KMK Law Corporate & Securities Blog

Many calendar year-end companies are beginning to prepare for annual meetings and related proxy soliciting activities. As part of that preparation, companies are turning to recent SEC rules, regulations, and policy updates. This advisory provides some reminders and updates for companies as they prepare for the 2017 proxy season.

Say-on-Frequency Vote
Rule 14a-21(b) first required public companies to conduct an advisory vote on the frequency of the say-on-pay vote at the first meeting of shareholders held on or after January 21, 2011, with subsequent votes on frequency no more than every six years. As a result, many public companies will include a proposal for their 2017 annual meetings asking shareholders if the say-on-pay vote should occur every one, two, or three years. However, “smaller reporting companies” as of January 21, 2011 were not required to hold their say-on-frequency vote until 2013; their next say-on-frequency vote is not needed until 2019.

The say-on-frequency vote is required even if the company is already conducting its say-on-pay vote annually. The Form 8-K reporting voting results must disclose both the results of the say-on-frequency vote and the frequency with which the company intends to conduct the say-on-pay vote in light of the say-on-frequency results (if this is unknown at the time of the filing, companies can amend their Form 8-K within 150 days after the end of the annual meeting).

Golden Leash Compensation Disclosures
As we previously blogged, NASDAQ adopted a rule requiring disclosure of directors’ “golden leash” compensation. NASDAQ-listed companies must disclose certain information relating to compensation or other arrangements with third parties to directors or director nominees either through the company’s website or proxy statement. Companies may wish to revise their directors’ and officers’ questionnaire accordingly.

Pay Ratio Disclosures
The initial disclosure regarding pay ratio is required for a company’s first full fiscal year beginning on or after January 1, 2017. Therefore, companies generally will initially be required to include pay ratio disclosure in their 2018 proxy statements. Pay ratio disclosure will be required in all filings requiring executive compensation disclosure pursuant to Item 402 of Regulation S-K. In sum, pay ratio disclosure requires public companies to disclose:

• The median of the annual total compensation of all employees other than the CEO;
• The annual total compensation of the CEO; and
• The ratio between median annual total compensation and the CEO’s annual total compensation.

Although pay ratio disclosure is not required for the 2017 proxy season, companies should start to allocate resources now to prepare for compliance with the rule. Companies should be determining the methodology they will use (the rules allow a few different methods) to calculate and report their pay ratio disclosure and coordinate their reporting systems. In addition, compensation committees may want to preview what the ratio is likely to be.

Non-GAAP Financial Measures
Companies must be attentive to the use of non-GAAP financial measures included in the proxy statement and other reports. The SEC has increased its focus on compliance with the requirements for use of non-GAAP financial measures and issued new and updated C&DIs on the subject. These new C&DIs illustrate what the SEC considers to be misleading uses of non-GAAP financial measures and unacceptable prominence of non-GAAP financial measure presentation. In response to the C&DIs, companies should:

• Confirm that all non-GAAP financial measures are presented with comparable GAAP measures and that the GAAP financial measures are presented with equal or greater prominence;
• Omit non-GAAP per share liquidity measures; and
• Review all non-GAAP adjustments to ensure they will not be viewed as misleading and revise or eliminate adjustments.

Form 10-K Summary
The SEC recently adopted new rules permitting a summary in the Form 10-K. Companies opting to provide the summary must include hyperlinks to the related, more detailed disclosure in the Form 10-K.

Other Dodd Frank Proposed Rules
While proposed rules have been issued, final rules have not yet been adopted for pay versus performance disclosures, compensation clawbacks, or hedging disclosures. We will continue to monitor the rule-making process and provide updates.