(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
Under the Dodd-Frank Act, public companies involved in merger and acquisition transactions must hold a non-binding shareholder advisory vote on parachute compensation related to the merger (the “Say-on-Parachutes” vote) and must include new disclosures of parachute payments in the merger proxy statement or other filing relating to the transaction. On January 25, 2011, the SEC adopted final rules implementing these requirements (PDF), effective for merger-related filings on or after April 25, 2011. Unlike the other shareholder advisory votes under the Dodd-Frank Act, there is no two-year deferral of effectiveness for smaller reporting companies.
Since the Act was enacted last year, these golden parachute provisions have been outside the spotlight – public companies have understandably focused more of their attention on the separate Say-on-Pay and Say When on Pay advisory votes, which are both required at this year’s annual meeting. However, companies need to consider whether to include the new enhanced parachute disclosures in the annual meeting proxy statement, on a voluntary basis, in order to take advantage of a possible exception from the Say-on-Parachutes vote requirement in a later merger. As described below, most companies will choose not to include the enhanced disclosures in the annual meeting proxy statement.
The new SEC rules added Item 402(t) of Regulation S-K (see Release (PDF) at page 6043), which describes the parachutes disclosure required to be included in the merger proxy statement or other transaction-related filing, such as a tender offer statement. Item 402(t) requires a new Golden Parachute Compensation table with detailed information on the various payments to each named executive officer related to the transaction.
The Item 402(t) disclosures are not required any SEC filings until there is a merger or acquisition transaction. However, if the Item 402(t) disclosures are voluntarily included in an annual meeting proxy statement that includes a Say-on-Pay vote, the company might be able to subsequently use an exception under the statute and avoid the Say-on-Parachutes vote if there is a merger. In its adopting release for the final rules governing the Say-on-Parachutes vote, the SEC states, “we would expect that some issuers may voluntarily include Item 402(t) disclosure with their other executive compensation disclosure in annual meeting proxy statements soliciting the [Say-on-Pay vote] . . . so that this exception would be available to the issuer for a potential subsequent merger or acquisition transaction.”
Is it a good idea to include the voluntary Item 402(t) disclosure to take advantage of the exception? I believe most companies will conclude that it’s not worth it:
- In its adopting release, the SEC made it clear that the exception from the vote requirement is very narrow. At the time of the merger, if there are any new or amended golden parachute arrangements since the date of the previous Say-on-Pay vote, the rules require a Say-on-Parachutes advisory vote on the new or amended arrangements. Even changes resulting from additional grants of equity or salary increases or the addition of a named executive officer would make the exception unavailable. Therefore, even if the company includes the Item 402(t) information voluntarily, it is very likely that there will be some changes to parachute compensation that will require a Say-on-Parachutes vote on the changes at the time of a merger. The merger proxy statement will be required to include two tables – one that shows all of the golden parachute compensation, and a second table disclosing only the new or revised arrangements subject to the vote.
- If the Item 402(t) disclosure is added voluntarily to the annual meeting proxy statement, this will add even more complexity to that document in a section that is already complex and often confusing.
- The addition of the voluntary Item 402(t) disclosure to the annual meeting proxy statement will call additional attention to the parachutes arrangements for purposes of the Say-on-Pay vote. In its 2011 Compensation Policy FAQs, ISS states that, if the company adds the voluntary disclosure, the information in the parachute table will “carry more weight” in ISS’s overall Say-on-Pay recommendation. Therefore, the voluntary disclosure could increase the chances of negative recommendations from proxy advisory firms on the Say-on-Pay vote.
- Boards may not view the requirement of holding the Say-on-Parachutes vote at the time of a merger or acquisition as a great additional burden. The vote is non-binding, and unlike the regular Say-on-Pay vote, the directors who made the compensation decisions subject to the shareholder vote generally will not be continuing in office after the vote. That said, of course the directors would greatly prefer a positive advisory vote, and the vote must be taken seriously.
- Depending on the structure of a future merger and acquisition deal, the Say-on-Parachutes vote may never be required anyway. Many cash mergers are structured as a friendly tender offer followed by a short-form merger. In those deals, there will be no Say-on-Parachutes vote because there is no solicitation of proxies or consents for approval of the ultimate short-form merger. However, the tender offer statement will be required to include the Item 402(t) disclosure.
For these reasons, I don’t expect to see a lot of companies elect to include the “Golden Parachutes Compensation” table required by Item 402(t) in their annual meeting proxy statements.