Proxy Access Now a Mainstream Governance Practice

Transcription

1 SIDLEY CORPORATE GOVERNANCE REPORT w a Mainstream Governance Practice 65 of S&P 500 Companies Have Adopted February 1, 18 Overview... 1 The SEC s 10 Rule... 3 Shareholder Proposals... 4 First Attempt at Using Promptly Withdrawn... 4 Emergence of Fix-It Proposals Seeking to Amend Existing Bylaws... 6 Institutial Investor Support for... 6 Advisory Firm Policies ISS Negative Vote Recommendatis Against Directors ISS QualityScore Factors Relating to Grounds for Exclusi of Shareholder Proposals SEC Staff Guidance Excludability of Directly Cflicting Shareholder Proposals Voting Results Proposals Adopti of Provisis And Typical Parameters A Moving Target Amendments to Previously Adopted Provisis Potential Impact of Corporate Governance Internatial Perspectives Practical Csideratis Appendix A Select Terms of Provisis Adopted Since January 1, 15 Appendix B Summary of Bylaw Amendments Sought by Shareholder Propents AMERICA ASIA PACIFIC EUROPE Sidley Sidley Austin refer to Sidley Austin LLP affiliated partnerships as explained at 18 Sidley Austin LLP Affiliated Partnerships. All rights reserved. The firm claims a copyright in all proprietary copyrightable text in this article. Sidley Austin provides this informati as a service to clients other friends for educatial purposes ly. It should not be cstrued or relied as legal advice or to create a lawyer-client relatiship. Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, ; One South Dearborn, Chicago, IL 60603, ; 1 K Street, N.W., Washingt, D.C. 005,

2 OVERVIEW As of the end of January 18, 65 of S&P 500 companies have adopted proxy access. 1 Through the collective efforts of large institutial investors, including public private pensi funds other shareholders, shareholders are increasingly gaining the power to nominate a number of director cidates without undertaking the expense of a proxy solicitati. By obtaining proxy access (the ability to include shareholder s in the comp s own proxy materials), shareholders have yet another tool to influence decisis. As a follow-up to our previous reports proxy access, this update reflects 17 developments the topic, including: The ctinuing pace of proxy access bylaw adoptis going cvergence toward stard key parameters (8 of companies that adopted proxy access in 17 did so the following terms: for 3 years for up to of the (at least 2 directors) with a nominating group size limit of ); Slightly increased average support (54 versus 51) for s to adopt proxy access in 17, but fewer proposals being voted as more companies adopted proxy access in exchange for withdrawal of the proposals; The failure to pass of all s seeking specified revisis to existing proxy access provisis (so-called fix-it proposals) in 17, despite favorable recommendatis from ISS, which voting results suggest that m shareholders are satisfied with proxy access market stard terms; The uncertainty created in July 17 when the Staff of the SEC s Divisi of Corporati Finance (SEC Staff) denied a comp s request to exclude a fix-it proposal solely seeking the removal of the nominating group size limit after previously allowing dozens of companies that had adopted proxy access market stard terms to exclude fix-it proposals solely seeking an increase in the limit the basis of substantial implementati; attempt to utilize proxy access at a U.S. public comp since e failed attempt in late 16; Fidelity s shift from opposing to supporting shareholder proxy access proposals, which could impact the ability of m companies to defeat such proposals. We have updated Appendix A which highlights, a comp-by-comp basis, various terms of proxy access provisis adopted by 475 companies in 15, This data includes the terms adopted by 131 companies in 17 since we published our last report. We have also updated Appendix B which summarizes recent fix-it proposals respses from the SEC Staff to requests to grant no-acti relief to companies seeking to exclude such proposals voting results such proposals.

3 Page 2 Snapshot of Provisis Adopted Since January 1, 15 (See Appendix A for these additial provisis, presented a comp-by-comp basis) Prevalence of Selected Alternatives Shareholder Viewpoints* Advisory Firm Policies Council of Institutial Investors (CII) Positi Durati / 3 years 473/475 (>99); included in SEC vacated rule / 2 years 1/475 (<1) 5 / 3 years 1/475 (<1) Nearly all favor Shareholder proposals more likely if comp adopts at 5 ISS Glass Lewis support CII supports ; endorses 2 years but acknowledges that 3 years has become stard minee of Greater of 2 or 338/475 (71) cap 77/475 (16) Greater of 2 or 32/475 (7) cap 28/475 (6); included in SEC vacated rule Most favor - ISS Glass Lewis support If adopted after majority-supported, ISS may issue negative vote recommendatis against directors if less than CII favors ability to nominate at least 2 cidates minating limit 10/475 (2); included in SEC vacated rule 50 3/475 (1) 35 1/475 (<1) 30 2/475 (<1) 25 15/475 () 439/475 (92) 15 2/475 (<1) 10 2/475 (<1) 5 1/475 (<1) General csensus that limit of is reasable Possibility of shareholder proposals seeking removal of limits or specifying a particular nominating group size (e.g., 40 or 50) ISS favors minimal or no limits; views as especially problematic if individual funds within a mutual fund family are counted as separate shareholders for aggregati limit purposes If adopted after majority-supported, ISS may issue negative vote recommendatis against directors if less than CII does not support nominating group size limits, but recognizes that has become market stard; believes that fund families should be treated as 1 shareholder * 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 watershed year, following the private ordering pattern of majority voting in unctested director electis. M companies received proposals for their 15 annual meetings requesting that the amend the bylaws to allow large, lg-sting shareholders (or groups of shareholders) to nominate directors include those s in the comp s own proxy statement related materials. The 15 proxy seas 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 negotiati adopti of proxy access via acti including an accelerating trend toward adopti without receipt of a. This trend ctinued in 16, to a lesser extent in 17. access initiatives had limited levels of success prior to 15. However, shareholder support started to increase in 14 as propents began to focus the for 3 years ownership requirement adopted by the SEC in its 10 rulemaking efforts (as described below). Sidley Austin LLP

