Corporate Communicator - 2017 Annual Meeting Season

Snell & Wilmer

Dear clients and friends,

We present our traditional year-end issue of Snell & Wilmer’s Corporate Communicator to help you prepare for the upcoming annual report and proxy season. This issue highlights SEC reporting and corporate governance considerations that will be important this annual meeting season as well as in the upcoming year.

During 2017, members of our Corporate & Securities group will continue to publish the Corporate Communicator, host business presentations, participate in seminars that address key issues of concern to our clients, and sponsor conferences and other key events. First on the calendar is our Ninth Annual Proxy Season Update, which will be held in our Phoenix office on January 12, 2017. Finally, we are pleased to present our 2016 Tombstone, which highlights selected deals that Snell & Wilmer’s Corporate & Securities group helped clients close during the year.

As always, we appreciate your relationship with Snell & Wilmer, and we look forward to helping you make 2017 a successful year.

Very truly yours,

Snell & Wilmer
Corporate & Securities Group


As we head into the proxy season, board composition continues to be a high-profile topic amongst investors, boards of directors, regulators and proxy advisory firms. There is no single approach to ensure an optimal board composition—many factors need to be evaluated in determining what works best for each company on a case-by-case basis. In particular, three important points to consider for board composition matters are tenure, diversity and board refreshment.


Director tenure is a key consideration in determining board composition and one that is often debated. On the one hand, some take the position that having long-tenured directors may have a negative effect on matters of director independence, as well as director performance. As a result of their lengthy board service, such directors may develop too close a relationship with management over time, which could potentially lead to complacency and have the undesirable effect of diminishing their role as an independent steward of the company. Moreover, having too many long-tenured directors may lead to a board with stale skills and perspectives, thereby reducing the effectiveness of the board.

On the other hand, others argue that long-tenured directors are valuable given their extensive understanding of the company’s business and operations. In addition, with their institutional knowledge of the company and long-standing relationship with management, such directors may be in a better position to influence and challenge management when necessary—something that a relatively new director on the board may not feel comfortable doing.

Ultimately, consideration should be given to having a board composed of a combination of short- and long-tenured directors, thereby ensuring that fresh perspectives are introduced while still retaining a sense of continuity and historical knowledge of the company amongst the board.


Board diversity can come in many forms, whether it’s diversity of race, gender, ethnicity, age or sexual orientation, as well as diversity in skills, background and experiences. Having a diverse board provides a wider range of perspectives and expertise, which may result in a more successful board. In fact, some studies have shown that diverse boards are correlated with better company performance.[1] For example, a study by McKinsey & Co. found that companies in the top quartile for gender or racial and ethnic diversity are more likely to have financial returns above their national industry medians. This is consistent with the belief of certain public company directors who responded to PricewaterhouseCoopers LLP’s 2015 Annual Corporate Directors Survey[2] in which more than 80 percent believed diversity at least “somewhat” enhances board effectiveness and company performance, and more than one-third believed it does so “very much.”

The issue of board diversity is also a current topic of consideration by the SEC. In December 2009, the SEC adopted amendments to Item 407(c) of Regulation S-K, which require companies to disclose whether, and if so, how, their nominating committees consider diversity and, if they have a policy on diversity, how its effectiveness is assessed. In June 2016, SEC Chair Mary Jo White, spoke at the International Corporate Governance Network Annual Conference and confirmed that the SEC staff is preparing a proposal, which would amend the current rule by requiring companies to include in their proxy statements “more meaningful” board diversity disclosures on their board members and nominees where that information is voluntarily self-reported by directors. Ms. White noted that disclosures on board diversity under the current rules have generally been vague and have changed little since the rule was adopted. Moreover, she stated that very few companies have disclosed a formal diversity policy. Given that Ms. White recently announced that she intends to leave at the end of the Obama Administration, it is unclear at this moment whether a final rule relating to board diversity disclosure will be proposed before her departure.

Board Refreshment

It is also important for a company to have processes in place to optimally refresh the board as needed. This will help ensure that the board has the necessary balance of skills, perspectives and experiences, which ultimately leads to a more effective board. Some companies implement a term limit for directors or a mandatory retirement age as a means to board refreshment. However, while either of these approaches do force board turnover, there is the risk of potentially losing productive directors with extensive experience as a result.

One alternative is for a board to utilize its self-evaluation process as a way to gauge if and how the board should be refreshed. By having a fulsome and rigorous evaluation framework in place, the board will be able to identify gaps or weaknesses, such as with respect to diversity or particular skill sets, and can then attempt to address these issues as appropriate (e.g., replacing current directors or adding new directors). However, companies may wish to keep in mind that certain institutional investors and proxy advisors have adopted explicit guidelines regarding director tenure and board refreshment, which, if not satisfied, may result in negative vote recommendations.


