Frequently Overlooked Disclosure Items in Annual Proxy Statements

Michael J. Schobel is partner and Erica E. Bonnett is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

In preparing the annual proxy statement, much care and attention is appropriately given to discussion of the company’s performance highlights, utilization of governance “best practices,” key compensation program developments, and other matters that are likely to draw investor attention and scrutiny. However, it is important not to forget that the annual proxy statement is also a legal disclosure document that is subject to a myriad of technical requirements set forth in Securities and Exchange Commission (“SEC”) rules and guidance. In our experience, some of the more subtle disclosure requirements are frequently overlooked, including, in particular, the items listed below. Companies should work with legal counsel to confirm that their annual proxy statements comply with all applicable disclosure requirements.

When to Provide GAAP Reconciliation

GAAP reconciliation is not required when disclosing non-GAAP performance targets or actual results relative to performance targets in the Compensation Discussion & Analysis (“CD&A”), provided that the disclosure explains how such values are calculated from the company’s audited financial statements. However, non-GAAP financial measures that are presented in the CD&A or any other part of the annual proxy statement for any other purpose (such as to explain the relationship between pay and performance or to justify certain levels or amounts of pay) are subject to GAAP reconciliation, which may be provided in an annex to the annual proxy statement (provided that the disclosure includes a prominent cross-reference to such annex) or by including a prominent cross-reference to the pages in the company’s annual report on Form 10-K containing the reconciliation.

Identifying Perquisites and Personal Benefits

Even if an item has a business purpose, it may still be considered a perquisite or personal benefit reportable in the “All Other Compensation” column of the Summary Compensation Table. Under SEC guidance, an item that confers a direct or indirect benefit that has a personal aspect is a perquisite or personal benefit unless it is “integrally and directly” related to the performance of the executive’s duties or is generally available on a nondiscriminatory basis to all employees. The SEC has clarified that “integrally and directly related” is a narrow concept that “draws a critical distinction between an item that a company provides because the executive needs it to do the job . . . and an item provided for some other reason, even where that other reason can involve both company benefit and personal benefit.” If an item is determined to be a perquisite or personal benefit, its business purpose and rationale should be described in the CD&A.

Disclosure of Deferred Equity Awards

With respect to equity awards for which settlement is deferred (whether or not such deferral is governed by a formal nonqualified deferred compensation plan), the amount deferred and the terms of the deferral should be disclosed in a footnote to the Option Exercises and Stock Vested Table for the year of vesting. In addition, such awards should be disclosed in the Nonqualified Deferred Compensation Table (and not the Outstanding Equity Awards at Fiscal Year-End Table) for the year of vesting and each subsequent year in which such awards remain outstanding.

How to Quantify Performance-Based Awards

For the Outstanding Equity Awards at Fiscal Year-End Table, the number (and value) of shares reported as subject to performance-based awards should be measured based on achieving threshold performance goals, although if the previous fiscal year’s performance has exceeded threshold, the disclosure should be based on the next higher performance measure (target or maximum) that exceeds the previous fiscal year’s performance. If performance goals are measured across multiple years, the company may use the performance through the end of the completed fiscal years over which performance is measured for purposes of determining the next higher performance measure. If the award provides only for a single payout level, the estimated amount should be reported.

When to Quantify Above-Market or Preferential Earnings

Above-market or preferential earnings on nonqualified deferred compensation should be disclosed in the Summary Compensation Table; however, for this purpose, earnings calculated in the same manner and at the same rate as earnings on externally managed investments under broad-based tax-qualified plans are not treated as above-market or preferential and need not be disclosed.

Disclosure of Outstanding Awards Held by Directors

The aggregate number of outstanding options (whether vested or unvested) and unvested stock awards held by each director at fiscal year-end should be disclosed in a footnote to the Director Compensation Table.

Compensation Plan Proposals

Any proposal seeking shareholder approval of a compensation plan must comply with Item 10 of the SEC’s Schedule 14A, including its easily overlooked requirements to (a) indicate the approximate number of persons in each class of eligible participants and (b) if stock options or other stock rights are offered under the plan, disclose the market value of company stock as of the latest practicable date.

Both comments and trackbacks are currently closed.