Wachtell, Lipton, Rosen & Katz

Nominating and Corporate

Governance Committee Guide

2016
 About This Guide

This Nominating and Corporate Governance Committee Guide (this “Guide”) provides
an overview of the key rules applicable to nominating and corporate governance committees
of listed U.S. companies and practices that nominating and corporate governance committees
should consider in the current environment. This Guide outlines a nominating and corporate
governance committee member’s responsibilities, reviews the composition and procedures of
the nominating and corporate governance committee and considers important legal standards and
regulations that govern nominating and corporate governance committees and their members.
This Guide also discusses some of the important matters that nominating and corporate govern-
ance committees may be called upon to decide or recommend an approach. Although generally
geared toward directors who are members of a public company nominating and corporate gov-
ernance committee, this Guide is also relevant to members of a nominating and corporate
governance committee of a private company, especially if the private company may at some
point consider accessing the public capital markets.

A few necessary caveats are in order. This Guide is not intended as legal advice, cannot
take into account particular facts and circumstances and generally does not address individual
state corporation laws. That said, we believe that this Guide will offer directors sound guidance
on general rules, practices and considerations relevant to the nominating and corporate govern-
ance committee.

The annexes to this Guide include sample committee charters and other policies and pro-
cedures. They are included because we believe them potentially useful to the nominating and
corporate governance committee in performing its functions. However, it would be a mistake to
simply copy published models. The creation of charters, policies and procedures requires ex-
perience and careful thought. It is not necessary that a company have every guideline and
procedure that another company has in order to be “state of the art” in its governance prac-
tices. When taken too far, an overly broad committee charter can be counterproductive.
For example, if a charter explicitly requires review or other action and the nominating and
corporate governance committee has not taken that action, that failure may be considered evi-
dence of lack of due care. Each company should tailor its nominating and corporate governance
committee charter and other written policies and procedures to what is necessary and practical
for that particular company.

To the extent this guide expresses opinions on corporate governance matters, these do not
necessarily reflect the views of Wachtell, Lipton, Rosen & Katz or its partners as to any particu-
lar situation. We would welcome any feedback readers may have on this Guide, either as to spe-
cific items or regarding its general layout and utility so that we can make future editions even
more useful. Please pass any comments you may have on to Trevor Norwitz (at tsnor-
[email protected]) or Sara Lewis (at [email protected]) or to any other contacts you may have at
the firm.
 © March 2016
Wachtell, Lipton, Rosen & Katz
All rights reserved.
 TABLE OF CONTENTS
Page

INTRODUCTION
PART ONE: THE “CORPORATE GOVERNANCE” FUNCTION OF THE
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE ........................... 1
I. The Purpose of Corporate Governance ............................................................................... 3
II. Sources of Corporate Governance Rules and Policies ........................................................ 5
A. State Law and Governance Documents .................................................................. 5
B. SEC Requirements .................................................................................................. 5
C. Stock Exchange Requirements ............................................................................... 7
1. Independence .............................................................................................. 8
2. Committees ................................................................................................. 8
3. Corporate Governance Guidelines and Codes of Conduct ......................... 8
4. Executive Sessions ...................................................................................... 8
5. Shareholder Approval of Certain Matters ................................................... 9
6. Exemptions ................................................................................................. 9
7. Phase-In Exceptions .................................................................................. 10
8. Noncompliance ......................................................................................... 10
D. Proxy Advisory Services and Institutional Investors ............................................ 11
1. Voting Guidelines ..................................................................................... 14
2. QuickScore ................................................................................................ 15
3. Shareholder Activism................................................................................ 16

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III. Key Corporate Governance Topics ................................................................................... 19
A. Classified Boards .................................................................................................. 19
B. Majority Voting .................................................................................................... 20
C. Shareholder Rights Plans ...................................................................................... 21
D. Advance Notice Bylaw ......................................................................................... 22
E. Separation of Chairman and CEO Roles .............................................................. 23
F. Ability of Shareholders to Act by Written Consent .............................................. 26
G. Ability of Shareholders to Call a Special Meeting ............................................... 27
H. Removal of Directors ............................................................................................ 28
I. Exclusive Forum Provisions in Organizational Documents ................................. 28
J. Dissident Director Compensation Bylaws ............................................................ 30
K. Proxy Access ......................................................................................................... 32
IV. Shareholder Proposals ....................................................................................................... 35
A. Shareholder Proposals Under Federal Law........................................................... 35
1. Eligibility and Procedural Requirements .................................................. 35
2. Substantive Requirements ......................................................................... 36
3. Curable and Non-Curable Deficiencies .................................................... 42
4. No-Action Requests .................................................................................. 42
5. Including Proposal in Proxy Materials ..................................................... 43
6. Precatory and Mandatory Proposals ......................................................... 43
B. Shareholder Proposals Under State Law............................................................... 43
C. Responding to Shareholder Proposals .................................................................. 44
1. Deciding Whether to Implement a Precatory Shareholder Proposal ........ 44
2. Proxy Advisory Policies Regarding Response to Shareholder
Proposals ................................................................................................... 45
3. Responding to Pressure from Shareholders and/or Proxy Advisory
Services ..................................................................................................... 45
D. Effect of Shareholder Proposals............................................................................ 45
E. Major Topics for Shareholder Proposals .............................................................. 47
1. Classified Boards ...................................................................................... 47
2. Separation of Chairman and CEO Positions ............................................. 47
3. Proxy Access ............................................................................................. 48
4. Succession Planning.................................................................................. 50

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 5. Executive Compensation .......................................................................... 50
6. Exclusive Forum Bylaws .......................................................................... 50
7. Social and Environmental Issues .............................................................. 51
V. Proxy Contests .................................................................................................................. 53
VI. Shareholder Engagement .................................................................................................. 55
PART TWO: THE “NOMINATING” FUNCTION OF THE NOMINATING AND
CORPORATE GOVERNANCE COMMITTEE ............................................................. 59
VII. Building an Effective Board ............................................................................................. 61
A. The Role and Responsibilities of the Board of Directors ..................................... 61
1. The Dual Role of the Board ...................................................................... 61
2. Tone at the Top ......................................................................................... 61
3. Risk Management ..................................................................................... 62
4. Crisis Management ................................................................................... 63
B. Board Composition ............................................................................................... 64
1. Director Qualifications.............................................................................. 65
2. Skills Matrices .......................................................................................... 66
3. Diversity.................................................................................................... 66
4. Regulatory Requirements.......................................................................... 68
C. Director Independence .......................................................................................... 69
1. Securities Market Independence Requirements ........................................ 69
2. SEC Requirements .................................................................................... 71
3. State Law .................................................................................................. 72
4. Proxy Advisory Services........................................................................... 73
5. Balancing Independence Against Expertise.............................................. 74
VIII. Director Selection ............................................................................................................. 77
A. Identifying and Recruiting Directors .................................................................... 77
1. Networking ............................................................................................... 77
2. Third-Party Search Firms .......................................................................... 77
3. Input from Within the Company ............................................................... 78
4. SEC Requirements .................................................................................... 79
B. Shareholder Nominations and Proxy Access ........................................................ 79
1. SEC Disclosure Requirements .................................................................. 79
2. Restrictions on Shareholder Nomination Rights....................................... 80

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 3. Proxy Access for Director Nominations ................................................... 81
IX. Director Orientation and Continuing Education ............................................................... 83
A. Orientation ............................................................................................................ 83
B. Continuing Education ........................................................................................... 84
C. Information Received by Directors ....................................................................... 84
X. Restrictions on Director Service ....................................................................................... 87
A. Other Directorships and “Overboarding” ............................................................. 87
B. Term Limits and Mandatory Retirement Ages ..................................................... 89
XI. The Functioning of the Board ........................................................................................... 93
A. Executive Sessions ................................................................................................ 93
B. Committees ........................................................................................................... 93
1. Audit Committee....................................................................................... 94
2. Compensation Committee......................................................................... 96
3. Risk Management Committee................................................................... 97
4. Special Committees .................................................................................. 97
5. Other Committees ..................................................................................... 99
XII. Succession Planning........................................................................................................ 101
A. CEO Succession Planning................................................................................... 101
1. Long-Term and Contingency Planning ................................................... 102
2. Approach ................................................................................................. 102
3. Creating a Candidate Profile ................................................................... 103
4. Internal and External Candidates ............................................................ 104
5. Seeking the Input of Others .................................................................... 104
6. Involvement of the Current CEO ............................................................ 105
B. Director Succession Planning ............................................................................. 105
XIII. Director Compensation ................................................................................................... 109
A. Vesting Responsibility for Setting Director Compensation................................ 109
B. Selecting the Form and Amount of Compensation ............................................. 109
C. Compensation for Additional Director Responsibilities ..................................... 110
D. SEC Disclosure ................................................................................................... 110
XIV. Evaluations of the Board, Committees and Management ............................................... 113
A. The Board’s Annual Governance Review .......................................................... 113
1. Methods of Evaluation ............................................................................ 114

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 2. Following Through ................................................................................. 115
B. Committee Self-Evaluations ............................................................................... 115
C. Evaluation of the CEO ........................................................................................ 116
1. Tasking the Responsibility ...................................................................... 116
2. Finding the Right Approach.................................................................... 116
3. Considering Replacing the CEO ............................................................. 116
D. Evaluation of Individual Directors...................................................................... 117
1. Methods of Evaluation ............................................................................ 117
2. Addressing Underperforming Directors ................................................. 117
E. Director Questionnaires ...................................................................................... 118
PART THREE: NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
ORGANIZATION AND PROCEDURES ..................................................................... 119
XV. Key Responsibilities of the Nominating and Corporate Governance Committee .......... 121
A. Existence and Composition................................................................................. 121
1. NYSE Requirements ............................................................................... 121
2. Nasdaq Requirements ............................................................................. 121
3. SEC Requirements .................................................................................. 122
B. Nominating and Corporate Governance Committee Charter and
Responsibilities ................................................................................................... 122
1. NYSE Requirements ............................................................................... 123
2. Nasdaq Requirements ............................................................................. 124
3. SEC Requirements .................................................................................. 125
XVI. The Membership and Functioning of the Nominating and Corporate Governance
Committee ....................................................................................................................... 127
A. Membership ........................................................................................................ 127
1. Size and Composition of the Committee ................................................ 127
2. Chairperson ............................................................................................. 127
3. Term of Service....................................................................................... 128
B. Meetings .............................................................................................................. 128
1. Regular Meetings .................................................................................... 128
2. Minutes ................................................................................................... 129
3. Rights of Inspection ................................................................................ 129
4. Third-Party Advisors .............................................................................. 131

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XVII. Fiduciary Duties of Nominating and Corporate Governance Committee Members ...... 133
A. The Business Judgment Rule .............................................................................. 133
B. Fiduciary Duties Generally ................................................................................. 133
1. The Duty of Care .................................................................................... 133
2. The Duty of Loyalty................................................................................ 134
3. Oversight Duties ..................................................................................... 134
C. Reliance on Experts ............................................................................................ 135
D. Exculpation and Indemnification ........................................................................ 135

ANNEX A COMPARISON OF NYSE AND NASDAQ CORPORATE GOVERNANCE

STANDARDS..................................................................................................... A-1
ANNEX B DIRECTOR RESIGNATION POLICY ..............................................................B-1
ANNEX C ADVANCE NOTICE OF STOCKHOLDER BUSINESS AND
NOMINATIONS .................................................................................................C-1
ANNEX D DIRECTORS’ AND OFFICERS’ QUESTIONNAIRE ..................................... D-1
ANNEX E NOMINATING AND GOVERNANCE COMMITTEE CHARTER ................. E-1

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 _________________________

INTRODUCTION
_________________________

The nominating and corporate governance committee goes by different names: the Secu-
rities and Exchange Commission (the “SEC”) refers to the “nominating committee,” the New
York Stock Exchange (the “NYSE”) to the “nominating/corporate governance committee,” and
Nasdaq to the “nominations committee.”1 Although traditionally known simply as the nominat-
ing committee, the increasing incidence of “corporate governance” in the title reflects the wider
scope of responsibilities this committee has assumed in recent years. Once focused almost ex-
clusively on identifying and selecting candidates for the board of directors, the nominating and
corporate governance committee now typically assumes a leading role in a broad array of corpo-
rate governance matters, including the development and implementation of corporate governance
guidelines, establishment of director criteria and review of candidates, evaluation of the perfor-
mance of the board itself and its committees, consideration of shareholder proposals and, in some
cases, management succession planning. Sometimes determination of non-employee director
compensation is handled by the nominating and corporate governance committee as well, alt-
hough in other cases this falls within the purview of the compensation committee.

The nominating and corporate governance committee is one of three standing commit-
tees, along with the audit committee and the compensation committee, required by the NYSE to
be composed entirely of independent directors. In the past decade and a half, considerable public
attention has been paid to the audit committee in the wake of the financial scandals of the early
2000s, and then to the compensation committee in light of the options backdating and other con-
troversies regarding executive compensation. Because it is less regulated and had received less
attention than those committees, the nominating and corporate governance committee had some-
times been thought of as the “third” of the three standing committees. But this has changed.
With the heightened focus on corporate governance, and a steady push by shareholder rights ac-
tivists and proxy advisory services to enhance “shareholder rights” and conform to “best practic-
es,” the role of the nominating and corporate governance committee has become far more promi-
nent in recent years, and we expect it will play a central role in the years to come. Indeed, it is
not uncommon for the chair of the nominating and corporate governance committee to be the
lead director at companies where the chief executive officer also chairs the board (although this
is of course not necessarily the case).

In simplest terms, just as the audit committee has primary responsibility to ensure that the
company’s financial policies and practices are appropriate, and the compensation committee has
primary responsibility to ensure that the company’s compensation policies and practices are ap-
propriate, so the nominating and corporate governance committee has primary responsibility to
ensure that the company’s corporate governance and nominations policies and practices are ap-
propriate for the company.
1
See, e.g., Item 407(c) of Regulation S-K; NYSE Listed Company Manual, Rule 303A.04; Nasdaq Listing Rule
5605-6(e)(B).
 The standards governing the composition and operations of the nominating and corporate
governance committee are in many respects not as specific or as rigorous as those applicable to
the audit and the compensation committees. While SEC rules apply to all listed companies, most
of the standards relevant to the nominating and corporate governance committee are to be found
in the applicable stock exchange listing standards. Listing standards applicable to the nominat-
ing and corporate governance committee are different for the NYSE and Nasdaq, subtly or sig-
nificantly, depending on the issue.

The landscape within which the nominating and corporate governance committee oper-
ates is always changing. The panoply of positions taken and policies adopted by the proxy advi-
sory service firms, large institutional investor groups and, to a lesser degree, other shareholder
rights activists are constantly evolving and shifting. Members of nominating and corporate gov-
ernance committees should be familiar with these policies and positions, which, while not bind-
ing on companies, undoubtedly have a significant impact on corporate governance practices.

This Guide is organized into three parts. Part I focuses on the “corporate governance”
function of the nominating and corporate governance committee; Part II turns to its “nominating”
role; and Part III addresses the committee’s basic organization and procedures. The purpose of
this Guide is to describe the standards applicable to the nominating and corporate governance
committee in order to assist committee members in better understanding their role and responsi-
bilities.
 _________________________

PART ONE:

THE “CORPORATE GOVERNANCE” FUNCTION OF THE NOMINATING AND

CORPORATE GOVERNANCE COMMITTEE

_________________________
 I. The Purpose of Corporate Governance

The term “corporate governance” encompasses a broad range of legal and non-legal prin-
ciples and practices that, in combination, establish the rights, powers and obligations of the vari-
ous stakeholders of a company. Although corporate governance principles and practices most
directly regulate the relationships among a company’s shareholders, board of directors and man-
agement, they also affect all of a company’s stakeholders, including employees, customers, sup-
pliers and creditors. Corporate governance can be seen as a means to facilitate the allocation of
power and the division of responsibility among the company’s stakeholders: the company’s
shareholders provide capital and approve certain major decisions and transactions; the board of
directors is elected by shareholders to oversee management and guide the direction of the com-
pany; and senior managers are responsible for the day-to-day operations of the company.

At its core, the proper goal of corporate governance is creating sustainable value. The
governance structure and policies that will best achieve this goal are as varied as are companies
themselves. A board should tailor its corporate governance decisions to its company, bearing in
mind factors such as the unique circumstances of the company and the culture and dynamics
among the principal stakeholders. We believe that decisions regarding corporate governance are
ideally determined by directors who have the best information to evaluate these factors, who best
understand the company holistically and who are ultimately responsible for the results of these
decisions as the only group of stakeholders subject to fiduciary duties.

In this respect, it is important for the nominating and corporate governance committee to
resist pressure to simply equate “shareholder-friendly” corporate governance policies with
“good” corporate governance policies or to substitute the judgment of proxy advisory firms or
activist investors for its own. Institutional investors, hedge funds and activist investors have
made considerable strides in recent years in taking the shareholder-centric model of corporate
governance from the fringe to the mainstream, advocating uniform adoption of so-called “best
practices.” However, such “best practices” may not be best for all companies or shareholders.
Shareholders have very different objectives and time horizons. Some shareholders, including
many activist investors and hedge funds, are looking to maximize their returns over a short peri-
od, while others, such as institutional investors and index funds, generally have longer-term ob-
jectives. Others, such as union pension funds, may have special interests not shared by the gen-
eral body of shareholders. Institutional investors are themselves intermediaries for the ultimate
beneficial owners of shares, and the interests of decision-makers at those institutions are often
not entirely aligned with the interests of those ultimate beneficiaries.

Empowering shareholders at the expense of the board will not necessarily lead to better
performance and more efficient management of corporations, and the optimal corporate govern-
ance structure for one company may not be the optimal corporate governance structure for an-
other company. In discharging its fiduciary duties, the nominating and corporate governance
committee must therefore remind itself of the fundamental goal of corporate governance and
make its own determination as to the proper corporate governance for the company. Directors
not only may—but should—disfavor so-called “best practice” governance provisions unless they
believe that such provisions are in the best interests of the company they serve.

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 Directors must exercise this judgment in a changing corporate governance landscape de-
fined by increasing direct shareholder engagement and frequent implementation by companies of
shareholder proposals. Companies and institutional investors now dialogue more regularly on
corporate governance and strategic matters than they have ever done before. Many “best prac-
tices” long advocated by shareholder groups—including say-on-pay, the dismantling of share-
holder defenses, majority voting in director elections and the declassification of boards—have
been codified in rules and regulations or voluntarily adopted by a majority of S&P 500 compa-
nies. As institutional shareholders and activists advocate new “best practices” and utilize new
approaches in engaging companies and in asserting their agendas, directors must strive to contin-
ue to act steadfastly in the best interests of the corporation and its shareholders.

In the last few years, there is evidence that a new paradigm may be emerging for corpo-
rate governance, in which leading institutional investors will support long-term investment and
value creation by more active engagement and reducing the degree to which they outsource cor-
porate governance decisions to ISS and activist hedge funds. A number of these institutional in-
vestors are significantly expanding their governance departments so that they have in-house ca-
pability to evaluate governance and strategy.

By way of example, Laurence Fink, Chairman and CEO of BlackRock, has said:

“It is critical . . . to understand that corporate leaders’ duty of care and

loyalty is not to every investor or trader who owns their companies’ shares at any
moment in time, but to the company and its long-term owners. Successfully ful-
filling that duty requires that corporate leaders engage with a company’s long-
term providers of capital; that they resist the pressure of short-term shareholders
to extract value from the company if it would compromise value creation for
long-term owners; and, most importantly, that they clearly and effectively articu-
late their strategy for sustainable long-term growth. Corporate leaders and their
companies who follow this model can expect our support.”

Crucial elements of this new paradigm, which the nominating and corporate governance
committee should be aware of and help the board to formulate, include: a well-articulated long-
term strategic plan, active board participation in the strategic planning process, communication
of the company’s strategic plan to investors, including by direct engagement by management
and, where appropriate, directors, a thoughtful and well-communicated approach to corporate
governance and appropriate attention to issues of corporate social responsibility and sustainabil-
ity issues about which the company’s investors care.

As the landscape continues to evolve, the nominating and corporate governance commit-
tee can play an important role in helping the board and management stay ahead of the curve.

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 II. Sources of Corporate Governance Rules and Policies

The main sources of substantive corporate governance rules are state law and stock ex-
change listing standards. Within these parameters, a company has a fair amount of flexibility in
implementing a corporate governance framework and memorializing that framework in its or-
ganizational documents. The SEC’s rules generally focus on ensuring adequate disclosure rather
than compelling any particular governance practice. Of course, requiring disclosure may in itself
nudge corporate governance practices in one direction or another. Additionally, corporate gov-
ernance decisions are increasingly the result not of black-letter legal requirements, but rather of
the substantial influence of proxy advisory firms, policies developed by large institutional inves-
tor groups and pressure from shareholder activists.

A. State Law and Governance Documents

The corporate governance framework of each company is principally defined by the laws
of its state of incorporation and by its organizational documents. State corporate statutes provide
some limits on how companies can structure their affairs, many of which are so ingrained that it
is difficult to imagine corporate governance in any other way. For example, under Delaware
law, each director of a corporation must be a natural person, regardless of what a corporation’s
organizational documents might say about the matter.2 However, a significant portion of state
corporate statutes simply provide default rules in the absence of any provision in a corporation’s
organizational documents to the contrary. Delaware in particular prides itself on its enabling
statute, which provides few mandatory elements but allows a high degree of private ordering. A
number of provisions in the Delaware General Corporation Law are prefaced by “unless the cer-
tificate of incorporation provides otherwise” or similar phraseology. 3 This leaves the tailoring of
a particular corporate governance regime to each individual company in its organizational docu-
ments.

Some corporate governance features, such as (in Delaware) classification of the board,
must be effected through the company’s certificate of incorporation (also known as its charter).
This means that shareholder approval is required to adopt such a provision—or to eliminate such
a provision. Other corporate governance matters are commonly fleshed out in a company’s by-
laws, and boards are commonly granted the authority to make, amend or repeal bylaws without
shareholder approval. Shareholders generally have the right to amend, adopt or repeal bylaws as
well. Other corporate governance policies, especially those that state the company’s current po-
sition with respect to a governance issue but preserve flexibility to deviate from it in appropriate
circumstances, are often best reserved for a company’s corporate governance guidelines. These
guidelines are typically adopted, and can be changed, by the board.

B. SEC Requirements

The SEC regulates corporate governance principally by imposing disclosure require-

ments, although it does impose some substantive requirements, such as those defining “inde-

2
8 Del. C. § 141(b).
3
See, e.g., 8 Del. C. §§ 141(b) (number of directors), 141(k)(1) (grounds for removal of directors) and 211(b)
(election of directors by written consent).

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pendence” for purposes of audit committee membership in the Sarbanes-Oxley Act of 2002
(“Sarbanes-Oxley”),4 and SEC Rule 10A-3 (see Section XI.B.1 for a further discussion of these
audit committee requirements). Regulation 14A and the accompanying Schedule 14A, which
govern the solicitation of proxies at shareholder meetings, are the SEC’s primary mechanisms for
requiring corporate governance disclosures. Regulation 14A specifies what information must be
presented to shareholders regarding director candidates and other matters to be brought before
the shareholders and the format in which it must be presented, and requires disclosure of corpo-
rate governance matters, such as board and committee composition, director and committee
member independence, attendance at and frequency of board and committee meetings and gov-
ernance and related-party transaction policies, to name just a few. Rule 14a-8 also provides rules
governing the inclusion and presentation of shareholder proposals in a company’s proxy materi-
als. For a discussion of Rule 14a-8, see Section IV.A.

The SEC also requires certain corporate governance disclosures under Sarbanes-Oxley,
which set new or enhanced standards for public company boards and management in the after-
math of corporate and accounting scandals, and the Dodd-Frank Wall Street Reform and Con-
sumer Protection Act (“Dodd-Frank”),5 the financial regulation passed after the financial crisis of
2008. Notably, the SEC now requires shareholders to vote on compensation plans at least every
three years6 under its say-on-pay regime and also to vote on “golden parachute” payments, which
are payments to an executive upon an executive’s termination in connection with a change in
control transaction, such as a merger.7 Additionally, companies must disclose compensation of
its named executive officers (the CEO, CFO and its three other highest paid executive officers)
in securities filings.8

In February of 2015, pursuant to Section 955 of Dodd-Frank, the SEC proposed rules that
would require disclosure in proxy statements involving the election of directors as to whether the
company permits employees (including officers), directors or their designees to engage in trans-
actions to hedge or offset any decrease in the market value of the company’s equity securities
held by these individuals.9 Existing proxy rules require companies to disclose stock ownership
guidelines and company policies pertaining to hedging activities of named executive officers, if
material. The newly proposed rules would apply beyond named executive officers to directors,
officers and employees generally, eliminate the materiality requirement and apply broadly to
company securities, whether or not granted for compensatory purposes.10

4
Pub. L. 107-204, 116 Stat. 745.
5
Pub. L. 111-203, 124 Stat. 1376.
6
17 C.F.R. § 240.14a-21.
7
Id.
8
17 C.F.R. § 229.402.
9
The comment period on the proposed rules ended on April 20, 2015 but final rules have not yet been enacted.
On February 10, 2016, Associate Director of the Division of Corporate Finance Elizabeth Murphy noted that SEC
staff are currently reviewing the definitions of certain terms in the proposed rule based received comments. Che
Odom, SEC Disclosure Review May See Concept Release in 2016, BLOOMBERG BNA (Feb. 17, 2016); see also Dis-
closure of Hedging by Employees, Officers and Directors, Release Nos. 33-9723 and 34-74232; 80 Fed. Reg. 8485
(proposed Feb. 9, 2015), available at http://www.sec.gov/rules/proposed/2015/33-9723.pdf; see also Wachtell, Lip-
ton, Rosen & Katz, SEC Proposes Proxy Disclosure Rules for Hedging by Directors, Officers and Employees
(Feb. 9, 2015), available at http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/WLRK/WLRK.23845.15.pdf.
10
Id.

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 Section 16 of the Securities Exchange Act of 1934 (the “Exchange Act”)11 also requires
all directors, certain executives and shareholders who own 10 percent or more of a company’s
securities to report transactions in the company’s securities, and filings of Schedules 13D and
13G (by shareholders with more than five percent of a company’s equity securities) are closely
monitored by companies in an effort to anticipate and respond to activism.

Finally, it is worth noting that Form 8-K operates to notify shareholders of certain chang-
es in a corporation’s corporate governance, such as material modifications to rights of sharehold-
ers, the election and appointment or departure of directors and certain officers, compensatory
arrangements with certain officers, changes in control of the company, amendments to the char-
ter or bylaws, amendments to a company’s code of ethics or waiver of a provision of a code of
ethics, results of shareholder votes and nominations of directors by shareholders.12

With respect to board composition, the SEC requires that all members of the audit com-
mittee be independent.13 Under SEC rules, an audit committee member is considered independ-
ent if he or she has not (1) accepted any consulting, advisory or other compensatory fee from the
issuer or (2) been an affiliate of the issuer or any of its subsidiaries. 14 The SEC also provides
that national stock exchanges, which must ensure that listed companies have independent com-
pensation committee members, must consider the same factors in assessing the independence of
compensation committee members as the SEC uses to assess audit committee member independ-
ence.15

Although many of the SEC rules regarding corporate governance are “disclosure-based,”
the substantive rules that the SEC does impose, as well as the potential impact of disclosure-
based rules on actual corporate governance practices, appear to be growing. In a March 2014
keynote address, former SEC Commissioner Daniel Gallagher noted the trend towards increased
federalization of corporate governance matters traditionally left to the states, citing Rule 14a-8
and the Dodd-Frank requirement for a say-on-pay vote as particular incursions: “Some of these
requirements unashamedly interfere in corporate governance matters traditionally and appropri-
ately left to the states. Others masquerade as disclosure, but are in reality attempts to affect sub-
stantive behavior through disclosure regulation. . . . This stands in stark contrast with the flexi-
bility traditionally achieved through private ordering under more open-ended state legal re-
gimes.”16

C. Stock Exchange Requirements

Both the NYSE and Nasdaq have adopted corporate governance standards that, with lim-
ited exceptions discussed below, apply to all companies listing common equity securities on the
exchanges. These governance standards generally do not apply to companies listing only pre-

11
15 U.S.C. § 78(a).
12
Items 3.03, 5.02, 5.01, 5.03, 5.05, 5.07 and 5.08 of Form 8-K. 17 C.F.R. 249.308.
13
17 C.F.R. § 240.10A-3(b).
14
17 C.F.R. § 240.10A-2(b)(ii)(A).
15
17 C.F.R. §§ 240.10A-3(a)-(b).
16
Daniel M. Gallagher, former Comm’r, SEC, Remarks at the 26th Annual Corporate Law Institute, Tulane Uni-
versity Law School: Federal Preemption of State Corporate Governance (Mar. 27, 2014), available at
http://www.sec.gov/News/Speech/Detail/Speech/1370541315952#.VQfYE9J0xMw.

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ferred or debt securities. The discussion in this section provides a brief summary of the corpo-
rate governance standards at both exchanges. Please see Annex A for a detailed comparison.

1. Independence

The rules of the exchanges require that a listed company’s board comprise a majority of
independent directors.17 The standards of both exchanges for determining director independence
are discussed in Section VII.C.1.

2. Committees

The stock exchanges require listed companies to have an audit committee and a compen-
sation committee, each of which must be composed entirely of independent directors. 18 Each of
these committees must have a charter vesting the committee with certain responsibilities and
providing for an annual evaluation of the committee.19 Under NYSE rules, members of the audit
and compensation committees must satisfy more stringent independence criteria than other direc-
tors. Additionally, the NYSE requires that listed companies have a nominating and corporate
governance committee, with a charter, composed entirely of independent directors. 20 Nasdaq
does not require listed companies to have a nominations and corporate governance committee,
but it does require that listed companies have a formal charter or written resolutions addressing
the nominations process and that director nominees be selected by independent directors.21

3. Corporate Governance Guidelines and Codes of Conduct

Both stock exchanges require listed companies to adopt and disclose a code of business
conduct and ethics for directors, officers and employees.22 The required contents of the codes of
conduct for the two exchanges differ somewhat, but they generally must include standards that
address honesty and ethical conduct. Companies must promptly disclose any waivers of the code
for directors or executive officers. Each code of business conduct must also contain compliance
standards or enforcement mechanisms. As discussed in Section XV.B.1, NYSE-listed compa-
nies are also required to adopt and disclose corporate governance guidelines that must address
director qualification standards, director responsibilities and other director and corporate govern-
ance matters. The Nasdaq listing standards do not address corporate governance guidelines.

4. Executive Sessions

The NYSE requires that non-management directors (even if not independent) meet in ex-
ecutive sessions without management directors or other members of management at “regularly
scheduled” meetings and that independent directors meet in executive sessions without non-
independent directors or members of management at least once a year. 23 Nasdaq requires that

17
NYSE Listed Company Manual, Rule 303A.01; Nasdaq Listing Rule 5605(b)(1).
18
NYSE Listed Company Manual, Rules 303A.05 and 303A.07; Nasdaq Listing Rules 5605(c)(2)(a) and
5605(d)(2)(a).
19
NYSE Listed Company Manual, Rules 303A.04 and 303A.05; Nasdaq Listing Rules 5605(c) and 5605(d).
20
NYSE Listed Company Manual, Rule 303A.04.
21
Nasdaq Listing Rule 5605(e).
22
NYSE Listed Company Manual, Rule 303A.10; Nasdaq Listing Rule 5610.
23
NYSE Listed Company Manual, Rule 303A.03.

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independent directors meet in executive sessions without non-independent directors or members
of management,24 with commentary to Nasdaq rules instructing that such executive sessions
should occur at least twice a year, and perhaps more frequently, in conjunction with regularly
scheduled board meetings.25

5. Shareholder Approval of Certain Matters

Both exchanges require shareholder approval in certain instances.

 Issuance in Acquisition: Both the NYSE and Nasdaq require shareholder approv-
al prior to the issuance of securities in connection with any transaction or series of
related transactions if the common stock to be issued is or will be equal to or
greater than 20 percent of the voting power or number of shares of common stock
outstanding before the issuance (subject to certain exceptions).26

 Changes in Control: Shareholder approval is also required under the rules of both
exchanges prior to an issuance that will result in a change of control of a listed
company.27

 Insider Transactions: Under certain circumstances, shareholder approval is re-

quired by both exchanges prior to the issuance of common stock to a director, of-
ficer or substantial security holder, or any of their affiliates.28

 Equity Compensation: Under the rules of both exchanges, subject to certain ex-
ceptions, shareholders must be given the opportunity to vote on the establishment
or material amendment of equity-compensation plans.29

6. Exemptions

Both exchanges provide exemption for relief from their rules to certain companies under
certain circumstances. Nasdaq-listed cooperatives, registered management investment compa-
nies, and controlled companies (defined as a company in which more than 50 percent of the vot-
ing power for director elections is held by an individual, group or another company) are not re-
quired to have a majority independent board, compensation committee, or independent director
oversight of nominations.30 Nasdaq also exempts limited partnerships from its general corporate
governance requirements, but imposes certain partnership specific governance requirements on
such entities.31 Similarly, the NYSE exempts registered management investment companies and

24
Nasdaq Listing Rule 5605(b)(2).
25
Nasdaq Listing Rule IM-5605-2.
26
NYSE Listed Company Manual, Rule 312.03(c); Nasdaq Listing Rule 5635(a)(1).
27
NYSE Listed Company Manual, Rule 312.03(d); Nasdaq Listing Rule 5635(b).
28
NYSE Listed Company Manual, Rule 312.03(b); Nasdaq Listing Rule 5635(a)(2).
29
NYSE Listed Company Manual, Rule 303A.08; Nasdaq Listing Rule 5635(c).
30
Nasdaq Listing Rules 5615(a)(2), 5615(a)(5), and 5615(c).
31
Nasdaq Listing Rule 5615(a)(4). Among other things, a Nasdaq-listed limited partnership must maintain a gen-
eral partner, have at least three independent directors pursuant to Rule 5605(c)(2)’s audit committee composition
requirements, review all related party transactions on an ongoing basis and review potential material conflict of in-

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certain passive issuers from most of its corporate governance requirements.32 NYSE-listed lim-
ited partnerships, companies in bankruptcy and controlled companies are not required to have
majority-independent boards, compensation committees or nominating and corporate governance
committees.33 All of these companies are, however, subject to the remaining corporate govern-
ance standards of each exchange.

Generally, foreign private issuers listed on an exchange are permitted to follow home
country practice in lieu of the exchange’s corporate governance standards, with the exception of
the governance standards regarding audit committees, certification of compliance, and, for
Nasdaq only, the prohibition on certain alterations to common stock voting rights.34 Foreign pri-
vate issuers listed on the NYSE must disclose any significant ways in which their corporate gov-
ernance practices differ from listing standards, and those listed on the Nasdaq must report each
requirement that they do not follow and describe the home country practice they follow in lieu of
that requirement.35 Additionally, a Nasdaq-listed foreign private issuer that follows a home
country practice in lieu of having an independent compensation committee must disclose the rea-
sons why it elected not to have such an independent committee.36

7. Phase-In Exceptions

Both exchanges provide that companies in various categories may phase into corporate
governance requirements. For example, both exchanges allow companies listed in conjunction
with an Initial Public Offering (an “IPO”), and those ceasing to qualify as controlled companies,
up to a year from the listing date to establish a majority-independent board.37 Subject to certain
distinctions, both exchanges also allow the companies in these two categories and companies
listing upon emergence from bankruptcy to phase in the number of independent directors that
serve as members of exchange-required committees: Committees must comprise a majority of
independent directors within 90 days and all independent directors within one year of listing or
status change.38

8. Noncompliance

Both exchanges require that a company promptly notify them in writing after the compa-
ny becomes aware of any noncompliance with the corporate governance standards.39 The NYSE
additionally requires that the CEO must certify to the NYSE each year that he or she is not aware
of any violation by the company of the NYSE corporate governance standards, qualifying the
certification to the extent necessary.40

terest situations where appropriate through use of an audit committee or comparable body of the partnership’s board
of directors.
32
NYSE Listed Company Manual, Rule 303A.00.
33
Id.
34
NYSE Listed Company Manual, Rule 303A.00; Nasdaq Listing Rule 5615(a)(3).
35
Id.
36
NYSE Listed Company Manual, Rule 303A.11; Nasdaq Listing Rule 5615(a)(3)(B).
37
NYSE Listed Company Manual, Rule 303.A00; Nasdaq Listing Rules 5615(b)(1)-(2) and (c)(3).
38
Id.
39
NYSE Listed Company Manual, Rule 303A.12(b); Nasdaq Listing Rule 5625.
40
NYSE Listed Company Manual, Rule 303A.12(a).

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D. Proxy Advisory Services and Institutional Investors

Large institutional investors commonly hold stock in hundreds of companies and thus are
called upon to vote at hundreds of shareholder meetings per year. While institutional investors
often have corporate governance departments to inform their voting decisions, most institutional
investors deal with this volume either by outsourcing voting decisions to proxy advisory services
or by using the recommendations of the proxy advisory services to guide their decisions. Proxy
advisory services provide voting recommendations on topics including director elections, say-on-
pay, shareholder proposals and mergers. In addition to providing company-specific voting rec-
ommendations, proxy advisory services publish voting guidelines setting forth their policies on
various issues. The two largest proxy advisory firms—Institutional Shareholder Services Inc.
(“ISS”) and Glass, Lewis & Co. (“Glass Lewis”)—enjoy an effective duopoly in the field, with a
97 percent share of the industry.41 ISS was acquired in 2014 by hedge fund Vestar Capital Part-
ners, and Glass Lewis “is an indirect, wholly owned subsidiary of the Ontario Teachers’ Pension
Plan Board, a major institutional investor.”42

In the last decade, the influence of proxy advisory firms has increased substantially, and
their recommendations are now a powerful (and often decisive) force in influencing corporate
governance and voting results. This growing influence is partly the result of the SEC’s creation
in 2003 of an effective safe harbor from a 1988 Department of Labor determination that institu-
tional investors owed their clients a fiduciary duty when voting their shares. The SEC safe har-
bor provides that fund managers may insulate themselves from fiduciary duty claims by, in ac-
cordance with a pre-determined policy, relying upon the proxy voting recommendations of a
third party.43 The influence of proxy advisory firms was also greatly increased by the move from
plurality to majority voting standards beginning in 2004, as that put “teeth” in their policies of
recommending “withhold” votes for directors who did not implement shareholder preferences as
reflected in precatory resolutions. It is generally understood that an ISS recommendation in fa-
vor of a shareholder proposal increases the approval vote substantially. One commentator con-
servatively estimates such increase to be, on average, 15 percentage points.44

However, both legislators and regulators have started to question the influence of proxy
advisory firms and have expressed the need to regulate these firms for conflicts of interest and

41
See Staff of H. Comm. on Fin. Servs., 113th Cong., Memorandum: June 5 Subcommittee on Capital Markets
hearing on “Examining the Market Power and Impact of Proxy Advisory Firms” 3 (May 31, 2013), available at
http://financialservices.house.gov/uploadedfiles/060513_cm_memo.pdf.
42
Id.; Press Release, ISS, Vestar Capital Partners Completes Acquisition of ISS (Apr. 30, 2014), available at
http://www.issgovernance.com/vestar-capital-partners-completes-acquisition-of-institutional-shareholder-services/.
43
Investment Advisers Act of 1940, 17 C.F.R. § 275.206(4)-6. See also Leo E. Strine, Jr., One Fundamental Cor-
porate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful
Electorates Also Act and Think Long Term?, 66 Bus. Law. 1, 17 (Nov. 2010) (“The problem of short-termism is also
illustrated by the policies of proxy advisory firms whose growth was fueled by the Labor Department’s informed
voting requirements for regulated investment funds.”), available at http://www.ecgi.org/tcgd/2011/documents/
Strine%20Fundmental%20Corp%20Gov%20Q%202011%20Bus%20 L.pdf.
44
James R. Copland, SEC Needs to Rethink Its Rules on Proxy Advisory Firms, Wash. Examiner, July 24, 2014,
http://www.washingtonexaminer.com/article/2551268#!.

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other issues.45 In response to this mounting pressure from both legislators 46 and companies, in
June 2014, the SEC issued regulatory guidance concerning the proxy voting responsibilities of
investment advisors and their use of proxy advisory firms. 47 The guidance reinforces the SEC’s
position that investment advisors owe fiduciary duties to their clients in proxy voting and that, to
comply with SEC rules in exercising its voting authority, an investment advisor must “adopt and
implement written policies and procedures that are reasonably designed to ensure that the in-
vestment advisor votes proxies in the best interest of its clients.” 48 The SEC advises that to
demonstrate compliance with these requirements, an investment advisor could periodically sam-
ple votes cast by proxy firms to confirm compliance with its policies and procedures and review
its policies and procedures at least once a year. Additionally, the SEC advises that when retain-
ing a proxy firm, an investment advisor should ascertain its “capacity and competency to ade-
quately analyze proxy issues,”49 including by considering the robustness of a proxy firm’s poli-
cies and procedures regarding its ability to ensure that its voting recommendations are based on
current and accurate information and to identify and address conflicts of interest and any other
considerations that the investment advisor may want to consider in evaluating the services of the
proxy firm.

In the guidance, the SEC also confirmed that investment advisors are not required to vote
every proxy and may instead choose a number of the following arrangements with clients: to
agree to forego voting on certain types of proposals due to costs; to vote in line with manage-
ment or a shareholder proponent; to abstain from voting all together; or to focus resources on
certain types of proposals. We believe that it would be a responsible policy for institutional in-
vestors that do not wish to devote resources to making educated voting decisions to have a de-
fault rule to vote in accordance with the recommendation of the board, unless instructed other-
wise. However, as we have noted, SEC guidance may result in investment advisors opting not to
vote on various issues, which could magnify the voices of activists or lead to distortions in the
character and quality of information conveyed by reported “votes cast.”50

45
See Staff of H. Comm. on Fin. Servs., 113th Cong., Memorandum: June 5 Subcommittee on Capital Markets
hearing on “Examining the Market Power and Impact of Proxy Advisory Firms,” 3 (May 31, 2013), available at
http://financialservices.house.gov/uploadedfiles/060513_cm_memo.pdf; See also Examining the Market Power and
Impact of Proxy Advisory Firms: Hearing Before the Subcomm. on Capital Markets and Gov. Sponsored Enters. of
the H. Comm. on Fin. Servs., 113th Cong. 1 (June 5, 2013), available at http:/financial ser-
vices.house.gov/uploadedfiles/113-27.pdf; Daniel M. Gallagher, Comm’r, SEC, Remarks at Society of Corporate
Secretaries and Governance Professionals (July 11, 2013), available at http://www.sec.gov/
News/Speech/Detail/Speech/1370539700301.
46
See Yin Wilczek, Congress Will Act if SEC Fails to Move on Proxy Advisors, Bloomberg BNA, June 27, 2014,
available at http://www.bna.com/congress-act-sec-n17179891633/.
47
SEC Staff Legal Bulletin No. 20, Proxy Voting: Proxy Voting Responsibilities of Investment Advisers and
Availability of Exemptions from Proxy Rules for Proxy Advisory Firms (June 30, 2014), available at
http://www.sec.gov/interps/legal/cfslb20.htm; for analysis of the guidance; see also Wachtell, Lipton, Rosen &
Katz, SEC Issues Regulatory Guidance on Proxy Advisory Firms and Proxy Voting Responsibilities (July 1, 2014),
available at http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/WLRK/WLRK.23439.14.pdf.
48
Id.
49
Id.
50
Wachtell, Lipton, Rosen & Katz, SEC Issues Regulatory Guidance on Proxy Advisory Firms and Proxy Voting
Responsibilities (July 1, 2014), available at http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/WLRK/
WLRK.23439.14.pdf.

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 Under the SEC guidance, with respect to conflicts of interest, proxy firms must disclose
to their clients the significant relationships and material interests in the matter that is subject of a
voting recommendation with a level of sufficiency that will enable the client to assess the relia-
bility or objectivity of the recommendation. Although this disclosure can be made to clients di-
rectly or publicly, as we noted elsewhere, we expect that proxy firms would choose to disclose
publicly so that their highly influential proxy reports are not misleading. 51 The SEC also advised
that it expects any changes to the current systems and processes of investment advisors or proxy
firms required as a result of the guidance to be made “promptly, but in any event in advance of
next year’s proxy season.” While we have noted that it seems likely that the SEC’s guidance is a
step in the right direction, further SEC Staff, Commission-level or legislative action will be
needed to increase the overall accountability of proxy advisory firms, resolve conflicts of interest
and address the lack of transparency in their methodologies and analyses.52

Additionally, in recent years money managers themselves have been questioning the wis-
dom of reliance on proxy advisory firm recommendations and have asserted an active and inde-
pendent approach to decision-making on corporate governance issues at portfolio companies.53
In a January 2012 letter sent by Larry Fink, the Chairman and CEO of BlackRock, to 600 com-
panies in BlackRock’s portfolio, BlackRock stated: “We reach our voting decisions inde-
pendently of proxy advisory firms on the basis of guidelines that reflect our perspective as a fi-
duciary investor with responsibilities to protect the economic interests of our clients.” 54 In
March 2014, BlackRock again took a stand, sending a letter to companies encouraging them to
focus on “achieving sustainable returns over the longer term” rather than succumbing to de-
mands for short-term results and return of capital.55 Similarly, the chairman and chief executive
officer of Vanguard clarified that the fund is interested in actively engaging on corporate govern-
ance issues: “[i]n the past, some have mistakenly assumed that our predominantly passive man-
agement style suggests a passive attitude with respect to corporate governance. Nothing could
be further from the truth.”56 In addition, a number of leading institutional investors are building
up their own capacities to assess the strategies and governance of the companies in their portfoli-
os, and thus reducing their need to outsource corporate governance activism to ISS and activist
hedge funds. Although the increasing assertiveness of large investment advisors may possibly
provide some limitations on the outsized influence of proxy advisory firms, in general their posi-
tions on corporate governance matters tend to be quite similar, especially in the sense of empow-
ering shareholders—rather than the board—to make major decisions regarding the destiny of the
company. In any case, in the current corporate governance environment companies must remain
cognizant of the positions of both major institutional shareholders and the proxy advisory firms
and their likely reactions to corporate governance initiatives.

51
Id.
52
See Wachtell, Lipton, Rosen & Katz, Some Thoughts for Boards of Directors in 2015 (Dec. 1, 2014), available
at http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/WLRK/WLRK.23672.14.pdf.
53
See Kristen Grind & Joann S. Lublin, Vanguard and BlackRock Plan to Get More Assertive with Their Invest-
ments, Wall St. J. (Mar. 4, 2015), http://www.wsj.com/articles/vanguard-and-blackrock-plan-to-get-more-assertive-
with-their-investments1425445200.
54
Letter from Larry Fink, BlackRock Chairman and CEO (Jan. 17, 2012), available at http://www.blackrock.com/
corporate/en-hk/literature/whitepaper/corporate-governance-engagement.pdf.
55
Id.
56
See Grind & Lublin, supra note 46.

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 1. Voting Guidelines

Proxy advisory firms convey their recommendations through voting guidelines and posi-
tion papers. Although these positions are generally described by the proxy advisors as “best
practices” to create shareholder value, they are often grounded in an ideology that the discretion
and judgment of the board must be limited, that relationships between boards and management
must be curtailed and that restraints on shareholder decision-making in the company’s business
are counterproductive. While proxy advisory guidelines, especially those published by ISS, his-
torically have tended to provide a generalized recommendation for each type of proposal, the
Recent updates to ISS policies on a number of issues represented a welcomed, measured, com-
pany-specific approach to corporate governance practices, reflecting a move, however limited,
away from one-size-fits-all policies and recommendations. For ISS, the shift to a “case-by-case”
approach was most apparent with respect to circumstances in which ISS would make “withhold”
recommendations against the full board, committee members or individual directors. 57 Where a
board does not adopt a majority-supported shareholder proposal, ISS will consider whether to
make a “withhold” recommendation on a case-by-case basis, considering mitigating factors in
cases involving less than full implementation, disclosed shareholder outreach efforts by the
board in the wake of the vote, the level of support and opposition for the proposal, actions taken
and the continuation of the underlying issue as a voting item on the ballot.58

Despite these recent positive shifts towards a “case-by-case” approach, proxy advisory
firms continue to articulate rigid, generalized views on various important and nuanced govern-
ance matters. Notably, in recent years, ISS and Glass Lewis have been advancing a shareholder-
centric position that will potentially punish a board that amends the bylaws of a company with-
out seeking shareholder approval even though boards have the authority to do so. Both proxy
advisors warn that they may use the significant power of their withhold vote recommendations in
response to a unilateral bylaw amendment that in their view materially diminishes or removes
shareholders’ rights or that could adversely impact the rights of shareholders.59 Additionally,
ISS recently adapted its unilateral bylaw and charter amendment voting guidelines to apply to
newly public companies. ISS will make adverse recommendations for directors at the first
shareholder meeting of a newly listed public company if that company has bylaw or charter pro-
visions that are “adverse to shareholder rights.” And, unless the adverse provision is reversed or
submitted to a vote of public shareholders, ISS will vote case-by-case on director nominees in
subsequent years. When updating bylaws, companies should consider explaining the board’s
rationale for the bylaws via appropriate disclosure in order to ensure that proxy advisory firms
and shareholders understand why particular changes are deemed appropriate and to facilitate dis-
cussion with investors.

Even when applying a “case-by-case” approach, proxy advisory firm methodologies tend
towards “scoreboards,” checklists, formulae and tabulations and cannot by their nature do justice
to the complexities of corporate governance at individual companies. For example, ISS’ “Equity
Plan Scorecard” bases recommendations with respect to equity plan proposals on a combination
57
See, e.g., ISS, U.S. Corporate Governance Policy, 2014 Updates 4-5 (2013); ISS, 2016 Americas Proxy Voting
Guidelines Updates 5-6 (2015).
58
ISS, 2016 U.S. Concise Voting Guidelines 5 (2015).
59
See ISS, 2016 U.S. Summary Proxy Voting Guidelines 13-14; Glass Lewis, Proxy Paper Guidelines, 2015 Proxy
Season 14.

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of weighted factors with relative weights varying by index.60 While this more nuanced approach
is preferable to the more rigid test it replaced, any evaluations using scorecards run the risk of
becoming mechanical and do not permit the appropriate exercise of judgment and flexibility to
consider the situation of each particular company in this complex area.

Gradual shifts away from the one-size-fits-all approach to the “case-by-case” or “holis-
tic” approaches in proxy firm recommendation is a welcome admission by proxy advisors that
generalized advice does not serve the best interests of companies. Yet, these shifts fall short of
stemming the tide of ideological generalizations advanced by proxy advisory firms and share-
holder rights activists that have eroded the governance provisions that have facilitated long-term
growth at many companies. Nominating and corporate governance committees should be cogni-
zant of the views of proxy advisory firms, but must exercise their own judgment when confront-
ed with corporate governance matters and resist the temptation to passively defer to the judgment
of proxy advisory services.

2. QuickScore

One feature of the corporate governance landscape that members of nominating and cor-
porate governance committees need to be aware of is the governance grades or ratings generated
by certain members of the governance industry. The most prominent of these is the Governance
QuickScore product produced by ISS (and another is GMI Ratings). Starting in the 2013 proxy
season, ISS replaced its former corporate governance scoring system, Governance Risk Indica-
tors (“GRIds”), with Governance QuickScore.61 In October 2014, ISS announced its third itera-
tion of the QuickScore product: QuickScore 3.0. QuickScore uses an algorithm to score compa-
nies on four “pillars”—Audit, Board Structure, Compensation and Shareholder Rights—and to
provide an overall governance rating. QuickScore incorporates a number of factors that affect
scoring, namely, director tenure, director approval rates, compensation of outside directors,
alignment on pay and total shareholder return and say-on-pay support. QuickScore 3.0 has add-
ed new factors, including whether the board has failed to address issues underlying majority di-
rector withhold votes and whether the board recently took actions that in ISS’s view materially
reduce shareholder rights.62 QuickScore reports also include numerous informational factors that
do not affect scoring. These include: board size; percentage of board members who are imme-
diate family members of majority shareholders, executives and former executive or former or
current employees; and the length of the employment agreement with the CEO. Certain factors
that were informational in QuickScore 2.0 contribute to scoring cards under QuickScore 3.0.
These include board-level gender diversity and number of financial experts on the audit commit-
tee.63

Scores are presented on a 1 to 10 scale and rely upon “decile” comparisons of a compa-
ny’s raw scores against those of others in the same index or region. Through this ranking, ISS

60
ISS, 2016 U.S. Summary Proxy Voting Guidelines 43.
61
ISS, ISS Governance QuickScore 2.0, Overview and Updates (Jan. 2014), available at http://issgovernance.
com/files/ISSGovernanceQuickScore2.0.pdf.
62
For a review of changes presented by QuickScore 3.0, see Wachtell, Lipton, Rosen & Katz, ISS QuickScore 3.0
(Oct. 24, 2014), available at http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/WLRK/WLRK.23593.14.pdf.
63
ISS, ISS Governance QuickScore 3.0, Overview and Updates (Rev. May 2015), available at
http://www.issgovernance.com/file/products/quickscore_techdoc.pdf.

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aims to “provide an at-a-glance view of each company’s governance risk.”64 ISS asserts that
QuickScore is an improvement from GRId because QuickScore is quantitatively-driven by corre-
lations between governance factors and financial metrics, with a secondary policy-based over-
lay.65 However, the specific weightings and balancing between quantitative and qualitative fac-
tors remain undisclosed. Consequently, the soundness of these purported correlations cannot be
tested, and companies are not able to calculate scores on their own.

We remain very skeptical of the notion that a board’s effectiveness can be quantified and
correlated to one-size-fits-all best practices. But even leaving aside the dubiousness of these cor-
relations, QuickScore is problematic in a number of respects. Ranking companies can be mis-
leading and counterproductive, as half of all companies, by definition, will be below the median.
Given the success of best-practices advocates in imposing uniformity of corporate governance
structures, it is likely that minor differences will separate the deciles, particularly in the Board
Structure and Shareholder Rights areas. As a result, many companies with no serious govern-
ance concerns face the unwarranted taint of a below-average score.

Because of ISS’s outsized influence, nominating and corporate governance committees

cannot disregard QuickScore, whatever its shortcomings. However, while directors should un-
derstand the QuickScore implications of different governance structures, they must also remem-
ber that a high score should not be an end in itself. Rather, directors have a fiduciary duty to ex-
ercise their informed business judgment to adopt the policies they believe will best serve their
company. No single metric or bundle of metrics can substitute for the informed business judg-
ment of a well-advised board as to what is necessary and appropriate in dynamic, real-world cir-
cumstances.