In recent years large institutional shareholders have increasingly turned to shareholder votes as a less-expensive way to influence corporate decision-making (or even secure board seats or takeover control). In particular, “proxy access” (the ability to include shareholder nominees in the company’s own proxy materials) can allow activist shareholders to nominate a portion of the board without incurring the expense of a proxy solicitation.

Data for 2016 has shown that this trend is continuing, with continued requests by investors to amend company bylaws to allow for proxy access and companies pre-emptively adopting proxy access. 2016 also saw, for the first time in history, an investor’s attempted use of proxy access to nominate a director candidate.

Proxy Access Used for the First Time Ever

Until recently, it seemed that the prize in proxy access fights was merely securing the ability to have access to the company’s proxy materials, with no specific intent to use the reforms that access could make possible. In November 2016, GAMCO Investors used a proxy access bylaw adopted by National Fuel Gas Company (NFG) only eight months earlier to nominate a director for election at NFG’s annual meeting. The proxy access bylaw adopted by NFG was considered “market” in that it allowed a single shareholder or group of up to 20 shareholders holding three percent or more of NFG’s stock for at least three continuous years to nominate up to 20 percent of NFG’s board (in NFG’s case, one of nine directors) if the ownership stake was acquired without the intent to change or influence control of the company.

GAMCO’s attempted use of proxy access was unsuccessful, however, as GAMCO withdrew its nominee and announced that it “will not pursue proxy access.” As expected, GAMCO’s attempted use of proxy access faced intense opposition by NFG, which publicly took the position in a letter to GAMCO that GAMCO intended on changing or influencing control of NFG, and was therefore ineligible to utilize proxy access.

The takeaway from the GAMCO episode is that 13D filers, including hedge funds and other institutional investors, may be prevented from using proxy access from the get-go due to a presumption that such investors have the intent to change or influence control. Another takeaway is that because proxy access provisions are generally drafted to prevent short-term investors from usurping control, companies can and will use those provisions against institutional investors perceived as a threat.

Proxy Access and “Substantial Implementation”

There has been a trend in recent years for companies threatened with proxy access proposals to pre-emptively adopt a more rigorous form of proxy access bylaw. Later, if a proponent submits an alternative access proposal, the company would then seek to exclude the investor proxy access proposal under ‘34 Act Rule 14a-8(i)(10) on the grounds the proposal had already been “substantially implemented.” For the most part, this has been a successful strategy.

In 2016, the SEC staff granted no-action relief to several companies to permit the exclusion of shareholder proposals seeking proxy access in the company’s own proxy materials where the company had already adopted proxy access. These no-action letters suggested that a shareholder proxy access proposal with an ownership threshold of three percent for three continuous years would be deemed to have been “substantially implemented” if the company had already adopted a proxy access bylaw with those same thresholds, even if there were other differences between the investor’s proposal and the company’s proxy access bylaw.

In July 2016 the SEC, in a no-action letter to H&R Block, stated that a shareholder proposal to revise a company’s existing proxy access bylaw (which had been adopted by the company with three percent/three year holding requirements) could not be excluded, drawing a distinction between investor proposals for proxy access and proposals to change the company’s existing proxy access terms.

In September 2016 the SEC released three additional no-action letters confirming that company-adopted proxy access requirements do not have to be identical in all respects for a company to exclude an investor’s proxy access proposal—similarity of the core ownership requirements will do.

The main takeaway from this year’s no-action letters on substantial implementation is that the H&R Block no-action letter created an opening for activist investors to force companies to include proposals seeking to revise an already existing proxy access bylaw.


As is the case each year around this time, Institutional Shareholder Services Inc. (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”) both recently updated their proxy voting guidelines for the 2017 proxy season.

Updates to ISS’ Proxy Voting Guidelines

The following is a summary of ISS’ key policy updates applicable to U.S. companies:

Restricting Binding Shareholder Proposals

ISS adopted a new policy pursuant to which it will generally recommend voting against governance committee members if the company’s charter imposes undue restrictions on shareholders’ ability to amend the company’s bylaws. Such restrictions include, but are not limited to, an outright prohibition on the submission of binding shareholder proposals or share ownership or holding requirements beyond those required by Rule 14a-8.

Director Overboarding Policy

ISS will begin recommending votes “against” directors who sit on more than five public company boards. For public company CEOs, ISS will continue to recommend votes “against” such CEOs who sit on the boards of three or more public companies besides their own.

IPOs with Multi-Class Shareholder Structures

In light of the growing number of companies completing IPOs with multi-class capital structures if, prior to or in connection with a Company’s IPO, the company or its board adopts bylaw or charter provisions materially adverse to shareholder rights or implements a multi-class capital structure in which the classes have unequal voting rights, ISS will generally recommend a vote “against” all directors except new nominees unless there is a reasonable sunset provision. ISS will, however, continue to consider a number of enumerated factors before making its final recommendation.

