Proxy Access Momentum in 2016

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1 SIDLEY CORPORATE GOVERNANCE REPORT Overview... 1 The SEC s 10 Access Rule... 3 Recent Uptick in Shareholder Access Proposals... 3 Companies Targeted for Institutional Invesr Support for... 4 Advisory Firm Policies on... 7 Grounds for of Shareholder Proposals SEC Guidance on Excludability of Directly Conflicting Shareholder Proposals SEC Grants of -Action Relief for Substantially Implemented Access Proposals Voting Results on Proposals Adoption of Provisions And Typical Parameters A Moving Target Amendments Previously Adopted Provisions Potential Impact of on Corporate Governance... International Perspectives on Access Practical Considerations Appendix Select Terms of Access Provisions Adopted Since January 1, 15 Momentum in 16 Will Likely Become a Majority Practice Among Large Public Companies Within the Next Year June 27, 16 Through the collective efforts of large institutional invesrs, including public private pension funds, other shareholder proponents, shareholders are increasingly gaining the power nominate a portion of the board without undertaking the expense of a proxy solicitation. By obtaining proxy access (the ability include shareholder s in the comp s own proxy materials), shareholders will have yet another ol influence board decisions. Approximately 40 companies in the S&P 500 have now adopted proxy access. We expect that proxy access will become a majority practice among S&P 500 companies within the next year. As a follow-up our previous reports on proxy access, this update reflects recent developments on the pic, including: changes institutional invesr policies on proxy access, such as Vanguard lowering the ownership threshold for likely support from 5%, the willingness of the Securities Exchange Commission (SEC) grant no-action relief on the basis of substantial implementation companies seeking exclude proxy access proposals so long as the for 3 years ownership threshold in the comp s proxy access bylaw is consistent with the proposal, even if the bylaw otherwise deviates from the proposal s terms (e.g., nominating group size limit or the percentage of proxy access board seats), voting results on proxy access proposals so far in 16 the steady pace of proxy access bylaw adoptions the convergence ward stard key parameters (most commonly for 3 years for up of the board (at least 2 direcrs) with a nominating group size limit of ). We have also updated the Appendix which highlights, on a compby-comp basis, various terms of proxy access provisions adopted by 241 companies in 15 so far in 16, including the terms adopted by 123 companies since we published our last Sidley Corporate Governance Report on proxy access on January 14, 16. AMERICA ASIA PACIFIC EUROPE Sidley Sidley Austin refer affiliated partnerships as explained at 16 Affiliated Partnerships. All rights reserved. The firm claims a copyright in all proprietary copyrightable text in this article. Sidley Austin provides this information as a service clients other friends for educational purposes only. It should not be construed or relied on as legal advice or create a lawyer-client relationship. Atrney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are, 787 Seventh Avenue, New York, NY 10019, ; One South Dearborn, Chicago, IL 60603, ; 1 K Street, N.W., Washingn, D.C. 005,

2 Page 2 Snapshot of Provisions Adopted Since January 1, 15 (See the Appendix for these additional provisions, presented on a comp-by-comp basis) Prevalence of Selected Alternatives Shareholder Viewpoints* Advisory Firm Policies Council of Institutional Invesrs (CII) Position Duration / 3 years 232/241 (96%); included in SEC vacated rule 5% / 3 years 9/241 (4%) Nearly all favor Shareholder proposals more likely if comp adopts at 5% ISS Glass Lewis support CII supports views 5% as troublesome minee Greater of 2 or 151/241 (6) cap 57/241 (24%) Greater of 2 or 12/241 (5%) cap 21/241 (9%); included in SEC vacated rule Most favor - ISS Glass Lewis support If adopted after majority-supported, ISS may issue negative vote recommendations against direcrs if less than CII favors ability nominate at least two cidates minating limit 6/241 (2%); included in SEC vacated rule 50 1/241 (0%) 30 2/241 (1%) 25 8/241 () 215/241 (89%) 15 3/241 (1%) 10 5/241 (2%) 5 1/241 (0%) General consensus that limit of is reasonable Possibility of shareholder proposals seeking removal of limits ISS favors minimal or no limits If adopted after majority-supported, ISS may issue negative vote recommendations against direcrs if less than CII views limit as troublesome * Derived from publicly available voting policies as well as preferences expressed through engagement voting results. While proxy access has been the subject of s for several years, 15 was a tipping point, following the private ordering pattern of majority voting in uncontested direcr elections. The proposals request that the board amend the bylaws allow large, long-sting shareholders (or groups of shareholders) nominate direcrs include those s in the comp s own proxy statement related materials. The 15 proxy season saw a significant increase in the number of shareholder proxy access proposals shareholder support for such proposals (see box below), as well as an increased frequency of negotiation adoption of proxy access via board action including an accelerating trend wards board adoption without receipt of a. This trend continued in the first half of 16. access initiatives had limited levels of success prior 15. However, shareholder support started increase in 14 as proponents began focus on the for 3 years ownership requirement adopted by the SEC in its 10 rulemaking efforts (as described below). Key Highlights of Shareholder Proposal Voting Results* Shareholder Proposals (through June 24) Voted On Passed Average Support 34% 55% 51% * Data points in this report with respect proxy access proposals are derived from SharkRepellent.net, last accessed on June 24, 16. All voting results in this report are calculated on the basis of votes cast for the proposal divided by the sum of votes cast for against that proposal (not taking in account abstentions).