4 Page 3 Key Highlights of Shareholder Proposal Voting Results Shareholder Proposals to Adopt Voted On Passed 5 (28) 55 (60) 40 (52) 19 (5) Average Support Shareholder Proposals to Amend Provisis Voted On Passed () 0 (0) Average Support * Data points in this report with respect to proxy access proposals are derived from SharkRepellent.net, last accessed January 31, 18. All voting results in this report are calculated the basis of votes cast for the proposal divided by the sum of votes cast for against that proposal (not taking into account abstentis). In 15, with a major initiative from public pensi funds led by New York City Comptroller Scott M. Stringer with encouragement from major investors, such as TIAA, the large institutial investor industry group, the Council of Institutial Investors (CII), proxy access took hold. Adding to the momentum was the SEC Staff s refusal to grant no-acti relief in situatis where a comp intends to put forward its own competing proposal. advisory firm policies supporting proxy access added to the momentum. Moreover, in August 14, the CFA Institute published a report discussing the potential ecomic benefits of proxy access; this report has been cited by Comptroller Stringer, CalPERS other propents in their proposals. 2 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 matory proxy access. 3 The broad-based shareholder campaign for proxy access a comp-by-comp basis, the momentum amg targeted companies other leading companies to respd by taking acti to adopt proxy access (with or without first receiving a ), is reminiscent of the campaign several years ago for companies to replace plurality voting with majority voting in the unctested electi of directors. Both issues relate to the ability of shareholders to influence the compositi of the, both campaigns show the power of ccerted efforts at private ordering. THE SEC S 10 PROXY ACCESS RULE The SEC has unsuccessfully sought to 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 to nominate cidates through the comp s proxy materials if a shareholder (or a group of shareholders without limit the size of the nominating group) held of the comp s shares for at least 3 years. Under the rule, a nominating shareholder (or group of shareholders, with no limit the size of the group) could nominate e proxy access director or of the, whichever is greater. Rule 14a-11 was adopted shortly after Secti 971 of the Dodd-Frank Act cfirmed the SEC s authority to promulgate a proxy access rule. The SEC issued final rules mating proxy access in August 10, which were scheduled to become effective in vember 10. In additi, the SEC also amended Exchange Act Rule 14a-8(i)(8) to allow s relating to proxy access certain other director electi mechanisms. 4 In September 10, Business Roundtable the U.S. Chamber of Commerce challenged the validity of Rule 14a-11. In 11, the U.S. Court of Appeals for the District of Columbia Circuit vacated Rule 14a-11 the grounds that the SEC had acted arbitrarily capriciously in promulgating the rule failing to adequately Sidley Austin LLP

5 assess its ecomic impact. 5 The SEC did not appeal the court s decisi has not re-proposed proxy access rule since that decisi; however, the to Rule 14a-8 described above became effective in September 11, thereby opening the door to s seeking proxy access. 6 SHAREHOLDER PROXY ACCESS PROPOSALS Page 4 In public comments the SEC s proposed Rule 14a-11, several commenters expressed the view that the matter should be left to shareholders companies to decide a comp-by-comp basis through private ordering. 7 Private ordering may take place, for example, pursuant to Secti 112 of the Delaware General Corporati Law. 8 Fifteen companies adopted proxy access prior to 15, including a few large companies, such as Hewlett- Packard Comp (now known as HP Inc.), The Western Uni Comp Veriz Communicatis Inc., which each adopted proxy access after receiving a the topic, as well as some companies that have since ge private. In additi, proxy access with a 5 for 2 years ownership threshold has been matory for companies incorporated in rth Dakota since 08; we are aware of e public comp that reincorporated to rth Dakota from Delaware several years ago with the stated purpose of taking advantage of this other shareholder-friendly provisis. 9 To date, no shareholder has included a director in the proxy materials of a U.S. comp pursuant to a proxy access right. 10 FIRST ATTEMPT AT USING PROXY ACCESS PROMPTLY WITHDRAWN In vember 16, GAMCO Asset Management Inc. Gabelli Funds, LLC, entities affiliated with activist investor Mario Gabelli (collectively, GAMCO), attempted to utilize proxy access to nominate a director at Natial Fuel Gas Comp s 17 annual meeting. Natial Fuel had adopted proxy access in March 16 stard terms (i.e., for 3 years for up to of the with a nominating group size limit of ). GAMCO, which disclosed ownership of 7.8 of Natial Fuel s comm stock in its Schedule 14N, had owned greater than for more than 3 years. 11 Two weeks after the Schedule 14N filing, Natial Fuel disclosed in a Form 8-K that it had rejected GAMCO s proxy access the grounds that GAMCO could not comply with the terms cditis set forth in the proxy access bylaw. 12 Specifically, Natial Fuel s proxy access bylaw included a typical requirement that the nominating shareholder acquired the shares in the ordinary course of business not with the intent to change or influence ctrol of the Corporati, does not presently have such intent. Natial Fuel argued that GAMCO could not comply with that requirement because its Schedule 13D filings throughout its investment reflected a ctrol intent it had previously pressured the comp to spin-off certain of its assets, including by submitting a shareholder proposal for the comp s 15 annual meeting requesting that the engage an investment banking firm to effect a spin-off of the comp s utility segment (which proposal received 17.8 support). Five days after the Form 8-K filing, GAMCO disclosed that its proxy access had withdrawn his nominati at Natial Fuel that GAMCO will not pursue. 13 The first attempt to use proxy access at a U.S. comp by a known activist was surprising given the nominati restrictis relating to ctrol intent although the end result was not a surprise. It serves as a reminder to companies csidering adopting proxy access bylaws to thoughtfully csider the eligibility requirements applicable to nominating shareholders proxy access s. As of the date of this report, no other shareholder or nominating group has attempted to use proxy access at a U.S. comp. The private ordering effort is now in full swing. Shareholder proposals seeking proxy access were the defining feature of the proxy seass, s seeking the adopti of proxy access fix-it proposals seeking to amend existing proxy access provisis were also prevalent in the 17 proxy seas. 115 shareholder proxy access proposals were submitted for the 15 proxy seas, which was more than four times the number submitted for the 14 proxy seas. Based the success of private ordering efforts in 15, more than 0 shareholder proxy access proposals were submitted for the 16 proxy seas, Sidley Austin LLP

