216 Search Results

September 6, 2018 |
Webcast: IPO and Public Company Readiness: Focus on Executive Compensation

As far as compensation is concerned, everything changes once a company goes public. Stock price values increase, sometimes dramatically, from when the company was private. There is now a public market on which employees can monetize their vested stock awards. A multitude of new laws require significant compliance efforts. Companies now have to consider a much broader group of stockholder and influencer interests. As a company prepares for its initial public offering, it needs to give special consideration to its compensation philosophy, structure, process and elements. A number of steps can be taken before an IPO which cannot be taken, or won’t be as effective, afterwards. This webinar provides an overview of: common differences between private and public company compensation programs and how newly public companies can best plan for those differences; equity compensation plan design for public companies, including both broad based equity plans and employee stock purchase plans; governance and regulatory considerations, including the need to maintain an independent compensation committee; executive compensation disclosures, including the Compensation Discussion and Analysis (CD&A) and executive compensation tables; shareholder advisory firm guidelines in the executive compensation area, such as those issued by Institutional Shareholder Services (ISS) and Glass Lewis; and ongoing public company compensation consideration, including annual say-on-pay and say-on-frequency votes and CEO pay ratio disclosures. View Slides [PDF] PANELISTS: Stephen W. Fackler is a partner in the Firm’s Palo Alto and New York offices and Co-Chair of Gibson Dunn’s Executive Compensation and Employee Benefits Practice Group. Over the years, Mr. Fackler has advised scores of companies planning to go public and assisted them with the implementation of the changes to their equity and cash compensation plans and programs in advance of their IPOs. Mr. Fackler has been selected by Chambers and Partners as a Leading Employee Benefits Lawyer each year since 2006 (the first year in which the category was included) in its publication and for the last few years has been ranked in the highest Tier 1 band. He has been named among the Top 20 Most Powerful Lawyers for Employee Benefits and ERISA in the United States in Human Resource Executive magazine and Lawdragon every year from 2012 through 2018. Just recently he was named 2019 “Lawyer of the Year” in the area of Employee Benefits in the Silicon Valley/San Jose region. Sean C. Feller is a partner in the Firm’s Century City office and member of the Executive Compensation and Employee Benefits Practice Group. His practice focuses on all aspects executive compensation and employee benefits. His practice encompasses tax, ERISA, accounting, corporate, and securities law aspects of equity and other incentive compensation plans; qualified and nonqualified retirement and deferred compensation plans and executive employment and severance arrangements. Mr. Feller has been recognized by his peers as one of The Best Lawyers in America in the area of Employee Benefits (ERISA) Law. BTI Consulting named Mr. Feller as a 2018 BTI Client Service Super All-Star, one of six “standout attorneys who received recognition from multiple influential General Counsel and legal decision makers.” In 2017, he was ranked by Chambers USA as a Leading Lawyer in California in the area of Employee Benefits and Executive Compensation. Stewart L. McDowell is a partner in the Firm’s San Francisco office, a member of the Corporate Transactions Practice Group and Co-Chair of the Capital Markets Practice Group. Ms. McDowell’s practice involves the representation of business organizations as to capital markets transactions, mergers and acquisitions, SEC reporting, corporate governance and general corporate matters. She has significant experience representing both underwriters and issuers in a broad range of both debt and equity securities offerings. She also represents both buyers and sellers in connection with U.S. and cross-border mergers, acquisitions and strategic investments. The Recorder has named Ms. McDowell as a “Women Leader in Tech Law” for the last four years. She is ranked by Chambers USA for Capital Markets: Debt & Equity (California), and was named a “Top Woman Lawyer” by the Daily Journal in 2017. Krista P. Hanvey is an associate in the Firm’s Dallas office and member of the Executive Compensation and Employee Benefits Practice Group. Her practice focuses on all aspects of equity compensation and employee stock purchase plans; 401(k), ESOP and 403(b) tax-qualified retirement and nonqualified deferred compensation plans; executive employment, severance, change in control and non-compete agreements; performance bonus, sales commission and other incentive pay plans; and retiree medical, cafeteria and other welfare benefit plans. She regularly advises clients on the requirements of and compliance with tax laws, ERISA, HIPPA, COBRA, the Affordable Care Act and securities laws. Ms. Hanvey also has significant experience with all aspects of health and welfare benefit plan, retirement plan, and executive compensation compliance, planning, and transactional matters. She has also advised clients with respect to general corporate governance matters and regularly handles non-profit governance and pro bono adoption cases. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1. 0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.

August 30, 2018 |
IRS Issues Initial Selective Guidance on New Section 162(m) Provisions, including Transition Rules

Click for PDF On August 21, 2018, the IRS released Notice 2018-68, which provides initial guidance regarding changes made to Section 162(m) of the Internal Revenue Code (“Section 162(m)”) by last year’s Tax Cuts and Jobs Act (the “Act”). Since 1993, Section 162(m) has imposed a limit on federal income tax deductibility by publicly traded corporations for compensation paid to certain senior executives—generally the same executives whose compensation is disclosed in the corporation’s proxy statement, who are referred to under Section 162(m) as “covered employees”.  Section 162(m) has not imposed material increased tax costs on most publicly traded corporations since its enactment, probably mostly due to the exception for “performance-based compensation”—which includes cash bonuses, stock options, performance stock and similar awards— and the exclusion for amounts paid after termination of employment (such as deferred compensation and severance), at the same time that executive pay has increased significantly because of grants of cash and stock awards based on performance. The Act amends Section 162(m) in a number of substantial ways to expand the scope of coverage and limit the exceptions for compensation subject to its deduction limit.  The general view is that these amendments were part of a much broader effort to find ways to limit the federal government’s revenue loss resulting from the Act’s dramatic decrease in overall corporate income tax rates, with the maximum rate dropping from 35 to 21 percent.  The Act, among other things, (1) includes a public corporation’s Chief Financial Officer as a “covered employee” (which was the case prior to changes in the proxy reporting rules in 2009), (2) provides that once an executive becomes a “covered employee”, that executive remains a “covered employee” in perpetuity, (3) eliminates the current exception from the $1 million deductibility limit for “performance-based compensation”, and (4) applies the limit even for amounts paid after termination of employment. The Act generally becomes effective for a public corporation’s tax year beginning in 2018.  As part of the transition to the new law, the Act contains an exemption from the new law for “written binding contracts” in effect on November 2, 2017 (the date that the bill was introduced in the House of Representatives).  Specifically, the Act states that the changes to Section 162(m) “shall not apply to remuneration which is provided pursuant to a written binding contract which was in effect on November 2, 2017, and which was not modified in any material respect on or after such date.”  In other words, the pre-Act Section 162(m) rules generally continue to apply to these arrangements.  Notice 2018-68 is intended to answer some of the many questions raised by taxpayers, particularly with respect to the changes in the definition of “covered employee” and the application of the transition rule (also referred to as the “grandfather rules”). Who is considered a “covered employee?” Under the Act, a “covered employee” means any employee who is a principal executive officer (PEO) or principal financial officer (PFO) of a publicly held corporation or was an individual acting in that capacity at any time during the tax year . It also includes any additional employees whose total compensation for the applicable tax year places that employee among the three-highest compensated officers of the taxable year. At first glance, the definition looks like it covers the same group of executives whose compensation is subject to disclosure under federal securities laws in a publicly traded corporation’s proxy statement.  However, the Notice clarifies that there is no “end of year” requirement for determining the three highest compensated executives who did not serve during the year as PEO or PFO, which means that an executive officer can be a “covered employee” under Section 162(m) even if his or her compensation is not required to be disclosed in the corporation’s Summary Compensation Table under the rules of the Securities and Exchange Commission (“SEC”). The Notice provides an example where a corporation’s three most highly-compensated executives other than the PFO and PEO all terminated employment during the applicable taxable year.  In that instance, even though one of those individuals would not be considered a “named executive officer” under SEC rules, all three are considered “covered employees” under the new rules. Additionally, since the IRS will disregard the limited disclosure rules under the securities laws for smaller reporting companies and emerging growth companies for Section 162(m) purposes, those companies will find that they will need to calculate total compensation for more executives for purposes of Section 162(m) than is needed to satisfy the reporting requirements under the SEC’s rules. The Act also expands the definition of “covered employee” such that once an executive is a covered employee in any taxable year beginning after December 31, 2016, that status is retained forever and therefore covers all compensation paid to the executive for the remainder of his or her life, including compensation paid after the executive’s termination of employment (and even if it is paid to a beneficiary or heir after the executive’s death).  Prior law provided that an executive would cease to be a “covered employee” after his or her departure from the corporation, and therefore compensation paid after the executive was no longer a “covered employee” was not subject to Section 162(m). The IRS has provided a few examples to illustrate these changes. While the IRS has requested comments on how the rules should be applied to a corporation whose taxable year ends on a different date than its last completed fiscal year, the working principle that it has adopted in one of the examples is that if the corporation has a short tax year of less than 12 calendar months, the calculations to determine who is a “covered employee” will need to be completed independently for the short year. What constitutes compensation paid under a written binding contract? In general, compensation is considered as paid, or payable, under a written binding contract only to the extent that the corporation is obligated to pay the compensation under applicable law. Unless an agreement is renewed or modified, any compensatory payments made pursuant to such a written binding contract that was in effect on November 2, 2017, and that would have not been subject to the deduction limitation under Section 162(m) as it existed before the Act, are not subject to the deductibility limitation under the new rules.  The Notice emphasizes that in the case of executive employment agreements, even those with automatic renewal provisions, payments made under the agreement will generally be subject to the new law at the time that the contract is renewed or extended. Under prior law, “performance-based compensation” did not lose its exemption if the compensation committee of the board of directors of the corporation decided to unilaterally reduce the amount, which was called “negative discretion”.  The Notice provides an example clarifying that to the extent an agreement or plan allows for a corporation to exercise this negative discretion with respect to performance-based compensation under a pre-November 3, 2017 written binding contract, the corporation may only deduct the amount that is not subject to such discretion.  This example implies that where a corporation had a right to reduce performance-based compensation to zero regardless of actual performance, no portion of the compensation would be considered grandfathered for purposes of the Act.  However, this example, and the underlying reasoning, should not apply to plans or agreements by which negative discretion is exercised by establishing the actual performance goals to be achieved, which have been referred to as “umbrella plans” or a “plan within a plan”, so long as the actual goals were established on or before November 2, 2017.  Of course, this arrangement will only be grandfathered for as long as those pre-established goals remain in effect.  In addition, whether there was a right to reduce compensation payable presumably would have to be determined under applicable state law.  For example, if a plan includes a negative discretion right that the company has never exercised, this practice may mean that there is no actual negative discretion for state contract law purposes. The Notice also provides some examples clarifying that payments made pursuant to non-qualified deferred compensation programs in effect on November 2, 2017 will be grandfathered to the extent the corporation cannot unilaterally freeze or reduce future contributions.  Since in our experience most non-qualified deferred compensation plans contain provisions that allow the plan sponsor to amend or terminate those plans with few restrictions, these examples send a signal that those public corporations with non-qualified deferred compensation arrangements may need to reach out to the plan administrators to make sure that benefits as of November 2, 2017 are being calculated for future use, since for those sorts of plans, that may well be the only eligible benefit not subject to the new rules. What is considered a material modification? An agreement will be considered materially modified (and thus no longer eligible for grandfather treatment under the Act) if the agreement is amended to (1) increase the amount of compensation paid (other than in an amount equal to or less than a cost-of-living increase), (2) accelerate the payment of compensation without a time-value discount, (3) defer the payment of compensation, except to the extent any increase in the value of the deferred amount is based on either a reasonable rate of interest or a predetermined actual investment, or (4) make payments on the basis of substantially the same elements or conditions as the compensation payable pursuant to such agreement. The Notice contains an example in which a covered employee who has a grandfathered employment agreement providing for the payment of a fixed salary receives a restricted stock grant after November 2, 2017.  The example states that the grant of restricted stock is not a material modification because the stock grant is not paid on “substantially the same elements or conditions” as the salary.  (However, any payments under the stock grant itself will be subject to the new law.) To the extent an agreement is considered materially modified, all amounts received under the agreement after the effective date of such modification will be subject to the new rules, while the amounts received prior to the modification will remain protected under the grandfather rules. Does the Act impact renewable agreements? An agreement that is renewed after November 2, 2017 will be no longer be protected by the grandfather rules. An agreement is considered renewed on the date the agreement can be terminated by the corporation. An agreement is not considered renewable if it can only be terminated either (1) by the employee or (2) by having to terminate not only the agreement, but also the employee’s employment with the corporation. How should public corporations proceed? The changes to Section 162(m) made by the Act will result in large losses of tax deductions for compensation paid to executives classified as “covered employees”.  Based on the guidance issued in the Notice, the IRS has indicated that it intends to interpret the statute and the transition rule in ways that are intended to maximize the amount of compensation that will be subject to the new rules.  In particular, the Notice and its examples indicate that the IRS plans to interpret the “written binding contract” transition rule narrowly. When determining if an agreement is a “written binding contract,” we recommend consulting with counsel since the assessment of whether an agreement is required to be paid under applicable law will require analysis of applicable state law. We recommend that public corporations subject to Section 162(m) take careful inventory of all outstanding plans, agreements and arrangements that were in place on or before November 2, 2017 with one or more executives who are “covered employees”.  These arrangements should be reviewed to determine if and to what extent the grandfather rules can be relied upon.  In the case of deferred compensation, corporations should determine the amounts attributable to each participant who is or may become a “covered employee” that were accrued on or before November 2, 2017.  Such amounts will remain deductible when paid to the extent that they would have been deductible under the prior rules.  In some cases, coordination with plan administrators will be necessary.  Additionally, corporations should consider the potential tax impact of the new law and the IRS’s interpretive guidance prior to making any changes to plans or agreements in effect as of November 2, 2017. This Client Alert necessarily only scratches the surface of this complex topic.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, or the following authors: Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, sfackler@gibsondunn.com) Michael J. Collins – Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Arsineh Ananian – Los Angeles (+1 213-229-7764, aananian@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 12, 2018 |
Shareholder Proposal Developments During the 2018 Proxy Season

Click for PDF This client alert provides an overview of shareholder proposals submitted to public companies during the 2018 proxy season, including statistics and notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests. Top Shareholder Proposal Takeaways From the 2018 Proxy Season As discussed in further detail below, based on the results of the 2018 proxy season, there are several key takeaways to consider for the coming year: Shareholder proposals continue to be used by certain shareholders and to demand significant time and attention.  Although the overall number of shareholder proposals submitted decreased 5% to 788, the average support for proposals voted on increased by almost 4 percentage points to 32.7%, suggesting increased traction among institutional investors.  In addition, the percentage of proposals that were withdrawn increased by 6 percentage points to 15%, and the number of proponents submitting proposals increased by 20%.  However, there are also some interesting ongoing developments with respect to the potential reform of the shareholder proposal rules (including the possibility of increased resubmission thresholds). It is generally becoming more challenging to exclude proposals, but the Staff has applied a more nuanced analysis in certain areas.  Success rates on no-action requests decreased by 12 percentage points to 64%, the lowest level since 2015.  This is one reason (among several) why companies may want to consider potential engagement and negotiation opportunities with proponents as a key strategic option for dealing with certain proposals and proponents.  However, it does not have to be one or the other—20% of no-action requests submitted during the 2018 proxy season were withdrawn (up from 14% in 2017), suggesting that the dialogue with proponents can (and should) continue after filing a no-action request.  In addition, companies are continuing to experience high levels of success across several exclusion grounds, including substantial implementation arguments and micromanagement-focused ordinary business arguments.  Initial attempts at applying the Staff’s board analysis guidance from last November generally were unsuccessful, but they laid a foundation that may help develop successful arguments going forward.  The Staff’s announcement that it will consider, in some cases, a board’s analysis in ordinary business and economic relevance exclusion requests provided companies with a new opportunity to exclude proposals on these bases.  Among other things, under the new guidance, the Staff will consider a board’s analysis that a policy issue is not sufficiently significant to the company’s business operations and therefore the proposal is appropriately excludable as ordinary business.  In practice, none of the ordinary business no‑action requests that included a board analysis were successful in persuading the Staff that the proposal was not significant to the company (although one request based on economic relevance was successful).  Nevertheless, the additional guidance the Staff provided through its no-action request decisions should help provide a roadmap for successful requests next year, and, therefore, we believe that companies should not give up on trying to apply this guidance.  It will be important for companies to make a determination early on as to whether they will seek to include the board’s analysis in a particular no-action request so that they have the necessary time to create a robust process to allow the board to produce a thoughtful and well-reasoned analysis. Social and environmental proposals continue to be significant focus areas for proponents, representing 43% of all proposals submitted.  Climate change, the largest category of these proposals, continued to do well with average support of 32.8% and a few proposals garnering majority support.  We expect these proposals will continue to be popular going into next year.  Board diversity is another proposal topic with continuing momentum, with many companies strengthening their board diversity commitments and policies to negotiate the withdrawal of these proposals.  In addition, large asset managers are increasingly articulating their support for greater board diversity. Don’t forget to monitor your EDGAR page for shareholder-submitted PX14A6G filings.  Over the past two years, there has been a significant increase in the number of exempt solicitation filings, with filings for 2018 up 43% versus 2016.  With John Chevedden recently starting to submit these filings, we expect this trend to continue into next year.  At the same time, these filings are prone to abuse because they have, to date, escaped regulatory scrutiny. Click here to READ MORE. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group: Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) Maia Gez – New York (+1 212-351-2612, mgez@gibsondunn.com) Aaron Briggs – San Francisco (415-393-8297, abriggs@gibsondunn.com) Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com) Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, CA 90071 Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 18, 2018 |
Fifth Circuit Vacates Labor Department’s “Fiduciary Rule” “In Toto” in Chamber of Commerce of U.S.A., et al. v. U.S. Dep’t of Labor

Click for PDF On March 15, 2018, in a 2-1 opinion, the U.S. Court of Appeals for the Fifth Circuit struck down the U.S. Department of Labor’s controversial “Fiduciary Rule.”[1]  The Rule would have expanded who is a “fiduciary” under ERISA and the Internal Revenue Code, imposing significant new obligations and liabilities on broker-dealers and insurance agents who sell annuities to IRAs.  As the Fifth Circuit’s opinion explained, the Department had “made no secret of its intent to transform the trillion-dollar market for IRA investments, annuities and insurance products, and to regulate in a new way the thousands of people and organizations working in that market.”[2] The Fifth Circuit ruled for plaintiffs—the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association (“SIFMA”), the Financial Services Institute (“FSI”), the Financial Services Roundtable (“FSR”), the Insured Retirement Institute (“IRI”), and other leading trade associations—on each of their principal arguments.  Specifically, the Court reasoned that the Labor Department’s new definition of “fiduciary” was inconsistent with the plain text of ERISA and the Internal Revenue Code, as well as with the common-law meaning of “fiduciary,” which depends upon a special relationship of trust and confidence; that the Department impermissibly abused its authority to grant exemptions from regulatory burdens as a tool to impose expansive new duties that were beyond its power to impose; and that the rule impermissibly created private rights of action against brokers and insurance agents when Congress had not authorized those claims.  The Court therefore held that the Fiduciary Rule and the exemptions adopted alongside it were arbitrary, capricious, and unlawful under the Administrative Procedure Act (“APA”), and vacated them “in toto.”[3] Under the APA, “vacatur” is a remedy by which courts “set aside agency action” that is arbitrary and capricious or otherwise outside of the agency’s statutory authority.[4]  Its effect is to “nullify or cancel; make void; invalidate.”[5]  Because the effect of vacatur is, in essence, to remove a regulation from the books, its effect is nationwide.  As the U.S. Court of Appeals for the D.C. Circuit has explained, “When a reviewing court determines that agency regulations are unlawful, the ordinary result is that the rules are vacated—not that their application to the individual petitioners is proscribed.”[6]  The Fifth Circuit’s judgment, which is scheduled to take effect on May 7, thus will effectively erase the “fiduciary” rule from the books without geographical limitation. The Fifth Circuit’s decision was the second ruling last week to address the Fiduciary Rule.  On March 13, the Tenth Circuit addressed a more limited challenge to one aspect of the Rule, specifically, the procedures and reasoning followed by the Department in regulating products known as “fixed indexed annuities.”[7]  Although the Tenth Circuit rejected that challenge, it made clear it was not addressing two threshold issues that had not been presented:  whether the Labor Department had authority to promulgate the Rule and whether the Rule permissibly defined the term “fiduciary.”  The March 15 decision of the Fifth Circuit now conclusively resolves those questions in the negative.  And because the Fifth Circuit vacated the Rule on grounds the Tenth Circuit did not address, no “circuit conflict” is presented by the two decisions.[8] Gibson Dunn represented the U.S. Chamber of Commerce, SIFMA, the FSI, FSR, and IRI, among other associations, in their successful challenge to the Fiduciary Rule.  The American Council of Life Insurers and the Indexed Annuity Leadership Council filed parallel actions through separate counsel at WilmerHale and Sidley Austin, and Gibson Dunn presented oral argument before the Fifth Circuit for all three cases.    [1]   Chamber of Commerce of the U.S.A., et al. v. U.S. Dep’t of Labor, et al., No. 17-10238, slip op. 46 (5th Cir. Mar. 15, 2018).    [2]   Id. at 45.    [3]   Id. at 46.    [4]   5 U.S.C. § 706(2).    [5]   Black’s Law Dictionary (online 10th ed. 2014).  See, e.g., Kelso v. U.S. Dep’t of State, 13 F. Supp. 2d 12, 17 (D.D.C. 1998) (quoting United States v. Munsingwear, Inc., 340 U.S. 36, 41 (1950)) (explaining that “basic understandings of vacatur dramatize that, by definition, that which is vacated loses the ability to ‘spawn[ ] any legal consequences'”).    [6]   Nat’l Mining Ass’n v. U.S. Army Corps of Engineers, 145 F.3d 1399, 1409 (D.C. Cir. 1998) (quoting Harmon v. Thornburgh, 878 F.2d 484, 495 n.21 (D.C. Cir. 1989)).    [7]   See Mkt. Synergy Grp. v. U.S. Dep’t of Labor, et al., No. 17-3038 (10th Cir. Mar. 13, 2018)    [8]   A third challenge to the Fiduciary Rule is currently being held in abeyance.  See Nat’l Ass’n for Fixed Annuities v. U.S. Dep’t of Labor, et al., No. 16-5345 (D.C. Cir. Feb. 22, 2018) (holding case in abeyance pending joint status report within 10 days of the decision of the Fifth Circuit). The following Gibson Dunn lawyers assisted in preparing this client update: Eugene Scalia, Jason Mendro, Andrew Kilberg and Brian Lipshutz. Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, or the following authors: Eugene Scalia – Washington, D.C. (+1 202-955-8206, escalia@gibsondunn.com) Jason J. Mendro – Washington, D.C. (+1 202-887-3726, jmendro@gibsondunn.com) Please also feel free to contact the following practice group leaders: Administrative Law and Regulatory Practice: Eugene Scalia – Washington, D.C. (+1 202-955-8206, escalia@gibsondunn.com) Helgi C. Walker – Washington, D.C. (+1 202-887-3599, hwalker@gibsondunn.com) Labor and Employment Practice: Catherine A. Conway – Los Angeles (+1 213-229-7822, cconway@gibsondunn.com) Jason C. Schwartz – Washington, D.C. (+1 202-955-8242, jschwartz@gibsondunn.com) Executive Compensation and Employee Benefits Practice: Michael J. Collins – Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Stephen W. Fackler – Palo Alto/New York (+1 650-849-5385/212-351-2392, sfackler@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 21, 2018 |
Court Reevaluates Stockholder Ratification of Director Compensation for First Time in Decades

New York associates Jefferson Bell and David Coon are the authors of “Court Reevaluates Stockholder Ratification of Director Compensation for First Time in Decades,” [PDF] published by Delaware Business Court Insider on February 21, 2018.

