Article prepared by and republished courtesy of our colleagues Sanjay M. Shirodkar and David P. Lewis; originally published here:

As we enter 2016, we want to bring your attention to a few items that we believe will play prominent  roles in the 2016 proxy season.  In 2015, proxy access, shareholder activism and newly adopted or proposed rules from the Securities Exchange Commission were some of the big-ticket items.  These and other issues are on the hot list for this coming season. We also include a list of action items you may wish to consider as you plan for the 2016 proxy season.

Please keep in mind that the following Hot List is a summary only and is not intended to be specific legal or tax advice.  We encourage you to call the authors of this client alert or your DLA Piper contact if you have any questions or would like to discuss any of the issues described below in the context of your company.


In 2010, the SEC proposed a rule that would have allowed shareholders owning at least 3 percent of a company for at least three years to include in the company’s proxy materials director nominees for up to 25 percent of the board (the so-called 3 percent/3-year/25 percent formulation).  The SEC rule was struck down by the DC Circuit in 2011.  However, the core elements of the rule have over time become the basis of an increasing flow of shareholder proposals.

For the 2015 proxy season, Whole Foods received a shareholder proxy access proposal that substantially mirrored the SEC’s abandoned rule, or a 3 percent/3-year/20 percent formulation.  Whole Foods asked the SEC to allow the company to exclude the proposal pursuant to Rule 14a-8(i)(9) on the grounds that it was substantially similar to a proposal that Whole Foods was already considering, ultimately asserting that it would be submitting a proposal with a 5 percent/5-year/10 percent formulation.  The SEC staff initially agreed that the 3 percent/3-year/20 percent formulation could be excluded since it directly conflicted with Whole Foods’ own proposal, and the SEC staff issued a no-action letter allowing Whole Foods to exclude the shareholder proposal.  The shareholder appealed the grant of the no-action letter to the SEC. To many observers’ surprise, the SEC reversed the SEC staff’s decision.  The SEC staff withdrew its Whole Foods no-action letter and noted that it “will express no views on the application of Rule 14a-8(i)(9) during the current proxy season.”  See “SEC SLB 14H and other Shareholder Proposals Developments” below for an update on this letter.

Beginning in late 2014, New York City’s pension funds submitted a proxy access proposal to 75 large companies, which were targeted based on purported concerns over the companies’ governance or other features.  In terms of volume, proxy access was the highest-profile shareholder proposal topic during the 2015 proxy season, with close to 100 shareholder proposals on the ballot, or more than four times the number of such proposals that appeared on ballots in the prior year.  Nearly all of the proxy access shareholder proposals were modeled on the 3 percent/3-year/20 percent formulation.  More than half of the shareholder access proposals to date have received majority support.

Many asset managers have adopted policies on proxy access proposals, with some examining such proposals on a case-by-case basis.  On the public pension fund side, the California Public Employees’ Retirement System, the California State Teachers’ Retirement System (CalSTRS) and the Florida State Board of Administration each support proxy access proposals.  In fact, on January 4, 2016, CalSTRS announced that it has contacted 30 US public firms asking them to adopt the so-called proxy access bylaw and noting that it was ready to submit shareholder proposals on the topic if companies failed to heed its request.  Additionally, on January 11, 2016, the New York City Comptroller issued a press release announcing that it had filed 72 proxy access shareholder proposals for the 2016 proxy season.  Proxy advisors Institutional Shareholder Services (ISS) and Glass Lewis each published proxy access policies, with ISS generally supporting management and shareholder proposals for proxy access that comport with the 3 percent/3-year/25 percent formulation and Glass Lewis evaluating such proposals on a case-by-case basis.  See “ISS and Glass Lewis Voting Guidelines” below.

Most proxy access bylaws address, in some form, the following issues:  (a) ownership threshold, (b) length of ownership, (c) maximum number of stockholder nominated candidates, (d) calculation of qualifying ownership, including treatment of “loaned” shares, (e) stockholder group limit, (f) maximum number of access nominees, (g) notice deadlines, (h) future disqualification of stockholder nominees, (i) voting commitments, and (j) third-party compensation arrangements.  In August 2015, the Council of Institutional Investors published its views on seven provisions that are generally addressed when a company adopts proxy access.

