Preparing for the 2018 Proxy Season - BakerHostetler · 2017-11-29 · Preparing for the 2018 Proxy Season 7 Peter Casey Executive Vice President Alliance Advisors LLC Peter oversees

Preparing for the 2018 Proxy Season November 14, 2017

Preparing for the 2018 Proxy Season

Agenda ..................................................................................... 3

Speaker Biographies ................................................................ 4

Additional Reading ................................................................. 18

Table of Contents

Preparing for the 2018 Proxy Season 3

Preparing for the 2018 Proxy Season Tuesday, Nov. 14 • 9:00am – 12:15pm

8:30am – 8:45am Breakfast and Registration 8:45am – 9am Welcome and Introductions Speaker: Joseph P. Boeckman, Partner, BakerHostetler Proxy Primer: Overview of Shareholder Meetings and Proxy Voting 9:00am – 9:45am Speakers: Janet A. Spreen, Partner, BakerHostetler Alexandra C. Mackey, Assistant Vice President, Proxy Solicitation, Alliance Advisors LLC Proxy Preparation: The Role of Proxy Advisors in Shareholder Voting and Corporate Governance 9:45am – 10:30am Speakers: Suzanne K. Hanselman, Partner, BakerHostetler Peter Casey, Executive Vice President, Alliance Advisors LLC Break 10:30am – 10:45am SEC Rulemaking and Emerging Issues 10:45am – 11:30am Speakers: John J. Harrington, Partner, BakerHostetler Amy M. Shepherd, Partner, BakerHostetler Moderator: Joseph P. Boeckman, Partner, BakerHostetler Case Studies and Lessons Learned From Public Company Officers 11:30am – 12:15pm Speakers: Jack Adams, SVP-AGC, Corporate and Securities, Cardinal Health Dennis Hoffman, Assistant General Counsel, Greif, Inc. Moderator: Joseph P. Boeckman, Partner, BakerHostetler

Agenda


Jack Adams

Senior Vice President and Associate General Counsel ‒

Corporate and Securities

Cardinal Health

Jack Adams is Senior Vice President and Associate General Counsel ‒ Corporate and Securities of Cardinal

Health. Headquartered in Dublin, Ohio, Cardinal Health is a global health services and products company, which

improves the cost-effectiveness of healthcare.

Jack joined Cardinal Health in 2005 and leads the Corporate and Securities Group of the Legal Department. This

Group is responsible for providing legal services in the areas of corporate, securities, mergers and acquisitions,

executive compensation and benefits and treasury. Before Cardinal Health, he was Associate General Counsel-

Corporate and Securities at Entergy Corporation, an electric utility based in New Orleans, Louisiana.

Speaker Biographies


Joseph P. Boeckman

Partner

Columbus

200 Civic Center Drive

Suite 1200

Columbus, OH 43215-4138

T +1.614.462.4737 F +1.614.462.2616

[email protected]

Services Securities Offerings and

Compliance

Mergers and Acquisitions

Corporate Governance

Private Equity and Venture Capital

International Securities and Capital Markets

Industries Energy Industry

Admissions Ohio

Education J.D., The Ohio State University

Michael E. Moritz College of Law, 1987, Order of the Coif

B.B.A., University of Cincinnati, 1982

With a comprehensive legal background that has touched on the areas of securities, business transactions, corporate governance and strategic business planning, Joe Boeckman is well-equipped to advise his clients on any number of corporate and business law matters. Currently SEC counsel for major corporations, Joe also advises middle-market and smaller companies on business transactions such as mergers, acquisitions, divestitures and joint ventures, and capital-raising efforts, e.g., private offerings and venture capital financings. Joe understands the particulars of his clients’ businesses and is adept at directing clients toward solutions that best suit their individual circumstances.

Experience Serves as lead SEC counsel for a New York Stock Exchange company

with manufacturing facilities located in more than 50 countries. Represented this company’s Luxembourg subsidiary in a €200 million offshore senior note offering, where proceeds were used to fund growth opportunities outside of North America. Also represented this company in numerous business transactions.

Serves as lead SEC counsel for a NASDAQ stock market company. Represented the company in its Rule 144A $100 million senior note offering and subsequent exchange offering for registered senior notes. Additionally represented this company in several insurance company acquisitions that facilitated expansion of its product offerings and geographic reach.

Serves as outside general counsel for several energy clients, including two electric cooperatives and an integrated energy cooperative. Assists boards and management in corporate governance topics and business matters, including governance assessment, board and executive evaluations, board/management relations, fiduciary duties, strategic planning, and succession planning.

Counsels public companies regarding their ongoing disclosure and public reporting obligations under the securities laws, including Regulation FD, periodic reporting, proxy statements and annual meetings, and Section 16 matters. Counsels public companies on corporate governance matters related to the Dodd-Frank Act, the Sarbanes-Oxley Act and the listing rules of the New York Stock Exchange and NASDAQ stock markets.


Has extensive insurance regulatory experience, including representation of mutual and stock insurance companies, health care organizations, managed care organizations, and other regulated entities in transactional and regulatory matters before various state departments of insurance and other state regulatory agencies.

Recognition BTI Client Service All-Star (2014)

Memberships American Bar Association

Ohio State Bar Association

Columbus Bar Association

Electric Cooperative Bar Association

Association for Corporate Growth, Columbus Chapter

o Founding Member

o Membership Committee

The Entrepreneurship Institute: Advisory Board, Columbus Chapter

Community The Ohio State University, Moritz College of Law: Mentoring and More

@ Moritz Program: Participating Mentor

Salvation Army of Central Ohio: Finance Board

First Tee Columbus: Advisory Committee


Peter Casey

Executive Vice President

Alliance Advisors LLC

Peter oversees the Proxy Solicitation Group at Alliance Advisors and has extensive knowledge in equity

compensation plan analysis, corporate governance consulting, proxy solicitation and proxy contests. In addition,

Peter’s substantial proxy fight experience includes consent solicitations, hostile tender offers, contested mergers,

several proxy fights for board representation involving cumulative voting, as well as numerous “Vote No”

campaigns.

Peter began his career in 1994 and his client base has expanded over the years to include several high profile

corporations, hedge funds, and Canadian issuers. He is a graduate of Rutgers, The State University of New

Jersey.


Suzanne K. Hanselman

Partner

Cleveland

Key Tower, 127 Public Square

Suite 2000

Cleveland, OH 44114-1214

T +1.216.861.7090 F +1.216.696.0740

[email protected]

“Suzanne Hanselman...[gains]

particular praise for her work in

securities. Clients note that she

is ‘very good, responsible and

cost-effective.’“

— Chambers USA 2015

Services Corporate Governance

Securities Offerings and Compliance


Admissions Ohio


Michael E. Moritz College of Law, 1991, Order of the Coif

B.A., Miami University, 1985

Bringing a holistic view to her practice, Suzanne Hanselman counsels companies on day-to-day corporate issues, ensures compliance with federal securities law and provides guidance to general counsel. Because Suzanne sees her connection with her clients as a partnership, clients feel that she is part of their team while she works to navigate their needs and concerns.

Suzanne is ranked in Chambers USA: America’s Leading Lawyers for Business and is listed in The Best Lawyers in America©. She is the business development leader for BakerHostetler’s Cleveland office and the former Business Group coordinator.

Experience Represented a long-standing client of the firm in a $500 million debt

securities offering. Client priced a deal less than a week after seizing an opportunity to take advantage of public debt markets, giving the team minimal time to prepare and file a registration statement with the SEC, finalize offering materials, and negotiate an underwriting agreement, while also coordinating with the client, the underwriter and its attorneys, and the trustee on underlying documentation. With her ability to draw resources together quickly and her understanding of the way in which the client operated, she addressed necessary matters within the limited time frame.

Advised company on its governance, structure and corporate policies, as well as on executive corporation matters, for its initial public offering. Team members involved in this representation were chosen for their extensive IPO experience, as well as their ability to work with the issuer’s counsel that had been hired by a private equity firm to ensure that all the client’s constituencies were protected. Helped client put structure policies in place to make the transition into a public company, and the subsequent functioning as a public company, as easy as possible.

Designed executive compensation programs and disclosures around an initial public offering for a longtime BakerHostetler client. Representation of client required an understanding of corporate governance, shareholder views, tax issues, and SEC disclosure and reporting issues within the industry.

Performed work as member of a team serving as primary legal counsel to interrelated family trusts. Provided advice associated with trust administration and fiduciary compliance matters. Advised trusts on


consolidated investment policy under applicable law, securities matters related to investments held in sub-trusts, decanting the situs change issues associated with revocable trust entities, and income shifting analysis under domestic and foreign tax accounting rules.

Recognition Chambers USA: Corporate/M&A in Ohio (2007 to 2017)

BTI Client Service All-Star (2016)

BTI Transactions All-Star Team (2008)

The Best Lawyers in America©

o Cleveland: Corporate Compliance Law (2009 to 2017)

o Cleveland: Corporate Governance Law (2009 to 2017)

o Best Lawyers® 2015 “Lawyer of the Year”


o Cleveland: Corporate Law (2009 to 2017)


o Cleveland: Securities/Capitals Markets Law (2015 to 2017)

o Cleveland: Securities Regulation (2015 to 2017)

Ohio “Super Lawyer” (2008 to 2017)

Midpark High School Distinguished Alumni Hall of Fame

Memberships Cleveland Metropolitan Bar Association

o Securities Law Section: Past President

Law and Capital Markets @ Ohio State: Advisory Board

Community Leadership Cleveland: Class of 2013

Cleveland-Marshall College of Law: Adjunct professor, securities and corporate law

Greater Cleveland YWCA: Board

Menlo Park Academy: Board


John J. Harrington

Partner

Cleveland


Suite 2000


T +1.216.861.6697 F +1.216.696.0740

[email protected]

“John Harrington is ‘very

responsive and intelligent’ and

impresses sources with his

‘fabulous pace of play.’“

— Chambers USA 2014

Services Corporate Governance

Securities Offerings and Compliance


Prior Positions Securities and Exchange

Commission, Division of Corporation Finance (2007 to 2012)

o Office of Capital Market Trends

o Office of Rulemaking

o Disclosure Operations

Admissions Ohio

Education J.D., Case Western Reserve

University School of Law, 2005, summa cum laude, Order of the Coif

A.B., Princeton University, 1999

John Harrington represents clients in connection with capital markets and business combination transactions, and provides ongoing advice with respect to corporate and compliance matters. His transactional experience includes many registered and exempt offerings of equity and debt securities; tender offers; and public and private mergers, acquisitions, and joint ventures. In John’s representation of public companies, he provides day-to-day advice on securities reporting and disclosure issues, compliance with SEC and stock exchange requirements, corporate governance, investor relations and activist matters.

John’s securities and public company practice is informed by the experience and insights he gained during five years in the SEC’s Division of Corporation Finance, most recently as special counsel in the Office of Capital Market Trends. In this position, he analyzed trends and developments in the capital markets, evaluated novel and complex securities and transaction structures, and implemented regulatory and policy initiatives arising from financial industry reform legislation. While on the SEC staff, John also served in the division’s Office of Rulemaking, where he developed various new regulations applicable to public companies.

Experience Counsel to a Nasdaq-listed restaurant industry client in connection with

IPO and subsequent follow-on equity offerings, with aggregate value of more than $1 billion.

Counsel to a NYSE-listed energy industry master limited partnership in a $1.6 billion senior notes offering and $300 million follow-on common unit offering.

Counsel to a NYSE-listed insurance industry client in multiple senior notes offerings aggregating more than $1 billion.

Counsel to a NYSE-listed energy industry client in connection with the refinancing of more than $1 billion of subordinated notes through a combination of tender offers and redemptions and the registered offering of new notes.

Counsel to a NYSE-listed energy industry client in connection with privately negotiated exchange transactions of more than $1 billion of outstanding subordinated notes for new secured notes and common shares.


Company counsel in $800 million “going private” management buyout of a NYSE-listed consumer products industry client.

As part of a cross-practice business and litigation team, represented minority shareholder and director of a Nasdaq-listed insurance company in opposition to an unsolicited tender offer by majority shareholder.

Buyer counsel in strategic acquisitions of publicly-listed aerospace industry companies with an aggregate value of approximately $250 million.

Represents small- and mid-cap public companies in a variety of capital markets transactions, including limited shelf registrations and takedowns and CMPOs, and stock exchange listing matters.

Represents public companies in responding to stockholder proposals, including seeking no-action relief from the SEC under Rule 14a-8, and in addressing evolving corporate governance trends.

Represents public companies in reviews of Regulation G compliance and non-GAAP disclosure practices in light of renewed SEC guidance and focus.

Recognition Chambers USA: Corporate/M&A in Ohio (2014 to 2015)

Ohio Super Lawyers “Rising Star” (2014, 2017)

Memberships TheCorporateCounsel.net: Board of Advisors


Dennis Hoffman Assistant General Counsel Greif, Inc.

Dennis is responsible for managing the day-to-day legal affairs for all North

American business units, as well as working with business leaders in the Latin

American business unit. In this role, he oversees compliance matters as

required by the Securities and Exchange Commission for publicly traded

companies. Before joining Greif in 2010, Dennis served as in-house counsel

for one of the world’s leading building materials companies. Previously, he was

a corporate attorney at an AmLaw 100 firm.

Dennis received his juris doctorate from Cleveland State University's

Cleveland-Marshall College of Law, and his undergraduate degree from the

University of Michigan.


Alexandra C. Mackey, J.D.

Assistant Vice President

Alliance Advisors LLC

Alexandra is an Assistant Vice President in the Proxy Solicitation Group at Alliance Advisors. She advises on

various corporate proxy solicitation issues, and supports senior proxy executives by performing advisory influence

analysis and governance research.

Before joining Alliance Advisors, Alexandra was an associate in the New York office of a prominent global law

firm. During that time, she represented both public and private companies in all aspects of corporate transactions,

including mergers, acquisitions and dispositions; private equity transactions; and general corporate governance

matters.

Alexandra received her B.A. in Integrated Marketing Communications from Pepperdine University and her J.D.

from American University, Washington College of Law. She is a member of the New Jersey and New York State

Bar Associations.


Amy M. Shepherd

Partner

Columbus

200 Civic Center Drive

Suite 1200

Columbus, OH 43215-4138

T +1.614.462.4712 F +1.614.462.2616

[email protected]


Compliance



Industries Shale

Admissions Ohio


Michael E. Moritz College of Law, 1989

B.A., The Ohio State University, 1986

Amy Shepherd practices in the business area, with a primary focus in securities, corporate governance and general corporate matters. She focuses on meeting the needs of her clients in an efficient and timely manner, maintaining a thorough understanding of her clients’ industries to deliver the most effective service to meet corporate needs.

Amy has been listed in The Best Lawyers in America since 2010. She is a Securities and Audit Letter Review partner of the firm.

Experience Assisted oil and gas companies in the successful completion of public

and private offerings of securities.

Provides ongoing representation to an insurance client related to filings with the Securities and Exchange Commission (SEC) and related matters. Prepared a proxy statement for the client’s shareholder meeting seeking approval to amend the company’s organizational structure. Remains privy to changes in the client’s industry in order to understand risk and disclosure compliance issues.

Represented a public health care company in a going-private transaction, including preparation of the merger agreement and proxy statement. Provided corporate governance support for the client’s special committee, officers and directors.

Represented a Canadian oil and gas client in a series transaction resulting in the sale of all assets of the company to multiple purchasers, dissolution of the company and deregistration with the SEC.

Assists clients with board evaluations and self-assessments. Assists clients in establishing an appropriate process, developing the scope and substance of the evaluations/assessments, and, in some cases, facilitating the actual board evaluations, self-assessments and peer reviews.

Helps banking clients, family offices and trustees of trusts comply with the Securities Act of 1933, the Investment Advisers Act of 1940 and the Investment Company Act of 1940.

Recognition The Best Lawyers in America© (2010 to 2017)

o Columbus: Corporate Law


o Columbus: Securities/Capital Markets Law


o Columbus: Securities Regulation

Memberships Ohio State Bar Association

Columbus Bar Association


Janet A. Spreen

Partner

Cleveland


Suite 2000


T +1.216.861.7564 F +1.216.696.0740

[email protected]


Compliance

Mergers and Acquisitions


Admissions Ohio

Massachusetts

Education J.D., Georgetown University Law

Center, 1999, magna cum laude

B.A., The Ohio State University, 1995, summa cum laude

Janet Spreen focuses her practice on advising public companies on securities law compliance matters and capital markets transactions. Her experience includes a number of sophisticated equity and debt offerings, public company mergers, and extensive counseling on securities disclosure, compliance with SEC and stock exchange requirements, corporate governance and investor relations matters, and equity plans and executive compensation. Janet also advises significant stockholders of publicly traded companies on their reporting obligations, and has several years of experience assisting with corporate governance, international entity management and other matters for clients in an on-site role.

Experience Served as issuer's counsel to Bloomin' Brands Inc., which owns and

franchises Outback Steakhouse, Carrabba's Italian Grill, Bonefish Grill and Fleming's Prime Steakhouse and Wine Bar restaurants, in its 2012 $143 million initial public offering and follow-on offerings in 2013, 2014 and 2015 aggregating more than $1.2 billion. Advised through the transition as a new public company and continues representation regarding securities reporting and corporate governance obligations.

