January 19‚ 2012
Preparation for 2011 Fiscal Year SEC Filings and
2012 Annual Shareholder Meetings
As our clients and friends know, each year Mintz Levin
provides an analysis of the regulatory developments that impact public
companies as they prepare for their fiscal year-end filings with the
Securities and Exchange Commission (SEC) and their annual shareholder
meetings. This memorandum discusses key considerations to keep in mind as
you embark upon the year-end reporting process in 2012.1
Year 2 of Say-on-Pay.
As required by Section 951 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act) and related SEC rulemaking, public
companies other than smaller reporting companies were required to include
two new, non-binding resolutions in their proxy statements for their first
shareholder meetings taking place on or after January 21, 2011. The first
resolution, the “say-on-pay” vote, allows shareholders to vote whether to
approve executive compensation as disclosed in the proxy statement pursuant
to Item 402 of Regulation S-K. The second vote, referred to as the
“say-on-frequency” vote, asks shareholders how often they want to conduct
future say-on-pay votes: once a year, once every two years, or once every
three years. For the 2011 proxy season, shareholders overwhelmingly voted
in favor of annual votes on say-on-pay, as opposed to either of the other
possible choices, making say-on-pay a yearly event for most companies.
However, now that the first year is behind us, companies are not required
and not expected to propose another say-on-frequency vote until their
shareholder meetings taking place in 2017. Companies that qualify as
“smaller reporting companies” will not be required to conduct the
say-on-pay or say-on-frequency votes until the first annual or other
meeting of shareholders at which directors are to be elected that occurs on
or after January 21, 2013.2
For further detail on the final say-on-pay rules that were
adopted last year, please review our client
The advent of say-on-pay has caused companies to revisit how they
write their compensation-related disclosure in their proxy statements, in
particular the Compensation Discussion and Analysis (CD&A) section,
with both advocacy and disclosure in mind. For the year ended December 31,
2011, 46 companies failed to receive a majority vote in favor of their
executive compensation payments and practices, suggesting that executive
compensation is more vulnerable than initially thought at some companies.
While this percentage of failed votes is small compared to the number of
companies conducting say-on-pay votes last year, it is still higher than
most experts expected. In addition, say-on-pay has resulted in shareholder
litigation against many of these companies and such suits name the board,
compensation committee members, and executives in their suits.3 The allegations of several of the
complaints filed generally claim that the directors breached their
fiduciary duties in three different ways. The first alleged breach arises
from allegations that the directors diverted corporate assets to the
executives in a manner that put the executives’ interests ahead of those of
the shareholders. The second alleged breach arises from allegations that
the companies that have adopted “pay-for-performance” compensation policies
failed to disclose in their proxy statements that the compensation awards
were made notwithstanding or in contravention to the policies. Finally, the
complaints also bring claims for corporate waste against the directors
based on the alleged excessive size of the executive compensation awards.
Given these claims, it is critical for companies to review their CD&A
disclosure, especially with regard to a company’s pay-for-performance
philosophy. Many companies have boilerplate compensation policy language
that is vulnerable to being exploited by derivative plaintiffs and which is
not necessary to provide an accurate and reasonable basis for a company’s
compensation decisions. Companies should review the CD&A section of
their proxy statements to ensure that it reflects the company’s actual
executive compensation philosophy and accurately describes the rationale
for payment of executive compensation.
The Dodd-Frank Act added a new requirement in the CD&A
beginning this year relating to the say-on-pay vote taken last year. Item
402(b)(1) of Regulation S-K was amended to add section vii to the CD&A
disclosure requirements to require a discussion as to whether and, if so,
how the company has considered the results of the shareholder say-on-pay vote
in determining compensation policies and decisions and, if so, how that
consideration has affected the company’s executive compensation decisions
and policies. In preparing for compensation committee meetings, companies
should make sure the compensation committee is in a position to discuss and
make recommendations on this new disclosure requirement, as the disclosure
must specifically address what actions the company has taken to date.