3. Shareholder Activism

Shareholder activism is currently running at unprecedented levels, with close to $300 bil-
lion in activist funds66 and, according to recent data, 596 activist campaigns in 2015, represent-
ing a 22 percent increase over 2014.67 Shareholder activism can be broadly separated into two
categories. The first is corporate governance-related activism, which focuses on issues like
board structure, executive compensation, takeover defenses and social concerns. The second is
economically motivated activism, which seeks to alter the strategic direction of the company—
typically with the intent of causing a near-term event, such as prompting a sale of part or all of
the company or the return of capital to shareholders. To achieve such a change, economic activ-
ists will often advocate for the replacement of directors or senior managers, both as leverage to
settle proxy contests in favor of their economic agendas and as a strategy to influence board de-
cisions through board representation after a proxy fight is completed.68 Between 2012 and 2015,
64
Id. at 3.
65
ISS, ISS Governance QuickScore 2.0, Overview and Updates 3 (Jan. 2014).
66
Includes reported equity assets under management of activists included in the FactSet “SharkWatch50,” as of
January 6, 2016.
67
SharkRepellent. Including governance-based campaigns and 13D filings but excluding activism against fund
companies, there were 400, 488 and 596 campaigns in 2013, 2014 and 2015 respectively.
68
For example, a member of Third Point LLC’s slate at the Yahoo! 2012 annual meeting was elected to the com-
pany’s board of directors only to resign a little more than a year later, shortly after the conclusion of Yahoo!’s repur-
chase of Third Point’s stake, a transaction in which Third Point make a significant profit and which has been charac-
terized by industry commentators as “greenmail” and “insider trading.” See Steven Davidoff Solomon, Yahoo’s

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high-profile activists pursued 289 campaigns for board seats and successfully gained at least one
board seat 78 percent of the time. Of these 127 successful campaigns, only 16 percent went to a
vote. Settlements were reached 84 percent of the time.69

Over the last few years, companies have been under increased pressure from activist in-
vestors to return supposedly excess capital to shareholders, put into place new capital allocation
plans, sell or spin-off assets, increase merger consideration, replace managers or directors and
reform compensation structures, among other actions. However, whether this pressure will con-
tinue will likely be, to a certain extent, driven by macroeconomic market trends. Further, some
large institutional investors have explicitly rebuffed any activist investment strategies and tac-
tics.70 The 2015 activism trends included contesting pending transactions, pressuring companies
to merge (after building stakes in both as part of the campaign), and lobbying for break-ups and
divestitures. In 2015, activists also continued to attack companies that not long ago were consid-
ered too large or profitable to be susceptible to economic activism. In 2010, the number of large
cap companies, with market capitalization greater than $10 billion, targeted by activists was 17;
this number rose to 21 in 2014 and 25 in 2015.71 In 2015, 25 large cap companies,72 and 11
mega-cap companies, with capitalizations greater than $25 billion,73 were targeted by activists.
Even household-name companies with strong corporate governance and financial performance
now find themselves under siege from shareholder activists, often represented by well-regarded
advisors.

Activists have grown not only more ambitious in their objectives, but also more sophisti-
cated in their tactics. The unprecedented partnership between activist hedge fund Pershing
Square and Valeant Pharmaceuticals is one such example. The two parties formed a joint bid-
ding entity and quietly amassed a 9.7 percent “beachhead” investment in Allergan, Inc. stock and
options and publicly disclosed their interest on the same day that Valeant launched a $45 billion
unsolicited bid for Allergan. Although the bid was ultimately unsuccessful, the parties made a
sizeable profit when Allergan struck a much higher deal with Actavis plc. Pershing Square will
reap a profit of $2.6 billion and Valeant will receive 15 percent of that, or about $389 million,
from the transaction74 (subject to pending litigation alleging that these profits were derived from

Share Buyback is Legal, but Timing is Suspect, N.Y. Times DealBook (Jul. 23, 2013), available at
http://dealbook.nytimes.com/2013/07/23/yahoos-share-buyback-is-legal-but-timing-is-suspect/?_r=0.
69
Includes activist campaigns by activists included in FactSet’s “SharkWatch50” list that were announced between
2012 and 2015 and that targeted companies with an equity market cap of more than $500 million.
70
Letter from Warren E. Buffet to the Shareholders of Berkshire Hathaway Inc. (Feb. 27, 2016) (“Berkshire, how-
ever, will join only with partners making friendly acquisitions. To be sure, certain hostile offers are justified: Some
CEOs forget that it is shareholders for whom they should be working, while other managers are woefully inept. . . .
We, though, will leave these “opportunities” for others. At Berkshire, we go only where we are welcome.”).
71
SharkRepellent; Matteo Tonello, The Activism of Carl Icahn and Bill Ackman, The Harvard Law School Forum
on Corporate Governance and Financial Regulation (May 29, 2014), http://blogs.law.harvard.edu/corpgov/
2014/05/29/the-activism-of-carl-icahn-and-bill-ackman/.
72
SharkRepellent.
73
J.P. Morgan, The Activist Revolution: Understanding and Navigating a New World of Heightened Investor Scru-
tiny (Jan. 2015), available at https://www.jpmorgan.com/cm/BlobServer/JPMorgan_CorporateFinance
Advisory_MA_TheActivistRevolution.pdf?blobkey=id&blobwhere=1320667794669&blobheader=application/
pdf&blobheadername1=Cache-Control&blobheadervalue1=private&blobcol=urldata&blobtable=MungoBlobs.
74
See David Gelles, Allergan Escapes Valeant’s Pursuit, Agreeing to Be Bought by Actavis, N.Y. Times DealBook
(Nov. 17, 2014), http://dealbook.nytimes.com/2014/11/17/allergan-agrees-to-be-sold-to-actavis/?_r=0.

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illegal insider trading).75 Although not to the same degree, in 2015, Pershing Square teamed up
with a strategic acquiror—Canadian Pacific Railway—once again in Canadian Pacific’s unsolic-
ited takeover bid for Norfolk Southern.76 It remains to be seen whether we can expect to see
more activist hedge funds and strategic corporate acquirors teaming up for hostile takeover bids
in the future. Activists commonly use the two types of activism in tandem. Corporate govern-
ance changes serve as leverage to force economic or strategic changes, and a battle with econom-
ic activism may leave a company more vulnerable to corporate governance activism. Additional-
ly, economic activists often cloak themselves with a corporate governance platform in hopes of
gaining the support of proxy advisory services and institutional investors. Sections IV and V
discuss two of activists’ most important tools, the shareholder proposal and the proxy fight, in
greater detail.

75
See Allergan, Inc. v. Valeant Pharmaceuticals Int’l, Inc., 2014 WL 5604539 (C.D. Cal. Nov. 4, 2014).
76
See Svea Herbst-Bayliss, Ackman Plays Big Role in Laying Out Canadian Pacific Rail Deal, REUTERS CANADA,
Dec. 8, 2015, http://ca.reuters.com/article/businessNews/idCAKBN0TR2QN20151208.

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 III. Key Corporate Governance Topics

Whether periodically reviewing corporate governance policies or considering the appro-

priate response to a particular shareholder proposal, a nominating and corporate governance
committee will benefit from a solid understanding of the fundamental building blocks of corpo-
rate governance and an ongoing effort to keep apprised of legal, economic and social changes
that steer the ever-evolving thinking on corporate governance matters. By better appreciating the
considerations underlying a decision to adopt—or not—a particular corporate governance fea-
ture, a nominating and corporate governance committee will be better equipped to develop and
defend sound, cohesive and comprehensive corporate governance policies and procedures that
enable directors and management to best perform their duties, do not unduly dampen or encour-
age risk taking, promote long-term value creation and are conducive to good corporate citizen-
ship and social responsibility.

A. Classified Boards

Under a classified board, directors are divided into classes, typically three, with only one
class up for election at each annual meeting. Thus, directors on a classified board are essentially
elected to three-year terms. In addition to promoting board stability and enabling directors to
think on a longer timeframe, a classified board provides an important structural defense against
hostile takeovers. Whereas a hostile acquiror can seize control of a company without a classified
board in one successful proxy contest, obtaining a majority of a classified board typically re-
quires two elections.

Classified boards attract particularly great scrutiny due to the convergence of the interests
of governance activists and economic activists: governance activists see classified boards as a
barrier to board responsiveness, while economic activists see them as an impediment to forcing a
sale or other short-term event. The percentage of S&P 500 companies with a staggered board
has plummeted from over 60 percent to 10 percent in the past 12 years. 77 In recent years, Har-
vard Law School’s “Shareholder Rights Project” has led the charge for declassification.78 Now
in its fifth year, the Shareholder Rights Project reportedly works with several large pension funds
and a foundation to sponsor governance proposals at companies whose shares are owned by the
funds and the foundation.79 Although shareholder activists see board declassification as “im-
proving” governance arrangements, there is no persuasive evidence that declassifying boards en-
hances shareholder value over the long term, and the absence of a staggered board makes it more
difficult for a public company to fend off an inadequate, opportunistic takeover bid or to focus
on long-term value creation. Supporting this proposition, a study by Citigroup Global Markets
found that between 2001 and 2009 initial takeover bids were 28.7 percent higher for firms with a
77
SharkRepellent.
78
Our firm has criticized this “clinical program” headed by Professor Lucian Bebchuk for engaging in advocacy
advancing a narrow and controversial agenda that would exacerbate the short-term pressures under which U.S. com-
panies are forced to operate, rather than more appropriate academic activity. See Wachtell, Lipton, Rosen & Katz,
Harvard’s Shareholder Rights Project is Wrong (Mar. 21, 2012), available at http://www.wlrk.com/webdocs/ wlrk-
new/WLRKMemos/WLRK/WLRK.21664.12.pdf; Wachtell, Lipton, Rosen & Katz, Harvard’s Shareholder Rights
Project is Still Wrong (Nov. 28, 2012), available at http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/
WLRK/WLRK.22209.12.pdf.
79
See Shareholder Rights Project, available at http://srp.law.harvard.edu/index.shtml.

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staggered board in place and that staggered boards contributed an additional 13.5 percent in pre-
mium in subsequent negotiations, resulting in an aggregate 42.2 percent increase in takeover
premiums.

In late 2015, Airgas, which had successfully resisted an opportunistic hostile takeover bid
from Air Products about six years earlier, agreed to be sold to Air Liquide for more than double
the final Air Products offer, even before considering substantial dividends paid in the intervening
years, vindicating the Airgas board’s judgment. Airgas would not have been able to defend itself
without a classified board, which would have cost its shareholders billions of dollars in upside
value.80 Moreover, companies should be cautious of implementing changes—such as declassify-
ing the board—that cannot be easily reversed. Unlike a rights plan, which the board can imple-
ment quickly as the need arises, a declassified board is a defense that once removed cannot be
reinstated when a takeover threat materializes.

B. Majority Voting

The corporate law of most states, including Delaware, provides that directors are to be
elected by plurality voting unless otherwise provided in the company’s certificate of incorpora-
tion or bylaws.81 Under this default, if the nominees endorsed in the company’s proxy statement
run unopposed, they are assured of election regardless of the number of votes “against” or “with-
held.” Under a majority voting standard, however, a director is not elected unless he or she re-
ceives at least a majority of the votes cast.

Historically, directors of virtually all companies were elected under a plurality standard.
Beginning in 2004, activists began calling for majority voting, under which a nominee is elected
only if the votes for his or her election exceed the votes against. Some form of majority voting is
now used by almost 88 percent of S&P 500 companies and is well on its way to becoming uni-
versal among large companies.82 ISS and Glass Lewis advise shareholders to generally vote to
adopt the majority vote standard.83

Under state laws designed to ensure that there are always directors in place, a director
who receives less than a majority of the votes cast in a majority voting election would not be
elected but would continue to serve until his or her successor is elected and qualified. Many
companies with majority voting address the matter of holdover directors by establishing a resig-
nation policy for directors receiving less than a majority vote. In some cases, these policies call
for directors to deliver resignation letters in advance, which are triggered automatically if a di-
rector receives less than a majority vote (thereby avoiding compelling a sitting director to tender

80
See Leo E. Strine, Jr., Can We Do Better by Ordinary Shareholders? A Pragmatic Reaction to the Dueling Ideo-
logical Mythologists of Corporate Law, 114 Colum. L. Rev. 449, 454 n.16 (2014) (“As it turns out, they were right
and, within a few months, the stock was trading well above Air Products’ final bid of $70.00 and has continued to
trade above that threshold ever since.”). On November 18, 2015, Airgas agreed to be sold to Air Liquide at a price
of $143 per share, in cash, nearly 2.4 times Air Products’ original $60 offer and more than double its final $70 offer,
in each case before considering the more than $9 per share of dividends received by Airgas shareholders in the in-
tervening years.
81
See, e.g., 8 Del. C. § 215(c)(3).
82
SharkRepellent.
83
ISS, 2016 U.S. Summary Proxy Voting Guidelines 22; Glass Lewis, Proxy Paper Guidelines, 2016 Proxy Season
21-22.

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a resignation after failing to receive the requisite vote). An example of such a resignation policy
is attached as Annex B. The unconflicted members of the board (or perhaps of the nominating
and corporate governance committee) would then deliberate over whether or not to accept the
director’s resignation. Delaware courts have confirmed that a board of directors is not required
to accept the resignation of a director for failure to obtain majority support.84 However, nomi-
nating and corporate governance committee members should understand that shareholders likely
would not appreciate having a director they had rejected reinstated, absent special circumstances.
(Indeed, activists have coined a colorful but unflattering description of such holdover directors,
who are sometimes called “zombie directors.”) Further, on October 27, 2015, Pfizer Inc. re-
ceived a shareholder proposal that would require immediate removal of directors who failed to
receive a majority vote in uncontested elections, perhaps foreshadowing future activist efforts to
tighten majority voting standards even further.85

A company that adopts majority voting should draft its bylaws carefully (so that absten-
tions do not count as votes “against” the incumbent director) and to provide where possible that
once the determination is made that an election is “contested,” the plurality standard remains in
place even if there is no competing slate at the time of the shareholders’ meeting. The perils of
not doing so were demonstrated in a proxy contest a few years ago, in which a dissident dropped
its proxy contest and contended that the vote standard therefore reverted to majority, enabling a
“withhold” vote campaign intended to result in the failure of directors to be elected.86

C. Shareholder Rights Plans

A shareholder rights plan, popularly known as a “poison pill,” is a mechanism that can be
employed by board action that, while in place, effectively deters individuals or groups from ac-
quiring more than a specified percentage of the company’s stock. Rights plans do not interfere
with negotiated transactions and do not preclude unsolicited takeover offers. Instead, they com-
bat abusive takeover tactics by preventing an acquiror from gaining a controlling stake in a com-
pany without negotiating with the company’s board to provide an adequate bid. Also, if a tender
or exchange offer is launched, the rights plan will give the board and the shareholders time to
properly evaluate the bid and potentially to pursue more attractive options that might not other-
wise be available under the time pressure of a tender offer. Despite these salutary effects, share-
holder rights plans have been the subject of intense debate since they were first used in the
1980s. Critics contend that rights plans discourage deal activity and entrench boards by limiting
shareholders’ ability to approve the sale of the company.

Because a rights plan (especially when coupled with a staggered board) is the single most
effective defense against a hostile takeover bid, until the last decade most large companies had
standing rights plans in place, typically with 10-year terms. In response to sustained criticism
from activists that rights plans discourage deal activity and entrench boards by limiting share-
holders’ ability to approve a sale, most companies have allowed their rights plans to expire, pre-
ferring to hold in reserve the ability to adopt a rights plan in response to a takeover bid if one is

84
City of Westland Police & Fire Ret. Sys. v. Axcelis Techs., Inc., 1 A.3d 281 (Del. 2010).
85
Pfizer Inc., SEC No-Action Letter (Dec. 4, 2015). The SEC denied Pfizer’s request to exclude this proposal,
submitted by Kenneth Steiner, on the basis of substantial implementation under Rule 14a-8(i)(10).
86
Levitt Corp. v. Office Depot, Inc., 2008 WL 1724244 (Del. Ch. Apr. 14, 2008), available at http://courts.
delaware.gov/opinions/(ylqy0cetmgti2puq2mu4homz)/download.aspx?ID=105260.

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made (referred to as having a rights plan “on the shelf”). Indeed, the percentage of S&P 500
companies with a rights plan in place has decreased from about 60 percent to less than five per-
cent in the last 12 years.87 Proxy advisory voting policies have been a major driving force behind
this change. Even the proxy advisors acknowledge the significant beneficial effects of a rights
plan in providing time for the board and shareholders to respond to an actual threat, such as an
inadequate hostile takeover bid, but they view it as a short-term delaying device, not a “show-
stopper.” ISS recommends an “against” or “withhold” vote for directors who adopt a rights plan
with a term of more than 12 months or renew any existing rights plan (regardless of its term)
without shareholder approval, although a commitment to put a newly adopted rights plan to a
binding shareholder vote may offset such a recommendation.88 ISS also recommends voting on
a case-by-case basis for boards adopting a rights plan without shareholder approval. 89 ISS and
Glass Lewis also generally recommend, with limited exceptions, voting “for” shareholder pro-
posals requesting that a company submit its rights plan to a shareholder vote or adopt a policy
regarding the use of rights plans.90

Under pressure from activists, some companies have agreed not to implement a rights
plan absent shareholder approval or ratification within some period of time, most commonly one
year. Activist institutional investors, such as TIAA-CREF, have sponsored precatory sharehold-
er proposals to adopt a policy requiring that rights plans be submitted for shareholder approval.
In part, due to proxy advisory voting guidelines, such proposals routinely garner wide support,
even at companies that do not have a rights plan in place. For those companies that have not
adopted a policy that restricts the board’s ability to adopt a rights plan, they retain the ability to
maintain an “on-the-shelf” rights plan that can be adopted quickly by the board should a specific
threat arise. Unlike some other takeover defenses that once removed cannot practically be re-
gained, such as a staggered board, a “shadow” rights plan provides a company the flexibility to
respond to changing circumstances. A board may therefore conclude that it would be prudent to
avoid the scrutiny that accompanies adopting a rights plan by waiting until it is needed to fend
off a particular threat. A board should be wary, however, of policies or situations that would cur-
tail its ability to employ this crucial component of effective takeover defense.

D. Advance Notice Bylaw

The advance notice bylaw is an important corporate housekeeping tool with the primary
purpose of helping ensure orderly business at shareholder meetings. It requires a shareholder to
submit “advance notice” of his or her intention to introduce business at a shareholder meeting,
such as the nomination of director candidates or the introduction of a shareholder proposal. An
advance notice bylaw serves three significant functions: first, to inform a company of share-
holder business to be brought at the meeting an adequate time in advance of the meeting; second,
to provide an opportunity for all shareholders to be fully informed of such matters an adequate
time in advance of the meeting; and third, to enable a company’s board to make informed rec-
ommendations or present alternatives to shareholders regarding such matters. As a result, such
advance notice bylaws typically require not only notice of shareholder business but also the in-
87
SharkRepellent.
88
ISS, 2016 U.S. Summary Proxy Voting Guidelines 12.
89
Id.
90
ISS, 2016 U.S. Summary Proxy Voting Guidelines 26; Glass Lewis, Proxy Paper Guidelines, 2016 Proxy Season
36.

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formation necessary to determine that a shareholder-nominated director candidate is qualified to
be elected, as well as other important information, such as records demonstrating that the person
introducing business is actually a shareholder of the company. A common formulation of the
timeframe in which proposals or nominations must be submitted is no later than 90 days and no
earlier than 120 days prior to the anniversary of the prior year’s annual meeting. However, some
companies provide for different windows. For example, a number of companies have reconciled
their advance notice bylaw with the SEC’s timing requirements for Rule 14a-8 proposals (de-
scribed in Section IV.A), which call for any proposal to be submitted at least 120 calendar days
before the date on which the company released its proxy statement for the previous year’s meet-
ing.

Although the validity of advance notice bylaws has been established in many court deci-
sions, such provisions are not immune to legal challenge. In 2012, for example, the Delaware
Court of Chancery granted a motion to expedite a claim brought by Carl Icahn alleging that the
board of Amylin Pharmaceuticals had breached its fiduciary duties by enforcing the company’s
advance notice bylaw provision and refusing to grant Mr. Icahn a waiver so he could make a
nomination after the advance notice deadline and following the company’s rejection of a third-
party proposal.91 In December 2014, however, the Delaware Court of Chancery alleviated some
of the concerns raised by that decision, clarifying that in order to enjoin enforcement of an ad-
vance notice provision, a plaintiff would have to allege “compelling facts” (such as the board
taking an action that resulted in a “radical” change between the advance notice deadline and the
annual meeting) indicating that enforcement of the advance notice provision was inequitable.92
In other recent cases in Delaware, judges have ruled in favor of activist shareholders based on
ambiguities in the companies’ advance notice bylaw provisions. 93 These decisions provided a
sobering reminder of the importance of the advance notice bylaw as well as the need for clear
and careful drafting. As a result of decisions such as these, advance notice bylaws continue to
evolve. A model advance notice bylaw is attached as Annex C.

E. Separation of Chairman and CEO Roles

As in many other areas of corporate governance, the prevalence of the same individual
serving as both Chairman and CEO has seen a dramatic change in the last decade. A recent sur-
vey found that 48 percent of S&P 500 boards now separate the Chairman and CEO roles, com-
pared with 37 percent in 2009 and only 23 percent 12 years ago. 94 This trend has been driven in
large part by corporate governance activists who consider separation of the roles to be “best
practice.” In this vein, a survey of companies that had recently separated their Chairman and
CEO roles found that 43 percent of respondents considered that separation of the roles represents

91
Icahn Partners LP v. Amylin Pharmaceuticals, Inc., 2012 WL 1526814 (Del. Ch. Apr. 20, 2012).
92
AB Value Partners, LP v. Kreisler Mfg. Corp., 2014 WL 7150465, at *5 (Del. Ch. Dec. 16, 2014).
93
Jana Master Fund, Ltd. v. CNet Networks, Inc., 954 A.2d 335 (Del. Ch. 2008), aff’d, 947 A.2d 1120 (Del. 2008);
Levitt Corp. v. Office Depot, Inc., 2008 WL 1724244 (Del. Ch. Apr. 14, 2008); Sherwood v. Chan Tsz Ngon, 2011
WL 6355209 (Del. Ch. Dec. 20, 2011).
94
Spencer Stuart, Spencer Stuart Board Index 2015, at 20, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2015; Spencer Stuart, Spencer Stuart Board Index 2014, at 23, available
at https://www.spencerstuart.com/research-and-insight/spencer-stuart-us-board-index-2014.

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the best governance model.95 Much more important than the form of board structure, however, is
whether it works in practice for a particular company.

The traditional model of a combined Chairman and CEO generally offers a number of
advantages. The CEO’s thorough familiarity with the company, expertise in the industry and
leadership skills may uniquely position him or her to have the credibility with constituencies that
is essential to effectively chair the board. The CEO’s leadership as Chairman may also help
avoid the balkanization that may arise if directors split between those aligning with the CEO and
those aligning with the Chairman. Further, combining the roles of CEO and Chairman avoids
confusion over the scope of the Chairman’s and CEO’s respective responsibilities, thus potential-
ly enhancing CEO accountability. A CEO’s service as Chairman may also foster effective com-
munication between management and the board.

Advocates for the separation of the Chairman and CEO positions typically contend that
separation strengthens the board’s independence and ability to oversee and evaluate manage-
ment—and the CEO in particular—by reducing the CEO’s control over the board agenda. An-
other common rationale is that separating the roles will allow for greater focus and an effective
division of labor, with the CEO concentrating on running the company’s business and the
Chairman on leading the board. However, the validity of these arguments will vary depending
on a company’s specific circumstances and the dynamic of its leadership structure. Although the
SEC requires a company to disclose its board leadership structure and, if the CEO and Chairman
roles are combined, whether the company has a lead independent director and his or her specific
role,96 it should be noted that these are simply disclosure requirements—they are not a mandate
for separation of the CEO and Chairman roles, and they are not an endorsement by the SEC of
activists’ view that separation of the roles is in all cases a “best practice.”

A company choosing to separate the Chairman and CEO positions should ensure that the
respective roles of the two positions are clearly delineated to avoid duplication or neglect of cer-
tain responsibilities or damage to the cohesion of the board. Because of the risks to board cohe-
sion from separating the positions if they are currently held by the same person, succession is the
most common way for a Chairman/CEO split to come about. A recent survey found that nearly
half of all companies facing a succession event choose to change their board leadership struc-
ture.97 Similarly, nearly half of companies that had a combined Chairman/CEO in 2013 consid-
ered separating the positions upon their next CEO succession.98 And 19 percent said that they
expect that the board will split the roles within the next five years.99 A split may be desirable if
the incoming CEO is less familiar with the board and the company than was his or her predeces-
sor. It is not uncommon for companies that separate the Chairman and CEO role during a CEO
95
Spencer Stuart, Spencer Stuart Board Index 2015, at 20, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2015.
96
Item 407(h) of Regulation S-K. 17 C.F.R. 229.407(h).
97
Korn Ferry Institute and National Association of Corporate Directors, Annual Survey of Board Leadership 2014
Edition 18-19, available at http://www.kornferryinstitute.com/reports-insights/korn-ferry-nacd-annual-survey-
board-leadership-2014.
98
PricewaterhouseCoopers, Boards Confront an Evolving Landscape: PwC’s Annual Corporate Directors Survey
8 (2013), https://www.pwc.ie/media-centre/assets/publications/2014-pwc-ireland-annual-corporate-directors-survey-
full-report.pdf.
99
Spencer Stuart, Spencer Stuart Board Index 2015, at 20, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2015.

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transitional period to later recombine the roles once the CEO has gained experience with the
company. Some companies that separated the role of Chairman and CEO found the separation
suboptimal and so later recombined the positions.100

A company with a combined Chairman and CEO should have a lead director (also some-
times called a presiding director). From a board-effectiveness perspective, it is not necessary to
separate the roles of Chairman and CEO so long as there is an effective lead director in place.
As one position paper succinctly put it, after a review of the academic literature, “[n]o structural
attribute of boards has ever been linked consistently to company financial performance.” 101 In-
deed, a combined CEO and Chairman teamed with a capable independent lead director may ena-
ble the board to enjoy the benefits of both the CEO’s expertise and a strong independent voice.

All but eight boards of S&P 500 companies have either an independent Chairman or an
independent lead/presiding director.102 The full board selects the lead/presiding director accord-
ing to 71 percent of respondents from S&P 500 companies recently surveyed, while 14 percent
of respondents said that a lead/presiding director is selected by the nominating and corporate
governance committee and another 12 percent said that independent directors select the
lead/presiding director.103 The responsibilities of a lead director should be clearly delineated and
will include many of the responsibilities assumed by an independent Chairman. The traditional
responsibilities of the lead director include presiding at and having the authority to call executive
sessions, setting meeting agendas for executive sessions, and being available for consultation and
direct communication with major shareholders where appropriate. In recent years, there has
been an increasing focus on the role of the lead director, which has in many cases expanded to
include leading the board’s annual self-assessment process, cooperating with the CEO in setting
the agenda for full board meetings and sometimes also approving materials for full board meet-
ings. The lead director’s role should be tailored to the company’s needs, which depend on a
number of factors, such as the company’s history and the personalities of those serving on the
board.

While the nominating and corporate governance committee should make an independent
judgment as to the appropriate leadership structure, it should remain mindful of the powerful in-
fluence of proxy advisory firms. Glass Lewis will typically encourage support of proposals to
separate the roles of Chairman and CEO on the grounds that a CEO as Chairman makes it diffi-
cult for a board to fulfill its role as overseer and policy setter.104 ISS will generally recommend a
vote in favor of a shareholder proposal to require that the Chairman’s position be filled by an in-
dependent director, taking into consideration various factors, such as the scope of the proposal,
the company’s current board leadership structure, governance structure and practices and com-

100
Examples include Dell Inc., Walt Disney Corp., General Motors and Southwest Airlines. See Korn Ferry Inter-
national and National Association of Corporate Directors, Annual Survey of Board Leadership 2013 Edition 30,
available at http://www.kornferryinstitute.com/reports-insights/kornferry-nacd-annual-survey-board-leadership-
2013.
101
Richard Leblanc & Katharina Pick, The Conference Board, Director Notes, Separation of Chair and CEO Roles
3 (Aug. 2011).
102
Spencer Stuart, Spencer Stuart Board Index 2015, at 23, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2015.
103
Id. at 24.
104
Glass Lewis, Proxy Paper Guidelines, 2016 Proxy Season 6.

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pany performance.105 ISS has conceded, however, that “attempts to correlate the separation of
position with market performance have been inconclusive.”106

F. Ability of Shareholders to Act by Written Consent

Under Delaware law, unless a corporation’s charter provides otherwise, any action that
may be taken by shareholders at a meeting may instead be taken by written consent at the same
approval threshold as would be required to take such action at a meeting of shareholders.107
Over 70 percent of S&P 500 companies have charter provisions prohibiting action by written
consent, while other companies permit action by written consent only if unanimous (which, for
broadly held public companies, is effectively equivalent to a prohibition).108

Permitting shareholder action by written consent is considered by some institutional and

activist groups an important shareholder right. Having largely achieved their initial goals of
eliminating standing shareholder rights plans and classified boards, and facilitating shareholder-
called special meetings in between annual meetings (at ever decreasing thresholds), action by
written consent is one of the next targets of the activist groups. Because the prohibition on ac-
tion by written consent must be included in the charter (in Delaware at least), shareholder activ-
ists are proposing an increasing number of precatory resolutions calling on the board to permit
such action. Institutional investors often support these proposals and ISS will generally support
them as well unless the company allows special meetings to be called by 10 percent of their
shareholders, a majority vote standard in uncontested elections, no non-shareholder-approved
poison pill and an annually elected board. Companies generally resist these proposals, pointing
out that action by written consent is more appropriate for a closely held corporation with a small
number of shareholders than for a widely held public company. Action by shareholder meeting
provides many benefits not available in a written consent context, including: the meeting and the
shareholder vote taking place in a transparent manner on a specified date that is publicly an-
nounced well in advance, giving all interested shareholders a chance to express their views and
cast their votes; a forum for open discussion and full consideration of the proposed action; distri-
bution in advance of detailed information by both sides about the proposed action; and the ability
of the board to analyze and provide a recommendation with respect to proposed actions to be
taken. Action by written consent, on the other hand, effectively disenfranchises all of those
shareholders who do not have the opportunity to participate in the consent.

The only “benefit” to public company shareholders of action by written consent (if one
considers it a benefit) is that a company that does allow such action is particularly vulnerable to a
hostile takeover bid. A raider’s ability to conduct a consent solicitation and effectively “am-
bush” a target with little or no warning may limit a target company’s ability to mount an effec-
tive defense. Naturally, the smaller the market capitalization of the company, the greater the
threat becomes.

Unfortunately for companies today, it is unlikely that shareholders would support a char-
ter amendment to prohibit action by written consent, and many companies are being pressured by

105
ISS, 2016 U.S. Summary Proxy Voting Guidelines 20-21.
106
ISS, 2015 U.S. Proxy Voting Manual 52.
107
8 Del. C. § 228(a).
108
SharkRepellent.

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their shareholders and the proxy advisors to give up that protection if they have it. A company
that under its charter permits shareholders to act by written consent may limit its vulnerability by
adopting a bylaw that enables the board to control the setting of the record date for a sharehold-
er’s solicitation of written consents.109 The form of bylaw adopted generally adheres to the
standards that have been upheld by the Delaware Court of Chancery, sometimes referred to as
the “10 + 10” bylaw, which requires the board to take action to set a record date for the written
consent solicitation within 10 days of receiving notice from a shareholder seeking to solicit con-
sents, and requiring the board to then set a record date within 10 days of taking action. This
means that the record date for the consent solicitation cannot be more than 20 days after the
shareholder requests that the board set a record date, effectively giving the board a three-week
“heads-up” before a hostile party can solicit consents.110 Some companies that permit action by
written consent impose an ownership threshold requirement to request action by written consent
(ranging from 10 to 40 percent, with 20 to 25 percent being fairly common) and require a delay
“before consents can be delivered (e.g., 50 or 60 days) to ensure that shareholders have sufficient
time to consider the matters subject to the consent.”111 To best position itself in the event that
this approach is challenged, a company adopting such a bylaw should build as strong a record as
possible as to why the restriction is necessary and appropriate.

G. Ability of Shareholders to Call a Special Meeting

The right to call special meetings in between annual meetings is another activist investor
hot button. From the company’s perspective, it is better to have a predictable window of vulner-
ability around the annual meeting. The right to call special meetings—particularly when com-
bined with a declassified board—has the potential to seriously inhibit the ability of a board to
defend against an opportunistic takeover bid that undervalues the company. On the other hand,
shareholder rights activists consider the right to call special meetings an important element of
“shareholder democracy,” because if shareholders are permitted to call a special meeting, they do
not have to wait for an annual meeting to seek to effect change, but instead can act throughout
the year, including to submit shareholder proposals or seek removal of directors. In our view,
there is no reason to consider “California-style” recall elections a better model of democracy
than the traditional republican model, in which voters elect representatives periodically, entrust
them to do the job and can remove them from office at the end of their term if they are dissatis-
fied. However, activist pressure (powered by shareholder resolutions and ISS withhold recom-
mendations) is extremely hard to resist.

Under activist pressure, over 60 percent of S&P 500 companies now permit shareholders
to call special meetings in between annual meetings. 112 Among the companies that permit share-
holders to call special meetings, there is variation with respect to the minimum threshold re-
quired to call a special meeting. Many shareholder rights activists consider 10 percent the gold
standard and will initiate shareholder proposals even at companies that already permit sharehold-
ers to call special meetings at a higher percentage.

109
Edelman v. Authorized Distrib. Network, Inc., 1989 WL 133625 (Del. Ch. Nov. 3, 1989); see also Nomad Acqui-
sition Corp. v. Damon Corp., 1988 WL 383667 (Del. Ch. Sept. 16, 1988).
110
Edelman v. Ackerman, C.A. No. 11104 (Del. Ch. Nov. 3, 1989).
111
Sullivan & Cromwell LLP, 2014 Proxy Season Review, 9 (June 25, 2014).
112
SharkRepellent.

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H. Removal of Directors

As a general rule, directors may be removed, with or without cause, by the holders of a
majority of the shares entitled to vote.113 As a notable exception, Delaware corporate law pro-
vides that, unless the charter provides otherwise, directors of a corporation with a classified
board may be removed only for cause.114

Some companies’ charters still have supermajority vote requirements to remove directors
without cause. These supermajority provisions are generally disfavored by shareholder activists
and other institutional investor groups. Supermajority vote requirements have themselves often
been the subject of precatory proposals and tend to receive substantial shareholder support, lead-
ing to their elimination to avoid a withhold vote campaign under ISS’s implementation policy.
As the number of companies with classified boards and supermajority vote requirements de-
creases, directors become more vulnerable to removal at any time, and companies become more
vulnerable to takeovers.

I. Exclusive Forum Provisions in Organizational Documents

The increasing volume of duplicative, costly and often frivolous shareholder litigation
brought simultaneously in multiple courts in multiple states has led many companies to adopt an
“exclusive forum” provision. These provisions, which can be included either in a company’s
charter or bylaws, typically designate specific courts in the state of incorporation (Delaware for
many public companies) to serve as the exclusive venues for particular types of shareholder and
intracorporate litigation, most commonly (1) derivative lawsuits; (2) actions asserting breaches
of fiduciary duty; (3) actions arising pursuant to any provision of the corporate statute of the state
of jurisdiction (Delaware General Corporation Law for many public companies); and (4) actions
asserting claims governed by the internal affairs doctrine. Such provisions serve multiple objec-
tive, including preventing the waste that inevitably occurs when duplicative lawsuits asserting
the same claims on behalf of the same constituencies seeking the same relief are commenced at
the same time by multiple shareholders in multiple courts and ensuring that fiduciary duty and
internal affairs claims are adjudicated by the courts most familiar with the underlying corporate
law and capable of authoritatively interpreting the law. These provisions also allow companies
to better plan and manage the litigation landscape by imposing order and consistency before liti-
gation begins.

Exclusive forum provisions contained in bylaws and adopted unilaterally by the board
have been legally tested and upheld. Although a 2011 case in a California federal district court
initially refused to enforce a company’s board-adopted exclusive forum bylaw where it was put

113
Notably, in a recent transcript ruling, the Delaware Court of Chancery invalidated charter and bylaw provisions
providing that directors of a company without a staggered board and cumulative voting could only be removed for
cause. The stockholder plaintiffs argued—and the court agreed—that under § 141(k) of the Delaware General Cor-
poration Law, stockholders have the right to remove directors without cause unless the company has a staggered
board or cumulative voting. Companies with unclassified boards whose charters allow director removal only “for
cause” should consult with counsel as these charter provisions may be unenforceable and plaintiffs’ firms will be
seeking to compel companies to amend their charters to eliminate them, in order to earn a fee. In re Vaalco Energy
S’holder Litig., C.A. No. 11775-VCL (Dec. 21, 2015).
114
8 Del. C. § 141(k)(1).

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in place after alleged board-level malfeasance,115 the Court of Chancery ultimately upheld forum
selection bylaws as a matter of Delaware law in an important June 2013 decision involving a by-
law adopted by Chevron,116 and reaffirmed the validity of the bylaws in December of 2014, not-
ing that such bylaws reflect a company’s legitimate interest in rationalizing shareholder litiga-
tion.117

The number of companies adopting exclusive forum provisions has risen dramatically in
recent years. Exclusive forum provisions in certificates of incorporation or corporate bylaws
were first proposed in 2007118 and began to be adopted more broadly in 2010, following mention
of the provisions by the Delaware Court of Chancery as a possible solution to the multiforum
duplicative litigation problem.119 Before the Chevron opinion, approximately 250 publicly trad-
ed corporations had adopted an exclusive forum provision in some form; the overwhelming ma-
jority (approximately 175) in the form of a charter provision adopted in circumstances where
public shareholder approval was not required (e.g., in connection with an IPO, a spin-off or
bankruptcy reorganization). Since Chevron, over 575 public companies have adopted an exclu-
sive forum provision, with the overwhelming majority—over 90 percent—in the form of a
board-adopted bylaw.120 In 2015, the Delaware General Assembly gave statutory backing to
forum selection bylaws by adopting a new provision of the Delaware General Corporation Law,
which allows a company, in its certificate of incorporation or bylaws, to provide that “any or all
internal corporate claims shall be brought solely and exclusively in any or all of the courts in this
State.”121 Notably, the new provision also provides that a forum selection bylaw may not divest
stockholders of the right to bring suit in Delaware, overturning prior Delaware case law.122 Ju-
risdictions outside Delaware are increasingly enforcing forum selection bylaws that provide that
shareholder litigation must be conducted in Delaware.123 The Court of Chancery, however, has
consistently stated that it is reluctant to grant an anti-suit injunction against proceedings in a sis-
ter jurisdiction to uphold these bylaws, and instead still requires litigation filed outside of the

115
Galaviz v. Berg, 763 F. Supp. 2d 1170 (N.D. Cal. 2011).
116
Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013).
117
United Techs. Corp. v. Treppel, 109 A.3d 553 (Del. Dec. 23, 2014).
118
Theodore N. Mirvis, Anywhere But Chancery, The M&A Journal 17 (May 2007).
119
In re Revlon, Inc. S’holders Litig., 990 A.2d 940, 960-61 (Del. Ch. 2010).
120
According to SharkRepellent, between June 25, 2013 and March 1, 2016, 577 public companies adopted exclu-
sive forum bylaws. During the same period, ISS reports that 43 proposals to add an exclusive forum provision were
passed by public companies. Consequently, approximately 92.5 percent of exclusive forum bylaw adoptions since
Chevron were not put to a shareholder vote. As of March 1, 2016, 568 of the 577 companies adopting exclusive
forum bylaws since Chevron still have the provision in effect under their current bylaws.
121
8 Del. C. § 211.
122
Previously, the Court of Chancery had ruled that a company could validly adopt a bylaw providing that all litiga-
tion must be brought in its non-Delaware headquarters state. City of Providence v. First Citizens BancShares, Inc.,
99 A.2d 229 (Del. Ch. 2014).
123
E.g., In re CytRX Corp. S’holder Derivative Litig., No. CV-14-6414, 2015 WL 9871275 (C.D. Cal. Oct. 30,
2015); Brewerton v. Oplink Commc’ns, Inc., No. RG14-750111 (Cal. Super. Ct. Dec. 14, 2014); Groen v. Safeway,
Inc., No. RG14-716651, 2014 WL 3405752 (Cal. Super. Ct. May 14, 2014); Miller v. Beam, Inc., No. 2014 CH
00932, 2014 WL 2727089 (Ill. Ch. Ct. Mar. 5, 2014); Genoud v. Edgen Grp., Inc., No. 625,244, 2014 WL 2782221
(La. Dist. Ct. Jan. 17, 2014); Collins v. Santoro, No. 154140/2014, 2014 WL 5872604 (N.Y. Sup. Ct. Nov. 10,
2014); HEMG Inc. v. Aspen Univ., C.A. No. 650457/13, 2013 WL 5958388 (N.Y. Sup. Ct. Nov. 14, 2013); North v.
McNamara, 47 F. Supp. 3d 635 (S.D. Ohio 2014); Roberts v. TriQuint Semiconductor, Inc., 358 Or. 413, 415
(2015); see also City of Providence v. First Citizens BancShares, 99 A.3d 229 (Del. Ch. 2014) (enforcing a North
Carolina forum-selection bylaw).

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contractually selected forum to be challenged in that jurisdiction.124 Currently, over 26 percent
of Fortune 500 companies have an exclusive forum provision in their bylaws or charter.125

Although exclusive forum bylaws are becoming very mainstream and their legal validity
is now beyond question, they remain unpopular with some shareholder activists who consider
them an infringement of shareholder rights. ISS takes a case-by-case approach to recommenda-
tions on exclusive venue provisions, taking into account the company’s stated rationale for
adopting the bylaw, the company’s disclosure of past harm from shareholder lawsuits outside the
state of incorporation, the breadth and application of the bylaw, as well as certain features of the
company’s governance practices.126 However, ISS notes that unilateral adoption by the board of
an exclusive forum bylaw will be evaluated under its unilateral bylaw/charter amendment voting
policy, as discussed in II.D.1 above. As a practical matter, however, ISS routinely opposes these
provisions. Glass Lewis will generally recommend against any exclusive forum provision but
may change that recommendation if a company puts forth a compelling argument as to how the
provision would benefit shareholders, provides evidence of abusive litigation in other jurisdic-
tions, narrowly tailors such provision to the risks involved and has strong corporate governance
practices generally.127 Furthermore, Glass Lewis will generally recommend “against” the chair-
person of the company’s nominating and corporate governance committee if a company’s board
adopted during the past year an exclusive forum provision without shareholder approval or if the
board is currently seeking shareholder approval of such provision pursuant to a bundled bylaw
amendment rather than as a separate proposal.128 Additionally, the AFL-CIO and the Council of
Institutional Investors (“CII”) have each expressed their opposition to exclusive forum provi-
sions.129

J. Dissident Director Compensation Bylaws

In recent years, activist hedge funds engaged in proxy contests have increasingly offered
special compensation to their dissident director nominees. In about one-quarter of proxy fights
over the past few years, dissident nominees have been paid a relatively modest flat fee (typically
around $25,000 to $40,000) for agreeing to stand as candidates. In a few high-profile cases,
these arrangements provide for large payouts, in the millions of dollars, contingent on the nomi-
nee being elected and the activist’s goals being met within specified near-term deadlines. Prom-
inent examples included the proxy contests at Hess Corp. and Agrium.

These contingent compensation schemes (which have been referred to as “golden leash”
arrangements) are troublesome in a number of respects. They create incentives to maximize
short-term returns, whether or not doing so would be in the best interests of all shareholders.
They can lead to a multi-tiered and dysfunctional board in which a subset of directors is compen-

124
Order, Centene Corp. v. Elstein, C.A. No. 11589-VCL (Del. Ch. Oct. 8, 2015); Tr. of Rulings of the Ct., Edgen
Grp. Inc. v. Genoud, C.A. No. 9055-VCL (Del. Ch. Nov. 5, 2013).
125
SharkRepellent.
126
ISS, 2016 U.S. Summary Proxy Voting Guidelines 25-26.
127
Glass Lewis, Proxy Paper Guidelines, 2016 Proxy Season 38.
128
Id. at 14.
129
AFL-CIO, Proxy Voting Guidelines, Section D.16, at 20 (2012), available at www.aflcio.org/content/download/
12631/154821/proxy_voting_2012.pdf; Council of Institutional Investors, Corporate Governance Policies, Section
1.9, at 5 (Oct. 1, 2014), available at http://www.cii.org/files/policies/10_01_14_corp_gov_policies(1).pdf.

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sated and motivated significantly differently from other directors. Leading commentators share
these concerns. For example, Columbia School of Law Professor John C. Coffee, Jr. has written
that “third-party bonuses create the wrong incentives, fragment the board and imply a shift to-
ward both the short-term and higher risk,”130 and Professor Stephen Bainbridge of UCLA has
concurred, saying “[i]f this nonsense is not illegal, it ought to be.”131 The CII has also noted that
these arrangements “blatantly contradict” its policies on director compensation,132 and has called
on the SEC to consider interpretive guidance or an amendment to the proxy rules to require dis-
closure of compensation arrangements between nominating shareholders and their director can-
didates.133 We support CII’s call and, moreover, advocate that companies include robust disclo-
sure requirements in their advance notice bylaws to support transparency in dissident nomina-
tions. A company and its shareholders should have a clear understanding of economic arrange-
ments between dissidents and their activist backers.

In May 2013, we issued a memorandum alerting clients to the growing threat posed by
“golden leashes.”134 The memorandum recommended that companies might consider imple-
menting a bylaw that established a default standard (amendable by shareholder resolution as are
all bylaws) that would disqualify from service as a director any person party to such an arrange-
ment (with exceptions for indemnification, expense reimbursement and preexisting employment
relationships not entered into in contemplation of director candidacy). In the months following
publication of the memorandum, dozens of companies adopted a similar bylaw to address the
threats posed by these arrangements.

However, in January 2014, ISS released an FAQ warning that it “may” recommend a
withhold vote against director nominees if a board adopts “restrictive director qualification by-
laws” designed to prohibit “golden leashes” without submitting them to a shareholder vote.135
Predictably, ISS’s threat has had a chilling effect, with very few companies adopting, and most
that had adopted repealing, such bylaws to avoid a confrontation with ISS, despite the risks
posed by “golden leash” schemes. As we noted at that time, although we continue to believe that
such a bylaw is not only legal but consistent with good corporate governance, it is entirely ra-

130
John C. Coffee, Jr., Shareholder Activism and Ethics: Are Shareholder Bonuses Incentives or Bribes?, The CLS
Blue Sky Blog (Apr. 29, 2013), available at http://clsbluesky.law.columbia.edu/2013/04/29/shareholder-activism-
and-ethics-are-shareholder-bonuses-incentives or-bribes/.
131
Stephen Bainbridge, Can Corporate Directors Take Third Party Pay from Hedge Funds?, ProfessorBain-
bridge.com (Apr. 8, 2013), available at http://www.professorbainbridge.com/professorbainbridgecom/2013/04/can-
corporate-directors-take-third-party-pay-from-hedge-funds.html.
132
Council of Institutional Investors, CII Governance Alert, Special Pay Plans for Hedge Fund Nominees Spark
Controversy, Vol. 18, No. 18 (May 16, 2013).
133
Letter from Jeff Mahoney, Gen. Counsel, Council of Institutional Investors, to Keith F. Higgins, Dir., Division
of Corp. Finance, SEC (May 31, 2014), available at http://www.cii.org/files/issues_and_advocacy/
correspondence/2014/03_31_14_CII_letter_to_SEC.pdf.
134
Wachtell, Lipton, Rosen & Katz, Shareholder Activism Update: Bylaw Protection Against Dissident Director
Conflict/Enrichment Schemes (May 9, 2013), available at http://www.wlrk.com/webdocs/wlrknew/WLRKMemos/
WLRK/WLRK.22470.13.pdf. Additionally, ISS’s 2016 voting guidelines state that it will vote case-by-case on
board proposals that establish director qualifications taking into account the reasonableness of the criteria and the
degree to which they may preclude dissident nominees from joining the board. ISS, 2016 U.S. Summary Proxy Vot-
ing Guidelines 20.
135
ISS, Director Qualification/Compensation Bylaw FAQs (Jan. 13, 2014), available at http://www.iss
governance.com/files/directorqualificationcompensationbylaws.pdf; see also ISS Proxy Advisory Services, Report
on Provident Financial Holdings, Inc. (Nov. 12, 2013).

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tional for companies not to incur the disfavor of ISS over a theoretical issue by adopting the by-
law to discourage “golden leash” arrangements. Any dissident who implemented a golden leash
compensation scheme would likely weaken its proxy contest, and so it makes sense to contest
this issue on a case-by-case basis.

Some companies may still wish to protect themselves from the threats posed by “golden
leash” arrangements through appropriate bylaws and, in that case, may wish to consider bylaws
that permit payment of a reasonable candidacy fee. Companies may also want to consider seek-
ing shareholder approval of such bylaws, although it is still too early to predict what level of
shareholder support they would likely receive. Further, another option available to companies is
to prohibit golden leashes for proxy access nominated directors in their proxy access bylaws. At
least 25 companies have adopted proxy access with this sort of prohibition, although most com-
panies continue to take a disclosure-based approach. At a minimum, all companies should re-
quire full disclosure of any third-party arrangements that director candidates may have, which
has long been a common practice and does not (at least given ISS’s current position) raise the
risk of an ISS withhold recommendation. Additionally, on January 28, 2016, Nasdaq proposed a
change to its listing rules that, if implemented, would require Nasdaq-listed companies to public-
ly disclose golden leash arrangements.136

An important lesson from the “golden leash bylaw” affair is that ISS and other members
of the shareholder activist community are becoming increasingly resistant to board-adopted by-
laws on anything other than pure housekeeping matters. Their primary objection to the bylaw
was not with its substance—they generally agreed that “golden leash” arrangements are incon-
sistent with good corporate governance—but to the fact that boards implemented these bylaws
without shareholder approval or engagement. This is a significant development. The adoption
of bylaws that the board considers to be in the best interests of the company has traditionally
been within the board’s prerogative. Boards should still do what they think is right, but they
must be aware of the increasingly strident call for shareholder engagement regarding all things
that may affect shareholder rights and interests and engage with key shareholders on any change
that may be controversial.

K. Proxy Access

The year 2015 will be remembered as the year in which “proxy access” finally became a
reality. “Proxy access” is the term (or rather the slogan) that has come to stand for the right of
shareholders to put their own director candidates on the company’s proxy card and in the com-
pany’s proxy statement, rather than having to use their own proxy card and statement. Over the
past decade, this has been a fertile area for activism, discussion, rule-making and litigation.137
These events culminated in a U.S. Court of Appeals vacating the SEC’s promulgated mandatory
proxy access rule, called Rule 14a-11. The SEC did, however, amend Rule 14a-8 (which had
previously regarded proxy access proposals as excludable because they related to an election
contest) to allow shareholders to submit proxy access proposals to companies. As a result of this
136
The text of Nasdaq’s proposed rule change is available at, http://nasdaq.cchwallstreet.com/NASDAQ/
pdf/nasdaq-filings/2016/SR-NASDAQ-2016-013.pdf.
137
The SEC proposed a proxy access rule in 2003 and in 2007, approving the final rule in 2010.

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change, approximately 105 companies faced proposals seeking proxy access in 2015; 75 of these
proposals were submitted by the New York City Comptroller’s “2015 Boardroom Accountability
Project.”138 Consequently, proxy access was the most frequent issue formally raised by share-
holders in 2015, accounting for 22 percent of shareholder contacts.139 As of March 1, 2016, over
28 percent S&P 500 companies had some form of proxy access bylaw. 140 Many more companies
have been pursuing a “wait and see” approach toward proxy access, allowing the many issues
and parameters to settle before adopting their own policies.

With the recent increase in proxy access proposals, a consensus as to the headline terms
of such proposals has begun to emerge, among both large institutional shareholders and the mar-
ket more generally: particularly, that shareholders holding at least three percent of a company’s
shares continuously for three years should be able to nominate candidates for up to 20 or 25 per-
cent of the company’s board with up to 20 or so shareholders permitted to group and aggregate
continuously held shares in order to meet the 3% threshold, so called “3-3-20-20%” or “3-3-20-
25%” proposals.141 The headline terms of these proposals largely are consistent with the SEC’s
now-vacated Rule 14a-11 which had proposed to adopt the “3-3-25%” model. Because consen-
sus has begun to emerge on headline terms, the beginning of the 2016 proxy season has shown
an increased focus on other terms of proxy access bylaw provisions including, among others,
beneficial ownership definitions, limitations on shareholder group size and proxy access-
nominated-director qualifications. General trends in proxy access are discussed in more detail in
Section IV.E.3. and the excludability of such proposals through no-action relief (as it relates to
both headline and other terms) is discussed in more detail in Section IV.A.2.

138
SharkRepellent. See also David A. Katz, Proxy Access Proposals for the 2015 Proxy Season, The Harvard Law
School Forum on Corporate Governance and Financial Regulation (Nov. 7, 2014), available at
http://blogs.law.harvard.edu/corpgov/2014/11/07/proxy-access-proposals-for-the-2015-proxy-season/.
139
Spencer Stuart, Spencer Stuart Board Index 2015, at 22, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2015.
140
SharkRepellent.
141
In early 2015, both Blackrock and Vanguard made statements generally in favor of proxy access, and since then,
many other large institutional investors have adopted their own policies regarding proxy access proposals. See infra
nn. 194-196 and accompanying text.

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 IV. Shareholder Proposals

Given its corporate governance expertise and familiarity with the company’s corporate
governance rules and policies, the nominating and corporate governance committee is often
called upon to consider the appropriate response to a shareholder proposal. In fulfilling this
function, the nominating and corporate governance committee must not only understand the sub-
stance of the proposal but also the procedural and technical requirements applicable to share-
holder proposals, the consequences of proxy advisory voting policies and the prevailing trends in
shareholder sentiment.

A. Shareholder Proposals Under Federal Law

Under SEC Rule 14a-8, shareholder proposals must be included in a company’s proxy
statement and submitted to a shareholder vote unless they fail to meet eligibility and procedural
requirements of Rule 14a-8, or the proposal falls within one of 13 subject matter exclusions un-
der the rule. If a company intends to exclude a shareholder proposal under Rule 14a-8, the com-
pany must submit its reasons for excluding the proposal to the SEC. In general, a company will
not exclude a shareholder proposal unless the SEC accepts the company’s position that the pro-
posal may be excluded.