Represented a manufacturing company in connection with a public equity offering that facilitated its relisting on the Nasdaq Stock Market and a subsequent equity offering, and serves as external general counsel.

Represents several generations of family members in their securities law obligations resulting from their aggregate controlling interest in two public companies.

Represented Keithley Instruments Inc. in a sale process that culminated in the acquisition of the company by Danaher in a $300 million cash merger. Served as in-house counsel leading up to the sale, managing matters including SEC compliance, corporate governance, export compliance and distribution, and supply and development agreements.

Involved in two sizeable offerings for an insurance industry client, each valued at approximately $1 billion, including a $1 billion hybrid security offering (debt instrument with a partial equity treatment for rating agencies) in connection with a $3 billion recapitalization.

Oversaw the implementation of a corporate restructuring project involving dozens of entities located in more than 25 countries to realign the ownership structure and intercompany indebtedness. The project required coordination among local counsel and corporate and tax


advisers and strict adherence to cascading deadlines in each jurisdiction.

Served as a member of an in-house counsel team for a publicly held manufacturing corporation, providing ongoing advice regarding corporate governance, securities law compliance and management of its more than 80 international subsidiaries.

Recognition Client Choice Award: General Corporate in Ohio (2017)

Memberships American Bar Association

Ohio State Bar Association

Cleveland Metropolitan Bar Association

Community Cleveland Institute of Art

o Board of Trustees: Vice Chairman

o Audit Committee: Chairman

o Executive Committee

o Governance Committee

o Enrollment Committee: Vice Chairman


As part of BakerHostetler’s commitment to serve as a strategic business partner, we publish our Securities & Governance Update newsletter periodically as regulatory developments and business cycles warrant. This resource is designed to keep executives, corporate counsel and governance professionals apprised of regulatory and legal requirements affecting businesses with U.S. operations. If you would like to be added to the email distribution list for this newsletter, please email Marcie Valerio at [email protected]. The following pages include articles and excerpts that may be of interest.

Alliance Advisors Newsletter August 2017

SEC Provides Further Guidance on Pay Ratio Disclosures

SEC Statement on Treatment of Digital Assets Under the Federal Securities Laws

Reminder: Form 8-K Reporting on “Say-on-Pay Frequency”

PCAOB Adopts Changes to the Auditor’s Report to Require Disclosure of Critical Audit Matters

Why the Future of Dodd-Frank May Depend on CHOICE Act 2.0

How to Avoid Being the Target of a Disclosure-Only Lawsuit

Conflict Minerals Disclosure – New SEC Guidance

Notable Delaware Decisions: First Quarter 2017

Additional Reading

1 2017 Proxy Season Review | THE ADVISOR, August 2017

2017 PROXY SEASON REVIEW

By Shirley Westcott August 2017

Overview

The 2017 proxy season will go down as a turning point

for key environmental and social (E&S) initiatives as a

result of pronounced shifts in the positions and voting

policies of several major asset managers. For the first

time, three resolutions on the management of climate

change risks won majority support in the face of board

opposition, including a landmark vote at the world’s

biggest oil producer, Exxon Mobil.

Two fund managers—BlackRock and State Street

Global Advisors—also vowed to wield their proxy

voting power to drive greater gender diversity in

boardrooms where engagement efforts have been

exhausted. Both firms put their pledges into action this

season: two board diversity resolutions won majority

support, and between them BlackRock and State Street

cast votes against hundreds of nominating committee

members.

In contrast, the hot topic of the past two proxy

seasons—proxy access—was almost a non-event in

2017. Although over 170 resolutions were filed, only

30% ever reached ballots due to negotiated withdrawals

and omissions. By the end of June, the ongoing

campaign by the New York City Comptroller and other

filers had firmly established access rights at 60% of

S&P 500 companies. Private ordering has also

solidified “3/3/20/20” as the standard access structure,

negating shareholder interest in efforts by retail

investors to amend provisions in existing bylaws.

For the most part, no other types of shareholder

proposals achieved any appreciable voting momentum

this year. While there were record filings of resolutions

with social equity themes—board and workplace

diversity, gender pay equity, and the Holy Land

Principles—only the former gained any additional

traction. Similarly, average support for many

ubiquitous topics, such as independent board chairs and

political spending disclosure, simply held steady year

over year (see Table 1).

Proposal volume overall was down from 2016, in large

part due to the expansion of engagement between

investors and issuers. Resolutions on traditional

governance measures, such as board declassification

and majority voting, continue to fade from annual

meeting ballots. Similarly, concerns over executive

compensation have shifted to say-on-pay (SOP) votes,

which registered their highest average support and

lowest failure rate since 2011. E&S was the only

proposal category that had a spike in filings, but about

one-third were withdrawn following productive

dialogues with issuers.

Relatively few first-time proposals emerged this year.

New resolutions with a conservative slant on political

risk and religious identity non-discrimination, as well

as revivals of some familiar topics—drug pricing,

minimum wage reform and enhanced confidential

voting—did not withstand ordinary business

challenges. However, one standout was a new

campaign on the Dakota Access Pipeline’s impact on

Native American communities, which earned a

respectable 26.7% in average support.

Outside of proxy proposals, investors and proxy

advisors are zeroing in on new points of contention

which they feel compromise shareholder rights,

including virtual-only annual meetings, unequal voting

stock, and restrictions on amending corporate bylaws.

However, the fiercest showdown will be over stricter

rules governing shareholders’ ability to submit and

resubmit resolutions, which are currently under

consideration by Congress and the SEC.

This review examines some of the highlights of the

2017 proxy season and looks at the key developments

that will shape shareholder agendas for 2018.

THE ADVISOR

19


Governance

Proxy Access

Corporate adoptions of proxy access continued apace

during the past year, resulting in fewer submissions of

shareholder proposals and even fewer appearing on

ballots compared to 2016, due to negotiated

withdrawals and omissions. Currently, 451 companies

have access rights, including 60% of the S&P 500

Index. Over three-quarters of their bylaws adhere to

market standard parameters whereby up to 20 holders

owning 3% of the stock for three years may nominate

up to 20% of the board, often with a two-director

minimum.

Although many companies, particularly large-caps,

have embraced proxy access, over half of the adoptions

in the past year have been in response to the filing of

shareholder proposals rather than done proactively.

The New York City Comptroller’s office reported in

April that it had withdrawn 70% of its 2017 proposals

after the targeted companies adopted or agreed to adopt

meaningful proxy access bylaws.1 This is in stark

contrast to 2015—the first year of its Boardroom

Accountability Project—when 66 of the 75 resolutions

filed went to a vote. Among New York City’s 51

withdrawals this year were 43 companies that received

first-time proposals and three companies—Kilroy

Realty, New York Community Bancorp, and SBA

Communications—that agreed to reduce the ownership

thresholds in their existing proxy access bylaws from

5% to 3%, along with other revisions.

Changes to investor voting policies have added to the

pressure on companies to comply with proxy access

requests. This year, Fidelity Investments reversed its

longstanding position to oppose proxy access proposals

and began supporting those calling for market standard

1 See the New York City Comptroller’s 2017 target list at

http://comptroller.nyc.gov/services/financial-matters/boardroom-

accountability-project/focus-companies/ and press release at

http://comptroller.nyc.gov/newsroom/press-releases/comptroller-

stringer-and-nyc-pension-funds-with-50-new-agreements-

boardroom-accountability-projects-success-continues/.

regimes. As a result, targeted companies could no

longer count on opposition votes from Fidelity to defeat

shareholder resolutions.2

Potential backlash against directors has also made

issuers more disposed to implementing majority-

supported proxy access resolutions. All but a handful

of companies responded favorably to last year’s

majority votes, though three of the holdouts—Old

Republic International, Nabors Industries, and

Netflix—have a history of resisting majority-supported

shareholder resolutions. A fourth company—Spectrum

Pharmaceuticals—wanted to continue engaging its

shareholders on the matter. At all four firms, many of

the incumbent directors received sizable—and in some

cases majority—opposition votes. Following its annual

meeting, Nabors Industries—which had faced six years

of majority votes on proxy access—amended its access

policy to adopt a 3/3/20/20 structure. Previously, it

only permitted a single 5%/3-year holder to nominate

one director.

Corporate gadflies John Chevedden, James McRitchie,

Myra Young, and Kenneth Steiner accounted for over

half of the proxy access submissions, but two-thirds of

their 2017 resolutions sought changes to existing

bylaws (“fix-it” proposals) to make them more

shareholder-friendly. Most did not survive no-action

challenges.

Consistent with 2016, proposals seeking multiple

revisions to bylaws (a “proxy access enhancement

package”) could be excluded as substantially

implemented if the targeted company adopted a portion

of the changes, the most essential being to reduce a 5%

ownership threshold.3 This year, only one issuer—

Oshkosh—fulfilled that condition. In contrast,

proposals seeking only a single revision to an access

2 See Fidelity Investments’ 2017 guidelines at

https://www.fidelity.com/bin-

public/060_www_fidelity_com/documents/Full-Proxy-Voting-

Guidelines-for-Fidelity-Funds-Advised-by-FMRCo.pdf. 3 The proposed amendments typically included eliminating any

share aggregation limit, increasing the board seat cap to 25%, and

removing any restrictions on the renomination of access candidates.

20

http://comptroller.nyc.gov/services/financial-matters/boardroom-accountability-project/focus-companies/

http://comptroller.nyc.gov/services/financial-matters/boardroom-accountability-project/focus-companies/

http://comptroller.nyc.gov/newsroom/press-releases/comptroller-stringer-and-nyc-pension-funds-with-50-new-agreements-boardroom-accountability-projects-success-continues/



https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/Full-Proxy-Voting-Guidelines-for-Fidelity-Funds-Advised-by-FMRCo.pdf




bylaw—specifically, to increase the aggregation limit to

40 or 50 shareholders—were excludable under Rule

14a-8(i)(10) so long as the no-action request provided

details of the issuer’s institutional investor base to show

that a higher aggregation limit would not materially

impact the availability of proxy access. Two-thirds of

the single-issue fix-it proposals were omitted on that

basis this year.

Proxy Access Votes

Proposals calling for the initial adoption of proxy

access achieved a higher success rate and stronger

support than in 2016. Overall, 28 such resolutions

came to a vote, receiving 58.2% average support and 18

majority votes (see Table 2). Excluding those that were

not opposed by the board—Abercrombie & Fitch,

National Oilwell Varco, Nuance Communications, and

Waters—average support was 56.3%, up from 49.2% in

2016, and 58% of the resolutions received majority

votes, compared to 50% in 2016.

Notwithstanding the backing of Institutional

Shareholder Services (ISS), all of the fix-it proposals

were rejected by shareholders, with an average of

29.5% support, affirming that investors are reluctant to

tinker with proxy access bylaws containing standard

provisions.4 The only corporate movement to raise

aggregation caps in line with a retail investor proposal

occurred at Broadridge Financial Solutions, which

recently increased its limit from 20 to 50 shareholders

ahead of its November annual meeting. Other firms

made lesser adjustments, including Dun & Bradstreet,

which boosted its limit from 20 to 35 shareholders, and

PayPal Holdings, which simply mainstreamed its

provision from 15 to 20 shareholders.

4 This was further highlighted at Cummins and Williams-Sonoma

where competing management and shareholder proposals offered a

choice between a 20- or a 50-shareholder aggregation limit.

Investors overwhelmingly backed the management resolutions.

Proxy Access Outlook

Looking ahead, the private ordering of proxy access

will continue in the S&P 500 universe where adoptions

are forecast to reach as much as 75%-80% of the index

next year. However, as campaigns migrate downstream

to small and mid-cap firms, the pace of adoptions will

likely start slowing, as has occurred with other

governance reforms.

Meanwhile, fix-it proposals are undergoing a makeover

in view of the high degree of omissions this year. A

new version solely aims to raise aggregation caps, but

this time to allow an unlimited number of shareholders

to form a nominating group. The proposal has already

survived a no-action challenge by H&R Block on

substantial implementation grounds, so issuers should

expect more of them next year.

It still remains to be seen what circumstances will

trigger the use of proxy access and how likely it will be

successful. The sole attempt—by GAMCO Investors at

National Fuel Gas—was promptly disqualified because

of the nominator’s history of trying to influence control

of the company.

With that uncertainty in mind, some companies are

implementing alternative safeguards. This year, several

Maryland real estate investment trusts (REITs), which

are often in the crosshairs of union activists, countered

the adoption of proxy access—or the prospect of

adopting it—with additional protective measures.

Pebblebrook Hotel Trust, which implemented proxy

access in 2016, concomitantly granted shareholders the

right to submit bylaw proposals, but only if they meet

the same 3/3/20 eligibility criteria.5 Two other

REITs—Senior Housing Properties Trust and

Hospitality Properties Trust—reclassified their boards

shortly before or after their 2017 annual meetings

5 Pebblebrook Hotel Trust’s eligibility requirement runs counter to

ISS’s 2017 policy regarding shareholders’ ability to amend the

bylaws. However, the company based its provision on extensive

investor feedback, which shielded the directors from potential

voting backlash.

21


where proxy access proposals won substantial majority

support.

Director Votes

With newly established proxy access rights still

untapped, shareholders are relying on traditional

measures—director votes and “vote no” campaigns—to

register their dissatisfaction with individual board

members or entire boards. This season, the number of

directors receiving significant negative votes—in the

30% and 40% ranges—remained largely consistent

with the first half of 2016. However, far fewer

directors faced majority opposition compared to last

year—51 versus 70—signaling that companies are

effectively heading off issues of serious concern to

shareholders.

The highest no-confidence votes were primarily

attributable to compensation practices, attendance at

board and committee meetings, director independence,

and responsiveness to past shareholder votes. Where

opposition reached over 50%, companies with majority

voting and/or director resignation policies—eight in

all—promptly addressed the underlying concerns

following their annual meetings, particularly where

they involved only an isolated matter such as

attendance or overboarding. However, the boards of

three companies—Hospitality Properties Trust, Nabors

Industries, and Senior Housing Properties Trust—

continued to sidestep longstanding shareholder angst

over pay and governance and rejected director

resignations for a third consecutive year.

Few companies experienced any sizable repercussions

this year arising from a new ISS policy to oppose

governance committee members if shareholders do not

have the right to amend the bylaws. ISS reportedly

recommended against over 200 directors at Russell

3000 firms on this basis.6 Where this factor came into

play, only 14 governance committee members—

primarily chairs—received dissenting votes in excess of

6 See Sullivan & Cromwell’s 2017 Proxy Season Review at

https://www.sullcrom.com/2017-proxy-season-review.

40%, including four where opposition exceeded 50%.

Most of the affected companies were Maryland REITs,

and in a number of cases there were additional reasons

behind the negative votes relating to governance, pay,

attendance, overboarding and board responsiveness.

S&P 500 board members encountered significant

pushback from shareholders this year. According to

ISS, shareholders cast 20% or more of their votes

against 102 S&P 500 company directors—the most in

seven years. However, in only 14 cases did dissenting

votes reach over 40%, and half of these were one-off

situations: fallout at Wells Fargo over the consumer

account fraud and a “vote no” campaign at Mylan over

the EpiPen pricing controversy and high executive pay.

Apart from Mylan, most of this year’s “vote no”

campaigns failed to generate significant traction.

Several efforts were handicapped by high insider

ownership, including union attempts to unseat two

long-tenured directors at Urban Outfitters and a protest

vote at Red Rock Resorts, which went public last year

with dual-class stock and other adverse governance

provisions. In one of the more unusual campaigns, the

New York City Pension Funds took aim at NRG

Energy director Barry Smitherman, in part for his

alleged history of climate change denial. However, the

effort fell flat and Smitherman was reelected by 92% of

the votes.

Dual-Class Stock

Snap’s unprecedented issuance of non-voting stock in

its recent initial public offering (IPO) unleashed a

firestorm of protest from investors over multi-class

capital structures that accord founders perpetual control

of their companies. Notwithstanding Snap’s successful

IPO, investors are reopening the debate over unequal

voting rights on a number of fronts.

At the urging of the Council of Institutional Investors

(CII), index providers S&P Dow Jones, FTSE Russell,

and MSCI launched consultations this spring seeking

input from users and other stakeholders on whether to

exclude non-voting shares from their benchmarks.

22

https://www.sullcrom.com/2017-proxy-season-review


Based on the responses, S&P Dow Jones and FTSE

Russell recently announced the changes below. 7

The

MSCI review runs until Aug. 31.

S&P Dow Jones will no longer add companies

with multiple share class structures to the S&P

Composite 1500 and its component indices (S&P

500, S&P MidCap 400, and S&P SmallCap 600).

Existing index constituents will be grandfathered

and not affected by this change. No modifications

are being made to the methodologies of the other

S&P Dow Jones indices.

FTSE Russell will require developed market

constituents of all of its indexes to have over 5%

of their voting rights in the hands of unrestricted

(free-float) shareholders. The rule will take effect

for new constituents, including IPOs, in

September. Existing constituents will have a five-

year graced period to change their capital

structures to meet the hurdle. FTSE Russell will

review the level of the threshold and the sanction

for non-compliant companies annually.

