action items to prepare for 2015 proxy season

© 2014 Winston & Strawn LLP

November 20, 2014

Preparing for the 2015 Proxy Season Presented by: Erik Lundgren & Mike Melbinger

Brought to you by Winston & Strawn’s Employee Benefits and Executive Compensation Practice Group


Today’s eLunch Presenters

Michael Melbinger Employee Benefits and Executive

Compensation Practice Chicago

[email protected]

Erik Lundgren Employee Benefits and Executive


[email protected]

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Overview – Preparing for the 2015 Proxy Season

• Lessons Learned from 2014 Proxy Season • Coca-Cola stock plan

• Shareholder proposal and proxy disclosure trends

• New Proxy Advisor Policies for 2015

• Proxy Statement Drafting Tools and Tips

• Maximizing Say on Pay Support

• Compensation Litigation Update – Defensive Drafting

• Section 16 Disclosures in the Spotlight

• Pending CEO Pay Ratio and Other SEC Rulemaking

• Renewed Focus on Proxy Voting Standard

• PCAOB Auditing Standard No. 18

• SEC Guidance on “Bundling” Proxy Proposals

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1. Lessons Learned from 2014 Proxy Season


Lessons learned from Coca-Cola’s 2014 Plan Share Request

“There’s already 9% or so overhang…and this authorization of another 500 million shares

was too much.” Warren Buffett

• Coke requested shareholder approval of 500 million shares or 11.3% of shares outstanding at the 2014 shareholder meeting

• Also disclosed that it already had 369 million stock options (8.4%) and 19.6 million full value shares (0.4%) outstanding

• The sum of outstanding and requested shares equaled 20% of shares outstanding

• Coke attempted to highlight fact that the share reserve was subject to a 5 to 1 fungible share provision

• Coke also mentioned it expected the plan to last 4 years based on prior share usage of 60 million, 63 million, and 73 million shares issued in 2012, 2013, and 2014, respectively

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Digging Deeper – What Happened

• Coke explained how a 60% stock option/40% full value share LTI mix would impact future dilution • Estimated dilution would equal 14.2%, but did not fully explain how much dilution

would be from existing awards or the new share request

• Calculated dilution of 14.2% based on a “fully diluted” basis (i.e., shares awarded and available for grant are added to the denominator)

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Digging Deeper – What Happened (cont.)

• One shareholder took exception to the plan and created a video with misleading and incorrect statements about the cost and dilutive effect of the plan

• The adverse publicity compounded when a major investor publicly commented that he did not agree with management’s share request

• Coke filed supplemental proxy materials to further explain the 500 million share request

• In the end, the plan passed with 83% of the vote • ISS recommended a “For” vote as the plan met its Shareholder Value Transfer (SVT)

limit

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Digging Deeper – What Should Have Happened

• What the Coca-Cola Company could have shown shareholders:

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Share Request: 500 million shares

(11.3% shares outstanding)

Future Awards: 60% stock options

40% full value shares 5:1 fungible share factor

• Alternatively, they could have simply asked for 260 million shares with a full value share limit of 100 million shares

– Chances are a 260 million share request (or 5.9% of outstanding shares) would have attracted some attention, but not nearly as much as 500 million shares

Est. Annual: 65 million shares


Est. Aggregate: 260 million shares


*Analysis by Mike Kesner


Lessons Learned

• Just because ISS will approve a large share request does not mean you should ask for the maximum ISS will allow

• Shareholders often think of share requests simplistically (i.e., % of shares outstanding)

• Fungible share pools offer great flexibility, but “spike-up” the number of shares being requested

• Shareholders may prefer that companies ask for fewer shares on a more frequent basis

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Shareholder Proposal Trends

• 2014 proxy season stockholder proposals covered 3 general categories: 1. Social and environmental issues

2. Corporate governance

3. Executive compensation

• In 2014, stockholder proposals regarding social and environmental issues exceeded the number of corporate governance proposals

• Stockholder proposals are submitted for inclusion in proxy materials and non-binding vote of stockholders