6 well surpassing prior-year levels. More than 110 shareholder proxy access proposals were submitted for the 17 proxy seas, about evenly divided between proposals to adopt proxy access fix-it proposals. Page 5 The New York City Pensi Funds, with approximately $160 billi under management, accounted for the majority of the proxy access proposals submitted for the 15, proxy seass. In vember 14, Comptroller Stringer announced the Boardroom Accountability Project, targeting 75 companies with nbinding shareholder proxy access proposals for The proposals requested that the adopt, present for shareholder approval, a bylaw to give shareholders who meet a threshold of owning of the comp s stock for three or more years the right to include their director cidates, representing up to of the, in the comp s proxy materials, with no limit the number of shareholders that could comprise a nominating group. According to Comptroller Stringer, the targeted companies were selected due to ccerns about the following three priority issues: Climate change (i.e., carb-intensive coal, oil gas utility companies). Board diversity (i.e., companies with little or no gender, racial or ethnic diversity the ). Excessive executive compensati (i.e., companies that received significant oppositi to their say-pay votes in the prior year). In January 16, Comptroller Stringer announced that the New York City Pensi Funds exped the Boardroom Accountability Project by submitting proxy access proposals at 72 companies for the 16 proxy seas 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 from the New York City Pensi Funds for 16, each of which has since amended its proxy access bylaw to reduce the required ownership threshold from 5 to 16 ). Another 36 companies were newly targeted for 16, with a focus the New York City Pensi Fund s largest portfolio companies, coal-intensive utilities companies selected due to ccerns about diversity excessive CEO pay. The form of proxy access proposal submitted by Comptroller Stringer for the 16 proxy seas did not differ substantively from the template submitted for the 15 proxy seas except that it no lger specifically sought shareholder approval of proxy access bylaws. As of December 31, 16, 97 of the 110 companies targeted by the New York City Pensi Funds for had adopted proxy access. 17 In April 17, Comptroller Stringer the New York City Pensi Funds announced that they submitted another round of more than 70 proposals to adopt proxy access for the 17 proxy seas, this time exping the campaign to target companies with limited C-suite diversity inadequate disclosures about carb omissis. 18 The form of proposal for 17 was revised to indicate that the number of proxy access s shall not exceed the larger of two or of the. Comptroller Stringer the New York City Pensi Funds withdrew more than 50 of these proposals after negotiating with the companies, leaving ly 16 such proposals being voted in 17 (14 of which passed). The group did not modify its form of proxy access proposal for 18. The group did not submit fix-it proposals for 17 or 18. In September 17, Comptroller Stringer the New York City Pensi Funds launched the Boardroom Accountability Project 2.0 with the goal of making large public comp s more diverse, independent climate-competent. 19 In cnecti with this secd phase of the campaign, they sent form letters to the s of 151 companies (80 of which are in the S&P 500), all of which the group had previously targeted to adopt proxy access, seeking informati about the s compositi its processes for refreshment evaluati. Of the 151 targeted companies, 145 had adopted proxy access as of December 31, 17 after receiving a from the New York City Pensi Funds, 6 saw such proposals receive majority support at the companies 17 annual meetings, but have not yet adopted proxy access as of the date Sidley Austin LLP

