Noteworthy Provisions of the Dodd-Frank Act

for Public Companies

 

On July 21, 2010, the Dodd-Frank Act (the Act) was signed into law. The Act contains sweeping reforms to the entire U.S. financial services industry and contains a number of provisions that will affect how public companies operate. Below is a summary of some of the significant provisions of the Act that will affect public companies.

 

Proxy Access

 

Section 971 of the Act authorizes (but does not mandate) the Securities Exchange Commission (SEC) to adopt proxy access rules that would allow a shareholder to submit, and include in the issuer's proxy statement, nominations for the board of directors of the issuer. Unlike various versions of the proposed bill, the Act does not mandate majority voting standards for uncontested director elections. Nevertheless, any new proxy access rules adopted by the SEC are likely to increase the pressure on boards of directors to focus on short term, rather than medium or long term, success in order to help secure the positions of directors. The change may also increase the number of contested director elections.

 

In addition, Section 972 of the Act adds Section 14B to the Exchange Act. Section 14B requires the SEC to issue rules requiring an issuer to disclose in its annual proxy statement the reasons why the issuer has chosen: (1) the same person to serve as chairman of the board and chief executive officer; or (2) different individuals to serve as chairman of the board and chief executive officer.

 

Executive Compensation Disclosure

 

Section 953(a) of the Act requires the SEC to adopt rules requiring public companies to disclose the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions. The Act specifically states that this disclosure may be made through a graphic representation. Given the broad scope of the disclosure required by recent reforms to the SEC's rules regarding executive compensation, this new requirement of the disclosure of the relationship between executive compensation and financial performance seems to be designed to encourage issuers to tie the two more closely.

 

Section 953(b) of the Act further requires disclosure of the following:

·        the median of the annual total compensation of all employees of the issuer other than the chief executive officer;

·        the annual total compensation of the chief executive officer; and

·        a ratio comparing median employee compensation to chief executive officer compensation.

 

The requirement of calculating total employee compensation may be burdensome for issuers. In addition, this requirements seems to be intended to alter chief executive compensation to bring it more in line with compensation of other employees.

 

Hedging Policy Disclosure

 

The Act requires issuers to disclosure in their proxy materials whether any employee or member of the board of directors of the issuer is permitted to hedge the equity securities of the issuer. While the SEC encouraged discussion of this issue in the Management's Discussion and Analysis section, the Act makes the disclosure mandatory.

 

Say-On-Pay

 

The Act grants shareholders of public companies the right to a non-binding vote on executive compensation once every one to three years. For the 2011 proxy season, shareholders will be granted two separate votes. The first vote is the non-binding vote to approve or disapprove the executive compensation as described in the proxy statement. The second vote is a binding vote whether to hold the executive compensation vote every one, two or three years. Votes on the frequency on say-on-pay votes must be held at least every six years.

 

The Act also grants shareholders a non-binding vote on golden parachute compensation for executive officers in connection with mergers, acquisitions, consolidations or sales or dispositions of all or substantially all of the issuer's assets. Disclosure of any compensation that is based on or otherwise relates to the transaction must be made in the proxy statement in a clear and simple form in accordance with regulations to be promulgated by the SEC. The disclosure must include the aggregate total of all such compensation that may be paid to the executive officers.

 

Independence of Compensation Committee and Advisors

 

Section 952 of the Act requires the SEC to direct the national securities exchanges to prohibit the listing of an issuer if all of the members of the issuer's compensation committee are not independent. The Act does not define "independence," but rather provides for the SEC to adopt rules defining the term, considering relevant factors including: (1) the source of compensation of a member of the board of directors of an issuer, including any consulting, advisory or other compensatory fee paid by the issuer to such board member; and (2) whether a board member is affiliated with the issuer or an affiliate of the issuer.

 

The Act also provides that an issuer may only select a compensation consultant, legal counsel or other advisor after taking into consideration certain factors to be identified by the SEC that affect the independence of an advisor. Those factors include:

·        the provision of other services to the issuer;

·        the amount of fees received from the issuer;

·        the policies and procedures of the advisor that are designed to prevent conflicts of interest;

·        any business or personal relationship of the advisor with a member of the compensation committee; and

·        any stock of the issuer owned by the advisor.

 

Clawbacks

 

The Act requires the SEC to direct the national securities exchanges to prohibit the listing of securities of an issuer that does not comply with clawback requirements. The SEC rules must require disclosure of the policy of the issuer on incentive-based compensation that is based on financial information required to be reported under the securities laws. If the issuer is required to prepare an accounting restatement due to material noncompliance of the issuer with financial reporting requirements under the securities laws, the issuers must recover compensation from any current or former executive officer who received incentive-based compensation (including stock options) during the three-year period preceding the date on which the issuer is required to prepare an accounting restatement, based on the erroneous data. The amount required to be recovered is the excess of what was actually paid to the executive officer less what would have been paid under the restated financial statements.

 

Elimination of Broker Discretionary Voting

 

Section 957 of the Act eliminates broker discretionary voting in the election of directors, voting on executive compensation or any other significant matter as may be determined by the SEC by rule. This will prohibit brokers from voting uninstructed shares on, among other matters, say-on-pay votes.

 

For further information, or to discuss the implications of these provisions, please contact Stephen Hackman or John Thornburgh of Ice Miller's Business Group.

 

Oct. 1, 2010

 

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.