• The following slides describe 2014 stockholder proposals that are monitored by ISS. The following do not necessarily result in numerous proposals or significant stockholder support

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2014 Proxy Season Recap – Stockholder Proposals – Executive Compensation • Require Holding of Equity Awards

• Stockholders generally request a company require senior executives to hold equity awards until after retirement or for a substantial period after the awards have vested

• ISS Policy – Vote CASE-BY-CASE on proposals asking companies to adopt policies requiring senior executives to retain all or a significant portion of their equity awards acquired through compensation plans

• 2014 Support • ISS reported an average of 23% support for the 28 proposals voted on (1 proposal remains

pending), with no proposals passing

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2014 Proxy Season Recap – Stockholder Proposals – Executive Compensation (cont.) • Severance Agreements/Golden Parachutes

• Stockholder proposals seek non-binding stockholder approval of golden parachutes for executive officers. Golden parachutes generally are compensation and benefits packages paid to executives in the event employment is terminated (often in connection with a change of control)

• Say on Pay vote now required with respect to golden parachutes in a proxy statement relating to a stockholder vote to approve an acquisition, merger, consolidation or proposed sale or other disposition of all or substantially all assets of a company. However, no vote required if golden parachute compensation already has been subject to Say on Pay vote

• ISS Policy – Vote CASE-BY-CASE on proposals to approve a company’s golden parachute compensation

• 2014 Support • ISS reported an average of 41% support for the 3 proposals submitting severance agreements

to a shareholder vote, with 1 proposal passing and 2 proposals failing

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2. New Proxy Advisor Policies for 2015


Proxy Advisors – Overview

• ISS Policies - Overview • Proxy Voting Policies

• Equity Plan Scorecard

• Equity Plan Data Verification

• Corporate Governance Ratings (QuickScore 3.0)

• Glass Lewis (http://www.glasslewis.com/assets/uploads/2013/12/2015_GUIDELINES_United_States.pdf)

• Enhanced scrutiny on “one-off” awards

• Say on Pay voting recommendation approach

• Staff Legal Bulletin 20 (http://www.sec.gov/interps/legal/cfslb20.htm)

• Covers proxy voting responsibilities of investment advisers and their relationship with proxy advisors

• May not have direct impact on public company interaction with proxy advisors (ISS and Glass Lewis)

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http://www.glasslewis.com/assets/uploads/2013/12/2015_GUIDELINES_United_States.pdf

http://www.sec.gov/interps/legal/cfslb20.htm


Proxy Advisors – ISS Updates – Proxy Voting • Proxy Voting Guidelines (selected topics)

• Director Elections

• Say on Pay

• Equity Plan Scorecard – NEW (final in late November 2014) • Plan Cost, Plan Features and Grant Practices to be weighed and balanced

• Expanded list of “problematic” features of plans

• Independent Chair Shareholder Proposals – NEW (final in late November 2014) • New factors considered including absence/presence of executive chair, recent board and

executive leadership transitions at company, director/CEO tenure, and 5-year TSR performance

• Equity Plan Data Verification (http://www.issgovernance.com/file/faq/equity-plan-data-verification.pdf)

• Companies with a stock plan proposal may register for this (can’t participate without registering)

• Must file proxy statement at least 30 days prior to meeting to be eligible

• Data verification window will open approximately 12 business days after filing of definitive proxy; companies will have a 2 business day window to verify the data

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http://www.issgovernance.com/file/faq/equity-plan-data-verification.pdf


Proxy Advisors – ISS Updates – QuickScore 3.0 • Data Verification Through Nov. 14

• New Factors (plus # of women bd members and # of audit committee financial experts) • Does the company disclose a policy requiring an annual performance evaluation of the board?

• Has the board failed to . . . address the issue underlying majority director WHs (withhold votes)?

• Has ISS’ review found that the Board of Directors recently took action that materially reduces shareholder rights?

• Is there a sunset provision on the company’s unequal voting structure?

• Does the company have a controlling shareholder?