CII members have also appealed to the Senate Banking

Committee and major securities exchanges to enact

rules prohibiting the listing of companies with two or

more classes of stock with unequal voting rights. To

date, the New York Stock Exchange has not issued any

public statements in response. However, Nasdaq

released a report in May that endorsed multi-class stock

as a way of encouraging entrepreneurship, innovation

and wealth creation in the U.S. economy by

“establishing multiple paths entrepreneurs can take to

public markets.”8

7 See the S&P Dow Jones and FTSE Russell changes at

https://www.spice-indices.com/idpfiles/spice-

assets/resources/public/documents/560954_july2017usmethodology

updatesprmulti.pdf?force_download=true and

http://www.ftse.com/products/downloads/FTSE_Russell_Voting_Ri

ghts_Consultation_Next_Steps.pdf. 8 See Nasdaq’s report at

http://business.nasdaq.com/media/Nasdaq%20Blueprint%20to%20

Revitalize%20Capital%20Markets_tcm5044-43175.pdf.

As an additional step, CII has approached individual

companies, such as Blue Apron Holdings, that plan to

go public with multiple classes of stock, as well as

initiated discussions with investment banks and law

firms that are behind these structures. At a minimum,

CII is pushing for five-year sunset provisions or for

holding a shareholder vote every five years—on a one

share/one vote basis—on continuing the differential

voting rights structure.

The proxy advisors have also been cracking down on

recent IPOs with multi-class stock structures or other

unfavorable governance provisions, such as classified

boards and supermajority voting requirements to amend

the charter or bylaws. According to Cooley LLP, as of

mid-May, ISS had recommended against virtually all

director elections at newly public companies with these

features, while Glass Lewis recommended against

governance committee members in cases where the

company had been public for over a year. Other than a

few IPO spinoffs from public companies, Cooley had

not observed any firms adopting sunset clauses or

committing in advance to submitting these provisions

for shareholder approval.

At established companies, shareholders are having

more success at deterring the creation of unequal voting

stock than in abolishing it where it already exists.

Greenlight Capital’s controversial proposal to split

General Motors stock into dividend and capital

appreciation shares with disparate voting rights suffered

a stunning defeat with only 7.8% support. And in June,

a lawsuit from the California Public Employees’

Retirement System (CalPERS) compelled

IAC/Interactive to abandon its plan to issue a new class

of non-voting stock.

Proxy proposals, on the other hand, have proven futile

in prodding founder-controlled companies to

recapitalize their multi-class stock. This season, nine

such proposals were submitted, mostly by individual

investors, eight of which were reprisals—including for

the 13th consecutive year at Ford Motor. Average

support, at 29.3%, remained consistent with previous

years, despite the fact that at some companies, such as

23

https://www.spice-indices.com/idpfiles/spice-assets/resources/public/documents/560954_july2017usmethodologyupdatesprmulti.pdf?force_download=true



http://www.ftse.com/products/downloads/FTSE_Russell_Voting_Rights_Consultation_Next_Steps.pdf

http://www.ftse.com/products/downloads/FTSE_Russell_Voting_Rights_Consultation_Next_Steps.pdf

http://business.nasdaq.com/media/Nasdaq%20Blueprint%20to%20Revitalize%20Capital%20Markets_tcm5044-43175.pdf

http://business.nasdaq.com/media/Nasdaq%20Blueprint%20to%20Revitalize%20Capital%20Markets_tcm5044-43175.pdf


Alphabet, estimated support from non-insider

shareholders reached as high as 99%. According to

Proxy Insight, average support for the proposals was

69% when excluding founder influence.

Ultimately, shareholders may have to make a

compelling economic argument in order to convince

company founders to unwind multi-tiered stock. Such

was the case at Forest City Realty Trust which

collapsed its decades-old dual-class structure in the face

of chronic underperformance and persistent agitation by

hedge fund Scopia Capital Management.

Virtual Meetings

The rapid rise of virtual-only annual meetings over

traditional in-person events, particularly at large-cap

companies, has sparked criticism from some

shareholders who contend that e-meetings limit their

ability to directly engage and confront boards and

managements. This year alone, Broadridge Financial

Solutions expects about 250 companies to convene

online-only meetings, compared to 154 in 2016 and just

26 in 2012.

Various investors—mainly individuals—have tried to

slow the cyber meeting trend by submitting proposals

asking companies to reinstate physical meetings.

However, proxy proposals on this topic, including four

this year, continue to get omitted on ordinary business

or technical grounds. As a result, the New York City

Pension Funds adopted a tougher stance by declaring

that they would vote against governance committee

members at a virtual-only annual meeting. The new

policy applies to S&P 500 firms in 2017 and all other

companies thereafter.9 It is yet unclear whether this

approach will have any meaningful effect since most

9 See the New York City Pension Plans’ 2017 voting guidelines at

http://comptroller.nyc.gov/wp-content/uploads/documents/NYCRS-

Corporate-Governance-Principles-and-Proxy-Voting-

Guidelines_April-2016-Revised-April-2017.pdf and its press release

on virtual-only meetings at

https://comptroller.nyc.gov/newsroom/comptroller-stringer-virtual-

only-meetings-deprive-shareowners-of-important-rights-stifle-

criticism/.

institutional investors and proxy advisors have not

taken a position on virtual-only meetings.

Issuers planning to go the e-meeting route should

consider a hybrid format whereby remote

communications supplement, rather than supplant, an

in-person meeting. Investor groups such as CII,

CalPERS, and the California State Teachers’

Retirement System (CalSTRS) endorse hybrid

meetings. Alternatively, issuers can dispel negative

publicity and investor objections over cyber meetings

by employing various safeguards and best practices

suggested in the “Guidelines for Protecting and

Enhancing Online Shareholder Participation in Annual

Meetings,” developed by Broadridge and various

corporate and investor organizations.10

Environmental & Social

Climate Change

Two thousand seventeen has been a breakthrough year

for climate change resolutions with three registering

majority votes for the first time at Exxon Mobil,

Occidental Petroleum, and PPL. The proposals, which

deal with the business impact of the Paris Agreement’s

2° Celsius limit on global warming, saw average

support surge to 45.4% from 38% last year. The most

pronounced increase was at Exxon, where voting

support rocketed to 62.1% from 38.1% in 2016.

The landmark outcome is attributable to a shift in

voting by several large asset managers. BlackRock—

which had opposed the resolutions in 2016—designated

climate change as one of its engagement priorities for

2017-18 and announced that it would vote against

directors and in favor of shareholder proposals where

dialogue with issuers failed to resolve its concerns.

BlackRock took the additional step of explaining its

reversal of opinion at Exxon and Occidental in proxy

10 See http://media.broadridge.com/documents/Broadridge-

Guidelines-For-Shareholder-Participation-Report.pdf.

24

http://comptroller.nyc.gov/wp-content/uploads/documents/NYCRS-Corporate-Governance-Principles-and-Proxy-Voting-Guidelines_April-2016-Revised-April-2017.pdf



https://comptroller.nyc.gov/newsroom/comptroller-stringer-virtual-only-meetings-deprive-shareowners-of-important-rights-stifle-criticism/



http://media.broadridge.com/documents/Broadridge-Guidelines-For-Shareholder-Participation-Report.pdf

http://media.broadridge.com/documents/Broadridge-Guidelines-For-Shareholder-Participation-Report.pdf


voting bulletins.11

It plans to issue additional bulletins

on other high-profile proxy proposals—primarily at

companies that have been unresponsive to its “engage

first” approach—on the day of the annual meeting or

shortly thereafter.

While voting records won’t be known until Form N-PX

filings are released in August, media reports suggest

that State Street, Vanguard Group, and Fidelity

Investments supported the 2° C. proposals as well.

Like BlackRock, State Street has made climate change

a priority in its engagement with issuers and has shifted

its proxy voting in recent years to support more

climate-related shareholder resolutions—46% in 2016,

compared to only 20% in 2015 and 13% in 2014.

Fidelity and Vanguard, which have historically voted

against or abstained on most E&S resolutions, also

revised their voting guidelines for 2017. Fidelity will

support shareholder proposals calling for reports on

sustainability, renewable energy, and environmental

impact issues where it believes such disclosures could

provide meaningful information to investors without

unduly burdening the company. Likewise, Vanguard

eliminated the use of abstentions on E&S proposals and

will support those that have a “logically demonstrable

linkage” to long-term shareholder value.

Fund managers have also been under pressure in recent

years to explain disparities between their stated

positions on climate change and their voting records on

climate-related resolutions. This season, the Bank of

New York Mellon, Franklin Resources, and T. Rowe

Price Group were subject to proxy voting review

proposals, though they averaged only 6.7% support—in

line with prior years. Others are pending at two

Vanguard index funds with November annual meetings.

11 See BlackRock’s proxy vote summaries on Exxon Mobil and

Occidental Petroleum at https://www.blackrock.com/corporate/en-

br/literature/press-release/blk-vote-bulletin-exxon-may-2017.pdf

and https://www.blackrock.com/corporate/en-

br/literature/publication/blk-vote-bulletin-occidental-may-2017.pdf.

It has issued additional bulletins on Chevron, Mylan, Royal Dutch

Shell, and Santos. See https://www.blackrock.com/corporate/en-

br/about-us/investment-stewardship/voting-guidelines-reports-

position-papers.

Additional resolutions were withdrawn at BlackRock

and at JPMorgan Chase, both of which amended their

voting policies.

More efforts are underway to promote transparency

around proxy voting on climate change issues. This

year, the United Nations-backed Principles for

Responsible Investment (PRI) launched a proxy vote

declaration platform to allow investors to share their

proxy voting decisions on proposals filed or co-filed by

PRI signatories.12

Outlook on Climate Change Proposals

Looking ahead, the successful vote at Exxon, coupled

with the Trump administration’s withdrawal from the

Paris Agreement, is reinvigorating shareholder activists

to forge ahead with their climate change advocacy and

press portfolio companies to stay the course on

reducing carbon emissions. A number of businesses,

primarily in the technology and retail sectors, are

already joining alliances with investor groups,

universities, and state and local governments to

continue pursuing ambitious climate goals despite the

rollback of environmental regulations at the federal

level.13

However, climate risk proposals could be a tougher sell

next year at energy companies whose investors stand to

benefit substantially from the Trump administration’s

“energy dominance” strategy, which not only scales

back regulations but promotes the production of oil,

natural gas, and coal for export around the world.

Nevertheless, proponents will likely refile their

resolutions with a view that the Paris goals extend

decades into the future during which time the

regulatory and political landscape in the U.S. could

shift dramatically.

12 See the PRI platform at https://www.unpri.org/page/pri-launches-

proxy-voting-declaration-system and PRI’s analysis of the 2017

proxy season at https://www.unpri.org/news/proxy-season-2017-

analysing-the-trends. 13 See the “We Are Still In” initiative at http://wearestillin.com/.

25

https://www.blackrock.com/corporate/en-br/literature/press-release/blk-vote-bulletin-exxon-may-2017.pdf

https://www.blackrock.com/corporate/en-br/literature/press-release/blk-vote-bulletin-exxon-may-2017.pdf

https://www.blackrock.com/corporate/en-br/literature/publication/blk-vote-bulletin-occidental-may-2017.pdf

https://www.blackrock.com/corporate/en-br/literature/publication/blk-vote-bulletin-occidental-may-2017.pdf

https://www.blackrock.com/corporate/en-br/about-us/investment-stewardship/voting-guidelines-reports-position-papers



https://www.unpri.org/page/pri-launches-proxy-voting-declaration-system

https://www.unpri.org/page/pri-launches-proxy-voting-declaration-system

https://www.unpri.org/news/proxy-season-2017-analysing-the-trends

https://www.unpri.org/news/proxy-season-2017-analysing-the-trends

http://wearestillin.com/


Because climate risk disclosures are inconsistent across

companies, some investors, such as BlackRock and

CalPERS, are urging issuers to follow guidelines

developed by the Group of 20’s Financial Stability

Board in its Task Force on Climate-Related

Disclosures.14

The guidelines provide a standardized

methodology for analyzing corporate risks and

strategies under various carbon-constrained scenarios

that investors can use to benchmark companies.

Chevron used a similar framework in its 2017 climate

risk management report which prompted the

withdrawal of a 2° C proposal.15

Board Diversity

Diversity activists continued to make strides this year in

urging companies to improve the gender and racial mix

of their boards. Of the record 37 resolutions filed, over

60% were withdrawn after the targeted firms agreed to

improve their recruitment of women and minorities.

Average support on those voted rose to 27.7% from

24.8% in 2016, and two proposals received majority

approval, including at COGNEX and Hudson Pacific

Properties, where support reached 84.8%—an all-time

high.

Building on their success at large-cap firms, proponents

are increasingly drilling down to the next tier of

companies. The Amalgamated Bank/LongView Funds,

for example, reported that since the 2014-15 proxy

season, it has deepened its campaign to midsize firms,

including seven resolutions in 2017 which were largely

withdrawn. However, plenty of targets remain.

According to ISS, 28% of mid- and small-cap Russell

3000 firms have no female directors, compared to only

1% of the S&P 500 universe.

Beyond company commitments, shareholders are now

demanding results. BlackRock and State Street

14 See the Task Force’s guidelines at https://www.fsb-

tcfd.org/publications/final-recommendations-report/. 15 See Chevron’s report on managing climate change risks at

https://www.chevron.com/-

/media/chevron/shared/documents/climate-risk-perspective.pdf.

announced in March that they were stepping up their

board diversity advocacy through engagement and

letter-writing. If progress was not made within a

reasonable timeframe, they would use their proxy

voting power to drive change by voting against

nominating committee members.16

Both firms began

putting this policy into practice this proxy season.

According to its latest investment stewardship report,

BlackRock supported eight out of nine board diversity

proposals during the second quarter of 2017, and also

voted against members of the nominating committees at

five of the companies.17

State Street reported that it

voted against the chair or most senior member of the

nominating committee at 400 companies that had all-

male boards, including 394 U.S. firms.

A number of public pension plans and social

investment funds are taking a similar approach. In the

past year, the Massachusetts Pension Reserves

Investment Management Board (PRIM) and Rhode

Island State Investment Commission adopted policies

to vote against director nominees if less than 30% of

the board is gender and racially diverse.18

Calvert

Investments also amended its proxy voting policies in

August 2016 to oppose nominating committee members

if they failed to include diversity in director searches.

Other funds, such as Pax World, have had longstanding

policies to oppose board slates unless they include at

least two women.

16 See BlackRock’s 2018-2017 engagement priorities at

https://www.blackrock.com/corporate/en-us/about-us/investment-

stewardship/engagement-priorities. See SSGA’s “Guidance on

Enhancing Gender Diversity on Boards” at

https://www.ssga.com/investment-topics/environmental-social-

governance/2017/guidance-on-enhancing-gender-diversity-on-

boards.pdf. 17 See BlackRock’s Q2 2017 Investment Stewardship Report at

https://www.blackrock.com/corporate/en-

br/literature/publication/blk-qtrly-commentary-2017-q2-amers.pdf.

According to Bloomberg, between 2012 and 2016 BlackRock

supported only two board diversity resolutions and opposed 98. 18 PRIM’s prior policy, dating to 2015, called for 25% board

diversity. Based on this policy, PRIM has since voted against board

nominees in 65% of director elections.

26

https://www.fsb-tcfd.org/publications/final-recommendations-report/

https://www.fsb-tcfd.org/publications/final-recommendations-report/

https://www.chevron.com/-/media/chevron/shared/documents/climate-risk-perspective.pdf

https://www.chevron.com/-/media/chevron/shared/documents/climate-risk-perspective.pdf

https://www.blackrock.com/corporate/en-us/about-us/investment-stewardship/engagement-priorities

https://www.blackrock.com/corporate/en-us/about-us/investment-stewardship/engagement-priorities

https://www.ssga.com/investment-topics/environmental-social-governance/2017/guidance-on-enhancing-gender-diversity-on-boards.pdf



https://www.blackrock.com/corporate/en-br/literature/publication/blk-qtrly-commentary-2017-q2-amers.pdf

https://www.blackrock.com/corporate/en-br/literature/publication/blk-qtrly-commentary-2017-q2-amers.pdf


In a parallel effort, Congressional Democrats are

reviving calls for board diversity rulemaking by the

SEC. Through letters and renewed legislation—the

Gender Diversity in Corporate Leadership Act of 2017

(H.R. 1611)—they have petitioned the SEC to mandate

proxy disclosures of the gender, ethnic, and racial

composition of company boards.19

According to

Equilar, only 12.8% of S&P 500 firms voluntarily

provided these details about their board members and

nominees in their 2016 proxy statements.

Workforce Diversity

In addition to board-level initiatives, efforts to promote

workforce diversity accelerated this year, with double

the number of proposals filed as in 2016. Largely

sponsored by Trillium Asset Management at financial

services firms, the resolutions request a breakdown of

employees by race and gender across major EEOC-

defined job categories and disclosure of the company’s

policies and programs for increasing diversity in the

workplace.

