December 9, 2010

Shareholder Say on “Golden Parachute Compensation”

Here is something that Mike Melbinger recently blogged on his’s “Melbinger’s Compensation Blog“:

Public companies all over America are deciding whether to follow the disclosure requirements of the new, proposed rules on “Golden Parachute Compensation,” in order to take advantage of the exemption in the proposed rules from future disclosure and approval in a merger proxy. During the numerous compensation committee and board meetings on Shareholder Say on Pay that I have attended in the last month, I have had the opportunity to gain some useful insight on this issue.

Remember that Dodd-Frank would require a company to disclose, in any proxy in which shareholders are asked to approve an acquisition, merger, consolidation, etc., and seek shareholder approval of any “golden parachute compensation.”* However, Dodd-Frank would not require this approval if shareholders already had approved the company’s golden parachute payments and agreements as part of a regular Shareholder Say on Pay vote. To take advantage of this exception, the company must follow the disclosure requirements of new, proposed rules, including the new “Golden Parachute Compensation” table, rather than the more general, current requirements.

Our first reaction – and that of many others – to the Dodd-Frank exception that would not require separate approval of golden parachute compensation in a merger proxy if shareholders already had approved the company’s golden parachute payments and agreements as part of a regular Shareholder Say on Pay vote, was that it was very useful and most clients should take advantage of it. However, upon further reflection (and the experience of all those compensation committee meetings), we no longer see this exception as a no-brainer.

Here is why.

ISS recently announced that, in cases where the company incorporates the golden parachute vote into its SSOP vote, ISS will evaluate the “say on pay” proposal in accordance with its usual guidelines, “which may give higher weight to that component of the overall evaluation.”

Companies with an excise tax gross-up provision and/or a 3 times multiplier might be better off waiting for a merger proxy to make this disclosure and seek shareholder approval, rather than risking ISS (or other shareholder) disapproval of its entire compensation package. Clearly, for some companies, the benefit of having these arrangements approved in advance may not be worth the additional attention and risk that they may not be approved.

Making disclosure and seeking approval in a merger proxy seems less risky because the request for shareholder approval would be non-binding in any event, and a vote to disapprove would not affect the merger transaction in any way. Additionally, as pointed out in a recent Morrow & Co. update, the announcement of a merger often results in a change in the target company’s shareholder profile, with institutions selling shares and arbitrageurs and hedge funds buying. Thus, the merger proxy voting shareholder profile may be one that has a greater interest in seeing the transaction consummated and is less concerned about matters of compensation

The minimal risk of postponing this disclosure and request for approval until a merger proxy would seem to be that, in very close cases, shareholders might vote against the merger itself if they believe the parachute payments are excessive. Of course, ISS may come to demand this type of full disclosure over time, but they haven’t yet.

*Also remember that the new definition of “golden parachute compensation” means any type of compensation that relates to a change in control transaction, in any amount. For this purpose, at least, “golden parachute compensation” no longer refers to payments in excess of three times a covered executive’s base annual compensation.