Securities Law Blog

With proxy season rapidly approaching, here are five important considerations for public companies to consider in preparing their 2017 proxy statements.

1.        Say-on-Pay Frequency Vote May Be Required

Rule 14a-21(b) of the Securities Exchange Act of 1934 requires a say-on-pay frequency vote every six years. As the initial rules became effective for an issuer’s first annual or other meeting of the shareholders occurring on or after January 21, 2011, many issuers will need to include a frequency vote in their 2017 proxy statement. Issuers will need to include an agenda item asking shareholders if the say-on-pay vote should occur every one, two or three years. It is important to note that this say-on-pay frequency vote will not be required for all public companies in 2017 as companies that qualified as “smaller reporting companies” as of January 21, 2011, including newly public companies that qualified as smaller reporting companies after January 21, 2011, were not required to hold a frequency vote until the first meeting occurring on or after January 21, 2013.

2.        Update Your Director and Officer Questionnaires for Nasdaq’s “Golden Leash” Rule

Nasdaq’s new rule 5250(b)(3), which became effective on August 1, 2016, generally requires Nasdaq-listed companies to annually publicly disclose the material terms of all agreements and arrangements between any director or nominee and any third party relating to compensation or other payments, including non-cash payments, in connection with the person’s candidacy or service as a director. Nasdaq-listed issuers are advised to review their directors’ and officers’ questionnaires to ensure that they elicit the relevant information. Once disclosed, the information must be continuously accessible, updated at least annually until the earlier of the director’s resignation or one year following the termination of the agreement or arrangement and promptly corrected, through public disclosure, if the company determines that prior disclosure was deficient.

3.        Be Aware of ISS and Glass Lewis Updated Voting Policies

ISS and Glass Lewis have released updates to their proxy voting policies for the 2017 proxy season. Issuers should familiarize themselves with the new policies. In particular, both ISS and Glass Lewis appear to be focused on “overboarding.” ISS will recommend against a director who (i) is the company’s CEO and serves on the board of more than 2 public companies (besides his or her own), and (ii) any other director who serves on more than 5 public company boards in total. Glass Lewis will recommend against a director who (i) is an executive officer of the company and serves on the board of a total of 2 public companies (including his or her own), and (ii) any other director who serves on more than 5 public company boards in total.

Both ISS and Glass Lewis are also focused on governance matters at new public companies. ISS will recommend against directors at companies that, prior to or in connection with an IPO, (i) adopt bylaw or charter provisions that ISS views as materially adverse to shareholder rights, or (ii) implement a multi-class capital structure affording unequal voting rights. Similarly, Glass Lewis will review the terms of a company’s governing documents in order to determine whether shareholder rights are being severely restricted from the outset. In cases where Glass Lewis believes the board has approved governing documents that significantly restrict the ability of shareholders to effect change, Glass Lewis may recommend that shareholders vote against the members of the governance committee or the directors that served at the time of the governing documents’ adoption, depending on the severity of the concern.

Other ISS policy changes include (i) recommending against members of the governance committee if the company’s charter contains provisions that “unduly” restrict shareholders’ ability to amend the company’s bylaws, and (ii) adding a factor to its equity plan scorecard with respect to whether dividends are paid on unvested awards. In addition, Glass Lewis has clarified its approach to board evaluation, succession planning and refreshment.

4.        Be Mindful of Non-GAAP Financial Measures Included in Proxy Statements

Issuers should be mindful of non-GAAP financial measures included in their proxy statement as there are special rules for non-GAAP financial measures in the proxy statement context. The disclosure of target levels for incentive compensation arrangements that are non-GAAP financial measures is not subject to Regulation G, although a company must disclose how the numbers are calculated from its audited financial statements. When non-GAAP financial measures are included in a proxy statement for any purpose other than with respect to target levels, a company must comply with Regulation G and Item 10(e) of Regulation S-K. Issuers are encouraged to review the Compliance & Disclosure Interpretations issued by the SEC in May 2016 regarding non-GAAP Financial Measures. These C&DIs provide guidance into what the Staff considers to be misleading use of non-GAAP financial measures and what is considered unacceptable prominence of a non-GAAP financial measure presentation in an SEC filing.

5.        Not Ready for 2017

Several new rules that have been adopted or proposed by the SEC do not apply to the upcoming 2017 proxy season. Notably, the rules related to pay ratio disclosure adopted in August 2015, which will require public companies to disclose the ratio of the compensation of its chief executive officer to the median compensation of its employees, will not be required until a company’s first fiscal year beginning on or after January 1, 2017. Proposed rules regarding pay versus performance disclosures, compensation clawbacks and hedging disclosures have not yet been finalized.

Please feel free to contact the Olshan attorney with whom you regularly work or the author of this blog post if you have any questions regarding preparing your 2017 proxy statement.