Equity Plan Scorecard

ISS made minor revisions to the factor weightings under its three pillar “equity plan scorecard.” In addition to the weighting changes, however, ISS’ updated policy includes one additional factor related to the evaluation of the payment of dividends on unvested awards. ISS noted that from an incentive and retention perspective, dividends on unvested awards should be paid only after the underlying awards have been earned and not during the performance/service vesting period. Under the new factor, full points will be earned if the equity plan expressly prohibits, for all award types, the payment of dividends before the vesting of the underlying award (however, accrual of dividends payable upon vesting is acceptable). No points would be earned if this prohibition is absent or not applicable to all award types.

Non-Employee Director Compensation

ISS adopted a framework for evaluating non-employee director pay programs. Under the new framework, ISS will vote on a case-by-case basis on management proposals seeking ratification of non-employee director compensation based on the following factors:

  • If the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support; and
  • An assessment of the following qualitative factors:
    • the relative magnitude of director compensation as compared to companies of a similar profile;
    • the presence of problematic pay practices relating to director compensation;
    • director stock ownership guidelines and holding requirements;
    • equity award vesting schedules;
    • the mix of cash and equity-based compensation;
    • meaningful limits on director compensation;
    • the availability of retirement benefits or perquisites; and
    • the quality of disclosure surrounding director compensation.

ISS also clarified and broadened the various factors it considers when assessing the reasonableness of non-employee director equity plans that ISS determines to be relatively expensive. Specifically, ISS will consider all of the above qualitative factors in the aggregate rather than requiring satisfaction of specific minimum criteria.

Stock Distributions

ISS will generally recommend a vote in favor of management proposals to increase a company’s share capitalization in connection with a stock split or dividend, provided that the effective increase in the authorized share capitalization is equal to or less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization Policy.

Cash and Equity Plan Amendments

ISS also clarified how it evaluates 162(m) plans and proposals to amend existing plans. Generally, ISS will vote in favor of proposals that seek approval of a plan if it is administered by a committee consisting entirely of independent directors (as defined by ISS), except in the case where the plan is presented for the first time following an IPO or if the proposal is bundled with other material amendments, in which case its recommendation will be done on a case-by-case basis.

Key Updates to Glass Lewis’s Proxy Voting Guidelines

Director Overboarding Policy

Similar to ISS, Glass Lewis will generally recommend voting against a director who serves as a public company executive (as opposed to the comparable ISS policy which is limited to the CEO) while serving on a total of more than two public company boards, and any other director who serves on a total of more than five public company boards. When determining whether a director’s service on an excessive number of boards may limit the ability of the director to devote sufficient time to board duties, Glass Lewis will consider factors such as the size and location of the other companies on whose boards the director serves, the director’s board duties at the companies in question, whether the director serves on the board of any large privately-held companies, the director’s tenure on the boards in question and the director’s attendance record at all companies. Glass Lewis also noted that it may refrain from recommending against certain directors if the company provides sufficient rationale for the applicable director’s continued board service.

Governance Following an IPO or Spin-Off

Glass Lewis clarified how it approaches corporate governance at newly public companies. Glass Lewis noted that while it generally believes that newly public companies should be provided sufficient time to fully comply with marketplace listing requirements and meet basic governance standards, it will also review the company’s governing documents in order to determine whether shareholder rights are being overly restricted from the outset. In cases where Glass Lewis believes severe restrictions are present, it will consider recommending that shareholders vote against members of the governance committee or the directors that served at the time of the governing documents’ adoption, depending on the severity of the concern. In making its evaluation, Glass Lewis will consider:

  • the adoption of anti-takeover provisions, such as a poison pill or classified board;
  • supermajority vote requirements to amend governing documents;
  • the presence of exclusive forum or fee-shifting provisions;
  • whether shareholders can call special meetings or act by written consent;
  • the voting standard for the election of directors;
  • the ability of shareholders to remove directors without cause; and
  • the presence of evergreen provisions in the company’s equity compensation arrangements.

Board Evaluation and Refreshment

Glass Lewis clarified its approach to board evaluation, succession planning and refreshment. In general, Glass Lewis’s approach is intended to reflect its belief that a robust board evaluation process focused on the assessment and alignment of director skill with company strategy, is more effective than solely relying on age or tenure limits. Relevant factors in assessing the board’s overall composition include its diversity of skill sets, the alignment of the board’s areas of expertise with a company’s strategy, the board’s approach to corporate governance, and its stewardship of company performance.


The Dodd-Frank Wall Street Reform and Consumer Protection Act directed the SEC to implement rules covering a variety of compensation-related disclosures and other matters. The following discussion summarizes the status of select items that remain outstanding, were recently finalized or have had notable developments.

