We have been asked by general counsels of many public companies, and readers of our blog, if anyone was using the optional advisory approval of golden parachute arrangements permitted by the Dodd-Frank Act in connection with an annual meeting. If done right, approval of golden parachute arrangements at an annual meeting obviates the need to seek an advisory vote of those matters in connection with a merger or make disclosures in similar transactions, except to the extent changes occur. Ignoring one smaller reporting issuer that filed its proxy statement before the rules were finalized (Tech/Ops Sevcon, Inc.), we found five issuers that sought such approval. All had respectable market caps between $1.4 billion and $4.1 billion, except one which was under $100 million. Two had institutional ownership of more than 60%.
It is a popular misconception that if you include the golden parachute disclosures to obtain advance advisory approval of golden parachute arrangements that you need two ballot items – one to approve executive compensation and one to approve the golden parachute arrangements. That is not the case. If the disclosures with respect to golden parachute arrangements are made, they are covered by the general advisory vote on executive compensation.
Most public companies have chosen not to make the optional disclosures for the following reasons:
- Perhaps it will be interpreted as signaling an impending change-of-control transaction.
- Required data for preparing the disclosures are different from other tables, thereby making the disclosures more difficult to prepare.
- ISS and other advisors may object to the golden parachute arrangements, thereby impairing a favorable vote on executive compensation.
- Changes to golden parachute arrangements between the shareholder vote in which golden parachute arrangements are approved and a change in control transaction are subject to a separate advisory vote at the time of a change-in-control.
We note that all of the issuers who have sought approval of golden parachute arrangements to date have treated the matter as sort of a “magic bullet.” Sneak in the table for golden parachute arrangements at the end of your compensation tables, do not say more, and you are good to go upon a change-of-control. Should shareholders be told that their vote on executive compensation has an effect on subsequent advisory approval in connection with a change-of-control? It looks like fertile ground for SEC comment. That being said, disclosures would be difficult to make as issuers would have to fashion it to say no change-in-control transactions are contemplated, if true.
Our thoughts on some of the specific disclosures that have been made are set forth below.
Protective Life Corp. (Market cap $2.1 billion; institutional ownership 86%) This issuer has one of the most complex benefit plans of all of the issuers we looked at, so it may be the best starting point for others contemplating this disclosure. This issuer did not make disclosures required by S-K Rule 402(j) for termination of employment upon a change in control matters and included only the golden parachute table required by S-K Rule 402(t). The adopting release states (page 74) “The issuer must still include in an annual meeting proxy statement disclosure in accordance with Item 402(j) about payments that may be made to named executive officers upon termination of employment.” Perhaps there is no substantive difference here, but others need to be aware of this when following this precedent.
Transdigm Group Incorporated. (Market cap $4.1 billion; institutional ownership 91%) This issuer did make the separate disclosure required by both S-K Rules 402(j) and 402(t), but the amounts are identical. The proposing release (page 42 et. seq.) goes out of its way to explain how the calculations under 402(j) and 402(t) could be different. While there may be no substantive difference here, others need to be aware of this when relying on this precedent.
Sucampo Pharmaceuticals, Inc. (Market cap $64.2 million; institutional ownership 37%). This issuer made disclosures under both S-K Rule 402(j) and 402(t) with differing amounts. Hat tip to Thomas J. Knapp, General Counsel, whom we have worked with in the past and have great respect.
Fulton Financial Corporation (Market cap $2.3 billion; institutional ownership 49%). A fairly complex disclosure that includes 402(j) and 402(t) amounts in a single table without differing amounts. One draw back to this approach is uncertainty on whether you are invoking shareholder approval of golden parachute arrangements. We assume that is the case here.
FNB Bancorp. (Market cap $1.4 billion; institutional ownership 56%). The least complex disclosure, apparently there are only cash payments on a change of control. Others seeking to rely on this precedent should review the definition of “plan” in S-K Rule 402(a)(6) of Regulation S-K which differentiates S-K Rule 402(t) calculations from other disclosures and picks up certain non-discriminatory plans in S-K Rule 402(t) calculations.
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