Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

Under Section 913 of the Dodd-Frank Act, the SEC is required to conduct a study, and provide a report to Congress, concerning the obligations of broker-dealers and investment advisers, including the standards of care applicable to those intermediaries and their associated persons.  The SEC intends to deliver the report concerning this study, as required by the Dodd-Frank Act, no later than January 21, 2011.

 Section 913 of the Dodd-Frank Act also authorizes the SEC to promulgate rules concerning, among other things, the legal or regulatory standards of care for broker-dealers, investment advisers, and persons associated with these intermediaries for providing personalized investment advice about securities to retail customers.  In enacting any rules pursuant to this authority, the SEC is required to consider the findings, conclusions, and recommendations of the mandated study.  The study and the SEC’s consideration of the need for further rulemaking pursuant to this authority are part of the SEC’s broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers in connection with the Dodd-Frank Act.  In light of these legislative developments, the SEC proposed on December 1, 2010 to extend the date on which rule 206(3)-3T will sunset for a limited amount of time, from December 31, 2010 to December 31, 2012.

 The SEC has issued a final rule  amending rule 206(3)-3T only to extend the rule’s expiration date by two years.  Absent further action by the SEC, the rule will expire on December 31, 2012. The SEC stated it adopted this extension because it believes that firms’ compliance with the substantive provisions of rule 206(3)-3T provides sufficient protection to advisory clients to warrant the rule’s continued operation for the additional two years while it conducts the study mandated by Section 913 of the Dodd-Frank Act and consider more broadly the regulatory requirements applicable to broker-dealers and investment advisers.   As part of its broader consideration of the regulatory requirements applicable to broker-dealers and investment advisers, the SEC intends to carefully consider principal trading by advisers, including whether rule 206(3)-3T should be substantively modified, supplanted, or permitted to expire.

 The SEC expects to revisit the relief provided in rule 206(3)-3T soon after the completion of its study in January 2011.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

Section 954 of the Dodd-Frank Act requires national securities exchanges (meaning, for instance, the NYSE, Amex and Nasdaq) to adopt rules as directed by the SEC, which rules will require issuers to develop and implement a policy providing:

  • for disclosure of an issuer’s policy on incentive compensation that is based on financial information required to be reported under securities laws; and
  • that, if an accounting restatement is prepared, the issuer will recover any excess incentive-based compensation from any current or former executive officer who received such incentive-based compensation in the three preceding years.

Rules regarding Section 954 of the Dodd-Frank Act have not yet been proposed or finalized.  However we reviewed recent SEC filings to see what public companies are doing to prepare for the eventual adoption of the rules related to clawback policies.

 Adoption of Clawback Policies

 Robbins & Myers. The board of directors of Robbins & Myers, Inc. adopted a compensation clawback policy  and approved a compensation clawback acknowledgement and agreement. The form of acknowledgement and agreement provides that all annual incentives and other performance-based compensation granted on or after October 1, 2010 are subject to the clawback policy. The policy provides that the employee must repay or forfeit any annual incentive or other performance-based compensation as directed by the board of directors of the company if:

  • the vesting of such compensation was based on the achievement of financial results that were subsequently the subject of a restatement of the company’s financial statements,
  • the employee engaged in fraud or misconduct that caused or contributed to the need for the restatement,
  • the amount of such compensation that would have been received by the employee would have been lower than the amount actually received, and
  • it is in the best interests of the company and its shareholders for the employee to repay or forfeit the compensation.

Caplease.  Under Caplease, Inc.’s recently adopted clawback policy, the board of directors may recover incentive compensation paid to any current or former executive officer of the company if all of the following conditions apply:

  • the company’s financial statements are required to be restated due to material non-compliance with any financial reporting requirements under the federal securities laws (other than a restatement due to a change in accounting rules),
  • as a result of such restatement, a performance measure which was a material factor in determining the award is restated, and
  • in the discretion of the compensation committee, a lower payment would have been made to the executive officer based upon the restated financial results.

