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The SEC has issued a series of frequently asked questions, which in SEC speak are referred to as Compliance and Disclosures Interpretations (or C&DIs for short), on proxy statements and proxy solicitations.  In general the C&DIs replace previously issued telephone interpretations, but the lead in notes where substantive changes have been made.  For those who have not reviewed the age-old telephone interpretations manual recently, some of the more interesting C&DIs address Item 10 of Schedule 14A which sets forth disclosure requirements when compensation plans are submitted for shareholder approval.

According to the C&DIs:

  • Any action on a compensation plan that must be submitted for security holder approval requires all of the disclosure called for under Item 10 of Schedule 14A. If the action proposed is only an amendment to an existing plan (e.g., adding shares available under an option plan, or adding a new class of participants), the Item 10 disclosure still must include a complete description of any material features of the plan (Item 10(a)(1)), including the material differences from the existing plan (Instruction 2).
  • Item 10(a)(2)(i) disclosure regarding benefits or amounts that will be received by or allocated to each of the named executive officers and certain groups will only be called for if the plan being acted upon is: (i) a plan with set benefits or amounts (e.g., director option plans); or (ii) one under which some grants or awards have been made by the board or compensation committee subject to security holder approval (e.g., action is to add shares available under an existing option plan because there are not enough shares remaining under the plan to honor exercises of all outstanding options).
  • A registrant is required to disclose the New Plan Benefits Table called for under Item 10(a)(2) of Schedule 14A should list in the table all of the individuals and groups for which award and benefit information is required, even if the amount to be reported is “0”. Alternatively, the registrant can choose to identify any individual or group for which the award and benefit information to be reported is “0” through narrative disclosure that accompanies the New Plan Benefits Table.
  • A registrant cannot include other information, such as that called for by Item 10(b) of Schedule 14A, in the New Plan Benefits Table mandated by Item 10(a)(2) of Schedule 14A.
  • For option plans, no “dollar value” information should be given in the New Plan Benefits Table (i.e., no Black-Scholes or other valuation). The number of shares underlying the options should be provided in the “Number of Units” column.
  • Item 10(a)(2)(iii) of Schedule 14A does not require disclosure of actual awards made under an existing plan for the prior fiscal year. The language of Item 10(a)(2)(iii) stating “if the plan had been in effect” contemplates plans that were not in effect for the prior fiscal year. Accordingly, Item 10(a)(2)(iii) disclosure of actual awards under an existing plan for the last fiscal year is not required. Disclosure under this item would be required when action is being taken on an existing plan only where the existing plan is being amended to alter a formula or other objective criteria to be applied to determine benefits.
  • Item 10(a)(2)(i) or 10(a)(2)(iii) of Schedule 14A does not require a “pro forma” presentation of the benefits or amounts that would have been received under a plan where such awards or benefits are discretionary. Such discretionary awards or benefits would not be considered to be determinable for purposes of these two item requirements.
  • The disclosure requirement in Item 10(a)(2)(iii) of Schedule 14A applies only to plans that have objective criteria for determining the compensation payable under the plan so that the registrant can take the criteria and, assuming the variables of the last year, determine what would have been paid under the plan had it been in place then. An example would be a bonus or long-term incentive plan with award opportunities based upon a fixed percentage of salary and actual payment earned based upon corporate performance against fixed measures (such as percentage growth in earnings over previous years).
  • The “market value of the securities underlying the options, warrants, or rights as of the latest practicable date” for purposes of Item 10(b)(2)(i)(D) of Schedule 14A may be presented as either: (i) market price per share or (ii) aggregate market value of the total number of shares underlying all options (granted or available for grant) under the plan.
  • Item 10(b)(2)(ii) of Schedule 14A, requires the registrant to state separately the amount of options received or to be received. The requirement covers only options under the plan upon which action is being taken. For example, it would be inapplicable if a new plan was being considered because there would be no grants under that new plan to report. No disclosure is required if a new plan is being considered, even if the registrant has other plans under which there have been or will be options granted, and even if a previous or existing plan appears identical to the new plan in all but name.
  • The disclosure under Item 10(b)(2)(ii) of Schedule 14A does not need to appear in a table.
  • Item 10(b)(2)(ii) of Schedule 14A does not apply only to options received during the last year. It applies to all options received at any time (not just last year) and options to be received (if determinable) by the specified persons and groups. The information called for under this item requirement should be given for each individual and group (including those for which the amount of options received or to be received is “0”).