7 Page 6 of this report. The 145 targeted companies that have adopted proxy access are identified by a + in Appendix A to this report. EMERGENCE OF FIX-IT PROPOSALS SEEKING TO AMEND EXISTING PROXY ACCESS BYLAWS Following the flood of s asking companies to adopt proxy access, shareholder propents began submitting proposals in 16 requesting that companies make specific revisis to their existing proxy access bylaws. These so-called fix-it proposals were voted at ly eight companies in 16. The proposals passed at two companies (in each case where the propent requested a reducti of the ownership threshold from 5 to, amg other s) average shareholder support was approximately 44 (compared to s to adopt proxy access which have received average support of 51). While they are typically n-binding, a few fix-it proposals have been binding, ne of which were approved by shareholders. The initial variety of fix-it proposals requested some combinati of the following s: the ownership threshold would be ; the number of proxy access s would be the greater of or 2 directors (or, at some companies, ); loaned shares would count toward the ownership threshold so lg as they are ; there would be no limit the size of the nominating group; there would be no restricti the re-nominati of a proxy access based the number or percentage of votes received in a prior electi; there would be no requirement to hold shares after the annual meeting (e.g., for e year) or to express intenti to do so; the would not have the power to amend the proxy access bylaw; the would defer decisis about the suitability of shareholder s to a shareholder vote. Based SEC Staff determinatis discussed below, some shareholder propents began refining their shareholder proxy access proposals or fix-it proposals to limit them to a single issue, making it less likely for a comp to be able to exclude them the basis of substantial implementati. For example, for the proxy seass, certain individual shareholder propents asked companies solely to increase (to 40 or 50) or remove the nominating group size limit in their proxy access bylaws. Appendix B sets forth the specific proxy access bylaw s requested in the fix-it proposals submitted to date, as well as details about voting results the proposals the status of requests for no-acti relief, where applicable. INSTITUTIONAL INVESTOR SUPPORT FOR PROXY ACCESS access is now universally supported by institutial investors, including the following: BlackRock will review proxy access proposals a case-by-case basis generally support them provided that their parameters are not overly restrictive or erous provide assurances that the mechanism will not be subject to abuse by short-term investors, investors without a substantial investment in the comp, or investors seeking to take ctrol of the. 21 California Public Employees Retirement System (CalPERS) indicated that proxy access was e of its strategic priorities for the 15 proxy seas supported proxy access proposals at 100 companies in In February 16, CalPERS announced that proxy access will ctinue to be a strategic priority in 16 that it will ctinue to support s at the for 3 years threshold will issue adverse votes against director s at companies where proxy access proposals passed in 15 that implemented provisis that restrict or limit the use of proxy Sidley Austin LLP

8 Page 7 access. 23 CalPERS updated its Global Governance Guidelines in March 16 to recommend that companies adopt proxy access at the for 3 years threshold to nominate up to of the. 24 Finally, CalPERS submitted shareholder proxy access proposals at e comp in that passed each year with just under 75 support. California State Teachers Retirement System (CalSTRS) supports proxy access at the for 3 years threshold, capped at the lesser of 2 directors or of the. 25 Fidelity Fidelity, which had been the ly large institutial investor that generally voted against management shareholder proxy access proposals, updated its proxy voting policies in January 17 so that it now reviews proxy access proposals a case-by-case basis generally supports proposals with /3 years// thresholds. 26 J.P. Morgan generally supports proxy access at the 5 for 3 years threshold will oppose shareholder proxy access proposals which restrict share ownership thresholds to a single shareholder. In 17, J.P. Morgan Asset Management added to its policies that it will generally oppose fix-it proposals unless the terms of the existing proxy access right are unduly restrictive to shareholders ( that it generally supports s that have adopted proxy access at a /3 years threshold). 27 New York City Pensi Funds as discussed elsewhere in this report, the New York City Comptroller, behalf of the New York City Pensi Funds, launched a campaign in 14 which has been highly successful in spurring large public companies to adopt proxy access over the past few years. The New York City Pensi Funds proxy voting guidelines provide that they will generally support proposals with provisis no more restrictive than requiring aggregate ownership over 3 years. 28 State Street Global Advisors will review proxy access proposals a case-by-case basis evaluating the comp s specific circumstances the proposal s potential effect shareholder value, taking into account the ownership thresholds holding durati proposed in the resoluti, the binding nature of the proposal, the number of directors that shareholders may be able to nominate each year, comp governance structure, shareholder rights performance. 29 TIAA (formerly TIAA-CREF) wrote to the 100 largest companies in which it invests in February 15, encouraging them to adopt proxy access at the for 3 years threshold. 30 In additi, TIAA submitted proxy access proposals at some companies for the 16 proxy seas. T. Rowe Price supports proxy access proposals at the for 3 years threshold opposes significant impediments to a propent s ability to aggregate holdings with other shareholders to qualify for proxy access. For the 16 proxy seas, T. Rowe Price added to its Voting Policies that it will generally recommend votes against s to amend existing proxy access bylaws if the comp s bylaw meets the for 3 years threshold does not impede aggregati. 31 United Brotherhood of Carpenters sent letters to 50 companies in late 15 seeking a proxy access right in the event that the refuses to accept the resignati of an incumbent director who fails to receive majority support. 32 The letters were sent to companies with a majority voting stard a director resignati policy that had shareholder proxy access proposals 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 to decrease the ownership threshold for likely support from 5 to. Vanguard stated that the policy change was informed by engagement over the past year the critical mass of access adopti at the 3 percent Sidley Austin LLP

