when printing in black & white: go to the title master slide, delete the logo and place this...
Post on 19-Dec-2015
214 views
TRANSCRIPT
What Every In-House Counsel Should Know About Corporate Governance Developments and Other Highlights under the Dodd-Frank
Wall Street Reform and Consumer Protection Act
Presentation to The North Florida Chapter
Association of Corporate CounselSeptember 14, 2010
©2010 Foley & Lardner LLP2
Dodd-Frank Wall Street Reform and Consumer Protection Act On July 21, 2010, President Obama signed into
law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act).
The Act primarily addresses the overhaul of the national financial regulatory regime, but also contains corporate governance, executive compensation, disclosure, and other provisions that apply to public companies generally.
©2010 Foley & Lardner LLP3
Dodd-Frank Wall Street Reform and Consumer Protection Act This presentation will focus on those provisions
that are generally applicable to public companies, which most notably include:– Providing the SEC with authority to implement proxy
access– Mandating shareholder advisory votes on executive
compensation and “golden parachutes” – Enhancing compensation committee and adviser
independence requirements– Mandating executive compensation clawbacks– Increasing compensation and governance related
disclosure in proxy statements
©2010 Foley & Lardner LLP4
Dodd-Frank Provisions That Are Not Being Addressed Financial Stability Oversight Council Increased Authority for the Federal Reserve over
BHCs and nonbank financial companies FDIC’s Orderly Liquidation Authority for large
failing financial institutions Regulation of Derivatives Regulation of Advisers to Private Funds (Hedge
Funds) Creation of Federal Insurance Office Bureau of Consumer Financial Protection And many others
©2010 Foley & Lardner LLP5
Regulation D Definition of “Accredited Investor” has been
slightly changed. The minimum net worth standard for accredited investors as that term applies to natural persons has been changed to eliminate the primary residence from the net-worth calculation.
To the extent an investor is underwater, the liability in excess of the value of the primary residence is factored into the minimum net-worth calculation.
Second homes still count toward net-worth.
©2010 Foley & Lardner LLP6
Regulation D (con’t) July 21, 2011 – SEC is required to look at other
Accredited Investor standards for natural persons.
2014 – Another review of Accredited Investor definition and then periodic reviews every 4 years.
No grandfathering for offerings that began before July 21, 2010, but had not yet closed.
Bad boy pensions for rule 505 offerings will apply to Rule 506 offerings once SEC issues rules.
©2010 Foley & Lardner LLP7
Exemption from SOX Internal Controls Attestation Requirements Act permanently exempts companies that are
neither “large accelerated filers” nor “accelerated filers” from SOX Section 404(b) requirement to have the external auditor attest to internal control over financial reporting
Act also requires SEC to conduct a study to determine how SEC could reduce the burden of complying with SOX Section 404(b) for companies whose market capitalization is between $75 million and $250 million
©2010 Foley & Lardner LLP8
Shorter Reporting Deadlines SEC is permitted to shorten the 10-day reporting
periods for:– Form 3 under Section 16 – Schedules 13D and 13G.
©2010 Foley & Lardner LLP9
Proxy Access August 25, 2010 – SEC adopted proxy access
rules as permitted by the Act. “Proxy access” refers to the ability of
shareholders to include their director nominees in the company’s proxy materials.
Shareholders must own 3% of a company’s voting stock for 3 years in order to submit a nominee.
Maximum number of directors that can be submitted is the greater of one or 25% of the entire board. If multiple shareholders submit nominees, nominees from largest shareholders will be accepted.
©2010 Foley & Lardner LLP10
Proxy Access (con’t) Shareholders must certify that they have no
intent to control. Shareholder nominee must be described in a new
Schedule 14N. A company is not responsible for any information provided by the shareholders.
Shareholder nominations are required to be given to a company at least 120 days before the first anniversary date of the company’s proxy statement in the prior year.
Application of Proxy Access to smaller reporting companies is delayed for three years.