• Revised Factors • Has a regulator initiated enforcement action against the company in the past two years? [This factor

used to refer only to securities regulators]

• Has a regulator initiated enforcement action against a director or officer of the company in the past two years? [This factor used to refer only to securities regulators]

• What percentage of directors received shareholder approval rates below 80%? [This factor used to say below the “industry-index level”]

• Does the company’s average 3-year equity grant exceed the greater of 2 percent and the average of its industry/index peers? [This used to refer to grant of awards at “excessive rate”]

• Did the most recent Say on Pay proposal received shareholders’ support below 70%? [This factor used to say below the “industry-index level”]

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Proxy Advisors – Glass Lewis Policies • NEW: Enhanced scrutiny will be applied to “one-off” incentive grants on a case-by-case

basis • Thorough description required in proxy

• Explanation of necessity of awards

• Subject to future service and/or performance

• Problematic Features Affecting Say on Pay Vote Recommendation: • Inappropriate peer group and/or benchmarking issues

• Inadequate or no rationale for changes to peer groups

• Egregious/excessive bonuses, equity awards or severance, incl. golden handshakes/parachutes

• Problematic contractual payments, such as guaranteed bonuses

• Targeting overall levels of compensation at higher than median without adequate justification

• Performance targets not sufficiently challenging, and/or providing for high potential payouts

• Performance targets lowered without justification

• Discretionary bonuses paid when short- or long-term incentive plan targets were not met

• Executive pay high relative to peers not justified by outstanding company performance

• Terms of long-term incentive plans are inappropriate

• Insufficient disclosure of compensation policies

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3. Proxy Statement Drafting Tools and Tips


Proxy Disclosure Tools and Tips

• User Friendly Format • Institutional Investor Survey (RR Donnelley, 2013)

• Many access the proxy statement through a proxy advisor platform or Broadridge’s ProxyEdge; no one reviews a hard copy

• Most skip to specific sections of proxy when reviewing it (CD&A executive summary and proxy statement summary, especially)

• Director independence, pay for performance alignment and disclosure of performance measures ranked as most important subject matters

• Proxy Summaries (in CD&A and Proxy Intro)

• “Good Governance” Highlights • Disclosure targeted to impact QuickScore and proxy advisory firm reports

• Telling Your Story, including “Pay for Performance” • But remember “non-GAAP” rules (Reg S-K C&DI 118.09)

• Follow-through on Commitments Made in Prior Disclosure • SEC Comment Letter Responses

• Say on Pay Proposal Disclosure

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4. Maximizing Say on Pay Support


Say on Pay Results* and Strategies

• Overall passage rate for Say on Pay remains high (avg. support of 91% in 2014)

• So far in 2014, 55 Russell 3000 companies failed to obtain majority approval of their Say on Pay proposals

• 75% of companies have passed with over 90% approval in 2014

• ISS recommended a vote AGAINST Say on Pay at approximately 13% of companies it reviewed in 2014

• ISS effect? • Average approval with ISS “for”: 95%

• Average approval with ISS “against”: 67%

*Data from Semler Brossy September 10, 2014 Say on Pay Report

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Say on Pay Results and Strategies (cont.) • Usual reasons for failed Say on Pay votes:

• Pay and performance disconnect

• Rigor of performance goals

• Special awards or mega-grants • Solid TSR and financial performance don’t insulate companies from scrutiny (Chipotle)

• Non-performance-based equity

• Problematic pay practices

• Benchmarking practices

• Typical company changes in response to Say on Pay challenges*: • Improving proxy disclosure

• Ensuring incentive plan goals are sufficiently challenging

• Shifting pay mix to performance based

• Changing severance plan

• Increasing weight of performance shares

*NYSE Governance Services / Corporate Board Member / Pay Governance Fall 2013 Survey 22


Say on Pay Results and Strategies (cont.)

• Ensure that required and “best practices” disclosure and procedures are included/followed • Supporting Statement for Say on Pay Proposal (include current frequency and when

next vote will occur)

• Proxy Statement and Proxy Card Language – SEC Guidance

• CD&A disclosure re: consideration of Say on Pay result

• Executive Summary in CD&A

• Pay for Performance Emphasis in Disclosure

• Proxy Summaries

• “Good Governance” Highlights

• User-Friendly Format

• Telling Your Story

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5. Compensation Litigation Update – Defensive Drafting


Compensation Litigation Update

• Say on Pay Litigation – dead?

