TARP Companies Could Face Say-on-Pay Votes This Year

Say-on-pay could become widespread even more quickly than expected. Roughly 400 companies that received TARP money could face shareholder advisory votes on compensation this year.

In a Feb. 20 letter to Securities and Exchange Commission Chairman Mary Schapiro, Senate Banking Committee Chairman Chris Dodd asked the commission staff to provide guidance to public companies for complying with the requirement “as soon as practicable” since the requirement takes effect immediately.

“It is my view that this provision would not apply to preliminary ... or definitive proxy statements filed with the Securities and Exchange Commission on or before February 17, 2009, but would apply to proxies filed after,” Dodd wrote.

The SEC declined to comment.

Among other things, Title VII of the American Recovery and Reinvestment Act requires TARP recipients while they owe government money to permit shareholders a non-binding “say on pay” vote on executive compensation.

“Although the Commission will determine whether it will need to amend its rules to address the provisions of the Act, any such determination does not affect the effective date of this provision,” the letter states.

Gibson Dunn & Crutcher partner Sean Feller says TARP companies are “scrambling to figure out” what they need to do to comply, particularly since many year-end companies are finalizing their proxy statements.

As technical matter, Feller says companies that implement say-on-pay votes would be required to file a preliminary proxy statement for approval. However, he says the SEC may waive that requirement this year for TARP companies that have to comply with the stimulus act provision to enable companies to include the vote in their proxy statements.

“If the SEC waives that requirement, my guess is we’ll see most companies put this in their annual meeting proxy to avoid the expense of a special meeting,” Feller says. Otherwise, the letter appears to leave open the possibility that companies can hold the vote at a special meeting of shareholders instead.

Feller expects to see the SEC quickly issue guidance on the mechanics of say-on-pay votes. One open question is whether TARP recipients that implement a say-on-pay vote to comply with the Stimulus Act will be allowed to eliminate shareholder proposals seeking such votes. Another issue is whether companies should include a supporting statement from management or the board in the proxy. It isn’t required.

The letter notes that the amendment to the Emergency Economic Stabilization Act doesn’t affect the SEC’s existing compensation disclosure rules. Dodd also noted that a requirement for TARP-recipient CEOs and CFOs to certify compliance with the requirements of new Section 111 of the EESA isn’t yet effective, since those executive compensation and governance standards have yet to be established by the Treasury Secretary.