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What Every In-House Counsel Should Know About Corporate Governance Developments and Other Highlights under the Dodd-Frank

Wall Street Reform and Consumer Protection Act

Presentation to The North Florida Chapter

Association of Corporate CounselSeptember 14, 2010

©2010 Foley & Lardner LLP2

Dodd-Frank Wall Street Reform and Consumer Protection Act On July 21, 2010, President Obama signed into

law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act).

The Act primarily addresses the overhaul of the national financial regulatory regime, but also contains corporate governance, executive compensation, disclosure, and other provisions that apply to public companies generally.


Dodd-Frank Wall Street Reform and Consumer Protection Act This presentation will focus on those provisions

that are generally applicable to public companies, which most notably include:– Providing the SEC with authority to implement proxy

access– Mandating shareholder advisory votes on executive

compensation and “golden parachutes” – Enhancing compensation committee and adviser

independence requirements– Mandating executive compensation clawbacks– Increasing compensation and governance related

disclosure in proxy statements


Dodd-Frank Provisions That Are Not Being Addressed Financial Stability Oversight Council Increased Authority for the Federal Reserve over

BHCs and nonbank financial companies FDIC’s Orderly Liquidation Authority for large

failing financial institutions Regulation of Derivatives Regulation of Advisers to Private Funds (Hedge

Funds) Creation of Federal Insurance Office Bureau of Consumer Financial Protection And many others


Regulation D Definition of “Accredited Investor” has been

slightly changed. The minimum net worth standard for accredited investors as that term applies to natural persons has been changed to eliminate the primary residence from the net-worth calculation.

To the extent an investor is underwater, the liability in excess of the value of the primary residence is factored into the minimum net-worth calculation.

Second homes still count toward net-worth.


Regulation D (con’t) July 21, 2011 – SEC is required to look at other

Accredited Investor standards for natural persons.

2014 – Another review of Accredited Investor definition and then periodic reviews every 4 years.

No grandfathering for offerings that began before July 21, 2010, but had not yet closed.

Bad boy pensions for rule 505 offerings will apply to Rule 506 offerings once SEC issues rules.


Exemption from SOX Internal Controls Attestation Requirements Act permanently exempts companies that are

neither “large accelerated filers” nor “accelerated filers” from SOX Section 404(b) requirement to have the external auditor attest to internal control over financial reporting

Act also requires SEC to conduct a study to determine how SEC could reduce the burden of complying with SOX Section 404(b) for companies whose market capitalization is between $75 million and $250 million


Shorter Reporting Deadlines SEC is permitted to shorten the 10-day reporting

periods for:– Form 3 under Section 16 – Schedules 13D and 13G.


Proxy Access August 25, 2010 – SEC adopted proxy access

rules as permitted by the Act. “Proxy access” refers to the ability of

shareholders to include their director nominees in the company’s proxy materials.

Shareholders must own 3% of a company’s voting stock for 3 years in order to submit a nominee.

Maximum number of directors that can be submitted is the greater of one or 25% of the entire board. If multiple shareholders submit nominees, nominees from largest shareholders will be accepted.


Proxy Access (con’t) Shareholders must certify that they have no

intent to control. Shareholder nominee must be described in a new

Schedule 14N. A company is not responsible for any information provided by the shareholders.

Shareholder nominations are required to be given to a company at least 120 days before the first anniversary date of the company’s proxy statement in the prior year.

Application of Proxy Access to smaller reporting companies is delayed for three years.


Proxy Access (con’t) Company Action Items:

– Review and revise advance notice bylaw provisions to work with SEC rules

– Review and revise director nomination procedures in nominating and governance committee charter and corporate governance principles to work with SEC rules

– Be proactive in communicating with large shareholders and understanding their concerns


“Say on Pay” Vote on Executive Compensation Act requires companies to include in any proxy

statement requiring compensation disclosure a separate resolution subject to an advisory shareholder vote on the compensation of named executive officers (CEO, CFO and three other most highly compensated executive officers)– Effective for shareholder meetings occurring after

January 21, 2011 (six months after enactment)– Vote must be held at least once every three years,

with frequency determined by separate shareholder vote

– Vote is non-binding and will not be construed to: Overrule any board or company decision; Create or imply any change or addition to the fiduciary duty

of the board or the company; or Restrict or limit shareholder proposals relating to executive

compensation


“Say When on Pay” Vote

“Say on pay” vote must be held at least once every three years

Whether “say on pay” vote is held every one, two or three years must be included as separate resolution subject to shareholder vote in proxy statement for first annual shareholder meeting occurring after January 21, 2011

Vote on frequency of “say on pay” must reoccur at least once every six years

Act does not address what voting standard applies to “say when on pay” vote (i.e., plurality or majority)


“Say on Pay” Vote Although the “say on pay” requirement is self-

executing, it is likely that the SEC will issue rules on this topic – Current SEC rules would require all companies to

file a preliminary proxy statement ten days before the filing of the definitive proxy statement

SEC eliminated this requirement for TARP companies required to hold “say on pay” votes

– SEC proxy card rules only permit “for,” “against” or “abstain” votes and don’t contemplate one, two or three years for “say when on pay” vote


