Exemptions Proposed for Canadian and Other Foreign Private Issuers

The U.S. Securities and Exchange Commission has proposed new rules to require U.S. companies to provide their shareholders with non-binding votes on executive compensation ("say-on-pay") and compensation in connection with changes in control ("golden parachute" compensation). The rules were mandated by the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act. Voting on executive compensation will begin with shareholder meetings held on or after January 21, 2011 (six months after the enactment of the Dodd-Frank Act), and voting on golden parachute compensation will begin after the SEC's proposals become final (expected in the first quarter of 2011).

The say-on-pay and golden parachute votes will be advisory in nature so they will not bind the issuer's board of directors to any particular course of action. However, issuers will have to disclose in their annual compensation discussion and analysis whether and how they have taken previous voting results into account in formulating compensation policies and making compensation decisions.

Say-on-Pay

Before the enactment of the Dodd-Frank Act, say-on-pay was already mandatory for U.S. companies receiving federal bailout funds, and approximately 50 U.S. companies had adopted the practice voluntarily. The SEC's new rules will extend the requirement to all U.S. issuers by requiring them to hold a separate shareholder advisory vote to approve the compensation of executive officers at least once every three years. Shareholders will also vote at least every six years on whether the say-on-pay vote should occur every one, two or three years. Foreign private issuers, including Canadian companies eligible for the Multijurisdictional Disclosure System, will not have to comply since they are generally exempt from the U.S. proxy rules.

Although say-on-pay is not mandatory under Canadian law, it has already been adopted voluntarily by approximately 25 Canadian companies, including the major financial institutions. The practice is also supported by Canadian institutional investors and the Canadian Coalition for Good Governance, whose shareholder engagement policy includes a model say-on-pay resolution. Given these developments, and with say-on-pay becoming mandatory in the United States, we expect more Canadian companies to consider adopting say-on-pay as they prepare for the upcoming proxy season.

Golden Parachute Compensation

For an M&A transaction, a separate, non-binding shareholder vote on executive compensation arrangements may be required. The SEC is proposing that the vote cover every type of compensation relating to the transaction, including present, deferred and contingent compensation, except for bona fide post-transaction employment arrangements.

Shareholders will only get to vote on compensation arrangements if an M&A transaction is otherwise subject to their approval. Specifically, the following:

  • Tender offers will not require any vote on executive compensation.
  • If a transaction is subject to approval by the target's shareholders, those shareholders will get a non-binding vote on compensation arrangements between the target and its own named executive officers (NEOs) (and arrangements, if any, between the target and the acquiror's NEOs).
  • If a transaction is subject to approval by the acquiror's shareholders, those shareholders will get a non-binding voting on compensation arrangements between the acquiror and its own NEOs as well as the target's NEOs.

As a result, if a transaction is subject to approval by the target's but not the acquiror's shareholders, there will be no requirement for a vote on the compensation arrangements between the acquiror and the target's NEOs.

A vote will also not be required in respect of compensation arrangements such as those between a company and its own NEOs, if those arrangements were fully disclosed and quantified in the proxy materials for an earlier shareholders' meeting, and a general say-on-pay vote was conducted. Only new or amended compensation arrangements connected to an M&A transaction will be subject to the voting requirements.

A general exemption from the voting requirements will be available if the compensation arrangements in an M&A transaction involve NEOs of a foreign private issuer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.