Securities & Financial News to Note A Bi-Weekly Bulletin SEC/Corporate SEC Proposes Say-on-Pay Rules On October 18, 2010, the SEC proposed rules to implement the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ) relating to: (1) shareholder advisory votes on executive compensation ( say-on-pay ); (2) shareholder advisory votes on the frequency of say-on-pay votes ( say-on-frequency ); and (3) shareholder advisory votes on compensation arrangements in connection with significant corporate transactions ( say-on-golden-parachutes ). Say-on-Pay The proposed rules would require public companies to hold a say-on-pay vote at least once every three years. The proposed say-on-pay rules do not dictate a specific form of resolution or specific language to be used in structuring the shareholder vote. However, the vote must approve the compensation of the named executive officers (NEOs) as such compensation is disclosed under Item 402, including the CD&A, the compensation tables and other narrative disclosures. The say-on-pay vote would not cover disclosure required under Item 402(s) of Regulation S-K of risks arising from a company s employee compensation programs (although it would cover risk disclosure included in the CD&A regarding a company s named executive officer compensation programs). In addition, the CD&A must include disclosure as to whether, and if so, how the company s compensation policies and decisions have taken into account the results of previous say-on-pay votes. Companies must also briefly explain in the proxy statement the effects of the vote, such as whether it is non-binding. However, companies would not be required to state what action they would expect to take in response to a say-on-pay vote. Say-on-Frequency The proposed rules would require public companies to hold at least once every six years a separate shareholder advisory vote on whether the say-on-pay vote should be held every one, two or three years. The proposed rules would require companies to provide shareholders with four choices: whether the say-onpay vote should be held every year, every two years, every three years, or to abstain from voting. The proposing release states that if proxy service providers cannot reprogram their systems to allow for the four choices in time for the first required say-on-frequency votes, and until final rules are issued, companies may include only three choices on their proxy for the say-on-frequency proposal: one year, two years, or three years. While companies would be free to include their recommended alternative, the proxy card would need to make clear that the vote is not to approve or disapprove a company s recommendation. Companies would be required to disclose in their Form 10-Q their decision regarding how frequently they will conduct the say-on-pay vote. Issues Relating to Both Say-on-Pay and Say-on-Frequency Votes The following are issues that must be considered relating to both say-on-pay and say-on-frequency votes: Companies are required to hold say-on-pay and sayon-frequency votes at any annual or other shareholder meeting occurring on or after January 21, 2011, whether or not the final rules are adopted. A preliminary proxy statement would not be required to be filed in connection with the say-on-pay/say-onfrequency votes if the only ballot items that otherwise would require a preliminary filing are the say-on-pay and say-on-frequency votes. Brokers are not permitted to vote uninstructed shares on the say-on-pay/say-on-frequency votes. Proposed amendment to Rule 14a-8 would allow companies to exclude a shareholder proposal providing for a say-on-pay/say-on-frequency vote if the company has adopted a policy on say-on-pay/say-on-frequency votes that is consistent with the plurality of votes cast in the most recent relevant vote.