• Stock Plan Proposal Litigation – don't be a target

• Incentive Plan “Oops” Litigation – do your diligence

• Compensation Litigation and Directors • Seinfeld v. Slager, Facebook, Unilife

• Separate plan?

• Specific director compensation limits?

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Annual Meeting Disclosure Litigation – Strategies • Stock Plan Proposal – Disclosure Approach

• Start with the SEC disclosure rules

• Enhanced burn rate and overhang disclosure

• Review peer disclosures

• Supplemental disclosure – less is more?

• Stock Plan Drafting – Consider Addressing Director Compensation Hot Buttons

• The Next Wave of Executive Compensation Litigation? • Plaintiffs’ firms are creative

• W&S litigators are monitoring developments and are experienced in litigating against the plaintiffs’ firms bringing these lawsuits

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6. Section 16 Disclosures in the Spotlight


SEC Section 16 Enforcement Actions • SEC targeted individuals and companies for failure to file Section 16 reports

• Five companies cited had failed to report late filings in their annual proxy statements as required by Item 405 of Regulation S-K • Accurate Proxy disclosure is the company’s responsibility.

• Independent duty to verify

• Generic disclosure will not comply: “Certain officers and directors filed late”

• One company said it based its conclusions on written certifications when in fact it never received them

• Item 405 Requirement • Identify each person who failed to file on a timely basis reports required by section 16(a) of the

Exchange Act during the most recent fiscal year or prior fiscal years

• For each such person, set forth the number of late reports, the number of transactions that were not reported on a timely basis, and any known failure to file a required Form

• Company Action Items • Ensure that all required filings have been (i) made and (ii) made on a timely basis

• Include review and question in D&O questionnaire

• Make sure proxy disclosure is supported by the facts and meets Item 405 requirements

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7. Pending CEO Pay Ratio and Other SEC Rulemaking


CEO Pay Ratio and Other SEC Rulemaking

• Final Compensation Committee and Advisor Independence Rules Now Applicable

• Final Pay Ratio Rules Expected in 2014 – would be effective for 2015 compensation reported in 2016 proxy statement

• Pay for Performance, Hedging Disclosure, Clawbacks – proposed rules still pending

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Compensation Committee and Advisor Independence • Action Items for Compensation Committees and Companies

• Assess independence* of compensation consultants to the company and the compensation committee prior to proxy statement filing to comply with conflict of interest disclosure requirement

• Prior to receiving advice from advisers, assess independence* of all advisers to compensation committee (incl. outside legal counsel) • May need to anticipate which advisers may be asked to provide advice to the compensation

committee during the coming year so they can be “vetted” in advance

• Should review independence of advisers annually

• Amend compensation committee charter prior to compliance deadline

• Confirm/assess independence of the compensation committee members under new standards

*Advisor/consultant independence assessment will be done by the compensation committee based on information (i) received from the advisers as to the six independence factors and (ii) received from responses to questions in D&O questionnaires.

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CEO Pay Ratio

• The Dodd-Frank Act requires the SEC to adopt rules requiring companies to disclose: A. the median of the annual total compensation of all employees of the Company,

excluding the CEO,

B. the annual total compensation of the CEO of the Company, and

C. the ratio of (A) to (B)

• On September 18, 2013, the SEC proposed rules that would require the disclosure of these amounts and the pay ratio in the annual proxy statement

• As proposed, the rule would apply to the proxy statement reporting compensation for the first full fiscal year occurring after the rule’s effectiveness

• Final rule is expected in 2014 (if so, would apply to 2015 compensation reported in 2016 proxy statement for calendar year-end companies)

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CEO Pay Ratio – Proposed Rule

