As we prepare for the 2013 annual meeting and reporting season, there are many corporate governance and disclosure matters that companies should consider as they draft this season’s disclosure materials. Practice Center Contributor Brian Breheny and several Skadden colleagues recently prepared this comprehensive overview of the issues that companies need to address now. Highlights include:
Incorporate lessons from 2012 say-on-pay results. In the 2012 proxy season, approximately:
• 69 percent of say-on-pay proposals passed with more than 90 percent support;
• 21 percent passed with between 70.1 and 90 percent support;
• 7 percent passed with between 50 and 70 percent support; and
• 3 percent (61 companies) obtained less than 50 percent support.
Ensure compliance with new proxy disclosure rules concerning use of compensation consultants and related conflicts of interest.
The SEC adopted a new disclosure requirement in June 2012 that is applicable to any proxy or information statement for an annual meeting of shareholders (or a special meeting in lieu of the annual meeting) at which directors will be elected occurring on or after January 1, 2013. This new disclosure requirement is generally triggered when a compensation consultant is identified in a company’s disclosures because it plays a role in determining or recommending the amount or form of executive and director compensation and that role “has raised any conflict of interest.” In those situations, companies will be required to disclose the nature of the conflict and how the conflict is being addressed in the proxy or information statement.
Comply with IRC Section 162(m).
Internal Revenue Code Section 162(m) generally limits a public company’s deduction for compensation paid to its chief executive officer and its next three most highly compensated officers (excluding the CFO) to $1 million each per year. However, performance-based compensation (PBC), which is compensation paid pursuant to a plan or other arrangement and is only payable upon the attainment of objective performance targets set in advance by a committee of two or more outside directors based on shareholder approved performance goals, is not subject to the $1 million cap. Stock options and stock appreciation rights will constitute PBC without satisfying the otherwise applicable rules under Section 162(m) if (i) they are granted by outside directors (as that term is defined in the rule and explained more fully below) under a shareholder approved plan that contains a limit on the number of awards that an individual can receive in any specified period and (ii) the grants have an exercise price that is not less than the fair market value of the stock subject to the award on the grant date.
Consider potential impact from proposed revised listing standards related to compensation committees and advisors.
On September 25, 2012, the New York Stock Exchange (NYSE) and the Nasdaq Stock Market (Nasdaq) proposed revised listing standards that largely tracked the SEC’s rules requiring the exchanges to revise their standards as mandated by new Exchange Act Section 10C(c)(2). The revised listing standards need to be approved by the SEC before they go into effect, which has not occurred as of the date of this alert and is not expected in time for the revised standards to apply to annual meetings held in the first half of 2013.
Plan for impact of conflict minerals and resource extraction payments disclosure rules.
In August 2012, the SEC adopted the final rules to implement two of the more controversial provisions of the Dodd-Frank Act — the conflict minerals and resource extraction payments disclosure provisions. Although reporting under these rules by public companies will not begin until 2014, we believe it is important to start planning for compliance with these rules now.
Prepare for shareholder proposals.
Submitting proposals for inclusion on the annual meeting agenda and in the company’s proxy materials remains a focus of certain shareholders and groups. In the 2012 proxy season, the most common shareholder proposal topics included perennial favorites such as separating the chairman and chief executive officer positions, majority voting, board declassification, repealing supermajority voting requirements and providing shareholders a right to call special meetings or to act by written consent. Political spending also was a common topic for proposals in 2012 (see the additional information on this topic below). The most closely watched topic of the season, however, was the process for nominating and disclosing shareholder candidates (or “proxy access”).
Determine impact of SEC staff disclosure initiatives.
The staff of the Division of Corporation Finance recently has been focused on a number of key initiatives when reviewing periodic reports. These initiatives should be considered when preparing disclosures in the company’s financial statements and annual reports on Forms 10-K, 20-F or 40-F.
Note the new potential Iran-related disclosure requirements.
On August 10, 2012, President Obama signed the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITR Act) into law. Among other things, the ITR Act requires public companies to disclose information pertaining to certain Iran-related activities and transactions in their annual and quarterly reports filed on or after February 6, 2013. Companies should review their activities and the activities of their affiliates to determine whether they have engaged in any specified activities or transactions involving Iran and whether disclosures will be required under the new requirements.
Monitor proposed auditing standard relating to communications with audit committees.
On September 10, 2012, the SEC proposed rules that, if adopted, will implement Public Company Accounting Oversight Board (PCAOB) Audit Standard No. 16 (AS 16). If adopted as proposed, AS 16 will be effective for audits of fiscal years beginning on or after December 15, 2012, and related amendments to existing standards will be effective for reviews of fiscal quarters also beginning on or after December 15, 2012.
Assess disclosure policy concerning political contributions and lobbying expenditures.
In the wake of the U.S. Supreme Court’s decision in the Citizens United case and the record-breaking political spending that took place during the 2012 presidential election cycle, we expect to see heightened interest from shareholders concerning companies’ political and lobbying spending and related activities.
Consider policy on hedging and pledging of company stock by officers and directors.
Recently there have been several high-profile instances of public company executives having to dispose of company stock in order to meet margin calls. These instances, combined with the provision in the Dodd-Frank Act that mandates the SEC to adopt rules to require public companies to provide proxy statement disclosures indicating whether they have a policy permitting directors and employees to hedge against decreases in the company stock price, have led to a renewed interest in company policies regarding hedging and pledging of company stock by officers and directors.
Confirm director nominee compliance with advisory firm policies on overboarding.
Companies should consider whether their CEO or any of their directors may be “overboarded” under the newly revised ISS voting policies. ISS considers directors overboarded if they sit on more than six public company boards or if they serve as the CEO of a public company who sits on the boards of more than two additional public companies. ISS recommends “against” or “withhold” votes for directors it deems to be overboarded.
Comply with the XBRL filing requirements and, if applicable, account for the expiration of the two-year limited liability provisions.
All U.S. domestic companies (other than investment and business development companies) and foreign private issuers that prepare their financial statements in accordance with U.S. GAAP are now required to comply with the XBRL filing requirements. Foreign private issuers that prepare their financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board have been provided relief from the XBRL requirements by the staff of the Division of Corporation Finance until an SEC approved XBRL taxonomy for their financial statements is available. This relief is expected to remain in effect for the 2013 reporting season. Foreign private issuers that prepare their financial statements in accordance with local GAAP are not required to comply with XBRL filing requirements.
Update Form 10-K Items.
The SEC amended certain of its rules and forms to implement the mine safety disclosure provisions that were included in the Dodd-Frank Act that went into effect on January 27, 2012. One of the amendments to the SEC’s rules included a new Item 4 (entitled Mine Safety Disclosures) to Form 10-K. Companies should update their Forms 10-K to include new Item 4 and either provide the required disclosures or note that the item does not apply to the company.
Plan for additional Dodd-Frank Act requirements.
There are a number of corporate governance and disclosure provisions in the Dodd-Frank Act that require SEC action but have not been implemented yet. These provisions include rules related to mandatory compensation claw-back provisions and new disclosure requirements related to compensation matters, such as pay-for-performance, pay ratios, and the hedging activities of company employees and directors. These rules will not be in effect for the 2013 annual meeting and reporting season. However, companies may want to advise their board committee members about these impending rules and their anticipated impact moving forward.
Tags: compensation committees, compensation consultants, conflict minerals, corporate political spending, Disclosure, Executive Compensation, Iran, ISS, overboarding, Proxy Season, say on pay, shareholder proposals, XBRL