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SUMMARY OF 2009 LEGISLATIVE PROPOSALS REGARDING CORPORATE GOVERNANCE

By: Mark Hoffman, DLA Piper

So far in 2009, there have been a number of significant legislative proposals relating to shareholder votes on executive compensation (“say on pay”), shareholder access to a company’s proxy statement (“shareholder access”) and other matters relating to executive compensation and corporate governance. This Brief summarizes several of these legislative proposals, including their current status and main substantive provisions.

Corporate and Financial Institution Compensation Fairness Act of 2009
In July 2009, the House of Representatives passed Representative Barney Frank’s (D-MA) latest version of a say-on-pay bill, available here. The bill has been referred to committee in the Senate but has not yet been referred out of committee to the full Senate. The bill would:

• Require in any proxy for an annual meeting of shareholders a separate, non-binding shareholder vote to approve the compensation of executives as disclosed pursuant to SEC executive compensation disclosure rules;
• Require in any proxy that concerns certain merger and acquisition transactions a separate, non-binding shareholder vote to approve any agreements or understandings concerning any type of compensation that is based on or otherwise relates to the transaction (a “golden parachute” payment) and has not already been subject to a shareholder advisory vote;
• Require heightened independence standards for compensation committees (no compensation other than for board/committee service, no affiliates of the issuer);
• Require that compensation consultants, legal counsel and other advisers to a compensation committee meet independence standards established by the SEC;
• Require in any proxy for an annual meeting of shareholders disclosure of whether the compensation committee retained and obtained the advice of an independent compensation consultant and, if it did not, why not doing so was in the best interest of shareholders; and
• Impose additional regulations for compensation at depository institutions, broker-dealers, credit unions, investment advisors and other financial institutions, including prohibitions on any compensation structure or incentive-based payment arrangement that encourages inappropriate risks.

Shareholder Empowerment Act of 2009
Representative Gary Peters (D-MI) has proposed the Shareholder Empowerment Act of 2009, available here. The bill has been referred to committee but not yet reported out of committee to the full House of Representatives. The bill would:

• Require issuers to provide in their governing documents that directors in uncontested elections must be elected by a majority of the votes cast as to each nominee (plurality in contested elections);
• Require issuers to adopt a mandatory resignation policy for directors who are not elected to a new term;
• Require issuers to identify and provide security holders the opportunity to vote on director candidates nominated by certain shareholders;
• Nominating shareholders must own 1 percent of the issuer’s voting securities for at least two years;
  
• Would only apply when eligible security holders have nominated fewer than a majority of the directors authorized to serve on the board;
  
• Prohibit broker discretionary voting in uncontested elections;
• Require issuers to have an independent chairman of the board of directors who has not in the past five years served as an executive officer to the issuer (or in certain other roles);
• Require in any proxy for an annual meeting of shareholders a separate, non-binding shareholder vote to approve the compensation of executives as disclosed pursuant to SEC executive compensation disclosure rules;
• Require that compensation consultants are independent;
• Require clawback policies for payments awarded to executive officers that are unearned due to fraud, restated financial results, or other causes;
• Prohibit severance payments to senior executive officers terminated for poor performance; and
• Require additional disclosure of specific performance targets used to determine eligibility for bonuses, equity and incentive compensation to senior executive officers.

Excessive Pay Shareholder Approval Act
Senator Richard Durbin (D-IL) has proposed the Excessive Pay Shareholder Approval Act, available here. The bill has been referred to committee but not yet reported out of committee to the full Senate. The bill would:

• Limit the annual “compensation” for any employee of an issuer to 100 times the average compensation of all employees, unless 60 percent of shareholders have approved greater compensation; and
• Require proxy disclosure of the lowest, highest and average compensation paid to employees, as well as the number of employees paid more than 100 times the average compensation and the total compensation paid to such employees.
• “Compensation” includes wages, salary, fees, commissions, fringe benefits, deferred compensation, retirement contributions, options, bonuses, property and any other form of remuneration that the SEC may determine.
  

Excessive Pay Capped Deduction Act of 2009
Senator Durbin has also proposed the Excessive Pay Capped Deduction Act of 2009, available here. The bill has been referred to committee but not yet reported out of committee to the full Senate. The bill would:

• Limit the federal income tax deduction for compensation paid to executives to 100 times the amount of the average compensation for services performed by all employees of the taxpayer during the taxable year – amounts paid in excess of this cap would be non-deductible; and
• Require special reports to the Treasury Department regarding any such compensation.