“Say on Pay” Vote (con’t) Company Action Items:

– Be proactive with shareholders in justifying executive compensation

– Revisit proxy statement CD&A disclosure in light of “say on pay” vote

– Review company’s position with respect to hot button compensation issues for institutional investors and proxy advisory firms

– Review executive compensation programs for elements that may be controversial to shareholders

– Consider changes to proxy statement preparation timetable, particularly if preliminary proxy statement is required

– Review and revise compensation committee charter to consider “say on pay” vote

– Consider desired frequency of “say on pay” vote– Review and revise bylaws to permit voting standard used

for “say when on pay” vote


Shareholder Approval of Golden Parachute Compensation Act requires proxy materials for shareholder

meetings occurring after January 21, 2011 for the purpose of approving an acquisition, merger, consolidation, or proposed disposition of all or substantially all the assets of the company to include:– Disclosure of any golden parachute agreement with any

named executive officer of the company (or of the acquirer) concerning any compensation based on or otherwise related to the business combination being voted on;

– Disclosure of the aggregate total of all golden parachute compensation that may be paid to such named executive officer and the conditions under which it may be paid or become payable; and

– A separate resolution subject to shareholder vote to approve the disclosed agreements and compensation


Shareholder Approval of Golden Parachute Compensation (con’t) Disclosure

– Requires disclosure of present, deferred and contingent compensation

– Disclosure must be in clear and simple form in accordance with SEC rules

No deadline is set by the Act for the SEC to issue rules Shareholder vote

– Vote not required if agreements have been subject to a “say on pay” vote

– Vote is non-binding and will not be construed to overrule any board or company decision, create or imply any change or addition to the fiduciary duty of the board or the company, or restrict or limit shareholder proposals relating to executive compensation


Prohibition on Broker Discretionary Voting Act requires exchanges to prohibit discretionary broker

voting for the election of directors, executive compensation, or other significant matters (to be determined by SEC rule) unless beneficial owner has instructed broker how to vote – Amendment effective immediately– 2009 amendments to NYSE Rule 452 eliminated discretionary

voting for director elections, so practical implication of change is to eliminate discretionary voting on executive compensation matters, including shareholder advisory votes on executive compensation and golden parachutes

Company Action Items:– Consider additional efforts to obtain retail shareholder votes

as it will be more difficult to obtain their votes to approve “say on pay” and proposals related to compensation plans

– Negative shareholder advisory votes may lead to shareholder advisory services recommending against the election of compensation committee directors


Compensation Clawbacks Act directs SEC to issue rules requiring exchanges to

require that a listed company develop and implement a clawback policy providing:– For disclosure of the company’s policy regarding incentive-

based compensation based on financial information required to be reported under the federal securities laws; and

– In the event of an accounting restatement due to material noncompliance with any financial reporting requirement under the federal securities laws, the company recovers incentive-based compensation paid to any executive officer on the basis of the erroneous data

Applies to compensation paid to any current or former executive officer at any time during the three-year period preceding the restatement

Includes stock options awarded as compensation Amount recovered must be the excess of the compensation

paid over what would have been paid based on the restated financial information


Compensation Clawbacks (con’t)

Act does not set a deadline for SEC to act

Section 304 of the Sarbanes-Oxley Act of 2002 (SOX) already contains a clawback provision, although the standard under the Act is stricter than the SOX standard because SOX requires that the restatement occur “as a result of misconduct,” only applies to a company's CEO and CFO, and is limited to a 12-month period preceding the restatement

Company Action Items:– Adopt new clawback policy that complies with SEC rules, or

amend existing policy to ensure compliance with SEC rules– Consider how to effectively apply and enforce policy once

adopted or amended


Compensation Committee Requirements SEC must act by no later than July 16, 2011 (360

days after enactment) to issue rules to direct exchanges to prohibit listing of any company that is not in compliance with the requirements of the Act relating to:– Compensation committee member independence;– Compensation committee adviser independence;

and– Compensation committee authority and funding

Act exempts listed companies of which more than 50% of the voting power for the election of directors is held by an individual, group or other company


Compensation Committee Independence Exchanges must require that all compensation

committee members be independent (similar to audit committee members)

Exchanges must consider the following in determining independence: – A director’s source of compensation, including

consulting, advisory or other compensatory fees paid by the company to the director; and

– Whether a director is “affiliated” with the company or any affiliate or subsidiary of the company


Compensation Committee Independence (con’t) Company Action Items:

– Review current compensation committee member independence in light of most strict potential independence standard (i.e., audit committee standard)

– Review and revise compensation committee charter and corporate governance principles to comply with final rules

– Review and revise D&O questionnaire to capture information to determine independence


Compensation Committee Adviser Independence If compensation committee desires to engage

compensation consultant, independent legal counsel or other advisers, the committee must first take into consideration independence factors identified by the SEC, which must include:– The provision of other services to the company by

the adviser's firm; – The amount of fees received from the company by

the adviser's firm as a percentage of the adviser firm's total revenue;

– The policies and procedures of the adviser's firm that are designed to prevent conflicts of interest;

– Any business or personal relationship of the adviser with a member of the compensation committee; and