There has been substantial and growing criticism of late that the low eligibility require-
ments have led to an epidemic of shareholder proposals that are not only wasteful and distracting
for companies but are a major drain on the SEC staff’s resources. In 2014, then-SEC Commis-
sioner Daniel Gallagher stated that “[a]ctivist investors and corporate gadflies have used these
loose rules [under Rule 14a-8] to hijack the shareholder proposal system.”142 In response to an
essay by a leading shareholder rights advocate, Delaware Chief Justice Leo Strine wrote that “[i]t
simply raises the cost of capital to require corporations to spend money to address annually an
unmanageable number of ballot measures that the electorate cannot responsibly consider and
most investors do not consider worthy of consideration.”143 Both Commissioner Gallagher and
Chief Justice Strine have proposed various reforms to the Rule 14a-8 requirements, as discussed
further under Section IV.D, and it is possible that the requirements to submit a shareholder pro-
posal may be heightened in the future.

1. Eligibility and Procedural Requirements

In order to be eligible to submit a proposal, a shareholder must have continuously held at

least $2,000 in market value, or one percent, of the company’s securities entitled to vote for at
least one year at the time of the proposal and must continue to hold those securities through the
meeting date. A proposal must not exceed 500 words, and each shareholder may submit only
one proposal per meeting. Also, a proposal may be excluded if in the past two calendar years the

142
Daniel M. Gallagher, former Comm’r, SEC, Remarks at the 26th Annual Corporate Law Institute, Tulane Uni-
versity Law School: Federal Preemption of State Corporate Governance (Mar. 27, 2014), available at
http://www.sec.gov/News/Speech/Detail/Speech/1370541315952#.VQfYE9J0xMw.
143
Leo E. Strine, Jr., Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological
Mythologists of Corporate Law, 114 Colum. L. Rev. 449, 483 (2014).

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shareholder submitted a proposal but failed to appear and present such proposal at a meeting or
failed to maintain the required stock ownership through the date of a meeting.

Rule 14a-8 also imposes notice requirements. For a regularly scheduled annual meeting,
a proposal must be submitted at least 120 calendar days before the date on which the company
released its proxy statement for the previous year’s meeting. However, if the company did not
hold an annual meeting the previous year, or if the date of this year’s annual meeting has been
changed by more than 30 days from the date of the previous year’s meeting, then the deadline is
a reasonable time before the company begins to print and send its proxy materials. For a meeting
other than a regularly scheduled annual meeting, the deadline is a reasonable time before the
company begins to print and send its proxy materials. Very little guidance or precedent is avail-
able to clarify the meaning of “reasonable time” in this context.

2. Substantive Requirements

In addition to eligibility and procedural requirements, Rule 14a-8 provides 13 substantive

bases for exclusion:

 Improper under state law: If the proposal is not a proper subject for action by share-
holders under the laws of the jurisdiction of the company’s organization;

 Violation of law: If the proposal would, if implemented, cause the company to violate
any state, federal or foreign law to which it is subject;

 Violation of proxy rules: If the proposal or supporting statement is contrary to any of

the SEC’s proxy rules, including the rule prohibiting materially false or misleading
statements in proxy soliciting materials;

 Personal grievance; special interest: If the proposal relates to the redress of a per-
sonal claim or grievance against the company or any other person, or if it is designed
to result in a benefit to the submitting shareholder, or to further a personal interest,
which is not shared by the other shareholders at large;

 Relevance: If the proposal relates to operations that account for less than five percent
of the company’s total assets at the end of its most recent fiscal year, and for less than
five percent of its net earnings and gross sales for its most recent fiscal year, and is
not otherwise significantly related to the company’s business;

 Absence of power/authority: If the company would lack the power or authority to

implement the proposal;

 Management functions: If the proposal deals with a matter relating to the company’s
ordinary business operations;

 Director elections: If the proposal: (i) would disqualify a nominee who is standing
for election; (ii) would remove a director from office before his or her term expired;
(iii) questions the competence, business judgment or character of one or more nomi-

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 nees or directors; (iv) seeks to include a specific individual in the company’s proxy
materials for election to the board of directors; or (v) otherwise could affect the out-
come of the upcoming election of directors;

 Conflicts with company’s proposal: If the proposal directly conflicts with one of the
company’s own proposals to be submitted to shareholders at the same meeting (alt-
hough as discussed below, the SEC is currently reviewing its position on this basis for
exclusion);

 Substantially implemented: If the company has already substantially implemented the

proposal;

 Duplication: If the proposal substantially duplicates another proposal previously

submitted to the company by another proponent that will be included in the compa-
ny’s proxy materials for the same meeting;

 Resubmissions: If the proposal deals with substantially the same subject matter as
another proposal or proposals that has or have been previously included in the com-
pany’s proxy materials within the preceding five calendar years, a company may ex-
clude it from its proxy materials for any meeting held within three calendar years of
the last time it was included if the proposal received: (i) less than three percent of the
vote if proposed once within the preceding five calendar years; (ii) less than six per-
cent of the vote on its last submission to shareholders if proposed twice previously
within the preceding five calendar years; or (iii) less than 10 percent of the vote on its
last submission to shareholders if proposed three times or more previously within the
preceding five calendar years; and

 Specific amount of dividends: If the proposal relates to specific amounts of cash or

stock dividends.

Of these bases for exclusion, four have dominated no-action requests in recent years: vi-
olation of proxy rules because the proposal includes materially false or misleading statements,
“management functions” because the proposal deals with ordinary business operations, substan-
tial implementation by the company and conflicts with a company proposal that is to be submit-
ted for a vote at the same meeting. For example, of the 213 no-action requests in which the SEC
staff concurred that a shareholder proposal could be excluded during the 2015 proxy season, 55
percent pertained to these reasons—32 percent of exclusions were based on ordinary business
arguments, 21 percent on substantial implementation, and two percent because the proposal was
vague or false and misleading.144 Additionally, with the recent proliferation of shareholder
proxy access proposals, the start of the 2016 proxy season has seen a sharp increase in no-action
requests based on substantial implementation grounds under Rule 14a-8(i)(10) from companies
that have already adopted some form of proxy access bylaw but received a subsequent share-

144
Gibson, Dunn & Crutcher LLP, Shareholder Proposal Developments During the 2015 Proxy Season 2-3 (July
15, 2015), available at http://www.gibsondunn.com/publications/pages/Shareholder-Proposal-Developments-
During-the-2015-Proxy-Season.aspx [hereinafter GDC Shareholder Proposal Developments During the 2015 Proxy
Season].

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holder proposal often seeking to change, among other things, the minimum ownership threshold,
minimum ownership time period or board representation cap.

The SEC has required companies that seek to exclude proposals on the grounds that they
violate proxy rules to demonstrate that the statements in question are objectively materially false
and misleading, and the SEC has articulated a preference that companies address these state-
ments in their “statements of opposition” included in proxy materials rather than excluding the
proposal from the proxy statement altogether.145 Consequently, in 2014 and 2015, no-action re-
quests under Rule 14a-8(i)(3) were the most frequently rejected arguments with the SEC tending
to decide in favor of proponents.146 The policy implications of this position are difficult to ig-
nore—misstatements in a shareholder proposal may influence how other shareholders vote, even
if a company refutes them in its response; they may also spread misinformation if they are dis-
tributed through channels that the company cannot police. Notably, in February 2014, a federal
court recognized this difficulty when it ruled in favor of a company seeking to exclude a share-
holder proposal on the basis that the proposal included material, factual misstatements about the
amount of executive compensation paid by the company, the voting standard adopted by the
company, the existence of a clawback policy and the number of negative votes received by a di-
rector.147 Despite this court ruling, in 2015, the SEC continued to be reluctant to permit exclu-
sions on this basis: only one “materially false and misleading” argument was accepted by the
SEC as compared to four in 2014.148 Consequently, because the SEC has been a difficult forum
in which to succeed in excluding proposals on this basis, an increased number of companies may
decide to turn to federal courts when faced with misleading proposals.

Companies often rely on the “deals with ordinary business operations” exclusion in seek-
ing no action relief from shareholder proposals relating to social issues, such as health, financial
and environmental risks or human rights and healthcare. This reason has also been used, to vary-
ing levels of success, to exclude proposals relating to commercial practices, such as direct depos-
it financial lending and fair lending.149 In evaluating these requests, the SEC has focused on the
nature of the proposals—where the proposal transcends basic business operations and raises
broad policy issues for the company, it may not be excluded.150 With respect to health and envi-
ronmental risks, since 2009 the SEC has distinguished between excludable proposals that focus
on the internal assessment of the risks and liabilities that a company faces as a result of its opera-
tions, and non-excludable proposals that focus on a company minimizing or evaluating opera-
tions that may adversely affect the environment or public health.151 During the 2015 proxy sea-
son, approximately 108 no action requests sought exclusion on the basis of Rule 14a-8(i)(7), of

145
SEC Staff Legal Bulletin No. 14B, Shareholder Proposals (Sept. 15, 2004), available at
http://www.sec.gov/interps/legal/cfslb14b.htm.
146
GDC Shareholder Proposal Developments During the 2015 Proxy Season at 3.
147
See Express Scripts Holding Co. v. Chevedden, 2014 WL 631538 (E.D. Mo. Feb. 18, 2014).
148
Based on analysis of no-action letters submitted to the SEC between June 1, 2014 and January 1, 2015, 105 no
action requests were submitted on the basis of Rule 14a-8(i)(3) during the 2015 proxy season. 18 of these letters
were withdrawn and three were granted. Of the three granted, two were granted exclusion under Rule 14a-8(i)(3) on
the basis that the proposal was “vague and indefinite,” not on the basis that the proposal was “materially false and
misleading.”
149
ISS, 2013 U.S. Proxy Season Review: Environment & Social Issues 10.
150
SEC Staff Legal Bulletin No. 14E, Shareholder Proposals (Oct. 27, 2009), available at
http://www.sec.gov/interps/legal/cfslb14e.htm.
151
Id.

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which 50 were granted on the basis of Rule 14a-8(i)(7), 26 were withdrawn and 18 were de-
nied.152

Recently, a federal district court and a federal appellate court ruled on the exclusion of a
social proposal in reliance on the ordinary business exception. A shareholder of Wal-Mart
Stores, Inc. proposed that the board assign to one of its committees the responsibility of oversee-
ing the formulation, implementation and public reporting of policies that determine whether a
company should sell products that could endanger public safety, impair the company’s reputation
or would be considered offensive to the values of the company’s brand. 153 The SEC did not ob-
ject to Wal-Mart’s exclusion of this proposal on the basis that the proposal dealt with the ordi-
nary business operations, but the U.S. District Court in Delaware disagreed. The court decided
that because the proposal merely sought oversight of the development and implementation of a
company policy and left day-to-day aspects to the company’s management, it did not interfere
with management’s fundamental ability to run the company and so could be subject to share-
holder oversight.154 However, the Third Circuit quickly overturned the District Court’s decision,
calling the shareholder proposal “a sidestep from a shareholder referendum on how Wal-Mart
selects its inventory.”155 The Third Circuit also found that the shareholder proposal did not raise
a significant policy issue that transcended Wal-Mart’s day-to-day business operations qualifying
it for the social policy exception to exclusion.156 The court held that for retailers with diverse
product lines, a policy issue “must target something more than the choosing of one among tens
of thousands of products [that the retailer sells]” for it to transcend ordinary business opera-
tions.157

Often, companies also seek to exclude proposals on the basis that they were substantially
implemented by the company. A no-action request on this basis must not only demonstrate that
the relevant action by the company compares favorably with the proposal at issue but also ad-
dress each element of the proposal.158 However, the relevant action need not be taken by man-
agement or the board, and effects of court decisions, business developments, corporate events
and third-party requirements may render the proposal moot.159 While trends vary across pro-
posals, the SEC has increasingly made it more difficult to exclude a proposal on the basis of sub-

152
Data are based on analysis of no-action letters available as of March 6, 2016 that were submitted between Octo-
ber 1, 2014 and August 1, 2015 seeking no action relief for a 2015 annual meeting.
153
Trinity Wall Street v. Wal-Mart Stores, 75 F. Supp. 3d 617 (D. Del. 2014).
154
Id. In contrast, in analyzing whether a proposal requesting the formation of a special committee is excludable
under the ordinary business exception, the SEC has stated that “the key is to consider whether the underlying subject
matter of the committee involves an ordinary business matter.” Keith F. Higgins, Dir., Div. of Corp. Finance, SEC,
Rule 14a-8: Conflicting Proposals, Conflicting Views, Practising Law Institute Program on Corporate Governance
(Feb. 10, 2015), available at http://www.sec.gov/news/speech/rule-14a-8-conflicting-proposals-conflicting-views-
.html#.VPn3W2d0zPs.
155
Trinity Wall Street v. Wal-Mart Stores, 792 F.3d 323, 343 (3d Cir. 2015).
156
There is a significant social policy exception to the default rule of excludability for proposals that relate to a
company’s ordinary business operations. According to the SEC staff, the exception is available if “a proposal’s un-
derlying subject matter transcends the day-to-day business matters of the company and raises policy issues so signif-
icant that it would be appropriate for a shareholder vote . . . .” Staff Legal Bulletin No. 14E (CF), SEC Release No.
SLB – 14E (Oct. 27, 2009); see also, Trinity Wall Street 792 F.3d at 345-51 (discussing the exception in detail as it
applies to retailers).
157
Trinity Wall Street, 792 F.3d at 352.
158
Amy Goodman, et al., A Practical Guide to SEC Proxy and Compensation Rules § 12.08 (2014).
159
Id.

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stantial implementation. In the past, for example, the SEC granted requests that argued that spe-
cial meeting proposals were substantially implemented even where a company’s provision im-
posed additional conditions on calling a special meeting so long as these conditions were not re-
strictive. However, in 2014 the SEC denied no action requests where a proposal called for an
amendment to the bylaws that would allow 10 percent of the stockholders to call a special meet-
ing and the bylaws included a 25 percent standard.160 During the 2015 proxy season 104 no ac-
tion requests sought exclusion on the basis of Rule 14a-8(i)(10), 26 were granted on the basis of
Rule 14a-8(i)(10), 26 were withdrawn and 24 were denied.161

During the 2015 proxy season, the scope and application of Rule 14a-8(i)(9), which per-
mits companies to exclude a proposal if it directly conflicts with one of the company’s proposals,
received considerable scrutiny. In late 2014, Whole Foods requested no-action relief to exclude
a proxy access proposal that would have permitted shareholders holding at least three percent of
outstanding stock for at least three years to nominate up to 20 percent of directors for inclusion
in the company’s proxy statement. It did so on the grounds that the proposal conflicted with the
company’s own proposal that would permit shareholders holding at least nine percent of out-
standing stock for at least five years to nominate 10 percent of directors in the company’s proxy
statement. The SEC granted relief, but the shareholder proponent sought review by the commis-
sioners, and institutional investors lobbied the SEC to review the staff’s position.162 On January
16, 2015, the chairperson of the SEC instructed the Division of Corporation Finance to review
the scope and application of this basis for exclusion, and the SEC during the 2015 proxy season,
the SEC suspended its review of no-action request on this basis and reversed its view with re-
spect to the Whole Foods request.163

On October 22, 2015 the SEC released new guidance on Rule 14a-8i(i)(9) to clarify the
scope of the exclusion.164 Historically, many of the SEC’s response letters granting no-action
relief under Rule 14a-8(i)(9) allowed exclusion of shareholder proposals if inclusion could pre-
sent “alternative and conflicting decisions for the shareholders” and create the potential for “in-
consistent and ambiguous results.”165 However, based on a review of the history of the rule, the
SEC concluded that its intended purpose is to prevent shareholders from circumventing the
proxy rules governing solicitations.166 Consequently, a proposal will only be excludable on the

160
Id.
161
Data are based on analysis of no-action letters available as of March 6, 2016 that were submitted between Octo-
ber 1, 2014 and August 1, 2015 seeking no action relief for a 2015 annual meeting.
162
Letter from Ann Yerger, Exec. Dir., Council of Institutional Investors, to Kenneth F. Higgins, Dir., Division of
Corp. Finance, SEC (Jan. 9, 2015), available at http://www.cii.org/files/issues_and_advocacy/ correspondence/
2015/01_09_15_CII_to_SEC_re_Whole_foods.pdf.
163
Public Statement, Mary Jo White, Chair, SEC, Statement of Chair White Directing Staff to Review Commission
Rule for Excluding Conflicting Proxy Proposal (Jan. 16, 2015), available at
http://www.sec.gov/news/statement/statement-on-conflicting-proxy-proposals.html#.VQffxdJ0xMz; Announce-
ment, SEC, Division of Corporation Finance Will Express No Views under Exchange Act Rule 14a-8(i)(9) for Cur-
rent Proxy Season (Jan. 16, 2015), available at http://www.sec.gov/corpfin/announcement/cf-announcement---rule-
14a-8i9-no-views.html#.VQfm4tJ0xMw.
164
SEC Staff Legal Bulletin No. 14H (CF) (Oct. 22, 2015), available at
https://www.sec.gov/interps/legal/cfslb14h.htm#_ednref11.
165
Id.
166
The SEC’s conclusion stemmed from the additional procedural and disclosure requirements imposed on share-
holder solicitations in opposition to a management proposal by Regulation 14A that are not required by Rule 14a-8.
See, e.g., 17 C.F.R. 240.14a-6.

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basis that it directly conflicts with a management proposal 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.” This articulation is a higher burden for exclusion than under the
SEC’s previous formulation of the rule.

As an example, the SEC noted that it would not view a shareholder proxy access proposal
permitting holders of at least three percent of the company’s outstanding stock for at least three
years to nominate up to 20 percent of the directors as conflicting with a management proxy ac-
cess proposal allowing holders of at least five percent of the company’s stock for at least five
years to nominate up to 10 percent of the directors. In the SEC’s view, these proposals do not
conflict because (i) they “generally seek a similar objective, to give shareholders the ability to
include their nominees for director alongside management’s nominees” and (ii) “they do not pre-
sent shareholders with conflicting decisions such that a reasonable shareholder could not logical-
ly vote in favor of both proposals” (i.e., a shareholder concerned that the lower standard may not
receive requisite support could vote for both if generally in favor of some form of proxy ac-
cess).167 Further, the SEC noted that although in the event both hypothetical proposals were ap-
proved the company’s board might have to consider the effects of both proposals, this type of
decision does not represent “the kind of ‘direct conflict’ [Rule 14a-8(i)(9)] was designed to ad-
dress.”168 As a final piece of guidance, the SEC noted that the new standard for directly conflict-
ing proposals does not take into account whether a shareholder proposal is precatory or bind-
ing.169

On February 12, 2016, the SEC responded to 18 no-action requests seeking to exclude
proxy access shareholder proposal based on substantial implementation under Rule 14a-8(i)(10),
and granted relief in 15 instances. This wave of no-action letters is of particular importance in
light of the significant limitations placed on exclusion of such proposals under the SEC’s new
interpretation of Rule 14a-8(i)(9), as described above. As a general matter, previous SEC no-
action letters granting relief under Rule 14a-8(i)(10) have permitted exclusion of a proposal
when a company has demonstrated that actions it has already taken address the essential ele-
ments of a proposal. More specifically, the staff has stated that “a determination that the compa-
ny has substantially implemented [a] proposal depends upon whether [the company’s] particular
policies, practices and procedures compare favorably with the guidelines of the proposal.”170

With regards to proxy access, the SEC’s February 12 letters have made certain principles
clear. First, conformity between the ownership threshold adopted by the company and the own-
ership threshold in the proposal is a critical factor in obtaining no-action relief. In each of the 15
grants of relief, both the shareholder proposal and the company’s bylaw had the same 3 percent
ownership threshold and in all three denials, the company’s ownership threshold exceeded the
167
The SEC staff provided three additional examples. First, a management proposal asking shareholders to approve
a merger directly conflicts with a shareholder proposal to vote down the merger. Second, a management proposed
bylaw to require the CEO to always serve as Chairperson directly conflicts with a shareholder proposal seeking sep-
aration of the positions. And, third, a management proposal allowing the compensation committee to determine
vesting of equity awards in its sole discretion does not conflict with a shareholder proposal requiring all equity
awards to be subject to a minimum four-year vesting requirement. SEC Staff Legal Bulletin No. 14H (CF) (Oct. 22,
2015), available at https://www.sec.gov/interps/legal/cfslb14h.htm#_ednref11.
168
Id.
169
Id.
170
Texaco Inc., SEC No-Action Letter (Mar. 28, 1991).

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proposed ownership threshold in the shareholder proposal. Second, a lower cap on shareholder
nominees in the company’s bylaw than in a shareholder proposal did not preclude the grant of
no-action relief.171 Third, a company’s addition of reasonable eligibility requirements on proxy
access nominees—including, in the case where such requirements were not imposed on board
nominated directors—did not prevent the SEC from granting no-action relief on the basis of sub-
stantial implementation.172 Finally, companies that imposed aggregation limits on shareholder
groups for purpose of proxy access were not precluded from obtaining relief under Rule 14a-
8(i)(10) even where the shareholder proposal requests that group formation be in no way lim-
ited.173

3. Curable and Non-Curable Deficiencies

A deficiency may be either curable or non-curable. For example, an untimely submission

is not curable because the deadline has passed, whereas an overly wordy proposal is curable
through revision and resubmission. Similarly, a proposal that is improper under state law be-
cause it mandates a particular action may be cured by reformulating it as a precatory proposal. If
a deficiency is curable, a company must notify the proponent within 14 calendar days of receiv-
ing the proposal of any procedural or eligibility deficiencies, as well as of the time frame for re-
sponding. The proponent’s response must be postmarked no later than 14 days from the date of
receipt of the company’s notification. If a deficiency is non-curable, a company need not pro-
vide the proponent notice.

4. No-Action Requests

If a company wishes to exclude a proposal from its proxy materials, it must seek a no-
action letter by filing its reasons with the SEC no later than 80 calendar days before it files its
definitive proxy statement and form of proxy, although this requirement may be waived for good
cause. No-action letters issued by the SEC in response to these requests provide useful guidance
both to shareholders submitting proposals and to nominating and corporate governance commit-
tees in determining their response to shareholder proposals. In 2015, the percentage of no-action
letters seeking exclusion of a shareholder proposal for which the SEC granted relief fell to 61
percent from 71 percent in 2014.174

171
See, e.g., Target Corporation, SEC No-Action Letter (Feb. 12, 2016). Target’s proxy access bylaw limited the
number of proxy access nominees that will be included in the company’s proxy materials to the greater of two direc-
tors or 20 percent of the number of directors in office. The shareholder proposal called for the limit to be set at the
greater of two directors or 25 percent of the number of directors in office.
172
See, e.g., Northrop Grumman Corporation, SEC No-Action Letter (Feb. 12, 2016). The shareholder proposal
provided that “[n]o additional restrictions that do not apply to other board nominees should be placed on these
[proxy access] nominations or re-nominations. In its response, Northrop noted that “The Company provides in its
Proxy access Provision a number of other requirements . . . . While certain of these requirements are not explicitly
set out in the Company’s governing documents with respect to director nominees generally, each requirement is a
fundamental to the Company and applied by the nominating committee in determining which candidates to recom-
mend as nominees for election to the Board.”
173
See, e.g., Target Corporation, SEC No-Action Letter (Feb. 12, 2016). Target’s bylaw limited the size of groups
to no more than 20 shareholders and the shareholder proposal sought to make proxy access available for “any person
nominated for election to the board by a shareholder or an unrestricted number of shareholders forming a
group . . . .”
174
GDC Shareholder Proposal Developments During the 2015 Proxy Season at 2.

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 5. Including Proposal in Proxy Materials

A company may include in its proxy materials a statement of reasons why it believes that
shareholders should vote against a proposal. The company’s response or “opposition statement”
is not subject to the 500-word limit for shareholder proposals. The company must provide a
copy of this statement to the proponent no later than 30 calendar days before it files definitive
copies of its proxy statement and form of proxy, or, if the SEC’s no-action response requires the
proponent to make revisions to the proposal as a condition of its inclusion, then the company
must provide the proponent with a copy of its opposition statements no later than five calendar
days after the company receives a copy of the revised proposal.

6. Precatory and Mandatory Proposals

The corporate law of most states, including Delaware, provides that the business and af-
fairs of a company are to be managed under the direction of the board.175 Under this structure,
with the exception of a few specific items provided for by statute (such as the content of the
company’s bylaws and approval of mergers and sales of all or substantially all of the company’s
assets), running the company is left to the company’s directors and the management team ap-
pointed by those directors, rather than to shareholders. The avenue for shareholders to directly
affect the company’s operations is primarily confined to replacing the board or amending the
company’s bylaws. A shareholder proposal mandating that the board take a particular action
would run afoul of this fundamental division of power. Thus, shareholder proposals calling for a
specific action (other than seeking to amend the company’s bylaws), must, in general, be submit-
ted as precatory suggestions to the board. The board can then decide whether or not to imple-
ment the resolution adopted by the shareholders. As a practical matter, however, boards may
face significant pressure to implement precatory proposals supported by shareholders. (See Sec-
tion IV.C.) In Delaware and most other states, the board of directors must submit to the share-
holders any changes in the charter, and the shareholders may not amend the charter without
board approval. Accordingly, any shareholder efforts to amend the charter (for example, to elim-
inate a classified board or allow action by written consent) must be brought by precatory resolu-
tion.

B. Shareholder Proposals Under State Law

In addition to having a proposal included in the issuer’s proxy statement under Rule
14a-8, shareholders may submit proposals under state law. A key distinction between the two is
that, whereas a qualifying Rule 14a-8 proposal must be included in the company’s proxy state-
ment, a shareholder submitting a proposal under state law must ordinarily do so in his or her own
proxy statement. Thus, making a proposal under state law requires a shareholder to bear the ex-
pense of printing and mailing proxy materials. As a result, such proposals are most common in
the context of a hostile takeover bid or a proxy fight where the stockholder seeks a fundamental
change in corporate direction, including by proposing a competing slate of director nominees for
election. State law is particularly important for director nominations because, as noted above,
director nominations are generally excludable from proxy access under Rule 14a-8, leaving state
law as the only avenue.

175
See 8 Del. C. § 141(a).

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 Director nominations and other shareholder proposals must comply with a company’s
advance notice bylaws governing the deadline for submission of such proposals. In addition to
submission deadlines, bylaws typically require that the proponent be a shareholder as of the rec-
ord date of the meeting and call for a number of disclosures by the proponent. Examples of these
disclosures include background information about the proponent, the amount of the proponent
and its affiliates’ beneficial ownership (including derivative instruments) and any voting agree-
ment with other stockholders. If a proposal nominates a director candidate, bylaws often require
that the proposal include a questionnaire and all information about the nominee that would be
required for election of directors in a contested election pursuant to federal securities laws. In-
creasingly, bylaws also require that the nomination disclose any material arrangements or rela-
tionships between the proponent and the nominee. For submissions other than nominations, by-
laws typically require the text of the proposal and a brief description of the matter desired to be
brought, including any material interest of the stockholder in the matter.

C. Responding to Shareholder Proposals

The appropriate response to receipt of a proposal will vary depending on the facts and
circumstances. If a 14a-8 shareholder proposal does not comply with certain procedural and
substantive requirements, it may be excludable under SEC rules. If a state-law (that is, a non-
14a-8) proposal does not comply with the company’s bylaws, then it may generally be excluded
under the bylaws from being raised at the meeting. In other cases, the company may engage in a
dialogue with the shareholder to find a mutually acceptable compromise. In still other cases, it
may make sense to implement the proposal, or to formulate an alternative proposal that will
achieve largely the same effect. In responding to voted-upon shareholder proposals, boards
should be cognizant that their actions will likely be closely monitored by proxy advisory services
and activist investors. A board that declines to implement a supported shareholder proposal may
find itself subject to scrutiny and perhaps even election challenges or withhold-the-vote cam-
paigns. Increasingly in these situations, proxy advisory services are recommending “no” votes
for members of the nominating and corporate governance committee. While directors cannot be
dismissive of the influence of proxy advisory services and large shareholders, directors also
should not blindly succumb to their mandates. Care should be taken to consider shareholder
concerns and articulate the board’s reasoning, but ultimately corporate governance is a core func-
tion of the board, and directors must bear in mind that they are best positioned to select the best
policies for the company.

1. Deciding Whether to Implement a Precatory Shareholder Proposal

Neither federal nor state law imposes any legal obligation on the board to act upon preca-
tory shareholder proposals that receive majority support. To the contrary, it is the board’s re-
sponsibility to carefully evaluate such proposals and implement them only if it believes doing so
is in the best interests of the company. Provided that the board has deliberated with care and act-
ed to further the company’s best interests, any determination should be protected by the deferen-
tial business judgment rule.

Although the board’s decision not to implement a shareholder proposal will not be vul-
nerable to legal challenge, there may be other consequences. A board that declines to implement
a shareholder proposal that garnered substantial support may find itself subject to criticism and

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perhaps even election challenges or withhold-the-vote campaigns from proxy advisory services
or institutional investors. This can be particularly significant if the company’s directors are
elected by majority voting (as most directors now are).

2. Proxy Advisory Policies Regarding Response to Shareholder Proposals

ISS recommends voting on a case-by-case basis on individual directors, committee mem-

bers or the entire board if the board failed to act on a shareholder proposal that received the sup-
port of a majority of votes cast the previous year.176 Among the factors ISS will consider are the
subject matter and level of support of the proposal, the actions taken by the board in response
and its engagement with shareholders and the rationale provided in the company’s proxy state-
ment for the level of implementation.177 Glass Lewis takes a more aggressive position, stating
that any time a shareholder proposal receives at least 25 percent support, the board should, de-
pending on the issue, “demonstrate some level of responsiveness,” which will be evaluated on a
case-by-case basis.178 These ISS and Glass Lewis positions are more moderate than ISS’s for-
mer position that it would automatically recommend that shareholders withhold votes from direc-
tors who declined to implement expressed shareholder desires. ISS’s withhold policy, coupled
with the shift to majority voting, were strong contributors to the erosion of takeover protections,
such as shareholder rights plans and staggered boards over the past decade.

3. Responding to Pressure from Shareholders and/or Proxy Advisory Services

Despite the changing dynamics between the board and shareholders, the board must re-
member that it has the responsibility to exercise its own business judgment in determining what
course will best serve the company. A board need not, and should not, accede to every corporate
governance “best practice” promulgated by proxy advisory services and other governance activ-
ists. That said, without abdicating its responsibilities, the board should be mindful of governance
policies and shareholder concerns and consider the potentially disruptive impact of scrutiny from
shareholders and proxy advisory services as one factor in determining the company’s best inter-
ests. When the board chooses to depart from the approach called for by corporate governance
activists, it must be prepared to articulate clear and thoughtful explanations for its decisions.
This approach will build the board’s credibility with shareholders and also help it formulate poli-
cies that may be acceptable to all parties. In the current corporate governance environment, the
challenge for directors is to base their decisions on what they believe will best serve the company
while at the same time maintaining sufficient awareness and sensitivity of shareholder concerns
to avoid an attack that could undermine the board’s ability to serve the company’s best interests.

D. Effect of Shareholder Proposals

Corporate governance has undergone a dramatic transformation over the last decade, in
no small part as a result of activists who brought shareholder proposal after shareholder proposal
until nearly every company had succumbed; in short, the putative aspirational “best practices” of
a decade ago have been so widely adopted or codified that there is now a period of relative stasis
in corporate governance. Among S&P 500 companies in 2015: only 10 percent had staggered

176
ISS, 2016 U.S. Summary Proxy Voting Guidelines 15.
177
Id.
178
Glass Lewis, Proxy Paper Guidelines, 2016 Proxy Season 7-8.

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boards, compared to 47 percent in 2005;179 the CEO was the only non-independent director on 61
percent of boards, compared to 39 percent in 2005;180 88 percent had some form of majority vot-
ing for directors, compared to virtually none in 2003; and four percent had a poison pill in place,
compared to 45 percent in 2005.181 Nevertheless, pressure from corporate governance activists
remains acute, partly due to increased scrutiny of the remaining holdouts and partly as a result of
ever-evolving standards from those who make their living in the corporate governance industry.

S&P 500 companies received 630 shareholder proposals in 2015 as compared to 636 in
2014, 663 in 2013 and 494 in 2005; the figures for the Russell 3000 were 864 in 2015, 853 in
2014, 844 in 2013 and 592 in 2005.182 In 2015, almost 15 percent of the shareholder proposals
submitted to S&P 500 companies and voted on received majority support, compared to about
13 percent in 2014, 19 percent in 2010, and 24 percent in 2009.183 This is attributable in large
part to a shrinking proportion of the core corporate-governance related proposals that typically
receive strong support, as companies have conformed to “best practices” mandates, and an in-
crease in socially oriented proposals that typically receive less support.

Even when unsuccessful in changing a company’s corporate governance, shareholder

proposals are not without impact. As Delaware Chief Justice Strine observed, shareholder pro-
posals can distract managers from running companies and impose unnecessary costs on compa-
nies, with virtually no cost to the shareholder proponents.184 In order to minimize such costs—or
at least to provide some assurance that the proposal warrants such costs, Chief Justice Strine
suggests that proponents of economic proposals be required pay a filing fee and own a substan-
tial equity stake in the company and that companies be permitted to exclude proposals that have
been submitted to a vote in the past and failed to receive a minimum level of shareholder sup-
port.185 In his keynote address at the Tulane Corporate Law Institute, then-SEC Commissioner
Daniel Gallagher expressed similar concerns about Rule 14a-8 and likewise suggested increasing
the ownership requirement and lengthening the holding period for bringing shareholder pro-
posals, banning or limiting “proposal by proxy” (where a person with no shares acts on behalf of
another holder), more carefully policing the subject matter of proposals and raising the voting
thresholds required for proposals to be resubmitted after receiving low shareholder support in
prior years.186

179
SharkRepellent.
180
Spencer Stuart, Spencer Stuart Board Index 2015, at 12.
181
SharkRepellent. Includes all shareholder proposals received for inclusion at an annual meeting for companies in
the S&P 500 index at the time the proposal was received, including non-U.S. companies.
182
Id. Includes all shareholder proposals received for inclusion at an annual meeting for companies in the Russell
3000 index at the time the proposal was received, including non-U.S. companies.
183
Id. Includes all shareholder proposals received for inclusion at an annual meeting for companies in the S&P 500
index at the time the proposal was received, including non-U.S. companies.
184
Leo E. Strine, Jr., Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological
Mythologists of Corporate Law, 114 Colum. L. Rev. 449, 475 (2014).
185
Id. at 499.
186
Daniel M. Gallagher, Comm’r, SEC, Remarks at the 26th Annual Corporate Law Institute, Tulane University
Law School: Federal Preemption of State Corporate Governance (Mar. 27, 2014), available at
http://www.sec.gov/News/Speech/Detail/Speech/1370541315952#.VQfYE9J0xMw.

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E. Major Topics for Shareholder Proposals

1. Classified Boards

Given the large number of companies that have already eliminated their classified boards,
it is not surprising that declassification proposals are at a five-year low. Twenty-seven proposals
were submitted to S&P 500 and Russell 3000 companies in 2015, compared to 23 in 2014, 53 in
2013, 103 in 2012 and 87 in 2011.187

Over the past few years, shareholder activist groups, in particular, the Harvard Law
School’s Shareholder Rights Project, have played a significant role in the adoption of declassifi-
cation proposals. During 2012, 2013 and first half of 2014, this Harvard clinical program, sub-
mitted declassification proposals to 129 companies, 121 of which agreed to move toward annual
elections after engaging with the project.188 We believe that it is extremely regrettable that
shareholder activists and some academics have succeeded in largely eliminating classified boards
from large-cap American companies. A classified board combined with a shareholder rights plan
is the best hope a company has of fending off an opportunistic hostile takeover attempt. Value-
creating defenses, such as that of Airgas against the predations of Air Products a few years ago,
would not have been possible had Airgas not had a staggered board. All that said, one must be
realistic and accept that a company facing a precatory proposal to eliminate its staggered board
has little hope of convincing shareholders to vote against it. Once the shareholders have ap-
proved the resolution calling for its repeal, unless the board is willing to accept a high withhold
vote and a measure of shareholder opprobrium, the question is whether to eliminate the classifi-
cation at one time or to roll it off over a three-year period, as many companies have done.

2. Separation of Chairman and CEO Positions

S&P 500 companies received the most proposals to separate the Chairman and CEO roles
in 2015 than in any other year since 2005. Sixty-four proposals to separate the Chairman and
CEO roles were submitted to S&P 500 companies in 2015, compared to 57 in 2014, 62 in 2013,
58 in 2012, and 26 in 2005. And 54 (roughly 84 percent) went to a vote; the figures for Russell
3000 companies are 76 proposals submitted and 65 voted on (roughly 86 percent). 189 Despite
this uptick in proposals, it is possible that the successful model of independent lead or presiding
directors has dampened the enthusiasm for separation. Support for these proposals was striking-
ly low: for S&P 500 companies, only two proposals that went to a vote received majority sup-
port, and the average level of support was only 30 percent, consistent with 2014 where three pro-
posals received majority support and the average level of support was 31 percent. 190 It must be
recognized, however, that many institutional investors support independent board leadership as a

187
SharkRepellent. Includes all board declassification shareholder proposals received for inclusion at an annual or
special meeting for U.S. companies in the S&P 500 or Russell 3000 index at the time the proposal was received.
188
Matteo Tonello & Melissa Aguilar, The Conference Board, Proxy Voting Analytics (2010-2014), at 160, availa-
ble at http://www.conference-board.org/publications/publicationdetail.cfm?publicationid=2857.
189
SharkRepellent. Includes all shareholder proposals for separation of CEO and Chairman positions received for
inclusion at an annual or special meeting for U.S. companies in the S&P 500 or Russell 3000 index, as applicable, at
the time the proposal was received.
190
Id.

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general rule, and a strong case will have to be made to retain a combined Chairman/CEO role if
an effort is made to split those positions.

3. Proxy Access

Although proxy access became available to U.S. corporations after the SEC amended
Rule 14a-8 in 2011, the high volume of proxy access proposals that was expected in the wake of
the change did not materialize immediately. Only 22 shareholder proxy access proposals were
received by companies in 2012. Nineteen were received in 2013 and 24 were received in
2014.191 However, as previously noted in Section III.K, proxy access was the most common sin-
gle issue for shareholder proposals in 2015: companies received approximately 105 proxy ac-
cess shareholder proposals in 2015—75 of which were submitted by the New York City Comp-
troller’s “2015 Boardroom Accountability Project”—and 13 management sponsored proxy ac-
cess proposals were put forward.192 One hundred and three of the 118 total proxy access pro-
posals were voted on in 2015 (87 percent) and 60 percent of voted-on proposals passed, receiv-
ing, on average, 55.2 percent support.193 The overwhelming majority of passing proposals mod-
eled proxy access on the terms of the SEC’s now-vacated Rule 14a-11: shareholders holding at
least three percent of a company’s outstanding shares continuously for at least three years can
nominate directors for up to 25 percent of the board.194 Additionally, 63 companies adopted
proxy access bylaws in 2015 without prompting from a shareholder proposal at their 2014 or
2015 annual meetings.195 Some portion of these preemptive bylaw adoptions may have been
spurred by public announcements supporting proxy access from many of the United States’ larg-
est asset managers.196

Management responses to the receipt of a shareholder proxy access proposal varied in

2015. The majority of companies—69 percent—recommended against the shareholder proposal
without proposing or adopting a different proxy access bylaw. However, this reaction was large-
ly unsuccessful: 60 percent of these shareholder proposals still passed, averaging 55 percent

191
SharkRepellent.
192
Id.
193
Id. Percent support figure is calculated based on the number of votes cast, including abstentions.
194
Ernst & Young LLP, Four Takeaways from Proxy Season 2015 (June 2015), available at
http://www.ey.com/GL/en/Issues/Governance-and-reporting/EY-four-takeaways-from-proxy-season-2015.
195
SharkRepellent.
196
In early 2015, both Blackrock and Vanguard made statements generally in favor of proxy access. Blackrock
evaluates proxy access proposals on a case-by-case basis by generally has been supportive of standard “3-3-25%”
proposals. BlackRock, Proxy Voting Guidelines for U.S. Securities 4 (Feb. 2015), available at
http://www.blackrock.com/corporate/en-us/literature/fact-sheet/blk-responsible-investment-guidelines-us.pdf;
Proxy Access: The 2015 Proxy Season and Beyond, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 1 (June 23,
2015). Vanguard is supportive of proxy access bylaws but believes “that proxy access provisions should be appro-
priately limited to avoid abuse” by short term investors and generally believes that shareholders holding three per-
cent of a company’s outstanding shares for at least three years should be able to nominate directors for up to 20 per-
cent of the board. Vanguard, Vanguard’s Proxy Voting Guidelines (2016), available at
https://about.vanguard.com/vanguard-proxy-voting/voting-guidelines/. Similarly, CalPERS and CalSTRS are gen-
erally supportive of proxy access bylaws. See, CalPERS, Global Principles of Accountable Corporate Governance
15 (Rev. March 16, 2015), available at https://www.calpers.ca.gov/docs/forms-publications/global-principles-
corporate-governance.pdf; CalSTRS, Corporate Governance Principles 13 (Apr. 3, 2015), available at
http://www.calstrs.com/sites/main/files/file-attachments/corporate_governance_principles_1.pdf.

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support.197 Fourteen percent of companies embraced shareholder proposals by adopting a bylaw,
supporting the shareholder proposal or agreeing to submit a management proposal on the top-
ic.198 Seven percent of boards unilaterally adopted a proxy access bylaw with more restrictive
terms than the shareholder proposals—generally, five percent ownership for at least three years
and restricting group nominations to either 10 or 20 shareholders. In this segment, shareholder
proposals that went to a vote averaged 48 percent support.199 Finally, another seven percent of
boards submitted a more restrictive counter proposal; however, average support for shareholder
proposals in this segment exceeded average support for management proposals, 55 percent com-
pare to 42 percent.200

However, approval of a shareholder proxy access proposal at the annual meeting is not
the end of the story for boards. While shareholder proposals tend to be quite short and include
only headline terms—i.e., three percent continuous holders for three years can nominate up to 25
percent of directors—actual proxy access bylaws are quite long and extremely nuanced. For ex-
ample, proxy access bylaws generally contain, among other things, extensive provisions: (i) de-
fining beneficial ownership (sometimes limiting ownership to net long positions), (ii) dictating
how many shareholders can join together as a group for purposes of meeting the required owner-
ship threshold, (iii) limiting proxy access proposals in successive years to prevent directors nom-
inated by proxy access from comprising a majority of the board and (iv) defining proxy-access-
nominated director qualifications (e.g., prohibitions on golden leashes). Consequently, the extent
of additional provisions that boards may add to shareholder-approved proxy access proposals
without being deemed “unresponsive” by ISS and other proxy advisory services is yet to be de-
termined.201 Of the 55 companies that had shareholder proxy access proposals pass in 2015, 19
are yet to adopt a proxy access bylaw as of March 1, 2016.202

Going forward, whether a 2016 shareholder proxy access proposal will pass remains a
highly fact-specific question and likely will turn on, among other things, the terms of the pro-
posal, the company’s recent performance, the company’s corporate governance profile and, most
importantly, the company’s engagement with its shareholders. However, 2015’s proxy season
did show that proxy access proposals are widely supported and that boards should be prepared to
deal with receipt of a proxy access proposal. Like other governance issues, there is no one-size
fits all approach. Boards should consider their existing governance profile, unique shareholder
base and long-term strategy in formulating a response to a shareholder proxy access proposal or
in consideration of unilateral adoption of a proxy access bylaw. Further, while proxy access may
nominally increase a company’s vulnerability to an election contest, the reality is that, in most
cases, the incremental increase in risk will be negligible. First, traditional activists are unlikely

197
Ernst & Young LLP, Four Takeaways from Proxy Season 2015 (June 2015), available at
http://www.ey.com/GL/en/Issues/Governance-and-reporting/EY-four-takeaways-from-proxy-season-2015.
198
Id.
199
Id.
200
Id. The remaining three percent of proposals were omitted or withdrawn.
201
ISS will recommend on a case-by-case basis for directors if the board fails to act on a shareholder proposal that
received the support of a majority of the votes cast in the previous year, considering, among other things, the out-
reach efforts of the board in wake of the vote, the rationale provided in the proxy statement for the level of imple-
mentation, the subject matter of the proposal, the level of past shareholder support for the proposal and the continua-
tion of the underlying issue as a voting item on the ballot. ISS, 2016 Summary Proxy Voting Guidelines 15 (Rev.
Feb 23, 2016).
202
SharkRepellent.

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to use proxy access in a campaign for board control and the circumstances under which these
well-funded activists would seek to include a proxy access nomination are the same circum-
stances under which they would launch a traditional proxy fight—the marginal cost savings of
nomination through proxy access is unlikely to move this line in a meaningful way. Second,
when ownership amount and duration thresholds are properly set with an eye towards avoiding
abuse by investors who lack a meaningful long-term interest in the company, the shareholders
best positioned to make use of these bylaws are institutional investors. Consequently, boards and
management with a proven track record of delivering value should have little more to fear if they
have developed a thoughtful long-term plan and clearly articulated it to shareholders by engaging
in constructive dialogue.

4. Succession Planning

In 2009, the SEC reversed its position that shareholder proposals relating to succession
planning were excludable on the grounds that succession planning related to the company’s ordi-
nary operations. Since this reversal, a number of shareholder proposals have been submitted
seeking to require development or disclosure of a company’s succession plan. These proposals
typically urge a company to adopt detailed policies regarding succession planning, often in their
corporate governance guidelines, and to make certain disclosures relating to succession planning.
For example, in 2012, the AFL-CIO filed a proposal calling for Berkshire Hathaway to adopt a
succession planning policy that would include developing criteria for the CEO, identifying inter-
nal candidates, and annually reviewing and publishing a report on the plan. The proposal re-
ceived less than five percent of votes cast. No succession planning proposals were received by
S&P 500 companies during the 2015 proxy season.203

5. Executive Compensation

The advent of say-on-pay in 2011 reduced, but did not eliminate, compensation-based
shareholder proposals. A total of 92 compensation-related shareholder proposals were brought
in 2015 at S&P 500 companies down from 95 in 2014 and 133 in 2013.204 Of the proposals re-
ceived, 34 targeted “golden parachutes” and sought to limit accelerated vesting of equity awards
averaging support of 32.4 percent and 22 sought adoption or disclosure of clawback policies av-
eraging support of 30.3 percent.205 Only one compensation related proposal passed in 2015.206

6. Exclusive Forum Bylaws

Recent history suggests that, despite activists’ best efforts to the contrary, shareholders
approve of exclusive forum provisions. In 2015, 25 companies sought ratification of an existing
exclusive forum bylaw or put adoption of such a provision to shareholder vote and only six pro-

203
SharkRepellent.
204
Id. Includes all management and director compensation related proposals other than say-on-pay proposals re-
ceived for inclusion at an annual or special meeting for companies in the S&P 500 at the time the proposal was re-
ceived.
205
GDC Shareholder Proposal Developments During the 2015 Proxy Season at 5.
206
SharkRepellent. Includes all shareholder proposals related to management and director compensation other than
say-on-pay proposals received for inclusion at an annual or special meeting for companies in the S&P 500 at the
time the proposal was received.

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posals failed to pass despite ISS recommending “against” nearly all of the proposals. 207 Further,
prior to 2015, only three management proposals to adopt an exclusive forum provision have
failed—one in 2011 and two in 2012.208 Similarly, during the 2012 proxy season, the two share-
holder proposals to repeal exclusive forum bylaws that were brought to a vote were rejected, re-
ceiving less than 40 percent support, notwithstanding ISS’s recommendation for repeal in each
case.

7. Social and Environmental Issues

Over 40 percent of all shareholder proposals in the 2015 proxy season were focused on
social and environmental issues, representing the largest category of shareholder proposals sub-
mitted. Despite their prevalence, historically, average support for these proposals remains quite
low on average (approximately 21 percent), although shareholder support varies widely by the
proposal topic. Proposals receiving greater levels of shareholder support included those relating
to political spending and lobbying, corporate sustainability and climate-change-related reporting
and equal opportunity employment policies.209 However, there may be an uptick in support for
these proposal in the 2016 proxy season, as institutional investors, such as BlackRock, have re-
cently advocated for social and environmental issues to be primary considerations in companies’
long-term plans for creating sustainable value and the U.S. Department of Labor has recently
confirmed that social and environmental issues are proper components of a pension plan’s fidu-
ciary’s primary analysis of the economic merits of competing investment choices.210

207
Shirley Wescott, 2015 Proxy Season Review, THE ADVISOR 8 (August 2015), available at
http://www.governanceprofessionals.org/HigherLogic/System/DownloadDocumentFile.ashx?DocumentFileKey=f5
62b4f3-d4ff-41f0-a90c-b92165d4ee68. In 2015, exclusive forum bylaw proposals failed to garner the requisite sup-
port at Avery Dennison, Bristol-Myers Squibb, Caleres, Commercial Vehicle Group, DSP and Noravax.
208
Id.
209
SharkRepellent. Includes all shareholder proposals related to environmental and social issues received for inclu-
sion at an annual or special meeting for companies in the S&P 500 at the time the proposal was received.
210
On February 2, 2016, Larry Fink, CEO of BlackRock, sent a letter to the Chief Executives of S&P 500 compa-
nies and others noting that “Generating sustainable returns over time requires a sharper focus not only on govern-
ance, but also on environmental and social factors facing companies today. These issues offer both risks and oppor-
tunities, but for too long, companies have no considered them core to their business . . . . Over the long-term, envi-
ronmental, social and governance issues have real and quantifiable financial impacts. . . . Blackrock has been under-
taking a multi-year effort to integrate [social and environmental] considerations into our investment process.” Letter
from Laurence D. Fink, Chairman and CEO of BlackRock Inc. (February 2, 2016) Letter, available at
http://www.businessinsider.com/blackrock-ceo-larry-fink-letter-to-sp-500-ceos-2016-2. In October of 2015, the
U.S. Department of Labor clarified that Social and Environmental issues “may have a direct relationship to the eco-
nomic value of the plan’s investment. In these instances, such issues are not merely collateral consideration or tie-
breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing
investment choices.” Economically Targeted Investments and Investment Strategies that Consider Environmental,
Social and Governance Factors, 29 C.F.R. pt. 2509 (Oct. 26, 2015), available at https://s3.amazonaws.com/public-
inspection.federalregister.gov/2015-27146.pdf.

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 V. Proxy Contests

In a proxy contest, a shareholder solicits the proxies of other shareholders to support a

matter up for shareholder vote in opposition to company management and the board. Most proxy
fights are over the election of directors, but a dissident could also be contesting other issues, such
as governance changes or a precatory proposal to sell or break up the company. Proxy fights al-
so often accompany hostile takeover bids, as the raider needs to replace the board in order to
eliminate the shareholder rights plan, or poison pill, to complete the acquisition. A proxy fight
that is part of a takeover bid is not typically handled by the nominating and corporate governance
committee, but by the full board. The nominating and corporate governance committee may,
however, play a significant role in a stand-alone proxy fight (such as considering the qualifica-
tions of the dissident’s candidates so that they can make a recommendation to the full board).

Unlike a shareholder proposal pursuant to Rule 14a-8 promulgated under the Exchange
Act—in which the proponent seeks to include a proposal in the company’s proxy statement—in a
proxy contest, the dissident files its own separate proxy statement. Because the aim of a proxy
contest is typically to replace a company’s leadership and fundamentally alter the company’s di-
rection, the stakes are very high. A dissident may nominate a full slate, in which it proposes a
candidate for each board seat, or a partial slate (a “short slate”), in which it nominates fewer can-
didates than there are available board seats, often stopping short of seeking to take control of the
board. A dissident may run a partial slate because it has concluded that it could not garner sup-
port to replace the entire board or seize control, but may be able to elect a minority of directors to
act as a catalyst for change in the boardroom.

With the recent increase in adoption of “proxy access” bylaws, over the next few years
trends should begin to emerge giving companies insight into who will make use of these bylaws
and for what purposes. It is not expected that well-capitalized activists that are strongly incentiv-
ized to place their candidates on a board will rely on proxy access instead of their own proxy ma-
terials. Proxy access is more likely to be used by smaller activist funds and corporate govern-
ance activists, as well as special interest groups (such as unions), that do not want to invest in a
proxy contest. Proxy access may also be utilized by large institutional shareholders, although
they already have (and have had for some time) the substantial ability to influence the board
composition of their portfolio companies by direct engagement. Even where all a company is
facing is a slate of proxy access candidates, and not a full-fledged counter solicitation, it is likely
that companies will in many cases still see that as a “proxy fight” that threatens the corporation
and will respond accordingly. Even if a company ultimately prevails in the proxy contest, it
could suffer a high cost in terms of distraction and reputational damage (which some activists
seek to exploit).

The number of proxy contests at S&P 500 and Russell 3000 companies modestly de-
creased in 2015, to 64 from 66 in 2014.211 Notably, the trend of activists targeting large compa-
nies continued in 2015: 24 of the 64 targeted companies had market capitalizations of over $1

211
SharkRepellent. Numbers include all proxy contests (not just those for board seats) at S&P 500 and Russell
3000 companies for each year.

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billion, consistent with 27 in 2014 and 23 in 2013.212 This indicates that even large companies
once considered generally immune from activist investors are becoming targets. Interestingly,
however, activist success rates have been dropping since 2013. In 2015, activists were success-
ful in proxy contests or agreed to favorable settlements at S&P 500 and Russell 3000 companies
53 percent of the time compared to 64 percent in 2014 and 69 percent in 2013.213

Although they play an important role in corporate governance and are in some cases justi-
fied, proxy contests are expensive and distracting. All companies should have state-of-the-art
advance notice bylaws to limit their time of vulnerability and improve predictability. (See Sec-
tion III.D for a discussion on advance notice bylaws.) In addition to establishing the time period
in which a shareholder may submit nominations or other business, the bylaws may also specify
reasonable qualification requirements and solicit the disclosure of important information (such as
information about potential conflicts) in a director nomination questionnaire.

Depending on the issue at stake, a proxy fight may well command the attention of the
board and the highest echelons of management. It is most important that a company facing a
proxy fight have a qualified and experienced team of advisors, including lawyers, bankers, public
relations and investor relations professionals and proxy solicitors. Proxy fights involve many
strategic decisions in a fast-changing environment. They can also be emotionally draining, given
the high stakes and the fact that some shareholder activists specialize in personal attacks. A
company faced with a proxy contest may wish to consider settling prior to the actual vote. A set-
tlement may require considerable concessions from both the company and proponent but may
also offer a better alternative to pursuing the fight all the way to the vote.