January 31, 2018 |
IRS Issues First “Required Amendments List” for Tax-Qualified Retirement Plans Under New Program

Click for PDF In Revenue Procedure 2016-37 (issued in June 2016), the Internal Revenue Service substantially modified its determination letter program for tax-qualified retirement plans, such as pension plans and 401(k) plans.  (See the Gibson Dunn client alert:  http://www.gibsondunn.com/publications/Pages/IRS–Additional-Guidance–Changes-to-Determination-Letter-Program-for-Qualified-Retirement-Plans.aspx).  In the past, retirement plans would be eligible to submit an application for a determination letter every five years, and adopt “interim amendments” each year based on an IRS-provided list.  A favorable IRS determination letter states that the IRS has concluded that the terms of the retirement plan comply with the tax laws in effect at the time that the letter is issued.  It has the practical effect of preventing the IRS from asserting that the form of the plan does not comply with the extremely complicated tax laws regulating retirement plans, and arguing that as a result, the plan should be disqualified from enjoying the favorable tax treatment for tax-qualified retirement plans under the Internal Revenue Code.  Since one of the consequences of disqualification is the immediate taxation of all vested benefits of every participant in the plan as well as current taxation of all earnings on plan investments, retirement plans have routinely applied to obtain a favorable determination letter every five years.  The IRS letter has been widely viewed as a form of inexpensive insurance against the risk of plan disqualification. The new determination letter program dramatically reduces the number of retirement plans that are eligible to request an individual determination letter from the IRS.  As a general rule, only newly adopted plans and terminating plans may apply for determination letters.  Ongoing retirement plans are basically excluded from requesting this letter.  Thus, many plan sponsors will not have the comfort of an IRS “seal of approval” that a plan continues to be tax-qualified in form. Under the new program, it becomes much more important to follow the IRS’s publication of updated amendments and incorporate them into an ongoing plan in a timely manner.  Under Rev. Proc. 2016-37, the so-called “remedial amendment period” (the period during which legally-required plan amendments must be adopted) runs through the end of the second plan year beginning after the IRS issues its “required amendment list” (the “RA List”).  The IRS recently issued its first RA List under the new program in Notice 2017-72.  Since most tax-qualified retirement plans use the calendar year as their plan year, the amendments set forth in Notice 2017-72 will need to be adopted by a calendar year retirement plan no later than December 31, 2019. This first RA List addresses only three items.  First, and, most broadly applicable, cash balance and other “hybrid” pension plans must be amended to reflect final regulations that were issued in 2014 and 2015 and generally became effective in 2017.  Second, “eligible cooperative plans” and “eligible charity plans” must include provisions restricting benefit distributions in certain circumstances that are applicable pursuant to the Pension Protection Act of 2006.  Third, for defined benefit plans that offer partial annuity options, regulations issued in 2016 must be incorporated to the extent necessary.  Thus, this first RA List has limited applicability.  Among other things, there are no provisions affecting 401(k) and other defined contribution plans. The most important takeaway from Notice 2017-72 is the reminder that the determination letter program has effectively ended for most retirement plans.  This will put more pressure on plan sponsors to ensure plans are timely updated and periodically reviewed by knowledgeable experts.  It can also be expected that plan auditors and acquirors in corporate transactions may seek legal opinions or other comfort that plans are tax-qualified in form since with the passage of time, the last IRS determination letter issued to a plan will become increasingly dated.  Employers who last received a favorable determination letter several years ago also should carefully review whether all prior IRS-required amendments have been adopted, because adopting “interim amendments” and then waiting until the next 5-year determination letter cycle to update plan documents is no longer an option. Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, or the following: Stephen W. Fackler – Palo Alto and New York (+1 650-849-5385 and 212-351-2392, sfackler@gibsondunn.com) Michael J. Collins – Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Krista Hanvey – Dallas (+1 214-698-3425; khanvey@gibsondunn.com)  © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 17, 2018 |
UK Employment Update – January 2018

Click for PDF In this update we: focus on two areas of UK employment law which are currently having a major impact on employers: the Gender Pay Gap Reporting Regulations which come into force in 2018 and one of the most talked about issues last year: worker status and the gig economy consider recent decisions of the European Court of Human Rights and the English High Court on data protection issues which will impact employers as they prepare for the General Data Protection Regulation. A brief overview is provided below.  More detailed information is available by clicking on the appropriate links to the Appendix.  (click on link) Gender Pay Gap Regulations   (click on link) By 5 April 2018, all employers who employed more than 250 employees as at 5 April 2017 must have filed a gender pay gap report.   Our previous client alert considered the Regulations in detail and can be found here. Worker Status and the Gig Economy  (click on link) “Worker” status was one of the most talked about employment law issues in 2017 and this trend looks likely to continue with a number of appeal decisions due in early 2018.  We consider below the categories of worker and the protections they enjoy as well as key themes emerging from the recent cases. Data Protection Update   (click on link) The GDPR will come into force on 25 May 2018, imposing significant stricter and, in some cases, new obligations on those entities which process the personal data of EU residents or which are otherwise subject to GDPR .  We summarised the key provisions of the GDPR in previous alerts that can be found here.  We are working with a number of clients to ensure that they have policies and procedures in place to comply with the GDPR.  Those who have not yet done so, have only four months left to prepare. Data protection has also been the subject of several recent decisions which we consider below and which emphasise the need for employers to ensure that they have updated data protection policies and procedures in place. APPENDIX Gender Pay Gap Regulations Approximately 500 companies have taken the decision to file their gender pay gap reports at the time of writing and those reports have attracted considerable media interest. The accuracy of those reports has also come under the spotlight, with the media accusing some employers of underreporting their gender pay gap. With a little more than two months left before the deadline, we continue to advise clients on the most appropriate strategy in terms of presentation, explanation and publication of their reports.  Gender pay gap issues are also under scrutiny in the United States and we are working in connection with our US offices to ensure our clients consider comprehensive strategies both in the UK and in the US. Will the Regulations be enforced? The Regulations do not set out a means for enforcement and it was initially thought that there would be no legal consequences for non-compliance.  However, the UK Equality and Human Rights Commission (“EHRC”), which is empowered under UK law to enforce the Equality Act 2010, has recently acknowledged for the first time that it will take steps to enforce compliance with the Regulations and has published its proposed enforcement strategy which is subject to consultation until 2 February 2018. The EHRC intends to select random “targets” from different industries, prioritising those employers who do not publish Gender Pay Gap Reports or who appear to have published  inaccurate data.  Those who refuse or fail to engage with EHRC to rectify their non-compliance would face prosecution and potential criminal liability. Any attempt by the EHRC to exercise its proposed powers may well be met with a legal challenge given that the Regulations do not contain an enforcement regime and it has been argued (and, indeed, was the initial view of the EHRC) that the EHRC does not have the power to enforce them.  However, it may be that the EHRC use non-compliance with the Regulations as a pretext for a wider investigation into employers that it suspects of engaging in discriminatory hiring, promotion or other practices (an area for which they have clear statutory authority). Worker Status and the Gig Economy Who is a worker? Employment law in the United Kingdom is unusual in that it extends a number of employment protections to those who, while not employees, work under a contract to provide services personally to a customer or client.  These persons, along with traditional employees, are classified “workers” and are to be distinguished from the genuinely self-employed, who run their own business.  In the UK an individual providing a service or services to an employer or client may therefore be considered a traditional employee, a worker who is not a traditional employee, or a truly self-employed independent contractor.  Working out which of the three categories an individual falls into is far from straightforward and with the rise of the gig economy and agile working arrangements there has been a flurry of case law on the status of these workers. Status matters – rights afforded to employees, workers and the genuinely self-employed Determining whether an individual is an employee, worker or self-employed independent contractor is important when considering what legal rights they enjoy.  We set out below a table highlighting key differences between the rights afforded to each category: Right or entitlement Employee Worker Self-employed contractor National minimum wage ✔ ✔ ✘ Paid holiday/vacation ✔ ✔ ✘ Statutory sick pay ✔ ✘ ✘ TUPE protection upon the transfer of a business, undertaking service provision change ✔ ✘ ✘ Whistleblowing protection ✔ ✔ ✘ Protection from discrimination/harassment and related rights ✔ ✔ ✔ Special protection in the event of non-payment of wages ✔ ✔ ✘ Pension contribution from “employer” under auto-enrolment scheme ✔ ✔ ✘ Entitlement to paid rest breaks ✔ ✔ ✘ 48 hour limit on a maximum week’s work ✔ ✔ ✘ Statutory maternity/paternity/adoption/parental/shared parental leave and related rights ✔ ✘ ✘ Entitlement to request flexible working ✔ ✘ ✘ Right as fixed-term/part-time employee not to be treated less favourably than a comparable permanent/full time employee ✔ ✘ ✘ Minimum notice of dismissal ✔ ✘ ✘ Written statement of reasons for dismissal ✔ ✘ ✘ Protection from unfair dismissal ✔ ✘ ✘ Statutory redundancy payment and related rights ✔ ✘ ✘ Workers and the gig economy – themes emerging from recent cases Many businesses operating in the gig-economy treat their workforce as self-employed contractors, thus avoiding the legal and administrative burden associated with employing or engaging employees and workers. This provides them with greater flexibility as their business grows and allows them to price their products and services more competitively than traditional businesses. However, this business model has been threatened by a number of recent cases before the UK courts, all but one of which has resulted in the reclassification of individuals thought to be self-employed contractors as “workers”, with all the associated legal protections. The determination of worker status remains highly fact-sensitive and involves weighing up a series of factors.  What the parties call themselves and how they document their arrangements is of limited importance. We have drawn together a list of key factors upon which the UK courts have focused in recent cases when determining whether an individual is a worker or independent contractor (none of which are determinative): Factor Points towards worker status and away from self-employed independent contractor status Points towards self-employed independent contractor status and away from worker status Who actually performs the services? A worker invariably performs the services personally. An independent contractor tends to be free to engage and use their own personnel to perform the contract. Is the individual dependent upon one client or customer? A worker tends to works for and is dependent upon one client or customer and is required to accept work when offered.  A worker has little or no bargaining power to amend or alter their terms of engagement. An independent contractor tends to have multiple clients or customers  and is not obliged to accept work when offered.  An independent contractor has greater ability to negotiate their terms of engagement. How integrated is the individual into the business of the client or customer? Does the individual appear to be operating in business on his/her own account? A worker tends to work as an integrated part of the client or customer’s business.  For example, a client or customer may provide a worker with an email account and equipment for use when providing the services. An independent contractor tends to provide skills and expertise which are not integral to the business of their client or customer.  They tend to use their own equipment and to appear to operate as an independent business (e.g. with their own uniform, website, letterhead, business cards, marketing materials). Does the individual have discretion as to how they carry out the work? A worker tends to be tightly controlled by the client or customer as to when and how they carry out their work. An independent contractor has a task to perform but tends to have both the expertise and authority to determine when and how they will carry out the work within set deadlines. A recent decision of the Court of Justice of the European Union (CJEU) in King v The Sash Window Workshop Limited (C-214/16 CJEU EU:C:2017:914) illustrates how significant the consequences and costs of reclassification can be.  This case started life in a UK Employment Tribunal with a decision that Mr King, a window salesman, was a worker and not a self-employed independent contractor as previously thought.  The Employment Tribunal awarded Mr King holiday pay in respect of leave accrued and untaken in the previous years of his engagement (i.e. when he had been treated as a self-employed contractor).  That decision was upheld by the EAT.  On appeal, the Court of Appeal referred the issue to the CJEU. The Court held that Mr King was entitled to exercise his rights to take all the paid vacation that had accrued while he had been a worker, even before reclassification and without limit in time. We are expecting decisions on a number of worker-status cases early this year, including from the Supreme Court.  It is also possible that the Government may intervene and implement some of the recommendations from the Taylor Review which was published last year and which we commented upon in our previous alert which can be found here.  Whilst worker status is primarily a UK issue, questions as to employment status arising from the gig-economy are also being considered by the courts in the US.  We can assist clients across jurisdictions to ensure a strategic approach to these issues. Data Protection Update Employer vicariously liable for criminal data breaches In a recent High Court case brought by a group of over 5,000 employees against the UK retailer Morrisons, the employer was found vicariously liable for the acts of a rogue employee who uploaded employees’ personal data to a file sharing website. In 2014, a file containing the personal details (including bank accounts, salary details and personal phone numbers) of 99,968 Morrisons’ employees was uploaded to a file sharing website.  Morrisons was alerted to the breach by the local newspaper that had anonymously received a CD that contained the uploaded data.  Morrisons took immediate steps to get the website taken down, and alerted the police.  An employee was found guilty of fraud and breaches of the Data Protection Act 1998 for uploading the data.  He was sentenced to eight years imprisonment.  The employee obtained the data through his role as an IT auditor but retained a copy for his own improper purposes. 5,528 employees whose data was disclosed claimed compensation for breaches of the Data Protection Act and the common law duty of confidentiality.  The employees claimed that Morrisons was directly responsible for what had happened, or in the alternative, vicariously liable for the actions of its rogue employee. The court  found that the employee set out to deliberately damage Morrisons in retaliation for disciplinary action taken against him for an unrelated matter.  The court held that Morrisons was not directly responsible for breaches of the Data Protection Act because it was not the data controller at the time of the breach (i.e. it was not controlling the processing in question).  It also found that Morrisons had taken technical and organisational steps to prevent data breaches save for a failure to implement a system for the deletion of data (but even if such system had been implemented it would not have prevented the breach). However, notwithstanding this, the court held that Morrisons was vicariously liable for the acts of the employee since when the employee received the data he was acting in the course of his employment and there was a sufficiently close connection between the employee’s position as an IT auditor and his wrongful conduct in order to establish vicarious liability. The quantum of damages is still to be considered.  In the meantime, we understand that Morrisons has been granted leave to appeal.  In light of this case, and the GDPR coming into force this year, employers should be taking steps to ensure they have appropriate data security systems and procedures in place. Monitoring employees in the workplace The recent decision of the European Court of Human Rights in López Ribalda and others v Spain has ruled that, given the existing data protection rules on fairness and proportionality of data processing, and on information of data subjects, the indiscriminate use of secret CCTV cameras in the workplace that target all employees at all times cannot be used as evidence before courts to argue the dismissal of certain employees involved in thefts. The employer had installed several visible surveillance cameras aimed at detecting theft by customers, and several concealed cameras aimed at recording theft by employees.  Five employees were caught on video stealing items, and helping co-workers and customers steal items. The employees admitted involvement in the thefts and were dismissed.  The employees contended that the use of the covert video evidence in the unfair dismissal proceedings had infringed both their privacy rights under Article 8 and their right to a fair hearing under Article 6(1) of the ECHR. The court upheld the employees’ Article 8 claim finding that the Spanish courts had failed to strike a fair balance between the employees’ right to respect for their private life and the employer’s interest in protecting its property. The majority found that the employer’s rights could have been safeguarded by other means, notably by informing the employees in advance of the installation of the surveillance system and providing them with the information required by Spanish data protection law. The court unanimously rejected the employees’ Article 6 claim, finding that the video evidence was not the only evidence the domestic courts had relied on when upholding the dismissals. This case serves as a reminder to employers that reliance on CCTV and other monitoring in the workplace is limited to proportionate means and subject to informing employees of its use.  Employers should ensure that employees have been notified of the purpose of CCTV and other means of monitoring if they wish to rely on it for investigations, disciplinary proceedings and dismissals.  Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these and other developments.  Please feel free to contact the Gibson Dunn lawyer with whom you usually work or the following members of the Labor and Employment team in the firm’s London office: James A. Cox (+44 (0)20 7071 4250, jacox@gibsondunn.com) Amy Sinclair (+44 (0)20 7071 4269, asinclair@gibsondunn.com) Vonda Hodgson (+44 (0)20 7071 4254, vhodgson@gibsondunn.com) Thomas Weatherill (+44 (0)20 7071 4164, tweatherill@gibsondunn.com) Heather Gibbons (+44 (0)20 7071 4127, hgibbons@gibsondunn.com) Sarika Rabheru (+44 (0)20 7071 4267, srabheru@gibsondunn.com) Georgia Derbyshire (+44 (0)20 7071 4013, gderbyshire@gibsondunn.com)     © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

December 21, 2017 |
The Tax Bill: Year-End Planning Considerations for Executive Compensation

On December 19th and 20th, 2017, the Senate and the House passed the “Tax Cuts and Jobs Act”.  President Trump will sign the Act into law, though that may not be until early January due to technical Congressional budgetary rules. Among other things, the Act cuts the maximum corporate tax rate to 21% (from 35%), modestly reduces individual tax rates on a temporary basis through 2025, and largely eliminates the individual deduction for state and local income and property taxes during the same period. In order to enact legislation that did not require bipartisan support in the Senate, the projected budget deficit resulting from the various tax cuts, particularly the substantial reduction in the maximum corporate rate, could not exceed $1.5 trillion over the next 10 years.  In order to accomplish this goal, since the estimated revenue loss from the tax reductions is projected to exceed $2 trillion, a sizable number of revenue raisers were included in the Act.  One of these is a substantial expansion in the scope of nondeductibility for executive compensation under section 162(m) of the Internal Revenue Code (“Section 162(m)”). The Act amends Section 162(m) to, among other things, place a $1 million deduction cap on compensation paid to any of a public company’s named executive officers (determined under SEC proxy rules, and now including the chief financial officer) and eliminate the current exception from the $1 million deductibility limit for “performance-based compensation”.  The Act includes fairly vague “grandfathering” rules under Section 162(m) intended to cover currently excluded compensation (especially “performance-based compensation”) payable under arrangements in place before the Act was introduced in the House on November 2 that we expect will be the subject of future IRS guidance. The Act’s changes raise a number of planning considerations for corporations with respect to employee compensation.  For example, even with the higher marginal individual tax rates in effect for 2017, some employees may want to accelerate income into 2017 so that they can fully deduct the corresponding state and local income taxes that are withheld from this income.  In addition, companies may want to accelerate tax deductions into their fiscal year beginning in 2017 since those deductions are worth up to 35% instead of 21% starting in fiscal years beginning in 2018. Some key items that accrual-basis companies with calendar tax years may want to consider implementing before year-end include: Accelerating the payment of bonuses and other compensation into 2017.  This generally would result in corporate tax deductions for this year, as well as allow employees to deduct related state and local taxes paid before year-end.  Before any payments are accelerated, care should be taken to ensure that the applicable requirements of section 409A of the Code are not violated.  In addition, for public companies, the impact under Section 162(m) should be considered for this and the other items. Section 162(m) as in effect for 2017 has strict procedural rules that must be followed for compensation to qualify as “performance-based”, in particular certification of financial results by an independent committee of board members (usually the Compensation Committee) that may be difficult to implement prior to year-end. Taking action to allow for the accrual of bonuses as deductions in 2017, even if not actually paid until sometime in 2018 (but no later than March 15, 2018).  IRS guidance over the years has specified how these actions can be taken so as to allow for deductibility in 2017 but without employee income inclusion until payment is actually made in 2018. Possibly taking action to permit tax deductions in 2017 for restricted stock units and similar awards that will not be settled until early 2018 (but no later than March 15, 2018) through the issuance of cash or stock.  There are a number of technical concerns that require careful planning and assessment before proceeding. This Client Alert necessarily only scratches the surface of this complex topic.  Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues.  Please contact the Gibson Dunn lawyer with whom you usually work, or the following authors: Stephen W. Fackler – Palo Alto and New York (+1 650-849-5385 and 212-351-2392, sfackler@gibsondunn.com) Michael J. Collins – Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 28, 2017 |
Proxy Advisory Firms: Policy Updates and Action Items for 2018 Annual Meetings