©2010 Foley & Lardner LLP11
Proxy Access (con’t) Company Action Items:
– Review and revise advance notice bylaw provisions to work with SEC rules
– Review and revise director nomination procedures in nominating and governance committee charter and corporate governance principles to work with SEC rules
– Be proactive in communicating with large shareholders and understanding their concerns
©2010 Foley & Lardner LLP12
“Say on Pay” Vote on Executive Compensation Act requires companies to include in any proxy
statement requiring compensation disclosure a separate resolution subject to an advisory shareholder vote on the compensation of named executive officers (CEO, CFO and three other most highly compensated executive officers)– Effective for shareholder meetings occurring after
January 21, 2011 (six months after enactment)– Vote must be held at least once every three years,
with frequency determined by separate shareholder vote
– Vote is non-binding and will not be construed to: Overrule any board or company decision; Create or imply any change or addition to the fiduciary duty
of the board or the company; or Restrict or limit shareholder proposals relating to executive
compensation
©2010 Foley & Lardner LLP13
“Say When on Pay” Vote
“Say on pay” vote must be held at least once every three years
Whether “say on pay” vote is held every one, two or three years must be included as separate resolution subject to shareholder vote in proxy statement for first annual shareholder meeting occurring after January 21, 2011
Vote on frequency of “say on pay” must reoccur at least once every six years
Act does not address what voting standard applies to “say when on pay” vote (i.e., plurality or majority)
©2010 Foley & Lardner LLP14
“Say on Pay” Vote Although the “say on pay” requirement is self-
executing, it is likely that the SEC will issue rules on this topic – Current SEC rules would require all companies to
file a preliminary proxy statement ten days before the filing of the definitive proxy statement
SEC eliminated this requirement for TARP companies required to hold “say on pay” votes
– SEC proxy card rules only permit “for,” “against” or “abstain” votes and don’t contemplate one, two or three years for “say when on pay” vote
©2010 Foley & Lardner LLP15
“Say on Pay” Vote (con’t) Company Action Items:
– Be proactive with shareholders in justifying executive compensation
– Revisit proxy statement CD&A disclosure in light of “say on pay” vote
– Review company’s position with respect to hot button compensation issues for institutional investors and proxy advisory firms
– Review executive compensation programs for elements that may be controversial to shareholders
– Consider changes to proxy statement preparation timetable, particularly if preliminary proxy statement is required
– Review and revise compensation committee charter to consider “say on pay” vote
– Consider desired frequency of “say on pay” vote– Review and revise bylaws to permit voting standard used
for “say when on pay” vote
©2010 Foley & Lardner LLP16
Shareholder Approval of Golden Parachute Compensation Act requires proxy materials for shareholder
meetings occurring after January 21, 2011 for the purpose of approving an acquisition, merger, consolidation, or proposed disposition of all or substantially all the assets of the company to include:– Disclosure of any golden parachute agreement with any
named executive officer of the company (or of the acquirer) concerning any compensation based on or otherwise related to the business combination being voted on;
– Disclosure of the aggregate total of all golden parachute compensation that may be paid to such named executive officer and the conditions under which it may be paid or become payable; and
– A separate resolution subject to shareholder vote to approve the disclosed agreements and compensation
©2010 Foley & Lardner LLP17
Shareholder Approval of Golden Parachute Compensation (con’t) Disclosure
– Requires disclosure of present, deferred and contingent compensation
– Disclosure must be in clear and simple form in accordance with SEC rules
No deadline is set by the Act for the SEC to issue rules Shareholder vote
– Vote not required if agreements have been subject to a “say on pay” vote
– Vote is non-binding and will not be construed to overrule any board or company decision, create or imply any change or addition to the fiduciary duty of the board or the company, or restrict or limit shareholder proposals relating to executive compensation
©2010 Foley & Lardner LLP18
Prohibition on Broker Discretionary Voting Act requires exchanges to prohibit discretionary broker
voting for the election of directors, executive compensation, or other significant matters (to be determined by SEC rule) unless beneficial owner has instructed broker how to vote – Amendment effective immediately– 2009 amendments to NYSE Rule 452 eliminated discretionary
voting for director elections, so practical implication of change is to eliminate discretionary voting on executive compensation matters, including shareholder advisory votes on executive compensation and golden parachutes
Company Action Items:– Consider additional efforts to obtain retail shareholder votes
as it will be more difficult to obtain their votes to approve “say on pay” and proposals related to compensation plans
– Negative shareholder advisory votes may lead to shareholder advisory services recommending against the election of compensation committee directors
©2010 Foley & Lardner LLP19
Compensation Clawbacks Act directs SEC to issue rules requiring exchanges to
require that a listed company develop and implement a clawback policy providing:– For disclosure of the company’s policy regarding incentive-
based compensation based on financial information required to be reported under the federal securities laws; and
– In the event of an accounting restatement due to material noncompliance with any financial reporting requirement under the federal securities laws, the company recovers incentive-based compensation paid to any executive officer on the basis of the erroneous data
Applies to compensation paid to any current or former executive officer at any time during the three-year period preceding the restatement