9 Page 8 ownership level by an increasingly wide range of companies. Vanguard will ctinue to evaluate proxy access proposals a case-by-case basis but will now generally support proposals at the for 3 years threshold, capped at of seats. 33 Several institutial investors have adopted proxy access, shedding light the terms they presumably find acceptable. 34 The table below shows the key parameters of the proxy access provisis adopted by major institutial investors since late 15. All were adopted by the by unilateral bylaw, except where otherwise indicated. Instituti The Bank of New York Mell Corp. (adopted 10/13/15) BlackRock, Inc. (approved by shareholders adopted 5/25/16; amended 7//16) The Goldman Sachs, Inc. (adopted 10/23/15) JPMorgan Chase & Co. (adopted 1/19/16) Morgan Stanley (adopted 10/29/15) State Street Corporati (adopted 10/15/15) T. Rowe Price, Inc. (adopted 12/10/15) Durati for 3 years minee (Max of ( 2 directors) minating for 3 years for 3 years for 3 years for 3 years ( 2 directors) ( 2 directors) ( 2 directors) for 3 years for 3 years ( 2 directors) 15 CII has lg supported proxy access, favoring a broad-based SEC rule imposing proxy access. Absent such a rule, Secti 3.2 of CII s Corporate Governance Policies states that a comp should provide access to management proxy materials for an investor or a group of investors that have held in the aggregate at least of the comp s voting stock for at least 2 years, to nominate less than a majority of the directors. 35 In July 17, CII issued an update to its guidelines, originally published in August 15, 36 which set forth what it csiders best practices for companies adopting proxy access provisis. 37 The guidelines identify provisis that, if drafted otherwise, could significantly impair shareholders ability to use proxy access. CII suggests the following proxy access terms: o A minimum ownership threshold of. o o o o A requirement that nominating shareholders meet the minimum ownership threshold ly a date at least e week before the date that is also a date which the comp makes public its outsting shares. A requirement that shareholders own stock for at least 2 years before using proxy access (however CII recognizes that a 3-year holding period is stard). requirement that nominators must ctinue to hold the required amount of stock after the annual meeting. Counting loaned securities toward the ownership threshold providing at least a 5-day window if nominating shareholders must recall loaned shares to count them. Sidley Austin LLP

10 Page 9 Aggregati o o limitati the number of shareholders that may aggregate their shares to form a nominating group (however CII recognizes that a -shareholder cap is stard). Treating as 1 shareholder 2 or more funds that are (i) either under comm management investment ctrol, (ii) under comm management funded primarily by the same employer or (iii) csidered a group of investment companies as defined by the Investment Comp Act of Shareholder minees: Number Restrictis o o o o o Providing shareholders with the opti to nominate at least 2 proxy access cidates. adjustment to the shareholder cap for directors previously elected through proxy access, unless proxy access s from the current previous 2 annual meetings would cstitute a majority of the (look-back period should not exceed 2. re-nominati restrictis in the event a proxy access fails to obtain a specified minimum percentage of votes in a previous electi. requirement that prevents a cidate from being an eligible due to a third-party compensati arrangement (although CII strgly supports disclosure of such arrangements). additial disclosure requirements for nominating shareholders s apart from what the SEC requires in proxy ctests disclosures the comp requires from its own cidates; applying qualificati independence stards universally to shareholder management s. Miscellaneous o o o o automatic suspensi of proxy access for all shareholders in the event of a proxy ctest (although CII does not oppose provisis that bar the ccurrent use of a proxy ctest proxy access). Providing the same space treatment in the proxy statement for shareholder s as companies do for their own cidates. A requirement that interpretive questis be subject to judicial review, not the sole discreti of the. unlimited indemnificati requirements nominating shareholders. Three provisis that CII finds objectiable are very commly included in the proxy access bylaws that have been adopted to date: (i) a limit the size of the nominating group, (ii) a reducti in the shareholder cap for directors elected through proxy access in the past 2 years (iii) re-nominati restrictis based a failure to obtain a specified minimum percentage of votes in the past 2 years. Some institutial investors that favor proxy access coordinated their efforts during the 15 proxy seas in an attempt to increase investor support for the proxy access proposals they spsored. Specifically, the New York City Pensi Funds, CalPERS other large labor-affiliated pensi funds each filed Form PX14A6Gs with the SEC enabling them to communicate in support of their proxy access proposals (but not collect actual proxies) without such communicatis being subject to the proxy solicitati rules. The New York City Pensi Funds partnered with CalPERS again in to cduct exempt solicitatis in support of proxy access proposals. According to a report the 17 proxy seas by Broadridge PricewaterhouseCoopers, institutial investors are more than five times more likely to support proxy access than are individual investors: 52 of Sidley Austin LLP