The two most influential proxy advisory firms—Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”)—recently released their updated proxy voting guidelines for 2018.  The key changes to the ISS and Glass Lewis policies are described below along with some suggestions for actions public companies should take now in light of these policy changes and other proxy advisory firm developments.  An executive summary of the ISS 2018 policy updates is available here and a more detailed chart showing additional updates to its voting policies and providing explanations for the updates is available here.  The 2018 Glass Lewis Guidelines are available here. ISS 2018 Proxy Voting Policy Updates On November 16, 2017, ISS updated its proxy voting guidelines for shareholder meetings held on or after February 1, 2018.  These updates impact ISS policies for the United States, Canada, the United Kingdom, Ireland, Europe, the Nordics Region, Japan, China, Hong Kong, and Singapore.  This client alert reviews the major U.S. policy updates in ISS’s 2018 proxy voting guidelines, which are used by ISS in making voting recommendations on director elections and company and shareholder proposals at U.S. companies. ISS plans to issue a complete set of updated policies on its website in December 2017.  ISS also indicated that it plans to issue updated Frequently Asked Questions (“FAQs”) on certain of its policies in December, and it has already issued a set of Preliminary FAQs on the U.S. Compensation Policies, which are available here.  In January 2018, ISS will evaluate new U.S. shareholder proposals that are anticipated for 2018 and update its voting guidelines as necessary. 1.         Director Elections Non-Employee Director Pay ISS has adopted a new policy on “excessive” non-employee director pay, although the policy will not impact voting recommendations for 2018.  Under the policy, ISS will recommend votes “against” board or committee members responsible for approving or setting non-employee director compensation when there is a recurring pattern (which ISS defines as two or more consecutive years) of “excessive” pay without a compelling rationale or other mitigating factors to justify the compensation.  While ISS does not define what constitutes “excessive” pay, it notes that it has identified “cases of extreme outliers relative to peers and the broader market.” For 2018, ISS will continue to rely on its current policy to guide its vote recommendations.  Under this policy, patterns of excessive compensation may call into question directors’ independence and result in ISS including cautionary language in its proxy analysis.  After 2018, negative voting recommendations would be triggered only after ISS identifies a pattern of excessive pay in consecutive years. Pledging Company Stock In prior years, ISS has addressed pledging of company stock through its “governance failures” policy.  Under this policy, ISS issued negative voting recommendations for members of the committee charged with risk oversight based on “significant” pledging of company stock.  For 2018, ISS has implemented an explicit policy on problematic pledging that reflects its current approach to this issue.  Under this policy, ISS recommends votes “against” the members of the committee responsible for overseeing pledge-related risks, or the full board, where a “significant” level of executive or director pledging raises concerns.  In making its voting recommendations, ISS will consider the following factors: the existence of an anti-pledging policy that prohibits future pledging activity and is disclosed in the proxy statement; the magnitude of pledged shares in the aggregate in terms of total common shares outstanding, market value, and trading volume; disclosure of the progress, or lack thereof, in reducing the magnitude of aggregate pledged shares over time; proxy statement disclosure that the shares subject to stock ownership and holding requirements do not include pledged company stock; and any other factors that are relevant. Board Diversity ISS applies four fundamental principles when determining its votes for director nominees: accountability, responsiveness, composition, and independence.  ISS expanded its “composition” principle to include a specific statement about the benefits of boardroom diversity, which states that “[b]oards should be sufficiently diverse to ensure consideration of a wide range of perspectives.”  In addition, ISS stated that it will not consider a lack of gender diversity in making voting recommendations, but it will highlight in its voting analysis if a board has no female directors.  Poison Pills ISS significantly updated its policy for poison pills in an effort both to simplify the policy and reinforce its views that shareholders should timely approve poison pills.   Under the updated policy, ISS will recommend votes “against” all board nominees, every year, at a company that has a “long-term” poison pill (a pill with a term greater than one year) that was not approved by shareholders.  This policy reflects several changes.   First, commitments to put a newly-adopted long-term poison pill to a vote at the following year’s annual meeting will no longer be considered a mitigating factor that would exempt directors from negative voting recommendations.  Second, the frequency of adverse recommendations will increase.  Under its current policy, at companies with annual director elections, ISS only recommends “against” all board nominees every three years, while ISS will now recommend votes “against” all board nominees every year.  Third, companies with 10-year poison pills that were grandfathered into the current policy will no longer be grandfathered and will receive adverse voting recommendations.  According to ISS, this will impact about 90 companies.  With grandfathering gone, ISS has also removed its provisions for pills with deadhand and slowhand provisions since the few remaining deadhand/slowhand pills are not shareholder-approved and would be covered by the updated policy. ISS is maintaining its current policy for short-term poison pills (pills with a term of one year or less).  ISS will assess these on a case-by-case basis and focus its review on the company’s rationale for adopting the poison pill (instead of its governance and track record), as well as other relevant factors such as a commitment to put any renewal to a vote. ISS’s current policy on renewals and extensions of existing pills remains unchanged.  These will not receive case-by-case analysis, but rather, will result in adverse voting recommendations for all directors. 2.         Shareholder Proposals Gender Pay Gap ISS adopted a new policy focused on shareholder proposals that target the gender pay gap by requesting reports from companies on either (i) their pay data, by gender, or (ii) their policies and goals aimed at reducing existing pay gaps (if any).  ISS did not previously have a policy on this issue, and the new policy is intended to provide more clarity about ISS’s approach, given the expectation that the number of shareholder proposals on this subject will grow.  The new policy reflects a case-by-case approach to these proposals and will consider the following four factors: current company policies and disclosures regarding diversity and inclusion policies and practices; the company’s compensation philosophy and its use of “fair and equitable compensation practices”; any recent controversies, litigation or regulatory actions in which the company was involved related to gender pay gap issues; and any lag between the company and its peers with regard to reporting on gender pay gap policies or initiatives. Climate Change Risk ISS has also updated its policy on shareholder proposals relating to climate change risk, in light of recommendations from The Task Force on Climate-Related Financial Disclosures (“TCFD”) that were finalized in 2017.  Under its current policy, ISS generally supports shareholder proposals asking that a company disclose information on the risks it faces related to climate change, and the policy provides examples of those risks.  According to ISS, the updated voting policy “better aligns” with the TCFD recommendations, which seek transparency around the roles of the board and management in assessing and managing climate-related risks and opportunities.  In this regard, the updated policy applies not only to shareholder proposals seeking disclosure about “financial, physical, or regulatory risks” that a company faces related to climate change, but also proposals addressing “how the company identifies, measures, and manages such risks.” 3.         Executive Compensation              Pay-for-Performance Analysis Beginning in 2018, ISS will incorporate the Relative Financial Performance Assessment into its quantitative pay-for-performance analysis.  This metric compares a company’s rankings to a peer group with respect to Chief Executive Officer (“CEO”) compensation, and financial performance in three or four metrics, each as measured over three years.  The Preliminary FAQs on the U.S. Compensation Policies identify the metrics that ISS plans to use for each industry and how the metrics are weighted.  ISS intends to provide further specifics on the updated quantitative analysis in a white paper, but has indicated that the Relative Financial Performance Assessment would operate as a secondary quantitative screen that could move a company from “medium” to “low” concern or from “low” to “medium” concern.  The 2018 updates also clarify that the multiple of the CEO’s total pay relative to the peer group median is measured over the most recent fiscal year, which is consistent with ISS’s current policy. Board Responsiveness to Advisory Votes on Executive Compensation When a company receives support below 70% of votes cast on its last say-on-pay proposal, ISS will continue to make voting recommendations on a case-by-case basis the following year both for the say-on-pay proposal and the election of compensation committee members.  One of the elements that ISS currently considers is the board’s response to investor concerns, including disclosure of engagement efforts with major institutional investors on the reasons for their low support of the proposal.  For 2018, ISS has expanded the factors it will consider in assessing whether the board’s response to investor concerns was sufficiently robust.  In particular, ISS will consider disclosures about the timing and frequency of engagements with shareholders, and whether independent directors participated.  In this regard, the voting policy updates explicitly state that “[i]ndependent director participation is preferred.”  ISS will also consider disclosure about specific concerns voiced by shareholders that voted against the say-on-pay proposal, as a way of assessing whether subsequent changes made by the company were in fact responsive to those concerns.  Finally, in addition to considering whether the company made any changes in response to shareholder concerns, ISS will also consider the nature of those changes and whether they were meaningful. 4.         Other Changes The voting policies also include the following updates: Director independence criteria:  ISS is changing its terminology on director classifications—from “inside” to “executive” and from “affiliated outside” to “non-independent non-executive.”  In addition, directors who were previously considered “inside” directors due to ownership of more than 50% of a company’s stock will be moved to the “non-independent non-executive” category.  According to ISS, this change is purely to standardize terminology across markets and will not impact voting recommendations. Attendance for newly appointed directors:  ISS is exempting new directors who have served for only part of the year from its attendance policy, under which it generally recommends votes “against” directors who attend less than 75% of meetings unless the proxy statement includes “an acceptable reason” for the absences.  Under the current policy, new directors are assessed case-by-case and disclosure about schedule conflicts is viewed as an acceptable reason for poor attendance because the meeting schedule would have been set before the director joined the board.  Under the updated policy, ISS will exempt new directors from the attendance policy, rather than expecting disclosure about scheduling conflicts. Restrictions on shareholders’ ability to amend the bylaws:  Under its current policies, ISS recommends votes “against” members of the nominating/governance committee if a company’s charter places “undue” restrictions on shareholders’ right to amend the company’s bylaws.  These restrictions include prohibitions on the submission of binding shareholder proposals or ownership requirements in excess of those imposed by Rule 14a-8.  ISS has expanded this policy to address situations where a company’s bylaws (or the charter) include these types of restrictions. Glass Lewis 2018 Proxy Voting Policy Updates On November 22, 2017, Glass Lewis released its updated proxy voting policy guidelines for 2018 in the United States and Canada and for shareholder proposals.  This client alert reviews the major updates to the U.S. guidelines, which provide a detailed overview of the key policies Glass Lewis applies when making voting recommendations on proposals at U.S. companies and on shareholder proposals.  The key changes in the 2018 guidelines are summarized below. 1.         Board Diversity Glass Lewis has added a new section to its voting guidelines on how it considers gender diversity on boards of directors.  Glass Lewis affirmed that, as in prior years, it will continue to review board composition closely, and it may note as a concern instances where it believes the board lacks diversity, including those boards that have no female directors.  For 2018, Glass Lewis will not make voting recommendations solely on the basis of a board’s diversity, although this will be one of several factors Glass Lewis considers when evaluating a company’s oversight structure.  This will change in 2019, however, when Glass Lewis will begin recommending votes “against” the nominating/governance committee chair at companies with no female directors.  In those instances, Glass Lewis may also recommend votes “against” other nominating/governance committee members as well, depending on factors such as the company’s size, industry, and governance profile. The voting guidelines also state that Glass Lewis will “carefully review a company’s disclosure of its diversity considerations” in making voting recommendations.  Glass Lewis may not recommend votes “against” directors when the board has provided a “sufficient rationale” for the absence of any female board members or there is disclosure of a plan to address the board’s lack of diversity. 2.         Dual-Class Share Structures Glass Lewis has also added a new section to its voting guidelines on how it will consider dual-class share structures—different classes of stock that may differ in voting or economic rights—in analyzing various aspects of a company’s governance.  In this section, Glass Lewis explicitly states that dual-class voting structures “are typically not in the best interests of common shareholders” and that “[a]llowing one vote per share generally operates as a safeguard for common shareholders by ensuring that those who hold a significant minority of shares are able to weigh in on issues set forth by the board.” Consistent with these principles, Glass Lewis “generally considers a dual-class share structure to reflect negatively on a company’s overall corporate governance.”  It will typically recommend that shareholders vote in favor of recapitalization proposals to eliminate dual-class share structures and “against” proposals to adopt a new class of common stock. For companies that have done an IPO or spin-off in the past year, Glass Lewis has not changed its overall approach, which is that it generally refrains from making voting recommendations based on a company’s governance practices for the first year the company is public.  However, Glass Lewis evaluates newly public companies to determine whether the rights of shareholders are being “severely restricted indefinitely” based on a list of factors and may recommend votes “against” directors where it determines this is the case.  The 2018 voting policy updates add the presence of a dual-class share structure to this list of factors. The discussion on dual-class share structures also addresses how Glass Lewis will assess board responsiveness to a significant shareholder vote (discussed in the next section). 3.         Board Responsiveness to Significant Shareholder Votes Under Glass Lewis’s current policy on board responsiveness, Glass Lewis evaluates the board’s response on a case-by-case basis in situations where 25% or more of a company’s shareholders vote contrary to the company’s recommendation on any proposal, including the election of director nominees, company proposals and shareholder proposals.  For 2018, Glass Lewis is reducing this threshold to 20%, because it believes a 20% threshold is significant enough to warrant consideration of board responsiveness, especially when a proposal addresses compensation or director elections.  Accordingly, when 20% or more of the votes cast (excluding abstentions and broker non-votes) on a proposal (including the election of directors) are contrary to management’s recommendation, Glass Lewis will evaluate whether or not the board responded appropriately following the vote.  As under the current policy, the 20% threshold alone will not automatically generate a negative voting recommendation from Glass Lewis on director nominees or future proposals.  However, it may be a contributing factor to Glass Lewis’s recommendation to oppose the board’s voting recommendation. For companies with dual-class share structures,  Glass Lewis will review with care the approval or disapproval levels of shareholders that are unaffiliated with the company’s controlling shareholders when making a determination as to whether board responsiveness is warranted.  Boards are expected to exhibit an “appropriate” level of responsiveness to voting results where a majority of unaffiliated shareholders either supported a shareholder proposal or opposed a company proposal. 4.         Virtual Shareholder Meetings Recognizing that the number of companies adopting virtual-only meetings is “small but growing,” Glass Lewis has adopted a new policy on virtual meetings.  Glass Lewis considers virtual meeting technology “a useful complement” to in-person shareholder meetings because of its ability to expand the participation of shareholders that cannot attend those meetings in-person (resulting in a “hybrid meeting”).  At the same time, Glass Lewis states that virtual-only meetings could curb shareholders’ ability to have meaningful discussions with company management. In 2018, Glass Lewis will not make voting recommendations solely on the basis that a company has chosen to hold a virtual-only meeting.  Instead, when analyzing the governance profiles of companies that hold virtual-only meetings, Glass Lewis will look for “robust” proxy statement disclosure that makes clear that shareholders will have the same ability to participate in the virtual-only meeting that they would have at an in-person meeting.  This policy will change in 2019.  Beginning in 2019, Glass Lewis will generally recommend votes “against” the members of the nominating/governance committee where the company intends to have a virtual-only shareholder meeting and fails to provide the disclosure described above. 5.         Overboarded Directors Glass Lewis did not change its director overboarding policy for 2018, but did clarify how the policy will apply to directors who are serving in executive roles but are not CEOs.  Under Glass Lewis’s policy, it generally recommends a vote “against” (i) any director that serves as a public company executive officer while also serving on more than two total public company boards and (ii) any other director serving on more than five total public company boards. In determining whether to issue a negative voting recommendation, Glass Lewis considers whether service in excess of these limits may impact a director’s ability to devote sufficient time to board duties based on a number of factors, such as the size and location of the other companies where the director serves on the board and the director’s board duties at those companies.  For directors who are executives—but not CEOs—of public companies, the 2018 policy updates clarify that Glass Lewis will evaluate the specific duties and responsibilities of the executive’s role. 6.         CEO Pay Ratio Beginning in 2018, Glass Lewis’s Proxy Paper reports will include a company’s CEO pay ratio as an additional data point.  However, Glass Lewis notes in its 2018 voting policies that although the pay ratio can provide investors with more insight when assessing the pay practices at a company, pay ratio will not be a determinative factor in Glass Lewis’s voting recommendations at this time. 7.         Pay for Performance Glass Lewis’s pay-for-performance model, which ranks companies using a grade system of “A,” “B,” “C,” “D,” and “F,” did not change this year and will continue to be used to guide Glass Lewis’s evaluation of the effectiveness of compensation committees.  Where a company has a pattern of failing Glass Lewis’s pay-for-performance analysis, Glass Lewis will generally recommend a vote “against” that company’s compensation committee members.  The voting policy updates for 2018 provide clarification on the grading system by adding more detail on each of the grades.  Specifically: The letter “C” “does not indicate a significant lapse,” but instead “identifies companies where the pay and performance percentile rankings relative to peers are generally aligned.”  This suggests that a company does not overpay or underpay relative to its comparator group.  The grades “A” and “B” are also given to companies that align pay with performance, but indicate lower compensation levels relative to the market and to company performance.  A “B” grade stems from slightly higher performance levels in comparison to market peers while executives earn relatively less than peers.  An “A” grade shows that a company is paying significantly less than peers while outperforming the comparator group. A grade of “D” or “F” reflects high pay and low performance relative to the comparator group, with a “D” reflecting a disconnect between pay and performance and an “F,” a significant disconnect.  An “F” indicates that executives receive significantly higher compensation than peers while underperforming the market. 8.         Shareholder Proposals Climate Change Glass Lewis has expanded its policy on shareholder proposals relating to climate change.  Glass Lewis will generally recommend “for” shareholder proposals seeking disclosure of information about climate change scenario analyses and other climate change-related considerations at companies in certain extractive or “energy-intensive” industries that have increased exposure to climate change-related risks.  Glass Lewis generally supports the disclosure recommendations of The Task Force on Climate-Related Financial Disclosure (“TCFD”), but will conduct a case-by-case review of proposals requesting that companies report in accordance with these recommendations.  When evaluating proposals asking for increased disclosure, Glass Lewis will evaluate: the industry in which a company operates; the company’s current level of disclosure; the oversight afforded to issues related to climate change; the disclosure and oversight afforded to climate change-related issues at peer companies; and whether other companies in the company’s market or industry have provided disclosure that is aligned with the TCFD’s recommendations. “Fix It” Proxy Access Shareholder Proposals Glass Lewis has expanded its voting policy on proxy access shareholder proposals to address “fix it” proposals.  Shareholders have submitted “fix it” proposals to companies that already have proxy access in an effort to change specific terms of existing proxy access bylaws, such as the number of shareholders that can aggregate their shares to submit a proxy access nominee. Glass Lewis will evaluate these proposals on a case-by-case basis and will review a company’s existing bylaws in order to determine whether they “unnecessarily restrict” shareholders’ ability to use proxy access.  In cases where companies have adopted proxy access bylaws that “reasonably conform with broad market practice,” Glass Lewis will generally oppose “fix it” proposals.  Where a company has “unnecessarily restrictive” provisions, Glass Lewis “may consider support for well-crafted ‘fix it’ proposals that directly address areas of the company’s bylaws that [Glass Lewis] believe[s] warrant shareholder concern.” Dual-Class Share Structures Glass Lewis has codified its position on shareholder proposals asking companies to eliminate their dual-class share structures and will generally recommend that shareholders vote “for” these proposals. Actions Public Companies Should Take Now Evaluate your company’s practices in light of the revised ISS and Glass Lewis proxy voting guidelines:  Companies should consider whether their policies and practices, or proposals expected to be submitted to a shareholder vote in 2018, are impacted by any of the changes to the ISS and Glass Lewis proxy voting policies.  For example, companies should consider whether their non-employee director compensation has been previously deemed “excessive” by ISS and what mitigating factors or support can be provided to explain higher-than-average compensation in the 2018 proxy statement. Consider enhancing your proxy disclosures on matters including board diversity and shareholder engagement:  Companies should consider whether there is additional information they can provide in the proxy statement to emphasize the diversity of the board, particularly with respect to gender and ethnicity.  Boards that have more work to do on diversity should be aware that this is likely to be a continued area of focus, not just for ISS and Glass Lewis but for institutional investors as well.  Regardless of the level of support a company received for its say-on-pay proposal, companies should evaluate their disclosures about shareholder engagement and consider whether they can say more about their engagements on executive compensation and on other matters. Enroll in the Glass Lewis 2018 Issuer Data Report program:  Glass Lewis has not yet opened enrollment for its 2018 Issuer Data Report (“IDR”) program.  Companies that have previously enrolled will be automatically notified when the 2018 enrollment period begins, but companies that have not enrolled may sign up for notifications regarding the open enrollment period here.  The IDR program enables public companies to access (for free) a data-only version of the Glass Lewis Proxy Paper report prior to Glass Lewis completing its analysis and recommendations relating to public company annual meetings.  Glass Lewis does not provide drafts of its voting recommendations report to issuers it reviews, so the IDR is the only way for companies to confirm the accuracy of the data before Glass Lewis’s voting recommendations are distributed to its clients.  Moreover, unlike ISS, Glass Lewis does not provide each company with complimentary access to the final voting recommendations for the company’s annual meeting.  IDRs feature key data points used in Glass Lewis’s corporate governance analysis, such as information on directors, auditors and their fees, summary compensation data and equity plans, among others.  The IDR is not a preview of the final Glass Lewis analysis as no voting recommendations are included.  Each participating public company receives its IDR approximately three weeks prior to its annual meeting and generally has 48 hours to review the IDR for accuracy and provide corrections, including supporting public documents, to Glass Lewis.  Participation is limited to a specified number of companies, and enrollment is on a first-come, first-served basis.  To learn more about the IDR program and sign up to receive a copy of the 2018 IDR for your company, go to https://www.meetyl.com/issuer_data_report. The following Gibson Dunn lawyers assisted in the preparation of this client update: Ronald O. Mueller, Elizabeth Ising, Lori Zyskowski, Gillian McPhee and Lauren Assaf. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance or Executive Compensation and Employee Benefits practice groups: Securities Regulation and Corporate Governance Group: Elizabeth Ising – Co-Chair, Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney – Co-Chair, Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com) Brian J. Lane – Washington, D.C. (+1 202-887-3646, blane@gibsondunn.com) Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) Maia Gez – New York (+1 212-351-2612, mgez@gibsondunn.com) Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com) Executive Compensation and Employee Benefits Group: Stephen W. Fackler – Co-Chair, Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, sfackler@gibsondunn.com) Michael J. Collins – Co-Chair, Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Krista Hanvey – Dallas (+1 214-698-3425, khanvey@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 10, 2017 |
Updates to Taxation of Executive Compensation and Employee Benefits Under the Proposed House Tax Legislation

On November 9, 2017, the House Ways and Means Committee approved the Tax Cuts and Jobs Act (the “Act”) in order to send the Act to the full U.S. House of Representatives.  The version approved by the Committee differs in a number of material respects from the version presented to the Committee for markup just one week ago.  We provided a summary of the initial version of the Act [here] and also provided a summary of the key proposals affecting executive compensation and employee benefits [here], both of which noted that there is significant uncertainty as to whether some or all of the provisions in the Act will take effect, and, if they do, in what form.  In this Alert, we focus on the material changes to the Act relating to executive compensation and employee benefits made in the process of the Committee’s markup. Introduction of “Qualified Stock” for Awards to Employees of Privately Held Corporations The version of the Act presented to the Committee on November 2 would have imposed income taxes on grants of options and restricted stock units once substantial future services were no longer required to be provided.  Under current law, income taxes are generally not imposed on options until the later of the time of exercise or vesting and on restricted stock units (or RSUs) until the later of the time of vesting or delivery of the shares.  Last week’s version of the Act would have taxed these awards even if the recipient had not yet received any shares of stock. As we stated in our prior Alert, we expected to see “much comment and criticism”.  That criticism was applied very promptly, and in response to the most obvious deficiency—the taxation of these awards granted by privately held companies for which no public market is available for recipients to sell shares in order to cover their tax liabilities—the Act was revised to introduce the concept of “qualified stock” for compensatory stock awards to employees. Under the Act, qualified stock is any stock in a corporation if the stock is received by an employee of the corporation through the exercise of an option or settlement of a restricted stock unit that was awarded in connection with the employee’s performance of services for the employer and was granted at a time when the employer is an “eligible corporation”.   In order to qualify as an eligible corporation for a given calendar year, the employer’s stock must not have been publicly traded in any year preceding the year of the grant of the award and the corporation must make the grant under a written plan under which not less than 80 percent of all employees providing services to the employer in the United States are actually granted options or RSUs in the same calendar year that possess the same rights and privileges.  This 80% annual grant threshold is quite impractical, since not even companies that grant compensatory stock awards to all of their employees (such as many Silicon Valley startups) make such grants in a single calendar year. If all of the various requirements are satisfied, including the making of an election by the employee to have this treatment apply, qualified stock is not taxed until the earliest of the following events: (1) the date that the stock first becomes transferable, (2) the date that the employee becomes ineligible to receive the benefit (as described further in the next paragraph), (3) the date that any stock of the employer becomes publicly traded on an established securities market, (4) the date that the employee revokes his or her election, or (5) the fifth anniversary of the date that the stock first becomes transferable or is no longer subject to a substantial risk of forfeiture.  Since the deferral of taxation is intended to remove a potential burden for employees holding illiquid stock, the proposed law contains restrictions on employers from repurchasing their own shares as a means of providing employees with a mechanism to monetize their stock awards. One technical note:  Last week’s legislation proposed to limit the definition of “substantial risk of forfeiture” to the performance of substantial future services in the context of nonqualified deferred compensation (new proposed Section 409B).  Since the concept of “qualified stock” is being introduced as an amendment to a different section of the Internal Revenue Code (Section 83), we would expect that the established (and broader) definition of “substantial risk of forfeiture” already found in Section 83 would apply.  What this means, for example, is that the need to achieve bona fide performance goals could also qualify as a substantial risk of forfeiture and therefore delay income taxation. Not all employees are eligible to receive this tax benefit.  The limits on participation are broader than comparable provisions of current law governing incentive stock options or Section 423 employee stock purchase plans.  Under this version of the legislation, the favorable tax treatment for qualified stock is not available to any person who is serving, or has ever served, as the employer’s chief executive officer or chief financial officer, (including certain family members of the CEO or CFO), is a 1% owner of the employer, or at any time in the preceding 10 years has been one of the 4 most highly compensated officers of the employer. These proposed provisions would generally become effective for options exercised and RSUs settled after December 31, 2017.  Since, if enacted as presently drafted, these provisions could apply to options and RSUs that have already been granted and are presently outstanding, the transition rules should prove to be especially challenging to draft and administer. Reversal of Effective Elimination of Unfunded Non-Qualified Deferred Compensation In our last Alert, we explained that the initial version of the Act presented to the Committee last week would largely eliminate unfunded non-qualified deferred compensation by adding a new Section 409B and repealing current Section 409A.  It took only a few days for that position to be fully reversed.  In the version of the Act reported out by the Committee yesterday, Section 409B has been removed and current Section 409A has been restored.  Since under Section 409A, most options are not taxed until exercise and most grants of RSUs are not taxed until issuance of the stock, the addition of “qualified stock” that was added earlier in the Committee’s markup may have been effectively rendered pointless.[1] This also means that the current law regarding deferred compensation plans sponsored by tax-exempt organizations (other than state and local governments) under Section 457 would not be changed by the Act.  Furthermore, Section 457A (which covers deferred compensation paid by partnerships and certain foreign corporations) would also remain in effect under the Act. Postponement or Relaxation of the Proposed Repeal or Limitation of Certain Exclusions Relating to Fringe Benefits Over the past week, the Act was amended to delay the repeal of, or retain in part, certain employer-provided fringe benefits.  The fringe benefits affected by these changes include the following: Dependent Care Assistance Programs.  The Act delays the elimination of dependent care flexible spending accounts (dependent care FSAs) until the end of 2022 (five years). Qualified Moving Expense Reimbursement.  Last week’s version of the Act would repeal the exclusion from an employee’s income of any reimbursement received from an employer of qualified moving expenses related to a job relocation.  (The employee could still take a deduction for qualified moving expenses under Section 217 to offset this inclusion in income, but at a minimum it makes the preparation of the employee’s tax return more complicated and could still result in some mismatches between income and deductions that end up increasing the employee’s tax liability.) The Act was amended this week to preserve that exclusion, but only for members of the Armed Forces of the United States on active duty who move pursuant to a military order and incident to a permanent change of station. Next Steps in the Progress of Tax Legislation The Act is expected to be presented to the full House for a vote later this month.  In addition, the U.S. Senate yesterday announced its own version of tax legislation that differs materially from the Act. It is expected that each of the Senate and the House will adopt different versions of tax legislation, which will then be presented to the Joint Committee on Taxation in order to try to reconcile the different versions.  This process still has a long way to go, and if the events of the last week offer any predictive value, there will be plenty of changes in what has been developed to date. Gibson, Dunn & Crutcher is focused on the Act and how it would affect our clients, and we will continue to provide updates as more information about the Act or tax reform in general becomes available.    [1]   However, the proposed tax legislation released yesterday by the U.S. Senate does include limitations on non-qualified deferred compensation that are comparable to those provisions of Section 409B that were just deleted by the House on the same day.  So there will be further significant developments on this topic. The following Gibson Dunn lawyers assisted in preparing this client update: Steve Fackler, Michael Collins and Sean Feller. Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, or the following: Stephen W. Fackler – Palo Alto and New York (+1 650-849-5385 and 212-351-2392, sfackler@gibsondunn.com) Michael J. Collins – Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

November 8, 2017 |
Potential Changes in Taxation of Executive Compensation and Employee Benefits Under the Proposed House Tax Legislation

