Sec Proposes Anticipated Rules on Pay-Versus-Performance Disclosure

On April 29, 2015, the SEC, in a 3-2 vote of the SEC Commissioners, approved proposed rules (the “pay-versus-performance disclosure”) that would require an issuer to disclose the relationship between the issuer’s executive compensation and the issuer’s financial performance. The proposed rules would implement a disclosure obligation required under Section 953(a) of the Dodd-Frank Act. Chair White noted, in the SEC press release announcing the proposed rules, that the pay-versus-performance disclosure “would better inform shareholders and give them a new metric for assessing a company’s executive compensation relative to its financial performance.”

In particular, the proposed rules would amend Item 402 of Reg. S-K by adding a new Item 402(v) which would require issuers to disclose, in each proxy or information statement requiring executive compensation disclosure under Item 402 of Reg. S-K, the following:

  • the executive compensation “actually paid” to the issuer’s principal executive officer (“PEO”);
  • the executive compensation “actually paid” to the issuer’s named executive officers (“NEOs” ), expressed as an average for all such NEOs;
  • the issuer’s total shareholder return (“TSR” ); and
  • the TSR of a peer group of issuers.

Like all disclosures required under Item 402 of Reg. S-K, the pay-versus-performance disclosure would be subject to the say-on-pay advisory vote.

Compensation Actually Paid

Under the proposed rules, the executive compensation “actually paid” by an issuer means the total compensation for a particular executive disclosed in the summary compensation table adjusted by certain amounts related to pensions and equity awards. The adjusted disclosure represents an attempt by the SEC to reflect the compensation awarded to, or earned by, such executive officer in a particular year of service. In order to calculate the compensation “actually paid” to a particular executive officer, the total compensation disclosed for such executive officer in the summary compensation table would be adjusted to:

  • deduct the aggregate change in the actuarial present value of all defined benefit and actuarial pension plans reported in the Summary Compensation Table;
  • add back the actuarially determined service cost for services rendered by the executive officer during the applicable year;
  • exclude the grant date value of any stock and option awards granted during the applicable year that are subject to vesting; and
  • add back the value at vesting of stock and option awards that vested during the applicable year, computed in accordance with the fair value guidance in FASB ASC Topic 718.

An issuer would need to include footnotes to the pay-versus-performance summary table (see below for the form table) which describes the amounts excluded from and added to the total compensation reported in the summary compensation and the issuer’s vesting date valuation assumptions used (if materially different from the grant date assumptions disclosed in the issuer’s financial statements).

In addition to the required disclosure, an issuer would be permitted to make disclosures to capture the issuer’s specific situation and industry, provided that any supplemental disclosure is not misleading and not presented more prominently than the required pay-versus-performance disclosure. Examples of supplemental disclosure provided in the proposed rules include the disclosure of “realized pay” or “realizable pay” or additional years of data beyond the time periods required.

Peer Group

The peer group utilized for the TSR comparison would be the same peer group used by the issuer in its stock performance graph or in describing the issuer’s benchmarking compensation practices in its CD&A.

Format

The pay-versus-performance disclosure must be provided in tabular form as set forth below.

Year(a) Summary Compensation Table Total For PEO(b) Compensation Actually Paid to PEO(c) Average Summary Compensation Table Total for non PEO Named Executive Officers(d) Average Compensation Actually Paid to non PEO Named Executive Officers(d) Total Shareholder Return(f)

Peer Group Total Shareholder Return

(g)

Following the pay-versus-performance disclosure table, the issuer would be required to describe the relationship between the issuer’s executive compensation actually paid and the issuer’s TSR and the relationship between the issuer’s TSR and the peer group’s TSR.

Issuers will generally need to make the pay-versus-performance disclosure for its five (or three years, in the first applicable filing following the effectiveness of the proposed rule) most recently completed fiscal years.  However, smaller reporting companies will only need to make the disclosure for three years (or two years, in the first applicable filing following the effectiveness of the proposed rule).  In addition, a smaller reporting company would not be required to (i) disclose amounts relating to pensions (consistent with current executive compensation disclosure obligations); nor (ii) present the TSR of a peer group in its pay-versus-performance disclosure.