11 Page 10 votes cast by institutial investors were in favor of proxy access in the first half of 17, compared with ly 10 of those cast by individual retail investors. 38 The report also indicated that retail investors voted ly 29 of the shares they own (compared with 91 of institutial investors). These findings suggest that companies facing a shareholder proxy access proposal should seek out opportunities to engage with retail investors encourage them to vote. PROXY ADVISORY FIRM POLICIES ON PROXY ACCESS Both Institutial Shareholder Services (ISS) Glass, Lewis & Co. generally favor proxy access for significant, lg-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 lger than 3 years of ctinuous ownership for each member of the nominating group. Minimal or no limits the number of shareholders that may form a nominating group. A cap the number of available proxy access seats of generally of the. 39 ISS will review additial restrictis for reasableness. 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 17, ISS recommended votes in favor of all shareholder management proposals to adopt proxy access or amend existing proxy access bylaws. 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 s against the management proposals, as described below. Lack of Board Respsiveness to a Majority-Supported Shareholder Proposal 40 ISS issued FAQs in December 15 clarifying when it may issue negative vote recommendatis against directors of companies that do not implement a majority-supported shareholder proxy access proposal substantially in accordance with its terms. 41 In evaluating a s respse to a majority-supported proposal, ISS will examine: Whether the major points of the were implemented. Additial provisis that were not included in the in order to assess whether such provisis unnecessarily restrict the use of a proxy access right. ISS may recommend votes against individual directors, nominating/governance committee members or the entire if the proxy access provisi implemented or proposed by management ctains material restrictis more stringent than those included in the with respect to the following: thresholds above. durati lger than 3 years. Sidley Austin LLP

12 Page 11 Aggregati limits below shareholders. Cap proxy access s set at less than of the. ISS may issue negative vote recommendatis against directors if the aggregati limit or cap proxy access s differs from the terms of the the comp has not disclosed its shareholder outreach efforts engagement. If the proxy access provisi ctains restrictis or cditis proxy access s, ISS will review it a case-by-case basis csider the following restrictis as potentially problematic, particularly when used in combinati: Prohibitis resubmissi of failed s in subsequent years. Restrictis third-party compensati of proxy access s. Restrictis the use of proxy access proxy ctest procedures for the same meeting. How lg under what terms an elected shareholder will count toward the maximum number of proxy access s. When the right will be fully implemented accessible to qualifying shareholders. ISS views the following restrictis 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 aggregati limit. The impositi of post-meeting shareholding requirements for nominating shareholders. ISS policy does not address the unilateral adopti or of proxy access bylaws. ISS NEGATIVE VOTE RECOMMENDATIONS AGAINST DIRECTORS As discussed in a report proxy access bylaws issued by ISS in August 16 (the 16 ISS Report), 42 ISS initially issued negative vote recommendatis against certain directors at three companies in 16 for failure to adequately respd to majority-supported 15 shareholder proxy access proposals by adopting proxy access bylaws that ISS deemed significantly more restrictive than the. Comp CBL & Associates Properties, Inc. (ISS Report dated 4/13/16) Cheniere Energy, Inc. (ISS Report dated 5//16) Cloud Peak Energy Inc. (ISS Report dated 4/28/16 Alert dated 5/2/16) Affected Directors Lead independent director Governance Committee chair Governance minating Committee members Governance Committee members In each case, the comp originally adopted a proxy access bylaw with stard key parameters for 3 years for up to of the with a group size limit of. However, ISS took issue with restrictive secdary provisis in the proxy access bylaws when combined with (i) inadequate disclosure regarding the ratiale for some of the additial restrictis or shareholder engagement efforts when developing the proxy access bylaw (ii) the companies two-thirds vote requirements for shareholder-approved bylaw s. Sidley Austin LLP

13 Page 12 Restrictive Provisis ted by ISS size limit of shareholders (versus no limit in the ) without disclosure of shareholder outreach indicating a preference for such limit Cap proxy access s of of the (versus in the shareholder proposal) without disclosure of shareholder outreach indicating a preference for the cap The number of proxy access s will be reduced by the number of s who were proxy access s at either of the preceding 2 annual meetings whose nominati has been submitted by the The maximum number of proxy access s will be reduced by (i) the number of director cidates nominated other than those nominated as proxy access s; (ii) proxy access whom the decides to nominate as a The may omit proxy access s if it receives that shareholder intends to nominate a director pursuant to the advance procedures or if the nominator intends to participate in a proxy ctest at the same meeting If the comp receives that a shareholder intends to nominate (other than via proxy access) 50 or more of the directors to be elected at a meeting, no proxy access s will be included in the comp s proxy materials A nominator must agree not to engage in a solicitati may not participate in another party s solicitati A proxy access nominati deadline of -1 days prior to the last annual meeting s proxy issuance anniversary (versus 1-90 days for other matters) The nominator must certify its intenti to hold the required shares for e year following the annual meeting The comp may omit a proxy access who is or has been an officer or director of a competitor in the past 3 years The may omit a proxy access who was nominated at either of the last 2 meetings received a vote of less than of the shares of comm stock entitled to vote for such The will have broad binding authority to interpret the proxy access provisi make necessary determinatis Companies CBL, Cloud Peak Energy Cloud Peak Energy CBL, Cheniere Energy Cloud Peak Energy CBL, Cheniere Energy Cloud Peak Energy Inc. Cloud Peak Energy Cheniere Energy CBL CBL, Cheniere Energy, Cloud Peak Energy Cheniere Energy CBL, Cheniere Energy, Cloud Peak Energy ISS reversed the negative vote recommendatis against directors at Cloud Peak Energy Inc. after the comp amended its proxy access bylaw to (i) eliminate the aggregati limit of shareholders, (ii) increase the cap proxy access s from to of the (iii) remove all of the secdary provisis that ISS deemed overly restrictive. At the other two companies, the affected directors were elected by the shareholders, albeit with a relatively lower percentage of support (i.e., approximately 75 support at CBL & Associates Properties, Inc. between support at Cheniere Energy, Inc.). Cheniere Energy, Inc. subsequently amended its proxy access bylaw to, amg other things, remove the provisi permitting the comp to exclude a proxy access who received less than support at e of the two preceding annual meetings. Nabors Industries Ltd. adopted a proxy access provisi in 14 which allowed e shareholder with 5 ownership for at least 3 years to nominate e director. After receiving majority support shareholder proposals to adopt proxy access (or amend its provisi) for six straight years correspding negative vote recommendatis against directors from ISS, the comp amended the provisi in 17 to cform to market stard terms (i.e., /3 years// thresholds). In 17, ISS issued negative vote recommendatis against directors at three companies for failure to respd to s to adopt proxy access that received majority support at the 16 annual meetings. Sidley Austin LLP