Companies should make sure their compensation committees have been provided
with the following information well in advance of approving this year’s
the results of the shareholder vote on say-on-pay from the 2011
annual meeting and any information that the company has as to the specific
shareholders that voted against say-on-pay; and
the 2011 Institutional Shareholder Services (ISS) Proxy Advisory
Services report discussing its analysis of the company’s say-on-pay
In preparing for this year’s say-on-pay vote the compensation
committee should consider:
how it defines “pay-for-performance” and whether the company has a
good pay-for-performance story for 2011 backing up its executive
whether the company should reach out to shareholders who voted
against the company’s say-on-pay proposal last year (and who are still
shareholders) to determine what issues they had with the company’s
compensation as many institutional shareholders have expressed their desire
to engage with companies regarding their executive compensation policies as
long as the discussion is not at the eve of the voting decision and
preferably before the proxy season begins in earnest;
whether the company has had any significant changes to its
shareholder base that could change the say-on-pay results for this year;
whether ISS changes in how it will be determining whether a company
has a pay for performance disconnect this year will have any effect on its
recommendations for the 2012 proxy season.
Lastly, as companies enter this proxy season they need to be
aware of how ISS will evaluate their say-on-pay proposals this year. ISS
expects companies which received the support of less than 70% of the votes
cast last year on say-on-pay to take specific action to address the
concerns expressed by shareholders and expects to see substantive
disclosure regarding the company’s response to shareholders’ opposition. If
ISS is not satisfied with the changes made by the company, they will
recommend a vote against compensation committee members as well as a vote
against this year’s say-on-pay proposal. As it did last year, ISS will
continue to review say-on-pay proposals by making a quantitative assessment
of the CEO’s pay as compared to the company’s financial performance to
initially identify underperforming companies. However, ISS has revised its
approach and will measure the degree of alignment between the company’s
total shareholder return rank and the CEO’s rank within the peer group4 as measured over a one-year (40%
weight) and three-year (60% weight) period as well as the multiple of the
CEO’s total pay relative to the peer group median. It will also measure the
absolute alignment between the trend in CEO pay and a company’s total
shareholder return (TSR) over the prior five fiscal years. These
quantitative measures are to identify outlier companies that have
demonstrated significant misalignment between CEO pay and company performance
over time. In cases where alignment appears to be weak, further in-depth
analysis will determine causal or mitigating factors, such as the mix of
performance- and non-performance-based pay, grant practices, the impact of
a newly hired CEO, and the rigor of performance programs.5
SEC Rules on Mandatory
Proxy Access Have Been Vacated by the Courts but “Private Ordering” Lives
On. Despite the mandate provided by Section
971 of the Dodd-Frank Act and subsequent rulemaking by the SEC,
shareholders’ ability to require companies to include shareholder nominees
in companies’ own proxy statements was vacated by the United States Court
of Appeals for the District of Columbia Circuit in July 2011.6 However, the amendments to Rule
14a-8 of the Securities Exchange Act of 1934, as amended (the Exchange
Act), the rule addressing when a company must include a shareholder’s
proposal in its proxy statement, were not affected by the court decision
and became effective on September 20, 2011. As a result of amendments to
Rule 14a-8, shareholders will now be able to propose nominees for director
in a company proxy statement provided that a company’s by-laws allow for
such action. This is known as “private ordering.” As a result, proxy access
may become a reality if shareholders are successful in requiring companies
to add by-law amendments allowing for shareholders to nominate directors in
a company’s proxy statement. If a company’s by-laws allow shareholder proxy
access for director nominations, then the same procedures must be followed
as those that would have been followed had mandatory SEC proxy access
survived under the Exchange Act. These procedures include Rule 14a-18,
providing for disclosure regarding nominating shareholders and nominees
submitted for inclusion in a company’s proxy material pursuant to
applicable law or a company’s governing documents; Regulation 14N, which
requires filings by certain nominating shareholders on a Schedule 14N; and
amendments to Rule 14a-2(b) to facilitate shareholder director nominations.
As of December 21, 2011, ISS had reported a total of 16 proxy access
proposals submitted to companies with varying procedural provisions. It
remains to be seen whether any of these proposals for by-law amendments to
require proxy access will be adopted by companies or whether any company
may instead choose to adopt its own preemptive proxy access by-law
amendment to provide procedures more stringent than would be set forth in a
shareholder by-law amendment proposal. We expect that like majority voting
for directors, the momentum for proxy access will begin with larger
companies and will continue to gain traction over the next few years.
SEC Issues Additional
Guidance with Respect to Proposals Brought by Shareholders. The SEC staff issued Legal Bulletin No.