XBRL

Companies would be required to tag the pay-versus-performance disclosure using XBRL.  Smaller reporting companies would not be required to comply with the tagging requirement until the third filing in which the pay-versus-performance disclosure is provided.

Companies to which Disclosure Requirement Applies

The proposed pay-versus-performance disclosure rules would apply to all reporting companies, except registered investment companies, foreign private issuers and emerging growth companies.

Conclusion

It is unclear whether the pay-versus-performance disclosure will be adopted (and in effect) in time for the 2016 proxy season.  The SEC is seeking comments on the proposed rules for 60 days following their publication in the Federal Register.

ISS’ FAQs on Equity Plan Data Verification – Roadmap for Proxy Statement Disclosures

If you have a proposal to adopt or amend the company’s equity plan in the proxy statement that you file with the SEC after September 8, 2014, then you can use a new data verification portal recently launched by Institutional Shareholder Services Inc. (ISS) to verify key data points underlying ISS’ evaluation of the plan. ISS explains on its website the mechanics of registering for the Equity Plan Data Verification and requesting modifications after reviewing data points posted by ISS.

One of the most interesting pieces of information provided by ISS in connection with the new portal is Appendix A to the FAQs on Equity Plan Data Verification because it lists the questions that ISS includes in its evaluation of equity plans. The questions are divided into several categories: (i) equity plan provisions, (ii) outstanding stock and convertibles, (iii) equity grant activity, and (iv) shares reserved and outstanding under equity compensation programs.

Listed below are certain questions from each category. Some of these questions can be used as a roadmap for proxy statement disclosures related to equity plan proposals in order to facilitate ISS’ review and evaluation of the plan.

Equity Plan Provisions:

  • Is stock option repricing permitted without shareholder approval?
  • Are cash buyouts of underwater stock options permitted without shareholder approval?
  • Does the plan provide for share recycling, whereby the plan’s share reserve is reduced by the net number of shares delivered through equity awards, not the gross number underlying the original awards?
  • Does the plan contain an evergreen provision, pursuant to which the plan’s share reserve is automatically increased annually?
  • What stock acquisition percentage triggers a change-in-control under the plan?
  • Does the plan provide for tax gross-ups on equity awards?

Outstanding Stock and Convertibles:

  • How many common shares are outstanding (includes all classes of common stock) as of the record date?
  • How many common shares are issuable upon (i) exercise of outstanding warrants, (ii) conversion of outstanding convertible debt, and (iii) conversion of outstanding convertible equity?
  • How many weighted average common shares were outstanding in the past 3 fiscal years, as used in the computation of basic EPS?

Equity Grant Activity:

  • What is the total number of time-vesting options/SARs and full value awards granted in the past 3 fiscal years?
  • What is the number of performance-based options/SARs that vested in the past 3 fiscal years?
  • What is the total number of performance-based full value awards earned in the past 3 fiscal years?

Shares Reserved and Outstanding under Equity Compensation Programs:

  • How many shares are reserved under the proposed new plan or pursuant to the plan amendment?
  • How many shares remain available for grant under all equity compensation plans?
  • How many shares are subject to outstanding awards?

To Unbundle or Not to Unbundle Multiple Amendments? There Is Still No Clear Answer to This Question.

On January 24, 2014, the SEC issued three unbundling Compliance and Disclosure Interpretations (C&DIs), in an apparent response to the decision of the U.S. District Court of the Southern District of New York in Greenlight v. Apple and in time for the 2014 proxy season.  The SEC concept of “unbundling” refers to separating matters submitted to a vote of shareholders into separate proposals, under Rules 14a-4(a)(3) and (b)(1)[1], under the Securities Exchange Act of 1934 so that shareholders could express their views on each separate matter.

With virtually no attention being paid to “unbundling” since September 2004 when the SEC issued an Interim Supplement to the Publicly Available Telephone Interpretations providing “unbundling” guidance in the context of mergers and acquisitions, “unbundling” was brought to light again in 2013, when the Court enjoined Apple, Inc. from accepting proxy votes in connection with a proposal to amend its articles of incorporation to (i) eliminate certain language in order to facilitate the adoption of majority voting for the election of directors, (ii) eliminate “blank check” preferred stock, (iii) establish a par value for Apple’s common stock of $0.00001 per share and (iv) make other conforming changes (Greenlight v. Apple, Feb. 22, 2013).  Greenlight Capital, L.P. sued Apple alleging that such proposal violated SEC “unbundling” Rules 14a-4(a)(3) and (b)(1). 