There are many negotiable elements that may be part of a settlement. A company may
agree to expand its board and to support some or all of the proponent’s nominees for election at
the annual meeting or to increase the number of independent board members. A proponent who
is running a slate after having expressed the desire for economic changes may agree to withdraw
the slate in exchange for the implementation of these economic changes (or a promise to consid-
er them). A company in turn may require that the proponent agree to a “standstill” provision that
prohibits the proponent from engaging in proxy contests, submitting proposals or proposing var-
ious transactions, such as additional stock purchases or tender offers, for a specified period of
time. In evaluating whether to settle or fight in a given proxy contest, a company may consider
the actual costs and distractions of conducting a protracted contest against the likelihood of suc-
cess, as well as the ability of the existing members of a company’s management and directors to
productively engage with the dissident’s proposed nominees. A company may also evaluate the
likely terms or parameters of a potential settlement and the impact on the company’s ongoing
business in engaging in an extended fight.

212
Id. Numbers include all proxy contests (not just those for board seats) at companies with a market capitalizations
greater than $1 billion for each year.
213
Id. The numerator includes the sum of (i) all successful proxy contests and (ii) all proxy contests in which an
activist agreed to a favorable settlement (not just those for board seats) at S&P 500 and Russel 3000 companies for
each year.

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 VI. Shareholder Engagement

Among the many changes in the corporate governance landscape seen in recent years,
one of the most fundamental is companies’, and particularly directors’, relations with their
shareholders. In addition to the other escalating demands of board service, directors are increas-
ingly called upon—and shareholders increasingly expect directors—to meet with shareholders on
corporate governance and other matters. One major impetus for this increased shareholder out-
reach was the enactment of mandatory say-on-pay voting. A recent survey by Pricewaterhouse-
Coopers found that 69 percent of boards had direct communication with institutional investors in
2015, compared to 66 percent in 2014.214 The same study also found an increased willingness to
engage with institutional investors on say-on-pay issues—77 percent of boards felt that share-
holder engagement on executive compensation was appropriate compared to 45 percent in 2013.
Two-thirds of directors also stated that it is appropriate for companies to engage with sharehold-
ers on risk oversight issues, compared with 48 percent in 2013.215 However, this trend has been
increasing over many years, as institutionalization of share ownership has increased. Today, re-
tail shareholders account for a minority of the float of most public companies.216 The majority of
the company stock is in the hands of institutional investors, who are themselves intermediaries
representing the interests of the ultimate beneficial owners.

The SEC requires a company to disclose whether it has procedures for shareholders to
communicate with the board of directors. If so, the company must describe how these communi-
cations may be sent to the board. If not, the company must disclose that it does not have such a
policy and explain why the board believes it is appropriate for the company not to have such a
process.217 Companies are increasingly using their public filings as an opportunity to highlight
their engagement with shareholders. A survey by Ernst & Young found that the percentage of
S&P 500 companies disclosing these engagement efforts increased to over 56 percent in 2015
from only six percent in 2010.218 Of companies making such disclosure, 46 percent disclose
changes in practices or disclosure as a result of engagement and 18 percent disclose when board
members are directly involved in engagement efforts.219

While a director’s primary focus must remain on partnering with and overseeing man-
agement to enhance the long-term value of the company, the board must adjust to this new cor-
porate governance landscape and be sensitive to shareholder demands. Shareholder concerns
should be listened to and addressed in a constructive manner, and the nominating and corporate
governance committee should ensure that the company maintains a shareholder relations pro-
gram that clearly articulates the reasons for the company’s strategies and engenders support from
the company’s major shareholders. Ordinarily, management should serve as the primary point of
214
PricewaterhouseCoopers, 2015 Proxy Season Wrap-Up 2 (Aug. 2015), https://www.pwc.com/us/en/corporate-
governance/publications/assets/pwc-proxy-pulse-third-edition-august-2015.pdf.
215
Id. at 7.
216
Further, retail shareholders rarely vote. During the 2015 proxy season, retail shareholders voted only 28 percent
of the shares they owned. Id. at 2.
217
Item 407(f) of Regulation S-K. 17 C.F.R. 229.407(f).
218
Ernst & Young LLP, Four Key takeaways from Proxy Season 2015 2 (June 2015),
http://www.ey.com/Publication/vwLUAssets/EY-four-takeaways-from-proxy-season-2015/$File/EY-four-
takeaways-from-proxy-season-2015.pdf.
219
Id.

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contact for shareholder outreach. However, the nominating and corporate governance committee
may sometimes find it appropriate and beneficial for this outreach to include direct communica-
tion between directors and shareholders. In the event of such communication, management and
the board should take care to coordinate their messages to avoid causing confusion among inves-
tors. The board and management should work out disagreements internally, and the company
should speak to shareholders with a unified voice.

The importance of effective shareholder outreach has been amply demonstrated in recent
proxy seasons. Most notably, DuPont, the largest corporation to ever engage in a proxy fight,
defeated Nelson Peltz’s campaign for four board seats even after ISS and Glass Lewis endorsed
parts of the dissident slate. By highlighting it proven track record of value creation, clearly
communicating its long-term plan to institutional investors—including BlackRock, Vanguard
and State Street who all voted for the company—and noting the short-term focused, value de-
stroying aspects of Peltz’s plan to split the company in two (e.g., it would have resulted in a loss
of DuPont credit rating), DuPont convinced its shareholder base to stand by the board and rebuff
Peltz’s activist strategy.220 Additionally, retail shareholders—representing approximately 30
percent of DuPont’s shareholder base—played a significant role in this proxy contest. Further,
shareholder engagement was critical in obtaining shareholder ratification at Bank of America’s
2015 annual meeting of its unilateral bylaw change to permit Brian Moynihan to serve as both
chief executive and chairman of the company.221

Additionally, there has been an increasing trend of firms disclosing both their shareholder
engagement efforts and changes resulting from those efforts in their annual proxy statement. In
2015, a number of companies, including PepsiCo, The Coca-Cola Company, General Electric,
Intel Corporation, Microsoft Corporation and Pfizer, Inc., made detailed disclosures in their
proxy statements about reaching out to shareholders on corporate matters. For example, after
receiving “valuable feedback from shareholders and other stakeholders,” PepsiCo decided to,
among other changes, amend its corporate governance guidelines and committee charters to
specify duties regarding management succession planning and adopt a new 100 percent perfor-
mance-based long-term incentive plan. 222 General Electric determined to, “after considering
feedback received from investors,” among other things, implement proxy access and increase the
Board’s oversight of corporate political spending with the Governance and Public Affairs Com-
mittee of the board approving an annual budget.223 Pfizer reported engaging its institutional
shareholders both within and outside the U.S. representing approximately 40 percent of its out-
standing share capital on compensation, the board’s oversight of cybersecurity risks, the ability

220
See, Ronald Orol, Why DuPont Beat Nelson Peltz in the Biggest Proxy Fight in Years, THESTREET.COM (May
20, 2015), http://www.thestreet.com/story/13158047/1/why-dupont-beat-nelson-peltz-in-the-biggest-proxy-fight-in-
years.html.
221
See, Christina Rexrode, Bank of America’s Brian Moynihan Survives Chairman-CEO Vote, THE WALL ST. J.
(Sep. 22, 2015), http://www.wsj.com/articles/bofas-moynihan-survives-chairman-ceo-vote-1442931646?cb=
logged0. 4272247084646549.
222
PepsiCo., Definitive Proxy Statement (Schedule 14A) at 18 (Mar. 25, 2015), available at
https://apps.intelligize.com/SECFilings?key=9h3qNqOHdjdGxzt74s4CyQ==#:Home-2016-03-09-10-32-46.
223
General Electric Co., Definitive Proxy Statement (Schedule 14A) at 13, available at http://www.ge.com /ar2014/
assets/pdf/GE_2015_Proxy_Statement.pdf.

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of shareholders to act by written consent, proxy access and board oversight over political spend-
ing.224

The impact of shareholder engagement was also seen in the say-on-pay context. George-
son reported that almost all of the 39 companies that successfully passed their say-on-pay vote in
2013 after failing to do so in 2012 disclosed a shareholder outreach effort in their 2013 proxy
statements, and many described the number of top shareholders that they contacted and/or the
percentage of shareholdings that were covered in their outreach efforts.225 A study by The Con-
ference Board noted that “companies that were in the 70-percent-or-less category in 2012 were
rewarded for their subsequent efforts to improve investor relations with an increase in 2013 in
average shareholder support of nearly 16 percentage points.”226 However, for 2014, The Confer-
ence Board observed that “[t]here is a significant year-over-year turnover in failed votes . . . and
all the companies that failed their say-on-pay votes in 2014 had successful votes in 2013, in most
cases by wide margins,” and that consequently, “companies cannot lower their guard when it
comes to compensation oversight and need to ensure ongoing transparency.”227

Effective shareholder engagement is particularly important when the company finds itself
under attack from activist investors or facing a hostile takeover bid or other corporate crisis. In
an activist situation, including one culminating in a proxy fight, well-established relationships
with large shareholders can prove outcome determinative. These relationships should be culti-
vated on a continual basis as part of the company’s advance preparedness for an activist situa-
tion. A board that begins a dialogue with shareholders only when it is under attack puts itself at
a significant disadvantage.

Constructive discussions with the activist and other shareholders may allow the board to
reach a compromise resulting in the withdrawal of a shareholder proposal. Indeed, an Ernst &
Young survey found that as of April 2015, 17 percent of shareholder proposals had been with-
drawn from 2015 meetings, consistent with 18 percent for the same period in 2014. Further, 70
percent of these withdrawn proposals were the result of constructive dialogue between the com-
pany and its shareholders, sometimes coupled with actions by the company. 228 Even if an ac-
commodation is not reached, good-faith discussions with the activist will strengthen the compa-
ny’s position with respect to other shareholders and proxy advisory firms. This can be particu-
larly valuable if the company solicits other shareholders and proxy advisory firms to vote against
the proponent’s proposal.

224
Pfizer, Inc., Definitive Proxy Statement (Schedule 14A) (Mar. 12, 2015), available at
http://www.pfizer.com/system/files/presentation/ProxyStatement2015.pdf.
225
See Georgeson Report, Facts Behind 2013 “Turnaround” Success for Say on Pay Votes 4 (Aug. 28, 2013),
available at http//www.georgeson.com/us/resource/Pages/sayonpay.aspx.
226
Melissa Aguilar, et al., The Conference Board, Proxy Voting Analytics (2009-2013), at 10 (Sept. 2014), availa-
ble at http://www.conferenceboard.org/proxy2013.
227
Melissa Aguilar & Matteo Tonello, The Conference Board, Proxy Voting Analytics (2010-2014) Executive Sum-
mary 13, available at http://www.conference-board.org/competencies/publicationdetail.cfm?publicationid
=2828&competencyID=3.
228
Ernst 7 Young, 2015 Shareholder Proposal Landscape 1 (April 2015),
http://www.ey.com/Publication/vwLUAssets/EY-shareholder-proposal-landscape/$FILE/EY-shareholder-proposal-
landscape.pdf.

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 Although the need for shareholder engagement is felt most acutely during a proxy fight or
in response to a specific crisis, the nominating and corporate governance committee must recog-
nize that, in this new corporate governance landscape, shareholder outreach is best seen as a reg-
ular, ongoing initiative. As part of this ongoing initiative, the nominating and corporate govern-
ance committee should track the composition of the company’s shareholders and stay abreast of
any reports on the company by proxy advisory services. Majority voting standards, changes to
stock exchange policies regarding discretionary broker votes, board declassification and other
changes to best practices have reduced the predictability in voting outcomes. In this environ-
ment, strong shareholder relations and a robust explanation of the company’s corporate govern-
ance policies are perhaps more important than ever before. Dialogue with shareholders can help
to increase the board’s credibility, enhance the transparency of governance decisions, preempt
shareholder resolutions and proxy fights and otherwise navigate potentially contentious issues
with shareholders.

In 2014 the chief executive of one of the world’s largest institutional investors, Van-
guard, suggested, in letters sent to many companies that company boards should create “share-
holder liaison committees” to provide investors with a direct line of communication to the
board.229 The Vanguard suggestion offers an intriguing alternative for meaningful engagement
between directors and shareholders, but might be more appropriately and flexibly effectuated
through a board subcommittee, perhaps a subcommittee of the nominating and governance
committee. Such a subcommittee need not have set membership with fixed terms but could in-
stead remain flexible. For example, where shareholders voice concerns about compensation mat-
ters, the board could add compensation committee members to the subcommittee. If sharehold-
ers later begin a dialogue about environmental matters, directors with that expertise could be
brought on. In this way, a board of directors can ensure that, at any given time, the subcommit-
tee consists of those directors most readily equipped to engage on matters of actual shareholder
concern. Of course, in many instances, shareholder engagement may be most efficient and ap-
propriate between shareholders and members of a company’s management or investors-relations
team, without the need to involve directors each and every time a shareholder wishes to express
its view.

229
Stephen Foley & David Oakley, Vanguard Calls for Boardrooms Shake-up, Fin. Times (Dec. 4, 2014),
http://www.ft.com/cms/s/0/543c3b72-7b4c-11e4-87d4-00144feabdc0.html#axzz3UJIeYq3d.

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 _________________________

PART TWO:

THE “NOMINATING” FUNCTION OF THE NOMINATING AND

CORPORATE GOVERNANCE COMMITTEE

_________________________
 VII. Building an Effective Board

Traditionally, identification and recommendation of board candidates constituted the

primary roles of the nominating committee. Although, as discussed, this committee now has as-
sumed a much greater role in formulating appropriate governance mechanisms and policies, its
role in populating the board is still a core and vitally important function. Before the nominating
and corporate governance committee goes about the work of identifying individual director can-
didates or formulating specific corporate governance policies, it should first have a strong under-
standing of the role of the board of directors.

A. The Role and Responsibilities of the Board of Directors

1. The Dual Role of the Board

The board of directors serves as both a monitor and a partner of the management team it
selects to run the day-to-day affairs of the company. To be effective, a board must find the right
balance between its monitoring and advising functions; and between engaging in a “hands-on”
approach to oversight and giving management the latitude necessary to operate the business. To
properly oversee management, directors must maintain a thorough understanding of the company
by asking the right questions and cultivating dialogue, transparency and robust information-
sharing between the board and management. At the same time, the board must take care that this
oversight does not encroach into areas better reserved for the company’s management.

While boards have always played the dual role of monitor and partner, increased political
and regulatory pressure for enhanced risk management have combined with a shift towards a
more shareholder-centric model of corporate governance to tilt the balance. Specifically, many
companies have reacted to those changes by emphasizing more heavily the board’s monitoring
function at the expense of the board’s equally important advisory role. Although the board must
diligently oversee management and be prepared to step in when necessary, most often a company
is best served when directors and management work together to set and achieve the company’s
goals. So long as directors exercise their independent judgment, it is not only perfectly appropri-
ate for directors and management to develop relationships of mutual trust and friendship, it is
vital. Such relationships enable management to draw on the insights and judgment of directors
and facilitate the board’s oversight and partnership functions by fostering greater communica-
tion, thereby allowing the board to provide more meaningful input into key decisions. Indeed, if
a director does not trust and respect management, the director should reconsider whether she or
he is a good fit for the company, or, if enough other directors share this view, the board should
consider whether changes to the management team might be in order.

2. Tone at the Top

Setting the right tone at the top is one of the most critical functions of an effective board.
The board’s culture and priorities, if properly instilled and communicated, will ripple through the
company and its interactions with its various constituencies. The board should work with senior
management to cultivate a corporate culture of integrity, compliance and professionalism.
Transparency and communication are key to the board’s ability to set the right tone at the top.
Even the most involved boards will find that they are unable to micromanage conformance to the

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company’s standards. Rather, the board should focus on setting the right tone and ensuring that
monitoring programs are in place and regularly assessed. The company’s code of conduct
should not be a mere formality: The code must be an ethos that is ingrained in the company’s
strategy and operations. Trends among boards in recent years support this notion. Pricewater-
houseCoopers’ 2015 Annual Corporate Director Survey found the most common board action
taken to reduce fraud risk in 2015 was to hold discussions regarding tone at the top with 68 per-
cent of surveyed board reporting such discussions, up 22 percent from 2012.230

3. Risk Management

In addition to its many other corrosive effects, a failure to instill the right corporate cul-
ture creates the risk of serious reputational, regulatory or legal consequences. This has been un-
derscored in recent years by disasters such as the financial crisis and the BP oil spill, which have
resulted in tens of billions of dollars in liabilities and brought an unprecedentedly bright spotlight
on the board’s role in overseeing risk management. In 2009, the SEC amended its rules to re-
quire disclosure of the extent of the board’s role in risk oversight of the company. 231 Among
many other changes targeting risk management, Dodd-Frank requires each publicly traded bank
holding company with $10 billion or more in assets to establish a stand-alone, board-level risk
committee. While these crises and their backlash demonstrate the need for vigilant oversight,
they do not change the fundamental principle of corporate governance that the proper role of the
board in managing the company’s risk is one of oversight rather than direct implementation.
Through proper oversight and setting the right tone at the top, the board can ensure that the com-
pany has an appropriate risk profile and that its officers and employees view risk management
not as an impediment but as an important part of the company’s success. In fulfilling its over-
sight duty, the roles and responsibilities of different board committees in overseeing specific cat-
egories of risk should be reviewed to ensure that, taken as a whole, the board’s oversight func-
tion is coordinated and comprehensive.

Further, the board’s focus on risk management is a top governance priority of institution-
al investors. A 2014 survey found that approximately 70 percent of investors thought that risk
management should be a high priority area of short-term board focus232 and a 2015-2016 Nation-
al Association of Corporate Directors survey revealed that risk oversight was one of the top three
issues discussed with institutional investors at large cap companies.233 Likely stemming from the
heightened shareholder focus on the topic—and of particular interest to nominating and govern-
ance committee members—nearly 80 percent of investors think that risk management expertise
is a critical and desirable attribute on boards, second only to financial expertise.234

230
PricewaterhouseCoopers, 2015 Annual Corporate Director Survey 32 (2015),
http://www.pwc.com/us/en/governance-insights-center/annual-corporate-directors-survey/assets/pwc-2015-annual-
corporate-directors-survey.pdf.
231
Item 407(h) of Regulation S-K. 17 C.F.R. 229.407(h).
232
PricewaterhouseCoopers, Investor Perspectives: How Investors are Shaping Boards Today. . . and into the Fu-
ture 8 (October 2014), http://www.pwc.com/us/en/governance-insights-center/publications/assets/pwc-investor-
survey-2014.pdf.
233
National Association of Corporate Directors, 2015-2016 NACD Public Company Governance Survey 13 (2015).
234
PricewaterhouseCoopers, Investor Perspectives: How Investors are Shaping Boards Today. . . and into the Fu-
ture 1 (October 2014), http://www.pwc.com/us/en/governance-insights-center/publications/assets/pwc-investor-
survey-2014.pdf.

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 Recently, regulators have focused on cybersecurity as an issue that companies must be
prepared to address. In March 2014, the SEC hosted a roundtable on cybersecurity topics and
the following month began to review the cybersecurity preparedness of dozens of registered bro-
ker-dealers and investment advisors.235 In June 2014, SEC commissioner Luis A. Aguilar
stressed that “the capital markets and their critical participants, including public companies, are
under a continuous and serious threat of cyber-attack, and this threat cannot be ignored.”236 Ac-
cording to Mr. Aguilar, effective board oversight of management’s efforts to address threats
from cyber-attacks “is critical to preventing and effectively responding to successful cyber-
attacks and, ultimately, to protecting companies and their consumers, as well as protecting inves-
tors and the integrity of the capital markets.”237 Certain highly publicized cybersecurity breach-
es, and the potentially serious reputational and other consequences of such breaches (notably in-
cluding those at Sony Corporation), have highlighted the need for board involvement in such
matters. As a result, boards have begun to become more engaged on the topic: in 2015, 66 per-
cent of boards discussed the company’s cyber risk disclosures, up from 38 percent in 2014.238
However, despite the increased focus, a recent survey found that only 14 percent of directors be-
lieve that their respective boards have a high level of understanding of the risks associated with
inadequate cybersecurity, and 43 percent of directors feel that the board does not receive enough
information from management regarding cybersecurity and IT risk.239

Boards should not assume that cybersecurity is too technical for meaningful director in-
put or that the issue is best left to a company’s IT function. Additionally, while the board should
be actively involved in overseeing and advising efforts to prevent cyber-attacks, the board should
also be actively involved in preparing for and putting into place a process for effectively manag-
ing the effects of any cyber-attack. A board must provide effective oversight over cybersecurity
through risk and crisis management by ensuring that cybersecurity is well integrated into enter-
prise risk management and that the company has in place systems that enable it to respond effec-
tively to cyber-attacks and cyber-breaches.240

4. Crisis Management

Closely related to its role in risk management, the board must also be prepared to meet
effectively any crisis that may confront the company. Examples of possible crises include an
235
See SEC, Office of Compliance Inspections and Examinations, National Exam Program Risk Alert, OCIE Cy-
bersecurity Initiative Vol. IV, Issue 2 (Apr. 15, 2014), available at http://www.sec.gov/ocie/announcemen
t/Cybersecurity+Risk+Alert++%2526+Appendix+-+4.15.14.pdf.
236
See Public Statement, Luis A. Aguilar, Comm’r, SEC, The Commission’s Role in Addressing the Growing
Cyber-Threat (Mar. 26, 2014), available at http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/
1370541287184#.VEUXBfldWvg.
237
Id.
238
PricewaterhouseCoopers, 2015 Annual Corporate Director Survey 43 (2015),
http://www.pwc.com/us/en/governance-insights-center/annual-corporate-directors-survey/assets/pwc-2015-annual-
corporate-directors-survey.pdf.
239
Additionally, 31 percent of directors reported being dissatisfied with the quality of information they receive from
management regarding cybersecurity risks facing their respective companies. National Association of Corporate
Directors, 2015-2016 Public Company Governance Survey 7 (2015), https://www.nacdonline.org/files/2015-
2016%20NACD%20Public%20Company%20Governance%20Survey%20Executive%20Summary.pdf.
240
For more detailed advice on board oversight of cybersecurity, see David A. Katz & Laura A. McIntosh, Corpo-
rate Governance Update: The Risky Business of Cybersecurity, N.Y. L.J. (Oct. 30, 2014), available at
http://www.newyorklawjournal.com/id=1202674985401?keywords=risky+business+of+cybersecurity&publication.

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unexpected departure of the CEO or other key members of management, rapid deterioration of
business conditions or liquidity, risk management or product failures, government investigations
and major disasters. Crises, almost by definition, are unexpected. That said, a board can prepare
itself by thoroughly understanding the company’s business and industry, with an eye towards
anticipating what challenges the company is most likely to face. 241 When a crisis does strike, the
CEO generally should lead the company’s response, with guidance and input from the board.
However, if the CEO has been compromised, the board must be ready to take a more active role
in navigating the company through the crisis.

B. Board Composition

The most important factors in determining the effectiveness of a board are the quality of
the people who serve as directors and their ability to work together. This is one reason that the
nominating and corporate governance committee’s role in identifying director nominees is so
critical to a company’s success. What is needed from directors is an emphasis on integrity, char-
acter, commitment, judgment, energy, competence and professionalism, and the right mix of in-
dustry savvy and financial expertise, objectivity and diversity of perspectives and business back-
grounds, among other qualities. Almost as crucial as the caliber of the directors as individuals is
how well they function as a group. Although a director’s qualifications may be discerned easily
from a resume or profile, the dynamics of a board can only be understood by those directors and
officers (and advisors) who actually participate in its meetings. A collegial board with mutual
trust and complementary skill sets can add value to the corporate enterprise that is greater than
the sum of its parts, while a balkanized board will usually be ineffective regardless of the quality
of its individual directors. Unfortunately, board culture and cohesiveness are not easily captured
and categorized on paper. The result is that such values are often underappreciated, especially in
this age of one-size-fits-all “best practices.”

The ever-increasing pressure from shareholder proxy advisory services, institutional in-
vestor groups, activist shareholders and other commentators for companies to conform to contin-
uously evolving and escalating standards for so-called “best practices” has made the task of as-
sembling a well-rounded board even more difficult in recent years. If proxy access becomes
widely implemented and actually used by shareholders, the process of designing and building a
balanced and effective board will become that much more complicated. One aspect of these
“best practice” standards involves an intense, arguably even excessive, focus on director inde-
pendence at the expense of other skills and qualifications. The combination of attributes, experi-
ences and personalities that constitute an effective board is intrinsically difficult, if not impossi-
ble, to boil down to bright-line checklists or off-the-shelf mandates. Undeniably, these man-
dates, oversimplified governance grades and “best practices” are increasingly difficult to resist.
Ultimately, however, directors serving on the nominating and corporate governance committee
must be prepared to explain to shareholders that it is more important to have directors and gov-
ernance policies that will best serve the company than to blindly conform to one-size-fits-all
mandates.

241
In 2015, 77 percent of surveyed directors reported that their board had actively discussed management’s plan to
respond to a major crisis and 62 percent of boards discussed testing the company’s crisis response plan. Pricewater-
houseCoopers, 2015 Annual Corporate Director Survey 31 (2015), http://www.pwc.com/us/en/governance-insights-
center/annual-corporate-directors-survey/assets/pwc-2015-annual-corporate-directors-survey.pdf.

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 1. Director Qualifications

The nominating and corporate governance committee’s search for nominees naturally be-
gins with an analysis of the qualities that the committee seeks in a candidate. This analysis
should consist of both an assessment of the skills and experiences possessed by current board
members and a vision of the ideal mix of director skills and experiences, given the company’s
circumstances. By comparing the skills and experiences already represented on the board with
the ideal complement of skills and experiences, the nominating and corporate governance com-
mittee will be well positioned to create a candidate profile and also to assess how well current
board members fit the company’s needs.

All directors should possess certain qualities, such as integrity, sound judgment and a
commitment to representing all shareholders. But the nominating and corporate governance
committee’s greatest challenge in composing a board is to find the right complement of abilities
and experiences among the directors that best serves the company. This requires a thorough un-
derstanding of the company, its business, its competitive landscape and its strategy. Attributes
and experiences typically sought by a nominating and corporate governance committee include
financial or risk assessment expertise, background in the company’s industry, familiarity with the
company, diversity, legal or regulatory compliance knowledge, valuable international or local
connections, experience in academia or government and service as an executive officer or direc-
tor of a public company.242 Among other sources of data, committee members can consider pre-
vious board and committee reviews and director self-evaluations as indicators of skills, experi-
ences and other traits that may be desired on the board.

Although it is more common today for the chief executive officer to be the only member
of management on the board, the nominating and corporate governance committee may consider
adding a second member to ensure that the board includes directors intimately familiar with the
company and to provide an additional source of direct input on the company’s operations to the
rest of the board. The nominating and corporate governance committee should continually eval-
uate the composition of the board to ensure that its combination of attributes fits the company’s
strategy and direction. For example, a company suddenly finding itself in financial or competi-
tive difficulties may seek to add a turnaround expert, while a company confronted with a scandal
or government investigation may benefit from additional expertise in compliance, government or
public relations. The importance of frequently reassessing the alignment of the board’s composi-
tion with the company’s needs is underscored by the remarkable pace of economic, technological
and regulatory changes in recent years.

242
A 2014 study found that shareholders believe financial expertise, risk management expertise, operational exper-
tise and industry expertise to be the most important attributes to have represented on a corporate board. Pricewater-
houseCoopers, Investor Perspectives: How Investors are Shaping Boards Today. . . and into the Future 1 (October
2014), http://www.pwc.com/us/en/governance-insights-center/publications/assets/pwc-investor-survey-2014.pdf.
However, a 2015 survey of directors found that industry specific experience, leadership experience and strategic
development know-how are the most desirable attributes for boards in evaluation of potential director candidates.
National Association of Corporate Directors, 2015-2016 NACD Public Company Governance Survey 26 (November
2014).

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 2. Skills Matrices

One increasingly popular tool for analyzing board composition against previously estab-
lished criteria is the skills matrix. A skills matrix is a boxed chart with one axis listing each di-
rector or nominee and the other axis listing the attributes that the nominating and corporate gov-
ernance committee desires to be represented on the board. These may include attributes that eve-
ry director should possess as well as attributes that should be represented by some subset of the
board. Examples of the latter include financial or risk assessment expertise, background in the
company’s industry, and legal or regulatory compliance knowledge.

A skills matrix can serve as a visual, straightforward way of understanding the strengths
of the board and identifying any areas in which it may need improvement. It may also assist the
nominating and corporate governance committee both in analyzing the areas in which current
directors could benefit from additional training or exposure and also in evaluating which new
candidate would best complement the board’s current composition. However, when using a
skills matrix, the nominating and corporate governance committee should be mindful of the less
tangible characteristics of directors, like individual personalities, that may not be easily repre-
sented in the matrix but are nonetheless crucial in achieving a healthy board dynamic. Because
the company’s need for particular attributes will change over time, it is also essential that the
nominating and corporate governance committee assess on an ongoing basis the mix of skills and
experiences that is desired and that is represented on the board.

A recent survey by Ernst & Young reported that nine percent of S&P 500 companies in-
cluded such a matrix in their 2015 proxy statements, up from six percent in 2014.243 Including a
skills matrix in the company’s proxy statement can be helpful in preempting or responding to
pressures for board refreshment and providing greater objectivity and transparency to the nomi-
nation process. Whether or not a nominating and corporate governance committee chooses to
utilize or disclose a skills matrix, the focus remains the same: the committee should identify
nominees who will best contribute to the formation of a well-rounded and effective board.

3. Diversity

The issue of boardroom diversity—particularly gender diversity—has become increasing-

ly prominent in recent years in the United States and abroad. Several European countries have
adopted mandatory quotas for gender diversity, and a pending proposal by the European Com-
mission would require large public companies to introduce a new director selection procedure
that gives priority to qualified female candidates unless at least 40 percent of the board’s non-
executive directors are already women.244 In the United States, the California state legislature
adopted a resolution in 2013 urging every California public company to have one to three wom-
en on its board by the end of 2016,245 and the state of Massachusetts approved a similar resolu-

243
Ernst & Young LLP, 2016 Proxy Statements, Section 4.1 (Nov. 2015), available at
http://www.ey.com/Publication/vwLUAssets/2016ProxyStatements_CC0427_11November2015/$FILE/2016ProxyS
tatements_CC0427_11November2015.pdf.
244
Press Release, European Commission, Women on Boards: Commission Proposes 40% Objective (Nov. 14,
2012), available at http://europa.eu/rapid/press-release_IP-12-1205_en.htm.
245
S. Con. Res. 62, 2013-14 Leg. Sess. (Cal. 2013) (“Legislature . . . urges that, within a three-year period from
January 2014 to December 2016, inclusive, every publicly held corporation in California with nine or more director

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tion in 2015.246 While the numerous legislative and non-legislative initiatives aimed at promot-
ing diversity are not producing change at the speed that their proponents may desire, progress is
being made: according to a recent survey, female representation among new directors has in-
creased to 31 percent in 2015 from 17 percent in 2009, and recruiting minorities and women is
among the top priorities identified by directors.247

Since 2010, the SEC has required public companies to disclose in their proxy statements
whether their nominating and corporate governance committee considers diversity in identifying
director nominees. If there is such a policy, the company must describe how this policy is im-
plemented, as well as how the nominating and corporate governance committee or the board as-
sesses the effectiveness of its policy.248 Thus, any company stating that diversity is taken into
account in identifying nominees may be requested to explain how the consideration of diversity
is implemented and assessed. The SEC does not define “diversity” and notes that some compa-
nies may conceptualize diversity expansively and others more narrowly. The vast majority of
large companies opts for the former expansive approach, considering diversity to encompass
characteristics ranging from age, race, gender and geographic origin, to diversity of viewpoints
and experience. A 2013 survey found that 97 percent of Fortune 100 companies disclosed that
they seek diversity broadly defined, while 57 percent specifically included gender and ethnicity
in their diversity considerations.249 Interestingly, activist investors don’t seem to share the view
of most large companies that diversity has a positive impact on the functioning of their boards.
Since 2011, five of the U.S.’s largest activist funds have sought over 170 board seats but nomi-
nated women only seven times.250 Of the 108 seats won by these activists, only five were filled
by women.251

Focusing on diversity can have a number of salutary effects, such as bringing a wider
range of experiences and perspectives to the board and ensuring that the nominating and corpo-
rate governance committee selects from the largest pool of potential candidates. However, di-
versity is only one of many components of an effective board, and the nominating and corporate
governance committee should be cautious not to adopt policies that will bind it to promoting di-
versity at the expense of other important components. Board policies must be carefully articulat-

seats have a minimum of three women on its board, every publicly held corporation in California with five to eight
director seats have a minimum of two women on its board, and every publicly held corporation in California with
fewer than five director seats have a minimum of one woman on its board.”), available at
http://www.leginfo.ca.gov/pub/13-14/bill/sen/sb_0051-0100/scr_62_bill_20130920_chaptered.pdf.
246
Res. S. 107, 189th Gen. Ct., 2015-16 Leg. Sess. (Mass. 2015). The resolution was unanimously adopted by both
the Massachusetts Senate on July 29, 2015 and the Massachusetts House of Representatives on October 21, 2015.
247
Spencer Stuart, Spencer Stuart Board Index 2015, at 8, available at
https://www.spencerstuart.com/~/media/pdf%20files/research%20and%20insight%20pdfs/ssbi-2015_110215-
web.pdf?la=en.
248
Item 407(c)(2)(vi) of Regulation S-K. 17 C.F.R. 229.407(c)(2). See also Proxy Disclosures Enhancements, Ex-
change Act Release Nos. 33-9089 and 34-61175 (Dec. 16, 2009), available at
http://www.sec.gov/rules/final/2009/33-9089.
249
Ernst & Young LLP, Key Developments of the 2013 Proxy Season 5 (June 2013), available at
http://www.ey.com/Publication/vwLUAssets/Key_developments_of_the_2013_proxy_season/$FILE/Key-
developments-of-the-2013-proxy-season.pdf.
250
Carol Hymowitz, Icahn, Loeb and Other Activists Overlook Women for Board Seats, BLOOMBERGBUISINEES
(March 8, 2016), http://www.bloomberg.com/news/articles/2016-03-08/activists-from-icahn-to-loeb-overlook-
women-for-board-positions.
251
Id.

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ed to avoid creating absolute standards that may be difficult or imprudent to meet at particular
times. For instance, boards of directors are ordinarily small enough that the departure of one or
two directors could significantly alter the demographic makeup of the board. An absolute com-
mitment to a certain level of diversity could restrict the nominating and corporate governance
committee to considering only those potential candidates with the same diversity characteristics
as the departing director. Determining board composition requires an individualized approach
that takes all factors into account, rather than a one-size-fits-all requirement. The nominating
and corporate governance committee should reexamine its diversity policies annually, perhaps in
conjunction with reviews of the company’s committee charters and governance guidelines.

4. Regulatory Requirements

As part of the process of forming the right mix of directors, the nominating and corporate
governance committee must be mindful of all applicable regulatory requirements. For example,
the SEC requires disclosure of any specific qualifications that a company’s nominating and cor-
porate governance committee believes must be met by a nominee and any specific qualities or
skills that the committee believes are necessary for one or more of the company’s directors to
possess.252 The SEC also requires disclosure of the specific experience, qualifications, attributes
or skills that led to the conclusion that the nominee should serve as a director in light of the com-
pany’s business and structure.253 Combined, these two disclosures enable shareholders to com-
pare a nominee’s qualifications to the company’s previously identified criteria. Additionally,
SEC rules require companies to disclose whether their audit committee includes at least one
qualified “financial expert” and, if the committee does not include at least one “financial expert,”
to provide an explanation.254

In addition to SEC requirements, the securities exchanges may have additional require-
ments. For instance, both the NYSE and Nasdaq require that all members of the audit committee
be financially literate,255 and provide additional rules for independent director oversight of exec-
utive compensation and the director nomination process.256 The NYSE requires its listed com-
panies to include in their corporate governance guidelines director qualification standards that, at
a minimum, reflect the NYSE’s independence requirements.257 These standards may address
other substantive qualification requirements, including limitations on the number of boards on
which a director may sit, and director tenure, retirement and succession standards.258 However,
neither listing requirements nor state or federal law impose substantive standards that must be
applied in the search for and selection of candidates, leaving the nominating and corporate gov-
ernance committee to exercise its independent judgment in setting candidate criteria. An exer-
cise of this judgment may include the decision not to adopt specific or rigid policies regarding
director qualifications. While a nominating and corporate governance committee should careful-
ly consider the qualifications and attributes it seeks in a candidate, the committee will often find
it advisable to maintain the flexibility to adjust to the company’s changing circumstances by

252
Item 407(c)(2)(v) of Regulation S-K. 17 C.F.R. 229.407(c)(2)(v).
253
Item 401(e)(1) of Regulation S-K. 17 C.F.R. 229.401(e)(1).
254
Item 407(d)(5) of Regulation S-K. 17 C.F.R. 229.407(d)(5).
255
Commentary to NYSE Listed Company Manual, Rule 303A.07(a); Nasdaq Listing Rule 5605(c)(2)(A)(iv).
256
Nasdaq Listing Rule 5601.
257
Commentary to NYSE Listed Company Manual, Rule 303A.09.
258
NYSE Listed Company Manual, Rule 303A.09.

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avoiding rigid qualification requirements. Such an approach allows the committee to nominate
the candidate it feels will best serve the company, even if the candidate does not fit neatly into a
previously identified category.

C. Director Independence

In assessing a director’s independence, the nominating and corporate governance com-

mittee should take into account a number of sources. Securities markets impose mandatory re-
quirements regarding director independence, whereas the SEC focuses on disclosure. State law,
while not legally requiring independent directors, will sometimes view with heightened scrutiny
the decisions of directors who are not independent. In addition to these regulatory considera-
tions, the nominating and corporate governance committee should also be mindful of the inde-
pendence views of proxy advisory services.

1. Securities Market Independence Requirements

Director independence is, by far, the most significant regulatory requirement that the
nominating and corporate governance committee must consider with respect to board composi-
tion. Subject to limited exceptions, both the NYSE and Nasdaq require boards to consist of a
majority of independent directors and to have adopted specific rules as to who can qualify as an
independent director. Both markets require the board of any listed company to make an affirma-
tive determination, which must be publicly disclosed (along with the basis for such determina-
tion), that each director designated as “independent” has no material relationship with the com-
pany that would impair his or her independence.259 Such disqualifying relationships can include
commercial, industrial, banking, consulting, legal, accounting, charitable and familial relation-
ships, among others. However, ownership of a significant amount of stock, or affiliation with a
major shareholder, should not, in and of itself, preclude a board from determining that an indi-
vidual is independent.260 As a general matter, these independence rules ask whether the director
is a non-management director free of any material business relationships with the company and
its management in the past three years (other than owning stock and serving as a director). Even
if a director satisfies each listed requirement, the board must still determine whether the director
could exercise independent judgment given all the facts and circumstances.

(a) The NYSE Per Se Bars to Independence

A director is not independent under the NYSE rules if:

 in the last three years, the director has been an employee or executive of
the listed company or an immediate family member261 has been an execu-
tive of the listed company;262

259
NYSE Listed Company Manual, Rule 303A.02(a)(i); Nasdaq Listing Rules 5605(a)(2) and IM-5605.
260
Commentary to NYSE Listed Company Manual, Rule 303A.02; Nasdaq Listing Rules IM-5605.
261
“Immediate family member” is defined to include a person’s spouse, parents, children, siblings, mothers- and
fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and anyone (other than domestic employees)
who share such person’s home. General Commentary to NYSE Listed Company Manual, Rule 303A.02(b).

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  in any 12-month period in the last three years, the director or an immediate
family member has received more than $120,000 in direct compensation
from the listed company, other than as director or committee fees and pen-
sion or other forms of deferred compensation for prior service (provided
such compensation is not contingent in any way on continued service);263

 the director is a current partner or employee of the company’s auditor, an

immediate family member is a current partner of the company’s auditor or
an employee who personally works on the listed company’s audit, or with-
in the past three years the director or an immediate family member per-
sonally worked on the listed company’s audit;264

 in the last three years, the director or an immediate family member has
been employed as an executive officer of another company where any of
the listed company’s present executive officers at the same time serves or
served on that company’s compensation committee;265 or

 the director is a current employee, or an immediate family member is a

current executive officer, of a company that has made payments to, or re-
ceived payments from, the listed company for property or services in an
amount that, in any of the last three fiscal years, exceeded the greater of
$1 million, or two percent of such other company’s consolidated gross
revenues.266

(b) Nasdaq Per Se Bars to Independence

A director is not independent under Nasdaq rules if:

 in the last three years, the director has been employed by the listed com-
pany or a family member267 has been an executive of the listed compa-
ny;268

262
NYSE Listed Company Manual, Rule 303A.02(b)(i). Employment as an interim chairman, CEO or other execu-
tive officer will not disqualify a director from being considered independent following that employment. Commen-
tary to NYSE Listed Company Manual, Rule 303A.02(b)(i).
263
NYSE Listed Company Manual, Rule 303A.02(b)(ii). This $120,000 limit does not apply to compensation re-
ceived for former service as an interim chairman, CEO or other executive officer; compensation received by an im-
mediate family member for service as an employee of the listed company (other than as an executive officer); or
pension or other forms of deferred compensation for prior service, provided that such compensation is not contin-
gent in any way on continued service. Commentary to NYSE Listed Company Manual, Rule 303A.02(b)(ii).
264
NYSE Listed Company Manual, Rule 303A.02(b)(iii).
265
NYSE Listed Company Manual, Rule 303A.02(b)(iv).
266
Contributions to tax-exempt organizations are excepted from this limitation, but such contributions must be dis-
closed either on the company’s website or in its annual proxy statement. Despite this exception, contributions to
tax-exempt organizations may in some circumstances constitute a material relationship that compromises director
independence. Commentary to NYSE Listed Company Manual, Disclosure Requirement, Rule 303A.02(b)(v).
267
“Family member” is defined to mean a person’s spouse, parents, children and siblings, whether by blood, mar-
riage or adoption, or anyone residing in such person’s home. Nasdaq Listing Rule 5605(a)(2).

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  in any 12-month period in the last three years, the director or a family
member has received more than $120,000 in any compensation from the
company, other than as director or committee compensation;269

 the director or a family member is a partner in, or a controlling sharehold-

er or an executive officer of, any organization to which the listed company
made, or from which the listed company received, payments that in any of
the past three fiscal years exceeded the greater of $200,000 or five percent
of the recipient’s consolidated gross revenue for that year;270

 the director or a family member is employed as an executive officer of an-

other entity where at any time in the last three years any of the company’s
executive officers served on that entity’s compensation committee;271 or

 the director or a family member is a current partner of the company’s out-

side auditor, or was a partner or employee of the company’s outside audi-
tor who worked on the company’s audit in the last three years.272

2. SEC Requirements

The SEC requires disclosure of the following information relating to director independ-
ence in either a company’s Form 10-K or its proxy statement:

 Whether each director is independent under the company’s independence stand-

ards. Unless the company has adopted its own set of independence standards, this
refers to the independence standards of the applicable securities exchange. If the
company has adopted its own set of independence standards, the company must
either state that the standards are posted on its website (and provide its website
268
Nasdaq Listing Rules 5605(a)(2)(A), 5605(a)(2)(C). Service as an interim executive officer will not render a
director non-independent after the cessation of the employment, provided that the interim employment lasted less
than one year. Nasdaq Listing Rule IM-5605.
269
Nasdaq Listing Rule 5605(a)(2)(B). Note that, unlike the NYSE rules, Nasdaq rules include indirect compensa-
tion in this $120,000 threshold. For example, Nasdaq provides that political contributions to the campaign of a di-
rector or a family member would be considered indirect compensation. Nasdaq Listing Rule IM-5605. However,
this $120,000 restriction does not apply to compensation paid to a family member who is an employee (other than an
executive officer) of the company, or to benefits under a tax-qualified retirement plan or non-discretionary compen-
sation. Nasdaq Listing Rule 5605(a)(2)(B)(ii)-(iii). It likewise does not apply to compensation received for former
service as an interim executive officer, so long as that service did not last more than one year. Nasdaq Listing Rule
IM-5605.
270
Payments arising solely from investments in the company’s securities or under a non-discretionary charitable
contribution matching program are exempt from this restriction. Nasdaq Listing Rule 5605(a)(2)(D)(i)-(ii). How-
ever, except for the non-discretionary charitable contribution matching program, a director may not be considered
independent if the director or a family member serves as an executive officer of a charitable organization to which
the company makes payments in excess of the greater of five percent of the charity’s revenues or $200,000. Nasdaq
Listing Rule IM-5605.
271
Nasdaq Listing Rule 5605(a)(2)(E).
272
Nasdaq Listing Rule 5605(a)(2)(F). In the case of an investment company, in lieu of these restrictions, a direc-
tor’s independence is determined by reference to the “interested person” definition provided in Section 2(a)(19) of
the Investment Company Act of 1940, other than in his or her capacity as a member of the board of directors or any
board committee. Nasdaq Listing Rule 5605(a)(2)(G).

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 address) or include a copy of these independence standards as an appendix to its
proxy statement once every three years. If the company relies on an exemption
from a national securities exchange requirement for independence of a majority of
the board, the company must disclose the exemption and explain the basis for its
conclusion that the exemption is applicable.273

 For each independent director, the types of transactions and relationships that the
board considered in making its determination that the director was independent.274

3. State Law

The board of directors should also be cognizant of the criteria for independence in its
company’s state of incorporation when selecting directors and committee members. Courts ap-
ply heightened scrutiny when reviewing actions taken by directors with perceived conflicts of
interest; accordingly, a company should strive to select its nominating and corporate governance
committee in a way that will avoid judicial second-guessing. Consideration of independence
when selecting committee members is particularly important because certain decisions are some-
times delegated to a committee precisely because the board as a whole may be viewed as tainted
by a conflict of interest.

States ordinarily determine a director’s independence based on his or her economic and
familial relationships. Thus, a director who qualifies as independent under the NYSE or Nasdaq
standards will typically also be considered independent under state corporate law. However,
boards should consider all of the facts and circumstances surrounding a director’s relationship to
the company and management, appreciating that non-economic relationships may sometimes be
found relevant. While each case depends on its own facts, in Beam ex rel. Martha Stewart Liv-
ing Omnimedia, Inc. v. Stewart,275 the Delaware Supreme Court rejected the argument that a run-
of-the-mill personal friendship, without more, casts doubt on a director’s independence.276 This
decision accords with the long-standing principle of Delaware corporate law that a non-
management director is presumed to be independent in the absence of real evidence suggesting
otherwise.

Notably, in the 2013 MFW case, then-Chancellor Strine stated that directors’ satisfaction
of the NYSE independence standards was informative, although not dispositive, of their inde-

273
Item 407(a)(1)-(2) of Regulation S-K. 17 C.F.R. 229.407(a)(1)-(2).
274
Item 407(a)(3) of Regulation S-K. 17 C.F.R. 229.407(a)(3).
275
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1051 (Del. 2004). Plaintiffs
argued that certain board members were not independent from Martha Stewart because “Stewart and the other direc-
tors moved in the same social circles, attended the same weddings, developed business relationships before joining
the board and described each other as ‘friends’ . . . .”
276
In 2015, the Delaware Supreme Court clarified that Beam was not intended to suggest “that deeper human
friendships could not exist that would have the effect of compromising a director’s independence.” Delaware Coun-
ty Employees Retirement Fund v. Sanchez, 124 A.3d 1017, 1022 (Del. Sup. 2015). Drawing on this notion, the Del-
aware Supreme Court questioned the independence of a director who: (i) had a close friendship of over 50 years
with the controlling shareholder and chairman of the company; and (ii) was an executive at an insurance brokerage
that is a wholly owned subsidiary of a separate corporation of which the same chairman is the largest stockholder.
Id. at 1022-23.

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pendence under Delaware law.277 Then-Chancellor Strine observed that the NYSE independence
standards “were influenced by experience in Delaware . . . [,] cover many of the key factors that
tend to bear on independence, including whether things like consulting fees rise to a level where
they compromise a director’s independence, and they are a useful source for this court to consid-
er when assessing an argument that a director lacks independence.”278 The MFW case provides
valuable guidance to nominating and corporate governance committees by reaffirming that direc-
tors who satisfy listing requirements for independence will generally qualify as independent un-
der Delaware law.

4. Proxy Advisory Services

Proxy advisory services have developed definitions of director independence that differ
in some respects from, and are stricter than, those of the NYSE and Nasdaq. While proxy advi-
sories’ guidelines are not binding, they carry substantial influence among institutional investors,
and the nominating and corporate governance committee should be cognizant of them when as-
sessing director independence.

ISS categorizes director independence into three groups. The first is “inside director,”
which includes controlling stockholders, current officers or employees of the company or its af-
filiates and directors named in the company’s summary compensation table (excluding former
interim officers). The second is “affiliated outside director,” which includes certain former of-
ficers of the company, its affiliates or predecessors, as well as family members and those with
certain transactional, professional, financial or charitable relationships with the company. These
relationships include providing, or having certain relationships with an organization that pro-
vides, professional services to the company or to one of its affiliates in excess of $10,000 per
year. This $10,000 threshold is well below the thresholds set by the NYSE and Nasdaq. The
third is “independent outside director,” which is a director who has no material connection to the
company other than a board seat.279 ISS recommends a vote “against” any inside director or af-
filiated outside director serving on the audit, compensation or nominating and corporate govern-
ance committees, and against inside and affiliated outside directors when independent directors
make up less than a majority of directors.280

Glass Lewis guidelines state that, in assessing director independence, it will consider both
compliance with the applicable exchange listing requirements and the judgments made by the
director.281 Like ISS, Glass Lewis has three categories of director independence: independent
director, affiliated director, and inside director. Glass Lewis will consider a non-inside director
to be affiliated if, within the past three years, the director had a material financial, familial or
other relationship with the company or its executives or if the director’s employer had a material
financial relationship with the company. A director will also be considered an affiliate if the di-

277
In re MFW S’holders Litig., 67 A.3d 496, 509 (Del. Ch. 2013), aff’d sub nom. Kahn v. M & F Worldwide Corp.,
88 A.3d 635 (Del. 2014).
278
Id. at 511 (citation omitted).
279
ISS, 2016 U.S. Summary Proxy Voting Guidelines 17-18.
280
ISS, 2016 U.S. Summary Proxy Voting Guidelines 16.
281
Glass Lewis, Proxy Paper Guidelines, 2016 Proxy Season 3.

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rector or the director’s employer owns 20 percent or more of the company’s voting stock.282
Glass Lewis states that it will typically recommend voting “against” inside or affiliated directors
serving on a company’s audit, compensation or nominating and corporate governance commit-
tees, and against some inside or affiliated directors if the board is less than two-thirds independ-
ent.283

5. Balancing Independence Against Expertise

The financial crisis revealed that boards sometimes lack the industry expertise and intri-
cate knowledge of their companies that is necessary to properly oversee businesses of tremen-
dous complexity.284 This realization, in part, prompted the SEC to adopt in 2009 disclosure rules
requiring companies to discuss the specific experience, qualifications and skills that led to a di-
rector’s nomination. See Section VII.B.4. However, these disclosure requirements have far from
solved the problems that are created by mandatory independence requirements and undue focus
on board refreshment as an end in and of itself. In a February 2016 letter, State Street noted that
“[m]any boards lack the experience and expertise to engage effectively and critically with man-
agement with regard to a company’s long-term planning.”285 While some individuals with ex-
pertise will satisfy the exchanges’ stringent independence standards, these standards do preclude
insiders—those with the most intimate day-to-day knowledge of the company—and often limit
the ability to include industry experts who over their careers have developed networks and affili-
ations in the company’s sector.286 As stated in a 2009 study published by Professor Jay W.
Lorsch and other members of the Harvard Business School’s Corporate Governance Initiative,
“[a]s a practical matter it is difficult, if not impossible, to find directors who possess deep
knowledge of a company’s process, products and industries but who can also be considered in-
dependent.”287 All boards can and should gain insight into the company’s business through regu-
lar communication with management. Yet a board may find that even the most robust communi-
cations are an imperfect substitute for actual membership of those best positioned to understand
the company. This was acknowledged in a report issued by the NYSE’s Commission on Corpo-
rate Governance, which noted that “a minority of directors who possess in-depth knowledge of
the company and its industry could be helpful for the board as it assesses the company’s strategy,

282
A material financial relationship is one in which the director received over $50,000 for services outside of ser-
vice as a director or if the director’s employer received over $120,000 or an amount exceeding one percent of either
company’s consolidated gross revenue from other business relationships. Id. at 3-4.
283
Id. at 5.
284
A 2015 survey of directors found that industry expertise is viewed as the single most desirable characteristic that
a candidate for director can possess. National Association of Corporate Directors, 2015-2016 NACD Public Com-
pany Governance Survey 26 (2015).
285
Letter from Ronald P. O’Hanley, President and CEO of State Street Global Advisors (Fe. 26, 2016),
https://www.ssga.com/investment-topics/environmental-social-governance/2016/SSGAs-Letter-to-Directors-and-
Guidelines-on-Effective-Independent-Board-Leadership.pdf.
286
The effects of these independence requirements may have recently peaked. Average board independence may
have peaked among S&P 500 companies: 81 percent of all directorships are held by independent directors and
companies with fewer than average independent directors typically have governance structures that make near-term
change unlikely. ISS, 2015 Board Practices: Directors and Boards at S&P 1500 Companies 4 (Mar. 16, 2015).
287
Jay W. Lorsch, You Can’t Know It All: Why Directors Have Such Difficulty Understanding Their Companies,
Directors & Boards, Annual Report, Summer 2012, at 64.

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risk profile, competition and alternative courses of action,” and reminded companies that “a
properly functioning board can include more than one non-independent director.”288

288
Report of the New York Stock Exchange Commission on Corporate Governance 5 (Sept. 23, 2010), available at
http://www1.nyse.com/pdfs/CCGReport.pdf.