Action items:

  • We expect proxy access to dominate the 2016 proxy season and you should keep abreast of proxy access developments and educate your board on the relevant issues.
  • Boards should consider whether to adopt proxy access even in the absence of a shareholder proposal and should be prepared in the event a proposal is received.
  • Consider drafting and discussing with your board an acceptable proxy access bylaw.  While certain common terms are developing, there are many moving parts within a proxy access bylaw provision, and there is no one-size-fits-all or best practice bylaw provision that we are currently recommending.


Shareholder activism continues to increase.  The number of activist campaigns has risen steadily in each year since 2010.  Record numbers of activist campaigns (355) were announced against US companies in 2015.  Activist campaigns tend to focus on value creation, board seat, and officer/director removal.  Activists increasingly are targeting mid-cap companies in addition to large-caps.


**Courtesy of Research Spotlight.

One study found that, as of December 14, 2015, 127 activist campaigns had resulted in at least one board seat for the activist (or rights to appoint a new independent director).  The chart below illustrates the results of all campaigns for board seats attained via (a) a vote following a proxy fight, (b) settlement of a proxy fight, and (c) other activist campaigns, or granted to Schedule 13D filers that had not publicly agitated the company.


**Courtesy of Research Spotlight.

At the same time that takeover defenses have been targeted by proxy advisors and activists, hostile takeover bids continue.  Hedge funds and other activists increasingly are putting pressure on companies to focus on steps that could create an immediate increase in value at the potential expense of better results over the long term.  Over the last few years, the universe of activist shareholders has expanded, along with their supporters.  In particular, there has been a significant increase in the number of hedge funds that are activists.  Some studies have reported that activist hedge funds are estimated to have over $200 billion of assets under management (as compared to $50 billion in 2010).  This trend continued in 2015, and it is clear that shareholder activism is no longer a sideline venture, but instead has become a legitimate asset class and a potential source of increased returns for institutional investors.  Event-driven and opportunistic short-term investors can put tremendous pressure on boards of directors to focus on their short-term time horizons, notwithstanding the board’s fiduciary duty to consider the interests of all shareholders and to consider long-term value.

These developments and recent takeover trends, including several well-publicized unsolicited offers, all highlight the continued importance of shareholder engagement and appropriate takeover defenses in the current environment.  See “Shareholder Engagement and Disclosure in Proxy Statements” below.

Action items:

  • Articulate your board’s strategy for sustainable long-term growth.
  • Identify company vulnerabilities and periodically discuss alternatives with legal counsel and financial advisors.
  • Adopt an appropriate shareholder engagement policy; know your shareholders.  Meet them in off-cycles so you have a relationship in case you need to reach out to during the crunch times.  Monitor 13D, F and G positions of top institutional holders, including their investment philosophy, exit horizon, historical cost basis, and any parallel trading activity.
  • Monitor deadlines for stockholder nominations and shareholder proposals.


The SEC was fairly active in 2015 when it came to addressing executive compensation and hedging rules required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The SEC adopted final rules concerning CEO-to-median-employee pay ratio disclosure and proposed rules related to clawback listing standards, pay versus performance disclosure and hedging disclosure.

(a) Pay-ratio disclosures

On August 5, 2015, roughly two years after issuing the first proposed rule, the SEC adopted final rules concerning CEO-to-median-employee pay ratio disclosure (the Pay Ratio Rule).  Notwithstanding the significant public debate over this issue, the SEC adopted the final rules unchanged in large part from the first proposed rule.  Mandated by the Dodd-Frank Act, the Pay Ratio Rule will require a company with a fiscal year beginning on or after January 1, 2017 to report the ratio in its 2018 proxy statement.  The Pay Ratio Rule applies to all companies that are required to disclose executive compensation data under Regulation S-K’s Item 402(c)(2)(x), an existing rule that governs executive compensation.  The Pay Ratio Rule does not apply to emerging growth companies, smaller reporting companies, or foreign private issuers.

The rule will amend Regulation S-K by adding provision Item 402(u), which will require disclosure of:

  • The median annual total compensation of all employees of the company, excluding the principal executive officer (CEO).
  • The annual total compensation of the CEO.
  • The ratio of the annual total compensation of the median employee to that of the CEO.