3 Page 3 In 15, with a major initiative from public pension funds led by New York City Comptroller Scott M. Stringer with encouragement from major invesrs, such as TIAA, the large institutional invesr industry group, the Council of Institutional Invesrs (CII), proxy access ok hold. Adding the momentum was the SEC s removal beginning in 15 of a key defense in the form of no-action relief in situations in which a comp intends put forward its own competing proposal. advisory firm policies that support proxy access discourage efforts defend against proxy access proposals added the momentum. Moreover, in August 14, the CFA Institute published a report discussing the potential economic benefits of proxy access; this report has been cited by Comptroller Stringer, CalPERS other proponents in their proposals. 1 In early 16, a business law professor published a policy brief criticizing the CFA Institute report as being deeply flawed urging that it not be used as support for mary proxy access. 2 The broad-based shareholder campaign for proxy access on a comp-by-comp basis, the momentum that continues accelerate among targeted companies other leading companies respond by taking action adopt proxy access (with or without first receiving a ), is reminiscent of the campaign several years ago for companies replace plurality voting with majority voting in the uncontested election of direcrs. Both issues relate the ability of shareholders influence the composition of the board, both campaigns show the power of concerted efforts at private ordering. THE SEC S 10 PROXY ACCESS RULE The SEC has unsuccessfully sought adopt a market-wide proxy access rule for decades. Most recently, in 10, the SEC adopted a proxy access rule (Exchange Act Rule 14a-11) that would have given shareholders the ability nominate cidates through the comp s proxy materials if a shareholder (or a group of shareholders without limit on the size of the nominating group) held of the comp s shares for at least three years. Under the rule, a nominating shareholder (or group of shareholders, with no limit on the size of the group) could nominate one proxy access direcr, or of the board, whichever is greater. Rule 14a-11 was adopted shortly after Section 971 of the Dodd-Frank Act confirmed the SEC s authority promulgate a proxy access rule. The SEC issued final rules mating proxy access in August 10, which were scheduled become effective in vember 10. In addition, the SEC also amended Exchange Act Rule 14a-8(i)(8) allow shareholder proposals relating proxy access certain other direcr election mechanisms. 3 In September 10, Business Roundtable the U.S. Chamber of Commerce challenged Rule 14a-11. In 11, the U.S. Court of Appeals for the District of Columbia Circuit vacated Rule 14a-11 on the grounds that the SEC had acted arbitrarily capriciously in promulgating the rule failing adequately assess its economic impact. 4 The SEC did not appeal the court s decision has not re-proposed proxy access rule since that decision; however, the amendment Rule 14a-8 described above became effective in September 11, thereby opening the door s seeking proxy access. 5 RECENT UPTICK IN SHAREHOLDER PROXY ACCESS PROPOSALS In public comments on the SEC s proposed Rule 14a-11, several commenters expressed the view that the matter should be left shareholders companies decide on a comp-by-comp basis through private ordering. 6 Private ordering may take place, for example, pursuant Section 112 of the Delaware General Law. 7 Fifteen companies adopted proxy access prior 15, including a few large companies, such as Hewlett- Packard Comp (now known as HP Inc.), The Western Union Comp Verizon Communications Inc., which each adopted proxy access after receiving a on the pic, as well as some companies that have since gone private. In addition, proxy access with a 5% for two years ownership threshold has been mary for companies incorporated in rth Dakota since 08; we are aware of one public comp that reincorporated rth Dakota several years ago with the stated purpose of taking advantage of this other

4 Page 4 shareholder-friendly provisions. 8 To date, no shareholder has included a direcr in the proxy materials of a U.S. comp pursuant a proxy access right. 9 The private ordering effort is now in full swing. Shareholder proposals seeking proxy access have been the defining feature of the proxy seasons. 115 shareholder proxy access proposals were submitted for the 15 proxy season, which was more than four times the number submitted for the 14 proxy season. Based on the success of private ordering efforts in 15, more than 0 shareholder proxy access proposals were filed for the 16 proxy season, well surpassing prior-year levels. The New York City Pension Funds, with approximately $160 billion under management, accounted for the majority of the proxy access proposals submitted for the 15 proxy season. In vember 14, Comptroller Stringer announced the Boardroom Accountability Project, targeting 75 companies with non-binding shareholder proxy access proposals. 10 The proposals request that the board adopt a bylaw give shareholders who meet a threshold of owning of the comp s sck for three or more years the right include their direcr cidates, representing up of the board, in the comp s proxy materials, with no limit on the number of shareholders that could comprise a nominating group. According Comptroller Stringer, the targeted companies were selected due concerns about the following three priority issues: Climate change (i.e., carbon-intensive coal, oil gas utility companies). Board diversity (i.e., companies with little or no gender, racial or ethnic diversity on the board). Excessive executive compensation (i.e., companies that received significant opposition their 14 sayon-pay votes). COMPANIES TARGETED FOR 16 On January 11, 16, Comptroller Stringer announced that the New York City Pension Funds exped the Boardroom Accountability Project by submitting proxy access proposals at 72 companies for the 16 proxy season companies that had received proxy access proposals from Comptroller Stringer s office in 15 were targeted again for 16 because they had not yet adopted proxy access at a ownership threshold (two companies that had adopted a 5% proxy access bylaw received a binding proposal for ). Another 36 companies were newly targeted for 16, with a focus on the New York City Pension Fund s largest portfolio companies, coal-intensive utilities companies selected due concerns about board diversity excessive CEO pay. The form of proxy access proposal submitted by Comptroller Stringer for the 16 proxy season did not differ substantively from the template submitted for the 15 proxy season except that it no longer specifically sought shareholder approval of proxy access bylaws. As of June 24, 16, 56 of the 72 companies targeted for 16 have adopted proxy access. 13 Companies that were targeted by the New York City Pension Funds for 16 are identified by an + in the Appendix. INSTITUTIONAL INVESTOR SUPPORT FOR PROXY ACCESS access is supported by m institutional invesrs, including the following: BlackRock will review proxy access proposals on a case-by-case basis generally support them provided that their parameters are not overly restrictive or onerous provide assurances that the mechanism will not be subject abuse by short-term invesrs, invesrs without a substantial investment in the comp, or invesrs seeking take control of the board. 14 California Public Employees Retirement System (CalPERS) indicated that proxy access was one of its strategic priorities for the 15 proxy season supported proxy access proposals at 100 companies in In February 16, CalPERS announced that proxy access will continue be a strategic priority in 16 that it will continue support s at the for 3 years

