With the close of another year quickly approaching, it is time again for public companies to get equipped with the developments of the past year to position themselves for success in 2016. A review of the 2015 proxy season and a summary of the current and anticipated changes to disclosure regulations for the 2016 proxy season are below.
2015 IN REVIEW
During the 2015 proxy season, proxy access gained significant attention. The SEC’s 2010 proxy access rule, Rule 14a-11, provided that a shareholder was eligible to nominate proxy access candidates if the shareholder held at least 3 percent of the voting power for at least three years and was not prohibited from proposing a candidate under law or the company’s governing documents. Although this rule was struck down in 2011, many shareholder proposals are still based on both it and the SEC’s amendments to Rule 14a-8. Overall in 2015, there was a significant increase in shareholder proposals seeking proxy access. For example, companies such as Goldman Sachs, McDonald’s, Coca Cola, and most recently Apple have adopted proxy access.
Executive compensation issues were also a central theme in 2015. In general, companies received shareholder and proxy advisor approval for their pay practices during 2015. Additionally, there were fewer instances of multi-year failed Say-on-Pay votes in 2015 compared to 2014.
The comment periods have expired for proposed changes in pay-for-performance, hedging disclosure, and clawbacks; however, the SEC has not finalized the changes. Similarly, the comment period has expired for proposed changes regarding audit committee reporting requirements, but the changes have yet to be finalized. At this time, there is no anticipated date for implementation of these policies.
NEW FOR 2016
CEO Pay Ratio Disclosure Rules
In August 2015, the SEC adopted its long-anticipated final rule implementing Section 953(b) of Dodd-Frank, which requires public companies to disclose the pay ratio between their CEO’s annual total compensation and the annual total compensation of the companies’ “median” employee. With the exception of smaller reporting companies, emerging growth companies, foreign private issuers, and registered investment companies, all reporting companies will have to disclosure their pay ratio. The pay ratio disclosure must be included in any filing that requires executive compensation disclosure under Item 402 of Regulation S-K, which includes registration statements, proxy and information statements, and annual reports on Form 10-K.
Companies will need to comply with the new rule for the first fiscal year beginning on or after January 1, 2017. While this does not directly impact the 2016 proxy season, companies subject to the new rule will need to be proactive in evaluating and anticipating how to comply with the new and potentially burdensome disclosure requirements. The Final Pay Ratio Disclosure Rule is available here.
Rule 14a-8 and Conflicting Shareholder Proposals
In October 2015, the SEC released Staff Legal Bulletin No. 14H, which set forth the SEC’s updated guidance regarding the scope and application of Rule 14a-8(i)(9). Until the 2015 proxy season, companies were able to exclude shareholder proposals by submitting conflicting management proposals. Under the new guidance, a company cannot exclude a shareholder proposal based on Rule 14a-8(i)(9) unless the shareholder proposal “directly conflicts” with the management proposal. A shareholder proposal will not be viewed as directly conflicting with a management proposal if a reasonable shareholder could logically vote for both. Going forward, the new guidance will make it more difficult for companies to exclude certain shareholder proposals from their proxy statements. The Staff Legal Bulletin No. 14H, setting forth the guidance and specific examples, is available here.
Supreme Court Declined to Hear Newman Case
In October 2015, the U.S. Supreme Court declined to hear a petition for writ of certiorari filed by the Department of Justice in United States v. Newman. In Newman, the Second Circuit Court of Appeals dismissed indictments against two defendants accused of insider trading, holding that the government must prove a tippee knew that an insider received a personal benefit in exchange for disclosing confidential information, and that a benefit received must be sufficiently consequential.
This decision, and the fact that the U.S. Supreme Court let it stand, is significant in a number of ways. The decision raised the bar for what constitutes a personal benefit, noting that it must be more than mere friendship. Additionally, the Second Circuit is influential in securities law cases; therefore, Newman will likely influence insider trading cases in other circuits as well. The effects of Newman are already apparent—the government has dropped charges against a number of people accused of insider trading, thus demonstrating Newman’sinfluence. The full Newman decision can be found here.
Rules to Permit Crowdfunding
In October 2015, the SEC adopted final rules permitting private companies to raise up to $1 million per year through crowdfunding. While the new rules make it easier for startups and small businesses to raise capital from a wide range of potential investors, it also places a number of limitations and compliance requirements on companies looking to take advantage of it. For example, there are investment limits, required disclosures by issuers, and a requirement to use regulated intermediaries. The new rules will be effective on May 16, 2016, but forms for registration of funding portals will be effective in January 2016. Regulation Crowdfunding is available here.
