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Key Changes For 2010 Proxy Season

February 5, 2010

A number of new laws and regulations have been implemented within the past year affecting annual meetings and proxy statements for public companies. Generally, these rule changes will be effective for the 2010 proxy season. Certain changes will affect director and officer questionnaires, and people involved in that process should look into these changes further.

Election of Directors No Longer a “Routine Matter” for Purposes of Broker Voting

Brokers are no longer allowed to vote shares in the election of directors unless they have voting instructions from the beneficial owner of the shares. This is likely to be of particular concern to those companies whose director nominees are elected by majority vote. The rule change is unlikely to have a material effect on companies for which directors continue to be elected by plurality vote (that is, the election of the nominees who receive the most votes, regardless of the number of shares voted). In either case, this change could affect the ability to obtain a quorum, particularly if there are no “routine matters” on the agenda for which brokers are allowed to cast discretionary votes. For that reason, it may be advisable to ensure that a routine matter, such as the ratification of auditors, is on the agenda.

Additional Proxy Statement Disclosures

The new rules require the following additional disclosures in the proxy statement:

  • Disclosure of Risks Related to Compensation Policies and Practices. A company must discuss the extent to which risks arising from its compensation policies and practices for all employees, and not just the Named Executive Officers, are “reasonably likely to have a material adverse effect” on the company. If there is such a likelihood, the company must discuss how its policies and practices of compensating employees relate to its risk management practices and risk-taking incentives. If a company determines this likelihood does not exist, no affirmative disclosure is needed. This issue should be added to the agenda for consideration by the compensation committee. (This new rule is not applicable to smaller reporting companies.) Regulation S-K, Rule 402(s).

    This disclosure, if applicable, would appear separately from the CD&A, as it is not limited to the Named Executive Officers. This is likely the one new disclosure requirement that will create the most confusion. In its release, the SEC provided a non-exclusive list of conditions that could give rise to the disclosure, including compensation practice and policies at a business unit that: (a) carries a significant portion of the company’s risk profile, (b) has a significantly different compensation structure, (c) is significantly more profitable than other business units, (d) has compensation expenses that represent a significant portion of that unit’s revenues, and (e) has policies that significantly vary from the overall risk of reward structure at the company, such as bonus payments for the accomplishment of tasks.
  • Different Calculation for Reporting Equity Awards. In the Summary Compensation Table and the Director Compensation Table, a company must now report the value of equity awards based on the aggregate grant date fair value. This represents a change from the current rule, which requires the values to be reported based on the amount expensed for financial reporting purposes. Equity awards for prior years shown in the tables will also need to be recomputed based on the new rule. Regulation S-K, Rules 402(c) and (k).
  • Disclosure of Certain Services Provided by Compensation Consultants. If a company engages a consultant with regard to executive or director compensation, additional disclosures are required if the consultant also provides other services to the company (such as benefits administration or HR consulting). In addition, the current rules regarding disclosure of services provided by compensation consultants have been relaxed where those services relate to broad-based, nondiscriminatory plans or are not customized specifically for the company. Regulation S-K, Item 407(e).
  • Disclosure of Leadership Structure and Board Role in Risk Oversight. The new rules require a brief description of board leadership structure, including why the current leadership structure is appropriate and whether the positions of CEO and Board Chairman have been separated. If those positions are not separated, additional disclosures regarding the existence of a lead independent director are required. In addition, disclosures are required regarding the extent of the board’s role in risk oversight of the company, which might include how the company perceives the role of its board and the relationship between the board and senior management in managing material risks. Regulation S-K, Item 407(h).
  • Expanded Disclosure of Director Qualifications. The new rules require additional disclosure regarding the particular qualifications of directors and director nominees, including a description of specific experiences, qualifications, attributes, or skills that qualify the person to serve on the company’s board. Because of this, D & O questionnaires should be updated. Regulation S-K, Item 407(e).
  • Expanded Disclosure of Legal Proceedings. The new rules expand the scope of disclosure of legal proceedings in which directors or executive officers have been involved. The disclosure now covers a longer time period and more categories of legal proceedings. Regulation S-K, Item 407(f).
  • Board Diversity. The new rules require additional disclosures regarding the consideration of diversity in identifying board candidates. Regulation S-K, Item 407(c)

Additional 8-K Requirement for Shareholder Vote

The results of any shareholder vote must now be reported on Form 8-K within four business days of the vote. (Currently, these results are reported when the next Form 10-Q or 10-K is filed.)

SEC Guidance for Executive Compensation Disclosures

Although not a new rule change, an SEC staff member has provided informal guidance regarding executive compensation disclosures. In general, this guidance encourages companies to be more specific and thorough in their executive compensation disclosures. The guidance identifies more details that should be reviewed in connection with the preparation of the 2010 proxy statement. Based upon recent comment letters, the staff of the SEC is particularly interested in understanding the metrics and payout conditions for incentive plans.

The staff member also warned that companies that do not provide adequate disclosures regarding executive compensation may be required, in connection with an SEC comment letter, to amend past filings instead of following the current practice of addressing the comments in future filings.

For more information on these new changes and to determine how these rules may affect your company, contact your Varnum attorney.

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