Half of the 2017 resolutions were ultimately withdrawn

after the companies agreed to publicize their workforce

diversity data. Support for the resolutions voted saw a

resurgence, averaging 28.8%—the strongest level since

2012—and two proposals reached new highs: 36.4% at

Travelers Companies and 36.9% at T. Rowe Price

Group, where the board made no recommendation.

The push for equal employment opportunities for

women and minorities has coincided with a scale-back

in resolutions calling for non-discrimination policies

based on sexual orientation and gender identity.

Because many companies now offer such protections,

only eight resolutions were filed in 2017, all of which

were either withdrawn or, in the case of Cato, omitted

as substantially implemented.

Interest in effective workforce management is picking

up steam in advance of next year’s proxy season. In

19 See https://meeks.house.gov/media/press-releases/rep-meeks-

sends-letter-improving-corporate-board-diversity-disclosures-sec.

early July, a coalition of 25 investors led by the UAW

Retiree Medical Benefits Trust (the “Human Capital

Management Coalition”) submitted a rulemaking

petition to the SEC calling for comprehensive

disclosure of companies’ human capital management,

practices and performance. The petition outlines nine

broad categories of information deemed fundamental to

human capital analysis, including workforce diversity

and pay equity policies, which can impact firm

performance. Under current SEC rules, companies are

only required to report their employee headcount.20

Compensation

Say on Pay

Companies enjoyed record support for executive

compensation in the first half of 2017, validating the

effectiveness of their ongoing outreach with

shareholders. Across all companies, average SOP

support was 92%, up from 91.3% in the first half of

2016, while the rate of failure dipped to 1.2% from

1.6% last year—the lowest level since SOP was first

introduced in 2011. The percentage of companies

receiving over 90% support (78.1%) was higher than in

any other prior year, while the proportion receiving less

than 70% support (6.8%)—ISS’s threshold for

enhanced scrutiny—remained on par with 2016.

Among the 31 failures were 28 Russell 3000

constituents, including three in the S&P 500 Index:

Bed Bath & Beyond, ConocoPhillips, and Mylan (see

Table 3). Mylan, which also faced a director “vote no”

campaign over its EpiPen pricing scandal, registered

the lowest SOP approval at 16.5%. Fourteen of the

companies had experienced failed SOP votes at least

once in the past, and one firm—Tutor Perini—has seen

its executive compensation voted down every year

since 2011.

Direct engagement between issuers and investors is also

lessening the impact of negative proxy advisor

20 See the Human Capital Management Coalition’s rulemaking

petition at https://www.sec.gov/rules/petitions/2017/petn4-711.pdf.

27

https://meeks.house.gov/media/press-releases/rep-meeks-sends-letter-improving-corporate-board-diversity-disclosures-sec

https://meeks.house.gov/media/press-releases/rep-meeks-sends-letter-improving-corporate-board-diversity-disclosures-sec

https://www.sec.gov/rules/petitions/2017/petn4-711.pdf


recommendations. Through June, ISS advised against

12.4% of SOP proposals, roughly in line with the first

half of 2016 at 11.6%.21

Average SOP support at those

companies was 23.4% lower than at companies that

received a favorable ISS recommendation. In past

years, ISS influenced as much as 28% of the vote.

Say on Pay Frequency

SOP frequency votes also returned to ballots this year at

companies that held their last frequency vote in 2011.

The results confirmed an overwhelming preference by

both issuers and investors for annual pay votes.

Through June, 85% of boards recommended holding

yearly pay votes and shareholders approved annual

frequencies at 89% of companies. In many cases where

shareholders did not follow the board’s

recommendation, the votes were close. However,

shareholders soundly rejected the continuation or

adoption of triennial frequencies at 10 companies with

troublesome pay practices, reflected in failed or low

(less than 70%) SOP votes this year.

Pay Disparity

Coinciding with their diversity initiatives, shareholder

proponents honed their compensation-related

resolutions on gender pay equity and CEO/worker pay

disparity—the only compensation topics that

significantly gained in number this year.

As a follow-on to last year’s successful campaign at

technology companies, Arjuna Capital and Pax

World—joined this year by the New York City Pension

Funds—asked firms in the financial services, insurance,

healthcare, and telecommunications sectors to report on

whether they had a gender pay gap, the size of the gap,

and their policies and goals for reducing it. A broader

version submitted by Zevin Asset Management at

Colgate-Palmolive and TJX Companies extended to

pay disparities based on gender, race and ethnicity.

21 Glass Lewis has not yet published statistics on its 2017 SOP

recommendations.

About half of the companies complied with this year’s

requests, prompting withdrawals. The remaining

resolutions registered 12.9% support on average, down

from 16.9% in 2016 when a proposal at eBay won

majority backing. Undeterred by the results, Arjuna

Capital plans to refile the proposals next year and is

reported to be in talks with several retail firms to

release their data without a formal shareholder

resolution.

As in past years, union pension plans and other

proponents advanced resolutions requesting reports

comparing senior executive and employee pay and

whether there should be adjustments in the event of

downsizings. However, these continued to draw only

single-digit support. A new variation this year asked

six companies to take into account the pay grades and

salary ranges of all employees when setting target

amounts for CEO compensation. These were largely

withdrawn except at SL Green Realty where the

proposal received 3.2% support.

Pay Ratios

As it stands, the CEO pay ratio rule is unlikely to be

revoked ahead of its 2018 implementation date. The

Financial CHOICE Act of 2017, which overhauls the

2010 Dodd-Frank Wall Street Reform and Consumer

Protection Act, passed the U.S. House of

Representatives on June 8 but faces long odds in the

Senate in its current form. The CHOICE Act would

repeal the pay ratio rule along with other compensation

mandates, such as the disclosure of employee and

director hedging and holding periodic SOP votes,

except in years when there has been a material change

in executive pay.

There is still an outside chance that the SEC could

delay the effective date of the rule. In a recent speech,

Commissioner Michael Piwowar indicated that this is

still under consideration given unexpected difficulties

issuers are having in meeting the compliance deadline.

He urged interested parties to continue submitting

comment letters.

28


With the 2018 proxy season fast approaching, calendar-

year companies should continue to ready their pay ratio

disclosures for next year’s proxy statements. They

should also monitor how mainstream investors and

proxy advisors, who primarily focus on pay for

performance, plan to incorporate the ratios into their

SOP reviews. A Bank of America Merrill Lynch

analysis suggested that investors could attach more

importance to how a company’s pay ratio evolves over

time. A widening differential could be an early

warning indicator of the kind of runaway pay practices

that occurred before the 2008 financial crisis.

While issuers should prepare for potential fallout, early

corporate disclosures indicate that the numbers may not

be as eye-popping as activists allege. According to

Winston & Strawn, seven companies that voluntarily

disclosed their pay ratios in their 2017 proxy statements

calculated figures ranging from 6:1 to 79:1.22

Similarly, half of respondents to a 2016 Mercer survey

came up with CEO/worker pay ratios of less than

200:1—well below the 347:1 statistic touted by the

AFL-CIO, which has been called out for selectively

using the total compensation of the highest paid CEOs

in the S&P 500 Index.23

Aside from assembling disclosures, issuers should stay

apprised of efforts by state and local governments to

levy tax surcharges on publicly-traded companies

whose reported pay ratios exceed certain thresholds. At

the end of 2016, Portland, Oregon passed an ordinance

that will impose a 10% surtax on public companies

covered by the city’s business license tax if their pay

ratio is at least 100:1. The surtax rises to 25% if the

ratio exceeds 250:1. Other jurisdictions, including San

22 The companies reporting CEO pay ratios included First Real

Estate Investment Trust of New Jersey, Gencor Industries,

Novagold Resources, Northwestern, Noble Energy, Range

Resources, and Texas Republic Capital. 23 See Mercer’s survey at https://www.mercer.com/newsroom/ceo-

to-employee-pay-ratios-lower-than-expected-new-mercer-survey-

finds.html. See the American Enterprise Institute’s report on pay

ratios at http://www.aei.org/publication/on-the-afl-cios-inflated-

347-to-1-ceo-to-worker-pay-ratio-and-the-statistical-legerdemain-

used-to-produce-it/.

Francisco, Massachusetts, Rhode Island, Illinois, and

Minnesota, are considering similar measures in the

form of additional taxes or fees.

Shareholder Proposal Reform

For issuers and shareholders alike, the most far-

reaching governance component of the CHOICE Act is

the overhaul of Rule 14a-8 eligibility requirements,

which were last revised in 1998. The bill would raise

the ownership threshold for submitting a shareholder

proposal to 1% for three years, doing away with the

$2,000 threshold and extending the holding period from

the current one year. Resubmission thresholds would

be increased from 3% to 6% support on the first

submission, from 6% to 15% on the second submission,

and from 10% to 30% on the third submission. The bill

would also prohibit “proposals by proxy” whereby a

shareholder authorizes another individual to file a

resolution on his behalf.

Corporations and business organizations have long

argued that the shareholder proposal process has been

abused by special interest activists to advance social

and political agendas that have little connection to

shareholder value.24

Often these investors have

minimal stakes in their targeted companies and their

campaigns have a limited success rate. According to a

2016 paper by Stanford University’s Rock Center for

Corporate Governance, most shareholder proposals

receive only minimal support—29% on average over

the past 10 years—and only a handful of subject

matters routinely elicit majority support.25

All of this

comes at a real cost to companies and other public

shareholders—an estimated $87,000 per proposal

according to the U.S. Chamber of Commerce, including

24 See the recommendations of the Business Roundtable and the

U.S. Chamber of Commerce at

http://businessroundtable.org/resources/responsible-shareholder-

engagement-long-term-value-creation and

http://www.centerforcapitalmarkets.com/wp-

content/uploads/2013/08/023270_CCMC-SEC-Shareholder-

Proposal-Reform-Report_Online_Report.pdf?x48633. 25 See the Stanford University study at

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2821755.

29

https://www.mercer.com/newsroom/ceo-to-employee-pay-ratios-lower-than-expected-new-mercer-survey-finds.html



http://www.aei.org/publication/on-the-afl-cios-inflated-347-to-1-ceo-to-worker-pay-ratio-and-the-statistical-legerdemain-used-to-produce-it/



http://businessroundtable.org/resources/responsible-shareholder-engagement-long-term-value-creation

http://businessroundtable.org/resources/responsible-shareholder-engagement-long-term-value-creation

http://www.centerforcapitalmarkets.com/wp-content/uploads/2013/08/023270_CCMC-SEC-Shareholder-Proposal-Reform-Report_Online_Report.pdf?x48633



https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2821755


the costs of submitting no-action requests, preparing

rebuttals for the proxy statement, engaging with

shareholders, and on occasion challenging them in

court.

If enacted, the CHOICE Act thresholds would

dramatically alter the shareholder proposal landscape

by disqualifying some of the most prolific filers—state

employee pension plans, social investment funds, trade

unions, and corporate gadflies. The greatest impact

would be felt by retail proponents since institutional

investors of all stripes have often been able to

accomplish their objectives through direct dialogue

with issuers.26

Unsurprisingly, the prospect of more rigorous 14a-8

eligibility requirements has ignited outrage from

investor groups. Some are warning of unintended

consequences. CII pointed out that if sidelined from

submitting proxy proposals, frustrated shareholders

could cast more votes against directors or back hedge

fund activists. The reforms could also draw

traditionally passive investors into sponsoring

shareholder resolutions or being co-opted into

submitting proxy access nominees. Nevertheless, some

level of reform seems inevitable, which could be

accomplished through SEC rulemaking in the absence

of Congressional action. SEC Chair Jay Clayton

recently said that the Commission will take a close look

at the growth of shareholder proposals and the costs

they are imposing on ordinary investors.

Looking Ahead

In preparing for the 2018 proxy season, issuers should

be particularly attentive to the policies and voting

records of their major shareholders in view of the shifts

that occurred this year on key E&S issues. The

stauncher positions taken by major asset managers on

26 According to the Manhattan Institute, a handful of individual

gadfly investors and their family members sponsored nearly one-

third of all shareholder resolutions between 2006 and 2016. See

https://www.manhattan-institute.org/html/proxy-monitor-2016-

report-9297.html.

board diversity and climate change could prompt other

institutional investors and the proxy advisors to follow

suit when they update their voting guidelines for next

year. ISS’s newly released policy survey suggests that

it is contemplating revisions relating to board diversity,

multi-class stock, and virtual-only annual meetings.27

Large-cap companies will continue to be the primary

focus of proxy access campaigns. Those that have not

yet adopted access rights should consider whether to do

so preemptively, taking into account the likelihood of a

shareholder proposal receiving majority support. Fix-it

resolutions are also expected to resurface. Therefore,

companies that currently have proxy access bylaws

should monitor no-action letters and grounds for

omitting new proposal variations that arise.

Barring any intervening action by Congress or

regulators, CEO pay ratios are poised to be the most

controversial topic of 2018. In preparing their

disclosures, issuers should stand ready to address

adverse reactions from shareholders, proxy advisors,

employees, and the media. They should also avail

themselves of the opportunity to continue submitting

comment letters to the SEC on compliance burdens.

Finally, companies should keep in mind that most of

the 2017 shareholder resolutions were filed prior to the

2016 elections. As the Trump administration proceeds

with its economic and deregulatory agenda,

shareholders will be reshaping and likely stepping up

their campaigns for 2018. With an active annual

meeting season ahead, Alliance Advisors will keep

issuers apprised of key developments as they

materialize.