• How to Calculate the Ratio • Include all full-time, part-time, temporary, seasonal, and non-U.S. employees who

are employed as of the fiscal year-end

• May (but are not required to) annualize compensation for full-time employees who served part of the year

• May choose a method of identifying the median employee that best fits the Company’s particular circumstances • May use any consistently applied compensation measure (such as payroll or tax records) to

determine the median employee

• May use self-determined statistical sampling or other reasonable method to reduce the number of employees for whom annual compensation must be calculated

• What to Disclose • Total compensation of the median employee (using the Summary Compensation

Table Rules), CEO total compensation, and the ratio between the two

• The methodology and any material assumptions, adjustments or estimates used to identify the median employee

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8. Renewed Focus on Proxy Voting Standard


Proxy Voting Standards

• In June 2014, investors took executives of Houston-based Cheniere Energy’s to court over billions of dollars in stock awards the plaintiffs claim shareholders didn’t approve

• The lawsuit alleges deficiencies in the shareholder approval process for the Cheniere 2011 Stock Plan and the proxy statement disclosures concerning the 2011 Plan

• According to the lawsuit, Cheniere failed to count abstention votes tallied in February 2013 as “no” votes, as the suit alleges is required by law, and “falsely claimed the vote passed with a majority vote.” Last year, there were 77 million shareholder votes in favor of nearly tripling the 2011 compensation plan, 57.9 million votes against it, and 36 million abstentions

• Investors are trying to wrestle approximately 25 million shares from the executives, which were worth about $1.7 billion

• There are numerous vote-counting rules and disclosure obligations that present a broad coordination challenge for issuers and their counsel. This lawsuit has led issuers and their counsel to take a closer look at their proxy voting standards

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• State Law. Each state establishes some form of voting standard • In Delaware, the DGCL provides that, absent a specific statutory requirement, Delaware

corporations may establish their own standards for determining a quorum and the required vote for approval of any matter

• In the absence of such specification in the certificate of incorporation or bylaws of a corporation, Section 216(2) of the DGCL creates a default standard for matters not involving the election of directors: “In all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders”

• Section 216(3) of the DGCL creates the default standard for the election of directors as “a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors”

• Issuer Charter and Bylaw Provisions. Most issuers will take the default state standards and incorporate them into their charter and bylaws. While the language in the governing documents was essentially a formality in the past, the adoption of the majority voting for the election of directors over the past decade by many issuers has caused increased variation in the language of voting standards

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• Issuer Corporate Governance Principles. Often, corporate governance principles will restate the voting standards discussed in the charter and/or bylaws. For those issuers that have taken the “majority voting policy” approach to director elections but have not adopted the majority voting standard as part of their bylaws, the corporate governance principles include language demonstrating their commitment to majority voting

• Exchange Voting Standards. When the NYSE listing standards require shareholder approval of a particular matter, the NYSE has its own voting standard for determining whether that matter has been approved by shareholders • Section 312.07 of the NYSE Listed Company Manual provides that when NYSE listing standards

require shareholder approval of a matter, the matter will be deemed approved if "for" votes represent a “majority of votes cast”

• The NYSE considers an abstention to be a “vote cast,” and, therefore, an abstention has the effect of a vote against a matter

• Similarly, as Nasdaq Listing Rule 5635(e)(4) provides that shareholder approval under Nasdaq listing standards requires that “the minimum vote that will constitute shareholder approval shall be a majority of the total votes cast on the proposal,” an abstention also has the effect of a vote against the matter for that purpose

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Proxy Voting Standards Disclosure Requirements

• Proxy Statement Disclosure. Item 21 of Schedule 14A requires the following disclosure for each matter submitted to a shareholder vote: (i) “the vote required for approval or election, other than for the approval of auditors”; and (ii) “the method by which votes will be counted, including the treatment and effect of abstentions and broker non-votes under applicable state law as well as registrant charter and by-law provisions”