5 Page 5 threshold will issue adverse votes against direcr s at companies where proxy access proposals passed in 15 that implemented provisions that restrict or limit the use of proxy access. 16 Finally, CalPERS updated its Global Governance Guidelines in March 16 recommend that companies adopt proxy access at the for 3 years threshold nominate up of the board. 17 California State Teachers Retirement System (CalSTRS) supports proxy access at the for 3 years threshold, capped at a minority of board seats. 18 State Street Global Advisors will review proxy access proposals on a case-by-case basis evaluating the comp s specific circumstances the proposal s potential effect on shareholder value, taking in account the ownership thresholds holding duration proposed in the resolution, the binding nature of the proposal, the number of direcrs that shareholders may be able nominate each year, comp governance structure, shareholder rights board performance. 19 TIAA (formerly TIAA-CREF) wrote the 100 largest companies in which it invests in February 15, encouraging them adopt proxy access at the for 3 years threshold. In addition, TIAA submitted proxy access proposals at some companies for the 16 proxy season. T. Rowe Price supports proxy access proposals at the for 3 years threshold opposes significant impediments a proponent s ability aggregate holdings with other shareholders qualify for proxy access. For the 16 proxy season, T. Rowe Price added its Voting Policies that it will generally recommend votes against s amend existing proxy access bylaws if the comp s bylaw meets the for 3 years threshold does not impede aggregation. 21 United Brotherhood of Carpenters sent letters 50 companies in late 15 seeking a proxy access right in the event that the board refuses accept the resignation of an incumbent direcr who fails receive majority support. 22 The letters were sent companies with a majority voting stard a direcr resignation policy that had shareholder proxy access proposals on the ballots for their 15 annual meetings, whether or not those proposals received majority support. Vanguard announced in February 16 that it amended its proxy voting guidelines decrease the ownership threshold for likely support from 5%. Vanguard stated that the policy change was informed by engagement over the past year the critical mass of access adoption at the 3 percent ownership level by an increasingly wide range of companies. Vanguard will continue evaluate proxy access proposals on a case-by-case basis but will now generally support proposals at the for 3 years threshold, capped at of board seats. 23 Fidelity generally votes against management s adopt proxy access. 24 Several institutional invesrs have recently adopted proxy access, shedding light on the terms they presumably find acceptable. 25 The table below shows the key parameters of the proxy access provisions adopted by major institutional invesrs since late 15. All were adopted by the board by unilateral bylaw amendment, except where otherwise indicated.

6 Page 6 Institution Duration minee (Max minating The Bank of New York Mellon Corp. (adopted on 10/13/15) for 3 years (at least 2 direcrs) BlackRock, Inc. (approved by shareholders adopted on 5/25/16) for 3 years The Goldman Sachs, Inc. (adopted on 10/23/15) for 3 years (at least 2 direcrs) 15 JPMorgan Chase & Co. (adopted on 1/19/16) for 3 years (at least 2 direcrs) Morgan Stanley (adopted on 10/29/15) for 3 years (at least 2 direcrs) State Street (adopted on 10/15/15) for 3 years T. Rowe Price, Inc. (adopted on 12/10/15) for 3 years (at least 2 direcrs) CII has long supported proxy access, favoring a broad-based SEC rule imposing proxy access. Absent such a rule, Section 3.2 of CII s Corporate Governance Policies states that a comp should provide access management proxy materials for an invesr or a group of invesrs that have held in the aggregate at least of the comp s voting sck for at least two years, nominate less than a majority of the direcrs. 26 In August 15, CII issued guidelines setting forth what it considers best practices for companies adopting proxy access provisions. The guidelines highlight seven provisions that CII finds troublesome in that they could significantly impair shareowners ability use proxy access, or even render access unworkable. 27 The provisions that are of most concern CII are: An ownership threshold of 5%. The percent or number of board members that may be elected could result in fewer than two proxy access s. Aggregation of shareholders form a nominating group is limited a specified number. t counting loaned shares (that meet certain conditions with respect recall voting) ward the ownership threshold during the holding period. A requirement for a nominating shareholder continue hold the requisite percentage of shares after the annual meeting. Re-nomination restrictions in the event a proxy access fails receive a specified minimum percentage of votes. s on third-party compensation arrangements with proxy access s (although CII supports disclosure of such arrangements). When the guidelines were issued, the interim executive direcr of CII stated that every proxy access provision in effect at the time included at least one of these troublesome provisions. 28 Some institutional invesrs that favor proxy access coordinated their efforts during the 15 proxy season in an attempt increase invesr support for the proxy access proposals they sponsored. Specifically, the New York City Pension Funds, CalPERS other large labor-affiliated pension funds each filed Form PX14A6Gs with the SEC enabling them communicate in support of their proxy access proposals (but not collect actual proxies)