Pay Ratio Disclosure

Status: Final rules adopted; effective for first full fiscal year that begins on or after January 1, 2017 (for calendar year companies, effective for the 2018 proxy season)

Summary: Required in all filings that require executive compensation disclosure pursuant to Regulation S-K, Item 402. Requires companies to disclose the ratio of the median of the annual total compensation of all employees (other than the CEO) to the annual total compensation of the CEO.

Pay Versus Performance Disclosure

Status: Rules proposed in 2015; comment period has expired; not clear when final rules will be adopted

Summary: The proposed rules would require companies to disclose the relationship between executive compensation actually paid and the financial performance of the company, with performance measured against the company’s total shareholder return (TSR) and the TSR of a company-selected peer group. The proposed rules introduce the new formulation of compensation “actually paid” with such amount presented for the CEO and the other NEOs (other than the CEO) as a group.

Hedging Disclosure

Status: Rules proposed in 2015; comment period has expired; not clear when final rules will be adopted

Summary: The proposed rules would require companies to disclose in the proxy statement whether directors, officers and employees are permitted to enter into transactions to hedge or offset any decreases in the market value of the company’s equity securities held by such persons.

Clawback Policy

Status: Rules proposed in 2015; comment period has expired; not clear when final rules will be adopted

Summary: The proposed rules would direct the national securities exchanges (e.g., NYSE & Nasdaq) to require all listed companies to adopt and implement a written policy mandating the recovery (i.e., “clawback”) of incentive-based compensation payments under certain circumstances. The proposed rules would require a clawback in the event a company is required to prepare an accounting restatement due to “material noncompliance” with any financial reporting requirement. The proposed rules would apply to all “executive officers” (using the Section 16 definition of “officer”). The Section 16 standard encapsulates a substantially broader group than the current group covered by the clawback rules promulgated under the Sarbanes-Oxley Act of 2002, which only covers the CEO and CFO. The recovery amount is the amount of incentive-based compensation received by an officer that exceeds the amount the executive officer would have received had the incentive-based compensation been determined based on the accounting restatement. The compensation subject to clawback includes any incentive-board compensation paid based on a reporting financial measure that is determined and presented in accordance with the accounting principles used in preparing the company’s financial statements, including any measures derived in whole or in part from such measures (e.g., non-GAAP financial measures, such as stock price and TSR). In the event of a restatement and clawback, extensive disclosures would also be required.

Conflict Minerals

Status: Final rules adopted in 2012; protracted litigation appears to have ended with the SEC declining to further appeal a 2015 D.C. Circuit Appeals Court ruling

Summary: The final rules require companies to determine whether any of the products they manufacture, or contract for manufacture, contain conflict minerals (columbite-tantalite (coltan), cassiterite, gold, wolframite, or their derivatives, which are limited to tantalum, tin and tungsten) that are necessary to the functionality or production of such products. If so, companies are required to prepare and file with the SEC a Form SD (Specialized Disclosure Report). Companies subject to the rules are also required to evaluate (i) whether the conflict minerals used in their products manufactured, or contracted for manufacture, originated in the Democratic Republic of the Congo (DRC) or adjoining countries (Angola, the Republic of the Congo, Uganda, Rwanda, Burundi, Tanzania, Zambia, South Sudan and the Central African Republic) and, if so, (ii) whether such conflict minerals benefited armed groups.

The litigation resulted in a judicial opinion that the conflict minerals rules violated the First Amendment because the rules required companies to state whether their products have not been found to be “DRC conflict free.” However, all other aspects of the rules were upheld.

The SEC issued guidance in 2014 that as a result of the judicial opinion, companies are not required to describe their products as either “DRC conflict free,” “not been found to be, DRC conflict free,” or “DRC conflict undeterminable.” All other reporting requirements remain in place. Importantly, the SEC’s guidance further provided that the independent private sector audit is not required unless a company voluntarily elects to describe any of its products as “DRC conflict free” in its conflict minerals report. The SEC’s 2014 guidance appears to remain valid. Companies subject to the rules are required to file the Form SD for 2016 by May 31, 2017.


Say-on-Frequency of Say-on-Pay

As a reminder, SEC Proxy Rule 14a-21 requires companies to conduct an advisory vote on the frequency of the say-on-pay vote at the first annual meeting after January 21, 2011 and then on a frequency no less than six years thereafter. As a result, many public companies held their first say-on-frequency vote at their 2011 annual meeting and, accordingly, these companies will need to hold a say-on-frequency of say-on-pay vote again at their 2017 annual meeting. This vote must give shareholders the opportunity to express their view on whether the say-on-pay vote should be held every one, two or three years. The results of this vote and the Company’s determination of the frequency must also be reported on Form 8-K reporting the results of the annual meeting, although the determination of the frequency may be disclosed by amendment to the Form 8-K within 150 days after the shareholders’ meeting, or within 60 days of the deadline for Rule 14a-8 shareholder proposals for the following annual meeting, whichever is sooner.

