SEC Approves Significant New Proxy Disclosure Requirements

Article by Marty Dunn , Shelly Heyduk , Rebekah Toton , Erin Jaskot and Leanna Albrecht

On December 16, 2009, the U.S. Securities and Exchange Commission approved substantial revisions to its proxy rules by a 4-1 vote. These new proxy disclosure requirements are intended to enhance the information provided to shareholders so they are better able to evaluate the leadership of public companies and will be effective for filings made on or after February 28, 2010. The Commission did not address the proposed amendments to the proxy solicitation rules that were included as part of the proposing release, but it is expected that they will be considered next year in connection with the proposed proxy access rules.

The following description of the new proxy disclosure requirements is based on the discussion at the Commission's Open Meeting at which the new requirements were approved.

The new proxy disclosure requirements will require the following disclosure in proxy and information statements, annual reports and registration statements regarding:

Risks Arising From Compensation Policies And Practices.

• Amended Item 402 of Regulation S-K will require a company to include a narrative discussion of the company's compensation policies and practices for its employees generally (as opposed to just the company's named executive officers) if these compensation policies create risks that are "reasonably likely to have a material adverse effect on the company."
• • The threshold for disclosure was modified from the proposal, which would have required disclosure of compensation policies for employees generally if "risks arising from those compensation policies and practices could have a material effect on the company." The disclosure standard is now consistent with the standard used in Management's Discussion and Analysis for disclosing material trends and uncertainties.
  • Unlike the proposed standard, this new disclosure will be required only where it is reasonably likely that any material effects will be adverse.
• This new disclosure will not be part of the company's Compensation Discussion and Analysis, as the Commission had originally proposed.
• In determining whether disclosure is required, a company may consider offsetting and mitigating factors. As an example, a company may have a form of compensation that incentivizes employees to take risks, but if the company has taken some other action to ensure that these specific risks are consistent with the company's overall risk profile, the disclosure may not be required, as any risks presented by the form of compensation may not be "reasonably likely to have a material adverse effect on the company."
• Smaller reporting companies will not be subject to this new disclosure.

Value Of Option And Stock Awards Included In Summary Compensation Table.

• Amended Item 402 of Regulation S-K will require a company to disclose the aggregate grant date fair value of equity-based awards granted during the fiscal year to named executive officers and directors (as computed in accordance with FASB ASC 718, Stock Compensation (SFAS 123R)). This fundamentally alters the existing requirement, under which a company is required to report the dollar amount recognized for financial statement reporting purposes for the fiscal year with respect to all awards granted to such individuals.
• In the first year that companies become subject to the amended reporting standard, companies will be required to re-compute the value of option and stock awards reported in the Summary Compensation Table for each previous year already reported for each named executive officer. For example, a company with a fiscal year ending on or after December 20, 2009 will be required to report the aggregate grant date fair value of option and stock awards granted to each named executive officer in 2009 as well as in 2008 and 2007, requiring those companies to re-compute the amount previously reported in the Summary Compensation Table for those previous years. The Commission has clarified that the restatement of option and stock award values for previous years will not require any change in the named executive officers previously identified in those years or the inclusion of additional named executive officers in the current year.
• Amended Item 402 of Regulation S-K also will include an instruction to clarify that performance-based equity awards should be valued based on the probable outcome of the performance conditions (as of the grant date), rather than the maximum value of the award if all performance conditions are satisfied. The maximum value of the performance-based award will instead be required to be included in a footnote to the table.

Directors And Director Nominees.