7 without such communications being subject the proxy solicitation rules. The New York City Pension Funds partnered with CalPERS again in 16 conduct exempt solicitations in support of proxy access proposals. Page 7 According a report on the 15 proxy season by Broadridge PricewaterhouseCoopers, institutional invesrs are four times more likely support proxy access than are individual invesrs: 61 votes cast by institutional invesrs were in favor of proxy access in the first half of 15, compared with only 15 those cast by individual retail invesrs. 29 The report also indicated that retail invesrs voted only 28 the shares they own. These findings suggest that companies facing a proxy access vote should seek out opportunities engage with retail invesrs encourage them vote. PROXY ADVISORY FIRM POLICIES ON PROXY ACCESS Both Institutional Shareholder Services (ISS) Glass, Lewis & Co. generally favor proxy access for significant, long-term shareholders. ISS Shareholder Management Proposals ISS generally recommends in favor of shareholder management proxy access proposals with all of the following features: An ownership threshold of not more than of the voting power. A holding period of no longer than 3 years of continuous ownership for each member of the nominating group. Minimal or no limits on the number of shareholders that may form a nominating group. A cap on the number of available proxy access seats of generally of the board. 30 ISS will review additional restrictions for reasonableness. ISS will generally recommend a vote against proposals that are more restrictive than the ISS guidelines. ISS policy does not specifically address how it evaluates competing shareholder management proposals. In 16, ISS recommended votes in favor of the s for the management proposals with ownership thresholds but against the management proposals with 5% ownership thresholds. In 15, ISS recommended in favor of the shareholder proposals against the management proposals, as described below. Board Responsiveness a Majority-Supported Shareholder Proposal 31 ISS issued FAQs in December 15 clarifying when it may issue negative vote recommendations against direcrs of companies that do not implement a majority-supported shareholder proxy access proposal substantially in accordance with its terms. 32 In evaluating a board s response a majority-supported proposal, ISS will examine: Whether the major points of the were implemented. Additional provisions that were not included in the in order assess whether such provisions unnecessarily restrict the use of a proxy access right. ISS may recommend votes against individual direcrs, nominating/governance committee members or the entire board if the proxy access provision implemented or proposed by management contains material restrictions more stringent than those included in the with respect the following: thresholds above. duration longer than 3 years.

8 Page 8 Aggregation limits below shareholders. on proxy access s set at less than of the board. ISS may issue negative vote recommendations against direcrs if the aggregation limit or cap on proxy access s differs from the terms of the the comp has not disclosed its shareholder outreach efforts engagement. If the proxy access provision contains restrictions or conditions on proxy access s, ISS will review it on a case-by-case basis consider the following restrictions as potentially problematic, particularly when used in combination: s on resubmission of failed s in subsequent years. on third-party compensation of proxy access s. on the use of proxy access proxy contest procedures for the same meeting. How long under what terms an elected shareholder will count wards the maximum number of proxy access s. When the right will be fully implemented accessible qualifying shareholders. ISS views the following restrictions as especially problematic in that they effectively nullify the proxy access right : Counting individual funds within a mutual fund family as separate shareholders for purposes of an aggregation limit. The imposition of post-meeting shareholding requirements for nominating shareholders. ISS policy does not address the unilateral adoption or amendment of proxy access bylaws. minees The FAQs ISS issued in December 15 also clarify that when evaluating proxy access s, it will take in account relevant facrs, including: minee/nominar specific facrs: - minars rationale. - minars critique of management/incumbent direcrs. - minee s qualifications, independence overall fitness for direcrship. Comp specific facrs: - Comp performance relative its peers. - Background the contested situation (if applicable). - Board s track record responsiveness. - Independence of direcrs/s. - Governance profile of the comp. - Evidence of board entrenchment. - Current board composition (skill sets, tenure, diversity, etc.). - Ongoing controversies, if.