14F on October 18, 2011 providing new guidance on topics relating to
shareholder proposals under Rule 14a-8 of the Exchange Act that to date had
been unclear. The new guidance addresses issues on proof of share ownership
for beneficial owners, submission of revised proposals, procedures for
withdrawal of a no-action request for a proposal submitted by multiple
proponents, and the use of e-mail to transmit information. This SEC Legal
Bulletin, together with SEC Legal Bulletins 14-14E, contains important
information for any company that receives a shareholder proposal.
Other Sections of the
Dodd-Frank Act Are Still Subject to Rulemaking. The Dodd-Frank Act contains several other
sections that will impact companies’ proxy statements in coming years,
including the requirements to provide disclosure on measuring pay for
performance, the ratio between CEO compensation and other employees’
compensation, hedging of shares by employees and directors, clawback of
“erroneously awarded compensation” and rules regarding compensation
consultants and compensation committee independence.
However, these sections of the Dodd-Frank Act require that
the SEC undertake rulemaking to implement them, and only the rules with
respect to exchange listing standards regarding compensation committee
independence and factors affecting compensation adviser independence and
disclosure rules regarding compensation consultant conflicts have been
proposed to date. The SEC does expect to finalize these proposed rules in
the first half of the calendar year but it is unclear whether it will be in
time for the 2012 proxy season. The SEC’s rulemaking calendar was recently
revised to state that it expects to propose the rest of these corporate
governance and disclosure rules required by the Dodd-Frank Act in the first
half of the 2012 calendar year and adopt them in the July through December
2012 time frame, not within the time to take effect for the 2012 proxy
season. We will update our clients and friends separately as these rules
are proposed and issued.
Whistleblower Bounty System
in Effect. The SEC’s rules under Section 922 of the
Dodd-Frank Act, relating to bounties to be paid to whistleblowers who
report information to the SEC about violations of the securities laws, took
effect on August 12, 2011. These rules, which were the subject of hundreds
of comment letters, put in place a system under which whistleblowers may
benefit financially from contacting the SEC directly with allegations of
federal securities fraud and other violations.
A new Office of the Whistleblower has been set up within the
SEC, which is charged with receiving and reviewing reports directly from
individuals of violations or potential violations of the federal securities
laws. These reports can be submitted through a form on the SEC’s website,
by e-mail, or by telephone.
These regulations have the potential to impact any issuer
that has issued a security, regardless of whether that issuer is public,
private, foreign, or domestic, or whether the security is equity or debt.
As long as the situation about which a whistleblower makes a report
constitutes a violation or potential violation of the federal securities
laws, a whistleblower may bring a claim to the SEC in an effort to obtain a
reward. Companies have expressed serious concerns about these rules,
primarily because they are worried that the rules create a financial
incentive for employees to circumvent a company’s internal compliance
procedures and reporting mechanisms and contact the SEC directly with
respect to a potential violation.
In order to be entitled to a whistleblower bounty, an
individual must provide information that leads to the successful
enforcement by the SEC of a matter resulting in sanctions that exceed $1
million. The bounty, by statute, is required to be paid in an amount
between 10% and 30% of the funds that are recovered by the SEC in the
matter. As a result, a whistleblower complaint needs to involve a
reasonably significant claim in order to have the potential to result in a
recoverable bounty. Also, the bounty is only available to an individual,
and not to an issuer or other entity. Further, some individuals are
ineligible to obtain a whistleblower bounty, including those who have
client relationships with an issuer, such as an independent public
accountant or a lawyer. Interestingly, the SEC does not exclude individuals
who are involved in the wrongdoing itself from receiving a bounty, although
any participation in the wrongdoing would factor into the determination of
the size of the bounty awarded.
Whistleblower information, in order to qualify for the
payment of a bounty, has to be submitted on a voluntary basis.
Consequently, a person is not eligible for a bounty if he or she produced
information as the result of a subpoena or request for information by the
SEC. The individual must come forward with the information of their own
volition, and the information has to be “original,” meaning it (1) must be
derived from the independent knowledge or analysis of the whistleblower,
(2) is not known to the SEC from any other source, and (3) is not
exclusively derived from another public source such as an administrative
hearing or news report. Hearsay and other forms of indirect evidence are
not acceptable forms of evidence and cannot be used to support a
Other factors besides the culpability of the whistleblower
can increase or decrease a whistleblower award pursuant to these rules.