The SEC confirmed that say-on-pay/say-on-frequency votes are non-binding on a company and its board of directors. Say-on-Golden-Parachutes The proposed rules would require, in connection with shareholder approval of an acquisition, merger, consolidation or proposed sale or disposition of all or substantially all of a company s assets, disclosure of all golden parachute agreements that the soliciting company has with its NEOs or the NEOs of the acquiring company (if the soliciting company is the target company) with respect to compensation that is based on or otherwise relates to such transaction. In addition, these companies would be required to hold a separate shareholder advisory vote on these compensation arrangements unless all of the transaction-related compensation agreements and understandings were the subject of a prior say-on-pay vote. The proposed rules do not dictate a specific form of resolution or specific language to be used in structuring this advisory vote. The disclosure would be required in merger proxies, Schedule 13E-3 going private transactions, tender offers and consent solicitations. It would not be required in an annual meeting proxy that does not involve a merger or extraordinary transaction. However, if disclosure of the golden parachute compensation was included in the annual meeting proxy statement that was subject to a say-onpay vote, such an arrangement would be exempt from the say-on-golden-parachute vote. The new disclosure would be presented in both narrative and tabular form, with tabular disclosure made in a new Golden Parachute Compensation table that would include columns for the following categories of compensation: cash equity pension and nonqualified deferred compensation perquisites and other personal benefits tax reimbursements other items a total of the above items Companies must also disclose any material conditions or obligations to the receipt of payment, including non-compete, non-solicitation, non-disparagement or confidentiality agreements, their duration and provisions regarding waiver or breach. The disclosure would require a summary of the specific circumstances that would trigger payment, whether the payments would or could be lump sum, or annual, and their duration, and by whom the payments would be provided, and any material factors regarding each agreement. Comments are due on the proposed rules by November 18, 2010. http://www.sec.gov/rules/proposed/2010/33-9153.pdf SEC Proposes Rules on Institutional Manager Proxy Voting On October 18, 2010, the SEC proposed rules implementing the Dodd-Frank Act requirement that institutional investment managers report how they voted on say-on-pay, say-onfrequency and say-on-golden-parachute votes. The proposed reporting rules provide that an institutional investment manager subject to reporting obligations under Section 13(f) of the Exchange Act must report annually on Form N-PX how it voted on these proposals. Covered institutional investment managers will be required to report votes relating to shareholder meetings that occur on or after January 21, 2011. An institutional investment manager will be required to report its voting of any security over which the manager had or shared voting power with respect to say-on-pay, say-on-frequency and say-on-golden-parachute votes, without regard to whether it had voting power over other matters. The report would be required to be filed no later than August 31 of each year, with respect to votes that occurred in the 12 months ending June 30 of that year. The proposed rules provide a transition period, with respect to Form N-PX reporting obligations, for institutional investment managers that were previously not subject to Section 13(f) reporting obligations but became subject to such obligations in a given calendar year (e.g., by crossing the $100 million threshold). The information required to be disclosed in Form N-PX will include the following: name of the issuer of the security exchange ticker symbol of the security and its CUSIP number shareholder meeting date brief identification of the matter voted on with respect to registered management investment companies only, whether the matter was proposed by the issuer or a shareholder; number of shares the reporting person was entitled to vote (with respect to registered management investment companies) or had or shared voting power over (with respect to institutional investment managers) number of shares actually voted how the person voted those shares including, with respect to votes cast in multiple manners, the number of votes cast in each manner whether the vote was for or against management s recommendation identification of each institutional investment manager on whose behalf the Form N-PX is being filed Comments are due on the proposed rules by November 18,2010. http://www.sec.gov/rules/proposed/2010/34-63123.pdf 2
SEC Proposes Asset-Backed Securities Disclosure Rules On October 14, 2010, the SEC proposed asset-backed securities disclosure rules in accordance with Sections 932 and 945 of the Dodd-Frank Act. Under these proposals, the following requirements apply: issuers of asset-backed securities that are registered with the SEC would need to perform a review of the assets underlying the asset-backed securities proposed amendments to Regulation AB would require an issuer of asset-backed securities to disclose the nature, findings and conclusions of this review the issuer or underwriter for both registered and unregistered asset-backed securities offerings would be required to disclose the findings and conclusions of any review performed by a third party that was hired to conduct such a review Under the proposed rules, a third-party diligence provider whose findings and conclusions are included in a registration statement may be required to consent to being named in the registration statement as an expert and thus be subject to liability under Section 11 of the Securities Act. The SEC is required to adopt rules under Sections 932 and 945 of the Dodd-Frank Act within 180 days after enactment of the Dodd-Frank Act. Comments are due on the rules by November 15, 2010. http://www.sec.gov/rules/proposed/2010/33-9150.pdf SEC Releases Responses to Frequently Asked Questions Concerning Short Sale Rule The SEC recently released its responses to frequently asked questions relating to Rule 201 of Regulation SHO. Rule 201 restricts the price at which short sales may be effected when a stock has experienced significant downward price pressure. Compliance with the new rule is required as of November 10, 2010. Below are some of the answers to questions regarding Rule 201 that have been compiled by the staff. 