9 Page 9 specific facrs: - Whether the number of s exceeds the number of board seats. - Vote stard for the election of direcrs. Beginning in vember 15, ISS QuickScore governance ratings product has tracked, on a zero-weight basis, whether a comp has adopted proxy access. In particular, ISS tracks the minimum ownership threshold holding period, the maximum number of shareholders that can comprise a nominating group the maximum percentage or number of board seats open proxy access s. 33 Glass Lewis Glass Lewis proxy voting policies for 16 provide that it will review on a case-by-case basis shareholder proxy access proposals the comp s response, including whether the comp offers its own proposal in place of, or in addition, the. Glass Lewis will consider: Comp size. Board independence diversity of skills, experience, background tenure. The shareholder proponent the rationale for the proposal. The percentage of ownership requested the holding period requirement (although note that Glass Lewis policy does not specify a preferred percentage). The shareholder base in both percentage of ownership type of shareholder (such as a hedge fund, activist invesr, mutual fund or pension fund). Board management responsiveness shareholders, as evidenced by progressive shareholder rights policies (such as majority voting or board declassification) reaction s. Comp performance steps taken improve poor performance (such as appointing new executives or direcrs or engaging in a spin-off). Existence of anti-takeover protections or other entrenchment devices. Opportunities for shareholder action (such as the ability act by written consent or the right call a special meeting). Beginning with the 16 proxy season, Glass Lewis considers the following facrs when making vote recommendations with respect conflicting management s: The nature of the underlying issue. The benefit shareholders from implementation of the proposal. The materiality of the differences between the terms of the conflicting proposals. The appropriateness of the provisions in the context of a comp s shareholder base, corporate structure other relevant circumstances. A comp s overall governance profile, specifically, its responsiveness shareholders as evidenced by its response previous s its adoption of progressive shareholder rights provisions (which Glass Lewis has not defined). 34

10 Page 10 GROUNDS FOR EXCLUSION OF SHAREHOLDER PROXY ACCESS PROPOSALS Under the SEC s proxy rules, a comp may exclude a shareholder proxy access proposal from its proxy materials if the proposal fails meet of the procedural substantive requirements of Exchange Act Rule 14a-8. A comp may seek no-action relief from the Staff of the SEC s Division of Finance (SEC Staff), pursuant which the comp can exclude the proposal from its proxy materials. Two substantive grounds that have been relied on by companies seeking exclude a shareholder proxy access proposal are that the proposal directly conflicts with a management proposal (Rule 14a-8(i)(9)) or has already been substantially implemented by the comp (Rule 14a-8(i)(10)). However, as discussed below, the SEC Staff issued guidance in the Fall of 15 that has made it more difficult for a comp obtain no-action relief under Rule 14a-8(i)(9) on the grounds that a shareholder proxy access proposal directly conflicts with a management proxy access proposal. Therefore, companies that have adopted proxy access have argued substantial implementation when seeking exclude proxy access proposals from their 16 proxy statements have generally been successful as discussed below. Directly Conflicting Proposals In December 14, the SEC Staff granted no-action relief Whole Foods Market, Inc. on the basis that a for 3 years shareholder proxy access proposal directly conflicted with a 9% for 5 years management proposal. 35 When Whole Foods filed its preliminary proxy statement with the SEC after this relief was granted, the ownership threshold in the management proposal was reduced from 9% 5%. In the wake of the no-action relief granted Whole Foods, it was broadly expected that companies would counter shareholder proxy access proposals by putting forward management proxy access proposals with higher minimum ownership thresholds, obtain no-action relief on the basis that the proposals were conflicting therefore excludable. However, following the grant of no-action relief Whole Foods, James McRitchie, the proponent of the Whole Foods proposal, appealed the grant the full SEC a letter-writing campaign by incensed institutional invesrs followed. In January 15, SEC Chair Mary Jo White reversed course. In an unusual development, Chair White directed the SEC Staff review Rule 14a-8(i)(9) as a basis for exclusion. As discussed in a previous Sidley Update, 36 following Chair White s direction, the Division of Finance announced that it would express no view on the application of Rule 14a-8(i)(9) for the remainder of the 15 proxy season in connection with all shareholder proposals not just those seeking proxy access withdrew the no-action relief previously granted Whole Foods. 37 Business Roundtable other commentars expressed concern that the SEC s approach forced companies faced with a shareholder proxy access proposal that are considering a management proposal either include the in the proxy materials, even though it will compete with the similar management proposal possibly lead confusion, or omit the, creating a heightened risk of litigation negative targeting by certain pension funds proxy advisory firms. As described below, seven companies included competing shareholder management proxy access proposals on the ballot in 15 five companies have done so in 16 date. In a speech in June 15, SEC Chair White noted that, notwithsting concerns that shareholders would be confused by two competing proposals, shareholders were able sort it all out express their views. 38

