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Legal Update

U.S. Department of Treasury Proposes Significant Changes to Compensation Practices for All U.S. Public Companies

23 July 2009
Mayer Brown Legal Update

On July 16, 2009, the U.S. Department of Treasury delivered to the U.S. Congress draft legislation that, if adopted, could cause all public companies to make significant changes to certain of their compensation practices. The draft legislation is titled the “Investor Protection Act of 2009” (the “Proposed Legislation”).

The Proposed Legislation addresses the following three areas:

  1. Say-on-Pay. Public companies could be required to obtain a separate shareholder vote to approve the compensation of their executives as disclosed pursuant to the executive compensation rules of the Securities and Exchange Commission. The shareholder vote would not be binding on the company or the board of directors, nor would it create any additional explicit or implicit fiduciary duties for the board. The Proposed Legislation would require the SEC to adopt implementing rules within one year of the date of enactment of the Proposed Legislation.

  2. Golden Parachute Payments. Any proxy or consent solicitation materials used for a meeting of shareholders concerning an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all the assets of a public company (each a “business combination transaction”) would be required to include, in a clear and simple tabular form, disclosure:
    • Of any agreements or understandings that a soliciting person has with the executive officers of any participant to the transaction concerning any type of compensation that is based on, or otherwise relates to, the business combination transaction;
    • The aggregate total of such compensation to be paid or to become payable as a result of such transaction; and
    • The conditions upon which it may be paid or payable.

    In addition, any proxy or consent relating to a solicitation containing this disclosure would be required to provide for a separate shareholder vote to approve these agreements or understandings, as well as the disclosed compensation. The shareholder vote would neither be binding on the company or the board of directors nor impose any additional fiduciary duty on the board. Also, as with the say-on-pay provisions, the Proposed Legislation would require the SEC to adopt implementing rules within one year of the date of enactment of the Proposed Legislation.

  3. Stock Exchange Listing Standards Regarding Compensation Committees. Within 270 days of enactment of the Proposed Legislation, the SEC would be required to direct the national securities exchanges and the national securities associations to prohibit the listing of any security of any company in which:
    • Each member of the compensation committee of the board of directors is not independent. To be independent for this purpose, a member may not, other than in his or her capacity as a director or a member of the compensation committee, (i) accept any consulting, advisory or other compensatory fee from the public company and (ii) be an affiliated person of the public company or any subsidiary thereof;
    • Any compensation consultant, legal counsel or other adviser to the compensation committee is not independent;
    • The compensation committee does not have the authority, in its sole discretion, to retain and obtain the advice of an independent compensation consultant, independent legal counsel or other independent advisers;
    • The compensation committee is not directly responsible for the appointment, compensation and oversight of the work of the independent compensation consultants, independent legal counsel or other independent advisers; and
    • The public company does not provide appropriate funding, as determined by the compensation committee, for the payment of compensation to any independent compensation consultant, independent legal counsel or other independent adviser.

    In any proxy or consent solicitation materials used for an annual meeting of shareholders that occurs one year or more after the date of enactment of the Proposed Legislation, each public company will be required to disclose whether the compensation committee retained, and obtained the advice of, an independent compensation consultant. If the compensation committee did not retain, and obtain the advice of, an independent compensation consultant, the public company will be required to explain the basis for the compensation committee’s determination not to retain an independent compensation consultant.

Although the legislation was just recently sent to Congress, the U.S. Department of Treasury intends that certain provisions, such as say-on-pay, will be applicable for the upcoming 2010 proxy season. In order to meet this schedule, both Congress and the SEC would need to act on an expedited basis. In connection with their planning for the upcoming proxy season, public companies and their advisers should keep in mind how the Proposed Legislation will impact them and their clients.

If you have any questions regarding the Proposed Legislation, please contact the author of this Alert, (+1 312 701 7960), or any other member of our Corporate & Securities practice.

Learn more about our Corporate & Securities practice.

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