The clawback policy applies to any incentive compensation paid on or after December 7, 2010 and the recovery period is the three year period preceding the date on which the company is required to prepare the accounting restatement.

 Employment Agreements

 Signet.  An employment agreement for a new CEO of Signet Jewelers Limited provides “[t]he Executive shall be subject to the written policies of the Board applicable to executives, including without limitation any Board policy relating to claw back of compensation, as they exist from time to time during the Executive’s employment by the Company.”

 SuperMedia.  An employment agreement for a new CEO of SuperMedia Inc. provides “[n]otwithstanding any other provision in this Agreement to the contrary, any “incentive-based compensation” within the meaning of Section 10D of the Exchange Act will be subject to claw-back by the Company in the manner required by Section 10D(b)(2) of the Exchange Act, as determined by the applicable rules and regulations promulgated thereunder from time to time by the U.S. Securities and Exchange Commission.”

Benefit Plans

Dover.  Dover Corporation recently adopted a severance plan and a change-in-control severance plan.  Each plan gives the corporation the right to recover amounts paid to an executive under the respective plan “if required under any claw-back policy of the Corporation as in effect from time to time or under applicable law.”

NACCO.  Nacco Industries, Inc. recently amended its Value Appreciation Plan to provide “[t]he Employers may recover all or a specified portion of any Award paid after the Effective Date under the Plan . . . in the event the Participant, either during employment with the Employers or within two years after termination of such employment, commits an act materially adverse to the interests of the Employers or that materially disrupts, damages, impairs or interferes with the business of the Company and its affiliates.

Dominion Resources.  The grant agreement for a recent award of restricted stock to the CEO of Dominion Resources, Inc. includes provisions regarding:

  • recovery of shares in the event of restated financial statements as a result of fraud or intentional misconduct;
  • recovery of shares in the event of fraudulent or intentional misconduct materially affecting the company’s business operations; and
  • the award is subject to any clawback policies the company may adopt to conform to the Dodd-Frank Act.

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

Legislation has been passed by Congress amending the Dodd-Frank Act.  President Obama is expected to sign the legislation.

 H.R. 6398 amends Section 343 of the Dodd-Frank Act to provide that deposits in so called Interest on Lawyers Trust Account, commonly referred to as IOLTAs, will be fully guaranteed by the FDIC for a two year period.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The SEC has adopted proxy access rules, principally set forth in Rule 14a-11.  The rules, which were permitted by the Dodd-Frank Act, permit shareholders to include shareholder director nominees in a company’s proxy statement.  However, the proxy access rules are currently stayed because of litigation challenging the validity of the rules.  Nevertheless, several companies have recently amended their bylaws in anticipation of Rule 14a-11 becoming effective.

 The interface between bylaw provisions and the proxy access rules embedded in Rule 14a-11 is not entirely clear from the SEC rule making process.  However, it is now generally believed, based on statements by SEC staff, and a speech by Commissioner Walter, that proxy access under Rule 14a-11 is only available when the shareholder has a right under state law to nominate directors.  Accordingly, it appears shareholders must comply with advance notice bylaws to gain access to a proxy statement, or at least to nominate directors at a meeting.  Many believe however, that advance notice bylaws cannot be so severe so as to serve as an opt-out from Rule 14a-11.

 With the foregoing in mind, we took a look at recent efforts to amend bylaws to address Rule 14a-11.  As you can imagine, where something as complex as this is in flux, there is a divergence in models, with some being more preferable to others.

 Director Qualifications

 Bristow Group Inc., a Delaware corporation, adopted a bylaw which provides that at least two thirds of the members of the board of directors must be citizens of the United Sates within the meaning of the Federal Aviation Act.  It further provides that non-citizens are not eligible for nomination or election if together with the election of incumbents that are not US citizens would cause less than two-thirds of the directors to be U.S. citizens.