11 Page 11 SEC GUIDANCE ON EXCLUDABILITY OF DIRECTLY CONFLICTING SHAREHOLDER PROPOSALS On Ocber 22, 15, the SEC Staff issued Staff Legal Bulletin. 14H (CF) (SLB. 14H) 39 which provided new guidance on the excludability of s that directly conflict with management proposals under Rule 14a-8(i)(9). As discussed in a previous Sidley Update, 40 after reviewing the hisry intended purpose of Rule 14a-8(i)(9) per SEC Chair White s request, the SEC Staff announced in SLB. 14H that it will interpret the rule more narrowly than it has in the past. The SEC Staff will permit a comp exclude a as directly conflicting with a management proposal only if a reasonable shareholder could not logically vote in favor of both proposals, i.e., a vote for one proposal is tantamount a vote against the other proposal. A non-binding seeking proxy access on terms different from management s proxy access proposal will generally not be excludable under Rule 14a-8(i)(9). Proposals seeking a similar objective (e.g., proxy access) but on different terms (i.e., a different means of accomplishing the same objective) would not directly conflict, as a reasonable shareholder could logically vote in favor of both proposals. SEC Staff Example of Proposals That Do t Directly Conflict Management proposal with a 5% for 3 years ownership threshold limit on s of 10 the board Shareholder proposal with a for 3 years ownership threshold limit on s of of the board The SEC Staff does not believe that a reasonable shareholder would logically vote for two binding shareholder management proposals that contain two mutually exclusive mates. In the case of such a direct conflict, the SEC Staff could, in its no-action response, allow a shareholder proponent revise its proposal make it non-binding rather than binding, therefore potentially not excludable under Rule 14a-8(i)(9). In light of the new guidance, competing proxy access proposals continued appear on ballots during the 16 proxy season. In a situation where both the management s are approved by shareholders, the board may have consider the effects of both proposals; the SEC Staff does not consider such a decision represent the kind of direct conflict the rule was designed address. In SLB. 14H, the SEC Staff noted that, minimize concerns about shareholder confusion, comp that includes shareholder management proposals on the same pic on its ballot can include proxy statement disclosure explaining the differences between the two proposals how the comp would expect consider the voting results. Substantially Implemented Proposals Companies that adopt proxy access can seek omit a shareholder proxy access proposal on the grounds that it has been substantially implemented by the comp. In March 15, the SEC granted General Electric Comp no-action relief allowing it exclude a shareholder proxy access proposal on these grounds. The had sought an ownership threshold of for 3 years, for up of the board s seats but was silent on the number of shareholders that could comprise a nominating group. General Electric adopted a provision with the same for 3 years threshold for up of board seats, but limited the number of shareholders that could compromise a nominating group. 41 Substantial implementation under Rule 14a-8(i)(10) has been the primary basis of exclusion being asserted by companies when seeking no-action relief exclude shareholder proxy access proposals received for their 16 annual meetings. A number of companies that adopted proxy access on relatively stard terms sought exclude proposals filed by John Chevedden arguing that their proxy access bylaws implement the essential objectives of his proposal even though his proposal contains (i) a higher percentage of board seats available proxy access s (), (ii) no limit on the size of the nominating group (iii) no restrictions on proxy access s that are not also applicable other direcr cidates.

12 Page 12 SEC GRANTS OF NO-ACTION RELIEF FOR SUBSTANTIALLY IMPLEMENTED PROXY ACCESS PROPOSALS In the first half of 16, the SEC Staff has granted no-action relief 35 companies that sought exclude shareholder proxy access proposals from their 16 proxy statements on the grounds that they had been substantially implemented by the comp. Each of the companies had adopted a proxy access bylaw with a for 3 years ownership threshold mirroring the threshold requested by the proponent, even though the compadopted proxy access bylaw deviated from the specific terms of the shareholder proxy access proposal in various other respects. In February 16, the SEC Staff denied no-action relief three companies that implemented proxy access with a different ownership threshold (5%) than that sought by the proponent (). See our previous Sidley Update for more information. 42 The SEC Staff s responses provide clarity companies concerning their ability exclude shareholder proxy access proposals by adopting their own proxy access provisions. It suggests that companies have some flexibility adopt proxy access bylaws tailored their particular circumstances so long as they track the ownership threshold duration set forth in the proposal. Based on the recent SEC Staff determinations, no-action relief will be available even if the comp s proxy access bylaw (i) includes a limit on the number of shareholders that may aggregate form a nominating group (e.g., versus an unlimited number per the terms of the proposal) or (ii) includes a lower percentage or number of board seats available proxy access s than specified in the proposal (e.g., (rounding down) versus the greater of of the board or two per the terms of the proposal). Even the companies that were granted no-action relief this year should bear in mind that shareholders may submit proposals in the future seeking modify the terms of their proxy access bylaws. For example, James McRitchie, the proponent at Whole Foods several other companies that have since adopted proxy access, has expressed his disappointment with the recent SEC response letters, specifically the SEC Staff s apparent conclusion that the provision in his template proposal explicitly providing for no nominating group size limit is not an essential element of the proposal. He has vowed file binding bylaw resolutions in the future at companies that have adopted what he considers be proxy access lite bylaws in an effort obtain the same robust proxy access promised under vacated Rule 14a-8(i)(10). 43 McRitchie s initial attempts reform proxy access lite saw a setback when his proposal failed receive majority support at Apple s annual meeting in February 16 (it received 3 support). His proposal had sought amend Apple s existing proxy access bylaw remove the group size limit of increase the number of board seats applicable proxy access s from the greater of or two direcrs. It is possible that others will join McRitchie in submitting future s that specifically seek removal of the nominating group size limit or other modifications. The public pension funds led by New York City Comptroller Stringer have also expressed concerns about certain unworkable proxy access provisions adopted date, including provisions which limit the number of shareholders who can aggregate form a nominating group. 44 Comptroller Stringer s template proxy access proposals for do not limit the number of shareholders that can comprise a nominating group. VOTING RESULTS ON PROXY ACCESS PROPOSALS Key Highlights of Shareholder Proposal Voting Results Shareholder Proposals (through 6/24) Voted On Passed Average Support 34% 55% 51%