27 See ISS’s 2018 policy survey at

https://www.surveymonkey.com/r/ISS_2018_Annual_Policy_Survey

30

https://www.manhattan-institute.org/html/proxy-monitor-2016-report-9297.html

https://www.manhattan-institute.org/html/proxy-monitor-2016-report-9297.html

https://www.surveymonkey.com/r/ISS_2018_Annual_Policy_Survey


Table 1: 2016 & 2017 Shareholder Proposals

Governance Proposals 2016

Submitted

2016 Voted

On1

2016 Majority Votes2

2016 Average Support2

2017 Submitted

2017 Voted

On1



Declassify board 17 8 7 81.5% 16 8 5 61.1%

Director removal 2 2 0 9.0% 0 0 0

Majority voting 23 20 17 76.5% 18 13 9 66.7%

Proxy access 216 84 42 50.5% 171 50 18 45.0%

Poison pill 2 1 1 69.7% 4 0 0

Cumulative voting 1 1 0 10.9% 2 2 0 9.8%

Enhanced confidential voting 0 0 0 14 2 0 4.7%

Virtual meetings 0 0 0 4 0 0

Supermajority voting 29 16 10 59.6% 23 12 11 71.1%

Voting requirements 11 8 0 7.7% 12 10 0 9.1%

Dual-class stock 13 12 0 27.5% 11 9 0 29.3%

Special meetings 22 19 4 41.8% 27 23 4 41.9%

Written consent 19 17 1 41.3% 16 14 3 45.5%

Amend bylaws 4 2 1 49.2% 4 3 2 63.8%

Other anti-takeover 2 2 2 70.6% 1 1 1 89.0%

Independent chairman 61 50 1 30.7% 52 42 0 30.1%

Lead director 0 0 0 1 1 0 5.6%

Board independence, tenure and size

4 1 0 35.6% 1 0 0

Auditor tenure 15 0 0 0 0 0

Reincorporate to Delaware 0 0 0 1 0 0

Maximize value 14 9 1 26.8% 10 5 1 13.2%

Stock repurchases, dividends 19 17 0 3.7% 5 3 0 5.1%

Miscellaneous governance 19 4 2 45.8% 16 2 0 1.5%

Total Governance 493 273 89 409 200 54

31


Compensation Proposals 2016

Submitted

2016 Voted

On1



2017 Submitted

2017 Voted

On1



Severance pay 4 4 1 36.0% 2 1 0 36.0%

Accelerated vesting of equity awards

17 15 0 31.6% 6 5 0 29.6%

Revolving door payments 6 5 0 23.7% 5 4 0 28.3%

Clawbacks 6 6 0 14.3% 7 6 0 13.9%

Retention of equity awards 13 12 0 17.6% 4 3 0 29.8%

Performance-based awards 1 1 0 6.7% 0 0 0

Performance metrics 6 4 0 16.6% 0 0 0

CEO/worker pay disparity 6 3 0 5.8% 12 6 0 4.4%

Gender pay equity 13 5 1 16.9% 29 13 0 12.9%

Minimum wage reform 7 0 0 6 0 0

Pay caps 3 1 0 2.8% 1 0 0

Link pay to social issues 14 9 0 8.4% 11 8 0 11.5%

Proxy policy congruency – compensation

2 1 0 4.4% 3 3 0 3.8%

Miscellaneous compensation 7 1 0 0.6% 11 1 0 8.1%

Total Compensation 105 67 2 97 50 0

32


E&S Proposals 2016

Submitted

2016 Voted

On1



2017 Submitted

2017 Voted

On1



Animal welfare 8 4 1 27.9% 6 4 0 8.2%

Board diversity 36 9 2 24.8% 37 9 2 27.7%

Charitable contributions 1 0 0 5 5 0

Charitable contributions - liberal 0 0 0 1 1 0 3.7%

Charitable contributions - conservative

1 0 0 4 4 0 2.7%

Environmental 155 85 2 161 71 4

Coal 0 0 0 2 2 0 36.8%

Hydraulic fracturing 6 4 0 20.7% 3 1 0 38.7%

Fugitive methane 13 5 1 32.0% 13 4 0 30.0%

Environmental impact - water 7 2 0 19.8% 3 2 0 14.7%

2-degree scenario report 8 7 0 38.0% 19 16 3 45.4%

Other climate change report 17 12 0 22.6% 8 2 0 33.0%

GHG emissions reduction 20 11 0 20.8% 23 8 0 24.7%

Finance and climate change 0 0 0 4 2 0 5.7%

Energy efficiency and renewable energy

26 10 0 24.8% 14 6 0 17.5%

Oil and gas transport risks 0 0 0 1 0 0

Nuclear 1 1 0 4.3% 1 0 0

Miscellaneous climate change 0 0 0 1 0 0

Palm oil and deforestation 6 2 0 24.6% 8 3 0 19.7%

GMOs 3 0 0 0 0 0

Nanomaterials 3 1 0 3.8% 2 0 0

Recycling 11 7 0 19.9% 15 6 0 23.5%

Toxic substances 5 2 0 7.1% 7 3 0 15.4%

Board environmental risk committee

2 1 0 6.5% 1 0 0

Director with environmental expertise

3 3 0 19.6% 4 3 0 13.3%

Miscellaneous environmental 3 0 0 28.1% 0 0 0

Sustainability report 18 15 1 31.8% 23 10 1 32.1%

Board sustainability committee 0 0 0 2 0 0

Proxy policy congruency - climate change

3 2 0 6.5% 7 3 0 6.7%

Employment/discrimination 18 8 1 43 11 0

Workplace diversity 7 4 0 27.0% 17 7 0 28.8%

EEO - conservative view 1 0 0 8 0 0

EEO - sexual orientation 6 1 1 54.7% 8 0 0

33


E&S Proposals 2016

Submitted

2016 Voted

On1



2017 Submitted

2017 Voted

On1



Miscellaneous employment/discrimination

4 3 0 4.6% 9 4 0 5.4%

Proxy policy congruency - non-discrimination

0 0 0 1 0 0

Finance 4 1 0 5 1 0

Tax risk and policy 2 1 0 4.2% 0 0 0

Student loans 0 0 0 1 0 0

Business standards 0 0 0 4 1 0 21.9%

Indemnification 1 0 0 0 0 0

Miscellaneous finance 1 0 0 0 0 0

Health 11 2 0 22 3 0

Health - conservative 1 0 0 0 0 0

Drug pricing 1 0 0 11 0 0

Childhood obesity 3 0 0 0 0 0

Board expertise - product safety 0 0 0 2 1 0 6.8%

Antibiotics and factory farms 5 2 0 17.7% 7 2 0 31.3%

Miscellaneous health 1 0 0 2 0 0

Human rights 61 35 0 66 26 0

Country selection/divestiture - conservative

5 5 0 2.1% 4 2 0 1.3%

Country selection/divestiture - liberal

8 4 0 3.8% 5 2 0 14.7%

Holy Land Principles 9 9 0 3.9% 21 12 0 3.5%

Human trafficking 5 0 0 1 0 0

Human rights mediation/tobacco workers

8 6 0 4.4% 5 2 0 4.8%

Code of conduct 1 1 0 4.0% 0 0

Vendor code of conduct and human rights in supply chain

8 2 0 25.1% 7 2 0 20.5%

Worker safety 6 4 0 17.3% 4 1 0 28.1%

Human right to water 0 0 0 3 0 0

Internet and phone privacy, net neutrality, internet affordability

4 1 0 11.0% 5 1 0 1.1%

Board committee on human rights 3 2 0 2.1% 1 1 0 6.0%

Director with human rights expertise

0 0 0 1 0 0

Prison communications/inmate rights

2 1 0 21.5% 4 0 0

Indigenous people 0 0 0 5 2 0 26.7%

34


E&S Proposals 2016

Submitted

2016 Voted

On1



2017 Submitted

2017 Voted

On1



Miscellaneous human rights 2 0 0 0 0

Military sales 1 1 0 6.0% 1 1 0 4.0%

Political 114 76 2 101 61 0

Political - conservative 2 0 0 11 1 0 1.9%

Grassroots lobbying 53 43 0 24.6% 50 37 0 25.8%

Indirect Lobbying 4 2 0 17.6% 1 0 0

Public policy advocacy 5 1 0 21.2% 2 1 0 26.6%

Incorporate values 2 2 0 6.5% 0 0 0

Incorporate values - conservative 5 3 0 4.1% 0 0 0

Contributions - CPA 37 21 2 32.1% 31 17 0 28.2%

Non-deductible political expenditures

6 4 0 36.3% 4 3 0 26.6%

Advisory vote on political spending 0 0 0 2 2 0 6.4%

Tobacco 3 2 0 6 2 0

Tobacco advertising and education 0 0 0 2 1 0 2.6%

Teen smoking (smoke-free movies) 0 0 0 1 0 0

E-cigarettes 2 1 0 6.6% 0 0 0

Miscellaneous tobacco 1 1 0 18.2% 2 1 0 3.6%

Firearms 3 1 0 8.2% 0 0 0

Total Environmental & Social 415 224 8 453 194 6

Total Proposals (All) 1,013 564 99 959 444 60

Source: SEC filings, proponent websites, and media reports.

1. Includes floor proposals; excludes proposals on ballots that were not presented or were withdrawn before the annual meeting. 2016 figures are

for the full year and 2017 figures are for the first half of the year.

2. Based on votes FOR as a percentage of votes FOR and AGAINST.

35


Table 2: 2017 Proxy Access Votes (through June 30)

Adopt Proxy Access Proponent 2016 Vote1

2017 Meeting

Date

2017 Vote1

Abercrombie & Fitch Co.2 New York City Pension Funds 15-Jun 82.3% Charles Schwab Corp. New York City Pension Funds 16-May 61.3% Charter Communications, Inc. IBEW 25-Apr 43.6% Cigna Corp. John Chevedden 26-Apr 50.7% Columbia Sportswear Co. Myra Young 13-Jun 25.7% Crown Castle International Corp. New York City Pension Funds 18-May 86.6% Genomic Health, Inc. James McRitchie, Myra Young 15-Jun 43.2% GGP Inc. 17-May 55.3% Hospitality Properties Trust New York City Pension Funds 15-Jun 84.8% Humana Inc. New York City Pension Funds 20-Apr 76.3% International Business Machines Corp. New York City Pension Funds 25-Apr 59.4% Kinder Morgan Inc. New York City Pension Funds 10-May 58.6% Martin Marietta Materials, Inc. New York City Pension Funds 18-May 72.5% Minerals Technologies Inc. New York City Pension Funds 17-May 87.5% Monster Beverage Corp. New York City Pension Funds 43.4% 19-Jun 40.7% Nabors Industries Ltd.3 New York City Pension Funds 60.4% 6-Jun 66.8% National Oilwell Varco4 New York City Pension Funds 17-May 98.4% Netflix, Inc. New York City Pension Funds 71.8% 6-Jun 54.1% Nuance Communications, Inc.4 Kenneth Steiner 30-Jan 89.5% Old Republic International Corp. CalPERS 74.4% 26-May 74.6% PACCAR Inc. New York City Pension Funds 45.2% 25-Apr 49.6% Senior Housing Properties Trust New York City Pension Funds, UAW 18-May 78.7% Swift Transportation Co. John Chevedden 24-May 30.1% T-Mobile US Inc. 23.6% 13-Jun 19.9% Tyson Foods, Inc. 9-Feb 21.7% Universal Health Services, Inc. New York City Pension Funds 8.9% 17-May 8.3% Waters Corp.4 New York City Pension Funds 9-May 89.3% Williams-Sonoma, Inc. James McRitchie, Myra Young 31-May 19.4%

Average support (all) 58.2%

Average support where board opposed 56.3%

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39


Table 3: Failed Say-on-Pay Votes (through June 2017)

Company Meeting

Date Vote*

Previous Failed Votes*

Index

Nuance Communications, Inc. 30-Jan-17 33.5% 2015, 2013 R1000

Microsemi Corp. 14-Feb-17 45.4% R2000

Immunomedics, Inc. 3-Mar-17 38.4% R2000

Sprouts Farmers Market, Inc. 2-May-17 43.3% R1000

American Axle & Manufacturing Holdings, Inc. 4-May-17 38.8% R2000

Pain Therapeutics, Inc. 4-May-17 47.9%

Patriot Scientific Corp. 4-May-17 31.2% 2016, 2015, 2014,

2013 Whitestone REIT 11-May-17 43.1% R2000

ConocoPhillips 16-May-17 32.2% R1000, S&P 500

Medifast, Inc. 18-May-17 42.2% 2014 R2000

Senior Housing Properties Trust 18-May-17 46.0% 2016 R1000

Atlas Air Worldwide Holdings, Inc. 24-May-17 32.9% 2016, 2013 R2000

NII Holdings, Inc. 24-May-17 23.3% R2000

Sanchez Energy Corp. 24-May-17 47.8% R2000

Tutor Perini Corp. 24-May-17 42.3% 2016, 2015, 2014, 2013, 2012, 2011

R2000

Endologix, Inc. 31-May-17 40.5% R2000

Rockwell Medical, Inc. 1-Jun-17 25.9% R2000

SL Green Realty Corp. 1-Jun-17 42.8% 2015 R1000

IMAX Corp. 6-Jun-17 30.0% R2000

Nabors Industries Ltd. 6-Jun-17 44.0% 2016, 2014, 2013,

2012, 2011 R1000

New York Community Bancorp, Inc. 6-Jun-17 49.7% 2014 R1000

Spectrum Pharmaceuticals, Inc. 13-Jun-17 43.9% 2015, 2014, 2013 R2000

SeaWorld Entertainment, Inc. 14-Jun-17 42.6% R2000

Hospitality Properties Trust 15-Jun-17 48.0% R1000

Universal Insurance Holdings, Inc. 15-Jun-17 47.0% R1000

ImmunoCellular Therapeutics, Ltd.** 16-Jun-17 59.0%

FleetCor Technologies, Inc. 21-Jun-17 37.4% 2014 R1000

Argan, Inc. 22-Jun-17 45.4% 2015 R2000

Mylan N.V. 22-Jun-17 16.5% 2012 R1000, S&P 500

PHH Corp. 28-Jun-17 36.3% R2000

Bed Bath & Beyond Inc. 29-Jun-17 43.9% 2016 R1000, S&P 500

Source: SEC filings.

*Calculated as the number of FOR votes as a percentage of FOR and AGAINST votes.

**Received less than majority support after counting abstentions.

40


SEC Provides Further Guidance on Pay Ratio Disclosures October 3, 2017

Last week, the Securities and Exchange Commission (SEC) provided additional guidance for complying with the pay ratio disclosure requirements adopted under the Dodd-Frank Act that take effect in 2018. According to SEC Chairman Jay Clayton, "the guidance reflects the feedback the SEC has received and encourages companies to use the flexibility incorporated in our prior rulemaking to reduce costs of compliance.”

Background

In 2015, the SEC adopted new Item 402(u) of Regulation S-K to add the following disclosure requirements:

The median of the annual total compensation of all its employees, except the CEO.

The annual total compensation of its CEO.

The ratio of those two amounts.

These new disclosures initially appeared innocuous, but a closer look revealed that they are rife with details, and could require registrants to implement costly administrative measures to ensure compliance. While some initial guidance was provided through Compliance and Disclosure Interpretations (C&DIs) released in October 2016, numerous questions remained as to how to approach these calculations and the related disclosures.

New Guidance

Flexibility as a Key Component

The guidance is set forth in three sources – an interpretive release (Securities Act Release No. 33-10415; Securities Exchange Act Release No. 34-81673; the Interpretive Release); a statement from the SEC’s Division of Corporate Finance (Corp Fin Guidance) and updated C&DIs.

When adopting the pay ratio rules, the SEC stated that, in order for the data points provided by the rules to be of use to investors, the rules “should be designed to allow shareholders to better understand and assess a particular registrant’s compensation practices and pay ratio disclosures rather than to facilitate a comparison of this information from one registrant to another.”1 As such, the SEC emphasized that the rules provide flexibility for each registrant to determine how to comply in a manner that would “reduce costs and burdens for registrants while preserving what [the SEC perceives] to be the purpose and intended benefits” of the statutorily mandated disclosure.2

This flexible approach allows registrants to use reasonable estimates, assumptions, and methodologies, as well as reasonable efforts to prepare the disclosures. However, the SEC notes in the Interpretive Release that this approach can also result in a degree of imprecision, and acknowledged the need to address concerns as to whether uncertainty would lead to challenges to the accuracy of the disclosure. Accordingly, the Interpretive Release provides that if a registrant uses reasonable estimates, assumptions or methodologies, the pay ratio and related disclosure that result from such use would not provide the basis for SEC enforcement action unless the disclosure was made or reaffirmed without a reasonable basis or was not provided in good faith. A newly issued C&DI specifies that registrants are permitted to call such pay ratio disclosures “a reasonable estimate, calculated in a manner consistent with Item 402(u).”

Using Existing Internal Records

As previously noted, Item 402(u) requires a registrant to disclose the median of the annual total compensation of all its employees, excluding its principal executive officer. “Employees” include U.S. employees and employees located in any jurisdiction outside the U.S. In an effort to address concerns about compliance costs for multinational companies, registrants may generally exclude non-U.S. employees from its calculations where such employees account for 5 percent or less of the registrant’s total U.S. and non-U.S. employees.

The Interpretive Release clarifies that a registrant may use appropriate existing internal records, such as tax or payroll records, in determining whether the 5 percent de minimis exemption from the rule is available.


In addition, a registrant may use existing internal records that reasonably reflect annual compensation as the “consistently applied compensation measure” required by the rules to identify the median employee. The Interpretive Release clarified this approach may be acceptable even if those records exclude certain compensation elements, such as equity awards widely distributed to employees. The SEC noted that if a registrant determines that there are unusual characteristics of the identified median employee’s compensation that have a significant impact on pay ratio, “the registrant may substitute another employee with substantially similar compensation to the original identified median employee based on the compensation measure it used to select the median employee.” Defining an "Employee" The SEC has reversed its position that it had taken in an earlier C&DI regarding the definition of “employee.” For purposes of Item 402(u), “employee” is defined as “an individual employed by the registrant or any of its consolidated subsidiaries.”3 Excluded from this definition are workers who are employed, and whose compensation is determined, by an unaffiliated third party, but who provide services as independent contractors to the registrant. In the Pay Ratio Release, the SEC indicated that excluding independent contractors is appropriate, because registrants generally do not control the level of compensation paid to such workers. However, because some registrants already make determinations as to whether a worker is an employee or independent contractor in other legal or regulatory contexts, the SEC has clarified that a registrant may apply a widely recognized test under another area of law that the registrant otherwise uses to determine whether its workers are employees. Statistical Reasonableness What constitutes using “reasonable methodologies” or appropriate statistical sampling will depend on the facts and circumstances of the registrant. The Corp Fin Guidance provided detailed guidance and hypothetical examples regarding some common statistical techniques and methodologies registrants may consider, but it did not specify any requirements for statistical sampling. The staff challenged registrants to expand their statistical analysis vocabulary (or perhaps will cause a ramp-up of demand for consulting work by statisticians) by citing terms such as “lognormal” and “multimodal” distributions, but emphasized that the key to using any analytical tool is to apply reasonableness, as evidenced by some examples set forth in the Corp Fin Guidance:

Registrants may use a combination of reasonable estimates, statistical sampling and other reasonable methodologies, for example, in businesses with multiple business lines or geographic units.

One or more statistical sampling methods can be used, including, but not limited to, simple random sampling, stratified sampling, cluster sampling, and systematic sampling, and the release advises that “all statistical sampling approaches should draw observations from each business or geographical unit with a reasonable assumption on each unit’s compensation distribution and infer the registrant’s overall median based on the observations drawn."

Other reasonable methods may be used in combination with other approaches, including, but not limited to, making distributional assumptions, imputing or correcting missing values, and addressing outliers and other extreme observations.

The Corp Fin Guidance also included several hypothetical examples illustrating the application of these principles across multiple business units and geographical locations.