The SEC refers to the three components above as the pay ratio disclosure.  Besides disclosing pay ratio, companies are also required to describe their methodology and any material assumptions made in order to arrive at the calculation (for example, what, if any, adjustments or estimates were used).  There will be significant complexity in performing the calculation to arrive at the correct ratio disclosure given the flexibility in the Pay Ratio Rule’s reporting and calculation requirements.  Employers must choose which reporting methodology best suits the company’s business model, as the Pay Ratio Rule allows companies to use a range of permissible calculation types.  These calculation types can include estimates, statistical sampling, and the utilization of consistently applied compensation measures that serve to identify accurately the median employee based on each company’s unique facts and circumstances.

Implementing the Pay Ratio Rule will require companies to make some decisions including (a) determining exactly who is an “employee,” (b) disclosing the annual total compensation of the “median” employee of the registrant and thus determining its median employee, and (c) computing the total annual compensation of the CEO for the registrant’s last completed fiscal year in accordance with Item 402(c)(2)(x) of Regulation S-K.

Action items:

  • Given the flexibility inherent in the Pay Ratio Rule, as well as the various calculation methodologies a company can choose, we expect that registrants will encounter compliance issues and other difficulties in interpreting it.  For this reason, even though the disclosure is not required for 2016, it is prudent for registrants to undertake the following actions:
    • Identify and test possible methodologies for calculating the pay ratio and prepare a preliminary estimate of the pay ratio.
    • Determine whether data privacy rules will prevent sharing the employee information necessary to calculate and disclose the pay ratio so that there is sufficient time to get an exemption or other relief or obtain employee consent, as appropriate.
    • Update systems and develop processes to collect the required information.

(b) Clawback rules

On July 1, 2015, the SEC issued proposed rules to implement certain Dodd-Frank Act mandated provisions that any company whose securities are listed on a national securities exchange to adopt and enforce a policy requiring the clawback of incentive-based compensation from current and former executive officers in the event of an accounting restatement (the Clawback Rules).  The comment period on the proposed rules ended on September 1, 2015.  The SEC has instructed the stock exchanges to file proposed listing rules to implement the Clawback Rules no later than 90 days after publication of the final rule, and that those rules be effective no later than one year after that publication date.  Listed issuers would then be required to adopt a clawback policy no later than 60 days following the date on which the exchanges’ final rules become effective.

As proposed, the Clawback Rules direct national securities exchanges to promulgate listing standards requiring the recovery of incentive-based compensation during the three fiscal years preceding the date on which the listed company is required to prepare an accounting restatement to correct a material error.  Under these circumstances, the issuer could recover the amount of any incentive-based compensation erroneously awarded to an executive officer.  The amount recoverable by the issuer is the amount of incentive-based compensation received by the executive officer for up to three years that exceeds the amount of incentive-based compensation that otherwise would have been received had it been determined based on the company’s financial results as restated.  Under the proposed rules, an issuer is required to pursue recovery unless it would be impracticable because it would impose undue costs on the issuer or its shareholders or would violate non-US home country law.  Any decision on impracticability needs to be made by the committee of independent directors that is responsible for executive compensation.  Before concluding that it would be impracticable to recover amounts due, the issuer would first need to make a reasonable attempt to recover such compensation and would be required to document its attempt to recover and provide such documentation to the relevant stock exchange.  The listed issuer would also be required to disclose its clawback policy, disclose information about actions taken pursuant to its policy, and file its policy as an exhibit to its annual report.

Action items:

The ability of a company to recoup certain incentive compensation previously paid to its executive officers has been on the SEC radar for quite some time.  The proposed rules have elicited some critical comments, and the exact timing of when the Clawback Rules will be adopted is an open question.  Although the proposed Clawback Rules will not be effective for the 2016 proxy season, registrants should consider undertaking the following actions:

  • Registrants with an existing clawback policy should consider what additional details about the policy could be required.
  • Review and consider revising existing incentive-based compensation plans and programs, and the forms of award agreements and employee communication relating thereto, to include a general condition that the compensation awards (such as bonuses, equity awards and long-term cash compensation) are granted subject to any clawback policy that the company may adopt in the future to comply with Dodd-Frank Act or stock exchange rules.
  • Review corporate governance and executive compensation documentation.
  • Review bylaws, indemnification policies and committee charters in light of the proposed Clawback Rules.