13 Page 13 Shareholder Proposals Seventy-six shareholder proxy access proposals have been voted on so far in 16, averaging support of approximately 50.5 votes cast. Half of the proposals received majority support, while half did not pass. The decline in average support in 16 compared 15 reflects the fact that several targeted companies had adopted proxy access prior their 16 annual meetings. Average support at the 38 companies where proxy access proposals passed was 69%. ISS supported all but one of the s. ISS recommended against the at CSP, Inc. because its greater of or two direcrs provision would have enabled a shareholder gain control of 40 the comp s five-member board. Management recommended against all but five of the s. 45 Ninety-one shareholder proxy access proposals were voted on in 15, averaging support of approximately 55% of votes cast; 55 proposals (60%) received majority support while 36 (40%) did not pass. Management opposed all but four of the proposals; it supported three of the proposals provided no recommendation with respect one proposal. ISS supported all of the s, most of which included a for 3 years ownership threshold (such as Comptroller Stringer s proposals). 46 Voting results on shareholder proxy access proposals appear have been influenced by various facrs: Facrs Increasing Shareholder Support competing management proxy access proposal on the ballot Comp did not adopt proxy access prior the meeting Less insider ownership Less voting retail shareholders Combative ne of corporate disclosure around proxy access concept Concerns relating corporate performance, shareholder rights /or compensation Facrs Decreasing Shareholder Support Competing management proxy access proposal on the ballot Comp adopted proxy access prior the meeting; significantly lower support if previously adopted at ownership threshold Greater degree of insider ownership More voting retail shareholders More conciliary/open ne of corporate disclosure around proxy access concept Lack of concern relating corporate performance, shareholder rights /or compensation Management Proposals Twenty management proxy access proposals have been voted on so far in 16, averaging support of 87 votes cast. Sixteen proposals (80%) passed while four () did not pass. Of the four management proposals that failed, two were competing with s with (rather than 5%) ownership thresholds that passed one received majority support but fell short of the comp s 80% supermajority vote requirement. ISS recommended votes in favor of 17 of these proposals (which followed the for 3 years formulation) against three of these proposals (two of which included a 5% for 3 years ownership threshold one of which specified an aggregation limit of only 10 shareholders). Twelve management proxy access proposals were voted on in 15, averaging support of 62 votes cast. Seven proposals (58%) passed while five (42%) did not pass (including one that received majority support but fell short of the comp s supermajority vote requirement). ISS recommended votes in favor of five of these proposals (which followed the for 3 years formulation) against seven of these proposals (six of which included a 5% for 3 years ownership threshold; one included a for 3 years threshold (as discussed below)).

14 Page 14 Competing Shareholder Management Proposals So far in 16, shareholders have voted on competing proxy access proposals at five companies, including two companies (Chipotle Mexican Grill Inc. SBA Communications ) where competing proposals were also on the ballots for the 15 annual meeting. As shown in the table below, in 16 the management proposal passed at three companies the passed at two companies. At three companies ISS recommended votes in favor of both proxy access proposals indicating that the proposals are not mutually exclusive that strong support for the could convey the board a preference for a proxy access right without a limit on share aggregation, one that does not contain added restrictions. Comp Chipotle Mexican Grill, Inc. Shareholder Proposals Parameters ISS Rec. % Support 57.4 Cummins Inc. 3 years 31.6 cap For Kate Spade & limit 22.6 Comp on size of nominating Knight group Transportation, 22.3 Inc. SBA Communications Average % Support Amend bylaw reduce 5%, increase cap eliminate limit of 10 For Competing Proposals Management Proposals Parameters 5% 3 years cap limit of (Binding) 3 years cap (at least 2) limit of (Advisory) 3 years cap (at least 2) limit of (Binding) 3 years cap (at least 2) limit of (Binding) Approval of existing bylaw: 5% 3 years cap (at least 1) limit of 10 ISS Rec. % Support Subsequent Adoptions Against 23.7 N/A For 97.1 N/A For 81.8 For 93.7 Against Adopted on 5/19/16 3 years cap (at least 2) limit of Adopted on 5/12/16 3 years cap (at least 2) limit of Previously adopted on 7/28/15 5% 3 years cap (at least 1) limit of 10 At seven companies shareholders voted on two proxy access proposals at the 15 annual meeting a with a ownership threshold a management proposal with an ownership threshold of 5% (at six companies) or (at one comp). ISS recommended in favor of all seven s. ISS recommended against all seven management proposals, including at the one comp which proposed a for 3 years threshold but imposed more restrictive terms than the. Specifically, the management proposal at that comp included a cap of of board seats (compared with a cap in the ) a limit of shareholders in the nominating group (compared with no limit in the ). As shown in the table below, the management proposal passed at three companies, the passed at three companies, neither proposal passed at one comp there were no instances where both proposals passed. As noted above, SEC Chair White stated in June 15 that, despite the concerns of some commentars, there did not appear be shareholder confusion with respect competing proposals.

