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Legal Update

US Securities and Exchange Commission Approves Proxy and Other Disclosure Changes

17 December 2009
Mayer Brown Legal Update

On December 16, 2009, the US Securities and Exchange Commission (SEC) adopted Release Nos. 33-9089; 34-61175; IC-29092, containing the final rule changes on proxy disclosure requirements that will be effective for the 2010 annual reporting and proxy season. In summary, the rule changes will require proxy statements to include:

  • Disclosure of all employee compensation policies, not limited to executive officer compensation, to the extent that such policies create risks that are reasonably likely to have a material adverse effect on the company. 
  • Disclosure of the extent of the board’s role in risk oversight.
  • Disclosure of the value of stock and option awards in the summary compensation table and director compensation table, based on the aggregate grant date fair value (as opposed to the financial statement reporting value), irrespective of any time-based vesting conditions. This means that a grant which is subject to time-based vesting will be treated as if the entire amount of the grant were earned in the year of the grant, even though the grant may only vest over the course of several years and consequently might never be earned by the employee.
  • Disclosure of expanded details regarding the specific experience, qualifications, attributes and skills that qualify each director and nominee to serve in such a position, in light of the company’s business and structure at the time of filing of the proxy statement.
  • Disclosure of public company directorships held by directors and nominees at any time during the past five years (as opposed to just current directorships). 
  • Disclosure of involvement in various legal proceedings going back 10 years (as opposed to five years) and an expansion of the types of proceedings disclosed.
  • Disclosure of whether, and if so how, diversity is considered in the board nominating process. If there is a policy on board diversity, the discussion will need to describe how it is implemented and how the board or nominating committee assesses the effectiveness of its diversity policy. 
  • A description of the company’s leadership structure, such as whether or not the company combines or separates the chief executive officer and chairman positions, and whether there is a lead independent director and what role that lead director plays. This disclosure will need to state why the company believes its leadership structure is the most appropriate for it at the time of the filing.
  • Disclosure of fees paid to a compensation consultant and its affiliates if the consultant provides any services to the company in addition to those related to determining or recommending executive and director compensation, but only if such fees exceed $120,000 during the company’s fiscal year.

In addition to these proxy disclosures, voting results must be reported on a Form 8-K filed within four business days after the shareholder meeting.

Practical Considerations

In order to comply with the new requirements, companies should consider taking the following steps:

  • Revise or supplement director and officer questionnaires to request information about public company directorships held during the past five years (as opposed to just current directorships), and to request information about various legal or regulatory proceedings involving the director, nominee or officer for the past 10 years (as opposed to five years).
  • Determine who will provide input regarding the new disclosure regarding the specific qualifications, experience and attributes of each director and nominee. Consideration should be given to whether it is appropriate to add a question to the director questionnaire to elicit each director’s input with respect to his or her own qualifications. Alternatively, it may be preferable to seek the nominating committee’s guidance for this disclosure. Or, the disclosure might be prepared by legal counsel or investor relations and circulated for review.
  • Gather information about all relationships the company has with its compensation consultants. In order to research all company relationships with compensation consultants, companies may want to request their consultants to supply information with respect to their affiliates.
  • Determine whether there are any compensation policies and practices for employees in general that are reasonably likely to have a material adverse effect on the company. Also, consider the relationship between compensation and the oversight of risk. It could take a great deal of time to thoughtfully address this new disclosure requirement. Therefore, it would be useful to prepare, as soon as possible, preliminary disclosure responsive to these concepts that can be reviewed by management and the compensation committee.
  • Prepare for circulation within the company, also as soon as possible, the new discussion on the leadership structure and the board’s involvement in the oversight of risk, as well as disclosure about the specific qualifications, experience and attributes of each director and nominee. This is disclosure that senior management and the board will likely want to review carefully.
  • Consider how best to articulate and implement the values reflected in the new board diversity disclosure requirement. The requirement does not define what diversity means in the context of board diversity. Instead, it will permit companies to take into account various attributes that contribute to diversity in different ways. 
  • Notify the persons gathering the information for the compensation tables to report stock and option awards based on aggregate grant date fair value.

If you have any questions about the proxy disclosure and solicitation enhancement rule changes, please contact the author of this Alert, Laura D. Richman, at +1 312 701 7304, or any other member of our Corporate & Securities practice.

Learn more about our Corporate & Securities practice.

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