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 VIII. Director Selection

A. Identifying and Recruiting Directors

Recruiting a balanced board of highly qualified directors is the central challenge for the
nominating and corporate governance committee. Achieving this balanced, high-quality board is
complicated by a number of factors. First, as noted above, the emphasis on exacting standards of
independence often comes at the expense of relevant experience and knowledge of the compa-
ny’s business and industry. Stock exchange standards and governance activists’ “best practices”
limit considerably the nominating and corporate governance committee’s flexibility in managing
this tradeoff. Second, the workload and time commitment required for board service has never
been greater. Finally, highly qualified individuals who manage to clear the independence hurdle
and are willing and able to shoulder the substantial time commitment of board service may nev-
ertheless be dissuaded by the potential for withhold-the-vote campaigns, sensationalist publicity
over executive compensation, shareholder litigation and other reputational risks. In the current
corporate governance environment, even directors of impeccable reputation at highly successful
companies may find themselves under attack from shareholder activists. These factors pose a
very real danger that companies will struggle to fill board seats with the experienced and highly
capable types of directors that have been such an essential element of the phenomenal success of
the American corporation.

This reality makes all the more critical the nominating and corporate governance commit-
tee’s ability to effectively identify and recruit actual candidates once it has developed a target
profile. Identifying and recruiting candidates should be an ongoing process that takes into ac-
count both the immediate needs of the board and its anticipated longer-term needs based on ex-
pected director turnover. This will allow the nominating and corporate governance committee to
prepare for the departure of key directors by either grooming internal replacements for leadership
positions or recruiting new directors before a critical skills gap appears.

1. Networking

Networking remains one of the most fertile sources of director candidates. At many
companies, new directors are sourced primarily from individuals already known to members of
the nominating and corporate governance committee, the chairman, other directors or the CEO or
who are recommended by internal or external advisors. This approach can be particularly effec-
tive if the members of the nominating and corporate governance committee have extensive expe-
rience in the company’s industry or on other company boards. Personal familiarity with a candi-
date enables the nominating and corporate governance committee to assess more quickly and ac-
curately the candidate’s fit with the board’s culture, which is especially important when there is a
need to expedite a search process. Drawbacks of reliance on networking include the possible
limiting of the nominating and corporate governance committee’s range of candidates and the
vulnerability to accusations of cronyism or a failure to value new viewpoints.

2. Third-Party Search Firms

To limit the downsides of relying on directors’ networks, cast a wider net, and add an
outside and arguably broader perspective, companies often engage third-party search firms to

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assist them in identifying director candidates, although there is certainly no requirement to seek
outside advice. Ordinarily, the nominating and corporate governance committee will be charged
with engaging such advisors, and NYSE-listed companies are required to vest the committee
with sole authority to retain, terminate and approve the fees of any firm used in the search pro-
cess.289 A third-party search firm can help identify a wider range of candidates and bring greater,
more specialized resources to bear than the company possesses internally, which can be especial-
ly useful when searching for director candidates with particular attributes or specialized skills.
Use of a third party may also have a benefit in terms of public perception in that it helps to con-
firm that the process is being driven by the nominating and corporate governance committee ra-
ther than by management. On the other hand, a search firm may in certain circumstances add
unnecessary expense and complexity to the nomination process. The nominating and corporate
governance committee should consider the needs and capacities of the company and make an
independent determination as to whether retention of an outside advisor is appropriate. If a third-
party advisor is retained, the nominating and corporate governance committee should be as spe-
cific as possible about its precise role and the relevant search parameters. For example, the third
party may simply provide a list of prospects that meet specified criteria and have been checked
for conflicts, or may actually interview candidates on behalf of the nominating and corporate
governance committee. At minimum, a nominating and corporate governance committee would
be well advised to engage a third party to perform background and reference checks of candi-
dates before formally nominating them. The SEC requires disclosure of any fees paid to third
parties to assist in identifying or evaluating potential nominees, as well as the function they per-
formed.290

3. Input from Within the Company

While the nominating and corporate governance committee should lead the search pro-
cess, it should seek the input of others inside the company. Nothing in the requirement that a
nominating and corporate governance committee consist entirely of independent directors pre-
cludes nonmembers from contributing to the committee’s work. The NYSE rules provide that
the nominating and corporate governance committee is to select director nominees “consistent
with the criteria approved by the board,” which of course includes the CEO and any other non-
independent directors.291 In most cases, the committee would struggle to perform effectively
without the participation of senior management, particularly the CEO, who is uniquely posi-
tioned in his or her understanding of the company, its strategy and its challenges. Thus, unless
unusual circumstances suggest otherwise, the nominating and corporate governance committee
would be well advised to work closely with the CEO when identifying, vetting, interviewing and
selecting candidates. Ultimately, however, the CEO’s input should only be one factor in the pro-
cess of the committee reaching an informed and independent judgment. The nominating and
corporate governance committee should conduct regular executive sessions to avoid any percep-
tion that the CEO has unduly controlled the nomination process.

Among other negative consequences, such a misperception can result in a backlash from
proxy advisory services. For example, in 2011, ISS recommended a “no” vote for the members

289
Commentary to NYSE Listed Company Manual, Rule 303A.04(b).
290
Item 407(c)(2)(viii) of Regulation S-K. 17 C.F.R. 229.407(c)(2)(viii).
291
NYSE Listed Company Manual, Rule 303A.04(b)(i).

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of Hewlett Packard’s nominating and corporate governance committee based on ISS’s view that
the committee’s search for new directors was tainted by the CEO’s involvement. While remain-
ing cognizant of the policies of proxy advisory services, it is important that the nominating
committee conduct its search in the way it deems most effective. And, absent unusual circum-
stances, a nominating and corporate governance committee is unlikely to find effective a search
process that excludes the views of a director—particularly one uniquely positioned to understand
the company’s needs.

4. SEC Requirements

For each nominee approved by the committee for inclusion on the company’s proxy card
(other than executive officers and directors standing for reelection), the SEC requires companies
to identify whether the nominee was recommended by a security holder, a non-management di-
rector, the CEO, another executive officer, a third-party search firm or another specified
source.292

B. Shareholder Nominations and Proxy Access

As a general matter, the right of shareholders to nominate candidates to be considered for

election to the board of directors is well established in state law. In Delaware, for example, then-
Chancellor Leo Strine stated: “Put simply, Delaware law recognizes that ‘the right of sharehold-
ers to participate in the voting process includes the right to nominate an opposing slate . . . the
unadorned right to cast a ballot in a contest for [corporate] office . . . is meaningless without the
right to participate in selecting the contestants. As the nominating process circumscribes the
range of choice to be made, it is a fundamental and outcome-determinative step in the election of
officeholders. To allow for voting while maintaining a closed selection process thus renders the
former an empty exercise.’”293

As the body with primary responsibility for reviewing candidates for nomination to be
elected as directors, and for making a recommendation to the full board, the nominating and cor-
porate governance committee is the logical and appropriate forum for consideration of director
candidates recommended by shareholders. As a general rule, shareholder nominees should be
considered on the basis of the same criteria as are used to evaluate board nominees. Even if it
may be readily apparent that some candidates are not adequately qualified, it is good practice for
the record to reflect that these candidates were fairly evaluated.

1. SEC Disclosure Requirements

The SEC requires companies to disclose whether they have a policy regarding the con-
sideration of director candidates recommended by shareholders. If it does have such a policy,
the company must describe the material elements of its policy, including whether it will consider
shareholder nominations, and, if so, the procedures that shareholders must follow to submit nom-
inations. If a company’s nominating committee does not have a policy regarding shareholder
recommendations for director, the company must state that fact and the basis for the view of its
board of directors that it is appropriate for the company not to have such a policy. The company

292
Item 407(c)(2)(vii) of Regulation S-K. 17 C.F.R. 229.407(c)(2)(viii).
293
Harrah’s Entertainment, Inc. v. JCC Holding Co., 802 A.2d 294, 310-11 (Del. Ch. 2002) (citations omitted).

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must disclose whether, and, if so, how, the nominating and corporate governance committee
evaluates recommendations submitted by shareholders differently than it evaluates recommenda-
tions from other sources.294 In certain circumstances, companies are additionally required to dis-
close director candidate recommendations received from shareholders that have beneficially
owned at least five percent of the company’s voting common stock for at least one year at the
time of the recommendation.295

2. Restrictions on Shareholder Nomination Rights

The right of shareholders to nominate director candidates is not unfettered. Many states,
including Delaware, have strong policies favoring freedom of contract and allowing parties in
contractual relationships to establish their own rules by contract. The certificate of incorporation
(or charter) and bylaws of a corporation establish a contractual relationship between a company
and its shareholders that may vary from, or even opt out of, the default voting and nominating
rules. Most listed companies have adopted bylaws establishing advance notice requirements for
shareholder nominations and other proposals by shareholders for business to be brought before
annual and special shareholder meetings. For a discussion of advance notice bylaws, see Section
III.D. In addition, many companies have adopted bylaws that include specified qualification re-
quirements for nominees for the board.

Traditionally, it has been within the purview of the board to establish reasonable qualifi-
cation standards for director candidates. Many companies have, for example, adopted bylaws
that include age restrictions, residential requirements, or stockholding requirements. These sorts
of qualification criteria have typically been implemented in bylaws adopted by the board. As
with all bylaws, they are generally subject to amendment or elimination by the company’s share-
holders. The board’s decision to adopt such bylaws could be challenged in court, and would
generally be viewed as a matter of the board’s business judgment, unless there was an indication
that directors failed to satisfy their duties of care and loyalty.

Although advance notice and qualification bylaws have generally been adopted by the
full board, their subject matter places them squarely in the area of focus of the nominating and
corporate governance committee, which often makes recommendations to the board for their
adoption, amendment or removal. More recently, institutional shareholders, proxy advisors and
other activists have taken a more restrictive view of the board’s right to implement these sorts of
bylaws absent shareholder input and/or approval (or, from their perspective, a more protective
view of shareholder rights). A telling recent example of this trend is to be found in the attempt
by a number of companies (based on a recommendation this firm made in a memorandum to cli-
ents) to adopt bylaws that provided a default rule against differential director compensation
“golden leash” schemes being increasingly promoted by some shareholder activists in their proxy
fights. Even though most corporate governance watchers and commentators, including the proxy
advisors, agreed that these “golden leash” arrangements were entirely inappropriate, there was
nevertheless a very strong and visceral reaction against the board adopting a default bylaw that
would have disqualified candidates who entered into them. For further discussion of this issue,
see Section III.J.

294
Items 407(c)(2)(iii)-(iv), (vi) of Regulation S-K. 17 C.F.R. 229.407(c)(2)(iii)-(iv), (vi).
295
Item 407(c)(2)(ix) of Regulation S-K. 17 C.F.R. 229.407(c)(2)(ix).

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 In light of this controversy, boards will need to think very carefully about adopting any
form of restrictive qualification requirements in the future, such as a change to the advanced no-
tice requirements discussed in Section III.D and may want to engage with significant sharehold-
ers regarding changes that may be controversial.

3. Proxy Access for Director Nominations

(a) SEC Rules

SEC Rule 14a-8 previously allowed the exclusion from a company’s proxy of any pro-
posal relating to director elections. In August 2010, the SEC amended this exclusion and also
adopted Rule 14a-11, which required companies to include in their proxy statements director
nominations of shareholders meeting certain ownership criteria. Both of these changes were
stayed pending the resolution of litigation challenging Rule 14a-11, which in July 2011 was
struck down by the Circuit Court for the District of Columbia as an arbitrary and capricious ex-
ercise of the SEC’s rule-making authority.296 The SEC did not appeal the court’s ruling,297 and
Rule 14a-11 is now vacated. With the dispute regarding Rule 14a-11 resolved, the amended ver-
sion of Rule 14a-8(i)(8) took effect in September 2011. Under the amended Rule 14a-8(i)(8), a
proposal can no longer be excluded simply because it “relates to” the election of directors. In-
stead, it is only excludable if it:

 would disqualify a nominee who is standing for election;

 would remove a director from office before his or her term expires;

 questions the competence, business judgment or character of one or more nomi-

nees or directors;

 seeks to include a specific individual in the company’s proxy materials for elec-
tion to the board of directors; or

 otherwise could affect the outcome of the upcoming election of directors.298

Of these five grounds for exclusion, the most significant pertains to the nomination of a
“specific individual” for election. As a result of this exclusion, companies need not include
shareholder nominations of directors in their proxy statements. Thus, unlike Rule 14a-11’s pro-
posed “direct access” to a company’s proxy, amended Rule 14a-8(i)(8) requires a shareholder
desiring to make such a nomination to proceed by way of a two-step process. First, a sharehold-
er may make a proposal under Rule 14a-8(i)(8) to amend the company’s bylaws concerning the
procedures by which directors are nominated (for instance, by providing that the company must
include in its proxy statement the nominations by shareholders meeting certain eligibility crite-
ria). Second, if the proposal is successful, the shareholder may propose director nominees pur-
suant to the company’s amended bylaws.

296
Bus. Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011).
297
Press Release, SEC, Statement by SEC Chairman Mary L. Schapiro on Proxy Access Litigation (Sept. 6, 2011),
available at http:// www.sec.gov/news/press/2011/2011-179.htm.
298
17 C.F.R. § 240.14a-8(i)(8).

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 (b) Delaware Law

In contrast to the one-size-fits-all approach to proxy access proposed by the SEC and ul-
timately struck down, Delaware has adopted a framework that allows companies to tailor proxy
access to their particular circumstances. In 2009, Delaware amended its corporate law to provide
that the board or shareholders of a Delaware company may adopt a bylaw requiring the inclusion
of a shareholder’s director nominees in the company’s proxy solicitation materials.299 The stat-
ute includes a non-exclusive list of conditions that the bylaws may impose on proxy access, in-
cluding minimum ownership requirements, mandatory disclosures by the nominating shareholder
and restrictions on nominations by persons who have acquired a specified percentage of the
company’s outstanding voting power. Another 2009 amendment to Delaware’s corporate law
provides that a company’s bylaws may require the company to reimburse a stockholder for ex-
penses incurred soliciting proxies in connection with an election of directors.300 Again, a com-
pany may impose any lawful condition or procedure on such reimbursement, including limita-
tions based on the amount of support the shareholder’s nominee received. This private ordering
approach to proxy access allows companies and their shareholders to adopt rules tailored to the
specific circumstances of a company. Many consider this state law approach to be more appro-
priate than the federalization of the election process that the SEC was proposing. (See Sections
III.K, IV.A.2 and IV.E.3 for more on proxy access.)

299
8 Del. C. § 112.
300
8 Del. C. § 113.

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 IX. Director Orientation and Continuing Education

A. Orientation

The nominating and corporate governance committee should ensure that new directors
are provided with a thorough orientation that will accelerate their adjustment to the board. If the
board takes an annual retreat, the retreat may offer an opportunity to satisfy a large portion of
this orientation. The content of director orientation should focus on enabling new directors to
quickly gain a full understanding of the company’s business and risk profile. If the director is to
serve on a board committee or otherwise perform a specialized role, his or her orientation pro-
gram should be customized to reflect those added responsibilities. Orientation programs should
be regularly reviewed and modified to ensure that they are tailored to address the most important
issues facing the company. As part of their orientation, new directors should be provided with
the company’s corporate governance documents, including committee charters, policies and eth-
ics codes, biographies of the company’s directors and executive officers, selected public docu-
ments of the company, including proxy statements and annual and quarterly reports, minutes of
the board and its committees’ recent meetings, and a calendar of upcoming meetings and key
dates for the company. New directors should also meet with their fellow directors and with ex-
ecutive officers. If a physical inspection of one or more facilities or sites would aid in the new
director’s understanding of a company, the nominating and corporate governance committee
should consider including a tour as part of its orientation program. A selection of key analyst
reports by third-party analysts covering the company may also enhance a new director’s appreci-
ation for the company and how it is perceived.

Especially if it is the new director’s first time serving on a public company board, orien-
tation should also include a thorough briefing on applicable laws, including securities laws and a
director’s fiduciary duties. Director orientation must strike the right balance by providing sub-
stantive information that will allow a new director to “hit the ground running” without over-
whelming him or her with a barrage of documents. Striking this balance requires an ongoing fo-
cus on and reassessment of the company’s priorities by the nominating and corporate governance
committee.

The importance of director orientation is greater now than ever before. Directors today
not only serve in an environment of unprecedented complexity and time demands, but a large
number of them are serving without any considerable experience with either the company or
public company boards generally. Historically, over 30 percent of directors joining outside
company boards were first-time directors and in 2014 the number grew to an all-time high of 39
percent.301 And, as discussed at length in Section VII.C.5, the outsized emphasis placed on di-
rector independence by corporate governance “best practices” often precludes adding to the
board the most experienced individuals with the strongest grasp of the company. The wisdom of
ever-increasing reliance on individuals with limited familiarity with board service or the compa-
ny is dubious and, perhaps, nominating and governance committees have begun to take notice:

301
Spencer Stuart, Spencer Stuart Board Index 2014, at 6, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2014.

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In 2015, only 26 percent of directors joining outside company boards were first-time directors.302
However, to a certain extent, nominating and governance committees must accept that this has
become a part of the corporate governance landscape and ensure that orientation programs are as
robust as possible to get new directors up to speed.

B. Continuing Education

Director education should not end once a new director is brought up to speed. While
there is no legal requirement for directors to receive tutorials to satisfy their fiduciary obliga-
tions, such education can be very useful. Indeed, the complexity of the many financial, risk
management and other issues facing companies today that was highlighted by the financial crisis
has led to a renewed focus on the information and education programs provided to directors. In a
constantly changing competitive and regulatory environment, continuing education is vital to en-
sure that directors remain aware of the challenges and opportunities the company faces. Even a
long-serving director with an intimate familiarity with the company’s industry and strategy will
be unable to perform effectively if he or she does not stay abreast of many regulatory and other
developments. To the extent that directors lack the knowledge required to maintain a strong
grasp of current industry and company-specific developments and specialized issues, the nomi-
nating and corporate governance committee should consider periodic tutorials as a supplement to
board and committee meetings.

Given the importance of continuing education, it is no surprise that over three quarters of
directors participated in some form of board educational program during 2015 in order to stay
apprised of trends in corporate governance and other areas.303 And, at large cap companies, di-
rectors spent, on average, 23 hours participating in director educational programs during 2015. 304
Training and tutorials may consist of outside programs, training in the boardroom or some com-
bination of the two and should be tailored to the issues most relevant and important to the com-
pany and its business. Outside experts, while not required, may be helpful for certain training
and tutorials, although in many cases the company’s own experts are better positioned than out-
siders to explain the particular issues facing the company.

C. Information Received by Directors

The ability of the board or a committee to perform its oversight role is, to a large extent,
dependent upon the relationship and the flow of information between the directors, senior man-
agement and the risk managers in the company. In this vein, the board and management should
together determine, and periodically reassess, the information the directors should receive so that
the board can effectively perform its oversight function. As a starting point, the board should
receive financial information that makes readily accessible the company’s results of operations,
variations from budgeted expenditures, trends in the industry and the company’s performance
relative to its peers, as well as copies of media and analyst reports on the company. However, in
order for the board to properly fulfill its oversight role, companies should work to ensure that the

302
Spencer Stuart, Spencer Stuart Board Index 2015, at 9, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2015.
303
PricewaterhouseCoopers, PwC’s 2015 Annual Corporate Directors Survey 24, available at
http://www.pwc.com/us/en/corporate-governance/annual-corporate-directors-survey/downloads.html.
304
National Association of Corporate Directors, 2015-2016 NACD Public Company Governance Survey 23 (2015).

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board is receiving information about all aspects of the company’s operations. For example,
while only about three percent and eight percent of directors thought that they did not receive
enough information regarding corporate performance and financial risk, respectively, 44 percent
of directors think that they receive insufficient information regarding the cybersecurity and IT
risks facing their companies.305 This, however, underscores an important point for directors, if
directors do not believe that they are receiving sufficient information—including information
regarding the external and internal risk environment, the specific material risk exposures affect-
ing the company, how these risks are assessed and prioritized, risk response strategies, imple-
mentation of risk management procedures and infrastructure and the strengths and weaknesses of
the company’s overall risk management system—they should be proactive in asking for more.

Obtaining this information will not only aid directors in guiding the company but also
will avoid the possibility of directors being accused of failing to be aware of discoverable facts
that they should have known. The nominating and corporate governance committee should also
promote lines of communication between the board, its committees and senior management that
foster open and frank discussion of developments and concerns. As with director orientation, the
key is to provide useful and timely information without overloading the board with, for example,
all information that the CEO and senior management receive.

305
National Association of Corporate Directors, 2015-2016 NACD Public Company Governance Survey 38 (2015).

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 X. Restrictions on Director Service

A. Other Directorships and “Overboarding”

The workload and time commitment required for board service has escalated dramatically
in recent years: the 2015-2016 Public Company Governance Survey of the National Association
of Corporate Directors reported that public company directors spent, on average, nearly 250
hours performing board-related activities in 2015, compared to the 155 hours reported in 2003.306
As the time commitment of board service increases, so does the importance of ensuring that di-
rectors are able to shoulder this commitment. Therefore, the nominating and corporate govern-
ance committee should consider adopting a policy regarding additional directorships. The nomi-
nating and corporate governance committee may similarly choose to limit the directorships of the
company’s officers. According to a 2015 Spencer Stuart survey, only 20 percent of S&P 500
companies’ corporate governance principles specifically limit the number of outside boards on
which their CEO may serve. And, 95 percent of companies with restrictions limit CEOs to one
or two outside boards.307 Additionally, more than three-quarters of S&P 500 companies now im-
pose some restriction on their directors’ service on other boards, up from only one-half in
2006.308 Restrictions on additional directorships may apply across the board or only to a subset
of directors, such as those serving on the audit committee or those fully employed by the compa-
ny or another public company. For example, the NYSE requires that if an audit committee
member simultaneously serves on the audit committee of more than three public companies, the
board must disclose its determination that this would not impair the member’s ability to serve
effectively on the company’s audit committee.309 Fifty-nine percent of companies have set a
numerical limit for additional directorships applying to all directors, with almost 70 percent of
these companies setting the cap at three or four.310 Among those companies without established
numerical limits, 92 percent require directors to provide the company notice before accepting
another directorship and/or encourage directors to reasonably limit their additional board ser-
vice.311

As with many other issues confronting the nominating and corporate governance commit-
tee, the committee should be wary of establishing hard and fast rules regarding other director-
ships that limit its flexibility to exercise its best judgment based on particular circumstances.
One approach is to eschew a numerical limit but require a director to seek approval of the nomi-
nating and corporate governance committee before accepting another directorship. Another ap-
proach is to adopt a numerical limit but provide that the nominating and corporate governance
committee may waive this limit if it determines that the additional directorship will not impair

306
National Association of Corporate Directors, 2015-2016 Public Company Governance Survey 8 (2015). Nation-
al Association of Corporate Directors, 2014-2015 Public Company Governance Survey 12 (2014).
307
Spencer Stuart, Spencer Stuart Board Index 2015, at 13, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2015.
308
Id.
309
Commentary to NYSE Listed Company Manual, Disclosure Requirement, Rule 303A.07(a).
310
Spencer Stuart, Spencer Stuart Board Index 2015, at 13, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2015.
311
Id.

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the director’s ability to carry out his or her duties, or that his or her unique contributions to the
board would be difficult to replace.

At a minimum, the nominating and corporate governance committee would be well ad-
vised to adopt a policy of prior notification regarding other directorships or employment. This is
important not only to ensure that the director remains able to shoulder capably the responsibili-
ties of board service but also to check for any conflicts. In particular, antitrust laws prohibit
simultaneous service as a director or officer of two competing companies, subject to certain de
minimis exceptions.312 Companies should carefully weigh the costs and benefits of having direc-
tors who are associated with competitors, as this may become a lightning rod for activist criti-
cism, even if the overlap falls well within the legal safe-harbors.

ISS recommends an “against” or “withhold” vote for “overboarded directors,” defined as,
with regards to 2016 annual meetings those sitting on more than six public company boards and,
with regards to annual meetings on or after February 1, 2017, more than five public company
boards. Additionally, ISS recommends an “against” or “withhold” vote against CEOs sitting on
more than two public company boards besides their own (although ISS recommends an “against”
or “withhold” only with respect to the CEO’s outside boards).313 Similarly, Glass Lewis recom-
mends, with respect to 2016 annual meetings voting “against” directors who serve on more than
six public company boards and with respect to 2017 annual meetings, voting “against” directors
who serve on more than five public company boards.314 Additionally, Glass Lewis recommends
voting against directors who serve as an executive officer of any public company while serving
on more than two other public company boards.315 Glass Lewis also recommends voting against
a CFO being on the company’s board.316

In their proxy voting guidelines, several institutional investors have also developed poli-
cies on “overboarding.” The Council of Institutional Investors suggests that companies should
establish guidelines on how many other boards their directors may serve and states that directors
with full-time jobs should not serve on more than two other boards, that independent directors
should serve on no more than five for-profit company boards and that the CEO should not serve
as a director of more than one other company, and then only if the CEO’s own company is in the
top half of its peer group.317

312
Clayton Act § 8, 15 U.S.C. § 19. Under the current thresholds, simultaneous service as director or officer of two
corporations each with capital, surplus and undivided profits in excess of $31,084,000 and “competitive sales” of
$3,108,400 or more is prohibited, subject to several exceptions. In particular, if the “competitive sales” of either
corporation are less than two percent of that firm’s total sales, or less than four percent of each firm’s total sales, the
interlock is exempt under the statute. In addition, the statute expressly prohibits service on competing corporations,
not other business structures (e.g., partnerships or limited liability companies). Finally, Section 8 does not apply to
interlocks between banks. Section 8 provides a one-year grace period for an individual to resolve an interlock issue
that arises as a result of entry into new markets through acquisition or expansion.
313
ISS, 2016 U.S. Summary Proxy Voting Guidelines 16.
314
Glass Lewis, Proxy Paper Guidelines, 2016 Proxy Season 1.
315
Glass Lewis, Proxy Paper Guidelines, 2016 Proxy Season 16.
316
Id at 15.
317
Council of Institutional Investors, Corporate Governance Guidelines, Section 2.11 (Apr. 1, 2015), available at
http://www.cii.org/corp_gov_policies#BOD. CalPERS recommends that boards adopt and disclose guidelines in
proxy statements “to address competing time commitments that are faced when directors, especially acting CEOs,
serve on multiple boards.” CalPERS, Global Principles of Accountable Corporate Governance 17 (Rev. March 16,

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B. Term Limits and Mandatory Retirement Ages

The question of appropriate director tenure has become a hot topic in recent years. Cor-
porate governance activists are increasingly calling for director term limits and mandatory re-
tirement ages, both as a means of promoting “board refreshment” and because of a growing view
that serving on a board for an extended period of time affects a director’s independence.

As in all matters, we do not believe that a one-size-fits-all rule is an appropriate method

for making this determination. In some cases it may be appropriate for a particular director to
leave after an extended period on the board, and it is certainly advisable to periodically bring
new directors on to a board so that it can benefit from fresh (and more diverse) perspectives and
ideas. However, directors who have served on a board for a long time have an intimate familiari-
ty with the company and its business, history and values that cannot be easily or quickly replicat-
ed by a new candidate. Long-term directors provide continuity, cultural stability and institution-
al knowledge that can prove invaluable. We are also skeptical of the depiction of long-serving
directors as categorically less independent, given that such directors are more likely to have pre-
ceded the current CEO (and thus not to have been chosen by him or her) and to have the deep
knowledge of the company necessary to make independent judgments.

To date, only three percent of S&P 500 companies specify a term limit for director ser-
vice—a decrease from five percent in 2010318—making this one of the few areas where calls for
so-called best practices have gone largely unanswered. Companies’ policies in this area suggest
they may see value in having more experienced directors. The average tenure of directors at
S&P 500 companies in 2015 was 8.5 years, roughly stable in recent years.319 The average direc-
tor is 63.1 years old, compared with 60.5 in 2004, and 94 percent of companies with mandatory
director retirement ages set it at 72 or older, compared with 56 percent ten years ago.320

Term limits and mandatory retirement ages are indeed one way to bring fresh perspec-
tives and skills to the board. They may also in some cases relieve the nominating and corporate
governance committee from the often difficult decision to recommend against a directors’ re-

2015), available at https://www.calpers.ca.gov/docs/forms-publications/global-principles-corporate-governance.pdf.

While BlackRock reviews each situation on a case-by-case basis, it is most likely to withhold votes where “a direc-
tor is: 1) serving on more than four public company boards; or 2) is a chief executive officer at a public company
and is serving on more than two public company boards in addition to the board of the company where they serve as
chief executive officer.” BlackRock, Proxy Voting Guidelines for U.S. Securities 4 (Feb. 2015), available at
http://www.blackrock.com/corporate/en-us/literature/fact-sheet/blk-responsible-investment-guidelines-us.pdf. State
Street Global Advisors (“State Street”) states it may withhold votes from a director who sits on more than six public
company boards or from any CEO of a public company who sits on more than three public company boards. State
Street Global Advisors, Proxy Voting and Engagement Guidelines—US 2 (Mar. 2015), available at
https://www.ssga.com/investment-topics/environmental-social-governance/2015/Proxy-Voting-and-Engagement-
Guidelines-United-States.pdf. T. Rowe Price will generally vote against directors who sit on more than six public
boards and against CEOs who sit on more than two other public company boards. T. Rowe Price, Proxy Voting
Policies (Rev. Mar. 9, 2015), available at http://corporate.troweprice.com/
ccw/home/responsibility/conductingBusinessResponsibly/proxyVotingPolicies.do.
318
Spencer Stuart, Spencer Stuart Board Index 2015, at 14, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2015.
319
Id. at 16.
320
Id. at 15. Additionally, there has been a recent trend of more companies setting mandatory retirement ages at 75
or older—34 percent in 2015 compared to 19 percent in 2010 and eight percent in 2005.

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nomination. However, given the many potential negative consequences of such policies, these
blunt instruments are a poor substitute for the considered judgment of the nominating and corpo-
rate governance committee. Increased turnover may needlessly disrupt the cohesion of an effec-
tively functioning board. A board, like any organization, depends heavily on the trust and famil-
iarity of its members. This cautions against adopting rigid policies, such as term limits, that
make it more difficult to develop and maintain these relationships. Moreover, long-serving di-
rectors that have grown knowledgeable about the company and its industry are often the most
valuable contributors to a board. A policy requiring such a director to depart after a certain
number of years risks depriving the company of a valuable director who still has much to offer.
An across-the-board rule may strike some as more expedient, but ultimately the company will
best be served by the nominating and corporate governance committee making a determination
based on the facts and circumstances of each situation.

ISS currently recommends voting against shareholder proposals imposing director term
limits.321 However, if the average tenure of a board’s directors exceeds 15 years, ISS will con-
sider in making recommendations whether directors are sufficiently independent from manage-
ment and whether there has been sufficient turnover to ensure fresh perspectives in the board-
room.322 ISS is considering whether it should classify directors with lengthy tenures as non-
independent, and whether or not to consider the mix of director tenures on a board as a key factor
in deciding whether to recommend a vote for the reelection of nominating and corporate govern-
ance committee members. Under ISS’s new QuickScore governance ranking, tenure of more
than nine years will be considered “excessive” on account of “potentially compromis[ing] a di-
rector’s independence” and negatively factor into weightings, depending on the proportion of
directors with such tenure.323 Moreover, ISS may decide to revisit its voting policies with re-
spect to the imposition of director term limits in light of a study released by ISS, which found
correlations between long-tenured boards (an average of 15 or more years) and lower levels of
board independence and independent board leadership, as well as lower levels of “positive” gov-
ernance features, such as annual elections and a majority voting standard in director elections.324

Many institutional investors have their own views on these matters. While most favor
board refreshment generally, institutional investors have taken varied positions on whether—and
when—mandatory term limits or retirement ages are appropriate mechanisms for achieving such
refreshment. The Council of Institutional Investors urges boards “to consider carefully whether a
seasoned director should no longer be considered independent,”325 and, in 2016, CalPERS’s
adopted a bright-line rule for how it views director tenure to impact independence: “[CalPERS]
believe[s] director independence can be compromised at 12 years of service—in these situations
a company should carry out rigorous evaluations to either classify the director as non-
independent or provide a detailed annual explanation of why the director can continue to be clas-

321
ISS, 2016 U.S. Summary Proxy Voting Guidelines 19.
322
Id.
323
ISS, Governance QuickScore 3.0, at 11 (Rev. May 26, 2015), available at
http://www.issgovernance.com/file/products/quickscore_techdoc.pdf.
324
ISS, Board Practices: The Structure of Boards at S&P 1500 Companies 43 (2014).
325
Amy Borrus, Council of Institutional Investors, More on CII’s New Policies on Universal Proxy and Board Ten-
ure (Oct. 1, 2003), available at http://www.cii.org/article_content.asp?article=208.

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sified as independent.”326 In contrast, while BlackRock encourages boards to “routinely refresh
their membership,” it does not believe that long board tenure is necessarily an impediment to di-
rector independence and that “a variety of director tenures within the boardroom can be benefi-
cial to ensure board quality and continuity of experience . . . .”327 It remains to be seen whether
the evolving views of proxy advisory services and some institutional investors will lead to the
adoption of bright-line policies on director tenure.

326
CalPERS, Global Principles of Accountable Corporate Governance 16 (Rev. March 16, 2015), available at
https://www.calpers.ca.gov/docs/board-agendas/201603/invest/item05a-02.pdf. Additionally, CalSTRS also advo-
cates that boards should have a mechanism to ensure that there is periodic refreshment but does not support limiting
director tenure. CalSTRS, Corporate Governance Principles 3 (Feb. 2015). State Street will generally vote against
age and term limits unless the company is found to have poor board refreshment and director succession practices
and has a preponderance of non-executive directors with excessively long tenures serving on the board. State Street
Global Advisors, Proxy Voting and Engagement Guidelines—US 4 (Mar. 2015).
327
BlackRock, Proxy Voting Guidelines for U.S. Securities 4 (Feb. 2015).

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 XI. The Functioning of the Board

A. Executive Sessions

Whether or not a board has an independent chairman, its non-management directors

should meet regularly outside the presence of management in executive sessions. Executive ses-
sions allow for frank review of certain issues, such as management performance and succession
planning, that may be better discussed at times outside the presence of management. They can
also serve as a safety valve to deal with problems that directors may hesitate to bring up before
the full board. However, boards should be careful that the use of executive sessions does not
have a corrosive effect on board collegiality and its relations with the CEO. To guard against
this danger, boards should not use executive sessions as a forum for revisiting matters already
considered by the full board or to usurp functions that are properly the province of the full board.
Board minute books should reflect when executive sessions of the board were held and who was
in attendance, but it is not necessary and in some cases may be inappropriate to have detailed
minutes of those sessions. Of course there may also be times when, for reasons of confidentiality
or sensitivity, it is preferable for the independent directors to meet informally.

The NYSE requires listed companies to hold regular executive sessions of either non-
management directors or independent directors and, if those sessions include directors who do
not qualify as independent under the NYSE standards, the NYSE recommends that companies
also schedule an executive session of independent directors at least once a year.328

Nasdaq requires regular executive sessions, contemplated to mean at least twice a year.329
While many “best practices” proponents recommend holding an executive session along with
every regularly scheduled board meeting, the board should tailor the frequency of and agenda for
executive sessions to the particular needs of its company, rather than reflexively following the
latest trend. Each executive session should have a presiding director, although it need not be the
same director each time.

The SEC requires disclosure of the identity of the sole director chosen to preside over all
executive sessions or, if the presiding director differs at each meeting, how the presiding director
is chosen at each meeting.

B. Committees

A large proportion of the “heavy lifting” of board service is performed on the board’s
committees. In addition to the standing audit, compensation, and nominating and corporate gov-
ernance committees that companies are required or expected to have, boards may choose to cre-
ate other committees, either as standing committees or on an ad hoc basis, to deal with specific
issues that arise. Board committees have whatever powers and authorities the board chooses to
vest in them (subject to modest legal requirements; for example, a committee generally cannot
agree to a merger or to sell the company). Their function is to enable the board to perform its
many functions more efficiently and effectively.

328
Commentary to NYSE Listed Company Manual, Rule 303A.03.
329
Nasdaq Listing Rules 5605(b)(2), IM 5602-2.

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 We commend readers to our separate guidebooks on the Audit Committee and Compen-
sation Committee, but provide a brief description of the requirements for those committees be-
low because ensuring that the board is properly populated so that each of the committees will be
able to meet all requirements and perform its work well is central to the mission of the nominat-
ing and corporate governance committee.

1. Audit Committee

(a) Independence

In addition to qualifying as independent under the listing standards of the securities mar-
ket(s) on which a company’s securities are traded, audit committee members also must satisfy
the more stringent definition of audit committee independence set forth in Sarbanes-Oxley and
SEC Rule 10A-3. Both the NYSE and Nasdaq explicitly require compliance with those inde-
pendence requirements.330 Audit committee members may not, directly or indirectly, receive any
compensation from the company—such as consulting, advisory or similar fees—other than their
director fees, and may not be affiliates of the company. The affiliate disqualification covers any
individual that, directly or indirectly through one or more intermediaries, controls, is controlled
by, or is under common control with, the company. The prohibition on acceptance of compensa-
tory fees precludes audit committee service if the company makes any such payments either di-
rectly to the director, or indirectly to an immediate family member, or to law firms, accounting
firms, consulting firms, investment banks or financial advisory firms in which the director is a
partner, member, managing director, executive officer or holds a similar position.

(b) Financial Literacy

The major securities markets require that each member of an audit committee be able to
read and understand fundamental financial statements. Under the NYSE listing standards, it is
the board’s duty to determine, in its business judgment, whether each member of the audit com-
mittee is financially literate. While Nasdaq requires that each member be financially literate up-
on joining the audit committee, the NYSE permits members to become financially literate within
a reasonable period of time after joining.331

(c) Financial Expertise

The NYSE requires that at least one member of the audit committee must have account-
ing or related financial management expertise as determined by the board in its business judg-
ment. The expertise requirement generally is fulfilled by a background in finance that permits a
board to conclude in good faith that the director is capable of understanding the most complex
issues of accounting and finance that are likely to be encountered in the course of a company’s
business. The NYSE permits a board to presume that an individual who is an “audit committee
financial expert” within the meaning of the SEC’s rules (described below) has the requisite “ac-
counting or related financial management expertise” to satisfy the NYSE’s listing standards.332

330
NYSE Listed Company Manual, Rule 303A.01; Nasdaq Listing Rules 5605(c)(2), IM-5605-4.
331
Nasdaq Listing Rule 5605(c)(2)(A)(iv); Commentary to NYSE Listed Company Manual, Rule 303A.07(a).
332
Commentary to NYSE Listed Company Manual, Rule 303.07(a).

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 Under Nasdaq rules, at least one member of an audit committee must have past employ-
ment experience in finance or accounting, requisite professional certification in accounting, or
any other comparable experience or background that results in the individual’s financial sophisti-
cation, including being or having been a CEO, CFO or other senior officer with financial over-
sight responsibilities. An individual who is an “audit committee financial expert” within the
meaning of the SEC’s rules is deemed to fulfill this latter requirement.333

(d) Audit Committee Financial Expert

Under the direction of Sarbanes-Oxley, the SEC issued rules requiring a public company
to disclose in its annual reports (or annual proxy statements) whether any member of its audit
committee qualifies as an audit committee financial expert, as determined by the board in its
business judgment.334 The SEC regulations define an “audit committee financial expert” as an
individual who has all of the following attributes:

 an understanding of GAAP and financial statements;

 the ability to assess the general application of GAAP in connection with account-
ing for estimates, accruals and reserves;

 experience in preparing, auditing, analyzing or evaluating financial statements

that present a breadth and level of complexity of accounting issues that can rea-
sonably be expected to be raised by the company’s financial statements, or expe-
rience actively supervising persons engaged in such activities;

 an understanding of internal controls and procedures for financial reporting; and

 an understanding of audit committee functions.335

An individual must have acquired the five audit committee financial expert attributes
listed immediately above through any one or more of the following:

 education and experience as a principal financial officer, principal accounting of-

ficer, controller, public accountant or auditor, or experience in one or more posi-
tions that involve the performance of similar functions;

 experience in actively supervising a principal financial officer, principal account-

ing officer, controller, public accountant, auditor or person performing similar
functions;

 experience in overseeing or assessing the performance of companies or public ac-

countants with respect to the preparation, auditing or evaluation of financial
statements; or

333
Nasdaq Listing Rules 5605(c)(2)(A), IM-5605-4.
334
Item 407(d)(5)(i) of Regulation S-K. 17 C.F.R. 229.407(d)(5)(i).
335
Item 407(d)(5)(ii) of Regulation S-K. 17 C.F.R. 229.407(d)(5)(ii).

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  other relevant experience.336

2. Compensation Committee

Both the NYSE and Nasdaq impose additional independence requirements on directors
that serve on a compensation committee. Also, in order for a listed company that is a U.S. tax-
payer to take full advantage of available tax deductions for “performance-based compensa-
tion”337 paid to certain of its executives under Section 162(m) of the Internal Revenue Code (the
“Code”), at a minimum the compensation committee (or a designated subcommittee thereof)
needs to satisfy certain independence requirements that differ somewhat from the NYSE and
Nasdaq rules.

The NYSE rules require that, when evaluating the independence of any director who will
serve on the compensation committee, a board consider all relevant factors that could impair in-
dependent judgments about executive compensation including, but not limited to, (a) the source
of compensation of such director, including any consulting, advisory or other compensatory fee
paid by the company and (b) whether the director is affiliated with the company or one of its
subsidiaries or affiliates.338

Nasdaq rules prohibit compensation committee members from accepting any consulting,
advisory or other compensatory fees from the company or its subsidiaries (other than directors’
fees). Under Nasdaq listing standards adopted in response to Dodd-Frank as reflected in SEC
Rule 10C-1, Nasdaq-listed companies are now required to have a compensation committee con-
sisting of at least two independent directors. Nasdaq provides, however, that, if a compensation
committee is composed of at least three members, then, under exceptional and limited circum-
stances and if certain conditions are met, one director who is not independent under its rules may
be appointed to the compensation committee without disqualifying the compensation committee
from considering the compensation matters that would ordinarily be entrusted to it had it been
fully independent.339 Additionally, a compensation committee or a company’s independent di-
rectors must approve equity compensation arrangements that are exempted from the Nasdaq
shareholder approval requirement as a prerequisite to taking advantage of such exemption.340

Section 162(m) of the Code requires that the compensation committee (or a designated
subcommittee thereof) be composed solely of two or more “outside directors.”341 If a compensa-
336
Item 407(d)(5)(iii) of Regulation S-K. 17 C.F.R. 229.407(d)(5)(iii).
337
26 U.S.C. § 162(m)(4)(C), I.R.C. § 162(m)(4)(C); 26 C.F.R. § 1.162-27(e), Treasury Regulation § 1.162-27(e).
338
NYSE Listed Company Manual, Rule 303A.02(a)(ii).
339
The specific conditions that must be met in order for such exemption to be available, as well as the precise con-
tours of the Nasdaq definition of “independent,” are discussed in Appendix A and Section II.C.1 of this Guide, re-
spectively.
340
Nasdaq Listing Rules 5635(c)(2), (c)(4). Under these Nasdaq Rules, shareholder approval is required prior to the
issuance of securities when an equity compensation plan is to be established or materially amended, except for,
among other things, tax-qualified non-discriminatory employee benefits plans that are approved by the company’s
compensation committee and certain “sign-on” equity compensation awards that are approved by the company’s
compensation committee.
341
26 U.S.C. § 162(m)(4)(C), I.R.C. § 162(m)(4)(C); 26 C.F.R. § 1.162-27(e), Treasury Regulation § 1.162-27(e).
The general test for determining whether an individual can qualify as an outside director for these purposes is set
forth in Annex D the Directors’ and Officers’ Questionnaire, Part II, Item 12. If an individual cannot answer “No”
to each of the questions listed in such Item 12, the individual should contact the company’s designated legal counsel

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tion committee (or a designated subcommittee thereof) is comprised solely of two or more out-
side directors, then the company can, so long as certain other requirements of Section 162(m) of
the Code are satisfied, structure compensation that is to be paid to certain of its executives in a
manner that qualifies as fully tax deductible.

3. Risk Management Committee

The growing complexity of companies and the fallout from the financial crisis have led to
an increased focus on how boards are overseeing the management of their companies’ risk. The
NYSE rules require a company’s audit committee to “discuss guidelines and policies to govern
the process by which risk assessment and management is undertaken.” Accordingly the audit
committee often takes the lead in risk management oversight. However, the NYSE rules permit
a company to create a separate committee or subcommittee to be charged with the primary risk
oversight function, as long as the audit committee reviews the separate committee’s work in a
general manner and continues to discuss policies regarding risk assessment and management.
Given the audit committee’s number of other responsibilities, the scope and complexity of a
company’s business risks may make a separate risk committee desirable. For some companies
such a committee is mandated: Dodd-Frank requires each publicly traded bank holding company
with greater than $10 billion of assets to establish a stand-alone, board-level risk committee.

There is, however, no one-size-fits-all approach to risk management. Many boards

choose not to create a separate risk committee, instead charging the audit committee with risk
oversight, coupled with periodic review by the full board. In fact, a 2014 survey found that only
eight percent of S&P 500 companies have a standalone risk management committee. 342 When
this is the case, the audit committee must be sure to devote adequate time and attention to its risk
oversight function, outside the context of its review of financial statements and accounting com-
pliance. A board may also choose to allocate different areas of risk management among multiple
existing committees, which may result in a more balanced workload and a wider appreciation of
the company’s risks. Moreover, specialized committees may be tasked with specific areas of risk
exposure. Banks, for instance, often maintain credit or finance committees, while some energy
companies have public policy committees largely devoted to environmental and safety issues. If
responsibility for risk oversight is divided among multiple committees, however, care must be
taken to coordinate the committees’ work and to share information appropriately with each other
and with the full board. The board and the nominating and corporate governance committee
should carefully consider what approach makes the best sense for its particular company and en-
sure that risk management is treated as a priority throughout the organization.

4. Special Committees

A company may want to form a special committee of the board of directors in the face of
certain corporate situations. Generally, a special committee will be needed in situations where
the majority of the directors on a board has, or could reasonably appear to have, a conflict of in-

to discuss the facts and circumstances of the individual’s answers, so that a more detailed determination can be made
as to whether the individual constitutes an outside director for purposes of Section 162(m) of the Code.
342
Ernst & Young LLP, Let’s Talk: Governance, Beyond Key Committees: Boards create committees to support
oversight responsibilities 1 (April 2014), available at http://www.ey.com/Publication/vwLUAssets/EY_-
_Lets_talk:_fovernance/$FILE/EY-lets-talk-governance.pdf.

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terest in a transaction or matter. In such situations, a special committee comprised of independ-
ent, disinterested members of the board can provide a way to assure shareholders that a corporate
decision is fair and not the result of any undue influence by potentially conflicted directors. Di-
rectors may be considered interested to the extent they may have an interest or potential interest
on both sides of a transaction, or could otherwise gain an economic benefit above and beyond
that of the company generally. Specific examples of transactions that may lead to the formation
of a special committee include management buyouts and controlling shareholder transactions, in
each case where members of the board represent or are influenced by the conflicted party. If
formed, in addition to requiring all members of the special committee to be independent with re-
spect to the potential conflict, the special committee may also engage independent legal and fi-
nancial advisors. The terms and breadth of the board resolution establishing the special commit-
tee are extremely important and may be analyzed by the courts in determining the level of judi-
cial scrutiny warranted in a conflict situation. In many cases, the special committee should be
given the power to act on behalf of the company as the independent negotiator for the transaction
as necessary, with the full ability to take any requisite actions to come to a fair, independent and
informed determination.

A company may also want to form a special committee in the face of shareholder deriva-
tive litigation. Special litigation committees may be formed to determine whether certain share-
holder derivative claims should be pursued, settled or dismissed, but since a majority of directors
will often be interested as defendants in the face of litigation, the standard by which independ-
ence is evaluated may be more stringent than in the context of a corporate transaction. As the
Delaware Supreme Court stated in Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stew-
art, “[i]ndependence is a fact-specific determination made in the context of a particular case.
The court must make that determination by answering the inquiries: independent from whom
and independent for what purpose?”343 In Beam v. Stewart, the Delaware Supreme Court deter-
mined that a personal friendship or outside business relationship, standing alone, is insufficient
to raise a reasonable doubt about a director’s independence in the context of pre-suit demand on
the board.344 However, by contrast, in In re Oracle Corporation Derivative Litigation, the Del-
aware Court of Chancery, in looking at the purpose for which the special committee was formed,
found that the members of a special litigation committee formed to investigate alleged insider
trading by other directors lacked the requisite level of independence because, like the investigat-
ed directors, the special committee members had personal and professional ties to Stanford Uni-
versity.345

343
Beam ex rel. Martha Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1049-50 (Del. 2004).
344
Beam, 845 A.2d at 1049-52. However, in 2015, the Delaware Supreme Court clarified that Beam was not in-
tended to suggest “that deeper human friendships could not exist that would have the effect of compromising a di-
rector’s independence.” Delaware County Employees Retirement Fund v. Sanchez, 124 A.3d 1017, 1022 (Del. Sup.
2015). Drawing on this notion, the Delaware Supreme Court questioned the independence of a director who: (i) had
a close friendship of over 50 years with the controlling shareholder and chairman of the company; and (ii) was an
executive at an insurance brokerage that is a wholly owned subsidiary of a separate corporation of which the same
chairman was the largest stockholder. Id. at 1022-23.
345
In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003).

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 5. Other Committees

Some companies form other committees to address their specific needs, which may be
done on a permanent or ad hoc basis. Companies operating in industries subject to substantial
environmental regulation and oversight, for example, may establish committees to address envi-
ronmental matters. Exxon Mobil Corporation, for instance, has established an ongoing Public
Issues and Contributions Committee which “reviews the effectiveness of the Corporation’s poli-
cies, programs, and practices with respect to safety, security, health, the environment, and social
issues.”346 BP p.l.c. formed a Gulf of Mexico committee in July 2010 to help the company
monitor its response to the Deepwater Horizon accident and “to oversee the management and
mitigation of legal and license-to-operate risks arising out of the Deepwater Horizon accident
and oil spill.”347 Companies may also establish ad hoc committees to evaluate strategic initia-
tives or other tasks for a limited time period and may subsequently dissolve any such committee
upon completion of its specific task.

As discussed in Section VI, the chief executive of Vanguard, one of the largest institu-
tional investors, suggested that boards should create “shareholder liaison committees” to foster
closer relations with major investors. The idea of such deepened engagement has merit and is
consistent with the prevailing shareholder-centric view of corporate governance, but a subcom-
mittee (perhaps of the nominating and governance committee) might be a more appropriate and
flexible way to implement this concept.

Committees are also often formed for short-term purposes of convenience, such as to give
final approval to the terms of an agreement within parameters identified by the board, or to for-
mally establish a meeting date. Sometimes this committee consists of just one director, often the
CEO, when the formal action should be taken by the board rather than by officers.348

346
Exxon Mobil Corp. Proxy Statement (Schedule 14A), at 14 (Apr. 11, 2014), available at http://cdn.exxonmobil.
com/~/media/Reports/Other%20Reports/2014/2014_Proxy_Statement.pdf.
347
BP p.l.c., 2014 Annual Report (Form 20-F), at 69 (Mar. 3, 2015), available at http://www.bp.com/content/dam/
bp/pdf/investors/BP_Annual_Report_and_Form_20F_2014.pdf.
348
However, it should be noted that there has been significant pushback against small (i.e., two-person) board
committees when the committee plays a critical function from both governance activists and institutional sharehold-
ers. Glass Lewis opposes re-election of directors at companies with fewer than three audit committee members, and
Global Head of Corporate Governance at BlackRock Inc. has noted that two-member committees are “out of step
with how other boards operate.” Joann S. Lublin, Two-Person Board Committees Exist at Some Big Firms, THE
WALL ST. J. (Jan. 27, 2016), http://www.wsj.com/articles/two-person-board-committees-exist-at-some-big-firms-
1453942169.

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 XII. Succession Planning

A. CEO Succession Planning

Arguably the single most important responsibility of the board is selecting the company’s
CEO and planning for his or her succession. The integrity, dedication and competence of the
CEO are critical to the success of the company and the creation of long-term shareholder value.
Historically, the nominating and corporate governance committee has led this process and rec-
ommended to the board the CEO’s successor, and most boards continue to charge it with this re-
sponsibility.349 As executive compensation has become a more central and scrutinized issue,
boards have increasingly given their compensation committees a role in succession planning.
Some boards involve both the nominating and corporate governance and the compensation
committee in succession planning. If a board takes this approach, it is important that the respon-
sibilities of the two committees be clearly delineated to avoid conflict, redundancy or parts of the
process slipping through the cracks. Regardless of what committee is charged with leading the
effort, a board must remember that it bears the ultimate responsibility for succession planning.
Between 2001 and 2013, 442 companies, or 88 percent of the S&P 500, managed at least one
transition of the CEO, chairman, or both roles.350 Management succession planning is, in addi-
tion to prudent practice, a requirement for NYSE-listed companies. The NYSE corporate gov-
ernance guidelines state that succession planning should include formulating policies and princi-
ples for CEO selection and performance review, as well as policies regarding succession in the
event of an emergency or the retirement of the CEO.351 Nasdaq does not have such a require-
ment.

The consequences of failing to effectively plan for the CEO’s succession can be dire. If a
company is unprepared for when a vacancy occurs—which could happen unexpectedly for a
number of reasons—a leadership vacuum can arise that can shake confidence in the company,
both internally and externally, make the company more vulnerable to takeover attempts or share-
holder activism and render it unable to effectively seize opportunities or respond to challenges in
the interim. The absence of a thorough, well-formulated plan will likely force the board to re-
spond reactively and without the opportunity for calm deliberation upon the unexpected depar-
ture of the CEO.

Despite the clear importance of succession planning, a number of factors may impede the
board from giving this function the attention it warrants.352 Succession planning can be a sensi-
tive topic. Some boards may be hesitant to consider the replacement of the CEO when the com-

349
This is particularly the case for large companies. A 2015 survey found that 28.6 percent of companies with at
least $100 billion in assets formally assign succession planning responsibilities to the nominating and corporate gov-
ernance committee compared to only 8.3 percent of companies with less than $5 billion in assets. The Conference
Board, CEO Succession Practices 27 (2015).
350
Korn-Ferry International and National Association of Corporate Directors, Annual Survey of Board Leadership
2013, at 26.
351
NYSE Listed Company Manual, Rule 303A.09.
352
A recent survey found that 78 percent of boards formally discuss CEO succession at least once per year and 22
percent of boards discuss succession planning four or more times per year. Spencer Stuart, Spencer Stuart Board
Index 2015 19 (Nov. 2015), available at https://www.spencerstuart.com/research-and-insight/spencer-stuart-us-
board-index-2015.

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pany is thriving or to compound his or her concerns when the company is facing difficulties.
Perhaps an even greater danger to effective succession planning is the natural tendency to focus
on the more immediate challenges of running the company at the expense of long-term or con-
tingency planning. This danger is especially acute when the board lacks a formalized structure
and process for succession planning.