Increased Scrutiny of Non-GAAP Measures

On May 17, 2016 the SEC issued updated Compliance and Disclosure Interpretations (C&DIs) addressing the use of non-GAAP financial measures. The new guidance follows a series of “warnings” from the SEC that they are placing more scrutiny on abuses and a perceived overemphasis on non-GAAP financial information. The SEC has publicly stated that it is looking to rein in the use of non-GAAP measures and is stepping back from its deference to let companies present their own view of earnings.

Existing rules provide that when presenting a non-GAAP measure, the comparable GAAP measure must be given equal or greater prominence. The updated C&DIs provide guidance about the SEC’s view of this requirement. For example,

  • a non-GAAP measure cannot precede the most comparable GAAP measure (e.g., in earnings release headlines);
  • a company cannot provide a tabular disclosure of non-GAAP measure(s) without preceding it with an equally prominent tabular disclosure of comparable GAAP measure(s) or including the comparable GAAP measure(s) in the same table;
  • a company cannot present a non-GAAP measure using a different style (e.g., bold) that emphasizes it over the comparable GAAP measure;
  • a company cannot discuss and analyze a non-GAAP measure without similar discussion of the comparable GAAP measure, in a location of equal or greater prominence; and
  • a company cannot describe a non-GAAP measure, such as “record” or “exceptional,” without giving equally prominent characterization of the comparable GAAP measure.

The updated C&DIs also provide guidance about practices the SEC Staff views as misleading or possibly misleading, including but not limited to:

  • varying non-GAAP measures from period to period by including/excluding a particular change in the current period when similar item(s) were not included/excluded in prior periods (the Staff further indicated in may be necessary to recast prior measures to conform);
  • presenting a non-GAAP measure that excludes non-recurring charges, but does not exclude non-recurring gains; and
  • presenting a non-GAAP performance measure that is adjusted to accelerate revenue that is recognized over time under GAAP.

Hyperlinks to Exhibits Filed with the SEC

On August 31, 2016, the SEC proposed rule and form amendments that would require registrants to include a hyperlink to exhibits in their filings. To enable the inclusion of such hyperlinks, the proposed amendments would also require that registrants submit all such filings in HyperText Markup Language (“HTML”) format.

The SEC is proposing to amend Item 601 of Regulation S-K and Rules 11, 102, and 105 of Regulation S-T to require registrants to include a hyperlink to each filed exhibit as identified in the exhibit index. Under the proposed amendments, a registrant must include an active hyperlink to each exhibit identified in the exhibit index of the filing. If the filing is a periodic or current report under the Exchange Act, a registrant would be required to include an active hyperlink to each exhibit listed in the exhibit index when the report is filed. If the filing is a registration statement, the registrant would be required to include an active hyperlink to each exhibit only in the version of the registration statement that becomes effective. For registration statements or post-effective amendments that become effective upon filing with the SEC, an active hyperlink to each exhibit listed in the exhibit index of such filing must be included at the time of filing.

All registrants would be required to file the forms affected by the proposals in HTML format, and filing in American Standard Code for Information Interchange or “ASCII” format would no longer be allowed since ASCII does not support hyperlink functionality. This change would affect a very small number of registrants that still use ASCII, since, as the SEC noted, over 99 percent of the filings that were made in 2015 on the affected forms were filed in HTML.

In the press release announcing the proposed rule, SEC Chair Mary Jo White stated that the “proposed changes should make it significantly easier to locate documents attached to company filings.” Anyone seeking to access a filing incorporated by reference currently has to “review the exhibit index to determine the filing in which the exhibit is included, and then must search through the registrant’s filings to locate the relevant filing to review for the particular exhibit,” a process the SEC acknowledged is “both time consuming and cumbersome.”

The last day to submit comments was October 27, 2016, and there is no telling when the SEC will release its final rules.

Universal Proxy

On October 26, 2016, the SEC proposed amendments to the proxy rules that would require, in the case of contested elections, the use of universal proxy cards that include the names of both the registrant’s nominees and any dissident’s nominees. The use of a universal proxy is intended to allow shareholders’ to vote by proxy in a manner that more closely resembles how they can currently vote in person at a shareholder meeting.

Current Rules

Under the current rules, shareholders that attend a meeting in person generally vote by casting a written ballot provided at the meeting that includes the names of all duly nominated candidates for the board of directors. A shareholder can vote for the nominees of their choice among all of the nominees, selecting from any combination of the candidates; in effect, the shareholder can “split their vote.”

