Activist Investor Report – U.S. Senate Approves Wall Street Reform Bill

June 1, 2010

On May 20, 2010, the United States Senate approved a bill containing its version of the “Restoring American Financial Stability Act of 2010”, or RAFSA. While RAFSA focuses primarily on the expansion of federal regulation over banks and other financial institutions, the bill includes several significant proposals relating to executive compensation and corporate governance practices of U.S. publicly traded companies that are intended to enhance corporate transparency and the rights of shareholders.

Executive Compensation

  • Say on Pay” Shareholder Resolution. Each annual shareholder meeting proxy statement would be required to include a precatory “say on pay” shareholder resolution to specifically approve a company’s level of executive compensation. Shareholders would continue to have the right to make other proposals for inclusion in the company’s proxy statement relating to executive compensation. The bill would also prohibit discretionary broker voting on “say on pay” resolutions or other matters relating to executive compensation.
  • Executive Compensation Clawback. As a condition to listing on a national securities exchange, a company must adopt a policy that provides that if a company’s financial statements are restated due to material non-compliance with financial reporting requirements under the federal securities laws, the company may recover from all current and former executives the difference between that executive’s actual incentive based compensation for the prior three fiscal years and the amount of incentive based compensation that would have been paid during the same period after giving effect to the restatement.
  • Executive Compensation Disclosure. Each annual shareholder meeting proxy statement would be required to include, in addition to existing executive compensation disclosure, the median annual compensation of all of the company’s employees excluding the chief executive officer, and the ratio of the median compensation to the chief executive officer’s compensation. Additional disclosure would also be required regarding the relationship between executive compensation and the financial performance of the company, including stock price and dividends paid during the relevant period. Finally, the company would be required to disclose in each annual shareholder meeting proxy statement whether company policy permits any employee or director of the company to hedge against (i.e., sell short) any decrease in the market value of any equity security granted as part of such employee’s or director’s compensation or otherwise held by such person.
  • Compensation Committee Requirements. The independence of each member of the compensation committee of a company listed on a national securities exchange is required to be considered in light of the source of compensation to that director, including consulting, advisory or other fees, and whether the member is an affiliate of the issuer. In addition, the compensation committee would be required to provide additional disclosure regarding the independence of any compensation consultant and any other professional advisors retained by the committee.

Election of Directors

Uniform federal voting standards would replace current provisions relating to the election of directors governed by state law and a company’s bylaws. Under the proposed bill, all uncontested director elections would require directors to be elected by a majority of votes cast (as opposed to a plurality), and would require the nominee to submit his or her resignation if elected by less than a majority, in which case the company’s board would be require to accept the resignation or, if approved by unanimous consent of the board, reject the resignation and publicly disclose the reason such resignation was not accepted within 30 days of the vote. In contested elections, a director could be elected by plurality vote.

Proxy Access

RAFSA would grant the Securities and Exchange Commission the authority to adopt rules requiring the inclusion of shareholder nominees in the company’s own proxy statement. This provision clarifies the SEC’s authority to adopt a new Rule 14a-11 of the federal proxy rules that would require any reporting company subject to the proxy rules, or any investment company registered under the Investment Company Act of 1940, to include shareholder director nominees in the company’s own proxy statement, subject to the satisfaction of certain eligibility and procedural requirements.

The Senate’s RAFSA bill must be reconciled with a counterpart bill passed by the House of Representatives last year, entitled the “Wall Street Reform and Consumer Protection Act of 2009” before it can be approved in final form by Congress, and submitted to the President for his approval. Any legislation ultimately enacted may differ significantly from RAFSA or from the House bill.


Seward & Kissel will continue to monitor the progress of RAFSA, as well as other initiatives and developments of significance to our activist clients, and advise our clients of further developments in future Activist Investor Reports.

If you have any questions regarding this Report or other activist investor matters, please contact the following Capital Markets Group partners: Robert Lustrin at (212) 574-1420 or Ted Horton at (212) 574-1265 or any other member of the Capital Markets or Investment Management groups at Seward & Kissel.