 Felcor Lodging Trust Incorporated, a Maryland REIT, generally imposes an age limit of 70 years on directors nominated for election.

 Exclusive Model

 These models say that compliance with the advance notice provision is the exclusive way to nominate a director, and include some savings language in the event it is not possible to comply with both the advance notice provision and Rule 14a-11.  The most comprehensive example of bylaw amendments addressing Rule 14a-11 we reviewed was MGM Resorts International, a Delaware corporation.  Some of the things we liked are as follows:

  • Only those nominated in accordance in accordance with the bylaw shall be eligible to serve as a director.  (12(c))
  • The person presiding at the meeting has the power to determine eligibility.  (12(c))
  • If the nominating shareholder does not appear at the meeting the nomination shall be disregarded. (12(c))
  • Only stockholders of record may nominate directors. (12(a)(1))
  • Disclosure of derivatives positions.  (12(a)(3))
  • Company can require proposed nominee to furnish other information on eligibility and independence.  The information must be updated at the record date.  (12(a)(3))
  • A savings clause which says the advance notice provisions need not be complied with to the extent it is not feasible to comply with both Rule 14a-11 and the bylaws. (12(a)(5))
  • A requirement for the nominee to deliver a questionnaire.  The questionnaire requires representations as to certain voting commitments and, if elected, the nominee will comply with corporate governance, conflict of interest, confidentiality and trading policies.

 Care Investment Trust is another comprehensive example tailored to a Maryland REIT.  For those companies whose directors do not want multiple page advance notice bylaws, Analysts International Corporation, a Minnesota corporation, does a good job covering the basics.  Analysts International also has some nice language regarding broker non-votes. (Article III, Section 8) 

 Non-Exclusive Model

 These models tend to have less rigorous provisions regarding the bylaw being the exclusive method to nominate directors and/or the models have broader carve outs stating nothing in the advance notice bylaw affects the rights of stockholders to request inclusion of nominees in the company’s proxy statements pursuant to Rule 14a-11.  Examples include Bristow Group Inc., a Delaware corporation, and Felcor Lodging Trust Incorporated, a Maryland REIT.

 Rule 14a-11 Controls Model

Other models broadly defer to Rule 14a-11, providing compliance with Rule 14a-11 is adequate without regard to the advance notice bylaw.   Examples include Vectren Corporation, Flexsteel Industries, Inc. and Ampco-Pittsburgh Corporation.

 Conclusion

We prefer the exclusive model as it puts all nominees on equal footing and does not permit a company to opt out of proxy access and Rule 14a-11.  The non-exclusive model is often acceptable, and sometimes may be difficult to discern from the exclusive model, but may suffer from some ambiguity as to when Rule 14a-11 overrides an advance notice bylaw.  At this time, we do not see any advantages to the Rule 14a-11 controls model.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The Federal Reserve Board has published an expected timeline for rulemaking activities in the first half of 2011.  In the January to March 2011 timeframe, some of the things the Fed expects to accomplish include:

  • The Board will assist the Financial Stability Oversight Council, or FSOC, in developing a Notice of Proposed Rulemaking regarding the FSOC’s authority to designate certain nonbank financial companies for enhanced, consolidated supervision by the Federal Reserve. (Dodd-Frank Act Section 113) 
  • The Board will contribute to the FSOC’s study on the Volcker Rule’s activity restrictions. (Dodd-Frank Act Section 619(b)) 
  • The Board will request comment on a proposed inter-agency rule to: prohibit incentive-based payment arrangements that encourage inappropriate risk taking by covered financial companies, and require the disclosure and reporting of certain incentive-based compensation information by covered financial companies. (Dodd-Frank Act Section 956) 

 In the April to June 2011 timeframe, some of the things the Fed expects to accomplish include:

  • The Board will issue a final inter-agency rule to prohibit incentive-based compensation arrangements that encourage inappropriate risk-taking by covered financial companies, and to require the disclosure and reporting of certain incentive-based compensation information by covered financial companies. (Dodd-Frank Act Section 956) 
  • The Board will request comment on changes to existing rules to implement the requirements of section 939A of the Dodd-Frank Act relating to use of credit ratings in agency rules. (Dodd-Frank Act Section 939A) 
  • The Board, along with other federal regulatory agencies, will issue a final inter-agency rule to implement the credit risk retention requirements applicable in connection with the issuance of asset-backed securities. (Dodd-Frank Act Section 941) 
  • The Board, along with other federal financial regulatory agencies, will request comment on a proposed inter-agency rule to implement the Volcker Rule’s restrictions on proprietary trading, hedge fund, and private equity fund activity by insured depository institutions and their affiliates. (Dodd-Frank Act Section 619) 
  • The Board, along with other Federal financial regulatory agencies, will request comment on a proposed rule to implement the Volcker Rule’s concentration limit, which prohibits a financial company from making an acquisition if the liabilities of the combined company would exceed 10 percent of the liabilities of all financial companies. (Dodd-Frank Act Section 622) 

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

Several key themes can be distilled from filed say-on-pay and frequency proposals required by the Dodd-Frank Act.  Key differences also exist in issuer treatment of inclusion of a resolution on the frequency vote and how issuers explain how they will determine if a frequency vote passes.

Say-on-Pay

Many proposals address:

  • What the board will consider based on the outcome of the vote
  • Emphasis on the advisory nature of the vote:  it will not be binding on the board, overrule any decision made by the board or create or imply any additional fiduciary duty by the board
  • Compensations programs are designed to tie to performance that creates long term value
  • Compensation in relation to median or peer groups
  • Link to long term stock performance
  • Alignment to shareholder expectations both short and long-term
  • Emphasis on recent positive operating results
  • Reduced pay when operating results decrease
  • Alignment of executive compensation with key business objectives
  • Corporate governance controls over executive compensation
  • Absence of tax gross-ups
  • Limited compensation that is not tied to performance – absence of multi-year employment agreements, guaranteed incentive awards, “golden parachutes” or significant lump-sum compensation payments upon termination of employment
  • What the advisory vote is not a vote on:  not a vote on the company’s general compensation policies, compensation of the company’s board, or the company’s compensation policies as they relate to risk management

Frequency Vote

Many proposals address:

  • What the board will consider based on the outcome of the vote
  • That shareholders are free to express their concerns on executive pay to the board in years where a say-on-pay vote is not held
  • Annual votes might hinder long-term focus of compensation plans
  • Annual votes may overburden investors
  • Triennial votes afford the board the time to understand the results of the vote, discuss with shareholders and implement changes
  • Noting option plans and the like have been regularly submitted for shareholder approval
  • Triennial votes tie to multi-year performance cycles

Resolutions on Frequency Vote

Companies continue to vary on whether they include a formal resolution on the frequency vote, or just recommend a vote for one of the three alternatives. 

Determining Which Frequency Votes Passes

Generally, most state corporation laws provide that proposals, other than the election of directors, need to receive a majority of the votes cast to pass.  Many issuers seem to be departing from this legal standard, and state something to the effect that the frequency that receives the greatest number of votes cast will be the frequency selected by the shareholders.  Some recent disclosures in this regard are as follows:

  • The choice among the four choices included in the resolution which receives the highest number of votes will be deemed the choice of the stockholders (Hormel).
  • The option of one year, two years or three years that receives the highest number of votes cast by stockholders will be the frequency for the advisory vote on executive compensation that has been selected by stockholders (Wegner).
  • With respect to the frequency of advisory votes on executive compensation proposed in item (3), we have determined to view the frequency vote that receives the greatest number of votes cast by the holders of our Common Stock entitled to vote at the meeting as the advisory vote of shareowners on this item (Rockwell Collins).
  • All other matters require for approval the affirmative vote of a majority of those shares present in person, or represented by proxy, and entitled to vote at the Annual Meeting (Telular).
  • The option of one year, two years or three years that receives the highest number of votes cast by shareholders will be the frequency for the advisory vote on executive compensation that has been selected by shareholders (Rock-Tenn).

Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The first public company received credit for its cooperation as a result of the SEC’s policy with respect to cooperation in investigations and enforcement actions announced in January 2010.  The public company, Carter’s, Inc., entered into a non-prosecution agreement.

 The SEC charged a former Executive Vice President of Carter’s Inc. for engaging in financial fraud and insider trading. The SEC alleges that Joseph M. Elles’s misconduct caused an understatement of Carter’s expenses and a material overstatement of its net income in several financial reporting periods.

 The SEC also announced that it has entered a non-prosecution agreement with Carter’s under which the Atlanta-based company will not be charged with any violations of the federal securities laws relating to Elles’s unlawful conduct. The non-prosecution agreement reflects the relatively isolated nature of the unlawful conduct, Carter’s prompt and complete self-reporting of the misconduct to the SEC, its exemplary and extensive cooperation in the investigation, including undertaking a thorough and comprehensive internal investigation, and Carter’s extensive and substantial remedial actions.

 The SEC’s proposed whistleblower rules encourage employers to self report violations to the SEC.  Public companies should take into account the availability of the SEC policy for cooperation when considering when to self-report.  Unfortunately, at this time there is only a data base of one action  to use when making that assessment.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The SEC has proposed a rule creating a new process by which municipal advisors must register with the SEC.  The proposed rule, required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, would supplant a temporary rule the Commission adopted in September. Because the Act required that these advisors register by Oct. 1, 2010, the Commission adopted its earlier temporary rule on an interim basis so that advisors could fulfill the Act’s mandates.

 Municipal advisors provide advice to state and local governments and other borrowers involved in the issuance of municipal securities or with respect to the investment of governmental monies. Municipal advisors also solicit business from a state or local government for a third party. Subject to certain exemptions, the definition of municipal advisor under the Dodd-Frank Act includes financial advisors, guaranteed investment contract brokers, third-party marketers, placement agents, solicitors, finders, and certain swap advisors that provide municipal advisory services.

 Under the proposed permanent registration regime, municipal advisors would have to submit more detailed information than is currently required and certify that they have met or will meet the qualifications and regulatory obligations required of them.

 In particular, the proposed rule would require:

  • A municipal advisory firm to submit a Form MA to register.
  • An individual municipal advisor to submit a Form MA-I to register.
  • A municipal advisory firm or individual municipal advisor to submit a Form MA-W to withdraw from registration.
  • A non-resident municipal advisory firm (and any non-resident general partner or managing agent of a municipal advisory firm) to submit a Form MA-NR in order to appoint an agent for service of process.

 Like the temporary form required of municipal advisors (Form MA-T), the registration forms envisioned by the proposed rule would require municipal advisors to provide identifying and contact information, and to disclose — by selecting from a list — the municipal advisory activities in which they engage.

 Municipal advisors also would be required to provide disciplinary history information similar to the information that the SEC obtains from registered broker-dealers and investment advisers. Individual municipal advisors would be required to amend the form whenever any of the required information has become inaccurate in any way; and municipal advisory firms would be required to amend the form annually, and whenever identifying and contact information or disciplinary information has become inaccurate.

 Municipal advisors can continue to access and complete the temporary registration form (Form MA-T) on the SEC’s website. Information filed by municipal advisors on Form MA-T is made publicly available on the SEC’s website. In addition to registering with the SEC, municipal advisors also must register with the Municipal Securities Rulemaking Board (MSRB).