What’s Next Although challenges have brought uncertainty to the long-term future of the pay ratio rules, they remain in effect. Registrants must therefore continue their efforts to comply with the rules in the upcoming year. The guidance should provide comfort to registrants – so long as actions to report the pay ratio are reasonable, the SEC will not second guess the disclosure. _________________

[1] Pay Ratio Release, supra note 1, at 50106. [2] Id. at 50107. [3] 17 CFR 402(u)(3). Authors: Erin H. McBride, Janet A. Spreen and John J. Harrington


SEC Statement on Treatment of Digital Assets Under the Federal Securities Laws August 3, 2017 The U.S. Securities and Exchange Commission has provided welcome guidance by publishing its most comprehensive statement to date on the treatment of digital assets – and the offer and sale of such assets by "virtual" organizations – under the federal securities laws. Such offers and sales, which organizations typically conduct using distributed ledger or blockchain technology, have been referred to, among other things, as "initial coin offerings" (or “ICOs”) or “token sales.” These transactions have proliferated recently, attracting the attention of the SEC and no doubt other regulators. On July 25, the SEC issued an investigative report1 into a German group known as The DAO, a so-called “decentralized autonomous organization” that used blockchain technology to raise funds. The SEC found that The DAO used distributed ledger or blockchain technology to operate as a “virtual” entity and sold tokens representing interests in its enterprise to investors in exchange for payment with virtual currency. Investors could hold these tokens as an investment with certain voting and ownership rights or could sell them on web-based secondary market platforms. The SEC report concluded that the tokens such as those used in The DAO’s ICO are “securities” under the U.S. securities laws, and, among other consequences, the offers and sales of such tokens should be treated as securities offerings under the Securities Act of 1933, which act requires that any such offering either be registered with the SEC or carried out pursuant to some exemption from the SEC registration requirements. The SEC report thus confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption from registration applies. Those participating in unregistered offerings may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities themselves must register with the SEC unless they are exempt. The SEC noted that the registration and other requirements of the federal securities laws apply to those who offer and sell securities in the United States, whether or not the issuing entity is a traditional company or a decentralized autonomous organization, those securities are purchased using U.S. dollars or other fiat currencies or virtual currencies, or they are distributed in certificated form or through distributed ledger technology. Despite the novel technologies and other techniques that The DAO employed and which are employed in the crypto-currency industry at large, the SEC’s legal analysis relied on a basic and fundamental assessment of the definition of a security under the “investment contract” test and whether the tokens in question met that definition. In the statement2 announcing the publication of the report, the SEC staff reaffirmed the fundamental principle that the “hallmark of a security is an investment of money or value in a business or operation where the investor has a reasonable expectation of profits based on the efforts of others,” and explained that The DAO transaction satisfied that test and noted that anyone who solicits something of value in exchange for an interest in a digital or other novel form of storing value should carefully consider whether they are creating an investment arrangement that constitutes a security. According to the SEC, “[t]he definition of a security under the federal securities laws is broad, covering traditional notions of a security, such as a stock or bond, as well as novel products or instruments such as digital instruments, including crypto-currencies, tokens and the like, where value may be represented and transferred in digital form.” Having found that the tokens in question constituted a security, the SEC concluded that the sponsor neither registered its offer and sale nor conducted the offer and sale in a way that qualified for an available exemption from registration, thus violating the Securities Act. Apart from highlighting the basic Securities Act registration and disclosure requirements, the SEC cautioned that market participants in this area must also consider other aspects of the federal securities laws if they conclude that the assets in question meet the definition of a security under its guidance. According to the SEC, additional potential obligations include the following:

if a platform facilitating transactions in such securities is operating as an “exchange,” the platform may require registration as an exchange or “alternative trading system” under the Securities Exchange Act of 1934;


if the composition of assets of the entity offering and selling the security causes it to meet the definition of an “investment company,” even if inadvertently or temporarily, the entity may require registration under the Investment Company Act of 1940; and

if a person provides advice about an investment in the security, it may be deemed an “investment adviser” and may need to register as such under the Investment Advisers Act of 1940.

The SEC report and accompanying statements provide valuable guidance in this fast moving and rapidly evolving field and at the same time make very clear that structuring an offering that involves digital instruments of value or operates using a distributed ledger or blockchain does not remove that activity from the requirements of the federal securities laws. _______________

[1] You can find the SEC’s investigative report at: https://www.sec.gov/litigation/investreport/34-81207.pdf. [2] You can find the statement by the Division of Corporation Finance and Division of Enforcement at: https://www.sec.gov/news/public-statement/corpfin-enforcement-statement-report-investigation-dao. Simultaneously, the SEC issued an investor bulletin warning investors of the dangers of ICOs and related transactions, which is available at: https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-initial-coin-offerings. Author: Walter Van Dorn


Reminder: Form 8-K Reporting on “Say-on-Pay Frequency” Excerpted from the June 28, 2017, edition of Securities and Governance Update Many public companies have held, or will hold, their second “say-on-pay frequency” vote at their 2017 annual shareholders’ meeting. Companies generally must disclose the voting results of matters submitted to shareholders within four business days following the annual meeting of shareholders in a current report on Form 8-K under Item 5.07(b). Voting results may also be reported in a Form 10-Q or Form 10-K that is filed on or before the date that the Form 8-K is due. Because the say-on-pay frequency vote is an advisory vote and nonbinding, companies must take action to determine the frequency of the vote (every one, two or three years) going forward. Item 5.07(d) of Form 8-K requires disclosure of “the company’s decision in light of [the shareholder] vote as to how frequently the company will include a shareholder vote on the compensation of executives in its proxy materials …” This disclosure is required even if the company included its recommendation for say-on-pay frequency in the proxy statement and shareholders supported the company’s recommendation. Many companies make this disclosure in the post-meeting Form 8-K reporting voting results; however, Item 5.07(d) of Form 8-K allows companies up to 150 calendar days after the annual meeting to disclose their say-on-pay frequency determination, so long as the disclosure is made no later than 60 calendar days prior to the deadline for shareholder proposals for the next year’s annual meeting of shareholders. If the voting results were disclosed in a Form 8-K without a say-on-pay frequency determination, the frequency determination must be later disclosed by amending that Form 8-K (by filing a Form 8-K/A), rather than by filing a new Form 8-K. If a company reported voting results on Form 10-Q or Form 10-K, the Item 5.07(d) disclosure can be made in a new Form 8-K under Item 5.07, rather than in an amendment to the Form 10-Q or Form 10-K. (See SEC Division of Corporation Finance, Compliance and Disclosure Interpretations, Exchange Act Form 8-K-Question 121A.04.) In 2011, when the say-on-pay frequency disclosure rules were relatively new, hundreds of companies failed to timely make the Item 5.07(d) disclosure on the company’s determination as to the frequency of their “say-on-pay” vote. Failure to timely make the Form 8-K disclosures required under Item 5.07 can be problematic for companies planning on raising capital, because the disclosure failure can result in Form S-3 eligibility for 12 months unless a waiver is granted by the SEC. While the SEC generally granted waivers on a case-by-case basis for failure to make the required disclosures in 2011, such waivers will likely be more difficult to come by going forward. Speaking at a conference in 2012, Meredith Cross, then director of the SEC’s Division of Corporate Finance, commented that the failure of many companies to amend their Form 8-Ks following the first say-on-pay frequency vote “shouldn’t be a recurring problem.” In addition, companies should bear in mind the staff is generally reluctant to grant eligibility waivers and will do so “only under very limited circumstances.” (See SEC Division of Corporation Finance, Compliance and Disclosure Interpretations, Securities Act Forms ‒ Question and Answer 101.01.) Companies should make sure that the required disclosure has been made or take action to file an amendment to the post-meeting Form 8-K, if necessary. There are some companies that do not need to address say-on-pay frequency this year. In particular, smaller reporting companies were exempt from holding a say-on-pay or say-on-pay frequency vote until their 2013 annual meeting, so they will not be required to hold a say-on-pay frequency vote until 2019. In addition, emerging growth companies (EGCs) are exempt until after they cease to be classified as EGCs. Unlike with respect to the say-on-pay vote, however, the statute does not provide an explicit transition period for the first say-on-pay frequency vote, so it appears that the say-on-pay frequency vote would be required at the first annual meeting taking place after the company ceases to be an EGC. Other companies that will not need to hold a say-on-pay frequency vote in 2017 include those that held a say-on-pay frequency vote after 2011, such as those that became public or assumed reporting obligations after 2011. For these companies, the say-on-pay frequency vote will not be on the ballot again until the sixth anniversary of the previous vote. Author: Suzanne Hanselman


PCAOB Adopts Changes to the Auditor’s Report to Require Disclosure of Critical Audit Matters Excerpted from the June 28, 2017, edition of Securities and Governance Update On June 1, 2017, the Public Company Accounting Oversight Board (PCAOB) adopted a new auditor reporting standard, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion (AS 3101) that requires the auditor to provide new information about the audit and make the auditor’s report more informative and relevant to investors. The new standard retains the pass/fail opinion of the existing auditor’s report but makes significant changes to the existing auditor’s report, including the following:

Communication of critical audit matters (CAMs) – Matters communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex auditor judgment

Disclosure of auditor tenure – Disclosure of the year in which the auditor began serving consecutively as the company’s auditor

Clarify auditor’s role and responsibilities – Clarifies standard language about the nature and scope of the auditor’s existing responsibilities, including:

o Disclosure of auditor independence – Disclosure that the auditor is required to be independent o New error or fraud language – The addition of the phrase “whether caused by error or fraud,” to

be used in the description of the auditor’s responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements; the existing standard does not require the auditor’s report to contain the phrase “whether due to error or fraud”

o Addressed to shareholders and the board – The audit report will be addressed to the company’s shareholders and board of directors, with additional addressees permitted

o Financial statement notes – Identification of the financial statements, including the related notes and, if applicable, schedules, as part of the financial statements that were audited; under the existing standard, the notes to the financial statements and the related schedules are not identified as part of the financial statements

o Nature of the audit – The description of the nature of the audit reflected the auditor’s responsibilities in a risk-based audit and aligned the description with the language in the PCAOB’s risk assessment standards, including:

Performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks

Examining, on a test basis, appropriate evidence regarding the amounts and disclosures in the financial statements

Evaluating the accounting principles used and significant estimates made by management

Evaluating the overall presentation of the financial statements

More helpful and standardized format – The audit opinion will appear in the first section of the auditor’s report, and section titles have been added to guide the reader

Critical Audit Matters Communicated or required to be communicated to the audit committee Under the new standard1 a CAM is defined as any matter arising from the audit of the financial statements that was required to be communicated to the audit committee (even if not actually communicated) and matters actually communicated (even if not required) that are related to accounts or disclosures that are material to the financial statements and involved especially challenging, subjective or complex auditor judgment. It will include auditor communication requirements under AS 1301, Communications with Audit Committees, other PCAOB rules and standards,2 and applicable law,3 as well as communications made to the audit committee that were not required. Required communications to the audit committee generally include the areas in which investors have expressed particular interest in obtaining information in the auditor’s report, such as significant management estimates and


judgments made in preparing the financial statements, areas of high financial statement and audit risk, significant unusual transactions, and other significant changes in the financial statements. The new standard does not limit the source of CAMs to critical accounting policies and estimates, nor does it exclude from the source of CAMs certain required audit committee communications that relate to sensitive areas (e.g., corrected and uncorrected misstatements, qualitative aspects of significant accounting policies and practices, alternative treatments within GAAP, independence considerations, disagreements with management, overall planned audit strategy, delays encountered in the audit, and competency issues of management) and that could result in the auditor communicating information not disclosed by management. To the extent that any such communication qualifies as a CAM (including that it (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective or complex auditor judgment), it will be an appropriate subject for an auditor to communicate. Relates to Accounts or Disclosures That Are Material to the Financial Statements The new standard provides that each CAM relates to accounts or disclosures that are material to the financial statements, which means that the CAM could be a component of a material account or disclosure and does not necessarily need to correspond to the entire account or disclosure in the financial statements. For example, the auditor’s evaluation of the company’s goodwill impairment assessment could be a CAM if goodwill was material to the financial statements, even if there was no impairment. The CAM would relate to goodwill recorded on the balance sheet and the disclosure in the notes to the financial statements about the company’s impairment policy and goodwill. In addition, a CAM may not necessarily relate to a single account or disclosure but could have a pervasive effect on the financial statements if it relates to many accounts or disclosures. For example, the auditor’s evaluation of the company’s ability to continue as a going concern could also qualify as a CAM depending on the circumstances of a particular audit. On the other hand, a matter that does not relate to accounts or disclosures that are material to the financial statements cannot be a CAM. For example, a potential loss contingency that was communicated to the audit committee, but that was determined to be remote and was not recorded in the financial statements or otherwise disclosed under the applicable financial reporting framework, would not meet the definition of a CAM. The same rationale would apply to a potential illegal act if an appropriate determination was made that disclosure was not required in the financial statements. Similarly, the determination that there is a significant deficiency in internal control over financial reporting does not qualify as a CAM because it does not relate to an account or disclosure that is material to the financial statements. However, a significant deficiency could be among the principal considerations that led the auditor to determine that a matter is a CAM. Involved Especially Challenging, Subjective or Complex Auditor Judgment The determination of whether a matter qualifies as a CAM is principles-based. The new standard does not specify any items that would always constitute CAMs. For example, not all matters determined to be “significant risks” under PCAOB standards would qualify as CAMs because not every significant risk would involve especially challenging, subjective or complex auditor judgment. For example, improper revenue recognition is a presumed fraud risk, and all fraud risks are significant risks; however, if a matter related to revenue recognition does not involve especially challenging, subjective or complex auditor judgment, it will not be considered a CAM. In accordance with the new standard, material related-party transactions or matters involving the application of significant judgment or estimation by management do not qualify as CAMs, unless the auditor determines, in the context of the specific audit, that the matter involved especially challenging, subjective or complex auditor judgment. The PCAOB believes that focusing on the auditor’s judgment should limit the extent to which expanded auditor reporting could become duplicative of management’s reporting. The PCAOB also believes that CAMs reflecting differences in auditors’ experience and competence will also be informative. In determining whether a matter involved especially challenging, subjective or complex auditor judgment, the auditor should take into account, alone or in combination, certain nonexclusive factors, including:

1. The auditor’s assessment of the risks of material misstatement, including significant risks


2. The degree of auditor judgment related to areas in the financial statements that involved the application of significant judgment or estimation by management, including estimates with significant measurement uncertainty

3. The nature and timing of significant unusual transactions and the extent of audit effort and judgment related to these transactions

4. The degree of auditor subjectivity in applying audit procedures to address the matter or in evaluating the results of those procedures

5. The nature and extent of audit effort required to address the matter, including the extent of specialized skill or knowledge needed or the nature of consultations outside the engagement team regarding the matter

6. The nature of audit evidence obtained regarding the matter The new standard requires the auditor to communicate in the auditor’s report any CAMs arising from the current period’s audit of the financial statements or state that the auditor determined that there are no CAMs. Once an auditor decides that a CAM needs to be included in the report, the auditor would (1) identify the CAM, (2) describe the principal considerations that led the auditor to determine that the matter is a CAM, (3) describe how the CAM is addressed in the audit and (4) refer to the relevant financial statement accounts or disclosures. Some investors believe that CAMs will highlight areas that they may wish to emphasize in their engagement with the company and provide important information that they can use in making proxy voting decisions, including ratification of the appointment of auditors. Excluded Companies from CAM Disclosures The new standard will generally apply to audits conducted under PCAOB standards. Communication of CAMs is not required for audits of brokers and dealers, investment companies other than business development companies, benefit plans, and emerging growth companies; however, auditors of these entities may choose to include CAMs in the auditor’s report voluntarily. The other requirements of the new standard will apply to these audits. Effective Dates Subject to approval by the Securities and Exchange Commission (SEC), the new standard will take effect as follows:

All provisions other than those related to CAMs will take effect for audits of fiscal years ending on or after December 15, 2017.