On November 2, 2017, House Republicans released their much-anticipated tax reform proposal, entitled the Tax Cuts and Jobs Act (the “Act”).  We provided a summary of the Act here, which noted that there is significant uncertainty as to whether some or all of the provisions in the Act will take effect, and, if they do, in what form.  If enacted, certain provisions of the Act would have a major impact on executive compensation and various employee benefits, including qualified retirement plans and fringe benefits.  We summarize the provisions of the Act relating to executive compensation and employee benefits below. Effective Elimination of Unfunded Non-Qualified Deferred Compensation As an offset to lower individual tax rates, the Act substantially limits amounts on which taxes can be deferred by individuals as nonqualified deferred compensation.  The basic principle is that an individual would be taxed on compensation as soon as that compensation is no longer subject to an obligation to perform future substantial services.  Other types of restrictions, such as bona fide performance goals, that under current law delay taxation until if and when they are achieved, would not defer taxation.[1]  The proposed tax legislation takes the form of introducing a new Code section—Section 409B.  The existing elaborate rules governing the taxation of nonqualified deferred compensation under Section 409A would be repealed in their entirety. Section 409B would effectively eliminate long-term nonqualified deferred compensation as a means of delaying income taxation for years into the future by virtue of taxing compensation once any service requirement has been fulfilled.  Unlike Section 409A, there would be no penalties in the form of additional income taxes, interest and penalty taxes imposed under Section 409B. Certain concepts under Section 409A will or should remain.  First, the concept of payment on or before 2 ½ months after the end of a tax year in which the right to compensation vests (the so-called “short-term deferral rule”) would remain in effect.  Second, transfers of property in connection with the performance of services, which are taxed under Section 83, would not be covered under Section 409B.  Third, since Section 422 would not be repealed under the Act, incentive stock options should remain in effect.  The proposed legislation gives the Treasury Department broad authority to exempt various forms of compensation from Section 409B, so we would expect (as is the case in the Section 409A regulations) that if this legislation were enacted in its present form, the Section 409B regulations would expressly exempt incentive stock options. Options generally, however, receive unusually unfavorable treatment under Section 409B.  Both options and stock appreciation rights would become taxable when any service-based requirements are satisfied, regardless of whether or not the option is exercised, the underlying stock is publicly traded, or the option is then still subject to other restrictions such as performance goals that have not yet then been achieved.   We expect this provision in particular to draw much comment and criticism.  At least one member of Congress has already proposed allowing deferral of taxation of options until five years after vesting (or, if earlier, when the option is exercised). Deferred compensation plans sponsored by tax-exempt organizations (other than state and local governments) under Section 457 would be eliminated.  Section 457A (which covers deferred compensation paid by partnerships and certain foreign corporations) would also be repealed, presumably because the standard for taxation that is established for those arrangements is the same as has been proposed under Section 409B. These provisions would become generally effective for compensation attributable to services performed on or after January 1, 2018.  Deferred compensation accrued prior to 2018 is not entirely grandfathered, rather it must be taxed (generally upon actual payment) no later than December 31, 2025.  Note that this requirement includes even deferred compensation accrued prior to 2005, the year in which Section 409A originally became effective. Expansion of Non-deductibility of “Excessive” Executive Compensation under Section 162(m) The Act would substantially expand the scope of non-deductible executive compensation above $1 million in a single fiscal year for public companies.  It does so by making a number of important changes to Code Section 162(m). The current exemption for “performance-based compensation” (which covers cash incentive bonuses and a number of different types of equity compensation, such as options and performance shares) would be eliminated.  The exemption for commission payments would also be repealed. The scope of those executives whose compensation is covered by Section 162(m) would be expanded in two ways.  First, the Act conforms the definition of “covered employee” to the current definition of “named executive officer” applicable to proxy disclosure for public companies under federal securities law.  This has the effect of covering Chief Financial Officers, whose compensation has not been covered under current Section 162(m) in recent years.  It also results in covering any person who serves as a company’s principal executive officer or principal financial officer at any time.  Second, while under current law the group of covered employees is determined at the end of a public company’s fiscal year and applies only to compensation paid in that fiscal year, under the Act once an executive becomes a covered employee, that status is retained for the remainder of that executive’s life and therefore covers all compensation paid to the executive for the remainder of his or her life.  There is even a special rule to pick up compensation paid to beneficiaries after the death of a covered employee. The Act broadens the scope of companies treated as “publicly held corporations” subject to this law, including not only companies that have registered their stock or other equity securities with the Securities & Exchange Commission, but also certain other companies that file reports with the SEC (such as companies only filing reports relating to their debt securities).  This latter extension could be problematic since many of these additional companies are not currently required under securities laws to identify their named executive officers in SEC filings. These changes to Section 162(m) would be effective for tax years beginning after December 31, 2017. Changes Affecting Tax-Qualified Retirement Plans The Act also includes several changes directed at tax-qualified retirement plans.  Unlike the executive compensation provisions discussed in this client alert, none of these changes should be controversial, and we think it is likely that some or all of these changes will be enacted (either as part of the Act or in other legislation). During the drafting of the Act, there were rumblings that the Act could make a number of unpopular changes, such as significantly reducing the limit on employee “401(k)” contributions and characterizing all employee contributions as “Roth” after-tax contributions.  However, none of those provisions were included in the current version of the Act. The changes in the Act that would impact tax-qualified plans are: IRA Conversions.  Under current law, individuals are permitted to recharacterize contributions to “traditional” IRAs as contributions to “Roth” IRAs, and vice versa.  Under the Act, this will no longer be permitted after December 31, 2017.   Thus, individuals would be stuck with the initial tax treatment they choose for their IRAs. Reduction in Age for Permissible In-Service Distributions.  Currently, individuals who continue working generally cannot take distributions from defined benefit pension plans and money purchase pension plans until age 62.  Commencing with plan years beginning after December 31, 2017, the Act would allow plans to permit in-service distributions commencing at age 59-1/2, similar to the rules for 401(k) plans. Hardship Distributions.  Beginning in 2018, the Act would modify the rules applicable to hardship distributions from 401(k) plans.  First, the Act would eliminate the rule that participants must be suspended from making employee contributions for six months following a hardship withdrawal.  Second, the Act would repeal the requirement to take a plan loan before a hardship withdrawal is permitted.  Third, the types of contributions that may be withdrawn would be expanded to include qualified nonelective contributions, qualified matching contributions and post-1988 earnings. More Flexibility to Repay Plan Loans.  Under current law, a plan loan generally goes into default (triggering a deemed distribution and, in many cases, a 10% excise tax) unless the loan is repaid in full within 60 days following termination of employment.  The Act would extend that deadline to the individual’s due date (including extensions) for filing his or her individual tax return for the year of termination of employment. Closed Plan Nondiscrimination Testing.  In recent years, many employers have closed defined benefit pension plan participation to new employees, so that only previous hires continue to accrue benefits.  As the “grandfathered” group ages and becomes more highly-compensated relative to the rest of the workforce, that can result in the plan’s failure to satisfy various IRS nondiscrimination rules.  Subject to various requirements, the Act would provide relief to these plans, as well as to defined contribution plans where enhanced contributions are made for a “grandfathered” group who stopped accruing benefits under a pension plan in connection with a “freeze” of that plan. Repeal or Limitation of Certain Exclusions Relating to Fringe Benefits In the name of “simplification”, the Act also repeals or limits a number of exclusions or exemptions relating to employer-provided fringe benefits from an employees’ taxable income.  The fringe benefits affected include the following: Dependent Care Assistance Programs.  The Act eliminates dependent care flexible spending accounts (dependent care FSAs) by repealing Code Section 129.  Currently, an employee can contribute up to $5,000 on a pre-tax basis to fund child care costs or expenses related to care for a disabled spouse or other dependent or an elderly or disable parent.  Contributions to dependent care FSAs would no longer be excluded from income under the Act.  The Act would not have any impact on health FSAs that allow for contributions on a pre-tax basis up to $2,500 to cover health care expenses not covered by insurance. Adoption Assistance Programs.  The Act eliminates adoption assistance programs by repealing Code Section 137.  Under the Act, employers would no longer be permitted to exclude from income amounts paid or expenses incurred by the employer for qualified adoption expenses under an adoption assistance program. Educational Assistance Programs.  The Act eliminates educational assistance programs by repealing Code Section 127, which provides for an exclusion from taxable income of up to $5,250 of employer-provided educational assistance. Employer-Provided Lodging.  Currently, Code Section 119 excludes from an employee’s taxable income the value of certain employer-provided lodging where an employee is required to accept lodging on the employer’s business premises as a condition of employment.  The Act would add a new subsection (e) to Section 119 that would limit the aggregate amount that could be excluded from income in any one year to $50,000, which limit would be further reduced for certain highly compensated employees and 5% owners. Employee Achievement Awards.  The Act repeals Code Section 74(c) (and related provisions), which provides that certain employee achievement awards are not included in an employee’s taxable income (and are therefore not deductible by the employer). Gibson, Dunn & Crutcher is focused on the Act and how it would affect our clients, and we will continue to provide updates as more information about the Act or tax reform in general becomes available.    [1]   Although presumably the presence of these vesting conditions should affect the valuation of the compensation to be paid. The following Gibson Dunn lawyers assisted in preparing this client update: Steve Fackler, Michael Collins, Sean Feller and Arsineh Ananian. Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, or the following: Stephen W. Fackler – Palo Alto and New York (+1 650-849-5385 and 212-351-2392, sfackler@gibsondunn.com) Michael J. Collins – Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 26, 2017 |
SEC Issues Significant Guidance on Pay Ratio Rules

On September 21, 2017, the U.S. Securities and Exchange Commission (the "SEC") and the Division of Corporation Finance (the "Division") issued new interpretive guidance addressing significant issues under the pay ratio disclosure rule mandated by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act").  The guidance provides a number of helpful clarifications and examples that will assist companies in their efforts to comply with the disclosure rules and, as stated by SEC Chairman Clayton, "encourages companies to use the flexibility incorporated in [the SEC’s] prior rulemaking to reduce costs of compliance."[1]  The guidance consists of an interpretive release by the SEC available here, guidance by the Division available here, and new and revised Compliance & Disclosure Interpretations ("C&DIs") available here.  As discussed below, the Division also withdrew an earlier C&DI that had created uncertainty over when independent contractors and other workers would be viewed as company employees for purposes of the rule. As we previously discussed in this alert, Item 402(u) of Regulation S-K implements the pay ratio disclosure mandate of the Dodd-Frank Act.  The rule requires disclosure of: (i) the median of the annual total compensation of all employees of the registrant other than the CEO; (ii) the annual total compensation of the CEO; and (iii) the ratio of these two amounts.  Under Item 402(u), companies are generally required to report the pay ratio disclosure based on compensation for their first fiscal year beginning on or after January 1, 2017.  For a calendar-year company, the disclosure generally will be required in the company’s 2018 proxy statement, filed next year. This new guidance reiterates and clarifies important statements and concepts from the SEC’s release adopting Item 402(u) (the "Adopting Release").  In particular, the new guidance emphasizes that the SEC provided companies significant flexibility when it designed the pay ratio rule "to allow shareholders to better understand and assess a particular registrant’s compensation practices … rather than to facilitate a comparison of this information from one registrant to another."  Consistent with this approach, the guidance addresses a number of contexts in which, to mitigate the costs of compliance, the pay ratio rule generally allows companies to rely on existing internal records and use reasonable estimates, assumptions, and methodologies to identify the median-compensated employee and calculate that employee’s annual total compensation: Employees Covered by the Rule and the Treatment of Independent Contractors:  Item 402(u) defines an "employee" for purposes of the rule as "an individual employed by the registrant or any of its consolidated subsidiaries, whether as a full-time, part-time, seasonal, or temporary worker" and expressly excludes individuals "who are employed, and whose compensation is determined, by an unaffiliated third party but who provide services to the registrant or its consolidated subsidiaries as independent contractors or ‘leased’ workers."  The SEC’s new guidance affirmatively states that this exclusion is not the exclusive basis for determining whether a worker is an "employee" for purposes of the rule, and confirms that companies may use tests from other areas of law (e.g., tests under employment or tax law) to determine who is an employee.  Accordingly, companies generally will not be required to count independent contractors or workers employed by unaffiliated third parties as company "employees" for purposes of the pay ratio rule.  Consistent with the SEC’s new guidance, the Division withdrew one of its prior interpretations (C&DI 128C.05, originally issued in October 2016).  The withdrawn C&DI had suggested that companies had to count workers who were employed by unaffiliated third parties as company employees under the rule if the company determined their compensation, regardless of whether the worker was considered an "employee" for tax or employment law purposes.  The withdrawn C&DI, by going beyond the language of the rule itself and addressing "workers" generally, had significantly increased compliance costs and concerns as companies tried to determine whether workers employed by third parties might be deemed their "employees" for purposes of the pay ratio rule and, if so, how to obtain compensation information on such workers.  By reiterating that Item 402(u)’s definition of "’employee’ is an individual employed by the registrant," and confirming that companies generally can apply a "widely recognized test under another area of law to determine whether its workers are employees" for purposes of Item 402(u), the SEC’s guidance will greatly simplify compliance for many companies. Using a Consistently Applied Compensation Measure to Identify the Median Employee:  The SEC confirmed that companies can rely on existing internal records (such as tax and payroll records) that reasonably reflect annual compensation when utilizing a consistently applied compensation measure to identify the median employee, even if those records do not include every element of compensation such as equity awards.  This guidance is helpful because many companies administer their equity compensation through a separate reporting system and valuing equity compensation can be problematic.  In particular, this guidance will reduce compliance costs for companies seeking to rely on salary and cash bonus information or similar "base pay" information as the basis for identifying their median employee when the companies are able to conclude that such measures provide a reasonable alternative to annual total compensation for identifying their median employee.    Consistent with the SEC’s new guidance, the Division modified one of its prior interpretations (C&DI 128C.01, originally issued in October 2016) to omit language indicating that total cash compensation would not be an acceptable consistently applied compensation measure if annual equity awards were widely distributed among employees and that social security taxes withheld would not be an appropriate consistently applied compensation measure unless all employees earned less than the social security wage base.  The omitted language had drawn criticism as it failed to take into account the wide variety of equity compensation practices across companies, and (in contrast to the Adopting Release) seemed to focus on the pay structure of a company’s entire workforce, instead of addressing the relative impact of compensation elements paid to employees whose compensation is likely to be at or near the median.  Reliance upon Internal Records, Reasonable Estimates, Assumptions, and Methodologies: The new guidance reaffirms concepts from the Adopting Release allowing companies to rely upon reasonable estimates, assumptions, and methodologies, including statistical sampling, to comply with the rule.  For example, in its interpretive release, the Division identified a variety of situations where reasonable estimates may be used under the rule, including to: analyze the composition of the workforce; characterize the statistical distribution of compensation of employees; calculate annual total compensation or another consistently applied compensation measure; evaluate the likelihood of significant changes in employee compensation from year to year; identify the median employee; identify other employees around the middle of the compensation spectrum; and use the mid-point of a compensation range to estimate compensation The Division confirms that the pay ratio rule allows companies to use a combination of reasonable estimates, statistical sampling, and other reasonable methodologies.  In addition, by citing a variety of different statistical sampling approaches that can be applied under the rule, the Division has reaffirmed its flexibility and deference to companies to determine which reasonable and appropriate sampling methods may work best for their organization.  Other examples of reasonable methodologies identified by the Division include:  making one or more distributional assumptions, such as assuming a lognormal or another distribution provided that the company has determined that the use of the assumption is appropriate given its own compensation distributions; reasonable methods of imputing or correcting missing values; and reasonable methods of addressing extreme observations, such as outliers. As noted above, the guidance also confirms that companies may use existing internal records, such as tax or payroll records, in determining and disclosing the median employee’s compensation.  For example, Item 402(u) allows companies to exclude non-U.S. employees who constitute up to five percent of the company’s total workforce when identifying the median compensated employee.  In the new guidance, the SEC expressly affirms that a company can rely on internal records such as tax or payroll records in applying this five percent test.  Important Implications and the Role of Disclosure: Importantly, the SEC acknowledges that, in light of the use of estimates, assumptions, adjustments, and reasonable methodologies allowed under the rule, "pay ratio disclosures may involve a degree of imprecision."  The new guidance addresses a number of implications of this aspect of the rule.  Good Faith Standard: Acknowledging the inherent imprecision in these estimates, assumptions, and methodologies, the SEC stated that "if a registrant uses reasonable estimates, assumptions or methodologies, the pay ratio and related disclosure that results from such use would not provide the basis for Commission enforcement action unless the disclosure was made or reaffirmed without a reasonable basis or was provided other than in good faith." Anomalous Results: The SEC acknowledges that the use of a consistently applied compensation measure based on internal records may identify a median employee whose annual total compensation has anomalous characteristics.  The SEC’s guidance reaffirms that in such a situation, a company may substitute another employee with substantially similar compensation to the originally identified median employee.  We believe this same approach is generally appropriate when a company identifies more than one employee with the same median compensation based on its consistently applied compensation measure and that it would be consistent with this guidance for such a company to assess the annual total compensation of those employees and select the most representative case as its median employee.  Disclosure as Reasonable Estimate:  Consistent with the SEC’s new guidance, the Division issued a new interpretation (C&DI 128C.06, issued Sept. 21, 2017) stating that the Division would not object if a company states that its disclosed pay ratio is a reasonable estimate calculated in a manner consistent with Item 402(u) Finally, consistent with the SEC’s traditional focus on disclosure, the new guidance notes in a number of contexts the disclosure requirements under the pay ratio rule.  For example, the SEC’s guidance notes that if a company substitutes a different median employee to address anomalous results, the company should disclose the substitution as part of its brief description of the methodology it used to identify the median employee.  Similarly, the SEC notes that factors relevant to identifying a company’s employees who are covered by the rule may involve material assumptions that should be described as part of the company’s methodology for calculating and disclosing its pay ratio.  Overall, the new guidance reiterates the company-specific facts-and-circumstances nature of pay ratio determinations and further outlines the variety of estimates, methods, and options that a company has at its disposal in determining its employee population, identifying its median employee, and calculating its pay ratio.  What is appropriate for one company may not work for another, and companies will need to determine how best to comply with Item 402(u) in light of their size, geographic scope, and business operations.  Companies also should carefully evaluate how to briefly describe material estimates, assumptions, and methodologies they employ, to place their pay ratio disclosure in context and reflect the unique nature of the disclosure.    [1]   See SEC, Press Release, SEC Adopts Interpretive Guidance on Pay Ratio Rule, Sept. 21, 2017, available here. The following Gibson Dunn lawyers assisted in the preparation of this client update: Ronald O. Mueller, Elizabeth Ising, Maia Gez and Krista Hanvey. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group: Brian J. Lane - Washington, D.C. (+1 202-887-3646, blane@gibsondunn.com)Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)James J. Moloney - Orange County (+1 949-451-4343, jmoloney@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com)Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com)Maia Gez – New York (+1 212-351-2612, mgez@gibsondunn.com) Krista Hanvey – Dallas (+1 214-698-3425, khanvey@gibsondunn.com) Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

September 5, 2017 |
Internal Revenue Service Announces Relief for Southeast Texas Due to Hurricane Harvey

The Internal Revenue Service (the “IRS”) has announced relief from certain time sensitive deadlines for taxpayers affected by Hurricane Harvey (https://www.irs.gov/newsroom/tax-relief-for-victims-of-hurricane-harvey-in-texas). Pursuant to the announcement, affected Taxpayers (described below) may defer certain time-sensitive actions otherwise to be made on or after August 23, 2017 and before January 31, 2018 (the “Postponement Period”) to January 31, 2018. The IRS also reminded taxpayers of their ability to report deductions for casualty losses unreimbursed by insurance for Harvey in 2016 or 2017 and provided guidance on how to get expedited refund processing for 2016. In addition, the IRS has announced relief intended to ease the process whereby employer-sponsored retirement plans, such as 401(k) plans, may extend loans and make hardship distributions to individuals impacted by Hurricane Harvey and their family members (https://www.irs.gov/pub/irs-drop/a-17-11.pdf) (the “Relief Announcement”). Actions Postponed Tax Reporting and Payment Deadlines. Affected Taxpayers may postpone payment and filing deadlines for federal income taxes (e.g., individual, corporate and partnership tax return filings, estimated tax payments otherwise due September 15, 2017 and January 15, 2018) that would have been due during the Postponement Period until January 31, 2018. Payroll and certain excise tax reporting is postponed but not payment of employment and excise tax deposits (although penalties on deposits due on or after August 23, 2017 and before September 7, 2017 will be abated if paid by September 7, 2017). Employee plan reporting on Form 5500 due during the Postponement Period is included in the relief. Like-Kind Exchange Reporting Deadlines. The last day of the 45-day identification period and the 180 day exchange period and applicable reverse like kind exchange periods are postponed for Affected Taxpayers to the end of the Postponement Period and possibly up to 120 days thereafter. This rule also applies for some non-Affected Taxpayers in certain cases where the property at issue, a counterparty, a titleholder, or material documents are in the affected areas or lender or title insurance issues arise due to Hurricane Harvey. Affected Taxpayers Residence or Place of Business. Individuals with a principal residence in an affected area and business entities or sole proprietorships whose principal place of business is in an affected area Relief Workers. An individual relief worker affiliated with a recognized government or philanthropic organization and who is assisting in an affected area Location of Tax Records. Individuals, business entities, sole proprietorships, estates and trusts if such taxpayer has tax records necessary to meet a deadline and those records are maintained in an affected area Spouses and Traveling Victims. Spouses of an affected taxpayer (with respect to a joint return) and individuals visiting the affected area but are killed or injured as a result of the disaster Texas Counties Treated as Disaster Areas* Aransas Gonzales Newton Austin Hardin Nueces Bastrop Harris Orange Bee Jackson Polk Brazoria Jasper Refugio Calhoun Jefferson Sabine Chambers Karnes San Jacinto Colorado Kleberg San Patricio DeWitt Lavaca Tyler Fayette Lee Victoria Fort Bend Liberty Walker Galveston Matagorda Waller Goliad Montgomery Wharton *As of September 5, 2017 Casualty Losses In the announcement, the IRS reminds taxpayers that they may opt to deduct unreimbursed casualty losses from a federally declared disaster area in the year of the disaster or in the preceding taxable year. See IRS Publication 547 here: (https://www.irs.gov/publications/p547/ar02.html#en_US_2016_publink1000225399). Note casualty loss deductions are subject to other limitations, such as a floor of $100 and 10% of adjusted gross income, each discussed in IRS Publication 547. Affected taxpayers declaring the deduction on their 2016 return should put the disaster designation “Texas, Hurricane Harvey” at the top of Form 4684 (https://www.irs.gov/forms-pubs/form-4684-casualties-and-thefts) to expedite their refund claim. Benefit Plans This Relief Announcement extends to 401(k), 403(b) and 457(b) plans, IRAs, and qualified defined benefit pension plans with stand-alone accounts that hold employee contributions and rollover amounts.  Employees and close family members (e.g., spouse, children, grandchildren, parents, grandparents and other dependents) who live or work in areas affected by Hurricane Harvey and designated for individual assistance by the Federal Emergency Management Agency (FEMA) are eligible for relief under the Relief Announcement.[1] The Relief Announcement provides the following forms of relief: A plan will not be treated as failing to satisfy any requirement under the Internal Revenue Code (“Code”) merely because the plan makes a loan, or a hardship distribution for a need arising from Hurricane Harvey. When determining whether to make a hardship distribution, plan administrators may rely upon representations from the employee or former employee as to the need for and amount of a hardship distribution (unless the plan administrator has actual knowledge to the contrary). The relief applies to any hardship of the employee, not just the types enumerated under the Code. The six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply. Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features.  However, the plan must be amended to allow for plan loans and/or hardship distributions no later than the end of the first plan year beginning after December 31, 2017 (i.e., on or before December 31, 2018 for calendar year plans). Even in a situation where a plan administrator has not assembled all of the documentation required for a loan or distribution, loans and distributions may be made so long as the plan administrator makes a good-faith diligent effort under the circumstances to comply with those requirements.  As soon as practicable, the plan administrator (or financial institution in the case of IRAs) must make a reasonable attempt to assemble any forgone documentation. The relief provided under the Relief Announcement only applies to loans and hardship distributions made on or prior to January 31, 2018.  It is important to note that the tax treatment of loans and distributions remains unchanged. Thus, any distribution (not including amounts already taxed) made pursuant to the relief provided in the Relief Announcement will be includible in gross income and generally subject to the 10-percent additional tax imposed under Code section 72(t).    [1]   Parts of Texas are currently eligible for individual assistance. A complete list of eligible counties is available at https://www.fema.gov/disasters.  If additional areas in Texas or other states are identified by FEMA for individual assistance because of damage related to Hurricane Harvey, the relief provided in the Relief Announcement will also apply from the date specified by FEMA as the beginning of the incident period. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these and other tax- or benefits-related developments.  If you have any questions, please contact the Gibson Dunn lawyer with whom you usually work, any member of the Tax or Executive Compensation and Employee Benefits practice groups, or the authors: James Chenoweth – Houston (+1 346-718-6718, jchenoweth@gibsondunn.com) Michael J. Collins – Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com) Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) Krista Hanvey – Dallas (+1 214-698-3425,khanvey@gibsondunn.com) David Sinak – Dallas (+1 214-698-3107, dsinak@gibsondunn.com) Michael Q. Cannon – Dallas (+1 214-698-3232, mcannon@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 29, 2017 |
Shareholder Proposal Developments During the 2017 Proxy Season