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The SEC is requesting public comment to help inform its study pursuant to Section 939(h) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 on the feasibility and desirability of: standardizing credit ratings terminology, so that all credit rating agencies issue credit ratings using identical terms; standardizing the market stress conditions under which ratings are evaluated; requiring a quantitative correspondence between credit ratings and a range of default probabilities and loss expectations under standardized conditions of economic stress; and standardizing credit rating terminology across asset classes, so that named ratings correspond to a standard range of default probabilities and expected losses independent of asset class and issuing entity.

 Check dodd-frank.com frequently for updates on the Dodd-Frank Act and other important securities law matters.

The filing of proxy statements with Dodd-Frank compliant say-on-pay proposals has become a daily event.  Public companies continue to prefer a three year frequency vote.  As pointed out on thecorporatecounsel.net, if you prefer a triennial frequency, you probably want that choice to be the first choice on the proxy card.  Some examples from recently filed proxy statements are set forth below.

Xata Corp., set for below, recommends a two year frequency, joining Hormel, another Minnesota based public company, in this board recommendation.  Xata also states the frequency option that achieves a plurality of votes cast “will be deemed to have received the advisory approval of our shareholders.”

Costco

Say-on-Pay

In accordance with recent legislation, the Company is providing shareholders with an advisory (non-binding) vote on compensation programs for our Named Executive Officers (sometimes referred to as “say on pay”). Accordingly, you may vote on the following resolution at the 2011 annual meeting:

“Resolved, that the shareholders approve, on an advisory basis, the compensation of the Company’s Named Executive Officers as disclosed in the Compensation Discussion and Analysis, the accompanying compensation tables, and the related narrative disclosure in this Proxy Statement.”

This vote is nonbinding. The Board and the Compensation Committee, which is comprised of independent directors, expect to take into account the outcome of the vote when considering future executive compensation decisions to the extent they can determine the cause or causes of any significant negative voting results.

As described in detail under “Compensation Discussion and Analysis” our compensation programs are designed to motivate our executives to create a successful company. If fully earned based on the achievement of performance targets, equity compensation in the form of restricted stock units that are subject to further time-based vesting is the largest component of executive compensation. We believe that our compensation program, with its balance of short-term incentives (including cash bonus awards and performance conditions for awards of restricted stock units) and long-term incentives (including equity awards that vest over up to five years) and share ownership guidelines reward sustained performance that is aligned with long-term shareholder interests. Shareholders are encouraged to read the Compensation Discussion and Analysis, the accompanying compensation tables, and the related narrative disclosure.

The Board of Directors unanimously recommends that you vote FOR the approval, on an advisory basis, of the compensation of our Named Executive Officers as disclosed in the Compensation Discussion and Analysis, the accompanying compensation tables, and the related narrative disclosure.

Frequency Vote

In addition to providing shareholders with the opportunity to cast an advisory vote on executive compensation, the Company this year is providing shareholders with an advisory vote on whether the advisory vote on executive compensation should be held every one, two or three years.

The Board believes that a frequency of “every three years” for the advisory vote on executive compensation is the optimal interval for conducting and responding to a “say on pay” vote. Shareholders who have concerns about executive compensation during the interval between “say on pay” votes are welcome to bring their specific concerns to the attention of the Board. Please refer to “Shareholder Communications to the Board” in this Proxy Statement for information about communicating with the Board.

The proxy card provides shareholders with the opportunity to choose among four options (holding the vote every one, two or three years, or abstaining) and, therefore, shareholders will not be voting to approve or disapprove the Board’s recommendation.

Although this advisory vote on the frequency of the “say on pay” vote is nonbinding, the Board and the Compensation Committee will take into account the outcome of the vote when considering the frequency of future advisory votes on executive compensation.

The Board of Directors unanimously recommends that you vote for the option of “every three years” for future advisory votes on executive compensation.

