SEC Adopts Additional Compensation and CorporateGovernance Disclosure for 2010 Proxy - Davis Polk & Wardwell LLP

Davis Polk & Wardwell LLP
CLIENT MEMORANDUM **

SEC Adopts Additional Compensation and CorporateGovernance Disclosure for 2010 Proxy

Davis Polk Client Memorandum *

At an open meeting today, the SEC voted to adopt amendments intended to enhance compensation andcorporate governance disclosures. The new rule, which becomes effective February 28, 2010, wasadopted substantially as proposed with some changes described below. The SEC deferred considerationof changes to the proxy solicitation rules until it considers the proxy access proposal. Chairman Mary L.Schapiro reaffirmed her commitment to bring final proxy access rules to a vote “early next year.” *

This summary was based on oral discussions at the SEC’s open meeting. We will discuss the new rule inmore detail as part of a broader discussion on planning for the 2010 proxy season on Wednesday,January 6, 2010 in a webcast entitled “Planning for the 2010 Proxy Season: Evolving Issues, New Rules.”Details and a link to the webcast to follow. *

- Material risks arising from compensation policies. The new rule will require a discussion and analysisof compensation practices or policies for employees, if the risks arising from such policies or practices are“reasonably likely” to have a “material adverse effect” on the company. The proposal would haverequired disclosure if the risks arising from such policies or practices “may” have a “material effect” on themcompany. The disclosure will not be part of the CD&A, as the requirement will cover all employees andnot just executive officers. Smaller reporting companies will be exempt. *

- Changes to reporting the value of equity awards. The new rule will require that the value of optionsand stock awards reported in the summary compensation table and director compensation table bedisclosed at the aggregate “grant date fair value” of such awards. The previous rule required disclosureof the annual accounting expense instead. The grant date fair value approach, widely preferred by mostusers of reported compensation data, may affect not only the total compensation reported but also thecomposition of the named executive officer group. The new rule will also require companies torecompute the information for all the years shown in the tables. Additionally, the new rule clarifies thatawards subject to performance conditions are to be reported based on the probable outcome ofperformance conditions rather than the maximum potential value of the award, which is to be disclosed in a footnote to the table. *

- Directors and director nominees. The new rule will require disclosure for each director and newnominees regarding the particular experience, qualifications, attributes or skills that make the individual qualified to serve as a director. The new rule does not contain a similar requirement related to service on a board committee as was proposed. Additionally, the amendment requires disclosure of any public company directorships held at any time during the past five years instead of only current directorships, and lengthens the time period for which disclosure of legal proceedings involving directors or executive officers is required from five to ten years. While not specifically proposed, the amendment expands the list of legal proceedings covered by the rule to include those based on mail or wire fraud or fraud inconnection with any business entity; violations of federal or state securities, commodities, banking orinsurance laws and regulations or settlements to these actions; and disciplinary sanctions or ordersimposed by any stock commodities or derivatives exchange or other self-regulatory organization.Settlements of private civil litigation need not be disclosed. *

- Considerations of diversity in the nominations process. The new rule will require disclosure ofwhether and if so how, a nominating committee considers diversity in identifying directors. If a companyhas a diversity policy, the new rule will require disclosure of how the policy is implemented and how theboard assesses the effectiveness of its policies. According to Chairman Schapiro, companies will have the ability to define diversity “as broadly or as narrowly as they choose” as the rule will not have a setdefinition. *

- Board leadership structure and role in risk oversight. The new rule will require disclosure of acompany’s board leadership structure and a discussion of why the company believes that this boardleadership structure is the best structure for the company, including a discussion of whether and why thecompany has chosen to combine or separate the CEO and board chairperson positions. If one personserves as both the CEO and chair, the company must state whether and why it has a lead independentdirector and such director’s role. Companies must also disclose the extent of the board’s role in the riskoversight of the company. *

- Compensation consultants. The new rule will require specified disclosure of the fees and services paidto compensation consultants and their affiliates if they provide both consulting services relating toexecutive or director compensation and additional services, if the cost of such additional servicesexceeds $120,000. *

- Accelerated vote result reporting. A new Form 8-K item will require that annual meeting voting resultsbe reported within four business days of a company’s annual meeting, instead of on Form 10-Q or Form10-K. Where results will not be known by the deadline, companies will be permitted to disclosepreliminary voting results and file an amended 8-K reporting the final voting results within four businessdays after the final results are known.

If you have any questions regarding the matters covered in this publication, please contact any of thelawyers listed below or your regular Davis Polk contact
- Ning Chiu 212 450 4908 ning.chiu@davispolk.com
- William M. Kelly 650 752 2003 william.kelly@davispolk.com
- Barbara Nims 212 450 4591 barbara.nims@davispolk.com
- Richard J. Sandler 212 450 4224 richard.sandler@davispolk.com
- Mutya Fonte Harsch 212 450 4289 mutya.harsch@davispolk.com

© 2009 Davis Polk & Wardwell LLPNotice: This is a summary that we believe may be of interest to you for general information. It is not a full analysis of the matters presented and should not be relied upon as legal advice. If you would rather not receive these memoranda, please respond to thisemail and indicate that you would like to be removed from our distribution list. If you have any questions about the matters covered in this publication, the names and office locations of all of our partners appear on our website, davispolk.com.

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http://dreamlearndobecome.blogspot.com This posting was made my Jim Jacobs, President & CEO of Jacobs Executive Advisors. Jim also serves as Leader of Jacobs Advisors' Insurance Practice.