New C&DIs issued on January 24 provide examples and guidance as to whether companies should be unbundling multiple amendments into separate proposals.  Set forth below is a summary of such guidance, which makes it clear that there is no bright-line test and the unbundling decision is subject to the company’s facts and circumstances analysis. 

Charter Amendments Changing Terms of Preferred Stock

Fact Pattern. If management negotiated concessions from holders of a series of its preferred stock to reduce the dividend rate on the preferred stock in exchange for an extension of the maturity date, can management submit a single proposal to holders of the company’s common stock to approve a charter amendment containing both modifications: one relating to the reduction of the dividend rate and another relating to the extension of the maturity date?

Guidance. Yes, these multiple amendments effectively constitute a single matter and need not be unbundled because they are “inextricably intertwined.” Each of the proposed amendments relates to a basic financial term of the same series of capital stock and was the sole consideration for the countervailing amendment.  However, the staff would not view two arguably separate matters as being inextricably intertwined merely because the matters were negotiated as part of a transaction with a third party, nor because the matters represent terms of a contract that a party considers essential to the overall bargain.

Charter Amendments Changing Common Stock’s Par Value, Eliminating Provisions for Preferred Stock and Declassifying the Board

Fact Pattern.  Can management submit for shareholder approval amendments to the company’s amended and restated charter that would (i) change the par value of the common stock; (ii) eliminate provisions relating to a series of preferred stock that is no longer outstanding and is not subject to further issuance; and (iii) declassify the board of directors as one proposal?.  

Guidance.  Yes, the staff would not ordinarily object to the bundling of any number of immaterial matters with a single material matter. While, there is no bright-line test for determining materiality in the context of Rule 14a‑4(a)(3), companies should generally consider whether a given matter substantively affects shareholder rights. While the declassification amendment would be material under this analysis, the amendments relating to par value and preferred stock do not substantively affect shareholder rights, and therefore both of these amendments ordinarily could be included in a single restatement proposal together with the declassification amendment. However, if management knows or has reason to believe that a particular amendment that does not substantively affect shareholder rights nevertheless is one on which shareholders could reasonably be expected to wish to express a view separate from their views on the other amendments that are part of the restatement, the amendment should be unbundled. 

The analysis under Rule 14a-4(a)(3) is not governed by the fact that, for state law purposes, amendments could be presented to shareholders as a single restatement proposal. If, for example, the restatement proposal also included an amendment to the charter to add a provision allowing shareholders representing 40% of the outstanding shares to call a special meeting, the staff would view the special meeting amendment as material and therefore required to be presented to shareholders separately from the similarly material declassification amendment.

Amendments to Equity Incentive Plan

Fact Pattern. Can management present for a vote of shareholders a single proposal covering an omnibus amendment to the company’s equity incentive plan that (i) increases the total number of shares reserved for issuance under the plan; (ii) increases the maximum amount of compensation payable to an employee during a specified period for purposes of meeting the requirements for qualified performance-based compensation under Section 162(m) of the Internal Revenue Code; (iii) adds restricted stock to the types of awards that can be granted under the plan; and (iv) extends the term of the plan?  

Guidance. Yes, these proposed changes need not be unbundled into separate proposals pursuant to Rule 14a‑4(a)(3). While the Staff generally will object to the bundling of multiple, material matters into a single proposal – provided that the individual matters would require shareholder approval under state law, the rules of a national securities exchange, or the registrant’s organizational documents if presented on a standalone basis – the staff will not object to the presentation of multiple changes to an equity incentive plan in a single proposal.  This is the case even if the changes can be characterized as material in the context of the plan, and the rules of a national securities exchange would require shareholder approval of each of the changes if presented on a standalone basis.

 


[1] Rule 14a-4(a)(3) requires that the form of proxy must “identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters,” and Rule 14a-4(b)(1) provides that, subject to certain exceptions, the form of proxy must include separate boxes for shareholders to choose between approval, disapproval of or abstention “with respect to each separate matter referred to [in the form of proxy] as intended to be acted upon…”