– Any stock of the company owned by the adviser


Compensation Committee Adviser Independence (con’t)

Independence factors must be competitively neutral among the categories of consultants, legal counsel, or other advisers and preserve the ability of compensation committees to retain the services of members of any such category

Act does not require that a compensation committee engage outside advisers, that compensation committee advisers be independent, or that a compensation committee follow the advice of its adviser(s)


Compensation Committee Adviser Independence (con’t) Company Action Items:

– To the extent the compensation committee has engaged compensation advisers, review compensation committee advisers’ independence based on factors identified in the Act

– Consider establishing policies and procedures for the compensation committee to follow when retaining advisers

– Review and revise compensation committee charter to comply with final rules


Compensation Committee Authority and Funding Compensation committees must have authority

to hire compensation consultants, independent legal counsel and other advisers

Compensation committees must be directly responsible to appoint, compensate and oversee the work of compensation consultants, independent legal counsel and other advisers

Companies must provide compensation committee appropriate funding for compensation consultants, independent legal counsel and other advisers

Company Action Items:– Review and revise compensation committee charter

to comply with final rules


Proxy Statement Disclosure: Compensation Consultants Act directs SEC to issue rules requiring proxy

statement disclosure of:– Whether compensation committee retained or

obtained advice from a compensation consultant; – Whether the consultant’s work raised any conflict

of interest; and – If so, the nature of the conflict and how it is being

addressed Requirement will be effective for all annual

shareholder meetings occurring on or after July 21, 2011 (one year after enactment)


Proxy Statement Disclosure: Compensation Consultants (con’t) SEC rules adopted in 2009 require companies to

disclose the role of compensation consultants and work done by the consultants for the company as well as certain conflicts of interest


Proxy Statement Disclosure: Pay vs. Performance Act directs SEC to issue rules requiring companies to

include in their annual meeting proxy statements information that shows the relationship between executive compensation “actually paid” and the “financial performance of the company”– May include a graphic representation of the information

required to be disclosed– “Actually paid” standard is different than “awarded to, earned

by, or paid to” standard applicable under current proxy rules– In analyzing “financial performance of the company,” must

take into account any change in the value of shares of company stock and dividends

Act does not set a deadline for SEC to act Time period is uncertain – possibly just prior fiscal year.


Proxy Statement Disclosure: Pay Disparity Act directs SEC to issue rules requiring disclosure

in proxy statements of:– Median (not the average) annual “total

compensation” of all company employees (other than the CEO);

– Annual total compensation of the CEO; and– Ratio of median employee total compensation versus

CEO total compensation “Total compensation” must be calculated in

accordance with the rules for Summary Compensation Table in effect on July 20, 2010

Act does not set a deadline for SEC to act and SEC Chairman Schapiro noted that it is unlikely that these rules will be in place for the 2011 proxy season.


Proxy Statement Disclosure: Pay Disparity Company Action Items:

– Wait on SEC rules– Modify disclosure controls and procedures to

capture information required by anticipated SEC rules


Proxy Statement Disclosure: Employee and Director Hedging Act directs SEC to issue rules requiring annual meeting

proxy statement disclosure regarding whether employees and directors may purchase financial instruments designed to hedge or offset decreases in market value of compensatory awards of equity securities or otherwise held, directly or indirectly, by those persons– Includes prepaid variable forward contracts, equity swaps,

collars and exchange funds– Act requires disclosure only of policy with respect to

purchasing hedging instruments, rather than actual purchases– Current SEC proxy rules require specific hedging transactions

by executive officers or directors to be disclosed Act does not set a deadline for SEC to act

Company Action Items:– Review and revise existing hedging policy or consider adopting

hedging policy for directors, officers and employees


Proxy Statement Disclosure: Chairman and CEO Structure

Act directs SEC to issue rules requiring proxy statement disclosure of the reasons why a company has chosen either the same or different persons to serve as Chairman of the Board and CEO

2009 SEC rules already require disclosure of whether and why a company combines or separates the positions of Chairman and CEO


Institutional Investment Manager Vote Disclosure

Act requires institutional investment managers exercising investment discretion over $100 million or more of U.S. public company equity to report at least annually how they voted on “say on pay” and golden parachutes


Other Potential Exemptions Under the Act

Act permits the SEC or national securities exchanges to exempt classes of companies from the following requirements of the Act:– Proxy access authority; – Shareholder advisory votes on executive compensation

and golden parachutes; – Disclosure of investment manager votes on executive

compensation and golden parachutes; and – Compensation committee and adviser independence

SEC has delayed proxy access for small companies for three years


Immediate Action Items Educate directors and senior management Revise bylaws for proxy access Monitor SEC rulemaking Consider compensation policies and disclosures

in light of pending rules Be proactive in communication with large

shareholders and understand their concerns

This presentation is provided as a service to friends and clients. This presentation addresses new laws that will be subject to regulatory interpretation and rule-making over the next twelve months. The information contained herein should not be construed as legal advice.

Prepared by:

Gardner F. [email protected]

andMichael B. Kirwan

[email protected] & Lardner LLP

Jacksonville, FL(904) 359-2000

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