14 Page 13 minees The FAQs ISS issued in December 15 also clarify that when evaluating proxy access s, it will take into account relevant factors, including: minee/nominator-specific factors: o minators ratiale. o minators critique of management/incumbent directors. o minee s qualificatis, independence overall fitness for directorship. Comp specific factors: o Comp performance relative to its peers. o Background to the ctested situati (if applicable). o Board s track record respsiveness. o Independence of directors/s. o Governance profile of the comp. o Evidence of entrenchment. o Current compositi (skill sets, tenure, diversity, etc.). o Ongoing ctroversies, if. Electi specific factors: o Whether the number of s exceeds the number of seats. o Vote stard for the electi of directors. ISS did not make updates to its proxy voting policies regarding proxy access for the 17 or 18 proxy seass. ISS QUALITYSCORE FACTORS RELATING TO PROXY ACCESS As discussed in a previous Sidley Update, 43 in vember 16, ISS added to its QualityScore corporate governance ratings tool the following new scored questis relating to proxy access: What is the ownership threshold for proxy access? (ISS notes that most companies have adopted a threshold.) What is the ownership durati threshold for proxy access? (ISS csiders a holding period of lger than 3 years to be excessive.) What is the cap shareholder s to fill seats from proxy access? (ISS notes that generally investors have approved a range of - of the, that m companies have adopted a greater of 2 directors or of the stard.) What is the aggregati limit shareholders to form a nominating group for proxy access? (ISS notes that an aggregati limit of shareholders has generally been csidered a minimal restricti.) These questis supplement a factor ISS added in vember 15 asking whether or not the comp has adopted proxy access, which was previously tracked a zero-weight basis for informatial purposes ly but is now scored for QualityScore purposes. Through ISS QualityScore reports, we see how ISS views certain proxy access features. In QualityScore reports of companies that have adopted proxy access stard terms (i.e., for 3 years for up to of Sidley Austin LLP

15 Page 14 the (at least 2 directors) with a group size limit of ), ISS gave the companies a star for each of the four new scored questis relating to proxy access, designating that these factors positively impacted the absolute score for QualityScore s Shareholder Rights pillar. tably, for companies that have atypical proxy access provisis that ISS has objected to (e.g., a group size limit below ) or that have not adopted proxy access at all, ISS has left the field blank (meaning that the factor has no meaningful impact the pillar s absolute score ) rather than giving the comp a red flag for the applicable questi (meaning that the factor negatively impacts the pillar s absolute score ). Glass Lewis Shareholder Proposals Glass Lewis proxy voting policies provide that it will review a case-by-case basis shareholder proxy access proposals the comp s respse, including whether the comp offers its own proposal in place of, or in additi to, the. Glass Lewis will csider: Comp size. Existing or proposed proxy access provisis. (New factor for csiderati added for 17.) Board independence diversity of skills, experience, background tenure. The shareholder propent the ratiale for the proposal at the target comp. 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 investor, mutual fund or pensi fund). Board management respsiveness to shareholders, as evidenced by progressive shareholder rights policies (such as majority voting or declassificati) reacti to s. Comp performance steps taken to improve poor performance (such as appointing new executives or directors or engaging in a spin-off). Existence of anti-takeover protectis or other entrenchment devices. Opportunities for shareholder acti (such as the ability to act by written csent or the right to call a special meeting). Cflicting Proposals Beginning with the 16 proxy seas, Glass Lewis csiders the following factors when making vote recommendatis with respect to cflicting management s: The nature of the underlying issue. The benefit to shareholders from implementati of the proposal. The materiality of the differences between the terms of the cflicting proposals. The appropriateness of the provisis in the ctext of a comp s shareholder base, corporate structure other relevant circumstances. Sidley Austin LLP

