Say-on-Golden Parachute Proposals Drawing Pressure from Investors

According to ISS, there have been 140 say-on-golden parachute votes since this Dodd-Frank rule went into effect in January, 2011.Almost all of these say-on-golden parachute votes occurred when a transaction required such a vote.Only 8 of these votes have failed. However, the underlying mergers, on average, receive 20% more favorable support from shareholders than the votes on the parachute provisions.

Why are shareholders, more and more, using the say-on-golden parachute vote as a form of protest, especially a protest to companies that will soon after disappear into the acquirer and cease to be accountable?Moreover, is this form of protest making any difference?

These protest votes appear to be a way for shareholders to “send a broader message”. The expectation of significant growth in mergers and acquisitions over the next 12 to 18 months involving companies with substantial cash reserves and limited opportunities for organic growth further suggest that there is an audience paying attention.Independent directors are believed to be very likely to re-consider how these severance packages are designed, if something, such as parachute payments, could potentially get in the way of these deals.

 The advisory votes already appear to have caused change.Almost no company is adding 280G gross-up payments or single trigger cash severance, and many plans are now limiting golden parachute payments that would otherwise exceed 3 times base plus bonus, as recommended in ISS's new modified golden parachute recommendations for 2013.

 One thing is almost for certain, substantial changes in existing severance policies, in advance of a merger vote, will result in a failed parachute vote, as was the case with Ralcorp's shareholders voting 99% in favor of the merger with ConAgra Foods, while voting 49% to 44% in the advisory vote against the parachute payments.

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