Say-on-Pay

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Companies Get Hit With New Say-on-Pay Shareholder Derivative Suits

As previously posted on June 24, several derivative lawsuits have been filed against companies that have failed their “say-on-pay” votes. The lawsuits seek a recovery for alleged excessive executive compensation. Earlier this month, Dex One Corporation became the eighth company sued. The Dex One lawsuit, filed in the Eastern District of North Carolina, claims that officers and directors breached their fiduciary duty to the company by awarding large increases in compensation to the management team while the company was in bankruptcy, followed by a share price decline of more than 95 percent.

Since our last post on this topic, several companies with say-on-pay lawsuits have updated their disclosure.
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Large Accelerated Filer Announces Triennial Frequency in Face of Majority Support for Annual

The Dodd-Frank frequency vote is of course “nonbinding”, but companies that have “lost” the vote for triennial frequency have almost without exception decided that the better part of valor is to follow the shareholders’ expressed will for an annual vote. With more than 60% of large accelerated filers having announced their decisions, only two companies have bucked the trend. Annaly Capital Management just filed an amended Form 8-K declaring that its board has determined that future say-on-pay votes will be submitted to shareholders every three years, even though annual say-on-pay received majority approval. Annaly Capital Management is the first large accelerated filer to follow the example previously set by American Reprogaphics Company, a small company, to conduct triennial votes.
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Updated Say-on-Pay Scorecard

May is high season for annual shareholder meetings for U.S. public companies, so we wanted to update the findings that we shared in our last memo on the subject.  As of the end of last week, 802 large accelerated filers reported the voting results from their shareholder meetings.

Regarding approval of “say-on-pay”, so far:

Large Accelerated Filers by
Say-on-Pay Vote
(as of May 20, 2011)
90-100% Approval 540
80-89% Approval 126
70-79% Approval 65
60-69% Approval 40
50-59% Approval 14
40-49% Approval 9
30-39% Approval 7
20-29% Approval 1
0-19% Approval 0
Total 802

In other words, less than 17% of large accelerated filers reported say-on-pay results below the 80% approval level, and less than 9% reported results below the 70% approval level.
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Announcing the Frequency of Say-on-Pay

Questions have come up about whether companies can declare how frequently they intend to hold say-on-pay votes in the Form 8-K announcing annual meeting results within four business days after the meetings, or whether they must wait and make the disclosure in an amended Form 8-K.  While this seems to demand a simple “why not” response, the confusion stems from the fact that careful readers of the rules noted that the Form 8-K itself only provides for disclosing future frequency in an amended 8-K, to be filed no later than 150 days after the end of the meeting and 60 days before the 14a-8 shareholder proposal deadlines.
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Strong Support for Declassification and Majority Voting

Although it often looks like proxy season 2011 is a one-topic event, say-on-pay is just one item on proxy cards.  Recent data reminds us that say-on-pay may even be the least controversial item.  ISS reports that as of May 9, shareholder proposals calling for declassifying boards (annual election of directors) won as much as 95% and 81% approval rates at MEMC Electronic Materials and Alcoa, respectively.  Average support so far for nine proposals is 69%, up from 61% last year.  Shareholder proposals on majority voting are also faring well, averaging 57% support at 14 companies, including 78% at SkyWest.

Recognizing the increased probability of getting these types of results, companies that receive such proposals often go ahead and implement without putting the shareholder proposals on the ballot.  
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The Meaning (or Absence Thereof) of Abstentions

When shareholders mark “abstain” on a ballot, what does it mean?  Does the meaning differ depending on whether it’s to elect a director, vote on say-on-pay or a shareholder proposal?  The effect of abstentions in determining the pass/fail rate for an item depends on state law and corporate governance documents, but should they be excluded if we’re trying to examine different companies’ results for comparability?

You may be aware that it is ISS policy to ignore abstentions when reporting the results of shareholder proposals, citing Rule 14a-8(i)(12).  The approval rate of shareholder proposals determined by ISS feeds into their policy of recommending against boards for failure to implement proposals that receive majority support two out of three years in a row.
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Say-on-Pay Scorecard

We released today a memo summarizing the say-on-pay results so far this proxy season, including eleven companies who have failed to get majority support and a number of others where the vote was close enough to suggest meaningful shareholder concerns.  My anecdotal experience so far this season suggests a couple of supplemental points:

  • With every public company required for the first time this year to comply with say-on-pay, ISS is clearly swamped, and it’s showing in terms of quality control: we’ve seen an unusual level of cases in which ISS made factual mistakes in its report, and even a couple of situations in which ISS missed issues that in other years would likely have concerned them.


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The Magic Number So Far is… Nine

We’re up to nine failed say-on-pay votes so far for the year. We’ll provide a client communication shortly on the latest state of play in the say-on-pay world, including the reasons reported for the negative votes, and interesting additional soliciting materials filed by companies facing negative ISS recommendations. But we still have a long way to go before we can get the full picture. While the last week in April saw 300 annual meetings held, there will be over 400 alone in the first two weeks of May and 650 in the third week of that month.
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Is Anyone Winning on Triennial Say-on-Pay Frequency?

Notable recent support for triennial say-on-pay include Viacom, with insiders controlling about 80%, and Franklin Resources, which barely squeaks in 57% support for triennial even though insiders own approximately 35%.  The tide is starting to turn as more companies recognize that triennial is a long shot without some kind of insider block.  Our data shows 416 large accelerated filers and 188 S&P 500 companies had filed their proxy statements, with 59% of large accelerated filers and 64% of the S&P 500 now recommending for annual say-on-pay.

Contact nchiu.
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The Hypothetical Becomes a Reality

We’ve all engaged in the “what-if” scenarios of close votes on the say-on-pay frequency vote, faced by Green Mountain Coffee Roasters.  The company recommended triennial say-on-pay frequency and received 49.37% for annual and 49.99% triennial.  Talk about close.  Instead of keeping us in suspense as they are legally permitted to do, the company has announced that they will adopt annual frequency and hold another vote next year.  Would more a .01% support that pushed triennial into majority support made a difference to the board?
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