The Shareholder Bill of Rights Act of 2009 (S. 1074) (the “Bill”) pending before the U.S. Senate requires that public companies provide for shareholder voting on executive and “golden parachute” compensation and shareholder proxy access to nominate directors. Additionally, the Bill introduces several new corporate governance standards, including mandatory separation of the positions of board chair and CEO, annual director elections, majority voting for director elections, and establishment of a risk committee.
The genesis of the Bill is the current economic and financial crises, which the Bill states has been caused principally by a “widespread failure of corporate governance” and “the lack of accountability of boards to…the shareholders.” As a result, the Bill tries to strike a balance by providing “a greater voice to shareholders” while not interfering with management. The stated goal of the Bill is “[t]o provide shareholders with enhanced authority over the nomination, election, and compensation of public company executives.”
Key Provisions of the Bill
Shareholder Advisory Vote on Executive Compensation
Section 3 of the Bill provides for advisory shareholder voting on executive compensation in the following instances:
“Say-on-Pay”. Companies would be required to give shareholders an advisory vote on executive compensation by including a separate resolution for shareholder approval in a company’s proxy materials for each annual meeting or other meeting in which compensation disclosure is mandated under the rules of the Securities and Exchange Commission (“SEC”). Such disclosure must include a “compensation discussion and analysis, the compensation materials, and any related material.”
Golden Parachute Compensation. In any proxy solicitation materials concerning an acquisition, merger, consolidation, or proposed sale or disposition of substantially all of the assets of a company, the soliciting person must disclose, “in a clear and simple form”, any agreements or understandings that such person has with any principal executive officers of the company concerning compensation related to the transaction (i.e., golden parachute compensation) which have not previously been voted on through a “say-on-pay” vote discussed above. Additionally, the proxy solicitation materials must provide for a shareholder vote to approve such agreements or understandings.
The Bill sets forth several rules of construction relating to the provisions above, most notably that results of the shareholder advisory votes for executive and golden parachute compensation are non-binding and would not overrule a decision of the board. In addition, the provisions do not change any existing fiduciary duties of the board nor do they create any additional fiduciary duties of the board. Each of the above provisions would apply to shareholder meetings occurring one year after the Bill’s enactment.
Shareholder Proxy Access
Section 4 of the Bill directs the SEC to establish rules for shareholder access to proxy solicitation materials supplied by a company “for the purpose of nominating individuals to membership of the board of directors….” However, proxy access is conditioned upon the shareholder’s or a shareholder group’s beneficial ownership of at least one percent of the voting stock of the company for at least two years prior to the next scheduled annual meeting of the company.
Corporate Governance Standards
Section 5 of the Bill contains the following new corporate governance standards:
Independent Chair. A public company must provide in its governing documents or in a public statement of corporate policy that (i) its chairperson is independent and (ii) such chairperson cannot have previously served as an executive officer of the company.
Annual Director Elections. The governing documents of a company must provide for the annual election of the directors of the company by the shareholders, which would effectively eliminate staggered boards of directors.
Majority Voting of Directors. In an uncontested board election, a director would be required to receive a majority of the votes cast for such nominee to be elected. In a contested election (i.e., one where the number of nominees exceeds the number of seats), a director would be elected by a vote of the plurality of votes cast. Additionally, any incumbent director failing to receive the requisite majority vote in an uncontested election would be required to tender his or her resignation to the board. The board must accept such resignation, and determine and publicly disclose its effective date within a reasonable period of time.
Risk Committee. Within one year after the SEC’s promulgation of rules regarding risk committees, companies would be required to establish a risk committee that is comprised entirely of independent directors. The risk committee’s responsibility is to establish and evaluate the risk management practices of the company.
The Bill requires that the SEC institute rules within one year of the Bill’s enactment which would prohibit the national securities exchanges and associations from listing the securities of a company that fails to comply with the standards above after an opportunity to cure any failure. Under the Bill, the SEC also would have the ability to exempt certain companies.
Since its introduction, the Bill has sparked much debate in the corporate world. If adopted, the Bill could have a dramatic impact on corporate practices and would essentially federalize several corporate governance practices that have been traditionally left to the province of state law. While it is uncertain if, when and in what form the Bill may be enacted, it seems probable that at least some of the standards addressed in the Bill will become law. As a result, public companies should evaluate their corporate practices in light of the pending Bill and be prepared to make conforming adjustments if it is enacted.
If you would like to discuss actions companies should be prepared to take in light of the Shareholder Bill of Rights Act of 2009, or if you have any other questions about this client alert, please contact Bill Pappas or John McTyeire.
William G. Pappas
John H. McTyeire