Includes stock options awarded as compensation Amount recovered must be the excess of the compensation
paid over what would have been paid based on the restated financial information
©2010 Foley & Lardner LLP20
Compensation Clawbacks (con’t)
Act does not set a deadline for SEC to act
Section 304 of the Sarbanes-Oxley Act of 2002 (SOX) already contains a clawback provision, although the standard under the Act is stricter than the SOX standard because SOX requires that the restatement occur “as a result of misconduct,” only applies to a company's CEO and CFO, and is limited to a 12-month period preceding the restatement
Company Action Items:– Adopt new clawback policy that complies with SEC rules, or
amend existing policy to ensure compliance with SEC rules– Consider how to effectively apply and enforce policy once
adopted or amended
©2010 Foley & Lardner LLP21
Compensation Committee Requirements SEC must act by no later than July 16, 2011 (360
days after enactment) to issue rules to direct exchanges to prohibit listing of any company that is not in compliance with the requirements of the Act relating to:– Compensation committee member independence;– Compensation committee adviser independence;
and– Compensation committee authority and funding
Act exempts listed companies of which more than 50% of the voting power for the election of directors is held by an individual, group or other company
©2010 Foley & Lardner LLP22
Compensation Committee Independence Exchanges must require that all compensation
committee members be independent (similar to audit committee members)
Exchanges must consider the following in determining independence: – A director’s source of compensation, including
consulting, advisory or other compensatory fees paid by the company to the director; and
– Whether a director is “affiliated” with the company or any affiliate or subsidiary of the company
©2010 Foley & Lardner LLP23
Compensation Committee Independence (con’t) Company Action Items:
– Review current compensation committee member independence in light of most strict potential independence standard (i.e., audit committee standard)
– Review and revise compensation committee charter and corporate governance principles to comply with final rules
– Review and revise D&O questionnaire to capture information to determine independence
©2010 Foley & Lardner LLP24
Compensation Committee Adviser Independence If compensation committee desires to engage
compensation consultant, independent legal counsel or other advisers, the committee must first take into consideration independence factors identified by the SEC, which must include:– The provision of other services to the company by
the adviser's firm; – The amount of fees received from the company by
the adviser's firm as a percentage of the adviser firm's total revenue;
– The policies and procedures of the adviser's firm that are designed to prevent conflicts of interest;
– Any business or personal relationship of the adviser with a member of the compensation committee; and
– Any stock of the company owned by the adviser
©2010 Foley & Lardner LLP25
Compensation Committee Adviser Independence (con’t)
Independence factors must be competitively neutral among the categories of consultants, legal counsel, or other advisers and preserve the ability of compensation committees to retain the services of members of any such category
Act does not require that a compensation committee engage outside advisers, that compensation committee advisers be independent, or that a compensation committee follow the advice of its adviser(s)
©2010 Foley & Lardner LLP26
Compensation Committee Adviser Independence (con’t) Company Action Items:
– To the extent the compensation committee has engaged compensation advisers, review compensation committee advisers’ independence based on factors identified in the Act
– Consider establishing policies and procedures for the compensation committee to follow when retaining advisers
– Review and revise compensation committee charter to comply with final rules
©2010 Foley & Lardner LLP27
Compensation Committee Authority and Funding Compensation committees must have authority
to hire compensation consultants, independent legal counsel and other advisers
Compensation committees must be directly responsible to appoint, compensate and oversee the work of compensation consultants, independent legal counsel and other advisers
Companies must provide compensation committee appropriate funding for compensation consultants, independent legal counsel and other advisers
Company Action Items:– Review and revise compensation committee charter
to comply with final rules
©2010 Foley & Lardner LLP28
Proxy Statement Disclosure: Compensation Consultants Act directs SEC to issue rules requiring proxy
statement disclosure of:– Whether compensation committee retained or
obtained advice from a compensation consultant; – Whether the consultant’s work raised any conflict
of interest; and – If so, the nature of the conflict and how it is being
addressed Requirement will be effective for all annual
shareholder meetings occurring on or after July 21, 2011 (one year after enactment)
©2010 Foley & Lardner LLP29
Proxy Statement Disclosure: Compensation Consultants (con’t) SEC rules adopted in 2009 require companies to
disclose the role of compensation consultants and work done by the consultants for the company as well as certain conflicts of interest
©2010 Foley & Lardner LLP30
Proxy Statement Disclosure: Pay vs. Performance Act directs SEC to issue rules requiring companies to
include in their annual meeting proxy statements information that shows the relationship between executive compensation “actually paid” and the “financial performance of the company”– May include a graphic representation of the information
required to be disclosed– “Actually paid” standard is different than “awarded to, earned
by, or paid to” standard applicable under current proxy rules– In analyzing “financial performance of the company,” must
take into account any change in the value of shares of company stock and dividends
Act does not set a deadline for SEC to act Time period is uncertain – possibly just prior fiscal year.