First, the information must be significant and not just incremental to
information that the SEC already possesses. In addition, the size of an
award may be larger if the whistleblower reports the wrongdoing internally
through an issuer’s own compliance procedures and mechanisms before going to
the SEC. There is no requirement, however, for a whistleblower to report
internally before reporting to the SEC. A whistleblower may also make an
initial report anonymously, but if the SEC investigation does result in the
payment of an award, the person who made the report must reveal his or her
identity to the SEC in order to receive the payment.
To protect whistleblowers against retaliation, the
regulations contain an express anti-retaliation provision which mandates
that an issuer may not retaliate against an employee for coming forward
with a whistleblower report. To date, purported whistleblowers have brought
a number of anti-retaliation claims as a result of the whistleblower rules,
and the number of those claims is likely to increase as whistleblowers
become more aware of the existence of these regulations.
Companies should take steps now to ensure that their
employees are aware of internal reporting systems and compliance procedures
for addressing potential violations of the federal securities laws.
Employees should not learn about the concept of whistleblowing for the
first time when they hear about the potential to claim a bounty for making
a report to the SEC. Rather, they should have their employer’s own internal
reporting system at the top of their minds, and think of using that system
to report a problem if they see one. As part of preparations for fiscal
year-end reporting in 2012, companies should remind employees that
management is committed to full compliance with the federal securities regulations,
and educate them as to the systems in place at the company to report any
issues with compliance.
“Proxy Plumbing”. In
July 2010, the SEC issued a concept release on the US proxy system.7 This release, which has come to
be known as the “proxy plumbing” release, addresses three principal
questions regarding the current proxy system in the United States: whether
the SEC should take steps to enhance the accuracy, transparency, and
efficiency of the voting process; whether the SEC’s rules should be revised
to improve shareholder communications and encourage greater shareholder
participation in the shareholder meeting process; and whether the voting
power held by shareholders is aligned with the economic interest of such
shares. No rulemaking has yet been issued by the SEC in response to this
concept release, but we understand that the SEC is continuing to evaluate
the issues it raised in that document. In addition the SEC is also looking
at proxy advisory firms and the role they play in shaping shareholder
votes. Although the SEC has no ability to regulate these firms, the SEC is
concerned about the lack of competition and the sway they seem to have over
the voting decisions made by many institutional investors.
SEC Cybersecurity Guidance. On
October 13, 2011, the staff of the SEC issued Corporation Finance (CF)
Disclosure Guidance on Cybersecurity, a guidance document regarding
disclosures of cybersecurity risks that may impact the issuers of securities.8 There has been an increase in
cybersecurity attacks on issuers in many industries in recent years —
attacks on an issuer’s networks, systems, computers, programs and data that
can result in seizure or misappropriation of sensitive information about
business partners, customers, and other parties. The Guidance provides
direction to companies with regard to when the risks or consequences of
those attacks must be disclosed to the public.
An issuer is generally required to disclose any material
information related to its business that may impact an investor, including
with regard to cybersecurity or cyber attacks. Information is considered to
be material if there is a substantial likelihood that a reasonable investor
would consider it important when contemplating an investment in a company.
With respect to cybersecurity issues, there are certain
scenarios in which disclosures may be material to an issuer and its
investors. The Guidance notes that public companies are required to
evaluate their cybersecurity risks and “consider the probability of cyber
incidents occurring and the quantitative and qualitative magnitude of those
risks, including the potential costs and other consequences resulting from
misappropriation of assets or sensitive information, corruption of data or
operational disruption.” Therefore, issuers who work with or have
access to sensitive customer data or whose businesses would be seriously
impacted by a computer security breach should consider disclosing the risk
of cyber attacks and similar events in their disclosure documents.
The SEC also provided direction in the Guidance regarding
disclosures which reference how an issuer should address potential cyber
security risks, and the need to explain why the cost and consequences
associated with doing so represents a material event. The SEC also
addressed the need for disclosures if a cyber attack could materially
affect the issuer’s products or services, customer relationships, and
competitive conditions, as well as disclosure in the event of a pending
legal proceeding regarding a cyber attack.
