January 27, 2011Client Alert

Developments in Securities Law - January 2011



Preparing for the 2011 Proxy Season

In preparation for the 2011 proxy season, there are a number of new developments companies must take into account when preparing proxy statements and annual reports in the wake of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the release of proposed rules by the SEC. 


Say on Pay

A new mandatory say-on-pay proposal is required in annual meeting proxy statements for shareholder meetings occurring on or after January 21, 2011.  The SEC released proposed rules on October 18, 2010, which have not yet been finalized.  Under the proposal, companies are required to provide shareholders with a non-binding say-on-pay advisory vote approving the compensation of its executive officers at least once every three years.  Companies should begin preparing for say on pay by reviewing current linkages between its executive pay and performance and analyzing how its executive pay compares to pay at the company’s peers. Additionally, companies would be wise to revise their Compensation Discussion and Analysis disclosures to make the relationship between actual pay and performance more clear and convincing to shareholders.

Say on Frequency

At the first annual meeting occurring after January 21, 2011, and no less frequently than every six years thereafter, shareholders will be allowed to vote on whether the advisory say-on-pay vote should occur every year, every two years or every three years. Companies should determine whether to include a recommendation regarding the frequency vote in the proxy statement and, if so, what that recommendation should be.  Some proxy advisor firms and large institutional investors have issued or will issue policies regarding the frequency vote. Companies will also want to consider the frequency vote recommended by peer companies.  It is, however, too early in the current season to determine what the prevalent practice will be on the matter.

Say on Golden Parachutes

Companies holding shareholder meetings to approve a merger, acquisition or other business combination on or after January 21, 2011 or the date on which the related proposed rule and amendments are effective, are now required to provide a separate non-binding advisory vote on any transaction related to golden parachute compensation arrangements.  The new disclosure requirements include both narrative and tabular disclosure of all elements of golden parachute compensation as well as disclosure of the total of all golden parachute compensation.

Clawback Policy

New Section 10D of the Exchange Act requires the SEC to adopt rules prohibiting the listing on a national securities exchange of any issuer that has not adopted a clawback policy consistent with the section.  The clawback policy required under Section 10D would force issuers to recover from any current or former executive officer any incentive compensation that was paid during the three years preceding any accounting restatement due to material noncompliance with reporting requirements, to the extent it exceeds the compensation that would have been paid based on the restated financials.  While waiting for the SEC’s proposed rules, which are scheduled to be released between April and July of 2011, companies with clawback policies should review their existing policies against the requirements of Section 10D and determine how the proxy disclosure regarding the policies may need to be revised.  Companies without existing clawback policies should consider adopting a clawback policy and disclosing the policy in their proxy statement.

Proxy Access

On August 25, 2010, the SEC approved rules and amendments, including the adoption of a new Rule14a-11, that require public companies to permit a shareholder or group of shareholders owning at least 3% of a public company’s voting stock for at least three years to include director nominees in company proxy materials.  On October 4, 2010, however, the SEC stayed the effective date of the rules pending a judicial review by the U.S. Court of Appeals for the D.C. Circuit.  Although the matter will be considered on an expedited basis by the court, the fate of the new proxy rules is unlikely to be resolved prior to the summer of 2011 and will likely be inapplicable in 2011 for calendar year companies.  If the new rule survives legal challenge, companies will want to develop systems for processing shareholder nominees and review related provisions of their bylaws, corporate governance guidelines and Board committee charters.



Changes in and Disagreements with Accountants – On January 14, 2011, the SEC released new Q&A interpretations of the requirement in Form 8-K to promptly disclose changes in and disagreements with accountants.  The SEC clarified that events that require disclosure include the revocation of a principal accountant’s registration with the PCAOB; the engagement of a new principal accountant if the new principal accountant is a separate legal entity and separately registered with the PCAOB even if it is related in some way to the former principal accountant; advice from a principal accountant that internal controls necessary to develop reliable financial statements do not exist, even if remedied before the end of the interim period; advice from a principal accountant that there is a “material weakness” in internal control over financial reporting; and the presence of an explanatory paragraph in an audit report regarding the registrant’s ability to continue as a going concern.  Registrants are not required to affirmatively disclose the absence of reportable events and need not disclose if a principal accountant advises that there is a “significant deficiency” in internal controls over financial reporting, though the factors that led to the “significant deficiency” may otherwise lead to reportable events.  If a registrant’s principal accountant enters into a business combination with another accounting firm, the SEC clarified that disclosure may be required depending on the facts and circumstances of the combination, including its structure.  Additionally, the SEC clarified that the “subsequent interim period” referenced in Items 304(a)(1)(iv), (1)(v) and (2) of Regulation S-K is clarified as the period from the end of the registrant’s most recent fiscal year through the date of the change in principal accountants.



No relevant Proposed or Final Rules



No relevant Releases or Policy Statements.

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