in a ftnte. The Cmmissin has decided nt t eliminate the disclsure f full grant date fair value f individual equity awards frm the Grants f Plan-Based Awards Table, as had been prpsed. The Cmmissin believes this infrmatin is useful t investrs as a supplement t the aggregate disclsure required in the Summary Cmpensatin Table. The amendments als require that cmpanies restate their disclsure f grant date fair values f equity awards fr the tw years preceding the current year, and t make crrespnding changes in the ttal cmpensatin clumns, s that the disclsure will be cmparable acrss all years included in the Summary Cmpensatin Table. The amendments may result in mre frequent changes in the individuals required t be included in the Summary Cmpensatin Table based n large equity awards made in a single year, but cmpanies will nt be required t include different named executive fficers in the table based n recmputed ttal cmpensatin numbers fr prir years, r t amend prir years cmpensatin disclsures previusly included, r incrprated by reference, in Frms 10-K. In its July 2009 release, the Cmmissin had prpsed t amend the Summary Cmpensatin Table t remve frm the amunts included in the salary and bnus clumns any amunts fregne at the electin f the fficer and taken instead in the frm f equity awards, which wuld have been disclsed in the apprpriate clumn fr nn-cash awards. The Cmmissin did nt adpt that amendment, having decided based n cmments received that investrs prefer t 3
receive infrmatin abut cmpensatin in the frm that the cmpensatin cmmittee determined t pay it. PROXY STATEMENT DISCLOSURES RELATING TO CORPORATE GOVERNANCE MATTERS Disclsure abut directr qualificatins, invlvement in legal prceedings and ther directrships. The amended rules require cmpanies t disclse fr each nminee and directr, including incumbent directrs nt up fr reelectin, the particular experience, qualificatins, attributes r skills that led the bard t cnclude that the persn shuld serve as a directr f the cmpany. In the prpsing release, the Cmmissin had nted that the required disclsure shuld include such things as a directr s r nminee s risk assessment skills, as well as infrmatin abut his r her past experience, areas f expertise and a statement as t why the cmpany believes that the directr s r nminee s service as a directr wuld benefit the cmpany. The amendment as adpted, hwever, des nt specify the particular infrmatin abut a directr s skills, qualificatins, r expertise that must be disclsed, and the reference t risk assessment skills has been mitted. The amendment as adpted als des nt require disclsure regarding a directr s r nminee s qualificatins fr service n cmmittees f the bard, as had been prpsed. The amendments increase frm five years t 10 years the perid cvered by the required disclsure regarding a directr s r nminee s invlvement in certain legal prceedings, and require disclsure f directrships in ther public cmpanies held at any time during the preceding five years, rather than just directrships currently held, as required under the current rule. The Cmmissin believes these expanded disclsure requirements will prvide investrs with better infrmatin abut a directr s qualificatins, cmpetence and character. The amendments have als expanded the list f the types f legal prceedings that require disclsure, by adding the fllwing: Judicial r administrative rders r judgments relating t alleged vilatins f any law r regulatin prhibiting mail r wire fraud r fraud in cnnectin with any business entity; Judicial r administrative rders r judgments relating t alleged vilatins f any federal r state securities, cmmdities, banking r insurance laws and regulatins, r any settlement f such an actin; and Disciplinary sanctins r rders impsed by a stck, cmmdities r derivatives exchange, r ther self-regulatry rganizatin. Disclsure abut diversity practices in the directr nminatin prcess. The amendments require cmpanies t disclse whether and hw their bards r nminating cmmittees cnsider diversity in selecting nminees, and hw the cmpany implements its diversity plicy, if any, and evaluates its effectiveness. This requirement was nt specifically included in the amendments prpsed in July 2009, but the Cmmissin slicited cmments n the issue f diversity in the prpsing release. The amended rule des nt define diversity, and the Cmmissin ntes in the adpting release that sme cmpanies may interpret diversity expansively t include diversity f view pints, prfessinal experience, educatin, r ther qualities, while thers may fcus n diversity f race, gender, r natinal rigin. 4