16 Page 15 A comp s overall governance profile, specifically, its respsiveness to shareholders as evidenced by its respse to previous s its adopti of progressive shareholder rights provisis. 44 Glass Lewis made two updates to its proxy voting policies regarding proxy access for the 18 proxy seas: Fix-It Proposals. Under a new policy, Glass Lewis will evaluate proxy access fix-it proposals a case-by-case basis, csidering the comp s existing proxy access provisis to assess whether they unnecessarily restrict shareholders ability to use proxy access. If the existing proxy access provisis reasably cform with broad market practice, Glass Lewis will generally recommend against fix-it proposals. However, Glass Lewis may recommend in favor of a fix-it proposal if the comp has an unnecessarily restrictive proxy access provisi the proposal directly addresses areas of the provisi that Glass Lewis believes warrant shareholder ccern. at n-u.s. Companies. Under another new policy, Glass Lewis will evaluate a caseby-case basis s requesting that n-u.s. companies adopt proxy access. Glass Lewis will make its voting recommendatis based the regulatory lscape within the country in questi. Glass Lewis will recommend against such proposals if existing laws, policies or regulatis in the country where the comp is domiciled either (i) already provide shareholders with adequate proxy access rights or (ii) would prohibit the comp from adopting proxy access. GROUNDS FOR EXCLUSION OF SHAREHOLDER PROXY ACCESS PROPOSALS Under the SEC s proxy rules, a comp may exclude a relating to proxy access from its proxy materials if the proposal fails to meet of the procedural substantive requirements of Exchange Act Rule 14a-8. A comp may seek no-acti relief from the SEC Staff pursuant to which the comp can exclude the proposal from its proxy materials. Two substantive grounds that have been relied up by companies seeking to exclude a shareholder proxy access proposal are that (i) the proposal directly cflicts with a management proposal (Rule 14a-8(i)(9)) or (ii) has already been substantially implemented by the comp (Rule 14a-8(i)(10)). 45 However, as discussed below, the SEC Staff issued guidance in the fall of 15 that has made it more difficult for a comp to obtain no-acti relief under Rule 14a-8(i)(9) the grounds that a shareholder proxy access proposal directly cflicts with a management proxy access proposal. Therefore, companies that adopted proxy access argued substantial implementati when seeking to exclude proxy access proposals from their proxy statements were generally successful as discussed below. In respding to no-acti requests, the SEC Staff will distinguish between proposals seeking to adopt proxy access with specified parameters versus fix-it proposals requesting that specific revisis be made to an existing proxy access bylaw. See Appendix B for details about the status of requests for no-acti relief with respect to the fix-it proposals submitted to date. Directly Cflicting Proposals In December 14, the SEC Staff granted no-acti relief to Whole Foods Market, Inc. the basis that a for 3 years shareholder proxy access proposal directly cflicted with a 9 for 5 years management proposal. 46 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 to 5. In the wake of the no-acti relief granted to 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-acti relief the basis that the proposals were cflicting therefore excludable. However, following the grant of no-acti relief to Whole Foods, James Sidley Austin LLP

17 McRitchie, the propent of the Whole Foods proposal, appealed the grant to the SEC a letter-writing campaign by incensed institutial investors followed. Page 16 In January 15, former SEC Chair Mary Jo White reversed course. In an unusual development, Chair White directed the SEC Staff to review Rule 14a-8(i)(9) as a basis for exclusi. As discussed in a previous Sidley Update, 47 following Chair White s directi, the SEC Staff announced that it would not express a view the applicati of Rule 14a-8(i)(9) for the remainder of the 15 proxy seas with respect to all shareholder proposals not just those seeking proxy access withdrew the no-acti relief granted to Whole Foods. 48 Business Roundtable other commentators expressed ccern that the SEC Staff s approach forced companies faced with a shareholder proxy access proposal that are csidering a management proposal to either include the in the proxy materials, even though it will compete with the similar management proposal possibly lead to cfusi, or omit the, creating a heightened risk of litigati negative targeting by certain pensi funds proxy advisory firms. As described below, seven companies included competing shareholder management proxy access proposals the ballot in 15 (followed by five in 16 two in 17). In a speech in June 15, former SEC Chair White noted that, notwithsting ccerns that shareholders would be cfused by two competing proposals, shareholders were able to sort it all out express their views. SEC STAFF GUIDANCE ON EXCLUDABILITY OF DIRECTLY CONFLICTING SHAREHOLDER PROPOSALS In October 15, the SEC Staff issued Staff Legal Bulletin. 14H (CF) (SLB. 14H) 49 which provided new guidance the excludability of s that directly cflict with management proposals under Rule 14a-8(i)(9). As discussed in a previous Sidley Update, 50 after reviewing the history intended purpose of Rule 14a-8(i)(9) per former 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 to exclude a as directly cflicting with a management proposal ly if a reasable shareholder could not logically vote in favor of both proposals, i.e., a vote for e proposal is tantamount to a vote against the other proposal. A n-binding seeking proxy access 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 different terms (i.e., a different means of accomplishing the same objective) would not directly cflict, as a reasable shareholder could logically vote in favor of both proposals. SEC Staff Example of Proposals Do t Directly Cflict Management proposal with a 5 for 3 years ownership threshold limit s of 10 of the Shareholder proposal with a for 3 years ownership threshold limit s of of the The SEC Staff does not believe that a reasable shareholder would logically vote for two binding shareholder management proposals that ctain two mutually exclusive mates. In the case of such a direct cflict, the SEC Staff could, in its no-acti respse, allow a shareholder propent to revise its proposal to make it n-binding rather than binding, therefore potentially not excludable under Rule 14a-8(i)(9). In light of the guidance, competing proxy access proposals ctinued to appear ballots during the proxy seass. In a situati where both the management s are approved by shareholders, the may have to csider the effects of both proposals; the SEC Staff does not csider such a decisi to represent the kind of direct cflict the rule was designed to address. In SLB. 14H, the SEC Staff noted that, to minimize ccerns about shareholder cfusi, comp that includes shareholder management proposals the same topic its ballot can include proxy statement disclosure explaining the differences between the two proposals how the comp would expect to csider the voting results. Sidley Austin LLP