This client alert provides an overview of shareholder proposals submitted to public companies for 2017 shareholder meetings, including statistics and notable decisions from the staff (the "Staff") of the Securities and Exchange Commission (the "SEC") on no-action requests.[1] I.    Shareholder Proposal Statistics and Voting Results[2]         A.    Shareholder Proposals Submitted         1.    Overview For 2017 shareholder meetings, shareholders have submitted approximately 827 proposals, which is significantly less than the 916 proposals submitted for 2016 shareholder meetings and the 943 proposals submitted for 2015 shareholder meetings. For 2017, across four broad categories of shareholder proposals—governance and shareholder rights; environmental and social issues; executive compensation; and corporate civic engagement[3]—the most frequently submitted were environmental and social proposals (with approximately 345 proposals submitted). The number of social proposals submitted to companies increased to approximately 201 proposals during the 2017 proxy season (up from 160 in 2016).  Thirty-five social proposals submitted in 2017 focused on board diversity (up from 28 in 2016), 34 proposals focused on discrimination or diversity-related issues (up from 16 in 2016), and 19 proposals focused on the gender pay gap (up from 13 in 2016). Environmental proposals were also popular during the 2017 proxy season, with 144 proposals submitted (up from 139 in 2016).  Furthermore, there was an unprecedented level of shareholder support for environmental proposals this proxy season, with three climate change proposals receiving majority support and climate change proposals averaging support of 32.6% of votes cast.  This compares to one climate change proposal receiving majority support in 2016 and climate change proposals averaging support of 24.2% of votes cast.  As further discussed below, the success of these proposals is at least in part due to the shift in approach towards environmental proposals by certain institutional investors, including BlackRock, Vanguard and Fidelity.          2.    Types of Shareholder Proposals The most common types[4] of shareholder proposals in 2017, along with the approximate numbers of proposals submitted, were: social (201 proposals); environmental (144 proposals, including 69 climate change proposals); proxy access (112 proposals); and political contributions and lobbying disclosure (87 proposals). By way of comparison, the most common types of shareholder proposals in 2016 were: proxy access (201 proposals); social (160 proposals); environmental (139 proposals, including 63 climate change proposals); and political contributions and lobbying disclosure (91 proposals).         3.    Proponents As is typically the case, John Chevedden and shareholders associated with him (including James McRitchie, Kenneth and William Steiner, and Myra Young) submitted by far the highest number of shareholder proposals for 2017 shareholder meetings—approximately 203, which is 24.5% of all shareholder proposals submitted to date in 2017.   Other proponents reported to have submitted or co-filed at least 20 proposals each include: As You Sow Foundation (48, largely focused on environmental matters); Trillium Asset Management (42, largely focused on environmental matters); the New York City Comptroller (39, largely focused on governance/shareholder rights and environmental matters); Walden Asset Management (23, largely focused on environmental and political matters); Mercy Investment Services (21, largely focused on environmental and social matters); the New York State Common Retirement Fund (25, largely focused on political matters); and NorthStar Asset Management (20, largely focused on social matters).         B.    Shareholder Proposal No-Action Requests         1.    Overview During the 2017 proxy season, companies submitted 288 no-action requests to the Staff as compared to approximately 245 during the 2016 proxy season.  In 2017, the percentage of no-action requests that were granted by the Staff increased to 78%, the highest level in at least four years. The following table summarizes the responses to no-action requests that the Staff issued during the 2017 and 2016 proxy seasons:   2017 2016 Total no-action requests submitted 288 245 Total Staff responses issued[5] 283 239           No-action requests withdrawn 41 28           Responses granting or denying exclusion 242 211                      Exclusions granted 189 (78.0%) 143 (67.8%)                      Exclusions denied 53 (22.0%) 68 (32.2%)         2.    Reasons for Exclusion in 2017 Based on a review of no-action letters issued during the 2017 proxy season, the Staff concurred that shareholder proposals could be excluded for the following principal reasons:[6] 37.6% based on ordinary business arguments; 32.8% because the company had substantially implemented the proposal; and 17.5% based on procedural arguments, such as timeliness or defects in the proponent’s proof of ownership. Of the shareholder proposals for which no-action relief was denied, 47.2% were challenged as being related to the company’s ordinary business operations under Rule 14a-8(i)(7), making ordinary business the most common basis for denial as well as success for a no-action request. Other frequently unsuccessful arguments included that the proposal was vague or false and misleading (45.3% of denials), that the company had substantially implemented the proposal (30.2% of denials), and that there was a procedural defect in the submission of the proposal (17.0% of denials). Three aspects of the foregoing data are worth noting: The success during 2017 of ordinary business arguments, with 37.6% of no-action requests granted on that basis, up from 32.2% in 2016. The continued success of substantial implementation arguments. This marks the second straight year in which approximately one-third of all no-action requests were granted because the Staff concurred that the company had substantially implemented the proposal.  During the 2017 proxy season, 32.8% of such no-action requests were granted, down slightly from 34.3% in 2016 but up from 21.0% in 2015. The continued decrease in exclusions based on procedural arguments, with 17.5% of no-action requests granted on that basis in 2017, down from 23.1% in 2016 and 35.0% in 2015.                             a)    Increase in Exclusions Based on Ordinary Business Several new types of shareholder proposals were excluded based on ordinary business arguments during the 2017 proxy season, including proposals relating to (i) requests for reports on human lead exposure; (ii) a new version of minimum wage reform proposals; (iii) a new type of pharmaceutical pricing proposals; and (iv) a report on certain religious freedom principles.  In addition, the Staff agreed that certain environmental and social proposals were excludable on ordinary business grounds because the proposals sought to "micromanage" the company, as further described below.                                           i.    Requests for Reports on Human Lead Exposure During the 2017 proxy season, at least two companies received what appears to be a new type of environmental proposal.  Specifically, The Home Depot, Inc. and Lowe’s Companies, Inc. each received a shareholder proposal asking them to "issue a report, at reasonable expense and excluding proprietary and privileged information, on the risks and opportunities that the issue of human lead exposures from unsafe practices poses to the company, its employees, contractors, and customers."  The supporting statement mentioned that companies should consider improving their lead safety practices through "consumer education on lead-safe practices, free or discounted lead testing products, and dedicated lead safety personnel."  While proposals that focus on the adverse effects on the environment and/or public health are typically not excludable, both companies submitted no-action requests to the Staff arguing that this particular proposal was excludable because (1) the supporting statements made it clear that it related to ordinary business matters, namely, the products and services that these companies offer to their customers, and (2) the proposal did not otherwise focus on a significant policy issue.[7]  Ultimately, the proposal submitted to The Home Depot, Inc. was withdrawn, and the Staff granted the no‑action request submitted by Lowe’s Companies, Inc. While the Staff did not provide any additional insight into its decision, the Lowe’s decision confirms the well-established principle that proposals relating to both ordinary business matters and social policy issues may be excludable.                                           ii.    Minimum Wage Shareholder Proposals This proposal, which asks companies to adopt principles for minimum wage reform, is similar to the proposals submitted by Trillium Asset Management and several religious orders in 2016, with one important distinction described below. Specifically, last year, five of the six submitted proposals were successfully challenged under Rule 14a-8(i)(7) as relating to the companies’ ordinary business operations (specifically, general compensation matters).[8] Seeking to avoid exclusion on ordinary business grounds this year, the proponents (Trillium Asset Management and Zevin Asset Management) revised the proposal to include a specific disclaimer regarding general compensation matters by stating that the proposal did not "seek to address the [c]ompany’s internal approach to compensation, general employee compensation matters, or implementation of its principles for minimum wage reform" and giving the board discretion to determine the appropriate timing for publishing the principles. Five companies that received the proposal this year (including The TJX Companies, Inc. and Chipotle Mexican Grill, Inc., both of which received a minimum wage proposal last year as well) submitted no-action requests to the Staff arguing, among other things, that the proposals were excludable on ordinary business grounds (as relating to general compensation matters) with some letters explicitly noting that the issue of minimum wage is not a significant policy issue and that the Staff has never viewed it as such.[9] The no-action requests also maintained that, in spite of the proponent’s disclaimer, the supporting statement still addressed the wage practices (i.e., general compensation matters) of each company that received the proposal. The Staff agreed that the proposal could be excluded on ordinary business grounds, noting that the proposal "relates to general compensation matters, and does not otherwise transcend day-to-day business matters."[10]                                           iii.   Pharmaceutical Pricing Proposals This season saw the return of a shareholder proposal campaign targeting how pharmaceutical companies determine the price of their products.  At least ten pharmaceutical companies received proposals requesting that the board "issue a report listing the rates of price increases year-to-year of the company’s top ten selling branded prescription drugs between 2010 and 2016, including the rationale and criteria used for these price increases, and an assessment of the legislative, regulatory, reputational and financial risks they represent for the company."  The last campaign that similarly focused on the pricing of pharmaceutical products asked companies during the 2015 proxy season to prepare reports "on the risks to [the companies] from rising pressure to contain U.S. specialty drug prices."  Those proposals were found to be not excludable under Rule 14a-8(i)(7) by the Staff because they focused on "fundamental business strategy with respect to . . . [companies’] pricing policies for pharmaceutical products."[11] During the 2017 proxy season, the 10 companies that received this new drug pricing-related proposal sought no‑action relief under Rule 14a-8(i)(7), with many arguing that this proposal was different from the 2015 adverse precedents because in those instances, the proposals "focused on the company’s fundamental business strategy with respect to its pricing policies for pharmaceutical products rather than on how and why the company makes specific pricing decisions regarding certain of those products."  The companies also argued that "[u]nlike the requests in [2015], the primary focus of the [current proposals] . . . is on obtaining explanation and justification for product-specific and time period-specific price increases."  Most of the proponents, on the other hand, cited those same 2015 letters and argued that they stood for the proposition that "[i]t is abundantly clear that the pricing of their drugs . . . is a significant policy concern for drug manufacturers."  The Staff concurred that the proposals were excludable on ordinary business grounds because they related "to the rationale and criteria for price increases of the company’s top ten selling branded prescription drugs in the last six years."[12]                                        iv.    Report on Certain Religious Freedom Principles During the 2017 proxy season, the National Center for Public Policy Research and its leaders submitted a new type of proposal to at least eight companies asking them to produce a report (1) detailing risks and costs associated with pressure campaigns to oppose religious freedom laws, public accommodation laws, freedom of conscience laws and campaigns against candidates from Title IX exempt institutions, (2) detailing risks and costs associated with pressure campaigns supporting discrimination against religious individuals and those with deeply held beliefs, and (3) detailing strategies that they may deploy to defend their employees and their families against discrimination and harassment that is encouraged or enabled by such efforts.   While the proposals were framed as asking for a "[r]eport on certain non-discrimination principles," eight companies sought no-action relief on ordinary business grounds as relating to management of workforce and/or public relations.  The Staff concurred in the exclusion of five of these proposals under Rule 14a-8(i)(7), as relating to companies’ ordinary business operations.[13]  These no-action letters demonstrate that merely labeling a proposal as implicating discrimination issues is not sufficient to avoid evaluation of whether a proposal seeks to address ordinary business operations.                                     v.    Micromanagement Exclusions During the 2017 proxy season, some companies were also able to exclude proposals on ordinary business grounds because they impermissibly sought to "micromanage" the company.  These letters are notable because the Staff has rarely concurred with no-action requests based on the micromanagement prong of the ordinary business exception.  For example, Deere & Co. and another company were able to exclude on ordinary business grounds a proposal requesting that the company "generate a feasible plan for the company to reach a net-zero GHG emissions status by the year 2030 . . . and report the plan to shareholders" because, according to the Staff, the proposal sought to "micromanage the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment."[14]                             b)    Continued Success in Exclusions Based on Substantial Implementation While substantial implementation continued to be a popular basis for exclusion during the 2017 proxy season, 54.8% of the no-action requests granted on this basis concerned "amend proxy access" proposals, as further discussed below.  Overall, approximately 34 companies were able to exclude "amend proxy access" proposals based on arguments that the existing terms of their proxy access bylaws substantially implemented the proposal.[15]  As further discussed below, an additional 13 companies were able to exclude "adopt proxy access" proposals on the basis of substantial implementation arguments because of their adoption of a proxy access bylaw prior to their annual meetings.                             c)    Decrease in Exclusions Based on Procedural Arguments As noted above, the number of exclusions based on procedural arguments continued to decrease in 2017, with 17.5%[16] of no-action requests (or 33 of 189) granted on that basis in 2017, down from 23.2% in 2016 (or 33 of 142) and 35.0% in 2015 (or 46 of 133).  The most common procedural argument that failed to obtain no-action relief in 2017 was based on the one-proposal limitation.  Under Rule 14a-8(c), each shareholder may submit no more than one proposal to a company for a particular shareholders’ meeting. All seven no-action requests asserting that a submission violated the one-proposal rule did not prevail on this argument         C.    Shareholder Proposal Voting Results[17] Based on the 331 shareholder proposals for which ISS provided voting results in 2017, proposals averaged support of 29.0% of votes cast, slightly down from average support of 29.8% of votes cast in 2016.  The proposal topics that received high shareholder support, including four categories of proposals that averaged majority support, were: Board Declassification: Three proposals voted on averaged support of 70.2% of votes cast in 2017, compared to three proposals with average support of 64.5% in 2016; Elimination of Supermajority Voting Requirements: Seven proposals voted on averaged support of 64.3% of votes cast, compared to 13 proposals with average support of 59.6% in 2016; Adopt Proxy Access:  Eighteen adopt proxy access proposals voted on averaged support of 62.1% of votes cast. In 2016, average support for proxy access proposals where the company had not previously adopted some form of proxy access was 56.0%. Majority Voting in Uncontested Director Elections: Seven proposals voted on averaged support of 62.3% of votes cast, compared to 10 proposals with average support of 74.2% in 2016; Written Consent: Twelve proposals voted on averaged support of 45.6% of votes cast, compared to 13 proposals with average support of 43.4% in 2016; Shareholder Ability to Call Special Meetings: Fifteen proposals voted on averaged support of 42.9% of votes cast, compared to 16 proposals with average support of 39.6% in 2016; and Climate Change: Twenty-eight proposals voted on averaged support of 32.6% of votes cast, compared to 37 proposals with average support of 24.2% in 2016. Overall, approximately 10.9% of shareholder proposals that were voted on at 2017 shareholder meetings received support from a majority of votes cast, compared to 14.5% of proposals in 2016.  The table below shows the principal topics addressed in proposals that received majority support: Proposal 2017 Majority Votes 2016 Majority Votes Adopt proxy access 13 27 Elimination of supermajority vote requirements 6 8 Majority voting in uncontested director elections 4 8 Climate change   3[18] 1 Shareholder written consent 3 1 Board diversity 2 1 Board declassification 2 2 Shareholders’ ability to call special meetings 2 2 Report on sustainability 1 1 Political contributions disclosure 0 2 II.    Key Shareholder Proposal Topics and Trends During the 2017 Proxy Season         A.    Environmental Proposals The total number of environmental proposals increased in 2017, with shareholders submitting approximately 144 environmental proposals for 2017 meetings compared to 139 in 2016. Overall, the 55 environmental proposals voted on received average support of 28.9% of the votes cast, compared to 71 that received average support of 25.1% of votes cast in 2016. The largest group of environmental proposals related to climate change, with 69 such proposals submitted in 2017 compared to 63 in 2016.  The 28 climate change proposals voted on in 2017 averaged support of 32.6% of votes cast.[19]  Three climate change proposals received a majority of the votes cast, as further discussed below.  Climate change proposals were submitted not just to oil and gas companies, but also to companies in the financial services and technology industries.  ISS recommended that shareholders vote "for" 23 of the 28 proposals (or 82.1%) voted on in 2017 and "for" 27 of the 37 proposals (or 73.0%) of the proposals voted on in 2016. In addition to climate change proposals, environmental proposals submitted in 2017 included: 28 proposals related to environmental impacts on the community or supply chains, including impacts of deforestation and pesticides (with 11 such proposals voted on averaging 23.6% support); 24 proposals calling for reports on sustainability (with nine such proposals voted on averaging 30.0% support); 12 proposals focusing on renewable energy (with four such proposals voted on averaging 18.3% support); and Nine proposals focusing on recycling (with three such proposals voted on averaging 24.3% support).         1.    Three Climate Change Proposals Receive Majority Support and Pass in 2017 As mentioned above, three climate change proposals received majority support.  Various factors may have contributed to the success of these proposals.  Most notably, in March, BlackRock announced in its 2017-2018 engagement priorities that it expects boards to have "demonstrable fluency in how climate risk affects the business and management’s approach to adapting and mitigating the risk," and that where it has concerns that a board is not "dealing with a material risk appropriately," it may signal that concern through its vote.[20]  Vanguard also updated its proxy voting guidelines in 2017 to state that it would evaluate each environmental proposal on the merits and may support those with a demonstrable link to long term shareholder value.[21] The three climate change proposals that passed specifically called for a report on the impact of climate change policies, including an analysis of the impacts of commitments to limit global temperature change to two degrees Celsius.  The three companies where this proposal passed were the following: Occidental Petroleum Corp. received the proposal from Wespath Investment Management, the Nathan Cummings Foundation and other investors, including the California Public Employees’ Retirement System ("CalPERS"), and it received support of 67.3% of votes cast by the company’s shareholders, including BlackRock, a 7.8% owner. In an unprecedented move, BlackRock issued a press release announcing that it had supported the shareholder proposal.[22] PPL Corp., a utility holding company, received the proposal from the New York State Common Retirement Fund, and it received support of 56.8% of votes cast by the company’s shareholders, including CalPERS and other pension funds. Exxon Mobil received the proposal from the New York State Common Retirement Fund, and it received support from about 62.1% of votes cast by the company’s shareholders. These votes reflect the new willingness of institutional investors to support environmental proposals and the effect of increased pressure from their clients to influence companies on environmental issues.  In addition, the same proposal was submitted to 18 other companies and voted on at ten companies, where it averaged 45.6% of votes cast.         B.    Board Diversity Proposals Board diversity continues to remain at the forefront of corporate governance discussions as investors and shareholder activists are increasingly pushing for gender diversity on the boards of U.S. public companies.  Most recently, BlackRock and State Street Global Advisors announced plans to drive greater gender diversity on boards through active dialogue with companies.  These institutional investors have indicated that, if progress is not made within a reasonable time frame, they plan to use their proxy voting power to influence change by voting against certain directors, such as members of nominating and governance committees.[23] As such, perhaps unsurprisingly, in 2017 the number of board diversity proposals reached an all-time high.  Thirty-five proposals calling for the adoption of a policy on board diversity or a report on steps to increase board diversity were submitted in 2017 as compared to 28 proposals submitted in 2016.  As in 2016, a substantial number of board diversity proposals were withdrawn, likely due to commitments made by companies to the proponents of these proposals, such as adopting board recruitment policies inclusive of race and/or gender.[24] Of the 35 proposals submitted in 2017, eight proposals have been voted on and received, on average, 28.3% of votes cast, as compared to six proposals in 2016, which received, on average, 19.1% of votes cast.  ISS recommended that shareholders vote "for" all but two of the proposals voted on in 2017 and "for" all but one of the proposals voted on in 2016. Two board diversity proposals submitted in 2017 received majority support, as compared to one in 2016.  One of the successful proposals was submitted by the City of Philadelphia Public Employees Retirement System to Cognex Corp. requesting that the company’s board adopt a policy for "improving board diversity [by] requiring that the initial list of candidates from which new management-supported director nominees are chosen . . . by the Nominating and Corporate Governance Committee should include (but need not be limited to) qualified women and minority candidates."  Cognex Corp. had no women on its board of directors.  The proposal received 62.8% of votes cast. The second proposal asked a different company to prepare a report (at a reasonable expense and omitting proprietary information) on steps the company is taking to foster greater diversity on its board.  The proposal received the support of 84.8% of votes cast. These results, along with the continued investor focus on board composition and board diversity, mean that board diversity will continue to be raised in shareholder engagements, and that shareholder proponents likely will continue to use the Rule 14a-8 shareholder proposals process as a way to push for greater board diversity.         C.    Other Diversity-Related Proposals Approximately 34 proposals submitted to companies in 2017 related to discrimination and diversity concerns, compared to 16 such proposals in 2016.  These proposals included 20 proposals calling for the preparation of a diversity report, eight proposals calling for policy amendments to prohibit discrimination based on sexual orientation and gender, and six proposals calling for a report on company non-discrimination policies.  On average, the eight proposals related to discrimination and diversity concerns that were voted on in 2017 received support from 24.2% of the votes cast. ISS recommended that shareholders vote "for" all but three of these proposals voted on in 2017 and "for" all but two of these proposals voted on in 2016.         D.    Gender Pay Gap Approximately 19 proposals submitted in 2017 concerned the gender pay gap, compared to approximately 13 such proposals submitted for 2016 meetings.  Among the 19 proposals were 17 proposals requesting reports on the gender pay gap (two of which also requested a report on any race or ethnicity pay gaps), one proposal requesting evidence that no gender pay gap exists, and one proposal requesting disclosure of the number of women at each compensation percentile.  The proposals calling for a report on the gender pay gap include seven proposals submitted to financial institutions and credit card companies requesting a report on whether the company has a "gender pay gap," the size of the gap, and its policies and goals to reduce the gap.  On average, the eight gender pay gap proposals that were voted on received support from 18.8% of the votes cast.  ISS recommended that shareholders vote "against" all eight of these proposals in 2017 but "for" three out of the five proposals voted on in 2016.         E.    Pay Disparity Approximately 14 proposals regarding pay disparity were submitted in 2017, as compared with nine in 2016.  Among these proposals were two general types: proposals related to employee wages (eight proposals) and proposals requesting a report on the ratio between compensation paid to senior management and the median employee (six proposals).  On average, the three pay disparity proposals that were voted on in 2017 received the support of only 5.3% of the votes cast.  ISS recommended that shareholders vote "against" all three of these proposals voted on in 2017 and "against" both of these proposals voted on in 2016. Among the proposals related to employee wages were six proposals requesting that companies adopt principles for minimum wage and/or guaranteeing a living wage (five of which were submitted by either, or both of, Trillium Asset Management and Zevin Asset Management) and two proposals requesting a report on incentive risks for low-paid employees. Although the six pay ratio proposals represent a three-fold increase over the two pay ratio proposals submitted for 2016 meetings, the number remained well below the 15 pay ratio proposals submitted in 2015.  Pay ratio is likely to become a focus in upcoming months for companies and the investors eager to obtain this information, as under current SEC regulations, the pay ratio rule will generally require companies to disclose a pay ratio in their 2018 proxy statements.  Assuming no change in current regulations, the impact of this 2018 pay ratio disclosure on shareholder proposals may become apparent during the subsequent proxy season (i.e., in 2019).         F.    Virtual Annual Meeting-Related Proposals In recent years, an increasing number of companies have opted to hold exclusively virtual annual shareholder meetings.  These annual meetings are commonly referred to as "virtual-only annual meetings."[25] After not submitting shareholder proposals on this topic during the 2015 and 2016 proxy seasons, some proponents submitted proposals in 2017 requesting that companies that previously held virtual-only annual meetings adopt a corporate governance policy to initiate or restore in-person annual meetings.[26]  Notably, none of these proposals have gone to a vote.  Instead, in a decision critical for companies that currently hold or are contemplating switching to virtual-only annual meetings, the Staff issued a no-action letter for the 2017 proxy season permitting HP Inc. to exclude a shareholder proposal submitted by John Chevedden and Bart Naylor that objected to virtual-only annual meetings.  The Staff concurred that the proposal could be excluded under Rule 14a-8(i)(7) on the grounds that the "determination of whether to hold annual meetings in person" is related to the company’s ordinary business operations.[27] Since then, investors (including the New York City Comptroller, Walden Asset Management, the Interfaith Center on Corporate Responsibility, CalPERS, and the Council of Institutional Investors ("CII")) have continued to advocate against virtual-only meetings through their own policy pronouncements and direct communications with companies holding virtual-only meetings.  For instance, in the spring of 2017, the New York City Comptroller sent letters to more than a dozen S&P 500 companies that held virtual-only meetings in the prior year (or had announced that they would do so in the future) urging them to host in-person annual meetings instead, but noting that it welcomed and encouraged the use of new technologies to expand shareholder participation (i.e., in the context of "hybrid" annual meetings that allow both live and on-line participation).  Furthermore, under its updated proxy voting guidelines, the New York City Comptroller, on behalf of four New York City pension funds,[28] has indicated that the pension funds "may oppose all incumbent directors of a nominating committee subject to election at a ‘virtual-only’ annual meeting."[29]          G.    Proxy Access Proposals Although proxy access was the second most common shareholder proposal topic in 2017, the spotlight has waned on this issue as proxy access has become the majority practice in the S&P 500 (over 60% have adopted as of the end of the 2017 proxy season).  Proxy access refers to the right of shareholders under a company’s bylaws to nominate candidates for election to the board and have the shareholder nominees included in a company’s proxy materials. After two years of growing pains, proxy access has become the latest widely-accepted governance change among large-cap companies, following in the footsteps of previous shareholder-advocated governance changes, such as the replacement of plurality with majority voting in uncontested director elections and the declassification of boards.  Likewise, the core provisions in proxy access bylaws are now settled (i.e., ownership of 3% of a company’s shares for at least three years, and the right to nominate up to 20% of the board by a shareholder or group of up to 20 shareholders). Approximately 112 proxy access proposals were submitted for 2017 meetings, representing significantly fewer than the 201 proposals submitted for 2016 meetings and only slightly more than the 108 proposals submitted for 2015 meetings.  Of the 112 proxy access proposals, 59 proposals requested the adoption of a proxy access bylaw ("adopt proxy access proposals") and 53 proposals requested amendments to an existing proxy access bylaw ("amend proxy access proposals").  Thirty-four of the adopt proxy access proposals and nearly all of the amend proxy access proposals were submitted by John Chevedden (in his own capacity and on behalf of others), while an additional 18 adopt proxy access proposals were submitted by the New York City Comptroller. The 18 adopt proxy access proposals voted on received average support of 63.1% of votes cast, while the 20 amend proxy access proposals voted on received average support of 28.5% of votes cast.  A total of 13 proxy access proposals (all adopt proxy access proposals) received a majority of votes cast.  ISS recommended that shareholders vote "for" all of the proxy access proposals voted on in 2017 and "for" all but one of the proxy access proposals voted on in 2016. The main proxy access development in 2017 related to proposals seeking to amend an existing proxy access bylaw to increase the number of shareholders permitted to constitute a nominating group.  The Staff generally agreed with companies that they could exclude these proposals as substantially implemented, provided that the no-action request demonstrated how the existing aggregation limit achieved the proposal’s goal of providing a meaningful proxy access right.[30] As in 2016, a number of companies also obtained no-action letters concurring that a proposal seeking adoption of proxy access had been substantially implemented when the companies responded to the receipt of an adopt proxy access proposal by adopting a proxy access bylaw prior to their annual meetings, even though the companies’ bylaws varied in certain respects from the proxy access terms requested in the proposals.[31] III.    Potential Reform of Shareholder Proposal Rule There have been growing calls over the last decade to amend Rule 14a-8, the SEC’s shareholder proposal rule, to update various thresholds in the rule and to address some of the ways in which the rule has been abused.  For example, in 2014, the U.S. Chamber of Commerce, along with eight other business organizations, petitioned the SEC to raise the existing threshold for the excludability from company proxy materials of shareholder proposals previously submitted to shareholders that did not elicit meaningful shareholder support.  The petition requested that the SEC reconsider its resubmission rule by conducting a thorough cost-benefit analysis of the current rule and creating new threshold percentages based on the conclusions gleaned from its cost-benefit analysis.[32] More recently, the House Republicans’ proposal for financial regulation reform, the CHOICE Act, tackled the issue.  The legislation, which passed the House by a 233-186 vote in early June, would amend the shareholder proposal rule to (1) increase the holding period for the shareholder proponent from one year to three years; (2) require that a shareholder hold 1% of a company’s outstanding stock (and eliminate the option to satisfy this requirement by holding $2,000 in stock) for the holding period; (3) prohibit the submission of proposals other than by the shareholder (so-called "proposals by proxy"); and (4) increase the percentage of support that a proposal must have received the last time it was voted on in order to be resubmitted.  The proposed resubmission thresholds would exclude proposals that previously were voted on in the past five years and most recently received less than 6% (currently 3%) if voted on once, 15% (currently 6%) if voted on twice, and 30% (currently 10%) if voted on three times.[33] The CHOICE Act has faced strong opposition from institutional investors, including CII, which sent a letter to House members urging them to oppose the bill.[34] While the legislation’s prospects in the U.S. Senate are uncertain, the SEC may consider Rule 14a-8 amendments (although that is more likely to occur once the two vacancies on the Commission are filled). IV.    Top Take-Aways for 2017 Season Based on the results of the 2017 proxy season, there are several key take-aways to consider: First, 2017 was the year for both environmental and social proposals to take center stage, and the spotlight on these issues is likely to continue to shine brightly in 2018. Over 40% of shareholder proposals submitted in 2017 dealt with environmental and social issues, making this the largest category of shareholder proposals for the first time since 2014. The key environmental proposals in 2017 were climate change proposals (69 in 2017, with those voted on averaging 33.8% support); environmental impacts on communities or supply chains (28 in 2017, with those voted on averaging 23.6% support), and reports on sustainability (24 in 2017, with those voted on averaging 30.0% support).  The key social proposals to watch are board diversity proposals (35 in 2017, with those voted on averaging 28.3% support); diversity-related proposals (34 in 2017, with those voted on averaging 24.2% support); and gender pay gap proposals (19 in 2017, with those voted on averaging 18.8% support). With the Administration’s decision to withdraw from the Paris Climate Accord and decrease federal support for environmental initiatives, the focus on private sector environmental initiatives has increased, including through the submission of shareholder proposals. In this context, engagement on climate-related matters has become more important, as several institutional investors have indicated that company engagement and responsiveness on these issues can sway their votes. With several institutional investors increasingly willing to support environmental proposals, companies should consider whether to take additional actions with respect to their sustainability practices and how these efforts are communicated to investors.   Second, in the area of virtual-only annual meetings, the stage is set for increased debate over this hot-button issue. Companies now have solid no-action request precedent to exclude these shareholder proposals.  That being said, certain investors are very vocal about their opposition to virtual-only meetings. Their activism (both leading up to and during the meeting) may discourage some companies from making a move to virtual-only meetings. Companies that are currently holding virtual-only annual meetings may face increasing pressure to either hold hybrid annual meetings or to enhance virtual-only meetings to make them as interactive as possible (i.e., as close to a physical annual meeting as possible).  This would include live audio and/or video participation for all shareholder participants, which is something most companies that hold virtual-only annual meetings currently do not accommodate. Third, although the spotlight on proxy access has waned, this has become the latest standard governance practice. Companies that have not yet adopted proxy access are likely to continue to face shareholder proposals on this topic in the coming years, and these proposals are likely to continue to receive significant support—in 2017, adopt proxy access proposals voted on received average support of 63.2% of votes cast. Accordingly, companies that have not yet adopted proxy access may consider whether to do so—and this may arise either in response to a shareholder proposal or due to the desire to align with majority practice among S&P 500 companies.  Likewise, companies that previously adopted proxy access, particularly those that were early adopters of proxy access, may want to revisit their bylaws and consider whether their provisions align with the terms adopted by the majority of adopters. Lastly, the momentum to amend Rule 14a-8 is growing, albeit slowly. There is increasing support for amendments to the shareholder proposal rule to update various thresholds in the rule and address some of the ways in which the rule has been abused.  Rule 14a-8 was last amended in 2010 to no longer permit the exclusion of proxy access shareholder proposals.  However, there have been calls for some time to address other aspects of the rule.  Top items on the reform list for Rule 14a-8 include increasing the holding period and ownership requirements for shareholder proponents and increasing the resubmission thresholds for proposals that were voted on in prior years.   The CHOICE Act takes a comprehensive approach to amending the rule and aims to address these "top items" on the reform list as well as to prohibit submission of so-called "proposal by proxy" (i.e., ability of a proponent to act as a designee for an actual shareholder with respect to a proposal).  Given the scope of the reforms in the CHOICE Act, and with a new Administration and growing support for deregulation, changes to Rule 14a-8 may finally happen.  Even without Congressional action, the SEC could take action on its own to amend Rule 14a-8 with its rulemaking authority.    [1]   Gibson, Dunn & Crutcher LLP assisted companies in submitting the shareholder proposal no-action requests discussed in this alert that are marked with an asterisk (*).    [2]   For the purposes of reporting in this alert statistics regarding no-action requests, references to the "2017 proxy season" refer to the period between October 1, 2016 and June 1, 2017. Data regarding no-action letter requests as well as no-action letters was derived from the information available on the SEC’s website. Unless otherwise noted, all data in this alert on shareholder proposals submitted, withdrawn, and voted on is derived from the Institutional Shareholder Services ("ISS") publications and the ISS shareholder proposals and voting analytics databases, and includes proposals submitted and reported on in these ISS databases at any time prior to June 1, 2017 for annual meetings of shareholders at Russell 3000 companies held at any time in 2017 ("2017 meetings"). References in this alert to proposals "submitted" include those shareholder proposals voted on or that were withdrawn by the proponent. Voting results are reported on a votes cast basis (votes for or against) and do not address the impact of abstentions. Where statistics are provided for prior years, the data is for a comparable period in those years.    [3]   Corporate civic engagement includes proposals regarding support for political, lobbying, or charitable organizations.    [4]   Shareholder proposals are categorized based on the subject matter of various proposals. Social proposals cover a wide range of issues and include proposals relating to (i) board diversity; (ii) discrimination and other diversity-related issues; (iii) the gender pay gap; (iv) establishing a board committee on human rights; (v) requiring a director nominee with social and environmental qualifications; and (vi) providing a report on drug pricing increases. Environmental proposals include proposals addressing (i) a report on climate change; (ii) a report on or the adoption of greenhouse gas emissions goals; (iii) actions to address risks in light of climate change; (iv) reviewing public policy advocacy on climate change; (v) recycling; (vi) renewable energy; (vii) hydraulic fracturing; and (viii) a report on sustainability. Climate change proposals include proposals addressing (i) a report on climate change; (ii) a report on or the adoption of greenhouse gas emissions goals; (iii) actions to address risks in light of climate change; and (iv) reviewing public policy advocacy on climate change. Proxy access proposals are proposals calling on a company to adopt a proxy access right or to revise an existing proxy access bylaw. Political contributions disclosure proposals call on a company to provide information regarding political contributions, while lobbying disclosure proposals request information on a company’s lobbying policies and practices.    [5]   Includes Staff-issued responses either granting or denying exclusion of a proposal, or following withdrawal of a no-action request, usually in response to a proponent’s withdrawal of a proposal.    [6]   All percentages are based on the number of no-action requests for which relief was granted.    [7]   Lowe’s Companies, Inc. also argued that the proposal was excludable because it had already been substantially implemented (Rule 14a-8(i)(10)) and because it related to operations that did not meet the five percent threshold and were not otherwise significantly related to the company’s business (Rule 14a-8(i)(5)). The Staff did not address these arguments.  See Lowe’s Companies, Inc. (avail. Mar. 8, 2017).    [8]   See, e.g., The TJX Companies, Inc. (avail. Mar. 8, 2016)*.  One proposal was withdrawn (Panera Bread Co.).    [9]   See, e.g., CVS Health Corp. (avail. Mar. 1, 2017). [10]   See id.; see also Amazon.com, Inc. (avail. Mar. 1, 2017)*;  The Home Depot, Inc. (avail. Mar. 1, 2017)*; and The TJX Companies, Inc. (avail. Mar. 1, 2017)*.  One proposal was withdrawn (Chipotle Mexican Grill, Inc.). [11]   See Celgene Corp. (avail. Mar. 19, 2015); Vertex Pharmaceuticals, Inc. (avail. Feb. 25, 2015); Gilead Sciences, Inc. (avail. Feb. 23, 2015). [12]   See, e.g., Amgen Inc. (avail. Feb. 10, 2017); Eli Lilly & Co. (avail. Feb. 10, 2017). [13]   See, e.g., Johnson & Johnson (avail. Feb. 23, 2017)*.  The proposal was excluded on procedural grounds at two companies and was withdrawn at a third company. [14]   See Deere & Co. (avail. Dec. 5, 2016).  Deere argued that the proposal sought to micromanage the company by replacing the judgment of management with specific quantitative measures and timelines provided by shareholders, who, as a group, would not be in a position to make an informed judgment. The Staff also concurred that SeaWorld Entertainment, Inc. could exclude a shareholder proposal for the same reason (the proposal "seeks to micromanage the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment"). See SeaWorld Entertainment, Inc. (avail. Mar. 30, 2017). [15]   As further discussed below, the Staff generally agreed with companies that they could exclude as substantially implemented "amend proxy access" proposals that only requested an increase in the number of shareholders permitted to constitute a nominating group, provided that the no-action requests included specified share ownership information demonstrating that the aggregation limit in the company’s bylaw compared favorably to the limit in the shareholder proposal. See, e.g., Amazon.com, Inc. (avail. Mar. 7, 2017)*; Anthem, Inc. (avail. Mar. 2, 2017)*; and General Dynamics Corp. (avail. Feb. 10, 2017). [16]   Based on the number of no-action requests for which relief was granted. [17]   Voting results are reported on a votes cast basis (votes for or against) and do not address the impact of abstentions. [18]   The information in this alert regarding the three climate change proposals that received majority support includes the Exxon Mobil Corp. shareholder vote on May 31, 2017, which ISS voting results data did not yet report as of June 1, 2017.  Apart from this information, the data in this alert regarding climate change proposals is based on ISS data as of June 1, 2017, and, therefore, excludes this proposal.  [19]   Climate change proposals submitted in 2017 included 35 proposals calling for a report on climate change (including the three that received majority support); 29 proposals calling for a report on, or adoption of, greenhouse gas emissions goals; three proposals requesting the company to take action to address risks in light of climate change; and two proposals related to the review of public policy advocacy on climate change.   [20]   BlackRock, Our Engagement Priorities for 2017-2018, available at: https://www.blackrock.com/corporate/en-us/about-us/investment-stewardship/engagement-priorities. [21]   Vanguard, Vanguard’s Proxy Voting Guidelines, available at: https://about.vanguard.com/investment-stewardship/voting-guidelines/. Furthermore, Fidelity updated its proxy voting guidelines to state that "[i]n certain cases…Fidelity may support shareholder proposals that request additional disclosures from companies regarding environmental or social issues, where it believes that the proposed disclosures could provide meaningful information to the investment management process without unduly burdening the company." See Fidelity, Fidelity Funds’ Proxy Voting Guidelines, available at: https://www.fidelity.com/about-fidelity/fidelity-by-numbers/fmr/proxy-voting-overview.      [22]   See BlackRock Press Release, available at: https://www.blackrock.com/corporate/en-us/literature/publication/blk-vote-bulletin-occidental-may-2017.pdf (specifically noting that "when we do not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect the long-term economic interests of our clients, we will not hesitate to exercise our right to vote against management recommendations. Climate-related risks and opportunities are issues we have become increasingly focused on at BlackRock as our understanding of the related investment implications evolves"). [23]   BlackRock, Our Engagement Priorities for 2017-2018, available at: https://www.blackrock.com/corporate/en-us/about-us/investment-stewardship/engagement-priorities; State Street Global Advisors, SSGA’s Guidance on Enhancing Gender Diversity on Boards, available at: https://www.ssga.com/investment-topics/environmental-social-governance/2017/guidance-on-enhancing-gender-diversity-on-boards.pdf. [24]   For instance, in 2017, NorthStar Asset Management filed eight board diversity proposals.  Six of these proposals were withdrawn because companies agreed to make certain commitments with respect to seeking greater board diversity. See, e.g., Jeff Green and Emily Chasan, Investors Push Corporate Boards to Add Women, People of Color, Bloomberg, available at: https://www.bloomberg.com/news/articles/2017-03-02/shareholders-target-pale-male-and-stale-corporate-boards. [25]   According to Broadridge, in 2016, 187 companies held virtual annual meetings (including virtual-only meetings and hybrid meetings that are both virtual and physical).  Of those, 83% (155) were virtual-only meetings, as compared to 67% in 2015.  In addition, of these 155 virtual-only meetings, six were conducted with live video, while the vast majority (149) used only live audio. Moreover, of the 44 companies that held a hybrid annual meeting in 2015, 12 of them switched to virtual-only meetings in 2016. [26]   ISS data includes information about three such proposals. Two of these proposals were excluded after receiving no-action relief as described further below, and one proposal was excluded based on procedural grounds.  [27]   See HP Inc. (avail. Dec. 28, 2016)*.  In permitting HP to exclude the proposal, the Staff reaffirmed its position on this subject from more than 14 years ago. [28]   These four funds are the New York City Employees’ Retirement System, the New York City Police Pension Fund, the New York City Fire Department Pension Fund and the Board of Education Retirement System of the City of New York. The guidelines for these four funds indicate that a fifth New York City pension fund, the New York City Teachers’ Retirement System, has the same policy. See The Office of the New York City Comptroller, Corporate Governance Principles and Proxy Voting Guidelines (last amended Apr. 2017), available at: https://comptroller.nyc.gov/wp-content/uploads/documents/NYCRS-Corporate-Governance-Principles-and-Proxy-Voting-Guidelines_April-2016-Revised-April-2017.pdf. [29]   The revised policy applies to S&P 500 companies starting in 2017 and will expand to cover all U.S. portfolio companies in 2018. Nominating committee members can avoid negative votes during 2017 if their companies agree to hold in-person or hybrid annual meetings beginning in 2018. [30]   See, e.g., Leidos Holdings, Inc. (avail. Mar. 27, 2017); Quest Diagnostics Inc. (avail. Mar. 23, 2017); ITT Inc. (avail. Mar. 16, 2017). [31]   See, e.g., Marriott International, Inc. (avail. Feb. 27, 2017)*; OGE Energy Corp. (avail. Feb. 24, 2017); Comcast Corp. (avail. Feb. 15, 2017). [32]   U.S. Chamber of Commerce, Petition for Rulemaking Regarding Resubmission of Shareholder Proposals Failing to Elicit Meaningful Shareholder Support (Apr. 9, 2014), available at: https://www.sec.gov/rules/petitions/2014/petn4-675.pdf.  See also Business Roundtable, Principles of Corporate Governance 2016, available at: https://businessroundtable.org/sites/default/files/Principles-of-Corporate-Governance-2016.pdf. [33]   This would raise the thresholds to the same percentages that were proposed but not adopted by the SEC in 1998.  See Release No. 40018, available at: https://www.sec.gov/rules/final/34-40018.htm. ("We had proposed to raise the percentage thresholds respectively to 6%, 15%, and 30%. Many commenters from the shareholder community expressed serious concerns about this proposal. We have decided not to adopt the proposal, and to leave the thresholds at their current levels.").  [34]   Council of Institutional Investors, Institutional Investors Oppose Key Provisions of the Financial CHOICE Act, available at: http://www.cii.org/choice_act_press_release. Public pension funds backing the CII letter include the CalPERS, Colorado Public Employees’ Retirement Association and the New York State Teachers’ Retirement System.   The following Gibson Dunn lawyers assisted in the preparation of this client update: Ronald O. Mueller, Elizabeth Ising, Lori Zyskowski, Gillian McPhee, Maia Gez, Julia Lapitskaya, Lauren Assaf, Kevin Hill, Victor Twu, and Geoffrey Walter. Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have about these developments. To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, or any of the following lawyers in the firm’s Securities Regulation and Corporate Governance practice group: Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) Maia Gez – New York (+1 212-351-2612, mgez@gibsondunn.com) Michael Titera – Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com)   © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 2, 2017 |
PCAOB Adopts New Model for Audit Reports

