Securities And Governance Updates – January 26, 2017

Author:Mr Patrick Hannon, John J. Harrington, Janet A. Spreen, Samuel F. Toth and Robert A. Weible

As part of BakerHostetler's commitment to serve as a strategic business partner, we are pleased to publish this first edition of our Securities & Governance Bulletin. This resource is designed to keep executives, corporate counsel and governance professionals apprised of regulatory and legal requirements affecting businesses with U.S. operations. We will continue to publish the Securities & Governance Bulletin periodically, as regulatory developments and business cycles warrant. If there are specific topics that you would like us to discuss from time to time, please forward your suggestions to


Proxy Season Updates Non-GAAP Update Dodd-Frank Executive Compensation and Reporting Rundown Section 16 Update — Rule 16b-3(e) Exemption Challenge Corporate Governance Considerations: Implications of 2016 Decision PROXY SEASON UPDATES

Proxy Access Developments SEC Focus on Proxy Card Details ISS and Glass Lewis Voting Policies Updates and Considerations for the 2017 Proxy Season Reminder: Say-on-Pay Frequency Vote Division of Corporation Finance No Longer Requires 7 Copies of Glossy Annual Report Proxy Access Developments

The adoption of proxy access bylaws has continued over the past year, and we expect that trend will continue. Several hundred companies, including a significant number of S&P 500 companies, have now adopted proxy access bylaws. The primary terms of proxy access bylaws generally have coalesced around the 3/3/20/20 formulation — shareholders who have beneficially owned 3% or more of the company's outstanding common stock continuously for at least three years (or a group of no more than 20 shareholders meeting such requirements) may include in the company's proxy statement a number of eligible director nominees equal to no more than 20% of the board (or, in some cases, the greater of two directors or 20% of the board). However, there continues to be significant variation in how the 3/3/20/20 formulation is implemented, and the secondary features of adopted bylaws and investor focus have begun to shift to some of these details. Below are some noteworthy developments related to proxy access in 2016.

SEC No-Action Relief on Rule 14a-8 Shareholder Proposals

During the 2016 proxy season, more than 40 companies obtained no-action relief from the staff of the Division of Corporation Finance (Staff) of the Securities and Exchange Commission (SEC), allowing those companies to exclude Rule 14a-8 shareholder proposals related to the adoption of proxy access as "substantially implemented" under Rule 14a-8(i)(10) if the company had adopted a proxy access bylaw that contained a variation of the now-standard 3/3/20/20 formulation, for the most part regardless of whether secondary terms matched the terms of the proponent's request. In granting no-action relief, the Staff expressed the view that each company's adoption of a proxy access bylaw containing these thresholds achieved the "essential objective" of the shareholder proposal.

However, the Staff has found the "substantially implemented" argument less persuasive when considering no-action requests to exclude shareholder proposals dealing with amendments to existing proxy access bylaws (also known as "fix-it" proposals). Features of fix-it proposals have included reducing the beneficial ownership threshold from 5% to 3%, increasing the number of board seats available for proxy access nominees, eliminating holding requirements beyond the annual meeting date, easing the requirements related to loaned shares and renominations, and eliminating caps on the number of shareholders permitted to aggregate holdings to reach the beneficial ownership threshold. A company that relies solely on a previously adopted proxy access bylaw and takes no further action in response to a fix-it proposal will generally not be able to exclude the proposal as substantially implemented.

On the other hand, a company may be successful if it amends its proxy access bylaws to address at least partially the issues raised in the fix-it proposal. For example, after receipt of a fix-it proposal, each of NVR Inc. and Oshkosh Corp. amended its existing proxy access bylaw to address some of the changes requested by the proponent, including lowering the required ownership threshold from 5% to 3%. The Staff granted no-action relief to each company under Rule 14a-8(i)(10), indicating that the companies' policies, practices and procedures compare favorably with the guidelines of the proposal, and therefore the companies had substantially implemented the proposal. In these situations, although the companies did not address all or even most of the issues raised by the proposal, they did make the significant change of lowering the beneficial ownership from 5% to the standard 3%, as well as some other changes.