Proxy Card

IN THE ABSENCE OF SPECIFIC INSTRUCTIONS, PROXIES WILL BE VOTED “FOR” PROPOSALS 1, 2 AND 3, “FOR” A THREE YEAR FREQUENCY, AND IN THE DISCRETION OF THE PROXY HOLDERS AS TO ANY OTHER MATTER THAT MAY PROPERLY COME BEFORE THE ANNUAL MEETING OF SHAREHOLDERS.

Air Products

Say-on-Pay

As required by Section 14A of the Securities Exchange Act, shareholders may vote to approve or not approve the resolution below on the compensation of the Executive Officers as disclosed in the Compensation Discussion and Analysis and accompanying Executive Compensation Tables and narrative on pages 28-61:

RESOLVED, that the shareholders approve the Executive Officer compensation as discussed and disclosed in the Compensation Discussion and Analysis and the Executive Compensation Tables.

The Board recommends a vote for this resolution. Our Executive Officer compensation program is designed to reward performance that creates long-term shareholder value for you through the following features which are discussed on pages 29-31:

  • Constant performance goals, not tied to current operating or economic conditions, that require the management team to maintain and improve profitability in all economic environments to receive target compensation;
  • A compensation mix weighted toward long-term incentives to reward sustainable growth and profitability;
  • Substantial linkage of Executive Officer compensation to long-term stock performance; and
  • Median pay positioning for average performance, above median pay for above average performance, and below median pay for below median performance.

The Company has a record of providing an Executive Officer compensation program that is strongly aligned with its performance, illustrated by the charts on pages 31 and 32.

Although the vote is non-binding, the Board and the Management Development and Compensation Committee will review the voting results. If there are a significant number of negative votes, we will seek to understand the concerns that influenced the vote, and address them in making future decisions about executive compensation programs.

The Board recommends a vote “FOR” this resolution. As described in the Compensation Discussion and Analysis, our Executive Officer compensation program has been thoughtfully designed to support our long-term business strategies and drive creation of shareholder value. It is aligned with the competitive market for talent, very sensitive to Company performance and oriented to long-term incentives to maintain and improve the Company’s long-term profitability. We believe the program delivers reasonable pay which is strongly linked to Company performance over time relative to peer companies.

Frequency Vote

As required by Section 14A of the Securities Exchange Act, shareholders may vote on the resolution below regarding how often the Company will conduct a shareholder advisory vote on Executive Officer compensation. You may vote on whether you prefer an advisory vote every one, two, or three years, or to abstain.

RESOLVED, that the shareholders be provided an opportunity for an advisory vote on the compensation of Executive Officers as required by Section 14A of the Securities Exchange Act at the interval selected.

The Board recommends a vote every three years. As described in the Compensation Discussion and Analysis, the Company’s Executive Officer compensation is designed with a long-term focus. Key elements of the program include performance measures that require creation of shareholder value across economic cycles, long-term orientation of the pay mix to reward the disciplined long-term investments that are fundamental to our business model, and substantial linkage to long-term stock performance. The Board intends that the program be responsive to shareholder concerns, but is concerned that annual votes on the program could foster a short-term focus and undermine some of its most thoughtful features.

The Board is also concerned that annual advisory votes on executive compensation for all public companies will overburden investors and require them to evaluate too many executive compensation programs annually, hindering careful evaluation of the programs. Because of this, annual votes may lead to “one size fits all” formulas for evaluating compensation that will impair the Company’s ability to design its compensation program to align with its business model and performance drivers.

Finally, the Board believes that the Company will be better served by periodic votes on compensation that afford the Committee time to understand concerns and deliberate appropriate responses, and allow shareholders time to see responsive changes. In the event an advisory vote indicates shareholder concern, the Board believes shareholders will be best served if the Board takes the time to understand the issues and thoughtfully develop responsive alternatives.

The Board recommends a vote “FOR” three-year intervals to support the long-term focus of the executive compensation program and allow for thoughtful implementation of changes when needed.

Proxy Card

This proxy will be voted as directed, but if no instructions are given for voting on the matters listed on the reverse side, this proxy will be voted as recommended by the Board of Directors.