On June 1, 2017, the Public Company Accounting Oversight Board ("PCAOB" or "Board") moved ahead and adopted perhaps its most significant new standard since the Board’s inception, setting requirements for significant additional disclosures in the auditor’s report on an issuer’s financial statements.  These new disclosure requirements, if adopted by the SEC, will drastically alter the audit reporting model that has been in place for the past seventy years. Specifically, the new standard, available here, retains the pass/fail model present in the existing audit report, but goes well beyond this test and requires the auditor to include new disclosures in the audit report about critical audit matters ("CAMs") that the auditor identifies during the course of the audit.  As discussed below, CAMs represent a new concept in audit reporting, and the degree to which this new concept will impact various aspects of the audit process – including on the relationship between audit committees, auditors and management – remains uncertain. The standard also requires new disclosures in the audit report about the length of the auditor’s tenure and a statement about the applicable auditor independence requirements.  The Board’s new standard will be submitted to the SEC for consideration and notice and comment.  If the SEC approves the Board’s standard, the requirements for additional disclosure about auditor tenure and independence will be effective for all filers beginning in fiscal years ending on or after December 15, 2017.  The CAM reporting requirements will be effective for large accelerated filers beginning in fiscal years ending on or after June 30, 2019, and for all other filers beginning in fiscal years ending on or after December 15, 2020. The PCAOB has been considering this standard-setting initiative since 2011, when the PCAOB issued a concept release on potential changes to the audit report; that process evolved in 2013, when the PCAOB issued its original proposal on this topic.  In 2016, the PCAOB issued a re-proposal that narrowed in some respects the scope of the disclosure requirements for critical audit matters that appear in the audit report, and also dropped a component of the original proposal that would have required the auditor to review and report on matters outside the financial statements.  The adopted standard is substantially the same as the 2016 re-proposal, but clarifies some items which had been left unsettled in the re-proposal, including the applicability of the standard to emerging growth companies.  The adoption of the new standard represents an important development in the financial reporting landscape.  Issuers and their audit committees should review and consider the Board’s new standard in detail, including as described below under "Steps to Consider." What are CAMs? — New Required Disclosures in the Audit Report about Critical Audit Matters Under the new standard, a CAM is defined as "any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex auditor judgment."  The definition thus has three component pieces.  First, a CAM must be a matter that was voluntarily communicated to the audit committee or that was required to be communicated to the audit committee under Auditing Standard 1301 (formerly AS No. 16), Communications with Audit Committees.  As issuers and audit committees are well aware, the scope of these required communications is broad, with AS 1301 containing more than fifteen topics and several dozen related paragraphs that specify the topics that must be communicated to the audit committee.  Second, a CAM must relate to an account or disclosure that is "material" to the financial statements.  Notably, the definition does not require the communication itself to involve a material issue, but rather that the communication must be about an account or disclosure that is material to the financial statements.  And third, the definition provides that a CAM must have involved an "especially challenging, subjective, or complex auditor judgment."  The standard seeks to inject some objective criteria to help guide this test by laying out a non-exhaustive list of factors that an auditor should take into account in determining whether a matter involved such judgments, specifically:  the auditor’s assessment of the risks of material misstatement, including significant risks; the degree of auditor judgment related to areas in the financial statements that involved the application of significant judgment or estimation by management, including estimates with significant measurement uncertainty; the nature and timing of significant unusual transactions and the extent of audit effort and judgment related to these transactions; the degree of auditor subjectivity in determining or applying audit procedures to address the matter or in evaluating the results of those procedures; the nature and extent of audit effort required to address the matter, including the extent of specialized skill or knowledge needed or the nature of consultations outside the engagement team regarding the matter; and the nature of audit evidence obtained regarding the matter. The new standard provides that if the auditor determines that a CAM exists, the auditor must include disclosure in the audit report that:  identifies the CAM; describes the principal considerations that led the auditor to determine that the matter is a CAM; describes how the CAM was addressed in the audit; and identifies the relevant financial statement accounts and/or disclosures that relate to the CAM.  Disclosure satisfying these criteria is required for each CAM identified in the audit.  Where no CAM is identified, the auditor must include disclosure stating as much. By incorporating the concept of matters required to be communicated to the audit committee, the standard draws on existing AS 1301 to provide some guideposts for determining those matters that may be treated as CAMs.  However, given the lengthy list of required communications in AS 1301 and given that the standard includes both required communications and those that are voluntarily communicated to the audit committee, the range of matters that could be CAMs remains quite broad and could lead to significant new disclosures in the audit report, as discussed in more detail below under "Steps to Consider."  Additional New Disclosures in the Audit Report Auditor Tenure.  The standard requires the auditor to include in its report "[a] statement containing the year the auditor began serving consecutively as the company’s auditor."  Under this requirement, auditor tenure includes the years the auditor served as the company’s auditor both before and after the company became subject to SEC reporting obligations.  Although the Board unanimously adopted the standard, several Board members indicated they were not certain that auditor tenure disclosure is useful to investors.  These sentiments were expressed in part because many issuers have voluntarily included enhanced audit committee-related disclosures in their proxy statements and such disclosures often include information about the length of service by the auditor. Independence.  The standard also requires a statement in the audit report that the auditor "is a public accounting firm registered with the PCAOB (United States) and is required to be independent with respect to the company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the SEC and the PCAOB."  Clarification of Auditor Responsibilities.  Under the standard, the auditor also has to include in its audit report the phrase "whether due to error or fraud," when describing the auditor’s responsibilities under PCAOB standards to obtain reasonable assurance about whether the financial statements are free of material misstatements.  This phrase is not included in the existing auditor’s report.  When inclusion of the phrase was proposed as part of the 2016 re‑proposal, the PCAOB said that the phrase is added to clarify that the auditor is responsible for detecting material misstatements, whether such misstatements are due to error or fraud. Applicability to Filers The standard specifies that CAMs would not have to be disclosed in audit reports issued in connection with audits of emerging growth companies; brokers and dealers; investment companies other than business development companies; or employee stock purchase, savings, and similar plans.  It notes that auditors of these entities may consider voluntarily including communication of CAMs as described in the standard.  Steps to Consider With this new standard, the PCAOB is requiring changes to the pass/fail model that has served as the basis for audit reports for many decades.  As a result, even though the new standard still has to go through the SEC notice-and-comment process and its ultimate adoption thus hinges on SEC approval, issuers and their audit committees would be well served to review in depth the new disclosures mandated by the standard—particularly as they are disclosures for which the auditor will have the final say; and consider the potential implications of the new standard, including the issues discussed below.  Scope of the New CAM Definition.  During the standard-setting process, the PCAOB made efforts to reign in the breadth of its original concept for CAMs, but aspects of the final CAM definition still present concern.  The audit standard governing communications that the auditor is required to make to the audit committee is itself expansive, as noted above.  The definition also includes any communication made to the audit committee outside of the required communications.  It also appears that CAMs may not be limited to communication about material issues, but also could include disclosure of an issue that may not itself be material but that may involve a material account or disclosure.  And, the question of whether an issue was "especially challenging, subjective, or complex auditor judgment" by its terms will be a subjective matter for audit teams.  Discretion in making this determination of course could cut either way, but issuers and their audit committees should understand there will likely be a fair degree of variability in how the CAM definition may be applied, at least at the outset, given its potential breadth and subjectivity.     Auditor Disclosure of Original Information.  In reviewing the PCAOB’s original proposal and 2016 re-proposal, a number of commenters expressed concern that the standard would place the auditor in the position of being the source of disclosure of original information about a company—in other words, having to make disclosures before a company itself has made the disclosure or, in effect, forcing a company’s hand to make disclosures.  The Board’s final standard appears to give little heed to this concern.  The final adopting release acknowledges the tension, and observes that an auditor will not be obligated to provide original information about a CAM identified in the audit report "unless it is necessary to describe the principal considerations that led the auditor to determine that a matter is a critical audit matter or how the matter was addressed in the audit."  But disclosure of the CAM itself could result in disclosure of original information; and it would seem that auditors will not infrequently determine that disclosure is needed to describe the considerations that led to the determination that the matter is a CAM and how the matter was addressed, each of which could result in disclosure of original information.  On this point, the Board observed that it believes it is in the public interest for auditors generally to disclose information that is necessary to describe the principal considerations that led the auditor to determine that a matter is a CAM and how the CAM is addressed in the audit, even if such information would not otherwise be disclosed by the issuer.  Thus, issuers and audit committees will want to consider possible scenarios where the new standard might put the auditor in a position of having to make disclosures in the first instance, and prepare in advance for how to address these situations.   Uncertainty in Application.  A number of other concerns expressed during the standard-setting process appear not to have been fully addressed in the final standard.  For example, because the standard may require disclosure of matters that have been voluntarily reported to the audit committee, some expressed the view that the standard could lead auditors to hesitate in raising matters to audit committees as it would then trigger potential CAM reporting.  Conversely, some expressed concern that there will be a tendency to over-disclose the existence of CAMs given the subjectivity in the standard and the potential adverse consequences for the auditor associated with being second-guessed in whether a CAM should have been disclosed.  Still others expressed concern that the range of CAM disclosure practice among firms and engagement teams will lead to unhelpful variability across audit reports.  Additionally, some have expressed concern about the increased strain on audit committee resources, as well as concerns about the impact of the new disclosures on timing for completing the audit – for example, when financial reporting or audit-related issues that have CAM implications arise at the last moment.   In considering these issues, issuers and audit committees should engage with their auditors now to gain insights into the anticipated impacts on the audit process for their particular audit, including what the new standard might mean for the timing of audit completion and when and how the issuer and audit committee will have the opportunity to review proposed CAM audit reports.  In doing so, audit committees and issuers also may consider asking the auditor what types of issues in prior audits may be considered CAMs under the standard and what corresponding disclosures would have looked like if they had been disclosed in connection with those prior audit reports. Given the numerous questions that arise from the dramatic shift in the auditor reporting model in light of the Board’s new standards, issuers and audit committees may wish to consider submitting comments to the SEC on the new standard.   Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments.  To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any lawyer in the firm’s Securities Regulation and Corporate Governance practice group, or any of the following: Elizabeth Ising – Co-Chair, Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)James J. Moloney - Co-Chair, Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com)Brian J. Lane - Washington, D.C. (+1 202-887-3646, blane@gibsondunn.com)Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com) Michael J. Scanlon - Washington, D.C. (202-887-3668, mscanlon@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com) Michael A. Titera - Orange County, CA (+1 949-451-4365, mtitera@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