Disclsure regarding the cmpany s leadership structure and the bard s rle in risk versight. Under the amended rules, a public cmpany will be required t discuss its leadership structure and t indicate why it believes its structure is apprpriate fr the cmpany. Cmpanies will be required t cmment specifically n whether they cmbine r separate the Chairman f the Bard and CEO functins, and, if thse psitins are cmbined, t discuss whether the cmpany has a lead independent directr as well as the specific rles the lead independent directr plays in the cmpany. Disclsure will als be required with respect t the rle f the bard f directrs in risk versight f the cmpany. (The prpsing release referred t the bard s rle in the cmpany s risk management prcess, but the amendments, as adpted, mre apprpriately refer t the bard s rle in the versight functin.) The adpting release indicates that such disclsure might address questins such as whether individuals invlved in the day-tday supervisin f the risk management functin reprt directly t the bard as a whle, r t a cmmittee, and hw the bard r a cmmittee mnitrs risk. ACCELERATED DISCLOSURE OF VOTING RESULTS The Cmmissin has revised the requirements fr the disclsure f the results f sharehlder vtes, and such disclsure will nw be required much sner than it is typically made under the current requirements. Currently, public disclsure f the results f sharehlder vtes is required in quarterly r annual reprts n Frm 10-Q r Frm 10-K filed fllwing the quarter in which the meeting is held. Althugh sme cmpanies publicize summary vting results in press releases, there is ften a significant delay between the date f a cmpany s annual meeting and the filing f its Frm 10-Q r Frm 10-K in which the detailed disclsures are required. The Cmmissin has nw mved this disclsure requirement t Frm 8-K, and the disclsure must be made in a reprt n that frm filed within fur business days after the date f the meeting. If vting results cannt be finalized in that time frame, cmpanies will be required t disclse preliminary vting results, and t amend the Frm 8-K within fur business days after final results are available. PROPOSED AMENDMENTS TO PROXY SOLICITATION RULES In the prpsing release issued in July 2009, the Cmmissin had als prpsed amendments t several rules relating t the prxy slicitatin prcess, including a change that wuld clarify that a sharehlder prpnent f a shrt slate f directrs may rund ut its slate by seeking authrity t vte fr the nminees f anther sharehlder prpnent, and nt just fr the cmpany s nminees. Hwever, because the issues addressed by thse prpsals are clsely related t the issues addressed by the Cmmissin s pending prpsal regarding the ability f sharehlders t require public cmpanies t include sharehlders nminees in the cmpany s prxy statement (the prxy access prpsal ), the Cmmissin deferred cnsideratin f thse prpsals until it cnsiders the prxy access prpsal. The Cmmissin anticipates taking actin n the prxy access prpsal in early 2010. CONCLUSION Althugh the Cmmissin has indicated that the new rule amendments are intended t require disclsure and nt t mandate the adptin by public cmpanies f any particular cmpensatin r crprate gvernance practices, the additinal disclsure bligatins will likely cause mst public cmpanies t evaluate their current practices, if they have nt already dne s in respnse t the prpsed rules published in July f this year. Sme f the actins that cmpanies may want t cnsider include: 5
Analyzing whether their cmpensatin plicies and practices incentivize apprpriate risk-taking by management and emplyees, rather than excessive r inapprpriate risk-taking that is reasnably likely t have a material adverse effect n the cmpany; Evaluating the cmpany s relatinships with cmpensatin cnsultants t determine whether the relatinships create, r give the appearance f, cnflicts f interest; Reviewing the cmpany s prcess fr evaluating the skills and qualificatins f directrs and nminees, and the cmpany s ability t articulate the standards it applies; Reviewing the cmpany s practices with respect t bard diversity, r cnsidering implementing a diversity initiative if nne currently exists; Evaluating and cnfirming that the current leadership structure is apprpriate, given the cmpany s specific characteristics and circumstances, and cnsidering whether additinal frmalizatin r dcumentatin f the rles f the chairman f the bard, CEO, and lead independent directr, if any, is necessary; and Cnsidering whether any changes in, r further frmalizatin r dcumentatin f, the rle f the bard f directrs and its cmmittees (typically the audit cmmittee) in verseeing risks is necessary. Public cmpanies will als have t make changes t their directr and fficer questinnaires t request the additinal infrmatin required under the amendments relating t directrs and nminees invlvement in legal prceedings and ther public cmpany directrships. TO GET MORE INFORMATION If yu have questins abut any f the actins taken by the Securities and Exchange Cmmissin, r abut the Cmmissin s disclsure requirements generally, please cntact any f the Thmpsn & Knight attrneys with whm yu regularly wrk r Kenn Webb, a Partner in the Crprate and Securities Practice Grup in ur Dallas ffice. CONTACT: Kenn W. Webb Partner, Crprate and Securities 214.969.1549 Kenn.Webb@tklaw.cm 6
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