Xata

Say-on-Pay

The Company seeks a non-binding advisory vote from its shareholders to approve the compensation of our executive officers as described under “EXECUTIVE COMPENSATION” and the tabular disclosure regarding named executive officer compensation (together with the accompanying narrative disclosure) in this proxy statement.

This proposal gives our shareholders the opportunity to express their views on the Company’s executive officer compensation. Because your vote is advisory, it will not be binding upon the Board of Directors. However, the Compensation Committee will take into account the outcome of the vote when making future executive officer compensation decisions.

As we discuss below in our Compensation Discussion and Analysis, we believe that our compensation policies and decisions are designed to assist the Compensation Committee meeting its objectives. The objectives of the Company’s executive compensation program are to:

  • attract and retain top quality executive talent;
  • establish and support a performance-driven culture and motivate executives to deliver strong business results; and
  • ensure that executives are aligned with shareholder expectations by closely linking total compensation with short-term business objectives and creation of long-term shareholder value.

Accordingly, we are presenting this proposal, which gives you, our shareholder, the opportunity to approve our executive officer compensation as disclosed in this proxy statement by voting for or against the following resolution:

RESOLVED, that the shareholders approve the compensation of the Company’s executive officers, as disclosed in the Compensation Discussion and Analysis, the compensation tables, and the related disclosure contained in the Company’s Proxy Statement for its 2011 Annual Meeting.

OUR BOARD OF DIRECTORS BELIEVES THAT THE COMPENSATION OF OUR EXECUTIVE OFFICERS IS APPROPRIATE AND RECOMMENDS AN ADVISORY VOTE “FOR” THIS PROPOSAL.

Frequency

The Company seeks a non-binding advisory vote from its shareholders regarding the desired frequency for holding a non-binding advisory vote to approve the compensation of our executive officers as described in our annual proxy statements.

This proposal gives our shareholders the opportunity to express their views as to whether the non-binding advisory vote on our executive officer compensation practices should occur every one, two, or three years. Because your vote is advisory, it will not be binding upon the Board of Directors. However, the Board of Directors will take into account the outcome of the vote when deciding the frequency of the non-binding advisory vote on our future executive officer compensation decisions.

We recommend that a non-binding advisory vote to approve the compensation of our executive officers as disclosed in our annual proxy statements occur once every two years. We believe holding that vote every two years provides the most effective timeframe because it allows our Board of Directors and Compensation Committee sufficient time to engage our shareholders following each such vote in order to understand any concerns they may have, and to respond with any changes to the compensation of our executive officers and/or related disclosure deemed appropriate in response to the results of a shareholder advisory vote. In addition, our compensation program objectives include establishing and supporting a performance-driven culture and motivating executives to deliver strong business results. Accordingly, we believe that a vote every two years would provide our shareholders with additional time to evaluate the effectiveness of our executive compensation philosophy as it relates to our performance. In the future we may determine that a more or less frequent advisory vote is appropriate, either in response to the vote of our shareholders on this Proposal 3 or for other reasons.

While we believe our recommendation is appropriate at this time, the shareholders are not voting to approve or disapprove our recommendation, but are instead asked to provide an advisory vote on whether the non-binding advisory vote on the approval of our executive officer compensation practices should be held every one, two or three years. The option among those choices that obtains a plurality of votes cast by the shares present or represented by proxy and entitled to vote at the Annual Meeting will be deemed to have received the advisory approval of our shareholders.

OUR BOARD OF DIRECTORS RECOMMENDS AN ADVISORY VOTE FOR “2 YEARS” FOR THIS PROPOSAL.

Proxy Card

THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED “FOR” ALL NOMINEES LISTED IN PROPOSAL 1, “FOR” PROPOSAL 2, “2 YEARS” FOR PROPOSAL 3, AND IN THE DISCRETION OF THE PROXY HOLDER ON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.

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