15 Page Competing Proposals Comp The AES Chipotle Mexican Grill, Inc. Cloud Peak Energy Inc. Exelon Expedirs International of Washingn, Inc. SBA Communications Visteon Average % Support Shareholder Proposals Parameters 3 years cap limit on size of nominating group ISS Rec. For All % Support Management Proposals Parameters 5% 3 years cap moniring peers soliciting shareholder input when fixing limit (Advisory) 5% 3 years cap limit of (Binding) 5% 3 years 10% cap limit of 1 (Binding) 5% 3 years cap limit of (Advisory) 3 years cap limit of (Advisory) 5% 3 years cap limit of 10 (Advisory) 5% 3 years cap moniring peers soliciting shareholder input when fixing limit (Advisory) ISS Rec. Against All % Support 36.2 Subsequent Adoptions Adopted on 11/25/15 3 years cap limit of 34.7 N/A Adopted on 10//15 3 years cap (at least 1) limit of Adopted on 4/26/16 3 years cap (at least 2) limit of Adopted on 5/13/16 3 years cap limit of Adopted on 7/28/15 5% 3 years cap (at least 1) limit of 10 Adopted on 6/10/16 3 years cap (or if <10 direcrs) limit of ADOPTION OF PROXY ACCESS PROVISIONS AND TYPICAL PARAMETERS Since January 1, 15, 241 companies have adopted proxy access, they have done so in a range of circumstances as described in the Appendix. All companies adopted proxy access in their bylaws except for one comp, which incorporated it in the certificate of incorporation upon its spin-off, another comp that amended both its certificate of incorporation bylaws provide for proxy access. Approximately 40 companies in the S&P 500 have now adopted proxy access. Sixty-one companies adopted proxy access without having received a known shareholder proxy access proposal this trend is accelerating. The uptick in adoptions is also attributable negotiated settlements with shareholder proponents board responsiveness majority-supported s in light of the ISS FAQs discussed above. 80 Pace of Adoptions Pre Jan/Feb Mar/Apr Mar/Apr May/Jun May/Jun Jul/Aug Jul/Aug Sep/Oct Sep/Oct v/dec v/dec Jan/Feb Jan/Feb Mar/Apr Mar/Apr May/Jun 16

16 Page 16 The Appendix highlights the key parameters of the proxy access provisions adopted since January 1, 15, including the minimum ownership threshold, maximum percentage of board seats open proxy access s maximum number of shareholders that can comprise a nominating group. While market practice continues develop, the proxy access provisions adopted by companies since January 1, 15 include several elements that have emerged as typical, although there are some variations. The majority of proxy access provisions adopted in the first half of 16 include the following terms: for 3 years for up of the board (at least 2 direcrs) with a nominating group size limit of. The Appendix also highlights select terms relating the treatment of loaned shares, post-meeting ownership requirements, third-party compensation arrangements, nomination deadlines, exclusion of proxy access s if a direcr has been nominated under the advance provision, creeping control limitations re-nomination restrictions. In addition, proxy access provisions delineate various procedural informational requirements, proxy access eligibility conditions circumstances in which a comp will not be required include a proxy access in its proxy materials. A MOVING TARGET AMENDMENTS TO PREVIOUSLY ADOPTED PROVISIONS At three companies that adopted a proxy access bylaw in 15 prior the annual meeting, their respective boards subsequently amended the bylaws after shareholder proxy access proposals with less restrictive terms passed at the annual meetings. Specifically, CF Industries Holdings, Inc., Marathon Oil The Priceline Inc. amended their proxy access bylaws (i) decrease the required ownership percentage from 5% (ii) change the maximum percentage of board seats available proxy access s from. Amendments The Priceline Inc. s bylaw also eliminated the shareholder limit on forming a group for purposes of meeting the required ownership percentage made other modifications. Several other companies have amended their proxy access bylaws in recent months, including Cloud Peak Energy, Inc., Hasbro, Inc., HCP, Inc., Honeywell International Inc., Monsan Comp, rthrop Grumman, NVR, Inc., Pioneer Natural Resources Comp Regency Centers. Some of the companies stated that the amendments resulted from shareholder outreach evolving market practices, but they were presumably also in response ISS s new policy with respect board responsiveness a majoritysupported proxy access proposal which could have impacted direcr elections at 16 annual meetings. Several of the amendments directly addressed provisions that ISS views as problematic by: Clarifying that certain related funds will count as one shareholder for purposes of the applicable shareholder group size limit. longer requiring the requisite number of shares be held for one year after the annual meeting. Explicitly counting loaned shares ward the ownership threshold or extending the time by which loaned shares can be recalled in order count ward the threshold from 3 5 business days. Requiring disclosure of third-party compensary arrangements but no longer prohibiting them. longer restricting the re-nomination of a proxy access who failed receive at least support in the past two years. longer including a creeping control limitation which would have banned a successful nominating shareholder from using proxy access for two years. The amendments by HCP, Inc. NVR, Inc. also decreased the required ownership percentage from 5%. Cloud Peak Energy, Inc. s amendments its proxy access bylaw in May 16 increased the maximum number of proxy access s eliminated several restrictions conditions on the proxy access right, including removing the cap on the number of shareholders which may aggregate their shares meet the ownership threshold.