How the Staff will deal with different fix-it proposals and company responses going forward remains to be seen, but it appears that the particular facts and circumstances will dictate the results.

First Proxy Access Nomination

For all the attention given to proxy access and the rapid adoption of it by companies in the past couple of years, until very recently, it had never been utilized by a shareholder to make a director nomination. Any shareholder that nominates a director pursuant to a company's proxy access bylaw must file a Schedule 14N with the SEC. On November 10, 2016, investment firm GAMCO Asset Management Inc. (GAMCO) filed the first — and to date, only — Schedule 14N with respect to a proxy access nomination for National Fuel Gas Co. (NFG). However, on November 23, 2016, in a letter to GAMCO publicly furnished as an exhibit to a Form 8-K, NFG objected to the nomination, citing noncompliance with a standard proxy access bylaw provision requiring that a shareholder utilizing proxy access represent that it (a) acquired the requisite shares "in the ordinary course of business and not with the intent to change or influence control" and (b) does not have that intent when making the nomination. The letter noted GAMCO's history of Schedule 13D filings and active pursuit of a spin-off strategy. Shortly thereafter, on November 28, 2016, GAMCO indicated in a Schedule 13D amendment that it would no longer pursue proxy access.

While it has become clear in the past year that many companies will provide proxy access to shareholders, it remains unclear how frequently it will be utilized by shareholders and how proxy access elections will play out.

Proxy Advisory Firms

When shareholder proposals regarding proxy access have been submitted to shareholder votes, they have been among the most successful shareholder proposals and generally receive significant support. Both Institutional Shareholder Services Inc. (ISS) and Glass, Lewis & Co. (Glass Lewis) generally support proxy access. ISS' 2017 voting guidelines state that ISS will generally recommend in favor of management or shareholder proposals on proxy access that have the following features: (i) 3% beneficial ownership, (ii) a holding period of no longer than three continuous years, (iii) minimal or no limits on the number of shareholders permitted to form a nominating group, and (iv) a cap on the number of proxy access nominee seats at no less than 25% of the board. The guidelines state that ISS will also review the reasonableness of any other restrictions on the right of proxy access. In the past, in the context of assessing responsiveness of a board after a shareholder proposal received majority support, ISS identified potentially and especially problematic proxy access provisions. The especially problematic provisions are treating individual funds in a fund family as separate shareholders and imposing any post-meeting ownership requirements.

Glass Lewis' voting guidelines indicate that it generally supports proxy access as a means to ensure that significant, long-term shareholders have an ability to nominate candidates to the board. However, it considers each proposal on a case-by-case basis. Specifically, the guidelines state that Glass Lewis considers specified minimum ownership and holding period requirements, as well as company size, performance and responsiveness.

For 2017, ISS' QualityScore (formerly QuickScore) now includes four newly weighted questions about proxy access, focusing on whether a company has implemented proxy access and, if so, on ownership threshold and duration, any cap on proxy access board members, and aggregation limits.

Interplay With Universal Proxy Cards

In October 2016, the SEC proposed rules that would create a "universal proxy card" system in nonexempt proxy solicitations for contested director elections. Read our alert describing the SEC's universal proxy card proposal. While the future of that rulemaking is uncertain in light of the administration change, for any companies that have adopted or are considering adopting proxy access, it is worth following developments and considering the potential impact of such a system and the interplay with proxy access bylaws.

Proxy access and a universal proxy card system are similar in that they expand the ways that a shareholder could gain access to the board or conduct a contested election, beyond the traditional proxy contest involving competing slates. However, the SEC's proposal makes clear the view that a universal proxy card system should not be viewed as a substitute for proxy access bylaw provisions. A proxy access bylaw can be viewed as providing a shareholder with access to the registrant's proxy card and proxy statement, alleviating for the shareholder the cost and burden associated with preparing and mailing a proxy statement and soliciting on its own card (although presumably the nominating shareholder would still bear costs associated with conducting a campaign to elect its nominees). Under the proposed universal proxy card system, on the other hand, the shareholder would, in effect, get access only...

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