(c) Pay-for-performance disclosure

On April 29, 2015, the SEC proposed its long-awaited pay-for-performance rules.  The proposed rules (new Item 401(v) of Regulation S-K) would require a new table in any proxy or information statement comparing “executive compensation actually paid” to the “total shareholder return” (TSR) of the company and its peers, as well as a discussion of the relationship between these amounts.  The comment period on the proposed rules ended on July 6, 2015.  The proposed rules will not be effective for the 2016 proxy season.

The proposed rules would require tabular disclosure in a prescribed format of “executive compensation actually paid,” total compensation as disclosed in the Summary Compensation Table, TSR, and peer group TSR.  The proposed rules require a description of (1) the relationship between the executive compensation actually paid and TSR, and (2) the relationship between TSR and peer group TSR, in each case, over each of the five most recently completed fiscal years.  The proposed rules would permit disclosure of information in addition to what the proposed rules specifically require, so long as the information is not misleading and does not obscure the required information.  This would appear to permit, for example, companies that make executive compensation decisions utilizing EBITDA or other performance measures (but not TSR) to provide additional disclosure regarding the relationship between such measures and the amounts actually paid to executive officers.  The proposed rules provide that the peer group to be used for the TSR comparison may be selected by the company and may be the peer group identified by the company in its CD&A or used by the company for its stock performance graph.

Companies subject to the proposed rule would be required to provide information on the prior three years the first time the new disclosure is provided, with an additional year of information provided in each of the two subsequent annual proxy or information statements, until a total of five years are provided.

Action items:

  • Review the performance metrics used by the Compensation Committee with the proposed rules in mind.
  • Prepare a sample table to see how the company’s tabular disclosure would appear, and consider additional disclosures that would need to be made based on that result or on the company’s current compensation metrics.

(d) Hedging disclosure

On February 9, 2015, the SEC proposed rules that would require a public company to disclose whether its employees (including officers) and directors are permitted to hedge or offset any decrease in the market value of company equity securities and whether such securities were granted to such persons by the company as compensation or are otherwise held, directly or indirectly.  The comment period for these proposed rules ended in April 2015.  The proposed rules apply to all companies subject to the federal proxy rules, including smaller reporting companies, emerging growth companies, business development companies, and registered closed-end investment companies with shares listed and registered on a national securities exchange (the rules would not apply to foreign private issuers or registered investment companies that are not closed-end).  The proposed rules will not be effective for the 2016 proxy season.

The proposed rules are intended to inform shareholders as to whether employees or directors are allowed to engage in transactions to mitigate or avoid the risks of long-term stock ownership (thereby eliminating the incentive alignment associated with equity ownership).  Public companies are already required to disclose any policies on hedging by named executive officers.  The proposed rule would require disclosure, in any proxy or information statement relating to the election of directors, of whether any employee or director (or any of their designees) is permitted to purchase any financial instruments or otherwise engage in transactions that are designed to, or have the effect of, hedging or offsetting any decrease in the market value of equity securities that are granted to the employee or director by the company as compensation or held, directly or indirectly, by the employee or director.  The rule proposal does not require companies to prohibit hedging by employees or directors.  Disclosure under the proposed rule would require identification of the particular types of hedging transactions that the company permits and those it prohibits.  Companies would also be required to specify whether any permissions or prohibitions apply to some, but not all, persons covered by the proposed rules.  ISS views any amount of hedging of company stock by directors or executives as a “failure of risk oversight” that may lead to voting recommendations against individual directors, committee members or the full board of directors.

Action items:

  • Review existing hedging policy taking into account the proposed rules.
  • Review existing disclosure taking into account the proposed rules.

(e) New IRS guidance on CFO compensation (Section 162(m)) for smaller reporting companies

Recently, the Chief Counsel of the IRS released an interpretive memorandum relating to the application of the deduction limitation of Section 162(m) of the Internal Revenue Code.  Under this new guidance, a principal financial officer of a smaller reporting company can, under limited circumstances, be subject to the deduction limitation of Section 162(m) of the IRC.  The IRS publication – its Chief Counsel Advice − released on October 23, 2015 can be found here.

