CAPITAL MARKETS ALERT: Say on Pay: Proposal in ARRA Effective for the 2009 Proxy Season and Thereafter

    26 February 2009
    Earlier this week Senate Banking Committee Chairman Christopher Dodd (D-CT)  sent a letter to the U.S. Securities and Exchange Commission, which set forth his views on the effective dates for certain actions that are required to be taken by companies that have participated in the TARP Capital Purchase Program, as required by the American Recovery and Reinvestment Act (ARRA). One of the items covered in his letter was the requirement that a TARP recipient during the period that it is receiving assistance under TARP permit a non-binding shareholder advisory vote on executive compensation in a proxy statement, consent solicitation or similar solicitation for an annual or other meeting of shareholders. This requirement in ARRA is commonly referred to as the "say on pay" proposal.

    In his letter, Senator Dodd stated his belief that with respect to the non-binding "say on pay" proposal required by the legislation to be put to shareholders, the provision should not apply to any preliminary or definitive proxy statement filed with the SEC on or before February 17, 2009, but would apply to such filings made thereafter. Since alerting you of this letter, we contacted the Staff in the SEC's Division of Corporation Finance for guidance as to when the "say on pay" proposal requirement in ARRA would be effective for SEC reporting TARP recipients. After discussions with the Staff, we were advised that the Staff is following the guidance in Senator Dodd's letter and that the "say on pay" proposal of ARRA is required to be included by SEC reporting TARP recipients in their 2009 annual meeting proxy statements that are filed with the SEC after February 17, 2009. This guidance provided to us by the Staff, as well as certain other compliance matters relating to the "say on pay" proposal requirement of ARRA, is set forth in a Compliance and Disclosure Interpretation just published by the Staff. The following is a link to this published Staff guidance:

    The "say on pay" proposal  requirement may be complied with in one of two ways : (a)  by the SEC reporting TARP recipient including a "say on pay" advisory vote on executive compensation in its annual meeting proxy statement or (b) if the SEC reporting TARP recipient were to include in its annual meeting proxy statement a properly submitted shareholder proposal that fully complies with all of the requirements of ARRA.  

    We expect that most SEC reporting TARP recipients will comply with the "say on pay" proposal requirement using their own proposals. If, however, an SEC reporting TARP recipient were to receive a properly submitted shareholder request in time for its annual meeting proxy statement and decided to use such proposal to comply with the "say on pay" proposal requirement, the Staff advised us that the SEC reporting TARP recipient must be sure that any such shareholder proposal was composed in such a way that it fully complies with the "say on pay" requirements set forth in ARRA. Any such shareholder proposal, therefore, must be a non-binding vote that seeks the approval of the compensation of executives, as such compensation is disclosed pursuant to the SEC compensation disclosure rules (i.e. the Compensation Discussion and Analysis, compensation tables and related material SEC disclosure regarding compensation).  An example of a shareholder proposal that would likely not comply with the ARRA requirements would be if such proposal provided for a non-binding vote based upon something different than the SEC compensation disclosure rules. Ultimately, it is up to the SEC reporting TARP recipient to determine the compliance of any such shareholder proposal with the "say on pay" requirements of ARRA.

    An SEC reporting TARP recipient that complies with the "say on pay" proposal requirement by including its own advisory vote proposal on executive compensation in its annual meeting proxy statement will be required under Rule 14a-6 of the SEC proxy rules to make a preliminary filing of its annual meeting proxy statement that will be subject to a 10 day review period by the SEC. If the "say on pay" proposal were complied with using a proposal from a shareholder (as discussed above), then it would be a routine matter and not require under a preliminary filing with the SEC under SEC proxy rules.  SEC reporting TARP recipients should factor in the preliminary filing and review period into their timing for their annual meeting proxy statement mailing, especially given the new SEC e-proxy rules. Please note, that if the 10 day review period would cause significant burden to you and your ability to distribute your annual meeting proxy statement, in the recently published guidance by the Staff, there is a procedure for TARP recipients to seek relief from the Staff for this 10 day review period. 

    This new "say on pay" proposal requirement will continue each year until the SEC reporting TARP recipient no longer has any obligation arising from financial assistance provided under TARP (excluding warrants to purchase common stock that may continue to be outstanding). Although the SEC has published the interim informal guidance to assist SEC reporting TARP recipients to comply with the "say on pay" proposal requirement for this upcoming 2009 proxy season, we are expecting that the SEC will provide formal compliance requirements through the rulemaking authority granted to the SEC by ARRA. We will update you on any rulemaking by the SEC related to this "say on pay" proposal requirement under ARRA.

    We are happy to discuss these new "say on pay" proposal requirements under ARRA and to provide advice as to compliance. 

     Please contact one of the attorneys below if you have any questions.