©2010 Foley & Lardner LLP31
Proxy Statement Disclosure: Pay Disparity Act directs SEC to issue rules requiring disclosure
in proxy statements of:– Median (not the average) annual “total
compensation” of all company employees (other than the CEO);
– Annual total compensation of the CEO; and– Ratio of median employee total compensation versus
CEO total compensation “Total compensation” must be calculated in
accordance with the rules for Summary Compensation Table in effect on July 20, 2010
Act does not set a deadline for SEC to act and SEC Chairman Schapiro noted that it is unlikely that these rules will be in place for the 2011 proxy season.
©2010 Foley & Lardner LLP32
Proxy Statement Disclosure: Pay Disparity Company Action Items:
– Wait on SEC rules– Modify disclosure controls and procedures to
capture information required by anticipated SEC rules
©2010 Foley & Lardner LLP33
Proxy Statement Disclosure: Employee and Director Hedging Act directs SEC to issue rules requiring annual meeting
proxy statement disclosure regarding whether employees and directors may purchase financial instruments designed to hedge or offset decreases in market value of compensatory awards of equity securities or otherwise held, directly or indirectly, by those persons– Includes prepaid variable forward contracts, equity swaps,
collars and exchange funds– Act requires disclosure only of policy with respect to
purchasing hedging instruments, rather than actual purchases– Current SEC proxy rules require specific hedging transactions
by executive officers or directors to be disclosed Act does not set a deadline for SEC to act
Company Action Items:– Review and revise existing hedging policy or consider adopting
hedging policy for directors, officers and employees
©2010 Foley & Lardner LLP34
Proxy Statement Disclosure: Chairman and CEO Structure
Act directs SEC to issue rules requiring proxy statement disclosure of the reasons why a company has chosen either the same or different persons to serve as Chairman of the Board and CEO
2009 SEC rules already require disclosure of whether and why a company combines or separates the positions of Chairman and CEO
©2010 Foley & Lardner LLP35
Institutional Investment Manager Vote Disclosure
Act requires institutional investment managers exercising investment discretion over $100 million or more of U.S. public company equity to report at least annually how they voted on “say on pay” and golden parachutes
©2010 Foley & Lardner LLP36
Other Potential Exemptions Under the Act
Act permits the SEC or national securities exchanges to exempt classes of companies from the following requirements of the Act:– Proxy access authority; – Shareholder advisory votes on executive compensation
and golden parachutes; – Disclosure of investment manager votes on executive
compensation and golden parachutes; and – Compensation committee and adviser independence
SEC has delayed proxy access for small companies for three years
©2010 Foley & Lardner LLP37
Immediate Action Items Educate directors and senior management Revise bylaws for proxy access Monitor SEC rulemaking Consider compensation policies and disclosures
in light of pending rules Be proactive in communication with large
shareholders and understand their concerns
This presentation is provided as a service to friends and clients. This presentation addresses new laws that will be subject to regulatory interpretation and rule-making over the next twelve months. The information contained herein should not be construed as legal advice.
Prepared by:
Gardner F. [email protected]
andMichael B. Kirwan
[email protected] & Lardner LLP
Jacksonville, FL(904) 359-2000