• Amended Item 401 of Regulation S-K will require expanded narrative disclosure regarding the particular experience, qualifications, attributes or skills which, in light of the company's business and structure, led the company's board of directors to conclude that the person should serve as a director of the company. The disclosure will be required annually for all directors and nominees, even for directors on classified boards that are not up for election.
• The Commission eliminated the proposed requirement that would have required disclosure of a nominee's qualifications to serve on a particular board committee.
• Amended Item 401 of Regulation S-K also will require disclosure regarding any directorships held at public companies or registered investment companies by the director or nominee at any time during the past five years — this will be a change from the current requirement, which requires disclosure only of directorships currently held by nominees or directors.
• Amended Item 401 of Regulation S-K also will require disclosure regarding specified legal proceedings during the past ten years — this will be a change from the current requirement, which requires disclosure of legal proceedings during only the past five years. This disclosure requirement will apply to both directors and executive officers.
• The new disclosure requirement clarifies that private litigation settlements will not need to be disclosed and the list of legal proceedings will be expanded to include:
• • Any judicial or administrative proceeding based on federal or state securities, commodities, banking, or insurance laws and regulations or any settlement to these actions;
  • Any judicial or administrative proceedings resulting from involvement in mail or wire fraud or fraud in connection with any business entity; and
  • Disciplinary sanctions or orders imposed by a stock, commodities, or derivatives exchange or other self-regulatory organization.

Diversity In Identifying Nominees For Director.

• Amended Item 407(c) of Regulation S-K will require a company to disclose whether, and if so how, the nominating committee or board of directors considers diversity in identifying nominees for directors. If the company has a policy with regard to the consideration of diversity in identifying director nominees, the amendments require disclosure of the manner in which that policy is implemented and the manner in which the nominating committee or board of directors assesses the effectiveness of the policy. Diversity itself is not defined in the amendments but may be defined in a manner most appropriate to the company (including diversity as it relates to individuals' background or perspectives).

Board Leadership Structure And Role In Risk Oversight.

• New Item 407(h) of Regulation S-K will require disclosure about the company's "leadership structure," including disclosure regarding:
• • Whether the company has combined or separated the chief executive officer and board chair positions;
  • The basis for the board of directors' view that the company's particular leadership structure is appropriate for the company at the time of filing the proxy or information statement; and
  • Where the chief executive officer and chairman positions are combined, whether and why the company has a "lead independent director" and the specific role the lead independent director plays in the leadership of the company.
• New Item 407(h) of Regulation S-K also will require disclosure regarding the extent of the board of directors' role in the risk oversight of a company. In response to public comments that the board of directors does not typically perform a "risk management" function, the Commission revised the disclosure requirement to focus on a board of directors' oversight function. As such, the new disclosure requirement will focus on the manner in which the board of directors administers its risk oversight function (i.e., through the board of directors as a whole or through a committee of the board of directors).

Compensation Consultants.

• Amended Item 407 of Regulation S-K will require, in certain circumstances, disclosure of the fees paid to compensation consultants (and their affiliates) that play a role in determining or recommending the amount or form of executive or director compensation during the prior fiscal year only if that compensation consultant (or any of its affiliates) also provided additional services to the company or any of its affiliates during the prior fiscal year.
• Amended Item 407 of Regulation S-K will include exceptions to the disclosure requirement for circumstances that should not raise potential conflicts of interest, including:
• • Fees paid for additional services not exceeding $120,000 during the company's fiscal year;
  • Fees paid for consulting on broad-based plans that do not discriminate in favor of executive officers or directors; and
  • Fees paid for additional services limited to providing information to the company, such as a survey that is not customized for the company or only is customized based on parameters that are not developed by the compensation consultant.

Reporting Voting Results Of Shareholder Meetings.

• The requirement to report the results of voting at a meeting of shareholders will be moved from the Form 10-Q or Form 10-K filed for the period during which the meeting occurred to Form 8-K.
• New Item 5.07 of Form 8-K will require that results of voting at a shareholder meeting be reported within four business days of the meeting at which the vote was held. An instruction to this Item will clarify that the Form 8-K will be due within four business days of the meeting even if final voting results are not yet available — in these situations, the company will be required to report preliminary voting results on the Form 8-K and file an amendment to the Form 8-K to report the final voting results (the amendment would be due within four business days of the date that final results first become available).

O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.

www.omm.com

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.