Large accelerated filers – Provisions related to CAMs will take effect for audits of fiscal years ending on or after June 30, 2019

All other companies not excluded – Provisions related to CAMs will take effect for audits of fiscal years ending on or after December 15, 2020

This proposed timeline should provide accounting firms, companies and audit committees time to prepare for implementation of the CAM requirements, which are expected to require more effort to implement than are the additional improvements to the auditor’s report. Auditors may elect to comply before the effective date, at any point after SEC approval of the new standard. Expectations of the New Standard We expect the new standard to present meaningful challenges for public companies and their audit committees with respect to their disclosures and the dynamics of their interactions with the auditors. The new standard recognizes that the audit report may disclose a company’s nonpublic information as part of the CAM communications if that information is needed to describe the principal considerations that led to the CAM determination or how the CAM was addressed in the audit. In addition, the auditor’s insistence that certain CAM-related disclosures be included in the auditor’s report may impact a public company’s disclosure in other areas. For example, public companies already provide substantial disclosures regarding their accounting practices, policies and processes, particularly in the risk factors and MD&A section, and often have to contend with the


auditor’s desire or suggestion to include additional (viewed as either clarifying or unnecessary, depending on your perspective) disclosures. There is also likely to be additional pressure between management and the auditors to understand how the auditor intends to approach CAM disclosure with respect to the company, which existing accounting policies and practices would be likely to receive a CAM designation, and extensive discussions about what CAM disclosure would look like for those matters. As these discussions evolve, it will be interesting to see whether companies provide additional details of the communications with their auditors in the proxy statement in areas such as the audit committee report (which is furnished rather than filed), ratification of the independent auditor proposal (which is not required but is a matter of good corporate practice), a summary of the audit committee’s responsibilities or discussion related to the board of directors’ role in risk oversight. In that regard, we are mindful that only a handful of companies have volunteered additional disclosures, whether in the audit committee report or elsewhere in the proxy statement, in light of the SEC’s encouragement to do so in its 2015 concept release regarding possible revisions to its audit committee disclosures. We certainly encourage companies to engage in these discussions sooner rather than later to minimize these issues and to allow senior management and the board of directors time to consider these issues well in advance of finalizing their financial statements and substantive disclosures. This is not a discussion a public company wants to wrap up the week its public filing is due. There is also likely to be additional pressure between management and the auditors to understand how the auditor intends to approach CAM disclosure with respect to the company, which existing accounting policies and practices would be likely to receive a CAM designation, and extensive discussions about what CAM disclosure would look like for those matters. As these discussions evolve, it will be interesting to see whether companies provide additional details of the communications with their auditors in the proxy statement in areas such as the audit committee report (which is furnished rather than filed), ratification of the independent auditor proposal (which is not required, but is a matter of good corporate practice), a summary of the audit committee’s responsibilities or as part of the discussion related to the board of directors’ role in risk oversight. In that regard, we are mindful that only a handful of companies have volunteered additional disclosures, whether in the audit committee report or elsewhere in the proxy statement, in light of the SEC’s encouragement to do so in its 2015 concept release regarding possible revisions to its audit committee disclosures. We certainly encourage companies to engage in these discussions sooner rather than later to minimize these issues and to allow senior management and the board of directors time to consider these issues well in advance of finalizing their financial statements and substantive disclosures4 This is not a discussion a public company wants to wrap up the week their public filing is due. __________

[1] The PCAOB release contains a helpful chart that summarizes the critical audit matter analysis. [2] See Appendix B of AS 1301, which identifies other PCAOB rules and standards that require audit committee communication. [3] See, e.g., Section 10A(k) of the Exchange Act;, Rule 2-07 of Regulation S-X;, and Exchange Act Rule 10A-3. [4] See Possible Revisions to Audit Committee Disclosures, SEC Rel. No. 33-9862 (July 1, 2015) (e.g., Section VI.A.1.). Author: Jason Zachary


Why the Future of Dodd-Frank May Depend on CHOICE Act 2.0 Excerpted from the June 28, 2017, edition of Securities and Governance Update Repealing or substantially modifying the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) remains a top priority of Republican lawmakers. The latest attempt to do so is in the form of a comprehensive regulatory reform bill labeled the Financial CHOICE Act of 2017 (CHOICE Act 2.0), which was introduced by the bill’s sponsor, Jeb Hensarling, R-Texas, chairman of the House Financial Services Committee, in April 2017. CHOICE Act 2.0 is a modified version of the original bill, the Financial CHOICE Act of 2016, which was introduced by Chairman Hensarling in June 2016 to the House Financial Services Committee but failed to advance to the U.S. House of Representatives. CHOICE Act 2.0 passed the House Financial Services Committee on May 4, 2017, and passed the U.S. House of Representatives on June 7, 2017, in a party-line vote (233 to 186). All but one Republican voted for CHOICE Act 2.0, and all Democrats opposed it. Although the bill now must be approved by the U.S. Senate, it is not expected to receive the required 60 votes to pass, unless it undergoes substantial revisions to garner Democratic support. However, it is possible that portions of the proposed legislation may be passed by the Senate. Despite the uncertainty, it is clear that Republican lawmakers will continue to seek regulatory reforms, whether through CHOICE Act 2.0 or some other legislation. It seems equally clear that any proposed reform passed by the House of Representatives will likely be subject to significant negotiations and extensive modification during the legislative process, at least in the Senate. Regardless, CHOICE Act 2.0 provides valuable insight as to the areas on which Republican lawmakers are focused and the provisions that may be targeted for repeal or modification. We urge companies to continue to monitor the status of these proposals and, in cases where rules promulgated as a result of Dodd-Frank are set to take effect, to continue to prepare for implementation. Below is a summary of the key provisions of Dodd-Frank that may be affected by CHOICE Act 2.0. We have also included other notable provisions of CHOICE Act 2.0 that, if approved, would impact capital formation. Pay ratio ‒ Item 402(u) of Regulation S-K, which was promulgated as a result of the requirements of Dodd-Frank, requires public reporting companies to disclose their median employee’s total annual compensation as a ratio to the total annual compensation of their chief executive officer (Pay Ratio Rule). The Pay Ratio Rule is effective beginning on a company’s first fiscal year beginning on or after January 1, 2017. Thus, most reporting companies will be required to include pay ratio disclosure in their proxies during the 2018 proxy season. If passed, CHOICE Act 2.0 would repeal the Dodd-Frank requirement for adoption of the Pay Ratio Rule. In February 2017, then-acting chairman of the Securities and Exchange Commission (SEC), Michael S. Piwowar, issued a public statement questioning the Pay Ratio Rule, directed the SEC to reexamine the rule, and asked the public to submit comments on any unexpected challenges experienced and whether relief is needed. During the 45-day comment period, the SEC received approximately 180 comment letters, of which approximately 85 percent were in favor of the Pay Ratio Rule, as well as approximately 14,000 form letters in favor of pay ratio disclosures. We recommend that public reporting companies continue to prepare for implementation of the Pay Ratio Rule, as any relief or delay in the implementation is uncertain and, as more time passes, looks less and less likely. This is particularly important because CHOICE Act 2.0 would only eliminate the Dodd-Frank provision requiring the adoption of the Pay Ratio Rule. It would not result in a repeal of Item 402(u) of Regulation S-K, which would require additional regulatory action to accomplish. Hedging ‒ Dodd-Frank mandated that the SEC adopt rules requiring companies to disclose whether they allow their directors and employees to engage in hedging transactions related to company securities. The SEC has not yet adopted final rules. Under CHOICE Act 2.0, the SEC would no longer be required to adopt final rules. Many companies have already begun to adopt policies related to hedging transactions; thus, regardless of CHOICE Act 2.0 or other legislation, these policies may become “best practices” for public reporting companies. Say-on-pay and say-on-pay frequency ‒ Section 14(a) of the Securities Exchange Act of 1934, as amended (Exchange Act), requires public reporting companies to submit to stockholders an advisory vote to approve the executive compensation paid to named executive officers (say-on-pay), and also an advisory vote to determine


how often the say-on-pay vote must occur (say-on-pay frequency). CHOICE Act 2.0 would amend Section 14(a) of the Exchange Act to solely require a say-on-pay vote when there is a material change to the executive compensation program; thus, eliminating the say-on-pay frequency vote requirement. Regardless of whether CHOICE Act 2.0 becomes law, we expect that companies will continue to face pressure from stockholders or institutional shareholder organizations, such as ISS, to allow stockholders to provide feedback on a company’s executive compensation policies through similar advisory votes or other mechanisms. Executive compensation clawbacks ‒ Section 10D of the Exchange Act requires national securities exchanges to have listing standards requiring listed companies to “clawback” incentive-based compensation from any current or former executive officer in the event of a financial restatement. CHOICE Act 2.0 would amend Section 10D of the Exchange Act to limit the clawback to those current or former executive officers who had control or authority over the company’s financial reporting that resulted in the financial restatement. Accredited investor status ‒ Dodd-Frank mandated the SEC to increase the dollar thresholds for accredited investor status every four years. CHOICE Act 2.0 would amend Section 2(a)(15) of the Securities Act of 1933, as amended (Securities Act), to create a new statutory definition of “accredited investor” that would fix the income test at $200,000 (or $300,000, including income attributable to a spouse), but would adjust the net worth test, which is currently set at $1 million, for inflation every five years. Separately, the U.S. House of Representatives passed legislation in February 2017 that would include in the definition of “accredited investor” anyone who is licensed or registered with the SEC as a broker or investment advisor or “whose demonstrable education or job experience qualifies as professional knowledge of a subject related to a particular investment, and whose education or job experience is verified by FINRA or an equivalent self-regulatory organization.” Also in February 2017, then-acting Chairman Piwowar called for the SEC to increase investor access to private and risky investment strategies that are usually reserved for wealthy individuals, which could come in the form of a change to the current definition of “accredited investor.” The effect of the February 2017 proposed legislation as well as then-acting Chairman Piwowar’s statements indicate the desire on the part of some lawmakers to expand the definition of “accredited investor” to allow more individuals to qualify and participate in riskier investments. Conversely, the amendment proposed by CHOICE Act 2.0 signals the desire to continue to limit those individuals who qualify as an “accredited investor.” Conflict minerals ‒ In August 2012, the SEC adopted Rule 13p-1 of the Exchange Act as required by Section 1502 of Dodd-Frank. Rule 13p-1 of the Exchange Act requires public reporting companies that manufacture products containing certain minerals to disclose whether the minerals originated from the Democratic Republic of the Congo (DRC) or any country that shares a border with the DRC. CHOICE Act 2.0 would repeal Section 1502 of Dodd-Frank, as well as Sections 1503 and 1504 of Dodd-Frank requiring disclosure of resource extraction and mine safety. Prior to the House Financial Services Committee approving CHOICE Act 2.0, in April 2017 the SEC’s Division of Corporation Finance issued a public statement that it will not recommend enforcement of the conflicts source and chain of custody due diligence, independent audit, and Conflict Minerals Report requirements set forth in Item 1.01(c) of Form SD, as a result of the April 2, 2017, decision of the U.S. Court of Appeals for the District of Columbia Circuit reaffirming its prior holding regarding the constitutionality of Section 1502 of Dodd-Frank. For more information, please see our prior alert “Conflict Minerals Disclosure – New SEC Guidance.” Except as modified by the SEC’s April 2017 statement, companies were still required to file Form SDs for the 2016 calendar year. It is unclear, however, whether companies will be required to file Form SDs going forward. Proxy access rules ‒ Dodd-Frank granted the SEC authority to adopt mandatory proxy access rules. Pursuant to such authority, the SEC adopted Rule 14a-11 under the Exchange Act to give stockholders meeting certain criteria the ability to include director nominees in a company’s proxy statement. Litigation regarding the validity of the rule ensued, with the U.S. Court of Appeals for the District of Columbia Circuit ultimately vacating Rule 14a-11. After the court’s decision, the SEC implemented changes to Rule 14a-8, requiring companies to include in their proxy materials stockholder proposals addressing the director nomination process. Under Rule 14a-8, a stockholder who holds 1 percent or $2,000 of the company’s voting securities for at least one year and submits a proposal at least 120 days before the anniversary of the previous year’s proxy mailing may submit a 500-word


proposal for inclusion in the company’s proxy statement. Effectively, Rule 14a-8 empowers stockholders to make the decision on proxy access, and the applicable standards, on a company-by-company basis instead of through universally applicable procedures. CHOICE Act 2.0 would repeal the SEC’s authority to issue mandatory proxy access rules. However, this is not expected to impact many companies because they have already adopted proxy access provisions in their bylaws in response to stockholder pressure or as “best practices.” We expect companies to continue to adopt these measures regardless of whether the SEC’s authority to adopt proxy access rules is repealed. In addition, CHOICE Act 2.0 would direct the SEC (1) to amend Rule 14a-8 to require a stockholder to hold 1 percent ownership of a company’s voting securities for three years (instead of the current $2,000 worth of voting securities for one year) to be eligible to submit a proposal, (2) to increase the required voting success thresholds for resubmission of a stockholder proposal, and (3) to prohibit a company from including in its proxy materials a stockholder proposal submitted by a person in such person’s capacity as a proxy, representative or agent. Finally, CHOICE Act 2.0 would amend Section 14 of the Exchange Act to prohibit the SEC from adopting a “universal proxy” ballot in contested director elections. Disclosure of board leadership structure ‒ Dodd-Frank requires disclosure in annual proxy statements as to why a company chose its current board leadership model. Prior to the enactment of Dodd-Frank, Item 407(h) of Regulation S-K substantially required this disclosure. CHOICE Act 2.0 would repeal the Dodd-Frank provision requiring this disclosure; however, it would not repeal Item 407(h) of Regulation S-K, which would require additional regulatory action to accomplish. Other notable capital formation provisions contained in CHOICE Act 2.0 are discussed below: Definition of “general solicitation” ‒ CHOICE Act 2.0 would direct the SEC to revise the definition of “general solicitation” in Regulation D under the Securities Act so that it does not cover advertisements for meetings with issuers sponsored by angel investor groups, venture forums, venture capital associations and certain other entities (as long as the advertisement does not reference a specific securities offering), or apply to the meetings themselves, as long as only specified information about the issuers’ securities offerings is presented at the meetings. Expansion of Form S-3 eligibility ‒ CHOICE Act 2.0 would expand Form S-3 eligibility to include any registrant with listed equity securities, even those registrants that do not meet the $75 million minimum public float requirement. Extension of state blue-sky preemption ‒ CHOICE Act 2.0 would extend state blue-sky preemption to any security that is listed on a national securities exchange, or tier or segment thereof, as compared with granting blue-sky preemption only to securities listed on the NYSE, NYSE Amex and NASDAQ, and any other national securities exchange whose listing standards are deemed by the SEC to be substantially similar to NYSE, NYSE Amex and NASDAQ.

Registration under Section 12(g) of the Exchange Act ‒ CHOICE Act 2.0 would change the threshold requirement to register under Section 12(g) of the Exchange Act from 500 non-accredited holders to 2,000 and permit companies to deregister once they have fewer than 1,200 holders (as compared with 300). Authors: Alissa K. Lugo and Jeffrey E. Decker


How to Avoid Being the Target of a Disclosure-Only Lawsuit Excerpted from the June 28, 2017, edition of Securities and Governance Update The plaintiff-side M&A bar is notoriously creative in discovering new avenues to challenge transactions. The approach de jeur is to file a lawsuit seeking to enjoin the shareholder vote on an acquisition for insufficient disclosure, and then settle the suit when the company agrees to make additional disclosures and pay plaintiffs’ attorneys a “reasonable fee.” This type of litigation is tantamount to corporate extortion – the claims are often meritless, but corporations do not want to risk disrupting their transaction by challenging the plaintiff in court. These lawsuits are frustrating but avoidable. Below is an overview of the litigation in this area and how you can draft your disclosures to minimize the likelihood of becoming a target. How These Lawsuits Work When a company announces an acquisition, a plaintiff’s firm will review the disclosures and try to identify any relevant information the company has omitted. The firm will then file a lawsuit against the company and its board of directors, claiming the disclosures are inadequate to allow investors to make informed decisions on the acquisition. These claims come in various forms – chiefly as breach of the duty of candor and violations of Section 14(a) of the Securities Exchange Act of 1934. The plaintiff will ask the court to enjoin a vote on the transaction unless the company provides the additional information. Common Omissions Identified Most of the disclosures at issue in these suits fall within two categories: information related to the seller’s financial advisor’s fairness opinion, and disclosure of conflicts of interest. Plaintiffs regularly argue that shareholders require more detail regarding the fairness opinion to make an informed decision. This detail includes the projections underlying the opinion, fees paid to the financial advisor, and the methodology for valuing the business or certain assets. With regard to conflicts of interest, companies are targeted for failing to disclose affiliations between the target’s board and the buyer; promises of employment or board positions to current board members; and conflicts between the company, the board and the financial advisor. How Cases Are Resolved With the acquisition at risk, companies are in a difficult position. If they fight the preliminary injunction or move to dismiss the complaint, they risk delaying the acquisition as the court makes its decision. Plaintiffs’ lawyers offer an alternative: If the company makes the supplemental disclosures and pays the lawyers’ fees, the plaintiff will ‒ on behalf of all shareholders ‒ dismiss the suit and release the company and the board from any liability arising from the acquisition. Weighing these two options, most companies determine it makes more financial sense to settle the case. Some courts, particularly in Delaware, have been questioning the value of these suits to shareholders and refusing to approve plaintiffs’ counsel’s fee awards except in cases featuring clear omissions of obviously material information. Unfortunately, the pushback has not yet been strong enough to deter these suits altogether. Instead, plaintiffs’ firms are filing more complaints outside of Delaware, with California, New York and North Carolina becoming popular venues. How to Draft to Avoid Though these lawsuits are common, not all acquisitions prompt a disclosure-only lawsuit. The primary difference between transactions that are targeted and those that are not is the nature of the disclosures. Plaintiffs’ lawyers want sure things, which is why they focus their lawsuits on information that courts generally agree is important to shareholders: financial information and conflicts of interest. Companies and directors can reduce their exposure by providing more comprehensive disclosures of information in these two areas. While no two situations are identical, and it can be difficult to reconcile some of the decisions in this area, practitioners can find substantial guidance in the case law on how to address these matters in a manner that will discourage ill-founded claims. Authors: Jessie Gabriel and Molly Tranbaugh