Action item:

  • While the interpretive memorandum is not precedential authority, registrants that are smaller reporting companies should pay special attention to the compensation paid to the principal financial officer and, if appropriate, the Section 162(m) disclosure in the next proxy statement.


(a) SEC Staff Legal Bulletin 14H

Rule 14a-8(i)(9) is one of the substantive bases for exclusion of a shareholder proposal in Rule 14a-8.  It permits a registrant to exclude a proposal “[i]f the proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.”  During the 2015 proxy season, as described above in the “Proxy Access” section, questions arose about the previous interpretation of Rule 14a-8(i)(9) by the Division of Corporation Finance.  As a result of corresponding uncertainties, the Division decided to review the proper scope and application of this subsection of the rule.  In October 2015, the Division published a Staff Legal Bulletin (SLB) narrowing the application of Rule 14a-8(i)(9).  Under the new interpretation, the Division noted in the SLB that “whether a proposal is excludable under this basis should focus on whether there is a direct conflict between the management and shareholder proposals.  For this purpose, we believe that a direct conflict would exist if a reasonable shareholder could not logically vote in favor of both proposals, i.e., a vote for one proposal is tantamount to a vote against the other proposal.”  The SEC staff acknowledged that its interpretation placed a “higher burden” on companies seeking to exclude a proposal than under prior Division precedent.  As a result, it will be difficult for registrants to successfully exclude a proposal by offering alternative parameters regarding the same topic in the same proxy statement.

Rule 14a-8(i)(7) allows a registrant to exclude a shareholder proposal if it relates to its “ordinary business operations.”  This rule was the subject of an action decided by the Third Circuit Court of Appeals.  This case raised some questions as to the proper application of Rule 14a-8(i)(7).  As explained in the SLB, the Division believed that the “[t]hird Circuit goes beyond the Commission’s prior statements and may lead to the unwarranted exclusion of shareholder proposals.”  The Division explained that it intends to continue to apply Rule 14a-8(i)(7) as articulated by the SEC and consistent with the Division’s prior application of the exclusion when considering no-action requests that raise Rule 14a-8(i)(7) as a basis for exclusion.  Thus, there is no change in the application of this rule as a result of the Third Circuit decision.

(b) Shareholder proposals in 2015

According to ISS Voting Analytics, there were more than 1,030 resolutions spread across 540 firms for shareholder meetings in 2015.  Of those, about 45 percent resolutions pertained to environmental and social resolutions, 43 percent related to corporate governance issues and 12 percent dealt with compensation matters.  The most common shareholder proposals were:

  • political and lobbying activities
  • proxy access and
  • independent chair.

Action items:

  • In light of SLB 14H, consider whether any other section of Rule 14a-8 that may be available to exclude a shareholder proposal.
  • Review the company’s ISS Governance Score and consider any changes to the company’s governance and executive compensation profile that may be warranted.
  • Review proposals received by peer companies, and evaluate input from shareholder engagement initiatives, to assess potential exposure.


ISS and Glass Lewis have released their final voting policies for the 2016 proxy season.  The ISS revised voting policies will take effect for meetings held on or after February 1, 2016, and the Glass Lewis revisions are effective for meetings held on or after January 1, 2016.  The following is a summary of some relevant changes by ISS and Glass Lewis:

(a) Proxy access

On December 18, 2015, ISS issued 78 FAQs relating to its voting policies and procedures.  These FAQs contain detailed information regarding a broad variety of topics and we recommend companies review these in more detail for company specific issues.  There are two FAQs related to proxy access: FAQ #30 describes how ISS will evaluate a board’s implementation of proxy access in response to a majority supported shareholder proposal and FAQ #60 describes how ISS will evaluate proxy access director nominees (as compared to the ISS policy for evaluating director nominees in contested elections.)

(b) Director overboarding

ISS has reduced the number of board positions a non-CEO director can hold from the current six to five (in each case taking into account the board under consideration).  This reduction goes into effect for the 2017 proxy season.  For the 2016 proxy season, ISS would include cautionary language in its research report but not recommend a negative vote on an “overboarded” director.  There was no change to the current ISS policy of recommending against CEO directors who serve on more than two “outside” boards.