February 21, 2017 |
French Legal Briefing – France Continues to Adopt the Highest International Standards to Attract Investors

Despite a net fall in the global M&A activity in 2016 (the total deal value amounted last year to US$ 3.7tn, down 16 % compared to 2015[1]), French M&A market has been supported by a few domestic deals while the level of in-bound investments has dramatically dropped. Another distinctive feature of the 2016 M&A market, both globally and in France, has been an exceptional activity during the last quarter suggesting that French M&A market may be poised to accelerate and gain a new momentum in 2017. Several significant factors of uncertainty do remain, including in relation to the Brexit and Trump’s victory. In addition, the as-of-now unpredictable outcome of major elections to come later this year in the Netherlands, France and Germany may trigger political and economic disturbances. Combined, they may hamper 2017 perspectives for the EU and France. In this uncertain environment, businesses will need to be stronger and over-performing. Recent surveys[2] show that companies are, thus, likely, first, to refocus on their core businesses (leading to an increase of divestitures). Second, they will be required to remain alert to potential technology shifts. As in 2016, digital and technology will remain in fashion and should surge as top strategic drivers of M&A activity this year. In this context, France has continued to adopt in 2016 the highest legal international standards whether it be in terms of governance, by enacting the say-on-pay, or fight against corruption by modernizing and strengthening its judicial arsenal which will now have an extra-territorial reach. It has also chosen to be at the forefront of the protection regarding personal data. To assist French and foreign investors navigating through these important recent changes, the Paris office of Gibson, Dunn & Crutcher LLP is pleased to provide this French legal briefing. Executive Summary: Anti-corruption Compliance. The "Sapin 2 Law" adopted on December 9, 2016, broadly inspired by the US and UK regimes, intends to bring France to the highest standards in the areas of transparency and anti-corruption, setting up, among other things, new obligations for companies to establish adequate procedures to prevent and detect corruption and influence peddling. Corporate Governance / Directors’ Compensation: One of the other key provisions of the "Sapin 2 Law" provides for a binding say-on-pay for French listed companies, which will have an impact as from this year’s annual general meetings. Equity Incentive Plans: The tax and social regime of French equity-based incentive plans has gone through its 3rd reform since 2012, in a less favorable direction this time, including for foreign issuers. However, the negative effects of this reform may not be felt immediately as future grants may still benefit from the previous regime set up by the Macron Law provided that they are made pursuant to an authorization granted by a shareholders’ resolution adopted prior to January 1, 2017. Data Protection: The Law for a Digital Republic adopted on October 7, 2016 intends to strengthen the protection of personal data and anticipate the forthcoming entry into force of the European Union Regulation 2016/679 adopted on April 27, 2016. ______________________________________ 1.   Anti-corruption Compliance: The announcement of a more robust era in French anti-corruption enforcement and compliance expectations. On December 9, 2016, a new major statute on transparency, the fight against corruption and the modernization of the economy (better known as the "Sapin 2 Law") was enacted. The Sapin 2 Law, mainly inspired by the US and UK regimes, intends to bring France to the highest standards in the areas of transparency and anti-corruption.  Creation of a French Anti-Corruption Agency. The French Anti-Corruption Agency will replace the Central Service for the prevention of corruption which did not have any investigation or sanction powers. The new agency is the result of the French government’s aspiration to set up an independent and fully effective body (somewhat equivalent to the French financial markets authority (the Autorité des Marchés Financiers) or the French authority for the supervision of prudential insurance and reinsurance (the Autorité de Contrôle Prudentiel et de Résolution)). The Agency will include an Enforcement Commission ("commission des sanctions") vested with disciplinary powers and the ability to fine non-compliances (which are in addition to the existing criminal sanctions). One of the initial priorities of the Agency will be to assist French corporations in implementing the new arsenal by releasing recommendations. Obligation to establish adequate procedures to prevent and detect corruption and influence peddling. Which corporations are concerned? French companies with at least 500 employees and an annual turnover exceeding €100 million (such threshold being assessed on a consolidated basis with respect to group of companies the parent company of which is headquartered in France). Anti-corruption measures will have to be implemented in such companies and in their subsidiaries (even located outside France). What key measures will be implemented? Besides the introduction of a full set of anti-corruption procedures such as codes of conduct, training program for employees, accounting control systems or clients risk-based assessment procedures, the Sapin 2 Law also introduces two innovative measures: A risk mapping of external solicitations for corruption purposes to which the company may be exposed: this risk mapping will be key. It will need to be adapted to the industries and countries in which the corporation operates as well as to its clients, suppliers and intermediaries. It will need to be regularly monitored to take into account changes in business and risks. Therefore, corporations will be likely required to (a) identify actual and potential risks, (b) assess the risks, (c) elaborate appropriate measures to prevent and eradicate the identified risks and finally (d) implement those specific measures; Appropriate internal control procedures will need to be applied. These will likely require implementation of three types of processes (i) controlling operations, (ii) risks monitoring and managing and (iii) documenting internal controls to ensure compliance traceability. Failure to implement the corruption prevention plan may entail the liability of both the corporations and their legal representatives. Corporations may be fined up to EUR 1 million and individuals up to EUR 200,000. The Sapin 2 Law is somewhat similar to the United Kingdom Bribery Act (and also the Swiss regime) pursuant to which corporations may be sanctioned if they have not taken sufficient measures to prevent bribery (failure of commercial organizations to prevent bribery). Reinforcement of whistleblowing protection. The new statute strengthens the protection offered to whistleblowers by guaranteeing their confidentiality and offering an increased safeguard against retaliation. It extends whistleblowing protection to situations where the whistleblower has reported "a serious threat or damage to the public interest" and not only a violation of applicable laws. However, despite what was first enacted by the Sapin 2 Law, no financial assistance to the whistleblower to cover his/her proceedings costs will be provided as the French Constitutional Council considered this provision as unconstitutional. New extraterritorial reach of French anticorruption laws. The Sapin 2 Law considerably extends the jurisdiction of French criminal courts. It enables them to prosecute acts of corruption committed abroad by anyone who "carries on its business or a part of its business in France". This will need to be taken into account by foreign companies which conduct even part only of their business in France. Adoption of a judicial agreement process. The Sapin 2 Law introduces a new legal agreement mechanism, named public interest judicial agreement (convention judiciaire d’intérêt public) and resembling the DPA process in the United States. Under such mechanism, so long as prosecution has not been set in motion, the Public Prosecutor may offer companies accused of corruption, influence peddling or laundering of tax fraud proceeds to enter into a judicial agreement imposing payment of a financial penalty up to a maximum of 30% of the company’s average turnover over the past three years and/or the implementation of a three-year maximum anti-corruption compliance program supervised by the French Anti-corruption Agency. In addition, the agreement shall provide for indemnification of identified victims. If validated by the court following a public hearing, the judicial agreement is published on the French Anti-corruption Agency website. However, there is no recognition of guilt from the companies concerned and the judicial agreement is not recorded in the companies’ criminal record. In anticipation of the French Anti-Corruption Agency’s expectations, companies will have to implement adequate procedures (particularly internal control and risk-mapping) which will be broadly inspired by the US and UK regimes, as well as the best risk management practices already implemented by French insurance and banking institutions. 2.   Corporate Governance / Directors’ compensation: A new French binding say-on-pay Scope of the say on pay The say-on-pay process will concern compensation granted to the chairman of the board of directors, CEO or deputy CEO, members of the executive board ("Directoire") or members of the supervisory board ("Conseil de Surveillance") of a French société anonyme listed on a regulated market (Euronext). Surprisingly, the new scheme does not apply to the members of the board of directors ("Conseil d’administration") but this is likely due to the fact that the determination of the amount of attendance fees to be received by board members already lies within the power of the shareholders. No say-on-pay process is required with respect to the compensation received by the managers pursuant to an employment agreement. Two votes by the shareholders Prior vote. The principles and criteria for fixing, allocating and awarding the total compensation (including fixed, variable or exceptional compensation) to be paid to the managers shall be approved by the shareholders at each annual general meeting. A new vote is required (i) in case of any modification of such compensation policy and (ii) at each renewal of the managers’ office. In case of a negative vote of the shareholders, the principles and criteria approved for the preceding fiscal year shall continue to apply. If no principle or criteria was previously approved or in the absence of prior compensation paid to the managers, compensation shall be determined "in accordance with the existing practices of the company". Compensation committees of French listed companies will need to adopt such practices as soon as possible in view of the next ordinary general meeting of 2017, in the absence thereof. Subsequent vote. The shareholders will subsequently have to approve the total amount of compensation granted to the executive for the preceding year. In case of a negative vote of the shareholders, the fixed portion of the compensation will not be at risk but the variable and exceptional remunerations could not be paid. One should note that a subsequent vote is not required for the members of the supervisory board (except for its chairman). Practical considerations The provisions regarding the prior vote will apply from the annual general meeting for the first fiscal year ended after the promulgation of the law (December 9, 2016). Regarding the subsequent vote, the rule will apply from the end of the fiscal year following the first fiscal year ended after the promulgation of the law. In other words, companies which ended their fiscal year on December 31, 2016 will have to make a prior vote from their ordinary general meeting of 2017 and a subsequent vote in 2018. This new statute intends to reassure investors in French companies by preventing the allocation of abnormal compensation. However, this new statute could lead to emphasis being placed on fixed compensation (guaranteed by the prior vote) rather than variable compensation. This would go against established corporate governance principles which recommend to index officers’ compensation on the company’s financial performance by using variable and exceptional remunerations. It is likely that companies will have, during the next annual general meeting, to determine a level of fixed remuneration that will ensure the presence of the officers for the next years.    Depending on the level of constraint imposed by the shareholders when implementing this new say-on-pay process, the management of listed companies may also be keen to find out ways to circumvent it. To this end, they may try to use foreign companies to compensate their group officers. If that happened, this would obviously not improve transparency. The conditions of this new binding say-on-pay will be soon specified in a decree. However, listed companies should already take into consideration the "Sapin 2 Law" while organizing their new strategy and financial communication. 3.   Equity Incentive Plans: Free shares allocation – a step backwards the negative effects of which may be delayed. On December 29, 2016, the French Parliament adopted the Finance Act for 2017 (the "Finance Act"), which partially amends the legal and tax regimes of free shares allocation. The free shares allocation legal framework had been substantially improved by the so-called "Macron Law" enacted on August 6, 2015, with a view to improve the attractiveness of French equity-based incentive plans for employees. The new regime resulting from the Finance Act will apply to awards authorized by a resolution of the extraordinary general meeting of the shareholders passed on or after January 1, 2017 only. Consequently, new awards of free shares that have been authorized by a shareholders’ resolution passed between August 8, 2015 and December 31, 2016 (included) will still benefit from the favorable regime provided by the Macron Law, regardless of the date on which such awards will effectively be granted. Therefore, the negative effects of the reform may be delayed for issuers using multiannual stock inventive plans, as is commonly the case for foreign issuers, so long as they have been adopted prior to or on December 31, 2016 (but as from August 8, 2015). Vesting and holding periods The provisions related to the vesting and holding periods remain unchanged. Therefore, free shares can still vest 1 year after their grant date, provided that the aggregate vesting and holding periods are at least equal to 2 years. Increase of employers’ social security contribution Under the Finance Act, the employer social security contribution rate is increased from 20% to 30%, bringing it back to the former rate into force before passing of the Macron Law. The contribution remains due within the month following the date of the effective acquisition of the shares by the beneficiary. The employer contribution applying to small and medium-sized companies that have not distributed any dividend in the past five years shall remain unchanged at the rate of 20%. An increased taxation for the portion of the acquisition gain exceeding EUR 300,000 Contrary to the Macron Law, which provided for the taxation of all of the acquisition gain realized by the beneficiary as a capital gain, the 2017 Finance Act states that only the portion of such profit not exceeding EUR 300,000 per year will be treated as capital gain. The fraction of the acquisition gain exceeding EUR 300,000 per year will be taxed as employment income, losing the benefit of the 50% tax base reduction when the shares are held for at least 2 years and the 65% tax base reduction when the shares are held for more than 8 years. Accordingly, the 8% social security contribution applicable to activities income will apply to the portion of the annual acquisition profit in excess of EUR 300,000, instead of the 15.5% rate applicable to capital gains. The 15.5% social security withholding remains however applicable to any acquisition profit (or portion thereof) up to EUR 300,000. The 10% employee social security contribution that had been fully abolished by the Macron Law is partially reinstated for the part of the annual acquisition gain in excess of EUR 300,000. Summary table of the major changes to the free shares allocation legal and tax regimes   Previous regime Macron Law Regime Finance Act Regime Concerned free shares Awards authorized by an extraordinary shareholders’ resolution passed on or before August 7, 2015 Awards authorized by an extraordinary shareholders’ resolution passed between August 8, 2015 and December 31, 2016 (included) Awards authorized by an extraordinary shareholders’ resolution passed on or after January 1, 2017 Employer social contribution 30%due upon grant on market value of the free shares on the grant date 20%due upon vesting on the market value of the free shares as of such date 30%due upon vesting on the market value of the free shares as of such date Employee social contributions 10%+8% social security contributions due on acquisition profit (out of which 5.1% is tax deductible) 15.5% social security contributions due on acquisition profit (out of which 5.1% is tax deductible) Part of the annual acquisition gain up to EUR 300,000:15.5% social security contributions due on acquisition profit (out of which 5.1% is tax deductible)       Part of the annual acquisition gain exceeding EUR 300,000:10%+8% social security contributions due on acquisition profit (out of which 5.1% is tax deductible) Employee Income tax Acquisition profit subject to income tax (impôt sur le revenu) (at rates of up to 45%) Acquisition profit subject to income tax (at the applicable progressive rates) with a 50% tax base reduction when the shares are held for at least 2 years and a 65% tax base reduction when the shares are held for more than 8 years Part of the annual acquisition gain up to EUR 300,000: Acquisition profit subject to income tax (at the applicable progressive rates) with a 50% tax base reduction when the shares are held for at least 2 years and a 65% tax base reduction when the shares are held for more than 8 years Part of the annual acquisition gain exceeding EUR 300,000: Acquisition profit subject to income tax (impôt sur le revenu) (at rates of up to 45%) Total cost for employees(1) 60.7%(+3% or 4% in case special highincome contribution applies) 36.8%(2)(+3% or 4% in case special high income contribution applies) Illustrative examples: For an annual acquisition gain of up to EUR 300,000: 36.8%(2) For an annual acquisition gain of EUR 600,000: 48.75%(2) (plus, in each case, 3% or 4% in case special high income contribution applies) (1) Based on marginal rates.(2) if shares held at least for 2 years and less than 8 years after vesting 4.   Data Protection – The Law for a Digital Republic: anticipating the EU Regulation on data protection? The French Data Protection Act adopted on January 6, 1978 (the "French Data Protection Act") was amended twice in 2016. First, on October 7, 2016, when the French Parliament adopted the Law for a Digital Republic with the aim to create new rights for citizens in the digital environment. Amongst other rights, the Law for a Digital Republic intends to strengthen the protection of personal data. Secondly, on October 12, 2016 with the adoption of the Law for the modernization of justice. Interestingly, some provisions of these pieces of legislation anticipate the European Union Regulation 2016/679 adopted on April 27, 2016 relating to the protection of personal data and which will be applicable only as of May 25, 2018. Reinforcement of data subjects’ rights First of all, the Law for a Digital Republic creates specific provisions in the French Data Protection Act extending the right to be forgotten for minors. Indeed, the general right for data subjects to have their data deleted applies only where the data is "inaccurate, incomplete, equivocal, outdated or which processing is forbidden." According to the new provisions arising out of the Law for a Digital Republic, any individual can ask for the deletion of his/her data where such data was collected when he/she was still minor without having to demonstrate that he/she has a legitimate interest. Companies receiving such requests would be due to delete the data without undue delay. If the right mentioned above should have limited impact on our clients’ direct obligations, two other provisions of the Law for a Digital Republic should be considered closely as they need to be taken into account directly in companies’ data protection compliance measures. Companies are indeed expected to enable data subjects to exercise their rights directly online wherever possible. In practice, this means that all companies should create a specific email address dedicated to the handling of data subjects’ requests but also need to make sure that it creates a mechanism to ensure that such requests are actually handled. With always the idea to enable data subjects to master the use of their personal data, the French legislator also provides for additional obligations of information for companies processing personal data. As a result of this provision, companies are now expected to inform data subjects about (i) the data retention period of the data collected and processed and (ii) the right of data subjects to give instructions in relation to the processing of their personal data after their death. Such information shall be provided as part of the information notice which companies were already required to provide under the French Data Protection Act. Therefore, companies shall make sure that their existing and future information notices are compliant with these new provisions. The Law for a Digital Republic also granted data subjects with the right to data portability (i.e. the right to recover for free all the personal data and files). At this stage, companies shall therefore anticipate this new obligation by starting to consider the procedure they should implement to ensure that this right of portability is actually applied and what would be the consequences from a business point of view. However, this should be only initial thoughts since a decree shall further detail this upcoming obligations for companies. Finally, the Law for the modernization of justice has extended the right to class action in particular regarding the right for data subjects to bring a class action in case of data breach. Data protection litigation may therefore increase considerably – this will need to be taken into consideration by companies in their risks assessment. Strengthening of the CNIL enforcement authority According to the Law for a Digital Republic, the French data protection authority (the "CNIL") can now impose to companies a maximum fine of 3 million euros while it was previously limited to 150,000 euros. The amount of the penalty should be proportionate to the seriousness of the breach committed and the CNIL will take into consideration notably the intentional nature of the infringement, the measures taken by the data controller to mitigate the damage suffered by the data subjects and the degree of cooperation with the Commission to remedy the infringement. The Law for a Digital Republic shall therefore be considered by companies as a first step toward the EU Regulation 2016/679 which reinforces even further companies’ obligations and on which we will comment in future alerts. [1]      Source: Thomson Reuters. [2]      Notably, Deloitte’s M&A trends report 2016. The following Gibson Dunn lawyers assisted in preparing this client update:  Ahmed Baladi, Benoît Fleury, Ariel Harroch, Judith Raoul-Bardy and Clarisse Bouchetemble. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update.  TheParis office of Gibson Dunn brings together lawyers with extensive knowledge of all aspects of business law, covering corporate transactions, restructuring/insolvency, litigation, compliance, public law and regulatory, as well as tax and real estate.  The Paris office is comprised of a dynamic team of lawyers who are either dual or triple-qualified, having trained in both France and abroad.  Our French lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions and legal matters.  For further information, please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the Paris office by phone (+33 1 56 43 13 00) or by email (see below):  Corporate/M&A/Private EquityBenoît Fleury (bfleury@gibsondunn.com)  Bernard Grinspan (bgrinspan@gibsondunn.com)Ariel Harroch (aharroch@gibsondunn.com)Patrick Ledoux (pledoux@gibsondunn.com)Judith Raoul-Bardy (jraoulbardy@gibsondunn.com)Jean-Philippe Robé (jrobe@gibsondunn.com)Audrey Obadia-Zerbib (aobadia-zerbib@gibsondunn.com) IT/ Data Protection Ahmed Baladi (abaladi@gibsondunn.com)Bernard Grinspan (bgrinspan@gibsondunn.com)Vera Lukic (vlukic@gibsondunn.com) Audrey Obadia-Zerbib (aobadia-zerbib@gibsondunn.com) Compliance Benoît Fleury (bfleury@gibsondunn.com) Bernard Grinspan (bgrinspan@gibsondunn.com)Ariel Harroch (aharroch@gibsondunn.com)Judith Raoul-Bardy (jraoulbardy@gibsondunn.com) © 2017 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

January 26, 2017 |
Webcast: Key Legal Issues in Compensation and Benefits in M&A Transactions

