Preparation for 2014 Fiscal Year-End SEC Filings And 2015 Annual Shareholder Meetings

As our clients and friends know, each year Mintz Levin provides an analysis of the regulatory developments that impact public companies as they prepare for their fiscal year-end filings with the Securities and Exchange Commission (the "SEC") and their annual shareholder meetings. This memorandum discusses key considerations to keep in mind as you embark upon the year-end reporting process in 2015.1.

For the first time in many years, there are no SEC rule changes that will affect the year-end reporting process. In 2014, the SEC did not propose any rules relating to corporate governance and disclosure under the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), and the "pay ratio" disclosure rules proposed by the SEC in September 2013 have not yet been finalized.2. However, even if the "pay ratio" rule is adopted this year, this additional disclosure will not be required until proxy statements are filed during the 2017 reporting season (covering the 2016 fiscal year).

Shareholder activism remains strong, and institutional shareholders are continuing to put pressure on companies to conduct their affairs in a more transparent manner, encouraging the adoption of governance policies that benefit shareholders, such as executive compensation clawbacks, stock ownership guidelines, and majority voting, and discouraging policies such as plurality voting, staggered boards and "poison pill" plans. As the largest public companies have adopted many of these corporate governance initiatives already, institutional investors are moving their attention to smaller companies that may historically have lagged in the adoption of shareholder-friendly governance features.

We will continue to update you on important changes in these areas. We are excited to report that we recently joined forces with our colleagues in our securities litigation group to launch a new blog, Securities Matters. The blog provides comprehensive coverage of all aspects of the federal and state securities laws and regulations, capital market trends and best practices, corporate governance matters, Delaware corporate law, developments in securities and shareholder litigation and SEC enforcement, and related topics. Please subscribe to our blog at www.securitiesmatters.com/subscribe to stay current on new developments.

We have addressed topics that we believe continue to be of interest to the 2015 reporting season in further detail below.

Say-on-Pay: Considerations for 2015. Shareholder support on say-on-pay resolutions continued to average above 90% across all companies in 2014. Say-on-pay continues to be perceived as a year-to-year item, in which success in past years is no guarantee of success in the current or future years, and companies should not become complacent about achieving the necessary support, even if they have enjoyed strong support in prior years. The advent of say-on-pay continues to cause companies to reevaluate their compensation-related disclosures in their proxy statements, in particular the Compensation Discussion & Analysis (CD&A) section, with both advocacy and disclosure in mind. In addition, issuer engagement with institutional shareholders has become an integral part of the say-on-pay process, with many companies reaching out to their largest shareholders in the months following the annual meeting to discuss pay practices.

Institutional Shareholder Services (ISS) continues to define the standard as to what constitutes a "passing" voting percentage on a say-on-pay proposal, with 70% of the vote deemed by them to be acceptable and not require a company to alter its compensation strategy to demonstrate a stronger link between pay and performance.

ISS has not changed the way it analyzes say-on-pay this year 3. and continues to recommend a vote against a say-on-pay proposal if:

there exists a significant misalignment between CEO pay and company performance (pay for performance); the company maintains significant problematic pay practices; or the board exhibits a significant level of poor communication and responsiveness to shareholders. In addition ISS will recommend a vote against or withhold from the members of a company's compensation committee and potentially the full board if:

there is no say-on-pay proposal on the ballot, and an against vote on a say-on-pay proposal would be warranted due to pay-for-performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof; the board fails to respond adequately to a previous say-on-pay proposal that received less than 70% support of votes cast; ISS looks at the following in evaluating whether a company has adequately responded: disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level of support; specific actions taken to address the issues that contributed to the low level of support; other recent compensation actions taken by the company; whether the issues raised are recurring or isolated; the company's ownership structure; and whether the support level was less than 50%, which would warrant the highest degree of responsiveness. the company has recently practiced or approved problematic pay practices, including option repricing or option backdating; or ISS views the situation as egregious. We continue to see a trend of companies including an executive summary at the beginning of the proxy statement in an effort to highlight key messages, clearly define the company's views on pay for performance, and ensure the company has a reasonable narrative to support its decisions for last year's pay. A trend of disclosing "realized" or "realizable pay" has also continued to assist shareholders in understanding the executive compensation value actually transferred during a fiscal year and ISS' standard research report now will generally show three-year realizable pay compared to the three-year granted pay for S&P 1500 companies. ISS will discuss realizable pay in its report when its quantitative analysis results in a "high or medium" concern that a company's compensation policies are not linked to overall corporate performance and will also look at realized and/or realizable pay at smaller companies to assist it in determining whether the company demonstrates a strong commitment to a pay-for-performance philosophy.4.

In assessing executive compensation boards of directors should continue to bear in mind that their ultimate goal is not to secure a successful say-on-pay vote, but rather to attract, retain and incentivize executives who will contribute to the long-term value of the company. Directors should understand the executive compensation guidelines that ISS and similar groups promote, but should not allow this to override their own judgments as to the compensation programs and policies that are best for their companies. Directors should participate with management in soliciting favorable say-on-pay votes from major shareholders in order to overcome a negative recommendation by ISS.5.

Class action law suits alleging that boards of directors breached their fiduciary duties by approving purportedly deficient proxy statement disclosure and claiming that shareholders need more information in order to cast an informed vote, typically with respect to equity compensation plan approvals, have continued but have not had much success in the courts. Plaintiffs typically bring these cases in state court and seek an injunction against the upcoming annual meeting until sufficient disclosure is provided in the proxy statement in order for shareholders to make an informed decision. The threat of an enjoined annual meeting has pushed many of these companies that have been sued into providing additional disclosures, thereby justifying a fee award to plaintiff's counsel. In many cases suits are never even filed as before filing a complaint plaintiff's counsel will send a demand letter to the company based on what it believes is misleading or omitted information in a proxy statement and at the same time post on its webpage that it is looking for plaintiffs. Many of these demand letters target smaller companies that do not spend their resources on expansive proxy disclosure. Unfortunately, many of these companies still end up paying a fee to plaintiff's counsel to prevent litigation from being filed and spend additional time and resources filing proxy supplements in response to plaintiffs' demands.

Therefore, companies with a low or negative say-on-pay vote and companies seeking authorization for new or additional shares to be issued pursuant to equity incentive plans should take a careful look at their disclosure to ensure that it complies with proxy statement disclosure requirements as well as consider enhanced disclosures to reduce the possibility of litigation. Many companies have boilerplate compensation policy language that is vulnerable to being exploited by plaintiffs and which is not necessary to provide an accurate and reasonable basis for a company's compensation decisions. Some of the cases recently filed have focused on compliance with Section 162(m) of the Internal Revenue Code of 1986 by stating claims that the per share limit set forth in the company's equity plan has been exceeded or that there was inadequate or incorrect disclosure with respect to this rule in the CD&A and/or in the equity plan disclosure as language with respect to Section 162(m) was not properly drafted.

New ISS Policy for Evaluating Equity Plan Proposals. ISS has changed the way it will evaluate equity compensation plan proposals. It has developed an equity plan scorecard (EPSC) whereby instead of only evaluating the shares to be authorized and voting against plans that it believes have egregious plan provisions, the new EPSC will base recommendations on a combination of factors related to (1) plan cost relative...