Glass Lewis also is making some changes to its policy on this issue.  Starting in 2017, Glass Lewis will recommend against non-CEO directors who serve on more than five public company boards and against CEO directors who sit on more than two outside boards.  For 2016, Glass Lewis may note these levels as a concern, but will only recommend against directors under its current policy of more than six boards for non-CEO directors and more than three boards for CEO directors.

(c) Unilateral bylaw and charter changes

Based upon feedback from institutional investors, ISS bifurcated its policy on this issue and established separate methodologies for pre-IPO companies and post-IPO companies.


Glass Lewis has also revised its policies related to (a) conflicting management and shareholder proposals, (b) exclusive forum provision, (c) environmental and social risk oversight and (d) nominating committee performance.

Action items:

  • Review D&O Questionnaires for potential overboarding issues.
  • Discuss any potential changes to the company’s defensive profile with counsel.


On December 15, 2015, the Public Company Accountancy Board (PCAOB) adopted new rules that require auditors to disclose the name of the audit engagement partner.  Under the final rules, auditors will be required to file a new PCAOB Form AP, Auditor Reporting of Certain Audit Participants, for each issuer audit, disclosing:

  • The name of the engagement partner
  • The names, locations, and extent of participation of other accounting firms that took part in the audit, if their work constituted 5 percent or more of the total audit hours and
  • The number and aggregate extent of participation of all other accounting firms that took part in the audit whose individual participation was less than 5  percent of the total audit hours.

The standard filing deadline for Form AP will be 35 days after the date the auditor’s report is first included in a document filed with the SEC.  In the case of IPOs, the Form AP filing deadline will be 10 days after the auditor’s report is first included in a document filed with the SEC.  The rules are subject to approval by the SEC, and will be effective for auditor’s reports issued on or after January 31, 2017, or three months after SEC approval of the final rules, whichever is later.

The audit committee continues to be asked to provide greater transparency into its oversight duties and responsibilities, beyond the disclosures currently required in a company’s proxy statement.  In response, many companies have enhanced the content of the Audit Committee Report to include disclosure beyond those required by the SEC rules.  In July 2015, the SEC published a concept release seeking public comment regarding audit committee reporting requirements, with a focus on the audit committee’s reporting of its responsibilities with respect to its oversight of the independent auditor and enhancing the information provided to investors about the audit committee’s responsibilities and activities.

Action items: 

In addition to items noted above, audit committees should consider the following issues:

  • Technology-related risks to the registrant, including risks relating to cybersecurity, privacy and information system/security.
  • Financial reporting issues, including possible impact of the new revenue recognition standard.
  • Reviewing relevant PCAOB inspection reports of their public accounting firms.


As companies continue to focus on shareholder engagement efforts, pressure from activists and proxy advisors for greater board transparency and comprehensive strategic planning has increased.  The National Association of Corporate Directors, along with certain large asset managers, have each supported some form of increased dialogue and communications between the board and the shareholders.  Providing information about what the board is doing and why its decisions are aligned with the company’s business goals may be the most direct means to avoid the shareholder misperceptions and discontent that can lead to activism.  Shareholder engagement and board transparency can be demonstrated by enhanced disclosure and other communications, including describing engagement efforts in proxy statements.

ISS considers a say-on-pay vote with less than 70 percent stockholder approval a “failed” vote.  A failed vote by ISS standards means that ISS will expect the company to conduct “adequate” stockholder outreach to get feedback on the issues that contributed to the low level of support (e.g., the factors cited by ISS) and take specific actions to address such issues.  The nature of the stockholder outreach, the results thereof and the actions taken in response and/or the rationale for no action with respect to specific issues, as applicable, and other recent compensation and governance-related actions taken should be disclosed in detail in the subsequent proxy statement.  If adequate stockholder outreach is not conducted and communicated in the subsequent proxy statement, ISS will likely reconsider the same factors in the subsequent year and would likely vote “against” the subsequent say-on-pay proposal and “against” the compensation committee members up for re-election to the board.  If adequate stockholder outreach is conducted and communicated in the subsequent proxy statement, ISS will vote on the subsequent say-on-pay proposal and the compensation committee members up for re-election on a case-by-case basis, taking into account:

  • The subsequent proxy disclosure of the stockholder outreach efforts, the specific actions taken to address the stockholder issues contributing to the low level of support, and other recent compensation and governance-related actions taken
  • Whether the issues raised by ISS were recurring or “isolated” (e.g., one-time events)
  • A company’s ownership structure
  • Whether the shareholder support level was less than 50 percent.