A Brief Look at Other Updates for 2016
Recommendation Regarding “4(1½) Exemption.” The SEC Advisory Committee on Small and Emerging Companies recently recommended that the SEC formalize a Section 4(1½) transaction exemption for resales of privately issued securities that otherwise would not qualify under the Rule 144 safe harbor.
Opposition to Administrative Proceedings. Several actions have been filed seeking to block the SEC’s use of administrative proceedings, raising a number of fairness and constitutional challenges. While most actions have been unsuccessful, the use of administrative proceedings will likely stay in the spotlight so long as questions as to the impartiality of the proceedings remain.
Resource Extraction Disclosures. The SEC recently complied with a court order to file an expedited schedule for promulgating final rules regarding the disclosure of payments by resource extraction issuers, calling for a vote on the final rules by June 27, 2016.
Conflict Mineral Rules. In 2015, the conflict minerals disclosure rules were again found unconstitutional; however, it is likely the SEC will appeal the decision to the U.S. Supreme Court. This means that issuers will not have revised conflict minerals rules available when preparing their 2016 Form SD filings. For now, the trend is for issuers to generally follow a 2014 Staff compliance guide by avoiding any specific reference to a label or conclusion.
PROXY ADVISORY FIRM UPDATES
Glass Lewis Updates
Glass, Lewis & Co. (Glass Lewis) recently published its 2016 Proxy Season Guidelines. The guidelines include a number of changes, a summary of which is outlined below.
Conflicting Management and Shareholder Proposals. As discussed above, in October 2015, the Staff issued a new standard for determining whether a company can exclude a shareholder proposal based on the fact that it conflicts with another proposal under Rule 14a-8(i)(9). Glass Lewis revised its guidelines to outline the the factors it will evaluate when deciding whether to support conflicting management and shareholder proposals.
Exclusive Forum Provisions. Glass Lewis will no longer recommend that shareholders vote against the chairman of the nominating and governance committee based solely on an exclusive forum bylaw being adopted in connection with an IPO. Instead, Glass Lewis will weigh the presence of an exclusive forum provision in a newly-public company’s bylaws in conjunction with other provisions that limit shareholder rights such as supermajority vote requirements, classified boards, and fee-shifting bylaws.
Director Overboarding. In 2016, Glass Lewis will review director board commitments to determine when a board member serves on too many boards. During the 2016 transition period, Glass Lewis’ recommendations will remain at the existing thresholds of three total boards for a director who serves as an executive of a public company, and six total boards for directors who are not public company executives.
Beginning in 2017, Glass Lewis recommends changing the threshold to two and five total boards, respectively.
In its update, Glass Lewis also addressed environmental and social risk oversight, nominating committee performance, and compensation updates.
A copy of the full Glass Lewis Proxy Season Guidelines is available at the Glass Lewis website.
Institutional Shareholder Services (ISS) also updated its proxy voting policy guidelines for 2016, which will affect shareholder meetings that take place after February 1, 2016. The guidelines set forth a number of updates, which are summarized below.
Director Overboarding. Similar to Glass Lewis, ISS also updated its policy regarding director overboarding, reducing the threshold for overboarding from six to five boards for directors who are not company executives. The overboarding changes will go into effect in February of 2017, which gives companies a one-year grace period to determine how to address potential problems. Unlike Glass Lewis, ISS did not change its policy for overboarding of company executives, and the threshold will remain at three total boards.
Unilateral Governance Changes. For newly public companies, ISS will generally recommend against directors who have unilaterally adopted charter or bylaw amendments that are adverse to the rights of shareholders prior to or in connection with an IPO; however, it will be determined on a case-by-case basis.
Compensation of Externally Managed Issuers. The new “Problematic Pay Practices” policy provides that an externally managed issuer’s failure to provide sufficient disclosure for shareholders to reasonably assess the compensation made to executive officers will be deemed a problematic pay practice, and will typically result in a recommendation to vote against an issuer’s say-on-pay proposal.
Additionally, ISS addressed changes to contested director elections, policies requiring senior executives to hold shares through retirement, and environmental and social issues.
A copy of the full ISS 2016 Proxy Voting Guidelines is available here.