Where an issuer is required to incur substantial costs in
order to protect against potential cybersecurity risks, the issuer may need
to include references to those costs in the Management’s Discussion and
Analysis (MD&A) section of its filings, as well as in footnotes to
financial statements. Likewise, when a cyber attack occurs, litigation
involving suppliers and customers could be costly; companies may need to
disclose and explain these risks in addition to the consequences of the
cyber attack itself. Finally, issuers are required to disclose the
effectiveness of their disclosure controls and procedures in SEC filings;
to the extent those controls and procedures are impacted by cyber attacks,
an analysis of the consequences of those attacks for the controls and
procedures may be required.
The Guidance does not impose any new disclosure requirements
or make any changes to existing disclosure rules. The Guidance does,
however, make it very clear that the SEC is strongly concerned about
cybersecurity as a general concept. The purpose of the Guidance is to
remind companies that they should be keeping this specific topic in mind
when crafting disclosure within the existing framework of the SEC’s rules,
especially when preparing disclosure in their Forms 10-K regarding risk
factors, MD&A, the business description, financial statements, and
Disclosure. Conflict minerals-related disclosure is
another highly controversial topic for which the SEC was required to issue
rules under the Dodd-Frank Act. Section 1502 of the Dodd-Frank Act provides
that the SEC shall require companies to disclose whether or not their
products contain so-called “conflict minerals” — i.e., tin, gold, tantalum,
or tungsten, from the Democratic Republic of Congo and neighboring
countries. This provision was included in the Dodd-Frank Act at the request
of legislators who believe that the process of mining for and producing
these particular minerals in certain countries is contributing to a grave,
ongoing humanitarian crisis in that region of Africa.
The SEC proposed rules on this topic in December 2010, and
the Dodd-Frank Act had required the rules to be finalized by April 15,
2011. However, due to the strong resistance to the rules from a broad cross
section of the business community, the rulemaking has been delayed and, as
of January 2012, is still not yet final. The implementing rules as proposed
If “conflict minerals” are necessary to the functionality or
production of a product manufactured, or contracted to be manufactured, by
an issuer, the issuer would be required to disclose in its annual report
whether the conflict minerals originated in the Democratic Republic of the
Congo or an adjoining country.
If the answer is that they do originate in such countries, the
issuer must furnish an exhibit to its annual report that includes, among other
matters, a description of the measures taken by the issuer to exercise due
diligence on the source and chain of custody of its conflict minerals.
These due diligence measures would include, but would not be limited
to, an independent private sector audit of the issuer’s report conducted in
accordance with standards established by the Comptroller General of the
United States. Any issuer furnishing such a report would be required to
certify that it obtained an independent private sector audit of its report,
provide the audit report, and make its reports available to the public on
its Internet website.
Of particular concern to the business community is the fact
that there is no de minimis threshold for the disclosure, meaning
that the presence of even trace amounts of the conflict minerals would need
to be analyzed and reviewed for the purpose of this requirement. Further,
from a practical standpoint, commenters have argued that companies with
dozens or even hundreds of suppliers may find it unmanageably expensive and
burdensome to gather this information from several steps back in the supply
or production chain. The SEC convened a roundtable discussion on October
18, 2011 in order to obtain information from companies regarding this issue
that could help the agency put some parameters around the rule to make it
realistically manageable. However, as the final rules have not yet been
released, we are still waiting to see what the SEC ultimately produces. In
the meantime, companies engaged in manufacturing products in the
electronics, medical device, aerospace, and computer industries, among
others, should give some consideration to how they would address this
requirement by reviewing supply contracts to determine the number and
locations of suppliers they would need to contact for information in the
event that the rules are passed essentially as written.
Internal Control over
Financial Reporting. One positive development for smaller
reporting companies contained in the Dodd-Frank Act was the permanent elimination
of the requirement for such companies to provide an attestation report of
their auditors with respect to their internal control over financial
reporting in their annual reports on Form 10-K. All other companies have
been and are still required to include those reports, pursuant to Section
404 of the Sarbanes-Oxley Act. In addition, all issuers, including smaller
reporting companies, are required to include reports of their management as
to the effectiveness of internal control over financial reporting.