• In responding to this disclosure item, issuers must consider their charter and bylaws, as well as any corporate governance principles they have published, and address each of the following points for all matters placed before shareholders for a vote, including the election of directors, the ratification of auditors, the Say on Pay advisory vote, and any other proposals:

i. what are the voting options for the matter being voted upon (e.g., for an election of directors, is it a “true" majority vote standard with the options being “for,” “against,” or “abstain,” or do the options continue to be “for,” “withhold,” or “abstain”)

ii. what is the approval/election standard for the matter

iii. how does the company determine whether a quorum is present

iv. what is the standard for establishing the denominator of “votes cast” in the equation for approval (e.g., will it include abstentions or broker non-votes)

v. what will be the standard for determining “for” votes in the numerator of the equation for approval

vi. what is the standard for auditor ratification

vii. what is the meaning of the vote count for the Say on Pay advisory vote

• Form 8-K Disclosure. Item 5.07 of Form 8-K requires disclosure regarding any matter submitted to a vote of shareholders

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9. PCAOB Auditing Standard No. 18


PCAOB Auditing Standard No. 18

• The SEC has approved Auditing Standard No. 18, adopted by the PCAOB in June 2014. The standards become effective for audits of financial statements for fiscal years beginning on or after December 15, 2014, including for emerging growth companies (ECGs)

• There are three areas of focus for Auditing Standard No. 18: • related party transactions

• significant unusual transactions and financial relationships

• transactions with executive officers (such as executive compensation and perks)

• The new auditing standards subject these types of transactions to additional risk-based procedures that are designed to assist the auditors in identifying red flags that may cause material misstatements. Companies should also be aware that the auditing standard opens up possible new lines of inquiries from auditors to boards of directors

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• Related Party Transactions and the Audit Committee. The revised standard includes a requirement that the auditors communicate to the audit committee their evaluation of the company’s identification of, accounting for, and disclosure of its relationships and transactions with related parties, as well as significant matters arising from the audit regarding the company’s relationships and transactions with related parties. This includes whether all transactions: a. were disclosed to the auditors

b. were authorized in accordance with established policies

c. have terms similar to those in arm’s length transactions

• In addition, auditors may ask audit committees, or their chairs, about their understanding of the company relationships with related party transactions and whether the audit committee has any concerns about those transactions

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• Executive Compensation and the Compensation Committee. While the standard explicitly provides that the auditors’ work does not include an assessment of the appropriateness or reasonableness of executive compensation arrangements, the changes are designed to heighten the auditors’ attention to incentives or pressures for the company to achieve a particular financial position or operating results, recognizing the key role that a company’s executive officers may play in the company's accounting decisions or financial reporting

• The auditors may ask the chair of the compensation committee and compensation consultants about the structure of executive compensation, including incentive compensation and perks. Audit procedures may include reading employment contracts with executives and proxy statements. In addition, auditors will need to obtain an understanding of established policies and procedures regarding the authorization and approval of executive officer expense reimbursements

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10. SEC Guidance on “Bundling” Proxy Proposals


SEC Guidance on “Bundling” Proxy Proposals

• When preparing proxy statements, public companies must not “bundle” separate matters together for the purposes for shareholder voting

• In accordance with Rule 14a-4(a)(3) under the Exchange Act, when distinct matters are submitted to shareholders for approval pursuant to the solicitation of proxy authority, they must be “unbundled” so that shareholders are given the opportunity to vote on each material item individually

• Rule 14a-4(a)(3) requires that a proxy card must “identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters”

• When the proposals being presented for approval at a shareholders meeting involve topics that are clearly different from each other, it is relatively straightforward to divide the proposals into distinct voting items

• However, when a proposal involves multiple components that bear relationships to each other, it can be more difficult to determine whether such proposal must be “unbundled” to give shareholders the option to vote on each separate part

• 2013 Apple case (Greenlight Capital, L.P. v. Apple, Inc.) – Federal court enjoined Apple from bundling four charter amendments into a single proposal

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SEC Guidance on “Bundling” Proxy Proposals • On January 24, 2014, the Staff issued three compliance and disclosure

interpretations providing guidance on when unbundling is/isn't required. The following interpretations address multi-faceted charter amendments and omnibus equity incentive plan amendments

Section 101. Unbundling under Rule 14a-4(a)(3) Generally Question 101.01: Management of a registrant has negotiated concessions from holders of a series of its preferred stock to reduce the dividend rate on the preferred stock in exchange for an extension of the maturity date. Must a single proposal submitted by management to holders of the registrant’s common stock to approve a charter amendment containing these modifications be unbundled into separate proposals under Rule 14a-4(a)(3) – one relating to the reduction of the dividend rate, and another relating to the extension of the maturity date?