Conflict Minerals Disclosure – New SEC Guidance May 3, 2017 On April 7, 2017, the Securities and Exchange Commission ("SEC") Division of Corporate Finance (the "Division") indicated that it will not recommend enforcement of the conflict minerals source and chain of custody due diligence, independent audit and Conflict Minerals Report requirements set forth in Item 1.01(c) of Form SD. The Division's newly-adopted stance is a reaction to the April 3, 2017 decision of the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. District Court") reaffirming its prior holding (discussed in more detail here) regarding the constitutionality of Section 1502 of the Dodd-Frank Act, which serves as the impetus for the conflict minerals rules. The D.C. District Court held that Section 1502 violates the First Amendment to the extent that it compels companies to disclose that their products "have not been found to be 'DRC-conflict free.'" SEC Acting Chair Michael S. Piwowar explained the Division's decision with the following statement: "The primary function of the extensive and costly requirements for due diligence on the source and chain of custody of conflict minerals set forth in paragraph (c) of Item 1.01 of Form SD is to enable companies to make the disclosure found to be unconstitutional. In light of the foregoing regulatory uncertainties, until these issues are resolved, it is difficult to conceive of a circumstance that would counsel in favor of enforcing Item 1.01(c) of Form SD." Importantly, the Division’s statements did not address enforcement of Items 1.01(a) and 1.01(b) of Form SD. This means that public companies subject to the conflict minerals disclosure requirements must still conduct a reasonable country of origin inquiry and file a Form SD. Generally, Item 1.01(a) requires public companies that manufacture products containing (i) gold (ii) cassiterite (tin), (iii) columbite-tantalite, (iv) wolframite (tungsten), or (v) derivatives of any of these minerals to conduct a good faith country of origin inquiry reasonably designed to determine whether any of those minerals originated in the Democratic Republic of the Congo or an adjoining country (collectively, the "DRC"), or are from recycled or scrap sources. Item 1.01(b) requires companies that are able to conclude based on this inquiry that their conflict minerals originated outside of the DRC or from recycled or scrap sources to include "Conflict Minerals Disclosure" in their Form SD filings and websites briefly describing the country of origin inquiry and its results. Item 1.01(c) applies to companies whose products “have not been found to be DRC-conflict free’,” requiring companies in that case to conduct the source and chain of custody due diligence, obtain an audit of that due diligence and include a Conflict Minerals Report as an exhibit to their Form SDs (and provided related website disclosure). If a public company that is subject to the conflict minerals disclosure requirements chooses not to comply with Item 1.01(c) in light of the Division’s position, we expect that the company would still describe its reasonable country of origin inquiry under “Conflict Minerals Disclosure” in its Form SD filing and on its website, regardless of the results of that inquiry. While the Division's guidance indicates that it will not recommend enforcement actions for failure to comply with Item 1.01(c), companies should note that a Form SD is considered “filed,” rather than simply “furnished,” under the Exchange Act, which could subject a company to a private right of action under Section 18 of the Exchange Act for failure to file the Item 1.01(c) information. In addition, companies will want to consider the scope of disclosure that they may want to voluntarily provide to their stakeholders, notwithstanding the Division’s guidance on Item 1.01(c). The deadline to file a Form SD for the 2016 reporting year is May 31, 2017. The House Financial Services Committee is set to unveil an updated version of the Financial CHOICE Act (“CHOICE Act 2.0”) in the coming weeks. A discussion draft released on April 19 suggests that CHOICE Act 2.0 will require policymakers to study the benefits of regulations versus their costs. Ultimately, this directive may result in further revisions to the conflict minerals rules. Authors: John J. Harrington and Janet A. Spreen


Notable Delaware Decisions: First Quarter 2017 May 2, 2017 The Delaware Chancery Court and Delaware Supreme Court were busy during the first quarter of 2017, handing down decisions touching on:

Required disclosure in a variety of settings – for standard-of-review “cleansing” purposes and appraisal notice purposes, and of financial advisors’ analyses and potential conflicts of interest

Merger agreement interpretation and breach

Master limited partnership agreement interpretation and the implied covenant of good faith and fair dealing

Board deadlocks, bad behaviors and remedies

A few other interesting things – demand futility and board inaction, director-removal requirements, standing for books and records demands, and more contract interpretation and enforcement

Many of these decisions yield useful insights for practitioners and boards. Disclosure Analyses The Delaware Court of Chancery continues to confirm that a fully informed, disinterested and uncoerced stockholder vote can reduce the merger-challenge standard of review from entire fairness or Revlon’s enhanced scrutiny to the business judgment rule, absent a controlling stockholder on the other side of the transaction or competing for consideration. Importantly, however, deficient disclosure or the presence of coercion will torpedo the cleansing effort. A lower level of disclosure can suffice for appraisal notice purposes, and disclosure regarding financial advisors’ analyses and their potential conflicts of interest never slips far from view. In re Solera Holdings, Inc. Stockholder Litigation, Court of Chancery, decided January 5, 2017:

Granted motion to dismiss merger challenge, holding that transaction otherwise subject to Revlon enhanced scrutiny review would be reviewed under business judgment rule (“waste”) standard because of approval by majority of fully informed, disinterested and uncoerced stockholders

Observed that alleged disclosure deficiencies must be pled initially by plaintiff, following which defendant bears the burden of proving that the deficiencies are immaterial in order to obtain the cleansing effect from vote

Confirmed long-standing Delaware law that the test of materiality of information is whether there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote, i.e., whether there is a substantial likelihood that it significantly alters the total mix of information made available

In re Merge Healthcare Inc. Stockholders Litigation, Court of Chancery, decided January 30, 2017:

Granted motion to dismiss merger challenge, holding that transaction otherwise subject to entire fairness review based on director conflicts would be reviewed under business judgment rule (“waste”) standard because of approval by majority of fully informed, disinterested and uncoerced stockholders

Observed that alleged disclosure deficiencies must be pled initially by plaintiff, following which defendant bears the burden of proving the deficiencies are immaterial, in order to obtain cleansing effect from vote, citing Solera

Explained that enhanced scrutiny and entire fairness review address agency problem arising from potentially divergent interests of stockholders (the owners) and directors (the agents), and that fully informed, disinterested, uncoerced stockholder vote ameliorates that problem

Noted that even if large target stockholders were “controlling,” their interests were aligned with other stockholders, obviating entire fairness review trigger arising from controlling stockholder status

Declined to consider whether disclosure-based claims must be brought initially pre-closing, rather than post-closing (as was the case here)

Confirmed long-standing Delaware law that the level of disclosure required of a financial advisor’s analysis is “an accurate description of the advisor’s methodology and key assumptions,” that it need not include all data necessary for investors to make an independent determination of fair value, and that information that is “of interest” but not “material” need not be disclosed


In re Saba Software, Inc. Stockholder Litigation, Court of Chancery, decided March 31, 2017 (revised April 11, 2017):

Rejected defendants’ attempt to invoke business judgment rule (instead of Revlon) review for challenged sale of company based on “cleansing” stockholder vote, holding that vote was neither fully informed nor uncoerced, and denied director defendants’ motion to dismiss

Observed that failure to seek to enjoin merger vote based on disclosure deficiencies did not preclude making post-closing disclosure claims

Confirmed that management projections, but not advisor-prepared projections, are material for merger vote purposes, and that requisite summary of banker’s work need be sufficient only for stockholders to comprehend, not re-create, the analysis

Found disclosure deficiency in failure to disclose why financial statement restatement had not been completed, as likelihood of completing restatement was material to evaluating alternatives to sale and restatement was a material assumption underlying projections; also found that that deficiency, and failures to disclose other alternatives and the likelihood of litigation over the discount-to-market merger price, undermined the cleansing effect of the stockholder vote

Coercion found in board placing stockholders in situation of having to vote with no information regarding alternatives, leaving them no practical alternative but to vote in favor of sale regardless of its economic merits, notwithstanding that proxy statement’s words and tone were neutral and nonthreatening

Found adequate allegations of director bad faith and duty of loyalty breaches premised on directors’ intent to secure personal benefits from sale (in the form of accelerated and cashed-out equity awards) that were material to them and not shared by stockholders generally

In re Columbia Pipeline Group, Inc. Stockholder Litigation, Court of Chancery, decided March 7, 2017:

In order dismissing merger challenge and challenge to the adequacy of proxy statement disclosure for stockholder vote “cleansing” purposes, observed that alleged disclosure deficiencies must be pled initially by plaintiff, following which defendant bears the burden of proving the deficiencies are immaterial, in order to obtain cleansing effect from vote

Confirmed materiality standard cited in Solera

Noted, in the context of allegations that the entire board was motivated by conflicted self-interest, that the duty of disclosure requires disclosure of facts, not a “self-flagellating” drawing of conclusions that an investor “can readily stitch together” by inference from those facts

Held that requisite “full” disclosure of investment banker compensation and potential conflicts in the merger context does not require disclosure of financial advisor positions that do not rise to the level of an actual conflict, and that disclosure is sufficient if information regarding such interests can be “min[ed]” from the advisor’s own public filings

Vento v. Curry, Court of Chancery, decided March 22, 2017:

Preliminarily enjoined buyer’s stockholders’ vote on merger approval because of inadequate disclosure of buyer’s financial advisor’s merger financing fee

Rejected defendant’s contention that investors could piece together the information from a table in the registration statement and a Form 8-K filed two months earlier, holding that disclosure is inadequate if the disclosed information is “buried” in the proxy materials and stating that investors “should not have to go on a scavenger hunt” for a complete picture of the advisor’s financial interests in a transaction

Contrast holding and analysis in (and absence of any reference in Vento to) March 7, 2017 Columbia Pipeline decision reviewed above

In re United Capital Corp. Stockholder Litigation, Court of Chancery, decided January 4, 2017:

Rejected request for quasi-appraisal remedy based on alleged breaches of duty of disclosure in connection with a Delaware General Corporation Law (DGCL) §253 short-form merger

Noted that DGCL §253 is designed to obviate entire fairness considerations and that, absent fraud or illegality, minority shareholder’s only recourse is appraisal

Held that disclosure required in short-form merger context is only of information material to deciding whether to seek appraisal, that providing information sufficient to calculate “fair value” is not required, and that 80-page merger notice (which included substantial process and financial information) was adequate


Merger Agreement Interpretation and Breach Analysis Like golf shots and baseball games, no two merger agreement interpretations or analyses of covenant compliance are exactly alike. But those exercises can yield valuable clues for conducting the next effort and for negotiating and drafting to minimize ambiguities. Shareholder Representative Services LLC v. Gilead Sciences, Inc., Court of Chancery, decided March 15, 2017:

Found a contract term that had dual meanings in the biotechnology field “reasonably or fairly susceptible of different interpretations,” and therefore ambiguous for purposes of determining whether a milestone payment was triggered

Held that if a contract is ambiguous, the court may consider extrinsic evidence and must uphold, to the extent possible, the “reasonable shared expectations” of the parties at the time of contracting

Considered, in choosing between the competing contract term meanings proffered by the parties, multiple merger agreement drafts, exchanged email and telephonic communications during the parties’ negotiations, slide presentations and regulatory materials exchanged during the negotiations, the parties’ conduct regarding the issue after closing and before the dispute arose, and the structure and operation of the agreement’s milestone provisions as a whole

The Williams Companies, Inc. v. Energy Transfer Equity, L.P., Delaware Supreme Court, decided March 23, 2017:

Upheld Delaware Court of Chancery decision that Energy Transfer Equity (ETE) could terminate its merger agreement with Williams, finding that while the Chancery Court had erred in analyzing whether ETE had breached its covenants to use “commercially reasonable efforts” to satisfy a tax opinion condition, and to use “reasonable best efforts” to consummate the merger, it had concluded properly that ETE had met its burden to show that any such breach did not contribute materially to the failure of that condition

Strong dissent challenged the focus and adequacy of the Chancery Court’s covenant-breach analysis, found that the Chancery Court had failed even to analyze whether the covenant breaches contributed materially to the failure of the condition, and cited numerous details in the record regarding the management and timing of relevant communications that suggested that ETE had worked actively to cause that failure

Master Limited Partnership Agreements and the Implied Covenant Disputes concerning conflict of interest transactions involving master limited partnerships remain fertile ground for the intricate parsing of contract terms and the applicability (or not) of the implied covenant of good faith and fair dealing. Dieckman v. Regency GPLP, Delaware Supreme Court, decided January 20, 2017:

In reversing Court of Chancery decision, found that neither the contractual conflict committee approval safe harbor nor the contractual unaffiliated unitholder approval safe harbor was available to protect a merger with an affiliate from challenge

Found that the implied covenant of good faith and fair dealing was well-suited to imply contractual terms that are so obvious – such as that a general partner may not engage in deceptive conduct to obtain contractual safe harbor approvals – that a drafter would not have needed to include them expressly

Observed that the implied covenant is invoked, as in this case, when one party acts arbitrarily or unreasonably in conflict with the other party’s reasonable contractual expectations

In re Energy Transfer Equity L.P. Unitholder Litigation, Court of Chancery, decided February 28, 2017:

Denied cross-motions for partial summary judgment in matter arising from issuance of convertible units to some but not all unitholders in connection with financing a proposed merger

Found that factual uncertainties regarding the composition and functioning of the contractual Conflicts Committee, and regarding the meaning of the undefined contractual term “distribution” in the context of the issuance of convertible units, required further development of the facts before any decision on the merits could be rendered


Brinckerhoff v. Enbridge Energy Company, Inc., Delaware Supreme Court, decided March 20, 2017:

In reversing Court of Chancery decision, found that general “good faith” provisions of a limited partnership agreement do not override specific affirmative obligations

Found that contractual “good faith” standard derives from contractual expression of standard of care rather than from corporate law waste principles, resulting here in bad faith being alleged sufficiently if accused general partner did not reasonably believe it was acting in the best interest of the partnership

Observed that contractual “fair and reasonable” standard for approving conflicted transactions is “similar, if not equivalent to entire fairness review” in the corporate context

Observed that reasonableness of general partner’s reliance on financial advisor as professionally qualified within the contractual standard could be challenged by challenging advisor’s methodology

Board Deadlocks and Bad Behavior Setting up a business based on romance, or with a high risk of deadlock, can lead to unpleasant outcomes. Shawe v. Elting, Delaware Supreme Court, decided February 13, 2017:

Upheld Court of Chancery’s order under Delaware’s custodian statute, DGCL §226, to appoint a custodian to sell the business at issue, on the ground that it was suffering from irreparable injury because of divisions between the directors that the stockholders were unable to resolve

Noted, after detailing examples of directors’ extensive bad behavior that undermined employees’ morale, that the sale remedy also was well-designed to protect nonshareholder constituencies, notably employees, by positioning the company to succeed

Lengthy dissent took issue with custodian’s ability to order sale of stock without stockholders’ consent Kleinberg v. Aharon, Court of Chancery, decided February 13, 2017:

Held that appointment of a custodian was warranted in light of a board deadlock that stockholders could not resolve because of voting agreement constraints, which resulted in actual or threatened irreparable injury to the corporation arising from the CEO’s increasingly erratic behavior

Appointed a custodian with power to vote as the seventh director and authority to take additional steps to resolve the deadlock

Noted, at relevant junctures, that a director cannot act by proxy, and that a chief executive officer may not act in a manner contrary to the express desires of the board of directors

Ensing v. Ensing, Court of Chancery, decided March 6, 2017:

Granted declaratory judgments negating former husband’s efforts to remove former wife as manager of LLCs, appoint himself as manager and transfer membership units to an entity under his control, all based on interpretation of the applicable LLC operating agreement

Found that former husband had violated interim orders, sought rulings under false pretenses and introduced forged documents, and ordered him to pay a portion of former wife’s litigation expenses

Other Interesting Things – Demand Futility and Board Inaction, Director Removal, Books and Records Demands, and More Contract Interpretation and Enforcement

Horman v. Abney, Court of Chancery, decided January 19, 2017:

Noted that to plead a claim based on board inaction, plaintiff must plead facts showing that directors acted inconsistently with their fiduciary duties of oversight (i.e., implementing systems and controls, and responding to evidence of corporate misconduct) and knew they were doing so

Noted that exposure to “a substantial likelihood of personal liability” is the type of personal interest (in this case, self-preservation) that would disqualify a director from responding to a demand

Held that plaintiffs did not plead that directors consciously failed to oversee the company’s compliance with legal obligations, and therefore failed to plead demand futility adequately

Cautioned plaintiff against conflating bad outcomes for the company and bad faith on the part of the board


Frechter v. Zier, Court of Chancery, decided January 24, 2017:

Held that Section 141(k) of the DGCL unambiguously permits holders of a majority of a corporation’s shares to remove directors with or without cause, and invalidated a bylaw purporting to require a 66 2/3% vote for removal

Weingarten v. Monster Worldwide, Inc., Court of Chancery, decided February 27, 2017:

Held that Section 220(c) of the DGCL unambiguously requires that one filing a complaint to compel inspection of corporate records under Section 220 must be a stockholder at the time the complaint is filed, not just at the time the initial demand is made

Simon-Mills II, LLC v. Kan AM USA XVI Limited Partnership, Court of Chancery, decided March 30, 2017:

In a wide-ranging contract interpretation case involving a call provision for which the electable exercise currency had disappeared, found that parties lacked meeting of the minds on a substitute currency, that the implied covenant of good faith and fair dealing could not be invoked to supply the missing term, and that the call right therefore could not be enforced

Reviewed in detail when extrinsic evidence can be invoked to interpret a contract, what types of evidence may be considered, and Delaware’s principles of contract interpretation

Found that the implied covenant of good faith and fair dealing exists to handle developments and contractual gaps that neither party anticipated, but that the parties here knew about the currency issue and engaged in “gamesmanship and strategic silence” regarding the issue rather than dealing with it, thus negating application of the implied covenant

Reviewed the distinction between material and immaterial contract breaches and available remedies for each under Delaware law

Author: Robert Weible

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Preparing for the 2018 Proxy Season - BakerHostetler · 2017-11-29 · Preparing for the 2018 Proxy Season 7 Peter Casey Executive Vice President Alliance Advisors LLC Peter oversees