Proxy Season Heats Up as New Executive Compensation Rules are Effective and SEC Provides New Disclosure Guidance - 8 March 2010

With Spring just a few weeks away, it also means that the annual
proxy statement season for calendar year public companies is in full
swing. February 28th marked the effective date for the SEC's expanded executive compensation and corporate governance disclosure rules which we have previously reported on (see our December 18, 2009 blog).

In connection with the adoption of these new rules, the SEC's staff
has regularly been updating its interpretive guidance (see for example
our December 23, 2009
blog). Such guidance can be helpful to companies when questions arise
regarding how to correctly comply with the SEC's regulations. Most
recently, on March 1, 2010, the SEC's staff added/revised/withdrew
various interpretations
addressing proxy statement disclosure issues. The SEC's staff also
previously added new executive compensation disclosure interpretations
in January 2010 and February 2010.



Below is a brief overview of the SEC staff's recent updates to some of
its interpretive guidance with respect to executive compensation and
corporate governance disclosure requirements, which are relevant not
only for purposes of annual proxy statements but in registered
offerings of securities:



NEW INTERPRETATIONS

• Director Qualifications and Experience – The
  SEC issued new interpretations that reiterate its desire for companies
  to provide fuller disclosure regarding the specific
  attributes/qualifications of each individual director on a person by
  person basis. This information would also be required for those
  directors who are not up for re-election in the case of a classified
  board. However, the SEC also reiterated that this information need not
  be provided for directors whose term would not be continuing after the
  applicable meeting of shareholders.
  
   


• Equity Compensation –As we previously reported in our December 18, 2009
  blog, the SEC changed the requirements with respect to reporting equity
  compensation values in the Summary Compensation Table (and Director
  Compensation Table). That is, the grant date value of the estimated
  dollar values of equity-based compensation awards (as determined under
  FASB ASC Topic 718) will now be utilized as compared to the prior
  requirement of using the annual financial accounting expense recognized
  for such equity awards. Therefore, a number of new interpretations were
  provided regarding the reporting of equity compensation awards. For
  example, an interpretation was issued covering involved how to report
  the amount of compensation when a named executive officer leaves the
  company and, in connection with such separation from employment, the
  company then decides to accelerate vesting of an option grant that had
  been granted earlier in the same fiscal year. In addition, guidance was
  issued covering the exclusion of estimated forfeitures in valuing
  time-based vesting equity awards along with clarifying that an equity
  award that is forfeited by an executive officer in the year of grant
  will nevertheless still be included in determining whether such officer
  is one of the top most compensated executive officers for such year.
  The SEC also clarified when to report the grant of a performance based
  equity compensation award if a company's compensation committee retains
  discretion to reduce the earned value of the award (as often is the
  case for awards that are seeking to qualify as performance-based
  compensation under Internal Revenue Code Section 162(m)). And, the
  SEC's new interpretations addressed the proper reporting of
  compensation in the proxy's Summary Compensation Table when the
  settlement of incentive compensation arrangements can or does occur
  with company stock rather than cash.
  
   


• Compensation Consultants - Depending on the underlying facts (see our December 18, 2009
  blog), the expanded rules can require a company to disclose additional
  information regarding fees paid to a company's compensation consultant
  for other services rendered by the consultant to the company (depending
  on what the other services were and for what purpose they were
  performed). The SEC issued new interpretations covering the types of
  such other services provided by the consultant along with addressing
  situations where the consultant's services are not customized for a
  company or are limited to broad-based plans that do not favor executive
  officers.
  
   


• Risk Management - The
  new rules provide that if risks arising from a company’s compensation
  policies and practices are “reasonably likely to have a material
  adverse effect on the company”, then the company must provide
  disclosure about such policies and practices as they relate to risk
  management and risk-taking incentives that can affect the company’s
  risk and management of that risk. A new interpretation was issued
  stating that such disclosure should be presented together with a
  company's executive compensation disclosures.
  
   


• Reporting of Shareholder Votes - The
  new rules require accelerated reporting of shareholder votes on Form
  8-K within four business days of the shareholder meeting. The SEC
  provided a new interpretation stating that the end of the shareholder
  meeting is the triggering event for starting the four day period (such
  that if the meeting ended on Tuesday, day one would be Wednesday, and
  the four-business day filing period would end on Monday).
  
   


• Disclosure Requirements in Registration Statements - The
  SEC issued interpretations reiterating that if a registration statement
  or post-effective amendment is filed after the end of an issuer's
  fiscal year end but before its Form 10-K is due:
  
  
  
  
  
  
  
  • if filed on Form S-1, it must include Item 402 executive compensation disclosure prior to effectiveness
    
     
  
  
  • if filed on Form S-3, it may forward incorporate by reference to a subsequently filed Form 10-K
  
  
  
  

If a non-automatic shelf registration statement or post-effective
amendment thereto is to be filed after the due date for the Form 10-K,
the issuer must either file the definitive proxy statement before the
Form S-3 is declared effective or include the officer and director
information in the Form 10-K.



REVISED INTERPRETATIONS

• Equity Compensation – The SEC revised an
  interpretation covering the reporting of "re-load options" (i.e., where
  the optionee receives a new grant of options upon the exercise of an
  option) that were granted to a named executive officer. In such case,
  the grant date fair value of the additional options would need to be
  reported in the Summary Compensation Table in the aggregate amount. The
  SEC also has now stated that a company may provide the required
  valuation assumptions information for equity compensation awards (that
  would typically be incorporated by a reference to the company's
  financial statements) by reference to the Grants of Plan-Based Awards
  Table if the valuation assumptions are reported in such table.
  
   

WITHDRAWN INTERPRETATIONS

• Equity Compensation – As a result of the
  change in reporting equity compensation by switching to using grant
  date fair value, a number of the SEC's interpretations addressing the
  prior requirements of annual expense reporting became obsolete and
  therefore were withdrawn.
  
   

As we have mentioned in several of our prior blogs (see for example our December 18, 2009
blog), in addition to complying with the expanded disclosure rules, the
SEC has clearly signaled that it will be expecting, and looking for,
fuller compliance with its executive compensation reporting regulations
along with clearer and more transparent company disclosures in annual
proxy statements. Two primary areas that continue to receive greater
SEC scrutiny are disclosure of performance targets and compensation
benchmarking. Specific disclosure of performance targets which are a
material element of compensation, and the actual achievement level
against such targets, is required unless the company has a compelling
explanation of why such disclosure would cause it competitive harm.
And, the SEC has indicated
that the competitive harm argument is unlikely to be successful after
the company has disclosed the actual bonus amounts and particularly if
the performance targets are tied to company-wide financial results that
are publicly reported. Similarly, when a company refers to a peer group
used for benchmarking purposes, the SEC expects to see disclosure of
the names of the peer group companies, how they were selected, and
where actual awards fell relative to the benchmark. Therefore, in
conjunction with responding to the new disclosure requirements,
reporting companies should avoid simply repeating last year's proxy
disclosures. Rather, companies should consider re-examining the text
and format of their prior /proxy disclosures from a fresh perspective
with an objective of effecting improvements to the extent possible.
Failure to do so could provoke comments from the SEC which could then
force the company to have to amend its SEC filings.



If you have any questions regarding this information, please contact Greg Schick at (415) 774-2988.