Shareholder Bill of Rights Act of 2009
Senators Charles Schumer (D-NY) and Maria Cantwell (D-WA) have proposed the Shareholder Bill of Rights Act of 2009, available here. The bill has been referred to committee but not yet reported out of committee to the full Senate. The bill would:

• Require in any proxy for an annual meeting of shareholders a separate, non-binding shareholder vote to approve the compensation of executives as disclosed pursuant to SEC executive compensation disclosure rules;
• Require in any proxy that concerns certain merger and acquisition transactions a separate, non-binding shareholder vote to approve any golden parachute payment that has not already been subject to a shareholder advisory vote;
• Require SEC rulemaking to allow shareholders to use a company’s proxy materials to nominate individuals to membership on an issuer’s board of directors;
• Nominating shareholders must own 1 percent of the issuer’s voting securities for at least two years;
  
• Require issuers to have an independent chairman of the board of directors who has not previously served as an executive officer;
• Require annual elections of each member of the board of directors;
• Require that directors in uncontested elections be elected by a majority of the votes cast as to each nominee (plurality in contested elections);
• Require the resignation of directors who are not elected to a new term; and
• Require issuers to establish a fully independent “risk committee” to establish and evaluate an issuer’s risk management practices.

Investor Protection Act of 2009
Representative Paul Kanjorski (D-PA) has proposed the Investor Protection Act of 2009, available here. The bill, which was put forward by the Treasury Department pursuant to the Obama Administration's white paper "Financial Regulatory Reform: A New Foundation," would:

• Create an advisory committee to advise and consult with the SEC on investor protection matters;
• Increase the SEC’s ability to gather information for rulemaking and programmatic purposes;
• Permit the SEC to promulgate rules providing standards of conduct for brokers, dealers and investment advisers in providing investment advice that is solely in the interest of customers and clients;
• Permit the SEC to promulgate rules designating documents or information that must precede the sale of registered investment company securities;
• Permit the SEC to promulgate rules prohibiting or limiting the use of agreements to arbitrate future disputes with brokers, dealers and investment advisers;
• Permit the SEC to pay up to 30 percent of the monetary sanctions imposed in certain SEC judicial or administrative actions to whistleblowers who voluntarily provide original information to the SEC leading to the successful enforcement of the action;
• Expand the remedies available to whistleblowers who face retaliation;
• Expand the securities industry roles in which a bad actor may face collateral bars; and
• Create control person and aiding-and-abetting liability for violations of Sections 11 or 12 of the Securities Act of 1933, as amended, the Investment Company Act of 1940, as amended, and the Investment Advisers Act of 1940, as amended.

Ending Excessive Corporate Deductions for Stock Options Act
Senators Carl Levin (D-MI) and John McCain (R-AZ) have introduced the Ending Excessive Corporate Deductions for Stock Options Act, available here. The bill has been referred to committee but not yet reported out of committee to the full Senate. The bill would:

• Limit the tax deduction companies can take for stock option compensation to the amount of expense recognized for that compensation in their financial statements; and
• Subject stock option compensation to the existing $1 million limit in Section 162(m) of the Internal Revenue Code for deductions a publicly traded corporation may claim for certain executive officers’ compensation.

Conclusion and Outlook
The flurry of legislative activity this year regarding say on pay, shareholder access, executive compensation and other corporate governance matters is not the only indication of policy momentum. Congressional action aside, the SEC has proposed rules that would require a company to include in its proxy materials director nominees proposed by shareholders who satisfy certain ownership and other requirements, and that would narrow the circumstances under which a company may exclude shareholder proposals related to elections and nominations for directors. (See DLA Piper’s Alert). The SEC has also proposed rules to improve the notice and access model for furnishing proxy materials to shareholders, which may address lower levels of retail investor voting and simplify solicitations by shareholders. In addition, the SEC has proposed new disclosures regarding overall compensation policies and their impact on risk taking, stock and option awards of executives and directors, director and nominee qualifications and legal proceedings, company leadership structures and independent chairs, the board’s role in the risk management process and potential conflicts of interest of compensation consultants. For more in this subject, see this DLA Piper Alert.

Additionally, stock exchange rules and state law continue to evolve to address corporate governance issues. NYSE Rule 452 has been amended such that, as to meetings held on or after January 1, 2010, brokers may not cast discretionary votes in any election of directors. See DLA Piper’s Alert for more on this change. The Delaware General Corporation Law has been amended to expressly permit bylaws providing for shareholder access and reimbursement of stockholder proxy expenses in certain situations. For more on this amendment, see this DLA Piper Alert.

While it remains to be seen whether any of the foregoing legislative proposals will be enacted, we will continue to monitor them carefully and to follow other corporate governance developments.

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For more information about the legislative and regulatory proposals affecting corporate governance, please contact:

Mark Hoffman
Chair
Public Company and Corporate Governance Practice
T: +1 206 839 4823
F: +1 206 494 1788

Provided By:
DLA Piper
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