1. Long-Term and Contingency Planning

The nominating and corporate governance committee should ensure that the company is
engaged in both long-term succession planning and contingency or emergency planning. A 2015
survey found that 73 percent of boards have both emergency and long-term succession plans and
that 25 percent of boards only have an emergency succession plan in place.353 Long-term plan-
ning should have an eye toward the expected timeline for the incumbent CEO’s departure in the
normal course and cultivating potential successors with that timeline in mind. To do this effec-
tively, the nominating and corporate governance committee should maintain an ongoing dialogue
with the incumbent CEO regarding his or her future plans. The nominating and corporate gov-
ernance committee should also assess the likelihood and timing of a change of CEO based on his
or her performance and the direction of the company. This may be most efficiently done in con-
junction with the board’s annual review of the CEO. See Section XIV.C.

Contingency planning aims to keep the company prepared in the event the company must
fill an unexpected vacancy, which may occur due to a scandal or the death or departure of the
CEO. The nature of contingency planning requires the nominating and corporate governance
committee to adopt an “expect the unexpected” mindset. This has become even more imperative
in recent years, as the rate of CEO turnover has increased. According to a 2015 study, 1,341
CEOs left their posts in 2014, the highest figure since 2008.354 To avoid being caught flat-
footed, the nominating and corporate governance committee should ensure that it has considered
and developed internal candidates for both the long-term and in the event of an immediate and
unexpected vacancy.

2. Approach

There are no prescribed procedures for effective succession planning, and each board and
nominating and corporate governance committee should take the time to fashion a process ap-
propriate for its particular company. However, while the process should be tailored to the unique
circumstances of each company, there are certain guiding principles that all companies should
follow. Most fundamentally, succession planning should be a proactive, comprehensive and on-
going process, rather than an ad hoc or check-the-box activity. This should include, at minimum,
an annual comprehensive discussion of internal candidates and emergency plans, which is often
combined with the board’s annual evaluation of itself and management. See Section XIV.A.

Effective succession planning requires the board and the nominating and corporate gov-
ernance committee to possess an in-depth knowledge of its company and its internal pipeline of

353
Id.
354
Press Release, Challenger, Gray & Christmas, Inc., CEO Turnover Remains Constant: 110 CEO Changes Start
2015; Oil Prices Impact CEOs Too, Feb. 11, 2015, available at http://www.challengergray.com/press/press-releases/
2015-january-ceo-report-110-ceos-out-some-oil-prices#sthash.wfFjjYPm.dpuf.

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candidates and possibly to monitor outside candidates as well. The board, and the nominating
and corporate governance committee if it has been tasked with leading the effort, must take a
hands-on approach. It should not unduly defer to the current CEO, rely on résumés, or otherwise
outsource the process. The nominating and corporate governance committee should take the lead
in ensuring that succession planning is regularly discussed at the board level and that a systemat-
ic process for succession planning is in place. As part of this systematic process, the board
should regularly review its procedures and may find it helpful to formulate a list of qualities it
seeks in a candidate. With the tremendous and ever increasing demands on boards’ time, a board
that fails to make succession planning an institutionalized priority risks falling into the trap of
ignoring the issue until an unforeseen crisis has occurred.

3. Creating a Candidate Profile

The search for a CEO should begin with identifying the challenges and opportunities that
the company is expected to encounter in the applicable timeframe. Once this has been done, the
board and the nominating and corporate governance committee can identify the traits and quali-
ties in a prospective CEO that would be most useful in leading the company going forward. The
board and nominating and corporate governance committee should bear in mind that, as the cir-
cumstances and strategic direction of the company change, these traits and qualities may not be
the same ones that distinguished the incumbent CEO. These desired traits should be narrowed to
a manageable number to facilitate the nominating and corporate governance committee’s focus
on the most essential areas.

After formulating a desired profile for the next CEO, the board and the nominating and
corporate governance committee must establish a well-designed selection process to find candi-
dates who meet these requirements. This will provide a roadmap to keep the search focused and
also provide a neutral, pre-agreed-upon path to help avoid or resolve the differences of opinion
that often arise during the process.

Once the selection process has winnowed down a short list of the potential candidates
possessing the desired qualities, the nominating and corporate governance committee should
consider two key corporate-governance-related elements before reaching a final decision. First,
the new CEO should be a good fit with the culture of the board and the company. Second, the
new CEO’s long-term vision for the company must align with the vision of the board. No matter
the candidate’s other qualifications, if these two elements are absent, the candidate is likely to
end up a poor fit for the company. The importance of cultural compatibility and a shared strate-
gic vision underscores the necessity of the board getting to know candidates personally, as these
elements cannot be ascertained from reviewing résumés or soliciting recommendations from a
search firm. It should be noted that both of these elements depend heavily on the ability of the
CEO and the board to communicate and collaborate effectively. This in turn depends on a
shared understanding of the respective roles of the CEO and the board. A CEO must understand
that the board has the ultimate responsibility for overseeing the management of the company,
while the board should appreciate that the day-to-day business of the company is the purview of
management, led by the CEO. This understanding will enable the CEO and the board to sustain
an ongoing cooperative relationship founded on mutual respect.

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 4. Internal and External Candidates

The most promising prospects for the next CEO often reside within the company. In-
deed, promotion from within has often proven to be far more successful than hiring a CEO from
the outside. CEOs promoted internally benefit from greater familiarity with the company and are
typically less expensive (and their compensation less scrutinized) than CEOs recruited from out-
side. Development of an internal talent pipeline is therefore a strategic imperative for any com-
pany, and the board has an important role to play in this process. The search team should active-
ly identify promising leaders to keep a bench of qualified candidates at the ready. One useful
step is to create opportunities for promising officers to interact with or appear before the
board.355 This has the benefit of both familiarizing the board with potential candidates and de-
veloping the officers’ ability to interact with the board. The succession planning team should
also consider working with the CEO to establish policies to evaluate internal candidates and to
ensure that they are given opportunities to develop the skills and experience needed to possibly
head the company in the future; for example, by rotating candidates through the company’s key
departments. While the CEO should exercise primary responsibility for building the company’s
management team, the board can also help develop its talent pipeline by seeing that appropriate
recruiting and retention policies are in place at all levels of management.

Despite the importance of developing a talent pipeline and the benefits of internal promo-
tion, a CEO succession plan should also include ongoing consideration of external candidates.
This will enable the nominating and corporate governance committee to assess all of its options
and will take on additional importance if the board determines that a change in strategic direction
is in the company’s best interest. In all cases, consideration of external candidates will help the
board reach a more informed decision by having both a wider pool of candidates and an added
ability to benchmark internal candidates. Indeed, a recent survey found that nearly 71 percent of
companies have a formal process for reviewing internal succession candidates, and 51 percent
benchmark internal candidates against external candidates.356

5. Seeking the Input of Others

Succession planning should be a collaborative process that enables the nominating and
corporate governance committee, and ultimately the board, to benefit from a number of perspec-
tives and to utilize all of the company’s resources. One such resource is the compensation com-
mittee, whose role has become increasingly important due to the centrality of executive compen-
sation in attracting and retaining a qualified CEO, and because of the increased scrutiny generat-
ed by the topic in recent years. The nominating and corporate governance committee may also
benefit from discussions with senior officers in the company’s human resources department, who
should have detailed knowledge about pipeline talent as well as a specialized understanding of
what skills these promising candidates need to develop.

The nominating and corporate governance committee should consider engaging outside
advisors to aid in the canvassing for and assessment of external candidates. While it is by no

355
“Nearly all boards (98%) rely on regular interactions during board meetings and presentations to get to know
internal succession candidates.” Spencer Stuart, Spencer Stuart Board Index 2015 19 (Nov. 2015), available at
https://www.spencerstuart.com/research-and-insight/spencer-stuart-us-board-index-2015.
356
Id.

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means necessary to engage an outside advisor to lead the CEO search process, the broader reach
and perspective they can bring to bear can be invaluable in certain circumstances. It is true that
the services of a top-flight recruiting agency can be expensive, but the board must keep in mind
that this is one of the most important decisions they will make. A third party should at a mini-
mum be retained to lead a thorough verification and background check so that the board can rea-
sonably rely on this information when selecting a candidate.

6. Involvement of the Current CEO

When a company’s CEO enjoys the full confidence of the board, he or she should play a
prominent role in the succession planning process. In many circumstances, the board may want
the CEO to manage the process, with the board or the nominating and corporate governance
committee’s oversight. This is because the incumbent CEO is uniquely positioned to understand
the needs of the position and determine the successor best prepared to lead the company going
forward. A 2014 survey by Spencer Stuart found that 56 percent of CEOs evaluate internal can-
didates and report back to the board, 29 percent serve as the overall counsel to the committee
charged with succession planning, and 31 percent lead the succession process.357 Absent special
circumstances, any process not involving the CEO will be a poor substitute and presents a num-
ber of disadvantages. Without the insight of the CEO, the board may struggle to reach consensus
on priorities or candidates. This reality has been exacerbated in the past decade by the tremen-
dous emphasis placed on director independence, given the potential challenges in finding candi-
dates with special expertise and experience in the industry who also qualify as independent.

The incumbent CEO should keep the chair or lead director regularly involved and coor-
dinate his or her efforts with those of the nominating and corporate governance committee. The
chair or lead director and the nominating and corporate governance committee should in turn up-
date the rest of the board during the board’s executive sessions. This will enable the other inde-
pendent directors to express their views privately, while reinforcing an understanding that choos-
ing the next CEO is ultimately the responsibility of the entire board.

In certain circumstances, such as when the board lacks full confidence in the incumbent
CEO or when a crisis prevents use of the normal succession process, the nominating and corpo-
rate governance committee may need to take a larger role and minimize the CEO’s involvement.
Regardless of the circumstances, the committee must take an active role in the process and avoid
even the perception that it is merely a rubber stamp for the incumbent CEO. Choosing the com-
pany’s next CEO is one of the most difficult and consequential decisions a board must make.
The nominating and corporate governance committee must work vigilantly to ensure that the
board is well prepared to make this decision when the time comes.

B. Director Succession Planning

In addition to CEO succession planning, nominating and corporate governance commit-

tees should take many of these same steps with respect to succession planning for the board (of
course, the risk of crisis is lower with respect to the board because there are many directors but
only one CEO). However, director succession planning was an area of concern for boards in
357
Spencer Stuart, Spencer Stuart Board Index 2014, at 33, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2014.

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2015: Only 42 percent of boards thought that they were spending sufficient time on director suc-
cession planning.358 The nominating and corporate governance committee should have both
long-term and contingency plans in place to prepare for the departure of a director. This plan-
ning is particularly important for directors who occupy leadership positions on the board or pos-
sess important qualities, such as financial expertise. The nominating and corporate governance
committee may find this planning most effectively done in conjunction with the annual evalua-
tion of the board, its committees and directors. See Section XIV.A. For an extensive discussion
of board composition and qualifications that the nominating committee should consider during
board succession planning, see Section VII.B.1. The process of identifying and recruiting new
directors is discussed in Section VIII.A.

There are various ways to change the board’s composition. Many boards have the au-
thority under their company’s charter to increase or decrease the size of the board through a reso-
lution. This power can be used to proactively strengthen the board by adding an attractive can-
didate without waiting for a vacancy or replacing an incumbent director. Alternatively, there
may be circumstances where decreasing the board size, at least temporarily, is the best option.
Ordinary attrition of directors often provides an opportunity to update the board’s skill set to bet-
ter match the company’s changing circumstances. Sometimes a nominating and corporate gov-
ernance committee may determine that an incumbent director no longer fits the company’s needs
and recommend against that director’s renomination. In a recent survey by Pricewaterhouse-
Coopers, 40 percent of the directors polled suggested that someone on their board should be re-
placed due to diminished performance because of aging, lack of required expertise, poor prepara-
tion for meetings or other factors, an increase from only 31 percent in 2012. 359 If the nominating
and corporate governance committee holds this view on a director, it must be prepared to rec-
ommend a change. However, it should resist attempts by corporate governance activists to dis-
rupt a well-functioning team in the name of “board refreshment” as an end in itself. This newly
popular phrase has been seized upon to promote various agendas, including diversity goals and
director independence. However important those criteria may be, they only should be a part of
the nominating and corporate governance committee’s holistic assessment and not simply an ex-
cuse to make changes.

As discussed in Section X.B, there is a growing view among shareholder activist groups
and proxy advisory firms that long director tenure can affect a director’s independence. As it
plans for board succession, the nominating and corporate governance committee must be aware
of that view and monitor its prevalence, but always remember the benefits that flow from having
experienced and long-term directors on the board in terms of familiarity with the company busi-
ness, history, values and institutional knowledge.

Sometimes the regular succession planning process of a board is interrupted by an unex-

pected event. One such event that is occurring with increasing regularity (and may get worse as
proxy access becomes more prevalent) is the loss of key directors in a short-slate proxy contest.
Such an event will require the nominating and corporate governance committee to reevaluate the
resources it has available to it, in terms of qualifications and skill sets, to ensure that the board

358
PricewaterhouseCoopers, 2015Annual Corporate Director Survey 12 (2015), available at
http://www.pwc.com/us/en/corporate-governance/annual-corporate-directors-survey/downloads.html.
359
Id. at 8.

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continues to be able to fulfill its many duties. Although not always the case, it has been our ex-
perience that dissident directors who are elected to boards as a result of proxy fights often go on
to become valuable and productive members of the board. Understandably, however, nominat-
ing and corporate governance committees may be reluctant to assign newly elected dissident di-
rectors to particular committees or roles until they appreciate how they will affect the dynamic of
the board, and have a sense of their expected longevity on the board.

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 XIII. Director Compensation

A. Vesting Responsibility for Setting Director Compensation

While the NYSE and Nasdaq rules do not require a particular process for setting director
compensation, this responsibility should be entrusted either to a committee, such as the nominat-
ing and corporate governance committee or, in some instances, the compensation committee, or
to the full board. When directors who would directly benefit from a plan are charged with ap-
proving the plan, courts will review the plan under the entire fairness standard, rather than the
more deferential business judgment rule. Thus, it is generally best for the board to charge the
nominating and corporate governance committee with setting director compensation, subject to
the approval of the full board. Some boards place this responsibility with a company’s compen-
sation committee. In either case, the committee’s decision with respect to non-employee director
compensation should always be subject to full board review and approval. To avoid an inference
that the two are connected, boards should strive not to increase the compensation of management
at the same time they increase the compensation of non-management directors. Note that offic-
ers of the company serving on the board typically receive no compensation for this service.

B. Selecting the Form and Amount of Compensation

If the nominating and corporate governance committee participates in recommending di-

rector compensation, it should carefully consider both the form and the amount of the compensa-
tion. As to form, director compensation ordinarily consists of a mix of cash and equity payments
in an effort to align directors’ incentives with those of the company. A recent survey found that
54 percent of the average director’s compensation is paid in grants of the company’s stock, 38
percent in cash, and five percent in stock options.360 While the percent of stock-based compen-
sation has increased in recent years, these programs should be carefully designed to ensure that
they do not create the wrong type of incentives. Restricted stock grants, for example, are gener-
ally considered to be preferable to option grants because they expose a holder to both upside po-
tential and downside risk, which may better align director and shareholder interests and reduce
excessive risk taking.

As the responsibilities, time commitment, public scrutiny and risk of personal liability en-
tailed in board service have increased in recent years, so has the average director’s compensa-
tion. Indeed, the average director retainer has doubled in the past decade, and the average total
director compensation is now roughly $277,000, a five percent increase from 2014.361 The nom-
inating and corporate governance committee should consider the time commitment and other re-
sponsibilities of the directors as well as “benchmarking” the compensation against that being
paid to directors of comparable companies. While directors are not employees and compensation
is not their primary motivation for serving, offering appropriate and competitive compensation is
an important factor in attracting high quality directors. As part of the board’s annual self-
evaluation, the nominating and corporate governance committee should therefore consider

360
Spencer Stuart, Spencer Stuart Board Index 2015, at 30, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2015.
361
Id.

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whether director compensation programs need adjustment to reflect the increased responsibilities
of director service and director pay at comparable companies.

The nominating and corporate governance committee should carefully consider the mix
between individual meeting fees and retainers, particularly in light of the business and regulatory
demands that have deepened director involvement and the technological innovations that have
changed the way directors meet. Most companies have de-emphasized per-meeting fees and in-
stead increased retainers in light of these developments. In 2015, only 21 percent of S&P 500
companies pay board meeting fees, compared to 62 percent 10 years ago.362 Increasing retainers
in place of meeting fees offers the dual benefits of simplifying director pay and avoiding the is-
sues that arise from electronic forms of communication and frequent, short telephonic meetings.

C. Compensation for Additional Director Responsibilities

As companies transition away from per-meeting fees toward increased retainers, they
should consider whether additional retainer pay is appropriate for committee service that entails
extra responsibilities and time commitment. Such supplemental pay is legal and appropriate, and
indeed, 95 percent of S&P 500 companies provide some retainer to committee chairpersons and
41 percent pay some retainer to committee members.363 The increase in responsibilities required
of directors is especially pronounced for non-executive board chairs, lead directors and commit-
tee chairs. Accordingly, particular attention should be paid to whether these individuals are be-
ing fairly compensated for their efforts and contribution. Note also that in response to greater
shareholder sensitivities, companies may wish to review any director perquisite programs, as
well as director legacy and charitable award programs. Survey data will provide a useful starting
point in determining appropriate additional director compensation. Nonetheless, the nominating
and corporate governance committee should be willing to step outside of common practice if it
has a persuasive reason that the best interests of the company are advanced by so doing.

Director compensation is one of the more difficult corporate governance issues, as the
need to appropriately compensate directors runs up against the risk that their compensation may
result in factionalism on the board, raise an issue as to directors’ independence or cause distrac-
tion by shareholder activists. The NYSE warns that questions as to a director’s independence
may be raised if compensation is beyond what is customary, if the company makes substantial
charitable contributions to organizations with which a director is affiliated, or if the company
enters into consulting contracts with, or provides other indirect compensation to, a director. 364
All of these issues should be tracked and carefully scrutinized by the nominating and corporate
governance committee to avoid jeopardizing directors’ independence or creating any appearance
of impropriety.

D. SEC Disclosure

SEC rules require a Director Compensation Table that discloses director compensation
during the prior fiscal year that is comparable to the Summary Compensation Table for named

362
Id. at 32.
363
Id. at 33-34.
364
NYSE Listed Company Manual, Rule 303A.09.

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executive officers.365 The Director Compensation Table must disclose, among other things, di-
rector perquisites, consulting fees and payments or promises in connection with director legacy
and charitable award programs.366 Additionally, the company must provide narrative disclosure
of its processes and procedures for the determination of director compensation.367

365
Item 402(k) of Regulation S-K. 17 C.F.R. 229.402(k).
366
Item 402(k)(2)(vii) and Instruction to Item 402(k)(vii) of Regulation S-K. 17 C.F.R. 229.402(k)(2)(vii).
367
Item 402(k)(3) of Regulation S-K. 17 C.F.R. 229.402(k)(3).

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 XIV. Evaluations of the Board, Committees and Management

Boards of NYSE-listed companies are required to conduct annual performance evalua-

tions of the board itself and board committees, and the nominating and corporate governance
committee must be tasked with “oversee[ing] the evaluation of the board and management.”368
While not required by Nasdaq, the annual board evaluation is now a nearly universal practice,
with 98 percent of companies engaging in some form of it—up from 94 percent five years ago.369
The board and the nominating and corporate governance committee are not required by listing
standards or other law to adopt any particular approach to conducting this evaluation, leaving the
flexibility to proceed in a way tailored to the company’s and board’s particular needs and culture.

A. The Board’s Annual Governance Review

The board’s annual self-evaluation provides an opportunity and forum for a comprehen-
sive review of the company’s performance, strategy, corporate governance and responses to ad-
versity during the previous year. The board should review its structure, processes and proce-
dures to ensure that they are enabling the board to effectively carry out its responsibilities. This
should include a review of the number and mix of directors; the role and functioning of the
chairman or lead director and executive board sessions; board agendas; board committee struc-
ture and composition; and the quality of information and professional and other resources made
available to directors. The board should examine its role in developing and monitoring corporate
strategy and evaluate the effectiveness of the board and management in implementing this strate-
gy. As part of this evaluation, directors should consider whether the board’s structure, processes
and proceedings afforded them sufficient opportunity to converse with the company’s senior ex-
ecutives regarding the company’s strategy and performance. The board should also review cor-
porate governance matters such as monitoring of corporate controls, management review, suc-
cession planning and executive compensation.

The board’s annual evaluation should include a review of the company’s corporate gov-
ernance guidelines to make certain that they are clear and relevant and that they adequately ad-
dress key topics such as related-party transactions and conflicts of interest. Corporate govern-
ance documents should be updated to reflect any applicable legal or regulatory changes. They
should also be company-specific, rather than generic and overbroad. This will serve both to
make the documents a more useful guide and also avoid a failure to comply with a policy that
may be considered in hindsight as indicative of a lack of due care. Conversely, keeping policies
up to date and adhering to these procedures in good faith can be important factors in establishing
the applicability of exculpatory charter provisions in any litigation that might arise challenging
board actions. It is therefore important that the nominating and corporate governance committee
implement and update corporate governance guidelines and measure the board and its commit-
tees’ performance against these guidelines.

368
NYSE Listed Company Manual, Rule 303A.04(b)(i).
369
Spencer Stuart, Spencer Stuart Board Index 2015, at 29, available at
https://www.spencerstuart.com/~/media/pdf%20files/research%20and%20insight%20pdfs/ssbi-2015_110215-
web.pdf?la=en.

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 If the company faced any crises during the year, the annual evaluation should include a
review of how the crises came about and how they were handled. Any review should identify
the factors that caused or exacerbated the crises and examine the steps taken to correct any defi-
ciencies. Directors should consider the effectiveness of the board’s and management’s response
to the crises. As part of this inquiry, directors should ask whether they received adequate and
timely information from management and whether closer contact with management could help
avoid future crises. Directors should also evaluate the contributions of outside advisors, if any
were retained, in responding to the crises. Similarly, the evaluation should examine the appro-
priateness of the board’s and management’s response to any whistleblower complaints or share-
holder proposals made during the year. During the evaluation, the whole board should be briefed
on the status and results of any investigations into whistleblower allegations. The board should
also review the company’s shareholder relations program and ensure that it is maintaining an ap-
propriate level of interaction with key shareholders.

1. Methods of Evaluation

A questionnaire or survey of directors is the most common method of evaluating the full
board, with group discussions and interviews of individual directors also widely used.370 Each of
these methods has its advantages. For example, questionnaires and surveys are time-efficient,
produce quantifiable results and may encourage directors to speak more freely, whereas inter-
views and group discussions allow for in-depth and interactive discussion. Additionally, many
nominating and corporate governance committees seek management’s perspective on the interac-
tion between the board and management as part of the review. However, there is no single, es-
tablished procedure for a board’s annual review of its corporate governance. In order to effec-
tively perform its oversight function, it is important for each nominating and corporate govern-
ance committee to develop a customized approach to its annual review using the combination of
methods it determines are appropriate for its company’s particular circumstances. The board
should avoid an overemphasis on check-the-box paperwork and substantively focus on the most
critical issues facing its company. More important than the method employed is the result of fa-
cilitating an honest assessment of the board’s performance and a meaningful discussion of areas
for improvement.

It is perfectly acceptable for a board to conduct its annual review during a board meeting
without the engagement of third-party advisors.371 Outside advisors such as accountants, law-
yers and consultants offer a plethora of agendas, checklists and forms to assist the board in its
review. While these products can in some instances facilitate a productive and transparent re-
view, boards must guard against the danger of sacrificing substance for the sake of form. The
nominating and corporate governance committee should bear in mind that if a charter or check-
list requires review or other action, the failure to take such action may be argued in hindsight to
be evidence of lack of due care. Documents and minutes pertaining to the board’s self-
evaluation are not privileged; thus, a board should take care to avoid damaging the collegiality of

370
Spencer Stuart, Spencer Stuart Board Index 2013, at 30, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2013.
371
In 2015, only four S&P 500 companies disclosed engagement of an independent third-party to facilitate and con-
duct all or a portion of the board evaluation process. Spencer Stuart, Spencer Stuart Board Index 2015, at 29, avail-
able at https://www.spencerstuart.com/~/media/pdf%20files/research%20and%20insight%20pdfs/ssbi-
2015_110215-web.pdf?la=en.

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the board or creating ambiguous records that may be used against the company or the board in
litigation. The nominating and corporate governance committee need not create volumes of rec-
ords to demonstrate that the directors have fulfilled their responsibilities with respect to the
board’s self-evaluation. As in other matters, a good-faith effort and a reasonable, tailored pro-
cess will entitle directors to the protection of the business judgment rule.

2. Following Through

As important as the annual evaluation is, it should be seen as only one step in a continu-
ous process to enhance corporate governance. First, the nominating and corporate governance
committee must ensure that the board proactively addresses corporate governance challenges as
they arise, rather than waiting for the next annual review. Second, it should be remembered that
assessment is not an end in itself—the findings of the annual review must be translated into a
plan of action, and the implementation of this plan should be monitored and reassessed on an on-
going basis. A 2013 survey of directors found that 57 percent of boards act on issues identified
in their evaluations, with the most common changes being a change in board committee compo-
sition and seeking additional expertise on the board.372

B. Committee Self-Evaluations

The NYSE requires that audit, compensation and nominating and governance committees
conduct an annual self-evaluation.373 Many of the same steps discussed above that should be
taken by a board during its self-evaluation are also appropriate during committee self-
evaluations. Committees should assess their effectiveness and consider whether they have an
adequate structure and procedures to carry out their responsibilities, whether they have sufficient
access to the full board and to management, and the usefulness of any outside advisors. Commit-
tees should also review their charters for any desirable changes and measure their performance
against their charter. Additionally, committees may choose to evaluate the contributions of indi-
vidual members through group discussion or peer or self-evaluations.

Committees should pay particular attention to their relationships with the board as a
whole. Committees are an essential element to an effective board because they allow for special-
ized and focused attention to important issues. This function is undermined, however, if the
work of a committee is either duplicated or ignored by the whole board.374 An annual evaluation
of a committee should therefore ensure that the work of the committee is being efficiently inte-
grated into the overall work of the board. The results of the committees’ evaluations should be
shared with the full board to further this integration.

372
PricewaterhouseCoopers, Boards Confront an Evolving Landscape: PwC’s Annual Corporate Directors Survey,
14 (2013), available at http://www.pwc.com/us/en/corporate-governance/publications/boardroom-direct-news
letter/september-2013-issues-in-focus.jhtml.
373
NYSE Listed Company Manual, Rules 303A.07(b)(ii); 303A.05(b)(ii); 303A.04(b)(ii).
374
About half of S&P 500 boards evaluate the full board and its committees annually and one-third evaluate the full
board, committees and individual directors. Spencer Stuart, Spencer Stuart Board Index 2015, at 29, available at
https://www.spencerstuart.com/~/media/pdf%20files/research%20and%20insight%20pdfs/ssbi-2015_110215-
web.pdf?la=en.

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C. Evaluation of the CEO

CEOs are currently facing unprecedented levels of scrutiny from investors and the gen-
eral public, and boards have responded by engaging in more probing review of their CEOs. This
increased scrutiny, and say-on-pay legislation in particular, has led to nearly universal annual
reviews of CEO performance—98 percent of S&P 500 companies in 2014, up from 94 percent in
2009.375

1. Tasking the Responsibility

The NYSE listing standards require that the compensation committee be responsible for
reviewing and approving corporate goals and objectives relevant to CEO compensation and for
evaluating the CEO’s performance in light of those goals.376 Alternatively, the board may allo-
cate the responsibilities of the compensation committee to another committee composed entirely
of independent directors. Given that the NYSE listing standards also require the nominating and
corporate governance committee to oversee the evaluation of management,377 the nominating and
corporate governance committee is often involved in CEO evaluation as well.

2. Finding the Right Approach

CEO evaluations present challenges that do not arise in the board’s self-evaluation. The
board’s self-evaluation is typically focused on the board as a group, whereas CEO evaluations
necessarily focus on the individual. This difference increases the chance for acrimony or misun-
derstanding, making it imperative that the evaluation process be thoughtful. Each year, the board
should set clear objectives for the CEO and maintain an ongoing dialogue with the CEO regard-
ing progress towards those objectives. An ongoing dialogue will not only benefit the company
by addressing problems as they arise, it will also avoid the surprise and confusion of a CEO dis-
covering at an annual evaluation that the board has been dissatisfied with his or her performance.

3. Considering Replacing the CEO

As part of its annual review, a board may well determine that a change in management
leadership—either immediately or in the near future—is in the company’s best interests. Thus,
evaluation of the current CEO and succession planning are closely intertwined. The decision to
replace the CEO must be based on the directors’ independent judgment of the best interests of
the company. While replacing the CEO will sometimes be necessary, boards should carefully
weigh the costs of replacement and also consider whether some measure short of removal may
be appropriate.

375
Spencer Stuart, Spencer Stuart Board Index 2014, at 32, available at https://www.spencerstuart.com/research-
and-insight/spencer-stuart-us-board-index-2014.
376
NYSE Listed Company Manual, Rule 303A.05(a)(i)(A).
377
NYSE Listed Company Manual, Rule 303A.04(b)(i).

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D. Evaluation of Individual Directors

One-third of boards evaluate individual directors as part of their annual reviews—up

from 17 percent in 2009 years ago.378 Notably, despite this increase, only a minority of compa-
nies evaluate directors individually. This is likely the result of boards’ reluctance to single out
individual directors and a recognition that the effectiveness of a board or committee cannot be
easily disaggregated. It is also likely that, even if there is no official evaluation of directors indi-
vidually, if there are any significant problems with individual directors, they will come to light as
part of an overall board evaluation. While the board is certainly more than the sum of its parts,
evaluation of individual directors may identify areas for improvement that an evaluation of the
entire board does not. The nominating and corporate governance committee should weigh these
considerations and determine whether individual evaluations are in the company’s best interest.

1. Methods of Evaluation

If the nominating and corporate governance committee decides to conduct individual di-
rector evaluations, it should consider whether to conduct these assessments through self-
evaluations or peer evaluations. These evaluations ask directors to rate themselves or their fel-
low directors in a number of categories, such as meeting attendance and contribution or grasp of
the company and its industry. Both peer and self-evaluations can provide an opportunity for
constructive assessment of the board, and the nominating and corporate governance committee
may decide to use some combination of the two. Peer evaluations may in many cases prove
more informative and objective than self-evaluations, but they also risk damaging the collegiality
that is vital to a well-functioning board. If peer evaluation is used, the aggregate results should
be presented to each director privately. Alternatively, the nominating and corporate governance
committee may decide that a group discussion is the most beneficial format. The nominating and
corporate governance committee should also consider procedures to engage with directors who
receive negative feedback in their evaluations.

2. Addressing Underperforming Directors

Addressing the problem of underperforming directors is one of the most sensitive tasks
that a board faces. The ever-increasing responsibilities and time commitments that board service
entails have raised the bar for board services. In some cases, additional training or a reduction in
the directors’ other responsibilities may address the problem. In other cases, personality con-
flicts may lead to a balkanized board, stifling candid discussion and undermining the board’s ef-
fectiveness. Although there is generally no easy way to convince an underperforming director to
resign, the situation is typically best handled by the chairman of the nominating and corporate
governance committee or the lead independent director. Short of seeking a director’s resigna-
tion, the nominating and corporate governance committee should consider ways to restructure
the composition of the board and its committees.

The nominating and corporate governance committee is responsible for deciding whether
to recommend incumbent directors for renomination. Whether or not the board engages in a
formal review of individual directors, the board’s annual review provides an opportunity for the
378
Spencer Stuart, Spencer Stuart Board Index 2015, at 29, available at https://www.spencerstuart.com/
~/media/pdf%20files/research%20and%20insight%20pdfs/ssbi-2015_110215-web.pdf?la=en.

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nominating and corporate governance committee to assess whether the company’s interests
would be best served by the continued service of each director. While the importance of board
continuity dictates that a decision to replace an incumbent director not be made lightly, renomi-
nation must not be seen as a given. Rather, the nominating and corporate governance committee
must carefully assess the contributions and skills of each director and ensure that they continue
to fit the company’s needs and strategy. If the nominating and corporate governance committee
determines not to renominate a director, that director typically should be informed privately to
provide him or her with the opportunity to exit gracefully.

E. Director Questionnaires

Whether or not the nominating and corporate governance committee chooses to engage in
individual director evaluations as part of its annual review, it should ensure that directors fill out
a questionnaire at least annually. Among the topics typically covered by a director questionnaire
are: material relationships with an officer, parent, subsidiary or affiliate of the company; current
employment and other directorships; other directorships held in the past five years; relevant ex-
perience; certain legal actions in the past 10 years; beneficial ownership and trading of securities;
compensation, benefits and other perquisites; and questions tailored to service on particular
committees.

These questionnaires serve a number of functions. First, the SEC requires extensive dis-
closure regarding directors, and thus, gathering information from the directors is necessary to
make full and accurate disclosures in the company’s filings. Similarly, both the NYSE and
Nasdaq require a listed company to make a finding that its independent directors are indeed in-
dependent, and the questionnaire will help identify any relationships that may compromise direc-
tor independence. Director questionnaires also may help the company flag interlocking director-
ships that may be problematic under antitrust laws or determine that a director may simply have
too many other commitments to serve effectively. Lastly, the questionnaires aid in the nominat-
ing and corporate governance committee’s task of maintaining an up-to-date picture of its board
composition, particularly with respect to experience and skills, as part of the process of matching
directors’ attributes to the company’s needs.

An example of a director and officer questionnaire is attached as Annex D.

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 _________________________

PART THREE:

NOMINATING AND CORPORATE GOVERNANCE COMMITTEE ORGANIZATION

AND PROCEDURES

_________________________
 XV. Key Responsibilities of the Nominating and Corporate Governance Committee

The nominating and corporate governance committee is a standing committee of the

board to which the board delegates primary responsibilities for reviewing and recommending to
the board director nominees and the formulation, recommendation and implementation, if appro-
priate, of corporate governance policies and practices.

A. Existence and Composition

1. NYSE Requirements

The NYSE requires its listed companies to have a nominating and corporate governance
committee composed entirely of independent directors.379 Independence, for purposes of serving
on the nominating and corporate governance committee, is determined by the same standards
generally applicable to directors. (For a description of the NYSE’s independence requirements,
see Section VII.C.1.) So long as the committee members ultimately decide any matters within
the sole province of the committee, the NYSE’s independence requirement does not prohibit of-
ficers or non-committee member directors from attending a committee meeting, making a rec-
ommendation to the committee or requesting that a matter be addressed by the full board.

2. Nasdaq Requirements

Companies listed with Nasdaq may perform nominating and corporate governance tasks
through a committee of independent directors.380 Alternatively, Nasdaq allows director nomi-
nees to be selected or recommended by a majority of the board’s independent directors so long as
only independent directors participate in the vote. (For a description of Nasdaq’s independence
requirements, see Section VII.C.1.) The stated purpose of this rule is to provide companies with
the flexibility to choose an appropriate board structure and reduce resource burdens, while ensur-
ing that independent directors approve all nominations.381

Additionally, Nasdaq provides a limited exception to the requirement for complete com-
mittee-member independence. If the nominating and corporate governance committee is com-
posed of at least three members, a non-independent director who is not currently an executive
officer or a family member of an executive officer may serve on the committee if the board de-
termines that it is required by the best interests of the company. 382 This exception is allowed on-
ly under limited circumstances, and a member appointed under this exception may serve no
longer than two years.383 As with the NYSE, Nasdaq’s rules regarding committee member inde-
pendence do not prohibit non-committee members or non-committee member directors from at-
tending meetings or otherwise contributing to the work of the committee.

379
NYSE Listed Company Manual, Rule 303A.04(a).
380
Nasdaq Listing Rule 5605(e)(1).
381
Nasdaq Listing Rule IM-5605-7.
382
Nasdaq Listing Rule 5605(e)(3).
383
Note, however, that ISS recommends “against” or “withhold” votes for directors of companies that lack a formal
nominating committee or if non-independent directors serve on such committee. ISS, 2016 U.S. Summary Proxy
Voting Guidelines 16 (2015).

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 3. SEC Requirements

The SEC does not establish mandatory standards regarding the existence and composition
of the nominating and corporate governance committee but instead specifies certain disclosure
obligations. A listed company must state whether or not it has a standing nominating and corpo-
rate governance committee (or another committee performing a similar function).384 A company
with a nominating and corporate governance committee must identify each committee member,
state the number of meetings held by the committee during the last fiscal year and describe brief-
ly the functions performed by the committee.385 A company without such a committee must
identify each director who participates in the consideration of director nominees and must state
the basis for the view of the company’s board that it is appropriate not to have such a commit-
tee.386

The SEC requires a company to identify each member of its nominating and corporate
governance committee who is not independent under applicable independence standards. 387 A
listed company may use its own definition of independence, provided that the definition com-
plies with the independence standards of the exchange on which the company is listed. 388 In the
absence of company-defined independence standards for a committee, the applicable standard is
the one used by its exchange.389 A company that relies on an exemption from the independence
requirements of the exchange on which it is listed must identify the exemption and explain its
basis for reliance.390

B. Nominating and Corporate Governance Committee Charter and Responsibilities

A NYSE-listed company must have a written nominating and corporate governance

committee charter vesting the committee with certain responsibilities. In contrast, a Nasdaq-
listed company need not have a formal nominating and corporate governance committee at all,
and therefore need not have a formal committee charter. Nasdaq requires only that each compa-
ny certify that it has adopted either a written charter or board resolution addressing the process
by which directors are selected for nomination. Further, unlike a NYSE-listed company, a
Nasdaq-listed company is not required to task a specific committee with formulating its corpo-
rate governance standards. Nonetheless, in recent years there has been a notable trend among
Nasdaq-listed companies, especially large-cap companies, towards having formal nominating
and corporate governance committees and including within their ambit a leading role in forming
and implementing corporate governance policy.391 An example of a nominating and corporate
governance committee charter is attached as Annex E.

384
Item 407(b)(3) of Regulation S-K. 17 C.F.R. 229.407(b)(3).
385
Id.
386
Item 407(c)(1) of Regulation S-K. 17 C.F.R. 229.407(c)(1).
387
Item 407(a) of Regulation S-K. 17 C.F.R. 229.407(a).
388
Item 407(a)(1)(i) of Regulation S-K. 17 C.F.R. 229.407(a)(1)(i).
389
Id.
390
Instruction 1 to Item 407(a) of Regulation S-K. 17 C.F.R. 229.407(a).
391
Ninety-nine percent of S&P 500 companies have a nominating and corporate governance committee. Ernst &
Young LLP, Let’s Talk: Governance, Beyond key committees: Boards create committees to support oversight re-
sponsibilities 1 (Apr. 2014).

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 As a matter of good corporate governance, it is recommended that a company review its
nominating and corporate governance charter (or equivalent standards if a company does not
have a formal committee) at least annually and more frequently if circumstances warrant. The
nominating and corporate governance committee should lead this review, making sure that cor-
porate governance guidelines adequately address key topics such as director elections, related-
party transactions and conflicts of interest. As part of any review, a nominating and corporate
governance committee should ensure that the company’s charter, bylaws, corporate governance
guidelines, procedures and committee charters do not set inconsistent standards.

1. NYSE Requirements

As noted, the nominating and corporate governance committee of a NYSE-listed compa-

ny must have a written charter that describes the committee’s purpose and its responsibilities.
Because the charter is originally adopted by the board and subject to amendment by the board,
the authority and procedures of the committee can be altered as long as the committee retains the
responsibilities required under the NYSE rules. The responsibilities that the charter must pro-
vide for include:

 identification of qualified individuals who meet the criteria for board membership
set out by the board;392

 selection, or recommendation to the board, of director nominees to be presented at

the next annual meeting of shareholders;393

 development and recommendation to the board of a set of corporate governance

guidelines;394

 oversight of the evaluation of the board and management;395 and

 annual evaluation of the committee’s performance.396

Commentary to the NYSE rules instructs that the charter should also address a number of
topics concerning the committee itself, including:

 committee member qualifications;

 the process for committee member appointment and removal;

 committee structure and operations (including authority to delegate to subcommit-

tees); and

 committee reporting to the board.397

392
NYSE Listed Company Manual, Rule 303A.04(b)(i).
393
Id.
394
Id.
395
Id.
396
NYSE Listed Company Manual, Rule 303A.04(b)(ii).

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 The commentary also states that the charter should give the nominating and corporate
governance committee sole authority to retain and terminate a search firm to assist in identifying
director candidates.398 Boards may allocate the responsibilities of the nominating and corporate
governance committee to committees of their own denomination, provided that any such com-
mittee has a charter and is composed entirely of independent directors.

The NYSE listing standards instruct that the nominating and corporate governance com-
mittee is responsible for taking a leadership role in shaping a company’s corporate govern-
ance.399 As noted above, the NYSE-listed companies are required to adopt a nominating and
corporate governance committee charter giving the committee responsibility for the development
and recommendation to the board of a set of corporate governance guidelines applicable to the
company. These corporate governance guidelines must address the following subjects:

 director qualification standards;

 director responsibilities;

 director access to management and, as necessary and appropriate, independent

advisors;

 director compensation;

 director orientation and continuing education;

 management succession; and

 annual performance evaluation of the board.400

This charter must be made available on the company’s website.401

2. Nasdaq Requirements

Nasdaq is again more flexible in its charter requirements than the NYSE, allowing com-
panies to outline their nominations procedures and such related matters as are required under the
federal securities laws in a board resolution rather than a charter.402 Nasdaq’s charter require-
ments differ from those of the NYSE in two additional respects. First, whereas the NYSE lists a
number of responsibilities that must be entrusted to the nominating and corporate governance
committee, and also lists with greater specificity the topics that should be addressed in the com-
mittee charter, Nasdaq requires only that the charter or board resolution outline a company’s di-
rector nomination process and any related matters as required by federal securities laws. Second,

397
Commentary to NYSE Listed Company Manual, Rule 303A.04.
398
Id.
399
Id.
400
Commentary to NYSE Listed Company Manual, Rule 303A.09.
401
Website Posting Requirement to NYSE Listed Company Manual, Rule 303A.04.
402
Nasdaq Listing Rule 5605(e)(2).

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while the NYSE requires a company to make its committee charter available online, Nasdaq re-
quires only that a company certify that it has adopted a committee charter or board resolution.403

Although Nasdaq’s requirements offer greater flexibility, recent years have seen a notable
trend in Nasdaq-listed companies towards expanding the role of the nominating and corporate
governance committee to include a leading role in forming and implementing corporate govern-
ance policy.

3. SEC Requirements

The SEC requires a company to disclose whether its nominating committee has a char-
404
ter. If it does, the company must disclose whether a current copy of the charter is available on
its website, and if it is, the website address. If a copy is not available on the company’s website,
one must be included in the company’s proxy or information statement once every three fiscal
years and every year that the charter has been materially amended. If the company relies on a
prior year’s filing to fulfill this requirement, the company must identify the prior year.405

403
Id.
404
Item 407(c)(2)(i) of Regulation S-K. 17 C.F.R. 229.407(c)(2)(i).
405
Instruction 2 to Item 407 of Regulation S-K. 17 C.F.R. 229.407.

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 XVI. The Membership and Functioning of the Nominating
and Corporate Governance Committee

A. Membership

1. Size and Composition of the Committee

Neither federal law nor stock exchange listing requirements prescribe a minimum or
maximum number of members for a nominating and corporate governance committee.406 The
appropriate number of members will vary depending on such factors as the composition of the
board as a whole, the size and complexity of the company and the breadth of responsibilities
tasked to the committee. The size of the nominating and corporate governance committee varies,
although a committee of three or four members is fairly common. As part of its annual review,
the committee and the board should consider the attributes of the committee members to ensure
that the committee is appropriately constituted to effectively perform its tasks.

A company must be mindful of the director independence requirements imposed by its

stock exchange and other sources when selecting directors to serve on the nominating and corpo-
rate governance committee. The NYSE requires a nominating and corporate governance com-
mittee to be composed of independent directors and sets standards governing who can qualify as
an independent director. While Nasdaq does not require a formal nominating and corporate gov-
ernance committee, it does require that a company’s independent directors perform the nominat-
ing function generally assigned to a nominating and corporate governance committee.407 Unlike
members of the audit and compensation committees, who face additional independence require-
ments, the independence of members of the nominating and corporate governance committee is
judged by the same standards the NYSE and Nasdaq employ to determine director independence
generally.

2. Chairperson

While the effectiveness of the nominating and corporate governance committee depends
upon the contributions of each of its members, the chairperson has a particularly important role
to play. He or she establishes the agenda for committee meetings and leads committee discus-
sions to ensure that meetings are conducted regularly and efficiently and that each item receives
appropriate attention. Moreover, the chairperson is typically the voice of the committee in its
interactions with outside advisors, senior management and the full board. A 2013 study found
that 62 percent of committee chairs rotate every few years, and that rotation can serve to enhance
the experience and effectiveness of directors.408 It is not unusual for the chair of the nominating
and corporate governance committee to also serve as lead director when the chief executive of
the company also chairs the board. Although this is by no means necessarily the right choice for
any given company, the role that the nominating and corporate governance committee plays in

406
See NYSE Listed Company Manual, Rule 303A.04. Nasdaq does not require the formation of a nominating and
corporate governance committee, and the SEC requires only disclosure of committee-related information.
407
Nasdaq Listing Rule 5605(e)(1).
408
Heidrick & Struggles, 2013 Board of Directors Survey: The State of Leadership Succession Planning Today 7
(2014).

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establishing appropriate corporate governance policies and practices for the company positions
its chair well to perform the lead director role (which is described in Section III.E).

3. Term of Service

There are no rules that prescribe a particular length or term of service for members of a
nominating and corporate governance committee. Consequently, a board is free to fashion poli-
cies it determines are appropriate. As a general matter, the board should strike a balance be-
tween experience and stability on the one hand, and facilitating the exchange of fresh ideas and
perspectives on the other. High turnover on the committee may reduce cohesion, lead to ineffi-
ciency and make it harder to develop and implement long-term plans, such as board development
plans, corporate governance evolution, and management succession planning. Conversely, hav-
ing little or no turnover risks depriving the committee of the benefit of fresh ideas and perspec-
tives. In striking this balance, a board should consider periodically rotating its qualified directors
onto the committee. Boardroom diversity is an increasingly important consideration (as is de-
scribed in Section VII.B.3), and this can be thought to be especially true for the nominating and
corporate governance committee given its central role in identifying, reviewing and recommend-
ing candidates for the board.

B. Meetings

1. Regular Meetings

Apart from the requirement that the nominating and corporate governance committee
conduct an annual self-evaluation and oversee the annual self-evaluation of the board, neither the
SEC nor the major securities exchanges mandate the frequency of committee meetings. A nomi-
nating and corporate governance committee should meet with sufficient regularity to properly
carry out its duties. The appropriate frequency will depend on various factors, including the
scope of the committee’s responsibilities, the size of the company and whether any circumstanc-
es, such as an anticipated leadership transition or unusual shareholder activism, require extraor-
dinary committee attention. In addition to other meetings throughout the year, the committee
should meet in advance of the board’s annual nomination of directors. A 2014 study showed that
S&P 100 companies held anywhere between two and 13 committee meetings per year, with a
median of five meetings per year, and the frequency of these meetings has remained constant in
recent years.409

As with a meeting of the board, a meeting of the nominating and corporate governance
committee should provide adequate time for the discussion and consideration of each agenda
item. To help ensure productive discussion, the committee should devote sufficient attention to
planning the timing, agenda and attendees of the meeting.

409
David A. Bell, Fenwick & West LLP, Corporate Governance Survey – 2014 Proxy Season Results 28 (Dec. 11,
2014), available at http://www.fenwick.com/FenwickDocuments/2014-Corporate-Governance.pdf?WT.mc_id= CG-
Survey_121114.

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 2. Minutes

Nominating and corporate governance committees ordinarily prepare minutes of their

regular meetings but not of their executive sessions. These minutes should identify the topics
discussed, but it is neither necessary nor prudent to attempt to create a transcript of meetings.
Rather, minutes should be sufficiently detailed to document that the committee requested, re-
ceived, reviewed and discussed the information it deemed relevant in light of the facts and cir-
cumstances as they were known at the time. Courts and regulators reviewing a committee’s ac-
tions often regard minutes as the most reliable contemporaneous evidence of what transpired at a
meeting. In litigation concerning director-level conduct and decision-making, board and com-
mittee minutes are regularly used as evidence and can provide a guide to opposing counsel as to
which directors to depose and what topics to cover in such depositions. It is therefore of vital
importance that minutes are thoughtfully drafted to reflect the topics discussed at meetings and
the substance of the committee’s discussion in order to avoid creating an ambiguous record that
may later be used against the directors in litigation. As part of this effort, and because directors
today are often engaged in work with one another for their companies outside of formal meet-
ings, committees should consider including in the minutes reference to any discussion that oc-
curred among the members prior to or after the meeting.

Minutes should also reflect which members of the committee were present and whether
any non-committee members attended (and for what portions of the meeting they were in attend-
ance). It is good practice for directors who do not serve on the committee to have the opportuni-
ty to ask the committee questions, and the committee should consider providing the full board
with a report or copy of the minutes for each committee meeting. Drafts of minutes should be
prepared and circulated to each committee member reasonably promptly after each meeting to
help ensure accuracy. Where possible, the minutes should also be circulated in advance of a fu-
ture (ideally, the next) committee meeting in good time to allow each committee member a full
opportunity to review them before approval.

3. Rights of Inspection

The danger of improvidently drafted minutes is especially acute because state law often
provides shareholders a right to inspect the books and records of the company, including com-
mittee meeting minutes.410 For example, any stockholder of a Delaware company may make a
written demand to inspect board of director and committee meeting minutes.411 Although such
inspection rights are limited to situations where stockholders have a “proper purpose” for their

410
A glaring example of the expansive nature such requests can occasionally take occurred in 2014 when the Dela-
ware courts required Wal-Mart, in response to a shareholder demand to investigate potential wrongdoing associated
with illegal payments to Mexican officials, to produce documents from 11 different custodians, including those on
disaster recovery tapes, spanning a seven-year time period. The order also required production of documents that
were otherwise protected by attorney-client privilege. The stockholder investigation was prompted by an April 2012
New York Times article entitled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle.”
Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014); cf. United
Technologies Corp. v. Treppel, 109 A.3d 553, 559 (Del. 2014) (permitting the company to condition use of materi-
als obtained in an inspection of its books and records only to cases filed in Delaware courts and noting that “the
stockholder’s inspection right is a ‘qualified one’” for which the “Court of Chancery has wide discretion to shape
the breadth and use of inspections under §220 to protect the legitimate interests of Delaware corporations”).
411
8 Del. C. § 220.

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requested inspections, courts throughout the country have encouraged stockholders seeking to
bring derivative litigation to take pre-suit discovery via these statutory inspection rights. Dela-
ware’s proper purpose requirement is a “notably low standard,”412 which requires only that
stockholders produce evidence demonstrating a credible basis of actionable corporate wrongdo-
ing.413

However, to some extent, recent cases have limited the contours of “proper purpose.” In
Southeastern Pennsylvania Transit Authority v. AbbVie, Inc., stockholders of AbbVie demanded
the company’s books and records in order to investigate a potential breach of fiduciary duty after
the board abandoned its plans to pursue an inversion transaction and was forced to pay a $1.635
billion termination fee.414 The board abandoned its merger with Shire plc in response to changes
in Treasury Department inversion regulations, which the news had been speculating might occur
for some time prior to AbbVie signing up the deal.415 On this basis, stockholders alleged that
“the risk of loss of the tax advantages inherent in the merger with Shire was so substantial, and
so obvious, that the directors must have breached their fiduciary duties to the stockholders by
entering the deal.”416 The Chancery Court noted that although the “directors [had taken] a risky
decision that failed at substantial cost to the stockholders,” this in no way suggested that the di-
rectors had breached their duty of loyalty and denied the stockholders request to inspect
AbbVie’s records.417

A second and arguably, more serious consideration for companies is that where stock-
holders are granted the right to inspect the committee’s minutes, they may be able to make them
available to the public broadly. While companies have often been able to negotiate confidentiali-
ty agreements with shareholders when providing materials in response to books-and-records in-
spection requests, Delaware courts, at least, have declined to adopt a categorical rule of confi-
dentiality in favor of a balancing test. Specifically, Delaware cases have held that a court must
balance a company’s interest in privacy against its shareholders’ legitimate interest in communi-
cating regarding matters of common interest.418

412
Se. Penn. Trans. Auth. v. AbbVie Inc., No. 10374-VCG, 2015 WL 1753033 at *1 (Del. Ch. April 15, 2015),
aff’d No. 239,2015, 2016 WL 235217 (Del. Jan. 20, 2016).
413
See Wal-Mart Stores, Inc., 95 A.3d at 1283 (finding a credible basis of actionable corporate wrongdoing and
noting “[w]here a Section 220 claim is based on alleged corporate wrongdoing, and assuming the allegation is meri-
torious, the stockholder should be given enough information to effectively address the problem”) (internal quota-
tions omitted).
414
Abbvie, Inc., No. 10374-VCG, 2015 WL 1753033 at *1.
415
Id. at *7-8. The record was mixed as to whether the government was likely to act in the short term, despite
“heated anti-inversion” political rhetoric. For example, on the day before AbbVie’s board voted to approve the
terms of the proposed inversion, the New York Times reported that “Lawmakers say they want to stop United States
companies from reincorporating overseas to lower their tax bills, but the Obama administration and Congress appear
unlikely to take any action to stem the tide of such deals anytime soon.” David Gelles, Treasury Urges End to For-
eign Tax Flights, but Quick Action is Unlikely, N. Y. TIMES (July 16, 2014), http://dealbook.nytimes.com
/2014/07/16/ obama-administration-seeks-end-to-inversion-deals/?_r=0.
416
Id.at *1.
417
Id. at *1. AbbVie’s directors are exculpated from liability for breaches of their duty of care pursuant to Section
102(b)(7) of the Delaware General Corporations Law.
418
Disney v. Walt Disney Co., No. 380, 2004 (Del. Mar. 31, 2005) (Order).

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 4. Third-Party Advisors

The NYSE requires listed companies to grant the nominating and corporate governance
committee sole authority to retain and terminate any search firm to assist it in identifying director
candidates, including sole authority to approve the search firm’s fees and other retention
terms.419 Nasdaq imposes no such requirement, but boards of companies listed on Nasdaq may
also want to consider vesting the nominating and corporate governance committee with this
power.

