Corporate Governance

Shearman & Sterling Proxy Access | 21 SECOND-TIER TERMS In this article we refer to the additional criteria in their proxy access by-laws (beyond the headline terms) that must be met in order for shareholders to validly submit a proxy access candidate as "second-tier terms." Shareholders have become focused on second- tier terms. In July 2017, the Council for Institutional Investors updated its "Proxy Access: Best Practices" white paper and expanded the number of second- tier terms it considers when assessing a company's proxy access by-law. Some common second-tier terms include: Loaned shares: Whether shareholders are able to count loaned shares towards the minimum percentage ownership requirement. Treatment of investment funds: Whether investment funds consisting of multiple entities are able to aggregate their shares and be treated as one shareholder for purposes of the shareholder cap found in most proxy access by-laws. Restrictions on re-nomination: Whether proxy access candidates who fail to achieve a specific percentage of votes (usually 25%) are prevented from being re-nominated for a number of years (usually two years) after their initial nomination. Compensation arrangements: Whether proxy access candidates should be able to receive candidacy fees (and director fees) paid by shareholders, and whether such fees need to be disclosed to the company. Interaction of proxy access and proxy contests: The extent to which, if at all, proxy access should be available to shareholders if a concurrent proxy contest is being run. "FIX-IT" PROPOSALS As we predicted in last year's Corporate Governance Survey, 2017 saw a marked increase in the number of "fix-it" proposals. At least 60 "fix-it" proposals were received in 2017 compared to just 11 in 2016. Although only two "fix-it" proposals have passed (both in 2016), several developments make these proposals worth paying attention to especially as companies start to look ahead to the 2018 proxy season. The rise in "fix-it" proposals comes as companies have overwhelmingly adopted proxy access by-laws with 3 / 3 / 20 / 20 terms, in contrast to the 3 / 3 / 25 / no cap terms that shareholders have asked for. The majority of these proxy access by-laws also require shareholders to comply with more criteria than the original proxy access rule that was adopted by the SEC. Shareholder proponents have not taken this sitting down and shifted their focus to "fix-it" proposals that are designed to bring 3 / 3 / 20 / 20 by-laws closer to the 3 / 3 / 25 / no cap by-laws they espouse, and have also focused on the second-tier terms. "Fix-it" proposals generally fall in three categories: "tailored," "three-term" and "shareholder cap" proposals. Tailored proposals request amendments to several (typically four or five) terms of a company's by-laws. The terms include both headline and second-tier terms, such as the counting of loaned shares or treatment of investment funds. Only 15 tailored proposals have been submitted to date. So far, two tailored proposals have passed (it is worth noting that both companies had a minimum percentage ownership threshold of 5% and amended their by-laws afterwards). Three-term proposals target companies on three issues: the percentage of the board electable pursuant to proxy access, the shareholder aggregation cap and the restrictions on re-nominations of failed proxy access candidates. While several companies attempted to exclude these proposals through the SEC's no-action process, all such attempts were unsuccessful. Shareholder cap proposals seek only to amend the shareholder aggregation cap of a company's proxy access by-law. In most instances, shareholder cap proposals sought to increase this cap to 50 shareholders, although in a few instances the requested increase was to 40 shareholders. These proposals were the main driver of the increase in "fix-it" proposals in 2017. Only 25% of the shareholder cap proposals came to a vote in 2017 as the SEC generally allowed companies to exclude such proposals. 1 3 2 4 5

• Cover