In contrast, shareholders that do not attend the meeting and instead vote by proxy are typically provided one proxy card containing the registrant’s slate of board nominees and one or more proxy cards containing any dissident’s slate of nominees. In such cases, two current proxy rules constrain the shareholders’ ability to split their votes. First, the “bona fide nominee rule” (Rule 14a-4(d)) prevents any one party from including the other party’s nominees on its proxy card unless the other party’s nominee consents – an event that rarely occurs. Second, most states have some form of the “last-in-time” rule, under which a later-dated proxy card revokes and invalidates any earlier-dated card. These two rules effectively require a shareholder voting by proxy to submit its votes on either the registrant’s proxy card or the dissident’s proxy card, thus barring them from picking and choosing from both parties’ candidates as they would be able to if they attended the meeting and voted in person.

Although the “short slate rule” (Rule 14a-4(d)(4)) allows a dissident seeking to elect a minority of the board to “round out its slate” by soliciting proxy authority to vote for some of the registrant’s nominees on the dissident’s card, it still does not allow the shareholder to vote its own chosen combination of nominees but rather gives this choice to the dissident.

Proposed Universal Proxy Rule

The proposed rule attempts to correct this peculiarity in the proxy rules by requiring the use of a “universal proxy” card that includes the names of all duly nominated director candidates for whom proxies are being solicited. Each party soliciting proxies would continue to distribute its own proxy materials but would include its own version of the universal proxy card, which does not have to be identical to the other party’s card. This universal proxy would allow a shareholder voting by proxy to choose any combination of nominees.

Under the proposed rules, the universal proxy must:

  • indicate in bold face type whether it is being solicited on behalf of the registrant’s board of directors or the dissident’s and identify such dissident;
  • provide some way for shareholders to provide separate instructions on how proxy holders should vote on the election of directors separately from non-election proposals;
  • permit shareholders to withhold voting authority for each nominee;
  • clearly distinguish between registrant nominees, dissident nominees and any proxy access nominees;
  • list the nominees in alphabetical order by last name within each group of nominees;
  • use the same font type, style, and size to present all nominees;
  • prominently disclose the maximum number of nominees for which authority to vote can be granted; and
  • prominently disclose the treatment and effect of a proxy executed in a way that grants authority to vote for more nominees than the number of directors being elected, that grants authority to vote for fewer nominees than the number of directors being elected, or that does not grant authority to vote with respect to any nominees.

The proposed rule would also, among other things:

  • eliminate the short slate rule;
  • revise the definition of bona fide nominee so that such nominee’s consent is applicable to any proxy statement, not just the nominating party’s proxy statement;
  • retain the requirement that a nominee consent to serve, if elected, and further require that the proxy statement disclose if the nominee intends to serve only if its nominating party’s slate is elected or intends to resign if one or more of the opposing party’s nominees are elected to the board;
  • require a dissident to provide notice to the company of its intent to solicit proxies together with the name of its nominee in most instances at least 60 calendar days before the anniversary of the previous year’s annual meeting date;
  • require the registrant to notify the dissident of the names of its nominees in most instances at least 50 calendar days before the anniversary of the previous year’s annual meeting date;
  • require the dissident to solicit the holders of shares representing at least a majority of the voting power of shares entitled to vote on the election of directors;
  • require a dissident to file its proxy statement with the SEC in most instances by the later of 25 calendar days prior to the meeting date or five calendar days after the date the company files its definitive proxy statement;
  • require that the form of proxy cards include an “against” voting option when applicable state laws give effect to a vote against and an “abstain” option for elections where a majority vote standard applies; and
  • require that proxy statements disclose the effect of a “withhold” vote for elections where a plurality vote standard applies.

As of the date of publication of this article, the comment period is still ongoing, and given that the deadline to submit comments is not until January 9, 2017, it is unlikely that the final rules will be in place for the 2017 proxy season.


Companies listed on The Nasdaq Stock Market LLC (“Nasdaq”) now must disclose the material terms of all agreements and arrangements between activist investors and their directors or director nominees, known as “Golden Leashes,” pursuant to the Nasdaq Listing Rule 5250(b)(3), which became effective on August 1, 2016. Golden Leash compensation can take many forms, including cash, company stock or payments triggered by the implementation of the investor’s plans for the Nasdaq-listed company (e.g., paying dividends or implementing a stock buy-back program).

The rule appears to be a response to an increased use of Golden Leashes by activist investors to incentivize their director nominees on the boards of target companies. Nasdaq has indicated that it believes that these Golden Leash arrangements may lead to conflicts of interests and could impair a director’s ability to perform his or her fiduciary duties to the target company.

Under the new rule, Nasdaq-listed companies must disclose all agreements and arrangements between activist investors and their directors or director nominees relating to compensation in connection with such person’s candidacy or service as a director of the company. However, no disclosure is required for agreements and arrangements that:

  • solely relate to reimbursement of expenses in connection with candidacy as a director;
  • existed prior to the nominee’s candidacy and the nominee’s relationship with the third party has been publicly disclosed; or
  • save been disclosed by the company pursuant to Item 5(b) of Schedule 14A or Item 5.02(d)(2) of form 8-K in the current fiscal year.