Report Filing Deadlines
For companies that qualify as large accelerated filers and
have fiscal years ending on December 31, annual reports on Form 10-K are
due 60 days after fiscal year-end (Wednesday, February 29, 2012).9 Form 10-K reports continue to be
due 75 days following fiscal year-end for accelerated filers10 (Wednesday, March 15, 2012 for
December 31 year-end companies) and 90 days after fiscal year-end for
non-accelerated filers (Friday, March 30, 2011 for December 31 year-end
In addition, Form 10-Q reports filed by accelerated filers
and large accelerated filers continue to be due 40 days after the close of
the fiscal quarter. The deadline for Form 10-Q reports for non-accelerated
filers continues to be 45 days after the close of the fiscal quarter
These changes do not affect the existing proxy statement
filing deadline of 120 days after fiscal year-end for companies that choose
to incorporate by reference from their definitive proxy statements the
disclosure required by Part III of the Form 10-K.
Companies should also note the extra day in the first quarter
as this year is a leap year with February 29th as an added date.
Director and Committee Membership
Each year as part of the year-end reporting process, we
recommend that companies carefully examine the membership profiles of their
board and board committees. Sarbanes-Oxley, the SEC rules issued under
Sarbanes-Oxley, and the listing requirements of Nasdaq, NYSE, and NYSE Amex
relating to board and committee membership requirements all impact who may
serve.11 Mintz Levin has
prepared a director independence and qualification checklist to assist with
this analysis, and we encourage you to evaluate each director and director
nominee to ensure continued compliance with these requirements.
Approval of Equity Compensation Plans
Nasdaq, NYSE, and NYSE Amex all require shareholder approval
for the adoption of equity compensation plans and arrangements for
employees, directors, and consultants and for any material modification of
such plans and arrangements, including the addition of new shares to a
plan. Exemptions from the shareholder approval requirement continue to be
available for inducement grants to new employees if such grants were
approved by a compensation committee or a majority of the company’s
independent directors, and if, promptly following each grant, a press
release is issued specifying the material terms of the award, including the
name of the recipient and the number of shares issued. In certain
situations, exceptions to the requirement may also be available for a grant
relating to an acquisition or merger. An exemption from the shareholder
approval requirement is also available for certain tax-qualified,
non-discriminatory employee benefit plans (such as plans that meet the
requirements of Section 401(a) of the Internal Revenue Code and Employee
Stock Purchase Plans meeting the requirements of Section 423 of the
Internal Revenue Code), provided that such plans are approved by the
issuer’s compensation committee or a majority of the issuer’s independent
directors. Equity plans adopted prior to June 30, 2003 are unaffected under
this rule, until a material modification is made to such a plan.
As noted above, companies considering option repricing
programs in light of significant declines in their stock prices should note
that such programs may require shareholder approval, depending on the terms
of the equity compensation plan under which the options were granted. In
the event that shareholder approval is required, the company will need to
file a preliminary proxy statement with the SEC, which would not be
required for approval of a new plan or an amendment to an existing plan.
Companies should review their existing equity compensation
plans as part of their year-end reporting preparation in order to determine
whether shareholder approval will need to be obtained for new plans or to
determine increases in the numbers of shares available under old plans,
option repricing programs, or material plan amendments. Since this is
another area where ISS continues to weigh in heavily, both with respect to
the number of shares to be authorized under the plan and with respect to
some of the substantive disclosure within the plan itself, plenty of time
should be allotted to drafting proposals on these matters.
We also recommend that companies take the opportunity while
planning their year-end reporting to consider what amendments may be
necessary or desirable to their corporate documents over the coming year
that may require shareholder approval. Some items to consider are:
Does the company have enough shares authorized under its certificate
of incorporation to achieve all of its objectives for the year, including
acquisitions for which it may want to use its stock as currency?
Does the company have adequate shares available under its equity
compensation plans to last throughout the year?
Are there other material changes that should be made to the
company’s equity compensation plans that would require shareholder
Has the company reviewed its charter and by-laws to assess any
anti-takeover measures in place?
To the extent that a company expects any proposal in its
proxy statement to create controversy among its shareholder base, it may
want to consider hiring a proxy solicitor to assist with the process of
seeking the requisite shareholder vote.
In addition, in light of the say-on-pay, executive
compensation, and governance rules described above, management and
directors of public companies should annually consider the following
questions, with a view to the disclosure that would flow from each answer.