If the committee is granted this authority, it should bear in mind that there is no legal ob-
ligation to engage third-party advisors to assist in identifying director candidates. Third-party
advisors will in some instances bring valuable capabilities that a firm may not possess internally.
Directors should have full access to any consultants, and engaging and questioning advisors is
often an important part of the process by which the board reaches a judgment after careful and
informed deliberation. It is also important for the nominating and corporate governance commit-
tee to understand the nature and scope of any other services provided to the company by the
third-party advisor in order to detect any actual or perceived conflicts of interest. Of course, a
consultant’s judgment should not be viewed as a substitute for the independent judgment of the
committee and ultimately the board.

419
Commentary to NYSE Listed Company Manual, Rule 303A.04.

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 XVII. Fiduciary Duties of Nominating and Corporate Governance Committee Members

A. The Business Judgment Rule

The decisions of the nominating and corporate governance committee ordinarily will be
afforded the protection of the business judgment rule. The business judgment rule is a presump-
tion that in making a business decision independent directors have acted on an informed basis, in
good faith and in the honest belief that the action taken was in the best interests of the compa-
ny.420 A conscious decision to refrain from acting can also be an exercise of business judg-
ment.421 Unless a plaintiff can show that directors failed to act with loyalty or due care, the
courts will generally defer to the business judgment of the board or committee. If a plaintiff is
able to establish that the directors in question were conflicted or did not act with reasonable care,
then the burden may shift to the director defendants to demonstrate that the challenged act or
transaction was entirely fair to the company and its shareholders.422

The business judgment rule focuses on process and is deferential to the substantive deci-
sions reached by informed and disinterested directors. This deference reflects a fundamental
principle of Delaware corporate law—that the business and affairs of a company are to be man-
aged under the direction of the board of directors, rather than the courts.423

B. Fiduciary Duties Generally

Members of the nominating and corporate governance committee owe the company the
same fiduciary duties in the performance of their committee assignments as they do in the per-
formance of their activities as directors: a duty of care and a duty of loyalty.

1. The Duty of Care

The essence of a director’s duty of care is the obligation to exercise informed business
judgment. A business judgment is informed if, prior to making a decision, the director apprised
himself or herself of all material information reasonably available424 including potential alterna-
tives.425 This process would generally include consultation with management and, in many cas-
es, expert advisors, as well as receipt and review of such corporate records and information that
the directors consider necessary and appropriate to make the decision in question.426 A plaintiff
alleging a breach of the duty of care must establish that the director’s actions were grossly negli-
gent.427 Delaware Courts define gross negligence in this context as reckless indifference to or a
deliberate disregard of the whole body of shareholders, or actions that are outside the bounds of

420
E.g., Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984).
421
Id. at 813.
422
In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 52 (Del. 2006).
423
See 8 Del. C. § 141(a).
424
Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985).
425
Aronson v. Lewis, 473 A.2d 805, 812 (Del. Sup. 1984); Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150,
192 (Del. 2005).
426
See Section XVII C. for a discussion of reliance on corporate records and experts. See also, 8 Del. C. § 141(e).
427
Van Gorkom, 488 A.2d at 873.

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reason.428 Thus, a court will not find a breach of the duty of care simply because the directors’
decisions were not flawless. In the landmark Disney case, the Delaware courts reaffirmed that
informed directors acting in good faith will not be held liable for failure to comply with “the as-
pirational ideal of best practices” by “a reviewing court using perfect hindsight.”429

2. The Duty of Loyalty

The duty of loyalty requires a director to consider the interests of the company and its
shareholders rather than his or her personal interests or the interests of other persons or entities.
The Delaware Supreme Court has explained that “[e]ssentially the duty of loyalty mandates that
the best interest of the corporation and its shareholders takes precedence over any interest pos-
sessed by a director, officer or controlling shareholder and not shared by the shareholders gener-
ally.”430 Subsumed within the duty of loyalty is the duty to act in good faith. 431 A director fails
to act in good faith if he or she acts with a purpose other than that of advancing the best interests
of the corporation, acts with the intent to violate applicable positive law, or fails to act in the face
of a known duty to act, demonstrating a conscious disregard for his or her duties.432

3. Oversight Duties

Fiduciary duties apply not only to directors’ active decisions but also in their capacity as
overseers. A breach of the duty to oversee the affairs of the company is categorized as a breach
of the duty of loyalty, because establishing such a claim requires a showing of bad faith.433
These claims can expose directors to personal liability, as under Delaware law directors cannot
be exculpated or indemnified for breaches of the duty of loyalty.

The seminal Delaware case drawing the contours of directors’ oversight duties is the
1996 case In re Caremark.434 In Caremark, the court rejected claims that the company’s direc-
tors breached their fiduciary duties by failing to sufficiently monitor certain practices that alleg-
edly violated the Anti-Federal Payments Law and resulted in substantial criminal fines. The
court held that “only a sustained or systematic failure” of oversight would be sufficient to show
the lack of good faith necessary to establish a breach of loyalty claim. 435 A plaintiff alleging a
breach of fiduciary duty predicated on directors’ oversight function must establish either:
(1) that the directors utterly failed to implement any reporting information systems or controls; or
(2) that, having implemented such controls, the directors consciously failed to monitor or oversee
its operations.436

428
Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150,at 192. (Del. 2005).
429
In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 697-98 (Del. Ch. 2005), aff’d, 906 A.2d 27 (Del. 2006).
430
Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993).
431
Stone ex rel. AmSouth Bancorporation v. Ritter, 911 A.2d 362, 369-70 (Del. 2006).
432
In re Walt Disney Co. Derivative Litig., 906 A.2d at 67.
433
Stone, 911 A.2d at 370.
434
In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).
435
Id. at 971.
436
Stone, 911 A.2d at 370; see also, Central Laborers v. Dimon, No. 14-4516 (2d Cir. Jan. 6, 2016) (summary or-
der)

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 The principles of Caremark were reaffirmed in the 2009 case In re Citigroup.437 There,
shareholders of Citigroup alleged that the bank’s directors breached their fiduciary duties by ig-
noring “red flags” and failing to monitor risks from subprime mortgages and securities.438 The
Court dismissed these claims and emphasized the “extremely high burden” faced by claims seek-
ing personal director liability for a failure to monitor business risk, making clear that “[o]versight
duties under Delaware law are not designed to subject directors, even expert directors, to person-
al liability for failure to predict the future and to properly evaluate business risk.”439

C. Reliance on Experts

Under Delaware law, directors and committee members are protected in relying in good
faith upon the company’s records and the information, opinions, reports or statements of the
company’s officers, employees or committees, or any other person as to matters the director rea-
sonably believes are within such other person’s professional or expert competence and who has
been selected by or on behalf of the company with reasonable care. 440 This protection is availa-
ble even with respect to matters in which the directors themselves have expertise. 441 Thus, while
consultation with experts will not always be necessary or appropriate, it is often an important
component of satisfying directors’ duty of care and protecting decisions against judicial second-
guessing.

D. Exculpation and Indemnification

Delaware permits a company’s certificate of incorporation to contain a provision elimi-

nating or limiting the personal liability of a director for monetary damages for breaches of fidu-
ciary duty, except liability for (1) breaches of the duty of loyalty, (2) acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law, (3) the unlawful
payment of a dividend or unlawful stock purchase or redemption by the company and (4) any
transaction from which the director derived an improper personal benefit.442

Delaware law also permits a company to indemnify a director for expenses incurred in
any action by reason of his or her service as a director, so long as the director acted in good faith
and had no cause to believe his or her conduct was illegal.443 A company may also advance ex-
penses incurred in such an action and purchase indemnification insurance for its directors. Un-
like an exculpation provision, an indemnification provision may be placed in a company’s by-
laws instead of its certificate of incorporation. Indemnification may also be negotiated in a sepa-
rate agreement between the company and a director. Importantly, because a breach of the duty
of loyalty involves an act of bad faith, such breaches are not eligible for exculpation or indemni-
fication.

437
In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106 (Del. Ch. 2009).
438
Id. at 111.
439
Id. at 125, 131 (emphasis in original).
440
See 8 Del. C. § 141(e).
441
In re Citigroup Inc., 964 A.2d at 127 n.63.
442
8 Del. C. § 102(b)(7).
443
See 8 Del. C. § 145.

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 ANNEX A

Comparison of NYSE and Nasdaq Corporate Governance Standards

Standard Category Comment

1. Independence The NYSE standards require that a listed company’s board be Nasdaq listing requirements likewise provide that a company’s
composed of a majority of independent directors.444 The board must be composed of a majority of independent direc-
NYSE’s standard for determining director independence is dis- tors.445 Nasdaq’s standard for determining director independ-
cussed in Section VII.C.1. ence is discussed in Section VII.C.1. If a company fails to
comply with this requirement due to one vacancy or because
one director ceases to be independent because of circumstances
beyond the company’s control, the company has until the earli-
er of its next annual shareholder meeting or one year from the
event causing noncompliance. However, if the next annual
shareholder meeting is no later than 180 days following the
first date of noncompliance, the company instead has 180 days
to regain compliance.446 There is no analogous cure period
provision in the NYSE corporate governance guidelines.
2. Committees NYSE-listed companies are required to have a nominating and Nasdaq-listed companies are also required to have an audit
corporate governance committee, a compensation committee committee and a compensation committee composed entirely
and an audit committee, each of which must be composed en- of independent directors.451 Both of these committees must
tirely of independent directors.447 Each of these committees have a written charter vesting the committees with certain re-
must have a charter entrusting the committee with certain re- sponsibilities.452 For a more detailed discussion of these re-
sponsibilities and providing for an annual evaluation of the quirements, see Section XI.B. Nasdaq does not require listed
committee.448 Additionally, members of the compensation companies to have a nominating and corporate governance
committee449 and members of the audit committee450 must sat- committee. However, if a Nasdaq-listed company does not
isfy more stringent independence criteria than other directors. have a nominating and corporate governance committee com-

444
NYSE Listed Company Manual, Rule 303A.01.
445
Nasdaq Listing Rule 5605(b)(1).
446
Nasdaq Listing Rule 5605(b)(1)(A).
447
NYSE Listed Company Manual, Rule 303A.
448
NYSE Listed Company Manual, Rules 303A.04, 303A.05, 303A.06 and 303A.07.
449
NYSE listed companies must affirmatively determine that compensation committee members do not have any relationship to the listed company that is material to the direc-
tor’s ability to be independent from management in connection with the duties of compensation committee members by specifically considering (i) the source of compensation of

A-1
 Standard Category Comment
prised solely of independent directors, director nominees must
be selected or recommended to the board by independent direc-
tors constituting a majority of the board’s independent direc-
tors.453 For listed companies with a nominations committee of
at least three directors, Nasdaq permits one non-independent
director to be a committee member in exceptional and limited
circumstances.454 Non-independent directors serving under
this exception may serve no longer than two years.455 Addi-
tionally, each Nasdaq listed company must have a formal writ-
ten charter or board resolutions addressing the nominations
process.456
The SEC requires that all members of the audit committee be
independent.457 Under SEC rules, an audit committee member
may be considered independent only if he or she has not
(i) accepted any consulting, advisory or other compensatory
fee from the issuer or (ii) been an affiliate of the issuer or any
of its subsidiaries.458 The SEC also provides that national
stock exchanges, which must ensure that listed companies have
independent compensation committee members, must consider
the same factors in assessing the independence of compensa-

such director including any consulting, advisory or other compensatory fee paid by the listed company to such director (excluding standard compensation for board service) and (ii)
whether the director is affiliated with the listed company, its subsidiaries, or any affiliates of the listed company. NYSE Listed Company Manual, Rule 303A.02(a)(ii). However,
while the NYSE requires companies to analyze any and all potentially relevant circumstances when determining independence, it does not consider ownership of a significant
amount of company stock, by itself, as a bar to independence. Commentary to NYSE Listed Company Manual, Rule 303(a)(ii).
450
In addition to the generally applicable independence requirements for NYSE directors, audit committee members must, in the absence of an applicable exception, satisfy the
independence requirements of Exchange Act Rule 10A-3, as discussed in notes 457-459 and accompanying text. NYSE Listed Company Manual, Rule 303A.07(a).
451
Nasdaq Listing Rules 5605(c)(2)(a) and 5605(d)(2)(A).
452
Nasdaq Listing Rules 5605(c)(1) and 5605(d).
453
Nasdaq Listing Rule 5605(e)(1)
454
Nasdaq Listing Rule 5605(e)(3).
455
Id.
456
Nasdaq Listing Rule 5605(e)(2).
457
17 C.F.R. § 240.10A-3(b)(i).
458
17 C.F.R. § 240.10A-3(b)(ii)

A-2
 Standard Category Comment
tion committee members as the SEC uses to assess audit com-
mittee member independence.459
3. Corporate Gov- As discussed in Section XV.B.1, NYSE-listed companies are In contrast to the NYSE listing standards, Nasdaq listing stand-
ernance Guide- required to adopt, post to their website and disclose in SEC ards do not address corporate governance guidelines.
lines and Code filings corporate governance guidelines that must address di-
of Conduct rector qualification standards, director responsibilities, director
access to management and, as appropriate, independent advi-
sors, director compensation, director orientation and continu-
ing education, management succession and an annual perfor-
mance evaluation of the board.460
NYSE-listed companies are also required to adopt, post to their Nasdaq-listed companies are also required to adopt and make
website and disclose in SEC filings a code of business conduct public a code of conduct applicable to all directors, officers
and ethics for directors, officers and employees. This code of and employees.462 The code of conduct must include standards
conduct must address conflicts of interest, corporate opportuni- that promote: (i) honest and ethical conduct (including the eth-
ties, confidentiality, fair dealing, the protection and proper use ical handling of conflicts of interest); (ii) full, fair, accurate,
of the company’s assets, compliance with laws, rules and regu- timely and understandable disclosure; (iii) compliance with
lations (including insider trading laws) and encouraging the applicable governmental laws, rules and regulations; and (iv)
reporting of any illegal or unethical behavior. A code of con- prompt internal reporting of violations of the code.463 The
duct must require that any waiver of the code for executive of- code of conduct must also include an enforcement mechanism.
ficers or directors may be made only by the board or a board Any waivers of the code for directors or executive officers
committee, and listed companies must promptly disclose any must be approved by the board and disclosed to the public
waivers of the code for directors or executive officers. Each within four business days.
code of business conduct must also contain compliance stand-
ards and procedures that will facilitate the effective operation
of the code.461

459
17 C.F.R. §§ 240.10C-1(a)-(b).
460
NYSE Listed Company Manual, Rule 303A.09
461
NYSE Listed Company Manual, Rule 303A.10.
462
Nasdaq Listing Rule 5610.
463
The requirements for a Nasdaq-listed company’s Code of Ethics are derived from Section 406(c) of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K promul-
gated thereunder. Id. See also, 17 C.F.R. § 228.406; 17 C.F.R. § 229.406.

A-3
 Standard Category Comment
4. Executive Ses- The NYSE requires that non-management directors meet at Nasdaq requires that a company hold regularly scheduled ex-
sions regularly scheduled executive sessions without management.464 ecutive sessions at which only independent directors are pre-
“Non-management” directors include those directors who do sent.466 This is a more stringent requirement than the NYSE
not qualify as independent for reasons other than their position requirement, which allows regularly scheduled executive ses-
as an executive officer of the company. A company may in- sions to include all non-management directors (including non-
stead choose to hold regular executive sessions of independent independent directors). Commentary to this rule instructs that
directors only. If a company chooses to include all non- executive sessions should occur at least twice a year, and per-
management directors in its regular executive sessions, it haps more frequently, in conjunction with regularly scheduled
should hold an executive session including only independent board meetings.467 Unlike the NYSE guidelines, Nasdaq does
directors at least once a year. An independent director must not address who must lead executive sessions.
preside over each executive session of independent directors,
although it need not be the same director at each session.465
5. Shareholder Acquisitions: The NYSE requires shareholder approval prior Acquisitions: Nasdaq requires shareholder approval prior to
Approval of to the issuance of securities in connection with any transaction the issuance of securities in connection with the acquisition of
Certain Matters or series of related transactions if the common stock to be is- the stock or assets of another company if the common stock to
sued is or will be equal to or greater than 20 percent of the vot- be issued is or will be equal to or greater than 20 percent of the
ing power or number of shares of common stock outstanding voting power or number of shares of common stock outstand-
before the issuance (subject to certain exceptions).468 ing before the issuance.472
Changes in Control: Shareholder approval is required prior to Changes in Control: Shareholder approval is required prior to
an issuance that will result in a change of control of the com- the issuance of securities if such issuance or potential issuance
pany.469 will result in a change of control of the company.473
Insider Transactions: Shareholder approval is required prior to Insider Transactions: Shareholder approval is required prior to
the issuance of common stock to a director, officer or substan- the issuance of securities in connection with the acquisition of
tial security holder, or any of their affiliates, if the issuance the stock or assets of another company if (A) any director, of-

464
NYSE Listed Company Manual, Rule 303A.03.
465
Additionally, if one director is chosen to preside at all executive sessions, his or her name must be publicly disclosed. If the same director does not preside over every execu-
tive session, the company must publicly disclose the procedure by which a presiding director is chosen. Commentary to NYSE Listed Company Manual, Rule 303A.03.
466
Nasdaq Listing Rule 5605(b)(2).
467
Nasdaq Listing Rule IM-5605-2.
468
NYSE Listed Company Manual, Rule 312.03(c).
469
NYSE Listed Company Manual, Rule 312.03(d).

A-4
 Standard Category Comment
exceeds one percent of the voting power or shares of common ficer or substantial shareholder of the company has a five per-
stock of the company.470 cent or greater interest (or if such persons have a 10 percent or
Equity Compensation: Subject to certain exceptions, share- greater interest, collectively) in the company or assets to be
holders must be given the opportunity to vote on the estab- acquired or in the consideration to be paid in the transaction,
lishment or material amendment of equity-compensation and (B) the consideration paid in the transaction could result in
an increase in the company’s voting power or outstanding
plans.471
common shares of five percent or more.474
Equity Compensation: Subject to certain exceptions, share-
holder approval is required prior to the issuance of securities
when a stock option or purchase plan or other equity compen-
sation arrangement is made or materially amended.475
6. Exemptions Limited Partnerships, Companies in Bankruptcy and Con- Controlled Companies: Controlled companies (defined as a
trolled Companies: Limited partnerships, companies in bank- company in which more than 50 percent of the voting power
ruptcy, and controlled companies (defined as a company in for director elections is held by an individual, group or another
which more than 50 percent of the voting power for director company) are not required to have majority-independent
elections is held by an individual, group or another company) boards or compensation committees, or to meet Nasdaq’s re-
are not required to have a majority-independent boards, com- quirements regarding nominations by independent directors.479
pensation committee or nominating and corporate governance Controlled companies are, however, subject to the remaining
committee.476 These companies are, however, subject to the Nasdaq corporate governance standards.480
remaining NYSE corporate governance standards. Limited Partnerships: Limited partnerships are not generally
Foreign Private Issuers: Foreign private issuers listed on the subject to Nasdaq corporate governance requirements. Limited
NYSE are permitted to follow home country practice in lieu of partnerships must, however, maintain a general partner respon-
the NYSE corporate governance standards, with the exception sible for the day-to-day affairs of the company with a sufficient
of the NYSE governance standards regarding audit committees number of directors to satisfy Nasdaq’s audit committee re-
and certification of compliance.477 Foreign private issuers quirements.481 Limited partnerships must also be audited by an

472
Nasdaq Listing Rule 5635(a)(1).
473
Nasdaq Listing Rule 5635(b).
470
NYSE Listed Company Manual, Rule 312.03(b).
471
NYSE Listed Company Manual, Rule 303A.08.
474
Nasdaq Listing Rule 5635(a)(2).
475
Nasdaq Listing Rule 5635(c).
476
NYSE Listed Company Manual, Rule 303A.00.
477
Id.

A-5
 Standard Category Comment
must disclose any significant ways in which their corporate independent public accounting firm, review related-party
governance practices differ from the NYSE listing standards. transactions and abide by Nasdaq’s notification of non-
Commentary to the NYSE guidelines clarify that “what is re- compliance requirements. Limited partnerships are also sub-
quired is a brief, general summary of the significant differ- ject to the shareholder approval requirements with respect to
ences, not a cumbersome analysis.”478 establishing or amending equity compensation arrangements.
While Nasdaq does not require limited partnerships to hold
annual meetings, if annual meetings are held Nasdaq imposes
requirements regarding quorums and solicitation of proxies.482
Foreign Private Issuers: Foreign private issuers listed on
Nasdaq may follow the practices of their home countries in
lieu of Nasdaq corporate governance requirements, except that
they must comply with Nasdaq requirements concerning audit
committees, the prohibition on certain alterations to common
stock voting rights and notification of noncompliance.483 A
foreign private issuer electing to follow home country practices
in lieu of Nasdaq governance requirements must disclose in its
annual SEC reports each requirement that it does not follow
and describe the home country practice it follows in lieu of that
requirement. Such issuer must also submit to Nasdaq a written
statement from an independent counsel from the company’s
home country certifying that the company’s practices are not
prohibited by the home country’s laws.484

479
Nasdaq Listing Rule 5615(c)(2).
480
Id.
481
Nasdaq Listing Rule 5615(a)(4)(B)-(C).
478
Commentary to NYSE Listed Company Manual, Rule 303A.11.
482
Nasdaq Listing Rule 5615(a)(4)(D)-(J).
483
Nasdaq Listing Rule 5615(a)(3).
484
Id.

A-6
 Standard Category Comment
7. Phase-In Ex- Companies Listing in Conjunction with an Initial Public Offer- Companies Ceasing to Qualify as Controlled Companies and
ceptions ing: A company listing on the NYSE in conjunction with an Companies Listing in Conjunction with an IPO or Upon Emer-
initial public offering (“IPO”) must have a majority- gence from Bankruptcy: A company that ceases to qualify as a
independent board within one year of its listing date.485 The controlled company or a company listing on Nasdaq in con-
company must have at least one independent member of its junction with an IPO or upon emergence from bankruptcy
compensation and nominating and corporate governance com- must have a majority-independent board within one year of its
mittees by the earlier of the date its IPO closes or five business listing date.487 For each committee, the company must have
days from its listing date (typically, the date on which “when- one independent director as of its listing date, a majority of in-
issued” trading begins), a majority of independent members of dependent committee members within 90 days of listing and
these committees within 90 days of its listing date, and fully solely independent committee members within one year of list-
independent committees within one year of listing. The com- ing.488
pany must have at least one independent member of its audit Companies Transferring from Other Markets: Companies
committee by its listing date, a majority of independent mem- transferring to Nasdaq from other markets with a substantially
bers within 90 days of the effective date of its registration similar requirement are afforded the balance of any grace peri-
statement and a fully independent audit committee within one od afforded by the other market. Companies transferring to
year of the effective date of its registration statement. Nasdaq from other listed markets that do not have a substan-
Companies Listing in Conjunction with a Carve-Out or Spin- tially similar requirement are afforded one year from the date
Off Transaction: A company listing on the NYSE in conjunc- of listing on Nasdaq.489
tion with a carve-out or spin-off transaction must have at least
one independent member on its audit committee by the listing
date, a majority independent audit committee within 90 days of
the effective date of its registration statement and a fully inde-
pendent audit committee within one year of the effective date
of its registration statement. Further, the audit committee must
have at least two members within 90 days of the listing date
and at least three members within one year of the listing date.
Additionally, carved-out and spun-off companies must have at
least one independent member on each of its compensation and
nominating and corporate governance committees by the date
the transaction closes, a majority of independent members on
each committee within 90 days thereafter and fully independ-

485
NYSE Listed Company Manual, Rule 303A.00.

A-7
 Standard Category Comment
ent committees within one year.486 The company must have a
majority independent board within one year of its listing date.
Companies Listing Upon Emergence from Bankruptcy: A
company listing on the NYSE upon emergence from bankrupt-
cy must have a majority independent board within one year of
the listing date. The company also must have at least one in-
dependent member on both its compensation and nominating
and corporate governance committees by its listing date, a ma-
jority of independent members within 90 days after such date
and fully independent committees within one year. The com-
pany must comply with the NYSE requirements regarding au-
dit committees as of its listing date.490
Companies Ceasing to Qualify as a Controlled Company: An
NYSE company that ceases to qualify as a controlled company
must have a majority-independent board and fully independent
compensation and nominating and corporate governance com-
mittees within one year from its status change.491 The compa-
ny must also have at least one independent member on each of
its compensation and nominating and corporate governance
committees as of the date of its status change, and a majority
of independent committee members within 90 days.
Companies Ceasing to Qualify as a Foreign Private Issuer: An
NYSE company that ceases to qualify as a foreign private issu-
er must have a majority independent board and fully independ-
ent audit, compensation and nominating and corporate govern-
ance committees within six months of the date it ceases to so

487
Nasdaq Listing Rules 5615(b)(1)-(2) and 5615(c)(3).
488
Id.
489
Nasdaq Listing Rule 5615(b)(3).
486
Id.
490
Id.
491
Id.

A-8
 Standard Category Comment
492
qualify. Additionally, such companies must comply with
the shareholder approval of equity compensation plans re-
quirement by the later of six months after losing foreign pri-
vate issuer status or its first annual meeting after losing foreign
private issuer status, but, in any event, within one year after
loss of status.493
Companies Transferring from another National Securities Ex-
change: With regards to particular requirements of the
NYSE’s Corporate Governance Standards, companies transfer-
ring to the NYSE from another national securities exchange
that has a substantially similar governance requirement are af-
forded the balance of any transition period afforded by the oth-
er exchange. Companies transferring to the NYSE from other
national securities exchanges that do not have a substantially
similar requirement are afforded one year from the date of list-
ing on the NYSE.494
8. Noncompliance The CEO of a NYSE-listed company must certify to the NYSE A company must provide Nasdaq with prompt notification af-
each year that he or she is not aware of any violation by the ter an executive officer of the company becomes aware of any
company of the NYSE corporate governance standards, quali- noncompliance with Nasdaq’s corporate governance rules.496
fying the certification to the extent necessary.495
The CEO must promptly notify the NYSE in writing after any
executive officer of the company becomes aware of any non-
compliance with the NYSE corporate governance standards.

492
Id.
493
NYSE Listed Company Manual, Rule 303A.08.
494
Id.
495
NYSE Listed Company Manual, Rule 303A.12(a).
496
Nasdaq Listing Rule 5625.

A-9
 ANNEX B

Example of

Director Resignation Policy

This Director Resignation Policy (“Policy”) of [COMPANY] (the “Com-

pany”) applies to annual elections of directors in which the number of di-
rector nominees equals or is less than the number of board seats being
filled, hereinafter referred to as uncontested elections of directors. All
other elections of directors shall be governed by the Company’s Certifi-
cate of Incorporation and Bylaws without giving effect to this Policy.

In an uncontested election of directors, any incumbent nominee who re-

ceives a greater number of votes “withheld” from his or her election than
votes “for” his or her election will, [promptly] [within [five] days] follow-
ing the certification of the stockholder vote, tender his or her resignation
in writing to the Chairman of the Board for consideration by the Nominat-
ing and Governance Committee (the “Committee”).

The Committee will consider any such tendered resignation and, within
[90] days following the date of the stockholders’ meeting at which the
election occurred, will make a recommendation to the Board of Directors
concerning the acceptance or rejection of such resignation. In determining
its recommendation to the Board of Directors, the Committee will consid-
er all factors deemed relevant by the members of the Committee including,
without limitation, the reasons why stockholders who cast “withhold”
votes for such director did so, if known, the qualifications of the director
(including, for example, the impact the director’s resignation would have
on the Company’s compliance with the requirements of the Securities and
Exchange Commission and the [NASDAQ][NYSE]), and whether the di-
rector’s resignation from the Board of Directors would be in the best inter-
ests of the Company and its stockholders.

The Committee may also consider a range of possible alternatives con-

cerning the director’s tendered resignation as the members of the Commit-
tee deem appropriate, which may include, without limitation, acceptance
of the resignation, rejection of the resignation or rejection of the resigna-
tion coupled with a commitment to seek to address and cure the underly-
ing reasons reasonably believed by the Committee to have substantially
resulted in the “withhold” votes.

The Board of Directors will take formal action on the Committee’s rec-
ommendation within a reasonable period of time following the date of the
stockholders’ meeting at which the election occurred. In considering the

B-1
Committee’s recommendation, the Board of Directors will consider the
information, factors and alternatives considered by the Committee and
such additional information, factors and alternatives as the Board of Direc-
tors deems relevant.

The Company, within four business days after such decision is made, will
publicly disclose, in a Form 8-K filed with the Securities and Exchange
Commission, the Board of Director’s decision to accept or reject the resig-
nation, together with [a full explanation of the process by which the deci-
sion was made and], if applicable, the reasons for rejecting the tendered
resignation.

No director who, in accordance with this policy, is required to tender his

or her resignation, shall participate in the Committee’s deliberations or
recommendation, or in the Board of Director’s deliberations or determina-
tion, with respect to accepting or rejecting his/her resignation as a director.
Any such director shall, however, otherwise continue to serve as a director
during this period.

This Policy is effective commencing with the Company’s [next] annual

stockholders’ meeting.

B-2
 ANNEX C

SECTION 1.1. Advance Notice of Stockholder Business and

Nominations.

(A) Annual Meeting of Stockholders. Without qualifi-

cation or limitation, subject to Section [●] [reference the right of stock-
holders to include proposals in the proxy statement under Rule 14a-8 not
being affected by this provision] of these Bylaws, for any nominations or
any other business to be properly brought before an annual meeting by a
stockholder pursuant to Section [●] [reference the corporation’s annual
meeting of stockholders bylaw] of these Bylaws, the stockholder must
have given timely notice thereof (including, in the case of nominations,
the completed and signed questionnaire, representation and agreement re-
quired by Section [●] [reference the director qualification bylaw if appli-
cable] of these Bylaws), and timely updates and supplements thereof, in
each case in proper form, in writing to the Secretary, and such other busi-
ness must otherwise be a proper matter for stockholder action.

To be timely, a stockholder’s notice shall be delivered to

the Secretary at the principal executive offices of the Corporation not ear-
lier than the close of business on the one hundred and twentieth (120th)
day and not later than the close of business on the ninetieth (90th) day prior
to the first anniversary of the preceding year’s annual meeting; provided,
however, that in the event that the date of the annual meeting is more than
thirty (30) days before or more than sixty (60) days after such anniversary
date, notice by the stockholder must be so delivered not earlier than the
close of business on the one hundred and twentieth (120th) day prior to the
date of such annual meeting and not later than the close of business on the
later of the ninetieth (90th) day prior to the date of such annual meeting or,
if the first public announcement of the date of such annual meeting is less
than one hundred (100) days prior to the date of such annual meeting, the
tenth (10th) day following the day on which public announcement of the
date of such meeting is first made by the Corporation. In no event shall
any adjournment or postponement of an annual meeting, or the public an-
nouncement thereof, commence a new time period for the giving of a
stockholder’s notice as described above.

Notwithstanding anything in the immediately preceding

paragraph to the contrary, in the event that the number of directors to be
elected to the Board of Directors is increased by the Board of Directors,
and there is no public announcement by the Corporation naming all of the
nominees for director or specifying the size of the increased Board of Di-
rectors at least one hundred (100) days prior to the first anniversary of the
preceding year’s annual meeting, a stockholder’s notice required by this
Section [1.1(A)] shall also be considered timely, but only with respect to

C-1
nominees for any new positions created by such increase, if it shall be de-
livered to the Secretary at the principal executive offices of the Corpora-
tion not later than the close of business on the tenth (10th) day following
the day on which such public announcement is first made by the Corpora-
tion.

In addition, to be considered timely, a stockholder’s notice

shall further be updated and supplemented, if necessary, so that the infor-
mation provided or required to be provided in such notice shall be true and
correct as of the record date for the meeting and as of the date that is ten
(10) business days prior to the meeting or any adjournment or postpone-
ment thereof, and such update and supplement shall be delivered to the
Secretary at the principal executive offices of the Corporation not later
than five (5) business days after the record date for the meeting in the case
of the update and supplement required to be made as of the record date,
and not later than eight (8) business days prior to the date for the meeting
or any adjournment or postponement thereof in the case of the update and
supplement required to be made as of ten (10) business days prior to the
meeting or any adjournment or postponement thereof. For the avoidance
of doubt, the obligation to update and supplement as set forth in this para-
graph or any other Section of these Bylaws shall not limit the Company’s
rights with respect to any deficiencies in any notice provided by a stock-
holder, extend any applicable deadlines hereunder [or under any other
provision of the bylaws]497 or enable or be deemed to permit a stockholder
who has previously submitted notice hereunder [or under any other provi-
sion of the bylaws] to amend or update any proposal or to submit any new
proposal, including by changing or adding nominees, matters, business
and/or resolutions proposed to be brought before a meeting of the stock-
holders.

(B) Special Meetings of Stockholders. [Without quali-

fication or limitation, subject to Section [1.1(C)(4)] of these Bylaws, for
any business to be properly requested to be brought before a special meet-
ing by a stockholder pursuant to Section [●] [reference special meeting of
stockholders bylaw] of these Bylaws, the stockholder must have given
timely notice thereof and timely updates and supplements thereof in each
case in proper form, in writing to the Secretary and such business must
otherwise be a proper matter for stockholder action.]498

Subject to Section [1.1(C)(4)] of these Bylaws, in the event

the Corporation calls a special meeting of stockholders for the purpose of
electing one or more directors to the Board of Directors, any stockholder
may nominate an individual or individuals (as the case may be) for elec-
tion to such position(s) as specified in the Corporation’s notice of meeting,

497
To be included only if stockholders have the ability to call a special meeting.
498
To be included only if stockholders have the ability to call a special meeting.

C-2
provided that the stockholder gives timely notice thereof (including the
completed and signed questionnaire, representation and agreement re-
quired by Section [●] [reference director qualification bylaw, if applica-
ble] of these Bylaws), and timely updates and supplements thereof, in each
case in proper form, in writing, to the Secretary.

To be timely, a stockholder’s notice shall be delivered to

the Secretary at the principal executive offices of the Corporation not ear-
lier than the close of business on the one hundred and twentieth (120th )
day prior to the date of such special meeting and not later than the close of
business on the later of the ninetieth (90th) day prior to the date of such
special meeting or, if the first public announcement of the date of such
special meeting is less than one hundred (100) days prior to the date of
such special meeting, the tenth (10th) day following the day on which pub-
lic announcement is first made of the date of the special meeting and [, if
applicable,]499 of the nominees proposed by the Board of Directors to be
elected at such meeting. In no event shall any adjournment or postpone-
ment of a special meeting of stockholders, or the public announcement
thereof, commence a new time period for the giving of a stockholder’s no-
tice as described above.

In addition, to be considered timely, a stockholder’s notice

shall further be updated and supplemented, if necessary, so that the infor-
mation provided or required to be provided in such notice shall be true and
correct as of the record date for the meeting and as of the date that is ten
(10) business days prior to the meeting or any adjournment or postpone-
ment thereof, and such update and supplement shall be delivered to the
Secretary at the principal executive offices of the Corporation not later
than five (5) business days after the record date for the meeting in the case
of the update and supplement required to be made as of the record date,
and not later than eight (8) business days prior to the date for the meeting,
any adjournment or postponement thereof in the case of the update and
supplement required to be made as of ten (10) business days prior to the
meeting or any adjournment or postponement thereof.

(C) Disclosure Requirements.

(1) A stockholder’s notice pursuant to Section

[●] [reference stockholder ability to call a special meeting bylaw, if appli-
cable], Section [●] [reference the corporation’s annual meeting bylaw],
this Section [1.1] or Section [reference director qualification bylaws, if
applicable] must include the following, as applicable.

(a) As to the stockholder giving the no-

tice and the beneficial owner, if any, on whose behalf the nomination or

499
To be included only if stockholders have the ability to call a special meeting

C-3
proposal, as applicable, is made, a stockholder’s notice must set forth:
(i) the name and address of such stockholder, as they appear on the Corpo-
ration’s books, of such beneficial owner, if any, and of their respective
affiliates or associates or others acting in concert therewith, (ii) (A) the
class or series and number of shares of the Corporation which are, directly
or indirectly, owned beneficially and of record by such stockholder, such
beneficial owner and their respective affiliates or associates or others act-
ing in concert therewith, (B) any option, warrant, convertible security,
stock appreciation right, or similar right with an exercise or conversion
privilege or a settlement payment or mechanism at a price related to any
class or series of shares of the Corporation or with a value derived in
whole or in part from the value of any class or series of shares of the Cor-
poration, or any derivative or synthetic arrangement having the character-
istics of a long position in any class or series of shares of the Corporation,
or any contract, derivative, swap or other transaction or series of transac-
tions designed to produce economic benefits and risks that correspond
substantially to the ownership of any class or series of shares of the Cor-
poration, including due to the fact that the value of such contract, deriva-
tive, swap or other transaction or series of transactions is determined by
reference to the price, value or volatility of any class or series of shares of
the Corporation, whether or not such instrument, contract or right shall be
subject to settlement in the underlying class or series of shares of the Cor-
poration, through the delivery of cash or other property, or otherwise, and
without regard to whether the stockholder of record, the beneficial owner,
if any, or any affiliates or associates or others acting in concert therewith,
may have entered into transactions that hedge or mitigate the economic
effect of such instrument, contract or right, or any other direct or indirect
opportunity to profit or share in any profit derived from any increase or
decrease in the value of shares of the Corporation (any of the foregoing, a
“Derivative Instrument”) directly or indirectly owned beneficially by such
stockholder, the beneficial owner, if any, or any affiliates or associates or
others acting in concert therewith, (C) any proxy, contract, arrangement,
understanding, or relationship pursuant to which such stockholder, such
beneficial owner or any of their respective affiliates or associates or others
acting in concert therewith has any right to vote any class or series of
shares of the Corporation, (D) any agreement, arrangement, understand-
ing, relationship or otherwise, including any repurchase or similar so-
called “stock borrowing” agreement or arrangement, involving such
stockholder, such beneficial owner or any of their respective affiliates or
associates or others acting in concert therewith, directly or indirectly, the
purpose or effect of which is to mitigate loss to, reduce the economic risk
(of ownership or otherwise) of any class or series of the shares of the Cor-
poration by, manage the risk of share price changes for, or increase or de-
crease the voting power of, such stockholder, such beneficial owner or any
of their respective affiliates or associates or others acting in concert there-
with with respect to any class or series of the shares of the Corporation, or

C-4
which provides, directly or indirectly, the opportunity to profit or share in
any profit derived from any decrease in the price or value of any class or
series of the shares of the Corporation (any of the foregoing, a “Short In-
terest”), (E) any rights to dividends on the shares of the Corporation
owned beneficially by such stockholder, such beneficial owner or any of
their respective affiliates or associates or others acting in concert therewith
that are separated or separable from the underlying shares of the Corpora-
tion, (F) any proportionate interest in shares of the Corporation or Deriva-
tive Instruments held, directly or indirectly, by a general or limited part-
nership in which such stockholder, such beneficial owner or any of their
respective affiliates or associates or others acting in concert therewith is a
general partner or, directly or indirectly, beneficially owns an interest in a
general partner of such general or limited partnership, (G) any perfor-
mance-related fees (other than an asset-based fee) that such stockholder,
such beneficial owner of any of their respective affiliates or associates or
others acting in concert therewith is entitled to based on any increase or
decrease in the value of shares of the Corporation or Derivative Instru-
ments, if any, including without limitation any such interests held by
members of the immediate family sharing the same household of such
stockholder, such beneficial owner or any of their respective affiliates or
associates or others acting in concert therewith, (H) any significant equity
interests or any Derivative Instruments or Short Interests in any principal
competitor of the Corporation held by such stockholder, such beneficial
owner or any of their respective affiliates or associates or others acting in
concert therewith and (I) any direct or indirect interest of such stockhold-
er, such beneficial owner or any of their respective affiliates or associates
or others acting in concert therewith in any contract with the Corporation,
any affiliate of the Corporation or any principal competitor of the Corpo-
ration (including, in any such case, any employment agreement, collective
bargaining agreement or consulting agreement), (iii) all information that
would be required to be set forth in a Schedule 13D filed pursuant to Rule
13d-1(a) or an amendment pursuant to Rule 13d-2(a) if such a statement
were required to be filed under the Exchange Act and the rules and regula-
tions promulgated thereunder by such stockholder, such beneficial owner
or any of their respective affiliates or associates or others acting in concert
therewith, if any, and (iv) any other information relating to such stock-
holder, such beneficial owner of any of their respective affiliates or asso-
ciates or others acting in concert therewith, if any, that would be required
to be disclosed in a proxy statement and form or proxy or other filings re-
quired to be made in connection with solicitations of proxies for, as appli-
cable, the proposal and/or for the election of directors in a contested elec-
tion pursuant to Section 14 of the Exchange Act and the rules and regula-
tions promulgated thereunder;

(b) If the notice relates to any business

other than a nomination of a director or directors that the stockholder pro-
poses to bring before the meeting, a stockholder’s notice must, in addition

C-5
to the matters set forth in paragraph (a) above, also set forth: (i) a brief
description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material in-
terest of such stockholder, such beneficial owner and each of their respec-
tive affiliates or associates or others acting in concert therewith, if any, in
such business, (ii) the text of the proposal or business (including the text
of any resolutions proposed for consideration and, in the event that such
proposal or business includes a proposal to amend the Bylaws of the Cor-
poration, the text of the proposed amendment), and (iii) a description of all
agreements, arrangements and understandings between such stockholder,
such beneficial owner and each of their respective affiliates or associates
or others acting in concert therewith, if any, and any other person or per-
sons (including their names) in connection with the proposal of such busi-
ness by such stockholder;

(c) As to each individual, if any, whom

the stockholder proposes to nominate for election or reelection to the
Board of Directors, a stockholder’s notice must, in addition to the matters
set forth in paragraph (a) above, also set forth: (i) all information relating
to such individual that would be required to be disclosed in a proxy state-
ment or other filings required to be made in connection with solicitations
of proxies for election of directors in a contested election pursuant to Sec-
tion 14 of the Exchange Act and the rules and regulations promulgated
thereunder (including such individual’s written consent to being named in
the proxy statement as a nominee and to serving as a director if elected)
and (ii) a description of all direct and indirect compensation and other ma-
terial monetary agreements, arrangements and understandings during the
past three years, and any other material relationships, between or among
such stockholder and beneficial owner, if any, and their respective affili-
ates and associates, or others acting in concert therewith, on the one hand,
and each proposed nominee, and his or her respective affiliates and associ-
ates, or others acting in concert therewith, on the other hand, including,
without limitation all information that would be required to be disclosed
pursuant to Rule 404 promulgated under Regulation S-K if the stockholder
making the nomination and any beneficial owner on whose behalf the
nomination is made, if any, or any affiliate or associate thereof or person
acting in concert therewith, were the “registrant” for purposes of such rule
and the nominee were a director or executive officer of such registrant;
and

(d) With respect to each individual, if

any, whom the stockholder proposes to nominate for election or reelection
to the Board of Directors, a stockholder’s notice must, in addition to the
matters set forth in paragraphs (a) and (c) above, also include a completed
and signed questionnaire, representation and agreement required by Sec-
tion [●] [reference director qualification bylaw, if applicable] of these By-
laws. The Corporation may require any proposed nominee to furnish such

C-6
other information as may reasonably be required by the Corporation to
determine the eligibility of such proposed nominee to serve as an inde-
pendent director of the Corporation or that could be material to a reasona-
ble stockholder’s understanding of the independence, or lack thereof, of
such nominee. Notwithstanding anything to the contrary, only persons
who are nominated in accordance with the procedures set forth in these
Bylaws, including without limitation Sections [●] [reference annual meet-
ing, advanced notice and director qualification bylaws, as applicable]
hereof, shall be eligible for election as directors.

(2) For purposes of these Bylaws, “public an-

nouncement” shall mean disclosure in a press release reported by a nation-
al news service or in a document publicly filed by the Corporation with
the Securities and Exchange Commission pursuant to Section 13, 14 or
15(d) of the Exchange Act and the rules and regulations promulgated
thereunder.

(3) Notwithstanding the provisions of these By-

laws, a stockholder shall also comply with all applicable requirements of
the Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this Bylaw; provided, however, that any references
in these Bylaws to the Exchange Act or the rules promulgated thereunder
are not intended to and shall not limit the separate and additional require-
ments set forth in these Bylaws with respect to nominations or proposals
as to any other business to be considered.

(4) Nothing in these Bylaws shall be deemed to

affect any rights (i) of stockholders to request inclusion of proposals in the
Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange
Act or (ii) of the holders of any series of Preferred Stock if and to the ex-
tent provided for under law, the Certificate of Incorporation or these By-
laws. Subject to Rule 14a-8 under the Exchange Act, nothing in these By-
laws shall be construed to permit any stockholder, or give any stockholder
the right, to include or have disseminated or described in the Corporation’s
proxy statement any nomination of director or directors or any other busi-
ness proposal.

C-7
 ANNEX D

Name: ___________________________

[COMPANY]

DIRECTORS’ AND OFFICERS’ QUESTIONNAIRE

[COMPANY], a [STATE] corporation (the “Company”), is preparing its

annual report on Form 10-K (“Form 10-K”), its annual report to stock-
holders and its proxy statement for its upcoming annual stockholders’
meeting. Certain information about the Company’s Directors, Executive
Officers and key employees is needed to complete the Form 10-K, the an-
nual report and the proxy statement. The purpose of this Questionnaire is
to obtain that information so that the Company and its counsel can provide
accurate and complete information, and verify the disclosures to be con-
tained, in those documents.

Capitalized terms used in this Questionnaire are defined in the Glossary

attached at the end of this Questionnaire.

Please complete, sign, date and return this Questionnaire to [NAME OF

CONTACT PERSON AT THE COMPANY AND COMPANY
ADDRESS] on or before [DATE]. This Questionnaire may also be re-
turned by facsimile to [FAX NUMBER] or e-mailed to [E-MAIL
ADDRESS].

If you have any questions regarding this Questionnaire, please contact

[NAME OF CONTACT PERSON] at [TELEPHONE NUMBER], and
[s]he will assist you.

[Note: Generally the contact person is someone in the legal department,

such as the Corporate Secretary or a Deputy or Associate General Coun-
sel. If the Company has asked its outside counsel to assist with the prepa-
ration, distribution and collection of the Questionnaires, an additional
contact person at the outside law firm could be added.]

General Instructions

1. Part I of this Questionnaire should be answered by all Executive

Officers, Directors and Director nominees. Part II should only be an-
swered by non-executive Directors and Director nominees. Part III should
only be answered by those Directors and Director nominees who are
members of or nominees for the Audit Committee.

D-1
2. If the answer to any question is “No,” “None” or “Not Applica-
ble,” please indicate that as your response, but do not leave any answers
blank.

3. If additional space is required to answer any question, please use

the “Additional Information” page at the end of this Questionnaire. Please
identify all questions answered there by their respective question numbers.

4. Information requested in this Questionnaire is to be provided as of

the date you complete this Questionnaire, unless otherwise indicated. If,
after submitting this Questionnaire, any events occur or information comes
to your attention that would affect the accuracy of any of your responses
herein, please notify [NAME OF CONTACT PERSON] at [TELEPHONE
NUMBER] as soon as possible.

PART I – TO BE ANSWERED BY ALL EXECUTIVE OFFICERS,

DIRECTORS AND DIRECTOR NOMINEES

1. Background Information. Please provide the following infor-

mation:

[Note: This information is required by Item 7 of Schedule 14A, Item 401

of Regulation S-K.]

(a) Name:

(b) Business address and telephone number:

Residential address and telephone number:

(c) Date of birth:

(d) Citizenship:

(e) Are you related by blood, marriage or adoption to any Ex-

ecutive Officer, Director or any nominee to become an Executive Officer
or Director of the Company?

Yes ❏ No ❏

D-2
 If yes, please name the Executive Officer, Director or the nominee
and state the nature of the relationship:

(f) Were you appointed to serve as an Executive Officer or Di-

rector of the Company as a result of any arrangement or understanding
between you and any other Person (except the Directors or Executive Of-
ficers of the Company acting solely in their capacity as such)? [Note:
This information is required by Item 7 of Schedule 14A, Items 401(a) and
(b) of Regulation S-K.]

Yes ❏ No ❏

If yes, please explain the arrangement or understanding below and name

the other Party(ies) and attach a copy of any written arrangement or under-
standing to this questionnaire:

(g) Please review and update, if necessary, your personal in-

formation, which is attached as Appendix A. This information includes a
description of your business experience for at least the past [five OR
[NUMBER]] fiscal years, including:

 Principal occupations and employment;

 The name and principal business of any company or other organization

in which these occupations and employment were carried on; and

 Whether such company or organization is a parent, subsidiary or other

Affiliate of the Company.

This information should include all positions and offices, if any, that you
currently hold with the Company or any of its subsidiaries, the period of
time for which you have held each position or office and all positions and
offices held with the Company or any of its subsidiaries at any time during
the past [five OR [NUMBER]] fiscal years.

[Note: Item 401(e) of Regulation S-K requires disclosure of only a five-

year business experience biography of each officer, director and director
nominee. However, a company must also describe the specific qualifica-
tions, skills and experiences of each director or director nominee that

D-3
qualify him or her to serve as a director. Obtaining this additional infor-
mation is primarily addressed in Question 1(h) below. However, it is pos-
sible that many directors and director nominees may be too busy or reluc-
tant to complete this type of question, yet the company would still be obli-
gated to provide this information. In that event, the company’s legal de-
partment or outside counsel should be prepared to draft this discussion on
their behalf, subject to review by the specific director(s) or director nomi-
nee(s). Obtaining a longer business experience biography, such as for at
least 10 years instead of only five years, from each person can provide a
good background for this drafting. It is a good idea to use a 10-year peri-
od, but a longer period may be more appropriate for more senior direc-
tors or director nominees. Some companies may find that five years is suf-
ficient.]

If you are an Executive Officer and have been employed by the Company
or one of its subsidiaries for less than five years, please ensure that this
information includes a brief description of the nature of your responsibili-
ties in prior positions.

If you are a Director or nominee for Director, this information should also
list all other Directorships (and committee memberships) of public com-
panies or investment companies registered under the Investment Company
Act of 1940 that you currently hold or have held at any time during the
past five fiscal years.

[Note: This information is required by Item 7 of Schedule 14A, Items

401(a), (b) and (e) of Regulation S-K.]

Is the information in Appendix A complete and correct?

Yes ❏ No ❏

If no, please correct the information in Appendix A.

(h) If you are a Director or nominee for Director, please de-

scribe any specific qualifications or skills that you possess and/or any spe-
cific experience that you have had that you believe best address your qual-
ifications to serve as a Director of the Company. Please note that this in-
formation can extend beyond the past five years and can include any spe-
cific past experience that could be useful to the Company, such as previ-
ous directorships or employment with other companies in the same indus-
try as the Company or specific areas of expertise, such as accounting, fi-
nance, risk assessment skills or experience with compensation. Please feel
free to use the “Additional Information” page at the end of this Question-
naire for additional space to answer this question if necessary.

D-4
[Note: This Question 1(h) addresses the requirement in Item 401(e) of
Regulation S-K, in which a company must describe the specific qualifica-
tions, skills and experiences of each director or director nominee that
qualify him or her to serve as a director.]

(i) During the past 10 years:

[Note: This information is required by Item 7 of Schedule 14A, Item

401(f) of Regulation S-K.]

(To determine the 10-year period for Questions 1(i) and 1(j), the date of a
reportable event is considered to be the date on which the final order,
judgment or decree was entered, or the date on which any rights of appeal
from preliminary orders, judgments or decrees have lapsed. For bankrupt-
cy petitions, this date is the date of filing for uncontested petitions or the
date on which approval of a contested petition became final.)

(i) Has a petition under the federal bankruptcy laws or any

state insolvency law been filed by or against you, or has a receiver,
fiscal agent or similar officer been appointed by a court for the
business or property of (A) you, (B) any partnership in which you
were a general partner at, or within two years before, the time of
such filing or (C) any company or business association of which
you were an Executive Officer at, or within two years before, the
time of such filing?

Yes ❏ No ❏

(ii) Have you been convicted of fraud in a civil or criminal

proceeding (that was not overturned or expunged)?

Yes ❏ No ❏

D-5
 (j) During the past 10 years:

[Note: This information is required by Item 7 of Schedule 14A, Item

401(f) of Regulation S-K.]

(i) Have you been convicted in a criminal proceeding or

named the subject of a pending criminal proceeding, excluding
traffic violations and other minor offenses?

Yes ❏ No ❏

(ii) Have you been the subject of any order, judgment or de-
cree, not subsequently reversed, suspended or vacated, of any
court, permanently or temporarily enjoining or limiting you from
any of the following:

(A) acting as futures commission merchant, introducing

broker, commodity trading advisor, commodity pool opera-
tor, floor broker, leverage transaction merchant, any other
Person regulated by the Commodity Futures Trading
Commission, or an associated Person of any of the forego-
ing, or as an investment advisor, underwriter, broker or
dealer in securities, or as an affiliated Person, Director or
employee of any investment company, bank, savings and
loan association or insurance company, or engaging in or
continuing any conduct or practice in connection with such
activity;

(B) any type of business practice; or

(C) any activity in connection with the purchase or sale

of any security or commodity or in connection with any vi-
olation of federal or state securities laws or federal com-
modities laws?

Yes ❏ No ❏

(iii) Have you been the subject of any order, judgment or de-
cree, not subsequently reversed, suspended or vacated, of any fed-
eral or state authority barring, suspending or otherwise limiting for
more than 60 days your right to engage in any activity described in
subsection (ii)(A) above or to be associated with Persons engaged
in any such activity?

Yes ❏ No ❏

D-6
(iv) Have you been found by a court in a civil action or by the
Securities and Exchange Commission (the “SEC”) to have violated
any federal or state securities law, and the judgment in such civil
action or finding by the SEC has not been subsequently reversed,
suspended or vacated?

Yes ❏ No ❏

(v) Have you been found by a court in a civil action or by the

Commodity Futures Trading Commission to have violated any
federal commodities law, and the judgment in such civil action or
finding by the Commodity Futures Trading Commission has not
been subsequently reversed, suspended or vacated?

Yes ❏ No ❏

(vi) Have you been the subject of any order, judgment, decree or
finding, not subsequently reversed, suspended or vacated, of any
federal or state court or administrative agency relating to an al-
leged violation of any of the following:

(A) any federal or state securities or commodities law or

regulation;

(B) any law or regulation relating to financial institu-

tions or insurance companies (including any temporary or
permanent injunctions, orders of disgorgement or restitu-
tion, civil money penalties, temporary or permanent cease-
and-desist orders or removal or prohibition orders); or

(C) any law or regulation prohibiting mail or wire fraud

or fraud relating to any business entity?