Notwithstanding the exception above, where a pre-existing compensation agreement or arrangement exists, if there is a material change to such agreement or arrangement specifically in connection with such person’s candidacy or service as a director for the company, then the company is still required to disclose such agreement or arrangement, although only the difference in compensation related to such person’s candidacy or service as a director would need to be disclosed.

The required disclosure must be made either on the Nasdaq-listed company’s website or in its proxy or information statement with respect to a shareholders’ meeting at which directors are elected. The disclosure must be made no later than the date on which the company files its definitive proxy or information statement in connection with the applicable meeting. If a company does not file proxy or information statements, then the required disclosures may also be made in its Form 10-K or Form 20-F no later than when the company files such forms.

To comply with this new rule, a Nasdaq-listed company should ensure that its director and officer questionnaire for the upcoming proxy season is updated to ask each director nominee whether he or she is a party to any agreement or arrangement with any third party in connection with his or her nomination or service as a director of the company and, if any agreement or arrangement exists, provide the disclosures required by the new rule.


As companies look ahead in the New Year to expansion and growth, they inevitably will consider the capital markets as an option. In those discussions, Reg A+ should be considered. The following are a few of the most asked questions;


I am a little apprehensive about using Reg A+ based on what I have heard. How successful are Reg A+ Offerings?


Since the Jumpstart Our Business Startups (JOBS) Act was enacted in April 5, 2012, companies have been skeptical about whether Reg A+ offerings will be successful. According to Keith Higgins, Director of the Division of Corporation Finance at the SEC, in remarks given at a November 2016 Conference, 136 Regulation A Offering Statements had been filed,with 76 having qualified.

Success, however, is not only measured by whether the offering qualified. Many companies and investment bankers measure success based on the amount of capital raised and the quality and longevity of the investors.


What form should the offering take?


Based on the transactions that we are familiar with, several of the top underwriters have been doing agented best-efforts deals, a small percentage of which contain a hybrid crowd-funding component.

In the course of our review of over 50 company filings, we also found companies using a variety of unique structures including, use of finders registered as agents, a company self-underwriting its transactions through its CEO using a 1934 Act exemption and use of the company’s employees to distribute its securities. While these non-conforming methods may be technically compliant in certain circumstances, in our view, they may also decrease the chance of completing a successful offering.


How long should it take to prepare the necessary documentation to submit a Reg A+ initial filing to the SEC? – What are the factors that drive this answer?


Approximately 30-45 days depending on the (i) issues particular to a specific company (e.g., significant disclosure issues); (ii) marketing goals and strategies of the company and underwriter and/or agent (e.g., only U.S. offering vs. combined U.S. and international offering); (iii) whether the issuer wants to “test the waters” prior to making a formal filing; and (iv) the experience of in-house and outside advisors working on the project.

The Offering statement for a Reg A+ Offering is a Form 1-A Registration Statement, a form similar to other SEC Registration Statements.

If you are contemplating raising capital, all of the following are essential resources and essential discussion topics you may wish to have before commencing the project:

  1. Experienced Underwriter in your space – someone who has closed several Reg A+ transactions successfully;

  2. Experienced securities lawyer who has filed Registration Statements with the SEC under the JOBS Act and who has experience working with underwriters;

  3. Discuss with your underwriter the type and quality of the target investors (e.g. what percentage will be institutional? Will there be a trading market for the shares shortly after closing? If not, when? If so, which ones?) (e.g., reasonable alternatives to the NYSE and NASDAQ are the OTCQX U.S. or OTCQX International); and

  4. Do you have an internal team to pull this off? Ideally, a company should have an internal team of some accounting and business professionals. Other “nice to have skills” are in-house employees with tax and SEC reporting experience.

Preparation of the Offering Statement on Form l-A/Interaction with the SEC

How the company and counsel efficiently work together to address the substance of each of the questions addressed in the Form l-A will determine success in decreasing the time to qualification and to market.

An initial meeting to assign responsibilities and critique a first draft, if one is available, is crucial. If time to market is an issue, the designated team must be in sync with a plan and a calendar.

All options of the deal should be discussed and resolved as they relate to timing. Each decision tree should be marked out in a detailed time and responsibility schedule. The goal of this preparation is to produce the best document with only a few or no comments. This track will give the company the most flexibility to start selling its securities in the shortest period of time.

SEC Review

Once the company files the Form 1-A with the SEC via EDGAR, the Staff has 30 days to review and comment on its filing.[3] If the SEC comments on the filing, the SEC Staff will provide a comment letter to the company. The company must respond to such comment letter in writing, addressing each comment and referring to the section(s) of the Offering Statement that will be amended. The company’s response, together with the Amended Form 1-A, is then filed with the SEC via EDGAR.