Consider whether the company’s compensation policies and practices
for all of the company’s employees, including non-executive
officers, create risks that are reasonably likely to have a material
adverse effect on the company.
Are there business units that carry a significant portion of the
company’s risk profile?
Are there business units with compensation structured significantly
differently from the other units within the company?
Are there business units that are significantly more profitable or
risky than others within the company?
Are there business units where compensation expenses are a
significant percentage of the unit’s overall expenses?
Does the company have compensation policies or practices that vary
significantly from the overall risk and reward structure of the company and
are not in alignment with the timing of the outcome on which the award was
Is the company using a compensation consultant for which disclosure
would be required under these rules?
If the company is currently subject to the say-on-pay rules, is the
CD&A written in a sufficiently compelling and persuasive manner?
Consider, for each director and nominee, the particular experience,
qualifications, attributes, or skills that led the board to conclude that
the person should serve as a director for the company and how the
directors’ skills and background enable them to function well together as a
board, as of the time that a filing containing this disclosure will be made
with the SEC. Review the company’s current requirements regarding minimum
qualifications to serve as a director that are currently set forth in the
company’s proxy statement to make sure that the disclosure works with the
current nominating committee policy.
Consider whether, and if so how, the nominating committee considers diversity
in assessing director nominees. Consider whether to adopt a policy
regarding the consideration of diversity in identifying nominees, how to
implement the policy, and how to assess its effectiveness.
Consider the current governing structure of the board. Is it still
appropriate for the company? Are revisions necessary or appropriate?
Revise the nominating committee charter, if necessary, based on the
issues discussed above.
Consider the board’s role in managing and overseeing the material
risks facing a company. Has this role been effectively managed by the
board? Should the role be delegated to a committee?
We would also like to call your attention to the many
advisories and alerts regarding topics of current interest that are
available to you on our website, www.mintz.com.
New alerts and advisories are posted frequently, and we hope that you will
find the information to be useful.
Please contact the Mintz Levin attorney who is responsible
for your corporate and securities law matters if you have any questions or
comments regarding this information. We look forward to working with you to
make this year’s annual reporting process as smooth as possible.
* * *
1 We invite you to review our
memorandum from last year, which analyzed regulatory changes that were new
for fiscal year 2010, and we would be happy to provide you with another
copy upon request.
2 Smaller reporting companies
are those that have less than $75 million in public float as of the last
business day of their most recently completed second fiscal quarter.
3 For a further discussion
regarding say-on pay litigation see our Client Advisory, dated July 18,
2011, entitled “Lessons
Learned from Initial ‘Say-on-Pay’ Litigation, Plaintiffs’ Attorneys Start
Utilizing ‘No’ Votes as a Basis for Claims Against Directors”.
4 The peer group is generally
comprised of 14-24 companies that are selected by ISS using market cap,
revenue (or assets for financial firms), and GICS industry group, via a
process designed to select peers that are most similar to the company, and
where the company is close to median in revenue/asset size.
5 The ISS
2012 policy in evaluating say-on-pay is available on the ISS website.
6 Specifically, Exchange Act
Rule 14a-11, which sets forth the specific procedures and rules to be used
to nominate a director, was vacated.
7 Concept Release
on the U.S. Proxy System (Release No. 34-62495, July 14, 2010).
8 Securities and Exchange
Disclosure Guidance: Topic No. 2, Cybersecurity (October 13, 2011).
9 Large accelerated filers are
domestic companies that meet the following requirements as of their fiscal
have a common equity public float of at least $700 million, measured
as of the last business day of their most recently completed second fiscal
quarter (i.e., for calendar fiscal year-end companies, this test would be
applied as of June 30, 2011);
have been subject to the reporting requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, for at least 12
have previously filed at least one Annual Report on Form 10-K; and
do not qualify as smaller reporting companies under SEC rules.
10 Accelerated filers are
those that meet all of the above tests but have a common equity public
float of at least $75 million, but less than $700 million, measured as of
the last business day of their most recently completed second fiscal
quarter (i.e., for calendar fiscal year-end companies, this test would be
applied as of June 30, 2011).
11 Please see our Client Advisory,
dated November 2003, entitled “Changes to Corporate Governance Standards
for Nasdaq-Listed Companies,” for a further description of these changes.
We would be happy to provide you with a copy upon request.