1) The current national best bid does not factor into the calculation regarding whether the price of a covered security has decreased by 10% or more from the covered security s closing price as of the end of regular trading hours on the prior day. The covered security s price is based on trades reported in the consolidated system for the covered security during regular trading hours. 2) The determination regarding whether the Rule 201 circuit breaker has been triggered is limited to regular trading hours. 3) If the national best bid and offer for a covered security subject to the short sale price test restriction of Rule 201 become crossed, a short sale order in the covered 3 security may be displayed or executed at a price that is less than or equal to the current national best bid while the market is crossed. 4) The short sale price test restriction, once triggered, will apply to short sale orders for the remainder of the day and on the next trading day and outside of regular trading hours. 5) Rule 201 does not place any limit on the frequency or number of times the circuit breaker can be re-triggered with respect to a particular stock. http://www.sec.gov/divisions/marketreg/rule201faq.htm Accounting/Tax FASB Proposes Changes to the Goodwill Impairment Test On October 6, 2010, the Financial Accounting Standards Board (FASB) proposed two critical changes to the way companies test for impairment of goodwill as part of an accounting standards update on Topic 350. Specifically, FASB adopted the so-called equity premise to standardize the determination of the carrying amount of a reporting unit. In addition, FASB proposed that when a reporting unit s carrying amount is zero or a negative amount, the second step of the impairment test must be performed when it is more likely than not that a goodwill impairment exists. For financial accounting purposes, the intangible asset known as goodwill is not amortized under U.S. generally accepted accounting principles (GAAP). Instead, goodwill is tested for impairment at a reporting unit level in a twostep process. First, an entity must assess whether the carrying amount of a reporting unit exceeds its fair value (Step 1). Then, if it does, an entity must perform an additional test to determine whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The first proposed change addresses how an entity will calculate the carrying amount of a reporting unit for purposes of applying Step 1 of the goodwill impairment test. Companies currently have two options for calculating the carrying amount of each reporting unit: 1) the equity premise (calculated as the difference between total assets and total liabilities of the reporting unit), or 2) the enterprise premise (calculated as the difference between the total assets and liabilities of the reporting unit, excluding liabilities that are part of the capital structure of the reporting unit) The amendments in the proposed update would clarify that the equity premise is the only method an entity can use for purposes of calculating the carrying amount of a reporting unit.
Additionally, the proposed changes would modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity would be required to perform Step 2 of the goodwill impairment test if there are adverse qualitative factors that indicate that it is more likely than not that a goodwill impairment exists. The qualitative factors shall be those set forth in ASC 350-20-35-30, which include the following: a significant adverse change in legal factors or in the business climate an adverse action or assessment by a regulator unanticipated competition a loss of key personnel a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit Comments on the proposed changes are due on November 5, 2010. If adopted, the proposed changes would be effective for public companies in fiscal years and interim periods within those years, beginning after December 15, 2010, and for private companies one year later. Early adoption for public companies would not be permitted. http://www.fasb.org/cs/blobserver?blobcol=urldata&blobtable= MungoBlobs&blobkey=id&blobwhere=1175821431334&blobh eader=application%2fpdf Litigation Court of Chancery Affirms Validity of Bylaw Accelerating Timing of Annual Meeting In a case of first impression, the Delaware Court of Chancery considered the validity of a shareholder proposed bylaw amendment that would cause the company s annual meetings to be held in January of each year as opposed to August when the meetings have historically been held. The shareholder proposed the amendment in the midst of a takeover battle with the company. At the company s 2010 annual meeting, the shareholder had successfully obtained all three board seats that were up for election on the company s classified ninemember board. By moving the next annual meeting to January, the shareholder could attempt to add additional directors to the company s board sooner than normal. The company argued that the bylaw amendment was invalid because: 1) the amendment constituted a change to the company s bylaw provisions requiring a staggered board and therefore required a 67% vote to pass, as opposed to the majority vote it received 2) the amendment was inconsistent with the provisions of the company s certificate of incorporation providing for a staggered board 3) the amendment violated the Delaware law provisions authorizing corporations to adopt staggered boards The court found that the company s bylaws and certificate of incorporation provided only that directors were to stand for reelection at annual meetings held at some point during the third year following the year of their election and therefore the directors that were elected in 2008 could have their terms expire at the January 2011 annual meeting. In addition, the bylaws and certificate of incorporation did not clearly provide that the company s directors must serve a full three-year term. The Court also found that the bylaw amendment was valid under Delaware law. Airgas, Inc. v. Air Products and Chemicals, Inc., C.A. No. 5817-CC (Del. Ch. Oct. 8, 2010) The editors would like to thank the following contributor for her assistance with this issue of Securities & Financial News to Note: Alexandra P. Lumpkin 4
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