Yes ❏ No ❏

(vii) Have you been the subject of any sanction or order, not
subsequently reversed, suspended or vacated, of any national secu-
rities exchange, registered securities association, registered clear-
ing agency, registered commodities or derivatives exchange, regis-
tered derivatives transaction execution facility or registered deriva-
tives clearing organization or any similar exchange, association,
entity or organization with disciplinary authority over its mem-
bers?

Yes ❏ No ❏

D-7
If you answered yes to any of the foregoing questions in (i) and (j), please
describe each such event on the “Additional Information” page at the end
of this Questionnaire.

(k) Relationships with Government Officials.

(i) Do you currently hold a position as a Government Official or

have you been a Government Official within the past three years?

Yes ❏ No ❏

(ii) Do you have a familial relationship with a Government Offi-

cial?

Yes ❏ No ❏

If you answered yes to either (k)(i) or (k)(ii), please provide details

regarding your position as a Government Official or your familial
relationship with a Government Official, as applicable:

[2. Stock Ownership.

[Note: Use this version of Question 2 if the Company has the information
necessary to complete the security ownership table in Appendix B for each
director, officer and director nominee. Complete an Appendix B on behalf
of each person who is sent a Questionnaire before distributing the Ques-
tionnaires.]

(a) Do you know of any Person(s) or group(s) that Beneficially

Own(s) more than five percent of any class of the Company’s voting secu-
rities (other than [NAMES OF KNOWN five percent OR MORE
STOCKHOLDERS])? [Note: This information is required by Item 6(d)
of Schedule 14A, Item 403(a) of Regulation S-K.]

Yes ❏ No ❏

D-8
If yes, please provide the names and addresses of the Person(s) or group(s)
below:

(b) Please review and update, if necessary, the table in Appen-

dix B, which provides information regarding your security ownership, in-
cluding the number of shares of each class of equity securities of the
Company (or any of its parents or subsidiaries) that you “Beneficially
Owned” on [DATE]. [Note: Insert the most recent date possible, which
should be after the end of the company’s fiscal year.] Appendix B also
describes the nature and terms of any of your rights to acquire Beneficial
Ownership, whether you share voting or investment power over any shares
you own with any other Person and whether you disclaim Beneficial
Ownership of any of the shares. [Note: This information is required by
Item 6(d) of Schedule 14A, Item 403(b) of Regulation S-K.] Is the infor-
mation in Appendix B accurate and complete?

Yes ❏ No ❏

If no, please correct the information in Appendix B.

(c) Have you pledged as security any shares of any class of eq-
uity securities that you beneficially own as set forth in Appendix B, in-
cluding any securities held in margin accounts?

Yes ❏ No ❏

If yes, please list the number and class of equity securities below:

(d) Have you or any of your Immediate Family Members or

anyone else on your behalf, currently or since [DATE AT LEAST 12
MONTHS PRIOR TO QUESTIONNAIRE DISTRIBUTION], purchased
or sold any financial instruments (e.g., prepaid variable forward contracts,
equity swaps and cash-settled total return swaps, collars or exchange-
traded puts or calls) that are designed to hedge or offset any decrease in
the market value of Company Securities (i) granted to you by

D-9
[COMPANY] as part of you compensation as a director or officer of
[COMPANY] or (ii) otherwise beneficially owned by you?

Yes ❏ No ❏

If yes, please provide details, including the number and type(s) of securi-
ties and the date(s) on which the underlying transaction occurred:

[2. Stock Ownership.

[Note: Use this version of Question 2 if the Company does not have all of
the information necessary to complete the security ownership table in Ap-
pendix B for each director, officer and director nominee. This version of
Question 2 eliminates the use of a completed Appendix B and requires
each person completing this Questionnaire to provide the information on
his or her own behalf in this Questionnaire.]

(a) Do you know of any Person(s) or group(s) that Beneficially

Own(s) more than five percent of any class of the Company’s voting secu-
rities (other than [NAMES OF KNOWN five percent OR MORE
STOCKHOLDERS])? [Note: This information is required by Item 6(d) of
Schedule 14A, Item 403(a) of Regulation S-K.]

Yes ❏ No ❏

If yes, please provide the names and addresses of the Person(s) or group(s)
below:

(b) Please complete the information below regarding the equity

securities of the Company (or any of its parents or subsidiaries) that you
“Beneficially Owned” on [DATE]. [Note: Insert the most recent date
possible.] [Note: This information is required by Item 6(d) of Schedule
14A, Item 403(b) of Regulation S-K.]

D-10
 Please be sure that the table includes all of the following:

(i) Company securities owned solely by you through one or more

brokerage accounts (i.e., shares held in street name for your ac-
count);

(ii) Company securities owned jointly with your spouse or others;

(iii) Company securities owned by you as trustee of a trust;

(iv) Company securities owned by you as executor or administrator

of an estate;

(v) Company securities owned by you as custodian for a minor or

as a legal guardian for a minor; and

(vi) Company securities owned directly by others (such as a corpo-

ration or foundation) over which you share voting power and/or
investment power.

Number of shares of common stock

owned (includes vested restricted
stock awards)

Number of vested options owned

Number of unvested options owned

(please include vesting schedule)

Number of shares of unvested re-

stricted stock (please include vest-
ing schedule)

Any other equity securities owned

(please describe and include any
applicable vesting schedule)

D-11
Any equity securities in which own-
ership, voting power or investment
power is shared (please describe
and include any applicable vesting
schedule)

If you need additional space to complete this table, please include the in-
formation on the “Additional Information” page at the end of this Ques-
tionnaire.

(c) If you share the voting or investment power over any secu-
rity, please identify the Persons with whom you share such power and the
relationship that gives rise to sharing such power:

(d) Describe the nature and terms of any rights to acquire Ben-
eficial Ownership identified in Question 2(b):

(e) If you disclaim Beneficial Ownership of any shares listed

in Question 2(b), please describe the shares and why you disclaim Benefi-
cial Ownership:

(f) Have you pledged as security any shares of any class of eq-
uity securities that you beneficially own as set forth in the table above, in-
cluding any securities held in margin accounts?

Yes ❏ No ❏

D-12
If yes, please list the number and class of equity securities below:

(g) Have you or any of your Immediate Family Members or

anyone else on your behalf, currently or since [DATE AT LEAST
12 MONTHS PRIOR TO QUESTIONNAIRE DISTRIBUTION], pur-
chased or sold any financial instruments (e.g., prepaid variable forward
contracts, equity swaps and cash-settled total return swaps, collars or ex-
change-traded puts or calls) that are designed to hedge or offset any de-
crease in the market value of Company Securities (i) granted to you by
[COMPANY] as part of your compensation as a director or officer of
[COMPANY] or (ii) otherwise beneficially owned by you?

Yes ❏ No ❏

If yes, please provide details, including the number and type(s) of securi-
ties and the date(s) on which the underlying transaction occurred.

[3. Section 16 Reporting Compliance. Attached as Appendix C are

copies of the Section 16 filings that the Company made on your behalf
during the Company’s last fiscal year. Based on a review of these filings
and all your transactions in the Company’s securities, please answer the
following questions:

[Note: Use this version of Question 3 if the Company filed the Section 16
reports on behalf of the directors and officers and if copies of these filings
on behalf of each director and officer will be attached to his or her respec-
tive Questionnaire. If this is done for each officer and director, make sure
that copies of every filing made on behalf of the respective officer or di-
rector have been attached and that no filings have been omitted. Attach-
ing the filings will increase the size of this Questionnaire, which may make
distribution more difficult or costly.]

(a) Were any of your Section 16 filings (Forms 3, 4 and/or 5)

filed after the date on which they were due to be filed, or did you engage
in any transaction in the Company’s securities for which you failed to file

D-13
a required form? For reference, the due dates for Section 16 filings are as
follows: A Form 3 must be filed within 10 days after the event by which
you became a reporting person; a Form 4 must be filed by the end of the
second business day following the reportable transaction; and a Form 5
must be filed within 45 days after the end of the Company’s fiscal year.

Yes ❏ No ❏

If yes, please indicate the number of late filings, the number of transac-
tions that were not reported on a timely basis and any known failure to file
a required form:

(b) Have you engaged in any transactions in the Company’s

securities that have not yet been reported in the most recently filed Form 4
or Form 5?

Yes ❏ No ❏

If yes, please briefly describe the transaction(s):

(c) Is the information contained in Appendix C otherwise accu-

rate and complete?

Yes ❏ No ❏

If no, please explain below:

(d) Are you required to file a Form 5 with the SEC for the past
fiscal year? (A Form 5 is required to be filed with the SEC within 45 days
after the end of the Company’s fiscal year that reflects (a) any transaction
in the Company’s securities that you completed during the past fiscal year
that was not required to be reported on Form 4 and that you did not so re-
port; (b) any transaction in the Company’s securities that you should have
reported during the past fiscal year but did not; and (c) your aggregate
ownership of the Company’s securities as of the date that you file the

D-14
Form 5. However, you do not need to file a Form 5 if (i) you have not en-
gaged in any transaction in the Company’s securities during the past fiscal
year that is required to be reported on Form 5 or (ii) (x) each such transac-
tion was previously reported during the past fiscal year on a Form 4 and
(y) you do not have any other holding or transaction which otherwise was
required to be reported during the past fiscal year and which was not so
reported to the SEC.) By answering “No,” you are representing to the
Company that no Form 5 filing is required.

[Note: Include this clause (d) and the following clause (e) only if the
company has not made a Form 5 filing on behalf of the individual director
or officer and the Form 5 is not attached to Appendix C.]

Yes ❏ No ❏

(e) If you answered “Yes” to question 3(d) above, have you

filed a Form 5 or was one filed on your behalf, or will you be able to file a
Form 5 (or have the form filed on your behalf) by [DATE]? [Note: Insert
the date that is 45 days after the end of the Company’s fiscal year.]

Yes ❏ No ❏

If no, please explain why below:

[Note: The Form 5 is due within 45 days after the end of the fiscal year,
but, depending on the size of the company, the Form 10-K is due within 60
to 90 days after the end of the fiscal year. If the director or officer an-
swers “Yes” to subparagraph (e) of this version of Question 3, confirm
with the director or officer that his or her Form 5 was, in fact, filed on
time. If “Yes” was answered, but the Form 5 is not filed on time, this ver-
sion of Question 3 must be updated.]

[3. Section 16 Reporting Compliance. Based on a review of all your

transactions in the Company’s securities and all filings you made with the
SEC during the last fiscal year, please answer the following questions:

[Note: Use this version of Question 3 if copies of the filings of each direc-
tor and officer will not be attached to his or her respective Questionnaire.]

(a) Were any of your Section 16 filings (Forms 3, 4 and/or 5)

filed after the date on which they were due to be filed, or did you engage

D-15
in any transaction in the Company’s securities for which you failed to file
a required form? For reference, the due dates for Section 16 filings are as
follows: A Form 3 must be filed within 10 days after the event by which
you became a reporting person; a Form 4 must be filed by the end of the
second business day following the reportable transaction; and a Form 5
must be filed within 45 days after the end of the Company’s fiscal year.

Yes ❏ No ❏

If yes, please indicate the number of late filings, the number of transac-
tions that were not reported on a timely basis and any known failure to file
a required form:

(b) Have you engaged in any transactions in the Company’s

securities that have not yet been reported in the most recently filed Form 4
or Form 5?

Yes ❏ No ❏

If yes, please briefly describe the transaction(s):

(c) Are you required to file a Form 5 with the SEC for the past
fiscal year? (A Form 5 is required to be filed with the SEC within 45 days
after the end of the Company’s fiscal year that reflects (a) any transaction
in the Company’s securities that you completed during the past fiscal year
that was not required to be reported on Form 4 and that you did not so re-
port; (b) any transaction in the Company’s securities that you should have
reported during the past fiscal year but did not; and (c) your aggregate
ownership of the Company’s securities as of the date that you file the
Form 5. However, you do not need to file a Form 5 if (i) you have not en-
gaged in any transaction in the Company’s securities during the past fiscal
year that is required to be reported on Form 5 or (ii) (x) each such transac-
tion was previously reported during the past fiscal year on a Form 4 and
(y) you do not have any other holding or transaction which otherwise was
required to be reported during the past fiscal year and which was not so
reported to the SEC.) By answering “No,” you are representing to the
Company that no Form 5 filing is required.

Yes ❏ No ❏

D-16
 (d) If you answered “Yes” to 3(c) above, have you filed a Form
5 or was one filed on your behalf, or will you be able to file a Form 5 (or
have the form filed on your behalf) by [DATE]? [Note: Insert the date
that is 45 days after the end of the Company’s fiscal year.]

Yes ❏ No ❏

If no, please explain why below:

[Note: The Form 5 is due within 45 days after the end of the fiscal year,
but, depending on the size of the company, the Form 10-K is due within 60
to 90 days after the end of the fiscal year. If the director or officer an-
swers “Yes” to subparagraph (d) of this version of Question 3, follow up
with the director or officer to confirm that his or her Form 5 was, in fact,
filed on time. If “Yes” was answered, but the Form 5 is not filed on time,
this version of Question 3 must be updated.]

4. Payments for Personal Benefit. During the last fiscal year, did you
or any Immediate Family Member receive, or are you or any Immediate
Family Member to receive, directly or indirectly, any perquisite or other
benefit which was not (or will not be) directly related to the performance
of your job or the satisfaction of your obligations to the Company, from
(a) the Company or any of its parents or subsidiaries (examples would be
the payment of personal expenses, personal use of the Company’s proper-
ty, such as automobiles, and use of the corporate staff for personal purpos-
es) or (b) third parties as a result of or in connection with your employ-
ment by or relationship or association with the Company or any of its par-
ents or subsidiaries? [Note: This information is required by Item 8 of
Schedule 14A, Item 402 of Regulation S-K.]

Yes ❏ No ❏

If yes, please describe the benefit and list its dollar value (or any other
value ascribed to it).

D-17
5. Transactions with Related Persons. Since the beginning of the
Company’s last fiscal year, have you or any Immediate Family Member
engaged in any transaction in which the Company or any of its subsidiar-
ies was or is to be a participant and which the dollar amount involved ex-
ceeds $120,000? Does any proposed transaction exist in which the Com-
pany or any of its subsidiaries was or is to be a participant and in which
the dollar amount involved exceeds $120,000 and in which you or your
Immediate Family Member will have a direct or indirect interest? For the
purposes of these questions, a “transaction” includes, but is not limited to,
any financial transaction, arrangement or relationship (including any in-
debtedness or guarantee of indebtedness) or any series of similar transac-
tions, arrangements or relationships. [Note: This information is required
by Item 7 of Schedule 14A, Item 404(a) of Regulation S-K.]

Yes ❏ No ❏

If yes, please briefly describe the transaction or series of similar transac-

tions, including: (a) the name of such Person and the Person’s relationship
to the Company and/or the Company’s subsidiaries; (b) the nature of such
Person’s interest in the transaction (including the Person’s position or rela-
tionship with, or ownership in, a firm, corporation or other entity that is a
party to, or has an interest in, the transaction); (c) the approximate dollar
value of such transaction; (d) the approximate dollar value of such Per-
son’s interest in the transaction; and (e) any other information regarding
the transaction or the Person in the context of the transaction that could be
considered Material.

In the case of indebtedness, disclosure of the amount involved in the

transaction must include (a) the largest aggregate amount of principal out-
standing during the period for which disclosure is provided, (b) the
amount outstanding as of the most recent date, (c) the amount of principal
paid during the period for which disclosure is provided, (d) the amount of
interest paid during the period for which disclosure is provided and (e) the
interest rate or amount payable on the indebtedness.

6. Financial or Economic Interests in Certain Entities with Relation-

ships with [COMPANY]. Do you or any of your Immediate Family
Members or any other person living in your home, have a direct or indirect
financial or economic interest in or relationship with another business enti-
ty, vendor, sponsor or contractor with which [COMPANY] (or any of its

D-18
subsidiaries) has done business since [DATE AT LEAST THREE YEARS
PRIOR TO QUESTIONNAIRE DISTRIBUTION] or which is a competi-
tor of [COMPANY] (or any of its subsidiaries)?

Yes ❏ No ❏

If yes, please provide the information requested below.

(i) Name of the person having the interest or relationship and such
person’s relationship to [COMPANY] or any of its subsidiaries.

(ii) Name and nature of business entity, vendor, sponsor, contrac-

tor or competitor.

(iii) Description of the financial or economic interest in the busi-

ness entity, vendor, sponsor, contractor or competitor.

(iv) Brief description of any transactions or series of similar trans-

actions between [COMPANY] (or any of its subsidiaries) and the
other business entity, vendor, sponsor, or contractor, including the
dollar amount involved.

7. Five Percent or Greater Ownership in Any Entities. Do you or any

of your Immediate Family Members, either alone or in the aggregate, have
a direct or indirect ownership interest of five percent or more of the equity
of any entity?

Yes ❏ No ❏

If yes, please provide the information requested below.

D-19
 (i) Name of the person having the interest or relationship and
such person’s relationship to [COMPANY] or its subsidiaries.

(ii) Name and nature of the business entity.

(iii) Description of the financial or economic interest in the busi-

ness entity.

8. Change in Control. Do you know of any arrangement, including

any pledge of securities of the Company, which resulted in a change in
control of the Company in the last fiscal year, or may result in the future in
a change in control of the Company? [Note: This information is required
by Item 6 of Schedule 14A, Item 403(c) of Regulation S-K.]

Yes ❏ No ❏

If yes, please briefly describe any such arrangement:

9. Adverse Interest in Legal Proceedings. Do you know of any pend-

ing legal proceedings in which either you or any Director, Officer or Affil-
iate of the Company or any owner of more than five percent of any class
of voting securities of the Company, or any Associate of any such Direc-
tor, Officer, Affiliate or security holder, is a party adverse to the Company
or any of its subsidiaries, or has a material interest adverse to the Compa-
ny or any of its subsidiaries? [Note: This information is required by Item
7 of Schedule 14A, Item 103 (inst. 4) of Regulation S-K.]

Yes ❏ No ❏

D-20
If yes, please briefly describe any such proceedings:

10. Compensation Committee or Similar Committee.

(a) During the last fiscal year, have you been a member of the
compensation committee or similar committee of a company other than
the Company or, in the absence of such a committee, a member of the
board of directors of a company other than the Company that was involved
in making decisions regarding compensation policy? [Note: This infor-
mation is required by Item 8 of Schedule 14A, Item 407(e)(4) of Regula-
tion S-K.]

Yes ❏ No ❏

If yes, please indicate which company(ies) below:

(b) As a director or director nominee of the Company, during

the last three fiscal years, were you, or was an Immediate Family Member,
an Executive Officer or employee of any partnership, joint venture, corpo-
ration, trust, limited liability company, company or business entity, or oth-
er organization, whether for profit or not-for-profit, of which any execu-
tive of the Company was a director?

Yes ❏ No ❏

If yes, please describe such relationship, stating particularly the name of

the Company executive who is or was a director, whether such person is or
was on the compensation committee (or other committee performing
equivalent functions) of such partnership, joint venture, corporation, trust,
limited liability company, company or business entity, or other organiza-
tion, whether for profit or not-for-profit (please note if such partnership,
joint venture, corporation, trust, limited liability company, company or
business entity, or other organization, whether for profit or not-for-profit
did not have a compensation or equivalent committee), or otherwise par-
ticipates or participated in any deliberation of Executive Officer or other
employee compensation:

D-21
 (c) As a current or former officer of the Company or any of its
Subsidiaries or other Affiliates, did you also serve, at any time during the
last three fiscal years, as a member of the compensation committee (or
other committee performing equivalent functions), or as a director, of an-
other partnership, joint venture, corporation, trust, limited liability compa-
ny, company or business entity, or other organization, whether for profit or
not-for-profit, where an Executive Officer or employee of such other part-
nership, joint venture, corporation, trust, limited liability company, com-
pany or business entity, or other organization, whether for profit or not-
for-profit, has served or currently serves on the Company’s Board of Di-
rectors?

Yes ❏ No ❏

If the answer to question 10(c) is “Yes,” did any other Executive Officers
of the Company or any of its Subsidiaries or other Affiliates serve at the
same time on the compensation committee (or other committee perform-
ing equivalent functions) of that partnership, joint venture, corporation,
trust, limited liability company, company or business entity, or other or-
ganization, whether for profit or not-for-profit?

[Note: Item 8 of Schedule 14A (Item 402 of Regulation S-K) requires de-
tailed information on the compensation of executive officers and directors.
However, this Questionnaire does not include any questions requesting an
itemized response of the elements of executive compensation or director
compensation because it is typically easier and more efficient to obtain
executive compensation information from the Company’s compensation or
human resources department and director compensation information from
the Company’s Corporate Secretary. As a result, some directors and of-
ficers may not complete such a question.]

D-22
PART II – TO BE ANSWERED BY NON-EXECUTIVE
DIRECTORS AND DIRECTOR NOMINEES ONLY

[Note: For companies that use the Wachtell, Lipton, Rosen & Katz form
model bylaws (or a similar form), the representations and agreement at-
tached as Appendix D should be completed along with this Questionnaire
for all nominees for election or reelection as directors.]

[11. Independence.

[Note: Under Item 407(a) of Regulation S-K, a company must identify its
independent directors in its proxy statement. This version of Question 11
incorporates the NYSE’s independence standards and is applicable only to
reporting companies listed on the NYSE. If the company is listed on
NASDAQ, delete this version of Question 11 and use the following ver-
sion. In addition, this Question 11 should be modified to include any ad-
ditional independence standards adopted by the company.]

(a) Are you currently, or at any time during the last three years
were you, an employee of the Company or of any parent or subsidiary of
the Company, or is any Immediate Family Member currently, or at any
time during the last three years was an Immediate Family Member, an Ex-
ecutive Officer of the Company or of any parent or subsidiary of the
Company? [Note: This question is based on Section 303A.02(b)(i) of the
NYSE Listed Company Manual.]

Yes ❏ No ❏

If yes, please briefly describe:

(b) Did you or any of your Immediate Family Members re-

ceive, during any 12-month period within the last three years, more than
$120,000 in direct compensation from the Company or from any parent or
subsidiary of the Company, other than director and committee fees and
pension or other forms of deferred compensation for prior service (provid-
ed such compensation is not contingent in any way on continued service),
or do you or any of your Immediate Family Members plan to accept such
payments in the current fiscal year? [Note: This question is based on Sec-
tion 303A.02(b)(ii) of the NYSE Listed Company Manual.]

Yes ❏ No ❏

D-23
If yes, please briefly describe:

(c) Are you, or is any Immediate Family Member, a current

partner of [NAME OF THE COMPANY’S AUDITORS]; are you a cur-
rent employee of [NAME OF AUDITORS]; is any Immediate Family
Member a current employee of [NAME OF AUDITORS] who personally
works on the audit of the Company; or were you, or was any Immediate
Family Member, a partner or employee of [NAME OF AUDITORS] who
personally worked on the audit of the Company or any parent or subsidi-
ary of the Company within the last three years (but not currently)? [Note:
This question is based on Section 303A.02(b)(iii) of the NYSE Listed Com-
pany Manual.]

Yes ❏ No ❏

If yes, please indicate the entity and describe your or your Immediate
Family Member(s)’ role with the entity:

(d) Are you or are any of your Immediate Family Members

currently employed, or have you or any of your Immediate Family Mem-
bers been employed within the last three years, as an executive officer of
another entity where any of the Executive Officers of the Company or any
parent or subsidiary of the Company at the same time serves or served on
that entity’s compensation committee? [Note: This question is based on
Section 303A.02(b)(iv) of the NYSE Listed Company Manual.]

Yes ❏ No ❏

D-24
If yes, please indicate the entity and describe your or your Immediate
Family Member(s)’ role with the entity:

(e) Are you a current employee, or is an Immediate Family

Member a current executive officer, of a company that has made payments
to, or received payments from, the Company or any parent or subsidiary of
the Company for property or services in an amount which, in any of the
last three fiscal years, exceeds the greater of $1 million, or two percent of
such other company’s consolidated gross revenues during any of the last
three fiscal years? [Note: This question is based on Section
303A.02(b)(v) of the NYSE Listed Company Manual.]

Yes ❏ No ❏

If yes, please indicate the organization and describe the payments and your
role with the organization:

(f) Are you an executive officer of a charitable or other tax-

exempt organization which received contributions from the Company or
from any parent or subsidiary of the Company in any of the three preced-
ing years in an amount which exceeds the greater of $1 million, or two
percent of the organization’s consolidated gross revenues? [Note: This
question is based on Section 303A.02(b)(v) of the NYSE Listed Company
Manual.]

Yes ❏ No ❏

If yes, please indicate the organization and describe the payments and your
role with the organization:

D-25
 (g) Do you have any other relationship with the Company or
any parent or subsidiary of the Company, either directly or as a partner,
stockholder or officer of an organization that has a relationship with the
Company or any parent or subsidiary of the Company? [Note: This ques-
tion is based on Section 303A.02(a) of the NYSE Listed Company Manu-
al.]

Yes ❏ No ❏

If yes, please describe the relationship:

[11. Independence.

[Note: Under Item 407(a) of Regulation S-K, a company must identify its
independent directors in its proxy statement. This version of Question 11
incorporates NASDAQ’s independence standards and is applicable only to
reporting companies listed on NASDAQ. If the company is listed on the
NYSE, delete this version of Question 11 and use the preceding version.
In addition, this Question 11 should be modified to include any additional
independence standards adopted by the company.]

(a) Are you currently, or were you at any time during the past
three years, an employee of the Company or of any parent or subsidiary of
the Company? [Note: This question is based on Rule 5605(a)(2)(A) of the
NASDAQ Listing Rules.]

Yes ❏ No ❏

If yes, please briefly describe:

(b) During any 12 consecutive months within the last three

years, did you, or did any of your Family Members, accept any compensa-
tion from the Company or from any parent or subsidiary of the Company
in excess of $120,000 (other than: (i) compensation for board or board
committee service, (ii) compensation paid to a Family Member who is a

D-26
non-executive employee of the Company or any parent or subsidiary of
the Company, or (iii) benefits under a tax-qualified retirement plan or non-
discretionary compensation)? For purposes of this Question 11, the term
“Family Member” means a person’s spouse, parents, children and siblings,
whether by blood, marriage or adoption, or anyone residing in the person’s
home. Additionally, “compensation” refers to both direct and indirect
compensation including, among other things, consulting or personal ser-
vice contracts between the Company and a director or Family Member of
the director and political contributions to the campaign of a director or a
Family Member of the director.

[Note: This question is based on Rule 5605(a)(2)(B) of the NASDAQ List-

ing Rules. Under NASDAQ Marketplace Rule IM-5605, a director can be
deemed to be independent regardless of:

 non-preferential payments made in the ordinary course of provid-

ing business services (such as payments of interest or proceeds re-
lated to banking services or loans by an issuer that is a financial
institution or payment of claims on a policy by an issuer that is an
insurance company);

 payments arising solely from investments in the company’s securi-

ties; or

 loans permitted under Section 13(k) of the Exchange Act,

as long as the payments are not considered compensation. However, de-

pending on the circumstances, a loan or payment could be compensatory
if, for example, it is not on terms generally available to the public.]

Yes ❏ No ❏

If yes, please briefly describe:

(c) Are any of your Family Members currently serving as an

executive officer of the Company or any parent or subsidiary of the Com-
pany, or were any of your Family Members serving in such capacity at any
time during the past three years? [Note: This question is based on Rule
5605(a)(2)(C) of the NASDAQ Listing Rules.]

Yes ❏ No ❏

D-27
If yes, please briefly describe:

(d) Are you, or are any of your Family Members, a partner in,
or a controlling stockholder or an executive officer of, any organization to
which the Company made, or from which the Company received, pay-
ments for property or services in the current or any of the past three fiscal
years that exceeded five percent of the recipient’s consolidated gross reve-
nues for that year, or $200,000, whichever is more (other than: (i) pay-
ments arising solely from investments in the Company’s securities or (ii)
payments under non-discretionary charitable contribution matching pro-
grams)? [Note: This question is based on Rule 5605(a)(2)(D) of the
NASDAQ Listing Rules.]

Yes ❏ No ❏

If yes, please briefly describe:

(e) Are you, or are any of your Family Members, employed as

an executive officer of another entity where at any time during the past
three years any of the Company’s executive officers served on the com-
pensation committee of the other entity? [Note: This question is based on
Rule 5605(a)(2)(E) of the NASDAQ Listing Rules.]

Yes ❏ No ❏

If yes, please briefly describe:

(f) Are you, or are any of your Family Members, a partner of

[NAME OF THE COMPANY’S AUDITORS], or have you or any of your

D-28
Family Members been a partner or employee of [NAME OF AUDITORS]
who worked on the Company’s audit at any time during any of the past
three years? [Note: This question is based on Rule 5605(a)(2)(F) of the
NASDAQ Listing Rules.]

Yes ❏ No ❏

If yes, please briefly describe:

(g) Do you have any other relationships (i.e., being a partner,

stockholder or officer of an organization that has any commercial, indus-
trial, banking, consulting, legal, accounting, charitable, familial or any
other relationships with the Company or any of its subsidiaries) that could
interfere with your exercise of independent judgment in carrying out the
responsibilities as a director of the Company? [Note: This question is
based on Rule 5605(a)(2) of the NASDAQ Listing Rules.]

Yes ❏ No ❏

If yes, please briefly describe:

PART III – TO BE ANSWERED ONLY BY DIRECTORS WHO

ARE MEMBERS OF OR NOMINEES FOR THE AUDIT
COMMITTEE

12. Audit Committee Independence. As a member of or nominee for

the Company’s audit committee:

(a) Do you currently or do you plan to, in the current fiscal

year, accept directly or indirectly any consulting, advisory, or other com-
pensatory fee from the Company or from any of its subsidiaries, other than
in your capacity as a member of the audit committee, the board of direc-
tors or any other board committee or the receipt of fixed amounts of com-
pensation under a retirement plan (including deferred compensation) for
prior service with the Company or its subsidiaries, provided that such
compensation is not contingent in any way on continued service? For pur-
poses of this Question 12(a), “indirect” includes acceptance of such a fee

D-29
by a spouse, a minor child or stepchild or a child or stepchild sharing a
home with you or by an entity in which you are a partner, member, an of-
ficer such as a managing director occupying a comparable position or Ex-
ecutive Officer, or occupying a similar position (except limited partners,
non-managing members and those occupying similar positions who, in
each case, have no active role in providing services to the entity) and who
provides accounting, consulting, legal, investment banking or financial
advisory services to the Company or any of its subsidiaries. [Note: This
question is based on Rule 10A-3(b)(1)(ii)(A) under the Exchange Act.]

Yes ❏ No ❏

If yes, please describe the nature of the services that are to be provided
and the fee that is to be obtained:

(b) Other than in your capacity as a member of the audit com-

mittee, the board of directors or any other committee of the board of direc-
tors, are you an “affiliated person” of the Company or of any of the Com-
pany’s subsidiaries? For purposes of this Question 12(b), an “affiliated
person” is a person that directly, or indirectly through one or more inter-
mediaries, controls, or is controlled by, or is under common control with,
the Company or a subsidiary of the Company. You are not deemed to
control the Company or any of the Company’s subsidiaries if you are not
the beneficial owner, directly or indirectly, of more than 10 percent of any
class of voting equity securities of the Company or its subsidiaries and you
are not an executive officer of the Company or any of its subsidiaries.
[Note: This question is based on Rule 10A-3(b)(1)(ii)(B) under the Ex-
change Act.]

Yes ❏ No ❏

If yes, please describe your affiliation:

(c) Do you believe that you qualify as an “audit committee fi-

nancial expert”? For purposes of this Question 12(c), an “audit committee

D-30
financial expert” means a person who has the following attributes: (i) an
understanding of generally accepted accounting principles and financial
statements; (ii) the ability to assess the general application of such princi-
ples in connection with the accounting for estimates, accruals and re-
serves; (iii) experience preparing, auditing, analyzing or evaluating finan-
cial statements that present a breadth and level of complexity of account-
ing issues that are generally comparable to the breadth and complexity of
issues that can reasonably be expected to be raised by the registrant’s fi-
nancial statements, or experience actively supervising one or more persons
engaged in such activities; (iv) an understanding of internal control over
financial reporting; and (v) an understanding of audit committee functions.
Such attributes must be acquired through the following: (1) education and
experience as a principal financial officer, principal accounting officer,
controller, public accountant or auditor or experience in one or more posi-
tions that involve the performance of similar functions; (2) experience ac-
tively supervising a principal financial officer, principal accounting of-
ficer, controller, public accountant, auditor or person performing similar
functions; (3) experience overseeing or assessing the performance of com-
panies or public accountants with respect to the preparation, auditing or
evaluation of financial statements; or (4) other relevant experience. [Note:
This information is required by Item 7 of Schedule 14A, Item 407(d)(5) of
Regulation S-K.]

Yes ❏ No ❏

If yes, please describe your relevant education and experience:

[13. Other Audit Committee Criteria.

[Note: This version of Question 13 is applicable only to reporting compa-

nies listed on the NYSE. If the company is listed on NASDAQ, delete this
version of Question 13 and use the following version.]

(a) Do you believe that you are “financially literate” (as it

would be interpreted by the Company’s board of directors in its business
judgment) or, if not, can become so within a reasonable period of time of
your appointment to the Audit Committee? [Note: This question is based
on Section 303A.07(a) of the NYSE Listed Company Manual.]

Yes ❏ No ❏

D-31
 (b) Do you have accounting or related financial management
expertise (as it would be interpreted by the Company’s board of directors
in its business judgment)? [Note: This question is based on Section
303A.07(a) of the NYSE Listed Company Manual.]

Yes ❏ No ❏

(c) On how many other audit committees of public companies

do you serve? [Note: This question is based on Section 303A.07(a) of the
NYSE Listed Company Manual.]

0❏ 1❏ 2❏ 3❏ 4❏ 5❏ ]

[13. Other Audit Committee Criteria.

[Note: This version of Question 13 is applicable only to reporting compa-

nies listed on NASDAQ. If the company is listed on the NYSE, delete this
version of Question 13 and use the preceding version.]

(a) Have you participated in the preparation of the financial

statements of the Company or any of its current subsidiaries at any time
during the past three years? [Note: This question is based on Rule
5605(c)(2)(A)(iii) of the NASDAQ Listing Rules.]

Yes ❏ No ❏

If yes, please describe the extent of your participation:

(b) Are you able to read and understand fundamental financial

statements, including a company’s balance sheet, income statement and
cash flow statement? [Note: This question is based on Rule
5605(c)(2)(A)(iv) of the NASDAQ Listing Rules.]

Yes ❏ No ❏

D-32
 (c) Do you have past employment experience in finance or ac-
counting, requisite professional certification in accounting or any other
comparable experience or background which results in your financial so-
phistication? [Note: This question is based on Rule 5605(c)(2)(A) of the
NASDAQ Listing Rules.]

Yes ❏ No ❏

If yes, please describe your relevant education and experience:

(d) Are you or have you been a chief executive officer, chief
financial officer or other senior officer with financial oversight responsi-
bilities? [Note: This question is based on Rule 5605(c)(2)(A) of the
NASDAQ Listing Rules.]

Yes ❏ No ❏

If yes, please describe your relevant experience:

PART IV – TO BE ANSWERED ONLY BY DIRECTORS WHO

ARE MEMBERS OF OR NOMINEES FOR THE COMPENSATION
COMMITTEE OR DIRECTORS OR EXECUTIVE OFFICERS
OTHERWISE RESPONSIBLE FOR ADMINISTERING
EXECUTIVE COMPENSATION

14. Independence Under Certain Federal Tax Laws. [Note: This ques-
tion is based on Treasury Regulation § 1.162-27(e)(3) of the Internal Rev-
enue Code.]

(a) Are you currently, or have you ever been, an officer of the
Company or of any of the Company’s subsidiaries or Affiliates?

Yes ❏ No ❏

D-33
 (b) Are you currently, or have you ever been, an employee of
the Company or of any of the Company’s subsidiaries or Affiliates?

Yes ❏ No ❏

If yes, please briefly describe any compensation you received from the
Company or such subsidiary or Affiliate in respect of your services as an
employee (other than benefits under a tax-qualified retirement plan) in the
last year or expect to receive in the future:

(c) Do you or any associated entity, directly or indirectly, cur-

rently receive or expect to receive, or during the last year have you or any
associated entity received, any payments (or been party to a contract in
respect of any payments) in exchange for goods or services from the
Company or any of the Company’s subsidiaries or Affiliates (other than
for services as a director of the Company)? For purposes of this Question
14(c), the term “associated entity” means an organization that is a sole
proprietorship, trust, estate, partnership or corporation (and any affiliate
thereof) of which you have a beneficial ownership of at least five percent
or by which you are employed.

Yes ❏ No ❏

If yes, please briefly describe such payments, including their amount, and,
if applicable, your relationship to the entity receiving such payments:

D-34
15. Compensation Committee Independence. As a member of or nom-
inee for the Company’s compensation committee:

(a) Do you have any business or personal relationship with any

compensation consultant, legal counsel or other advisor that is currently
retained by the Compensation Committee or that you expect to be retained
by the Compensation Committee? [Note: This question is based on Item
407(e)(3) of Regulation S-K.]

Yes ❏ No ❏

If yes, please describe such relationship:

(b) Do you serve on the board of directors of any Company

(other than the Company) that retains [the same compensation consultant
as the Company] an advisor on executive compensation or other matters?
[Note: This question is based on Reg. S-K 407(e)(3).]

Yes ❏ No ❏

If yes, please name the company(ies) and briefly describe the services that
[the same compensation consultant as the Company] provides and lists
who at [the consultant] advises the company (as applicable):

D-35
I hereby acknowledge that the answers to the foregoing questions are cor-
rect and complete to the best of my knowledge. If any changes in the in-
formation provided occur prior to the date of the proxy statement for the
annual stockholders’ meeting, I will notify the Company and its counsel of
such changes. I hereby consent to being named as a Director or Executive
Officer of the Company in the Form 10-K, annual report and the proxy
statement, including any supplements or amendments to such documents.

Date: [DATE]

Signature

Please type or print your name

D-36
 ADDITIONAL INFORMATION

(Attach additional sheets as necessary.)

Question Answer

D-37
 GLOSSARY

DEFINITION OF CERTAIN TERMS

The terms below that are used in this Questionnaire have the following
meanings:

Affiliate: An “Affiliate” of the Company or a Person “affiliated” with the

Company refers to any Person that directly or indirectly Controls, or is
Controlled by, or is under common Control with, the Company, and in-
cludes any of the following Persons:

 Any Director or Officer of the Company.

 Any Person performing general management or advisory services for

the Company.

 Any “Associate” of the foregoing Persons.

Associate: An “Associate” of, or a Person “associated” with, a Person

means: (i) any relative or spouse of such Person or any relative of such
spouse, (ii) any corporation or organization (other than the Company or its
subsidiaries) of which such Person is an Officer or partner or directly or
indirectly the beneficial owner of 10 percent or more of any class of equity
securities and (iii) any trust or estate in which such Person has a substan-
tial beneficial interest or as to which such Person serves as a trustee, exec-
utor or in a similar fiduciary capacity.

Beneficially Owned: A “Beneficial Owner” of a security includes any

Person who, directly or indirectly, through any contract, arrangement, un-
derstanding, relationship or otherwise has or shares (i) voting power, in-
cluding the power to vote or to direct the voting of such security, or (ii)
investment power, including the power to dispose of, or direct the disposi-
tion of, such security. In addition, a Person is deemed to have “Beneficial
Ownership” of a security if such Person has the right to acquire beneficial
ownership of that security at any time within 60 days, including, but not
limited to: (i) through the exercise of any option, warrant or right, (ii)
through the conversion of any security, or (iii) pursuant to the power to
revoke, or the automatic termination of, a trust, discretionary account or
similar arrangement.

It is possible that a security may have more than one “Beneficial Owner,”
such as a trust, with two co-trustees sharing voting power, and the settlor
or another third party having investment power, in which case each of the
three would be the “Beneficial Owner” of the securities in the trust. The
power to vote or direct the voting, or to invest or dispose of, or direct the
investment or disposition of, a security may be indirect and arise from le-

D-38
gal, economic, contractual or other rights, and the determination of benefi-
cial ownership depends upon who ultimately possesses or shares the pow-
er to direct the voting or the disposition of the security.

The final determination of beneficial ownership depends upon the facts of

each case. You may, if you believe it is appropriate, disclaim beneficial
ownership of securities that might otherwise be considered “Beneficially
Owned” by you.

Control: “Control” (including the terms “controlling,” “controlled by”

and “under common control with”) means the possession, directly or indi-
rectly, of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of voting securities,
by contract or otherwise.

Director: A “Director” means any Director of a corporation, trustee of a

trust, general partner of a partnership, or any Person who performs for an
organization functions similar to those performed by the foregoing Per-
sons.

Executive Officer: An “Executive Officer” means a president, a principal

financial officer, a principal accounting officer (or, if there is no such ac-
counting officer, the controller), any vice president in charge of a principal
business unit, division or function (such as sales, administration or fi-
nance), any other officer who performs a policy-making function and any
other Person performing similar policy-making functions. Executive of-
ficers of the Company’s subsidiaries may be deemed executive officers of
the Company if they perform such policy-making functions for the Com-
pany.

Government Official: A “Government Official” includes: any elected or

appointed government officials; any employee or person acting for or on
behalf of a government official, agency, or enterprise performing a gov-
ernmental function; any political party officer, employee or person acting
for or on behalf of a political party or candidate for public office; or an
employee or person acting for or on behalf of a public international organ-
ization.

Immediate Family Member: An “Immediate Family Member” of a per-

son means the person’s spouse, parents, children, siblings, mothers and
fathers-in-law, sons and daughters-in-law, brothers and sisters-in-law, and
anyone (other than a tenant or domestic employee) who shares such per-
son’s home.

Material: “Material,” when used to qualify a requirement for providing

information on any subject, unless otherwise indicated, limits the infor-

D-39
mation required to those matters as to which there is a substantial likeli-
hood that a reasonable investor would attach importance in determining
whether to purchase the Company’s securities.

Officer: An “Officer” refers to a president, vice president, secretary,

treasurer or principal financial officer, controller or principal accounting
officer, and any person that performs similar functions for any organiza-
tion whether incorporated or unincorporated.

Person: A “Person” means an individual, corporation, partnership, limited

liability company, association, joint stock company, trust, unincorporated
organization or other entity, or a government or political subdivision
thereof.

D-40
 APPENDIX A

[Note: Appendix A should contain biographic information for the relevant

director or executive officer from the prior year’s Form 10-K or proxy
statement, as applicable, including the following items:

 The person’s name and age, any positions and offices with the Com-
pany held by such person, the term of office as director or officer and
the period during which he or she has served as such. [Note: This in-
formation is required by Item 7(b) of Schedule 14A, Items 401(a)-(c) of
Regulation S-K.]

 Business experience of the person during the past five years, includ-
ing: (1) the person’s principal occupations and employment during
the past five years, (2) the name and principal business of any corpo-
ration or other organization in which such occupations and employ-
ment were carried on and (3) whether such corporation or organiza-
tion is a parent, subsidiary or other affiliate of the Company. [Note:
This information is required by Item 7(b) of Schedule 14A, Item 401(e)
of Regulation S-K.]

 All positions and offices currently held by the person with the Compa-
ny or any of its subsidiaries and the period of time during which such
person has held each such position or office. If the person is not cur-
rently employed by the Company or any of its subsidiaries, Appendix A
should include information as to whether such person has been em-
ployed by the Company at any time during the past five fiscal years.
[Note: This information is required by Item 7 of Schedule 14A, Items
401(a) and (b) of Regulation S-K.]

When an executive officer or other person has been employed by the Com-
pany or a subsidiary of the Company for less than five years, Appendix A
should include a brief description of the nature of the responsibility under-
taken by the individual in prior positions to provide adequate disclosure of
his or her prior business experience.

For directors, this information should also include all directorships held
by the person in public companies and U.S.-registered investment compa-
nies, including any board committees on which such individual serves.
[Note: This information is required by Item 7(b) of Schedule 14A, Item
401(e) of Regulation S-K.]

For director nominees, Appendix A should contain a draft biography re-

garding each nominee, including the following items:

 The person’s name and age. [Note: This information is required by

Item 7(b) of Schedule 14A, Item 401(a) of Regulation S-K.]

D-41
 Business experience of the person during the past five years, includ-
ing: (1) the person’s principal occupations and employment during
the past five years, (2) the name and principal business of any corpo-
ration or other organization in which such occupations and employ-
ment were carried on and (3) whether such corporation or organiza-
tion is a parent, subsidiary or other affiliate of the Company. [Note:
This information is required by Item 7(b) of Schedule 14A, Item 401(e)
of Regulation S-K.]

 All positions and offices currently held by the person with the Compa-
ny or any of its subsidiaries and the period of time during which such
person has held each such position or office. If the person is not cur-
rently employed by the Company or any of its subsidiaries, Appendix A
should include information as to whether such person has been em-
ployed by the Company at any time during the past five fiscal years.
[Note: This information is required by Item 7 of Schedule 14A, Items
401(a) and (b) of Regulation S-K.]]

D-42
 APPENDIX B

[Note: If the version of Question 2 that requires completion of an Appen-

dix B for each person who will be sent a Questionnaire is being used, Ap-
pendix B should contain security ownership information as of the most
recent date possible for the relevant director or executive officer, as re-
quired by Item 6(d) of Schedule 14A and Item 403(b) of Regulation S-K.
The following is an example of a table that should be included in Appendix
B, to be verified by the individual.

Number of shares of common stock

owned (Includes vested restricted
stock awards)

Number of vested options owned

Number of unvested options owned

(Please include vesting schedule)

Number of shares of unvested re-

stricted stock (Please include vest-
ing schedule)

Any other equity securities owned

(Please describe and include any
applicable vesting schedule)

Any equity securities in which own-

ership, voting power or investment
power is shared (Please describe
and include any applicable vesting
schedule)

In addition to confirming security ownership, Appendix B should also de-

scribe the nature and terms of any of the individual’s rights to acquire
beneficial ownership and whether the individual disclaims beneficial own-
ership of any of the securities listed.

If the information to complete this table cannot be obtained (for a director

nominee or because the company does not have sufficient records), use the
version of Question 2 that requires each person completing this Question-
naire to complete the table.]

D-43
 APPENDIX C

[Note: Appendix C, if it is being included, should include all Form 3,

Form 4 and Form 5 filings made by the Company on behalf of the Direc-
tor or Executive Officer during the last fiscal year.]

D-45
 APPENDIX D

[Note: For companies that use the Wachtell, Lipton, Rosen & Katz model
bylaws (or a similar form specifying director qualification), the following
Director Nominee Representation and Agreement can be used to fulfill the
requirement in Section 2.10 of the model bylaws. This form should be
completed by all nominees for election and reelection as directors of the
Company.]

[COMPANY]

DIRECTOR NOMINEE REPRESENTATION AND AGREEMENT

THIS DIRECTOR NOMINEE REPRESENTATION AND

AGREEMENT (this “Representation and Agreement”) is delivered as of
__________, to [COMPANY], a [STATE] corporation (the “Company”),
by the undersigned nominee for election as a director of the Company (the
“Nominee”).

WHEREAS, the Nominee has been nominated for election as a di-

rector of the Company (the “Nomination”) by [a shareholder of] the Com-
pany pursuant to [Article II] of the Bylaws of the Company (the “By-
laws”); and

WHEREAS, [Section 2.9] of the Bylaws provides that, in order to

be eligible to be a nominee for election as a director of the Company, the
Nominee must complete and deliver to the Secretary of the Company at
the principal offices of the Company a written representation and agree-
ment as to certain specified matters.

NOW, THEREFORE, the Nominee hereby represents and warrants

to the Company and agrees as follows:

1. The Nominee:

(a) is not and will not become a party to:

(i) any agreement, arrangement or understand-

ing with, and has not given any commitment or assurance to, any person
or entity as to how the Nominee, if elected as a director of the Company,
will act or vote on any issue or question (a “Voting Commitment”) that
has not been disclosed to the Company; or

(ii) any Voting Commitment that could limit or

interfere with the Nominee’s ability to comply, if elected as a director of
the Company, with his or her fiduciary duties under applicable law;

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 (b) is not and will not become a party to any agreement,
arrangement or understanding with any person or entity other than the
Company with respect to any direct or indirect compensation, reimburse-
ment, or indemnification in connection with service or action as a director
that has not been disclosed to the Company; [and]

(c) both in his or her individual capacity and on behalf

of any person or entity on whose behalf the Nomination is being made,
would be in compliance, if elected as a director of the Company, and will
comply with all applicable publicly disclosed corporate governance, con-
flict of interest, confidentiality, and stock ownership and trading policies
and guidelines of the Company; [and]

[(d) [for companies that have share ownership require-

ments for directors] beneficially owns, or agrees to purchase within 90
days if elected as a director of the Company, not less than [ ] com-
mon shares of the Company (“Qualifying Shares”) (subject to adjustment
for any stock splits or stock dividends occurring after the date of such rep-
resentation or agreement), will not dispose of such minimum number of
shares so long as the Nominee is a director, and has disclosed to the Com-
pany whether all or any portion of the Qualifying Shares were purchased
with any financial assistance provided by any other person and whether
any other person has any interest in the Qualifying Shares;] [and]

[(e) [for companies with majority voting] will abide by

the requirements of [Section 2.10] of the Bylaws.]

2. The Nominee acknowledges and agrees that:

(a) the representations, warranties and agreements of

the Nominee in this Representation and Agreement will be relied upon by
the Company and that the Nominee will provide prompt written notice to
the Company upon any change, event, transaction or condition affecting
the accuracy or continued validity of the representations and warranties of
the Nominee or of any breach by the Nominee of any agreement made
herein; and

(b) in the event (i) any representation or warranty of the

Nominee in this Representation and Agreement is inaccurate in any mate-
rial respect or (ii) the Nominee is in breach of any agreement of the Nomi-
nee in this Representation and Agreement, such representation, warranty
or agreement shall be deemed not to have been provided in accordance
with [Section 2.9] of the Bylaws and the Nomination shall be deemed in-
valid.

3. Any notice required or permitted by this Representation

and Agreement shall be in writing and shall be delivered as follows with

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notice deemed given as indicated: (i) by personal delivery upon delivery;
(ii) by overnight courier upon written verification of receipt; (iii) by fac-
simile transmission upon acknowledgment of receipt of electronic trans-
mission; or (iv) by certified or registered mail, return receipt requested,
upon verification of receipt. Any notice to be made to the Company here-
under shall be sent to the following:

[COMPANY]
Attn: Corporate Secretary
[ADDRESS 1]
[ADDRESS 2]
[FACSIMILE]

4. This Representation and Agreement shall be governed in all

respects by the laws of [STATE], without regard to the conflicts of laws
provisions therein, and it shall be enforced or challenged only in federal or
state courts located in [STATE].

5. Should any provisions of this Representation and Agree-

ment be held by a court of law to be illegal, invalid or unenforceable, the
legality, validity and enforceability of the remaining provisions of this
Representation and Agreement shall not be affected or impaired thereby.

[Remainder of Page Intentionally Left Blank]

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 IN WITNESS WHEREOF, the Nominee has delivered this Rep-
resentation and Agreement as of the date first written above.

NOMINEE

Signature

Name:

Address:

Facsimile:

D-50
 ANNEX E

EXAMPLE OF
NOMINATING & CORPORATE GOVERNANCE
COMMITTEE CHARTER

Purpose

The Nominating & Corporate Governance Committee (the “Committee) is

appointed by the Board of Directors (the “Board”) of [COMPANY] (the
“Company”) (1) to assist the Board by identifying individuals qualified to
become Board members, consistent with criteria approved by the Board,
and to recommend to the Board the director nominees for the next annual
meeting of shareholders and the individuals to fill vacancies occurring be-
tween annual meetings of stockholders; (2) to recommend to the Board the
Corporate Governance Guidelines applicable to the Company; (3) to lead
the Board in its annual review of the Board and management’s perfor-
mance; and (4) to recommend to the Board director nominees for each
committee.

Committee Membership

The size of the Committee shall be determined by the Board in its sole
discretion, provided that, in no event, shall it consist of fewer than [●]500
member(s).

The members of the Committee shall be appointed annually by the Board

and will serve at the Board’s discretion. Committee members may be re-
moved from the Committee by the Board at any time, with or without
cause and any vacancies will be filled through appointment by the Board.

The Board shall appoint one member of the Committee as its Chairperson.

All members of the Committee shall meet the independence requirements

of the New York Stock Exchange and any other applicable laws or regula-
tions.

Meetings

The Committee shall meet as often as necessary to carry out its responsi-
bilities. The Committee Chairman shall preside at each meeting. In the
event the Committee Chairman is not present at a meeting, the Committee

500
Minimum number to be set in a manner consistent with governing state law and the
Company’s charter and bylaws.

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members present at that meeting shall designate one of its members as the
acting chair of such meeting.

Committee Authority and Responsibilities

1. The Committee shall have the resources and authority to discharge

its responsibilities, including the sole authority (i) to retain and
terminate any search firm to be used to identify director candidates
and (ii) to approve the search firm’s fees and other retention terms.
The Committee shall also have authority to obtain advice and as-
sistance from internal or external legal, accounting or other advi-
sors.

2. The Committee shall actively seek individuals qualified to become

directors for recommendation to the Board, consistent with criteria
identified by the Board.

3. The Committee shall seek to complete customary vetting proce-

dures and background checks with respect to individuals suggested
for potential Board membership by stockholders of the Company
or other sources.

4. The Committee shall annually review and make recommendations

to the Board with respect to the compensation and benefits of di-
rectors, including under any incentive compensation plans and eq-
uity-based compensation plans.

5. The Committee shall receive comments from all directors and re-
port annually to the Board with an assessment of the Board’s per-
formance, to be discussed with the full Board following the end of
each fiscal year.

6. The Committee shall annually, or more frequently as it deems ap-

propriate, review and reassess the adequacy of the Corporate Gov-
ernance Guidelines of the Company and recommend any proposed
changes to the Board for approval.

7. The Committee shall annually, or more frequently as it deems ap-

propriate, review the succession planning for the Company’s sen-
ior executive officers, including but not limited to the Chief Execu-
tive Officer and [may][will] do so in concert with the Compensa-
tion Committee.

8. The Committee shall make regular reports to the Board.

9. The Committee shall review and reassess the adequacy of this

Charter annually and recommend any proposed changes to the
Board for approval.

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10. The Committee shall annually review its own performance.

11. The Committee may form and delegate authority to subcommittees

when appropriate.

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