Answer: No. Multiple matters that are so “inextricably intertwined” as to effectively constitute a single matter need not be unbundled. The staff, in this particular case, would view the matters relating to the terms of the preferred stock as being inextricably intertwined, because each of the proposed provisions relates to a basic financial term of the same series of capital stock and was the sole consideration for the countervailing provision. Note, however, that the staff would not view two arguably separate matters as being inextricably intertwined merely because the matters were negotiated as part of a transaction with a third party, nor because the matters represent terms of a contract that one or the other of the parties considers essential to the overall bargain

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SEC Guidance on “Bundling” Proxy Proposals Question 101.02: Management of a registrant intends to present an amended and restated charter to shareholders for approval at an annual meeting. The proposed amendments would change the par value of the common stock, eliminate provisions relating to a series of preferred stock that is no longer outstanding and is not subject to further issuance, and declassify the board of directors. Under Rule 14a-4(a)(3), must the individual amendments that are part of the restatement be unbundled into separate proposals?

Answer: No. The staff would not ordinarily object to the bundling of any number of immaterial matters with a single material matter. While there is no bright-line test for determining materiality in the context of Rule 14a-4(a)(3), registrants should consider whether a given matter substantively affects shareholder rights. While the declassification amendment would be material under this analysis, the amendments relating to par value and preferred stock do not substantively affect shareholder rights, and therefore both of these amendments ordinarily could be included in a single restatement proposal together with the declassification amendment. However, if management knows or has reason to believe that a particular amendment that does not substantively affect shareholder rights nevertheless is one on which shareholders could reasonably be expected to wish to express a view separate from their views on the other amendments that are part of the restatement, the amendment should be unbundled

The staff notes that the analysis under Rule 14a-4(a)(3) is not governed by the fact that, for state law purposes, these amendments could be presented to shareholders as a single restatement proposal. If, for example, the restatement proposal also included an amendment to the charter to add a provision allowing shareholders representing 40% of the outstanding shares to call a special meeting, the staff would view the special meeting amendment as material and therefore required to be presented to shareholders separately from the similarly material declassification amendment

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SEC Guidance on “Bundling” Proxy Proposals

Question 101.03: Management of a registrant intends to present for a vote of shareholders a single proposal covering an omnibus amendment to a registrant’s equity incentive plan. The amendment makes the following changes to the terms of the plan:

• increases the total number of shares reserved for issuance under the plan

• increases the maximum amount of compensation payable to an employee during a specified period for purposes of meeting the requirements for qualified performance-based compensation under Section 162(m) of the Internal Revenue Code

• adds restricted stock to the types of awards that can be granted under the plan

• extends the term of the plan

Must any of these proposed changes be unbundled into a separate proposal pursuant to Rule 14a-4(a)(3)?

Answer: No. While the staff generally will object to the bundling of multiple, material matters into a single proposal – provided that the individual matters would require shareholder approval under state law, the rules of a national securities exchange, or the registrant’s organizational documents if presented on a standalone basis – the staff will not object to the presentation of multiple changes to an equity incentive plan in a single proposal. See Section III of Exchange Act Release No. 33229(Nov. 22, 1993). This is the case even if the changes can be characterized as material in the context of the plan and the rules of a national securities exchange would require shareholder approval of each of the changes if presented on a standalone basis

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http://www.sec.gov/rules/final/1993/33-7032.pdf

http://www.sec.gov/rules/final/1993/33-7032.pdf


Questions?


Thank You.

Michael Melbinger Employee Benefits and Executive


[email protected]

Erik Lundgren Employee Benefits and Executive


[email protected]

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