Shareholder Submission of Proposals on Executive Compensation

The annual deadline for shareholders of most companies to submit proposals on executive compensation is December. With the 4^th quarter approaching, this blog post by Attorney Michael S. Melbinger provides timely insights.

Company Must Include in Proxy Shareholder Proposal Limiting Future Equity Grants

Written by Michael Melbinger, first published on the Executive Compensation Blog, 7-16-2019.

Proxy season is essentially over, which means…it is time to start preparing for next proxy season! And since the deadline for shareholders to submit proposals ends in December for most companies, before much serious proxy statement drafting begins, I believe that shareholder proposals are a good topic to cover first.

We have blogged on shareholder proposals in the executive compensation area several times, as they have increased or decreased in frequency over the years (see, Shareholder Proposals on Executive Compensation Decrease in 2017). Well, they significantly increased in the 2019 season. Most of the shareholder proposals—and media attention—in 2018 and 2019 seems to have focused on Gender Pay Equity, but today I wanted to point out one on a more mundane matter.

In an April 11, 2019 letter from the Office of Chief Counsel Division of Corporation Finance to New York Community Bancorp, Inc., (NYCB) the Securities and Exchange Commission[i] SEC did not allow the company to omit the following shareholder proposal from its proxy materials:

To recommend to the Board of Directors to adopt a policy on making equity awards to senior executives, as follows:

No equity compensation grant may be made to a senior executive at a time when NYCB common stock has a market price that is lower than the grant date market price (taking into account stock dividends and stock splits) of any prior equity compensation grants to such individual. Compliance with this policy is excused if it would result in the violation of any existing contractual obligation or the terms of any existing compensation plan. 

In the SEC’s view, the company could not omit the proposal, which focused on policies for granting equity compensation awards to senior executives, from its proxy materials in reliance on:

• Rule 14a-8(i)(3), as materially false or misleading,[ii]
• Rule 14a-8(i)(10), as having been substantially implemented, or[iii]
• Rule 14a-8(i)(7), as not implicate significant compensation matters.[iv]

And while we are on the subject of shareholder proposals, one of the items in the SEC’s Spring 2019 Regulatory Flexibility Agenda (released in May) indicated that, as one of its rulemaking project for the upcoming year, “The Division is considering recommending that the Commission propose rule amendments regarding the thresholds for shareholder proposals under Rule 14a-8.” Presumably to increase the holding requirements. Stay tuned.

[i] Added for reader clarity

[ii] Division of Corporation Finance: Staff Legal Bulletin No. 14 The proposal or supporting statement is contrary to any of the Commission’s proxy rules, including rule 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials

[iii] Division of Corporation Finance: Staff Legal Bulletin No. 14 The company has already substantially implemented the proposal.

[iv] Division of Corporation Finance: Staff Legal Bulletin No. 14 The proposal deals with a matter relating to the company’s ordinary business operations.

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