The process of resolving the issues set forth in a SEC comment letter could range from three to four days to three weeks. Each new response letter requires a new Amended Form 1-A filing. This process can be cumbersome if the SEC and the company go back and forth with multiple letters and amendments.

FINRA Review

Use of underwriters, brokers, dealers and other sales persons regulated by FINRA will also create a timing component to manage because Regulation A+ offerings are considered public offerings for purposes of the FINRA rules. In particular, the corporate financing rule (Rule 5110) and the public offerings of securities with conflicts of interest rule (Rule 5121) are applicable. These rules prohibit underwriting terms or arrangements that FINRA deems unfair or unreasonable based on its rules.

The best way to avoid a problem is not to negotiate contractual transactions that do not comply with the rules. Often, underwriters may be more aggressive and stretch the limits of the guidelines. The time sensitivity of these issues is that the SEC will not allow the Offering Statement to be declared effective until the FINRA issues have been cleared.

Blue Sky Matters

There are two tiers of Regulation A offerings:

(i) Tier 1 Exemption for offerings of up to $20 million in a 12-month period, including up to $6 million of secondary sales by the issuer’s affiliates and (ii) Tier 2 - Exemption for offerings of up to $50 million in a 12-month period, including $15 million of secondary sales by the issuer’s affiliates.

Tier 2 Offerings are covered under Section 18 of the Securities Act and therefore exempt from Blue Sky regulation. Tier 1 Offerings are not. Blue Sky qualification is generally time consuming and costly, depending upon which and how many states the issuer seeks to register. The better strategy is to use Tier 2.

Tier 2 investors that are not accredited investors are subject to limits on the amount they may invest in a Reg A offering. Tier 2 issuers are subject to ongoing periodic and current reporting requirements. Tier 2 issuers can benefit from a conditional exemption from Exchange Act registration or can take advantage of a simplified process for entering Exchange Act reporting company status at the time they complete a Tier 2 Offering.


Because of its flexibility, Reg A+ remains a cost-effective method of capital raising. The question that a company needs to ask itself is whether it is ready to undertake the effort, which may include reaching out to outside advisors, particularly a top-tier investment banker in its space and seasoned legal representation that may guide the company through the process.


Recently, a Regional Director of the National Labor Relations Board (“NLRB” or “Board”) issued a complaint against a financial services employer alleging that the confidentiality, non-disparagement and arbitration provisions in the employment agreement that the employer required its employees to sign, violated the National Labor Relations Act.

The employment agreement, which observers believe is widely used in the financial services industry, prohibited employees from disclosing “the terms of your employment” as well as other “proprietary or confidential” information. In essence, “proprietary or confidential” was defined in the agreement as “any non-public information.”

Under current NLRB law, confidentiality provisions that “employees would reasonably understand to encompass such non-public information as employees’ wages, benefits and other terms and conditions of employment” are unlawful. This is true, even if the confidentiality provisions do not specifically refer to employment conditions or employee information. The issue is whether such prohibitions would “chill” the rights of employees to promote and/or act collectively with other employees.

The employment agreement also included a “non-disparagement” provision, which prohibited the employees from disparaging “[the employer] and/or its present or former affiliates, directors, officers, shareholders, employees or clients whether directly or indirectly, in any manner whatsoever” unless required by law.

Again, the NLRB is likely to view such provisions as “chilling” the employees’ right to engage in “concerted communications” regarding their terms and conditions of employment with other employees and third parties (press, unions, government agencies).

Finally, the employment agreement included an arbitration provision for employment disputes, which required the employees to waive their right to bring class actions.

Under Board law, such waiver requirements are unlawful, as they interfere with the employees’ right to engage in concerted or group activities.

Employers may wish to review their policies to determine whether policies on confidentiality, non-disparagement and/or arbitration have similarities to those described above. Modifications of those policies may be adopted in order to preclude adverse findings from the NLRB.


[1] See, e.g., McKinsey & Co., Diversity Matters (Apr. 2015); Deborah L. Rhode and Amanda K. Packel, Diversity on Corporate Boards: How Much Difference Does Difference Make?, 39 Del. J. Corp. L., 2 (2014).

[2] PricewaterhouseCoopers LLP, 2015 Annual Corporate Directors Survey (Oct. 2015).

[3] Subject to certain conditions, if the company wanted to “test the waters” or communicate with potential investors to see if they might be interested in the offering before filing the Form 1-A, it may do so by submitting a draft Offering Statement on Form l-A for non-public review by the SEC Staff. If the issuer has taken advantage of the non-public submission option, it must publicly file its initial draft Offering Statement and all subsequent nonpublic amendments and correspondence no more than 21 calendar days before the Offering Statement is qualified. Failure to do this will affect the qualification date.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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JD Supra Privacy Policy

Updated: May 25, 2018:

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