Say on Pay and SEC Rulemaking (Mandatory Proxy Solicitations)

The SEC has put out a rule proposal designed to implement the say on pay provisions in Dodd-Frank.  See Exchange Act Release No. 63124 (Oct. 18, 2010).

The provision contains a number of new requirements, most noticeably the adoption of Rule 14a-21.  The rule proposal covers the requirement of shareholder approval, the need for a vote at least every three years, the requirement that shareholders vote at least every six years on frequency of "say on pay" proposals, and the approval of golden parachutes in any solicitation for approval of an acquisition.  A note to the proposed rule specifies that the approval process does not apply to director compensation required by Item 402(k).

There are a number of observations that arise out of this proposal.  First, say on pay was voluntarily implemented by some companies and required for TARP recipients.  This provision (as was mandated by Dodd-Frank) extends say on pay to all public companies (those registered under Section 12 of the Exchange Act, a requirement that applies to companies with 500 shareholders of record and $10 million in assets; see Rule 12g-1).   

What Dodd-Frank left open but the SEC has apparently resolved is whether say on pay requires companies to engage in a proxy solicitation.  State law does not impose the requirement; nor does the federal securities laws.   Proxy solicitations are either discretionary acts or done pursuant to the requirements of the stock exchange.  Non-exchange traded companies, therefore, are not required to solict proxies (but still must distribute an information statement under Section 14(c) of the Exchange Act).  For those companies, the application of the say on pay requirements was murky.

The SEC has resolved the issue by providing that once a company engages in a solicitation for an annual meeting, the say on pay requirements attach.  See Proposed Rule 14a-21(a).  In other words, as long as a company not required to engage in a solicitation does not, say on pay does not apply.  Once the company engages in a solicitation, it will then lose future discretion over the right to engage in solicitations.  Thereafter, a say on pay vote must be held no less frequently than every three years and a vote must occur at least every six years on frequency.

Said another way, non-exchange traded companies that do not ordinarily solicit proxies will gradually find themselves required to do so.  Over time, most public companies will, as a result of say on pay, be required to solicit proxies.