Action items:

  • Improve design and presentation of the proxy statement, including use of executive summaries in the CD&A, hyperlinked tables of contents, use of graphics and emphasis on design, summary of “what we do” and “what we do not do,” and highlight changes made in response to say-on pay votes from prior years.
  • Start shareholder engagement early, including clearly explaining how shareholders can communicate and engage with the registrant and/or board.
  • Consult the guidelines provided in the SDX Protocol to establish a framework for shareholder-director engagements.
  • Undertake shareholder outreach for “failed” say-on-pay votes, keeping in mind not to selectively disclose material nonpublic information when engaging with any shareholders.  Consider using compensation committee members as part of the outreach, as they may carry greater influence with investors than management representatives or advisors.
  • Review the voting standards disclosure in the proxy statement.


In April 2015, the Delaware Chancery Court rendered a ruling which has resulted in increasing scrutiny of director compensation.  The key takeaway from the case is that any time a company seeks a shareholder vote on an amended or new stock plan in which directors can participate, such a plan should include appropriate and meaningful sub-limits for directors.  In the event that a company chooses not to include such sub-limits for directors, it should consider retaining a compensation consultant to form the foundation for the board’s decision relating to director compensation.

Action item:

  • Review equity incentive plans and director compensation policies and consider whether ratification votes, or amendments to impose a sub-limit on director grants, may be advisable.


The SEC’s conflict minerals rules require public companies to disclose information relating to conflict minerals (columbite-tantalite, also known as coltan, from which tantalum is derived; tin; gold; and tungsten; or their derivatives) contained in their products.  Companies subject to this rule have to file a Form SD with the SEC for the calendar year 2015 by May 31, 2016.

In previous years, issuers were permitted to describe their products as “DRC conflict undeterminable” in the Form SD if they were unable to determine the source and chain of custody of conflict minerals in a product (including whether or not such conflict minerals came from the Democratic Republic of Congo or an adjoining country), or whether conflict minerals in the product financed or benefitted armed groups in those regions.  Issuers using the “DRC conflict undeterminable” designation were required to file a Conflict Minerals Report (CMR), but were not required to obtain an Independent Private Sector Audit (IPSA) to assess the conflict minerals due diligence process employed by the issuer.  Starting with Forms SD filed in 2016 with respect to calendar year 2015, issuers will no longer be permitted to use the “DRC conflict undeterminable” determination.

For purposes of reporting in 2016, issuers must file a CMR as an exhibit to Form SD if they (1) are not a smaller reporting company and (2) are unable to determine that the conflict minerals contained in their products (a) did not originate in the Democratic Republic of Congo or an adjoining country, or (b) originated in the Democratic Republic of Congo or an adjoining country, but did not directly or indirectly finance or benefit armed groups.  As a result of a 2014 court decision that partially vacated the conflict minerals rules, the SEC has advised that issuers are not required to describe their products as “DRC conflict free” or having “not been found to be ‘DRC conflict free’” (however, the “DRC conflict undeterminable” designation may no longer be used by companies, other than smaller reporting companies).  Further, pursuant to interpretive guidance published by the Division on April 29, 2014, an IPSA will not be required unless an issuer voluntarily elects to describe a product as “DRC conflict free.”

Action items:

  • Review current conflict minerals compliance program, including confirming that supply chain diligence is current as of December 31, 2015.
  • To the extent relevant to the company, review relevant NGO publications and emerging requirements in the EU and some US states and cities.
  • Review prior Form SD filed by the company and its peer group competitors, with an emphasis on reviewing the supply chain diligence steps.
  • Consider contacting an auditor about the cost, timing, and process of an IPSA, and consider obtaining an IPSA in 2016 for purposes of evaluating the due diligence process.

The following lawyers also contributed to this client alert:  Sarah E. Ritter (Baltimore), Rita M. Patel (Washington, DC), Douglas Rein (San Diego), Melissa A. Bengtson (Phoenix) and James A. Smith (Washington, DC).