​Employees are a key component to most business combinations. Without their cooperation, and preferably motivated enthusiasm, the transaction will not be as successful as it could be. In addition, employees are a big investment, and buyers need to understand how the current employer has structured those costs. Buyers also often take on large potential liabilities – assumed equity compensation awards, accrued vacation, historical compliance problems, pensions, retiree medical benefits, union retirement plans, and others. A thorough understanding of the company’s overall “human resources” (meaning the people, the costs, the programs and the level of compliance) is the foundation on which the task of addressing the key issues is built. In this webcast, Gibson Dunn experts walk you through the key legal considerations involved in facing these business issues. View Slides [PDF] Topics discussed include: Keeping and motivating key employees Handling of existing incentive awards: both equity and cash Granting of new incentives Integration of existing benefit programs Negotiation of new agreements Effectively transitioning excess employees Handling of existing severance programs (both formal and informal) Handling of transitional employees Obtaining desired releases and restrictive covenants Managing existing liabilities (including any existing problem areas) Pension plans and retiree medical benefits Multiemployer plans and other union benefits issues Successor liabilities Different Issues when Going Global Regional differences Possible Changes with a New Incoming US Administration Who Should View This Program: General Counsels, HR personnel, in-house employment and benefits counsel, HR consultants   PANELISTS: Michael Collins is a partner in our Washington, DC office. He is Co-Chair of the Executive Compensation and Employee Benefits Practice Group. For four consecutive years, he has been ranked by Chambers & Partners USA as a leading lawyer in the area of Employee Benefits and Executive Compensation in the District of Columbia. He is also listed in 2016 edition of The Best Lawyers in America® under the category of Employee Benefits (ERISA) Law. His practice focuses on all aspects employee benefits and executive compensation. He represents both executives and companies in drafting and negotiating employment arrangements. Stephen Fackler is a partner in the firm’s Palo Alto and New York offices and Co-Chair of Gibson Dunn’s Executive Compensation and Employee Benefits Practice Group. He has extensive experience nationwide advising public and private companies, private equity funds and boards of directors on compensation and benefits matters. He also regularly advises senior executives on their employment and severance arrangements, and directors in connection with compensation and indemnification arrangements. Mr. Fackler has been selected by Chambers and Partners as a Leading Employee Benefits Lawyer each year since 2006 in its publication “America’s Leading Business Lawyers” and as a ‘Leading US Employee Benefits and Executive Compensation Lawyer’ by The Legal 500 in its inaugural 2007 and subsequent editions. He was named among the Top 20 Most Powerful Lawyers for Employee Benefits and ERISA in Human Resource Executive magazine and Lawdragon in 2012, 2013, 2014, 2015 and 2016. Sean Feller is a partner in our Century City office. He is a member of the firm’s Executive Compensation and Employee Benefits Practice Group. His practice focuses on all aspects executive compensation and employee benefits. His practice encompasses tax, ERISA, accounting, corporate, and securities law aspects of equity and other incentive compensation plans; qualified and nonqualified retirement and deferred compensation plans and executive employment and severance arrangements. He has been recognized by his peers as one of The Best Lawyers in America in the area of Employee Benefits (ERISA) Law. In 2016, he was ranked by Chambers USA as a Leading Lawyer in California in the area of Employee Benefits and Executive Compensation. MODERATOR: Jeffrey Chapman is Co-Chair of the firm’s Global Mergers and Acquisitions Practice Group. He maintains an active M&A practice representing private equity firms and public and private companies in diverse cross-border and domestic transactions in a broad range of industries. Chambers Global ranks him as one of the top 50 M&A lawyers in the United States. Law360 named him one of the nation’s top five Private Equity lawyers in 2015. Recognized for many years by Chambers USA in its most elite “Band 1” category as one of a handful of the leading corporate lawyers in Texas, Chambers singled him out in 2013 and elevated him to “Star Individual.” Mr. Chapman remains the only corporate lawyer in Texas history ever to be so designated. BTI Consulting named him to its 2016 BTI Client Service All-Stars list, one of only 37 M&A lawyers in the United States “singled out by general counsels as the best of the best, separating themselves from the pack with the ability to guide any deal and assemble the perfect teams” and “considered the cream of the crop when it came to their client service.” D CEO magazine and the Association of Corporate Growth named him the 2016 Dallas Dealmaker of the Year. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.5 credit hours, of which 1.50 credit hours may be applied toward the areas of professional practice requirement.  This course is approved for non-transitional credit only. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.5 hours. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

January 24, 2017 |
Webcast: Antitrust Agencies Issue Guidance for Human Resource Professionals on Employee Hiring and Compensation

​Antitrust authorities around the world are increasingly taking an interest in companies’ hiring practices and compensation decisions. On October 20, 2016, the Antitrust Division of the Department of Justice and the Federal Trade Commission jointly issued guidance for human resource (“HR”) professionals regarding the application of the federal antitrust laws in this area. The guidance focuses on HR professionals as gatekeepers, explaining that they “often are in the best position to ensure that their companies’ hiring practices comply with the antitrust laws.” The guidance also states that companies and individual HR professionals may be held criminally liable for antitrust violations in this area. Join Gibson Dunn for a one-hour discussion of the guidance, as well as how authorities in Europe would deal with these issues. Participants can also earn MCLE credit. View Slides [PDF] PANELISTS: Daniel G. Swanson is a partner in Gibson, Dunn & Crutcher LLP, with offices in Los Angeles and Brussels. Mr. Swanson has been a trial and appellate litigator for over 30 years, and has Co-Chaired Gibson Dunn’s highly-regarded Antitrust and Competition Practice Group since 1996. His practice focuses on U.S., U.K., EU and international antitrust and competition law, including trial and appellate litigation, class actions, criminal investigations and cartel defense, merger review and government civil investigations, regulatory and competition policy matters, and antitrust counseling. Rod J. Stone is a partner in the Los Angeles office of Gibson, Dunn & Crutcher LLP. He is a member of the firm’s Litigation Department and has extensive experience in antitrust, government investigations, unfair competition and competitive business practices litigation, including class actions. Mr. Stone’s antitrust litigation practice has encompassed a broad range of antitrust issues under the Sherman Act, the Clayton Act, the Robinson-Patman Act, the FTC Act, and state antitrust and unfair competition laws. He has litigated claims of alleged monopolization, tying, exclusive dealing, price fixing, group boycott, refusal to deal and price discrimination, among others, in civil litigation and government investigations throughout the country. Jessica Brown is a partner in the Denver office of Gibson Dunn and a member of the firm’s Labor and Employment, Class Action, and Electronic Discovery Practice Groups. She has been ranked by Chambers USA for twelve consecutive years as one of “America’s Leading Lawyers for Labor and Employment.” She also has been listed in The Best Lawyers in America®. The Denver Business Journal named Ms. Brown winner of the 2015 Outstanding Women in Business Award for the Law category. She was previously named one of Denver’s “Forty Under 40.” Ali Nikpay is a partner at Gibson Dunn & Crutcher and head of its competition practice group in London. He has more than 20 years of merger control, antitrust and litigation experience in both the private and public sectors. He has served in important positions at both the European Commission’s DG for Competition (DG COMP) and the UK competition authority. He has particular expertise in global cartel investigations and matters that are complex from an economic perspective. He has counseled clients such as UBS, Gala Coral, Schlumberger, Facebook, Marriott Hotels, and Debenhams plc. Clients he has advised prior to joining Gibson Dunn include GE, NTT DoCoMo, KKR, and CVC.   MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement.  This course is approved for non-transitional credit only. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast.  Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

December 5, 2016 |
A DOJ Crackdown on Employee Recruiting and Compensation

​Los Angeles partner Daniel Swanson, Washington, D.C. partner Jason Schwartz, Los Angeles partner Rod Stone and San Francisco associate Caeli Higney are the authors of "A DOJ Crackdown on Employee Recruiting and Compensation" [PDF] published by Law360 on December 5, 2016.

November 22, 2016 |
Proxy Advisory Firm Updates and Action Items for 2017 Annual Meetings

The two most influential proxy advisory firms–Institutional Shareholder Services (ISS) and Glass, Lewis & Co. (Glass Lewis)–recently released their updated proxy voting guidelines for 2017.  The key changes to the ISS and Glass Lewis policies are described below along with some suggestions for actions public companies should take now in light of these policy changes and other proxy advisory firm developments.  The 2017 ISS policy updates are available here.  The 2017 Glass Lewis Guidelines are available here.    ISS 2017 Proxy Voting Policy Updates  On November 21, 2016, ISS released updated proxy voting policies for shareholder meetings held on or after February 1, 2017.  These policies are used by ISS in making voting recommendations on director elections and company and shareholder proposals at U.S. companies.  The changes in the 2017 proxy voting guidelines are described below.  ISS also indicated that it plans to issue updated FAQs on equity plan proposals (discussed below) and other matters in mid-December, and that it plans to issue updated voting policies on shareholder proposals anticipated for 2017 annual meetings in January 2017.    1.      Director Elections  Overboarded Directors  As announced in the ISS 2016 Proxy Voting Policy Updates, ISS will begin recommending votes "against" directors who sit on more than five public company boards.  Prior to this announcement and during the 2016 transition period, the maximum number of boards a director could sit on without receiving a negative ISS voting recommendation was six.  The recommendations for public company CEOs remain unchanged:  ISS will continue to recommend votes "against" public company CEOs who sit on the boards of more than two public companies besides their own (but only at those companies where the CEO is a director, not on the CEO’s own board).  Restrictions on Shareholders’ Ability to Amend Bylaws ISS now will recommend votes "against" members of the governance committee if a company’s charter places "undue" restrictions on shareholders’ right to amend the company’s bylaws.  Undue restrictions include, but are not limited to, prohibitions on the submission of binding shareholder proposals or ownership requirements in excess of those imposed by Rule 14a-8.  ISS will continue to issue negative voting recommendations each year that these restrictions remain in place.  Prior to this update, ISS did not have a stated position on this issue.  Unilateral Bylaw/Charter Amendments and Multi-Class Capital Structures at IPO Companies ISS now will generally recommend votes "against" all directors other than new nominees if a company completes an IPO with a multi-class capital structure in which the classes do not have equal voting rights.  Prior to this update, ISS recommended votes "against" directors of IPO companies if the company had provisions in its charter or bylaws that were "materially adverse" to shareholder rights, and ISS provided a list of factors that could change the presumption of a negative voting recommendation, including a public commitment to put the adverse provision to a shareholder vote within three years of the date of the IPO.  Under the new guidance, if, prior to the IPO, the company or its board adopted charter or bylaw provisions materially adverse to shareholder rights, or implemented a multi-class capital structure in which the classes have unequal voting rights, ISS will recommend a vote "against" all directors except new nominees, unless there is a reasonable sunset provision (i.e., a commitment to hold a shareholder vote within three years will no longer be sufficient).  In addition to the sunset provision, as under its current policy, ISS will continue to consider a list of factors in making its final voting recommendation.  In addition, unless the adverse provision and/or problematic capital structure is reversed or removed, ISS will recommend votes case by case on director nominees in subsequent years.  2.      Capital  Stock Distributions:  Splits and Dividends ISS has a voting policy that specifically addresses common stock authorizations in connection with a stock split or stock dividend, and it has clarified this policy for 2017.  In connection with a planned stock split or stock dividend, a company may need to increase the number of authorized shares of its common stock, which would require shareholder approval.  The company may seek approval for a total number of shares that exceeds the number it anticipates distributing in connection with the stock split or stock dividend.  As updated, the ISS policy now makes clear that ISS will generally vote "for" these proposals as long as the "effective" increase in authorized shares satisfies ISS’s common stock authorization policy.  As we understand it, this clarification means that, in evaluating the impact of the increase on a company’s authorized share capital, ISS will continue to consider only the number of excess shares–that is, shares over and above those to be issued as a planned stock split or stock dividend.    3.      Executive Compensation  Equity-Based Incentive Plans ISS has changed aspects of its "Equity Plan Scorecard," which is part of its proxy voting policy for equity-based incentive plans.   Specifically, ISS has added a factor to the Equity Plan Scorecard that considers whether dividends or dividend equivalents related to an equity award can be payable prior to vesting of the award.  Under the new factor, equity plans that explicitly prohibit the payment of all dividends or dividend equivalents before the vesting of the underlying equity award will receive full credit, while companies will receive no credit if the prohibition is "absent or incomplete" (that is, it does not apply to all types of awards).  A company’s general practice to withhold dividends during the vesting period is insufficient to receive credit under the Equity Plan Scorecard if the policy is not made explicit in the equity plan document.  A provision that allows the accrual of dividends/dividend equivalents payable upon vesting is sufficient as long as dividends are withheld during the vesting period.  In addition to adding the new factor, ISS has also changed the factor in the Equity Plan Scorecard related to minimum vesting periods.  Under the updated factor, in order to receive full credit, an equity plan must specify a minimum vesting period of at least one year that applies to all award types and that cannot be overridden in individual award agreements.  This is a change from the prior version of the factor, which only required that the minimum vesting period apply to one type of award and was silent with respect to individual award agreements.  Amendments to Cash and Equity Incentive Plans ISS clarified how it will evaluate proposals to amend cash or equity incentive plans by more clearly differentiating the framework it will apply to various types of amendments.  ISS’s recommendation on amendments to all plans (whether cash, stock, or a combination of the two) that only seek shareholder approval of performance metrics for Section 162(m) purposes (other than in connection with the first such approval following an IPO) will depend on whether the board committee administering the plan consists entirely of independent directors.  Note that for these purposes ISS applies its definition of "independence", not the applicable New York Stock Exchange or NASDAQ definition.  All other cash and equity plan amendments will receive recommendations on a case-by-case basis.  The amendments do not substantively change the ISS policy; they merely clarify its application. Pay-for-Performance Updates Separately, ISS also recently announced that it would incorporate an additional proprietary financial performance metric into the pay-for-performance analysis it uses in evaluating a company’s executive compensation and say-on-pay proposal.  When evaluating executive compensation, ISS currently applies a quantitative screen that uses three metrics: (a) the degree of alignment between the company’s annualized total shareholder return (TSR) and the CEO’s annualized total awarded compensation, each measured on a relative basis within a peer group and over a three-year period; (b) the degree of absolute alignment between the trend in CEO pay and the company’s TSR over the prior five fiscal years; and (c) the multiple of the CEO’s total awarded compensation relative to the peer group median CEO total compensation. This quantitative screen is intended to flag companies where a potentially significant misalignment of pay and performance may exist and therefore where further assessment is warranted in the form of a qualitative pay-for-performance analysis.  Based on feedback obtained through its 2016 policy survey, ISS has announced that it will incorporate an additional pay-for-performance metric into its analysis beginning in 2017.  Specifically, ISS has developed a new metric that compares the relative degree of alignment between the CEO’s annualized total awarded compensation and the company’s performance as calculated by ISS based on six financial metrics, with both compensation and financial performance being measured relative to an ISS-selected peer group over a three-year period.  The six financial performance metrics that will be used in this analysis are (a) return on invested capital, (b) return on assets, (c) return on equity, (d) revenue growth, (e) EBITDA growth, and (f) growth in cash flow from operations.  The weight that ISS places on each of these six metrics will vary by industry for purposes of producing the new numerical weighted financial performance metric.  Beginning in 2017, ISS’s voting recommendation reports will present this information in a new standardized table that sets forth the company’s three-year performance based on TSR and on these six financial metrics relative to the company’s ISS selected peer group, compares performance on these metrics with relative compensation levels (in each case, relative to the ISS selected peer group), and presents the overall weighted financial performance metric.  Companies that subscribe to ISS’s executive compensation services will be able to view online projections of their relative financial performance evaluation under these new measures.   For 2017, ISS stated that it may use the relative financial performance information in the qualitative aspect of its pay-for-performance analysis.  Thus, no changes are being made for 2017 to ISS’s quantitative pay-for-performance analysis, although ISS is leaving the door open for changes in 2018 and beyond.  As with any standardized measure, some companies may object that the new financial performance measures utilized by ISS do not accurately portray their performance, and may object to the manner in which ISS weights the various financial performance measures.  The extent of these objections, and the extent to which shareholders embrace the ISS presentations, may well depend on the extent of transparency that ISS provides into its proprietary financial performance calculations and to the weight it assigns to each.    4.      Director Compensation  Shareholder Ratification of Director Compensation Programs ISS has added a new policy for evaluating company proposals seeking ratification of non-employee director compensation.  ISS will vote case by case on these proposals, based on a list of factors.  The list of factors includes director compensation at comparable companies, the presence of "problematic" pay practices relating to director compensation, director stock ownership guidelines and holding requirements, equity award vesting schedules, the mix of cash and equity-based compensation, "meaningful" limits on director compensation, the availability of retirement benefits, and the quality of disclosure surrounding director compensation.  ISS will also consider whether or not the equity plan under which non-employee director grants are made warrants support, if that plan is up for shareholder approval.  This policy is being implemented in reaction to shareholder litigation over director compensation and the ensuing shareholder ratification proposals put forth by companies.    Equity Plans for Non-Employee Directors ISS modified the factors considered when it evaluates equity compensation plans that apply solely to non-employee directors.  ISS will continue to evaluate plans on a case by case basis based on the estimated cost of the plan relative to peer companies, the company’s three-year burn rate relative to peer companies, and plan features.  In cases where director stock plans exceed ISS plan cost or burn rate benchmarks, in making its recommendation, ISS will continue to consider various factors relating to director compensation in formulating its voting recommendation.  However, rather than requiring that a company’s director compensation program meet certain enumerated criteria, which is the approach under ISS’s current policy, ISS will "look holistically" at all of the factors.  In addition, ISS has updated and expanded these factors so they are the same factors used in ISS’s new policy for evaluating company proposals seeking shareholder ratification of director compensation programs.    Glass Lewis 2017 Proxy Voting Policy Updates  On November 18, 2016, Glass Lewis released their updated proxy voting policy guidelines for 2017 in the United States and for shareholder proposals.  These guidelines are a detailed overview of the key policies Glass Lewis applies when making voting recommendations on proposals at U.S. companies and on shareholder proposals.  The four key changes in these 2017 guidelines are summarized below.    1.      Overboarded Directors  As previously announced, beginning in 2017 Glass Lewis will generally recommend voting "against" a director who serves as an executive officer of any public company while serving on a total of more than two (instead of three) public company boards (including their own) and any other director who serves on a total of more than five public company boards.  However, Glass Lewis has introduced some flexibility in how it will apply this standard: When determining whether a director’s service on an excessive number of boards may limit the director’s ability to devote sufficient time to board duties, Glass Lewis may consider relevant factors such as the size and location of the other companies where the director serves on the board, the director’s board duties at the companies in question, whether the director serves on the boards of any large privately held companies, the director’s tenure on the boards in question, and the director’s attendance record at all companies. Glass Lewis may also refrain from recommending voting "against" certain directors if the company provides sufficient rationale in the proxy statement for their continued board service.  Glass Lewis believes that this rationale "should allow shareholders to evaluate the scope of the directors’ other commitments as well as their contributions to the board including specialized knowledge of the company’s industry, strategy or key markets, the diversity of skills, perspective and background they provide, and other relevant factors." If directors are overboarded, Glass Lewis will not recommend that shareholders vote "against" overcommitted directors at the companies where they serve as an executive.   2.      Board Evaluation and Refreshment  Glass Lewis clarified its approach to board evaluation, succession planning and refreshment.  Generally speaking, Glass Lewis believes a robust board evaluation process–one focused on the assessment and alignment of director skills with company strategy–is more effective than solely relying on age or tenure limits.  This discussion appears in a newly captioned section entitled "Board Evaluation and Refreshment" in the U.S. Guidelines and reflects a shift in focus from a similar discussion that previously appeared under the heading "Mandatory Director Term and Age Limits."    3.      Governance Following an IPO or Spin-Off  Glass Lewis clarified how it approaches corporate governance at newly public entities. While it generally believes that such companies should be allowed adequate time to fully comply with marketplace listing requirements and meet basic governance standards, Glass Lewis will also review the terms of the company’s governing documents in order to determine whether shareholder rights are being severely restricted from the outset.  If Glass Lewis believes the board has approved governing documents that significantly restrict the ability of shareholders to effect change, it will consider recommending that shareholders vote "against" members of the governance committee or the directors that served at the time of the governing documents’ adoption, depending on the severity of the concern.  The new guidelines outline the specific areas of governance Glass Lewis will review (for example, antitakeover provisions, supermajority vote requirements, and general shareholder rights, such as the ability of shareholders to remove directors and call special meetings).   4.       Gender Pay Equity Shareholder Proposals    Glass Lewis codified its policy concerning shareholder proposals requesting that companies provide increased disclosure concerning efforts taken to ensure gender pay equity.  Glass Lewis will review these proposals on a case by case basis and will consider (a) the company’s industry; (b) the company’s current policies, efforts and disclosure with regard to gender pay equity; (c) the practices and disclosure of company peers; and (d) any relevant legal and regulatory actions at the company. Glass Lewis will consider recommending votes in favor of "well-crafted shareholder resolutions requesting more disclosure on the issue of gender pay equity in instances where the company has not adequately addressed the issue and there is credible evidence that such inattention presents a risk to the company’s operations and/or shareholders." Actions Public Companies Should Take Now Evaluate your company’s practices in light of the revised ISS and Glass Lewis proxy voting guidelines:  Companies should consider whether their policies and practices, or proposals expected to be submitted to a shareholder vote in 2017, are impacted by any of the changes to the ISS and Glass Lewis proxy voting policies.  For example, companies should consider whether any directors or director nominees would be considered "overboarded" under the updated policies.  Update ISS on your compensation peer group:  ISS is inviting companies to notify it of changes companies have made to the peer companies they use for determining compensation where the company’s next annual meeting will be held between February 1, 2017, and September 15, 2017.  ISS factors the company-selected peer companies into its peer group construction process as part of its compensation-related voting recommendations.  Companies do not need to submit an update if the peer group has not changed since the last proxy statement.  ISS will automatically use the peers disclosed in a company’s last proxy statement if no updates are submitted.  The ISS peer submission window will be open for these U.S. companies from 9:00 AM EST on Monday, November 28, 2016 until 8:00 PM EST on Friday, December 9, 2016.   Companies can submit the updates by logging onto the ISS Corporate Solutions website at https://login.isscorporatesolutions.com.   Check your ISS QualityScore Scores:  In late October, ISS announced QualityScore, a rebranded and revised version of its corporate governance ratings system.  Following a data verification period, ISS released on November 21, 2016, the new QualityScore ratings for companies.  These scores will be publicly available on Yahoo! Finance and included in the ISS reports containing proxy voting recommendations for shareholder meetings.  However, a company cannot update its QualityScore data once it files the proxy statement.  Thus, companies are encouraged to review in advance the new QualityScore scores and confirm the accuracy of the raw data that ISS is using.  QualityScore information can be accessed on the ISS Corporate Solutions website at https://login.isscorporatesolutions.com.   Enroll in the Glass Lewis 2017 Issuer Data Report (IDR) program:  Glass Lewis has opened enrollment for its 2017 Issuer Data Report (IDR) program.  The IDR program enables public companies to access (for free!) a data-only version of the Glass Lewis Proxy Paper report prior to Glass Lewis completing its analysis and recommendations relating to public company annual meetings.  Glass Lewis does not provide drafts of its voting recommendations report to issuers it reviews, so the IDR is the only way for companies to confirm the accuracy of the data before Glass Lewis’s voting recommendations are distributed to its clients.  Moreover, unlike ISS, Glass Lewis does not provide each company with complimentary access to the final voting recommendations for the company’s annual meeting.  IDRs feature key data points used in Glass Lewis’s corporate governance analysis, such as information on directors, auditors and their fees, summary compensation data and equity plans, among others.  The IDR is not a preview of the final Glass Lewis analysis as no voting recommendations are included.  Each participating public company receives its IDR approximately three weeks prior to its annual meeting and generally has 48 hours to review the IDR for accuracy and provide corrections, including supporting public documents, to Glass Lewis.  Participation is limited to a specified number of companies, and enrollment is on a first-come, first-served basis.  Enrollment closes on January 6, 2017, or as soon as the annual limit is reached.  To learn more about the IDR program and sign up to receive a copy of the 2017 IDR for your company, go to https://www.meetyl.com/issuer_data_report.    The following Gibson Dunn lawyers assisted in the preparation of this client alert:  Elizabeth Ising, Lori Zyskowski, Ronald Mueller, Sean Feller, Gillian McPhee and Matt Haskell. Gibson Dunn lawyers are available to assist in addressing any questions you may have about these developments.  To learn more about these issues, please contact the Gibson Dunn lawyer with whom you usually work, any lawyer in the firm’s Securities Regulation and Corporate Governance and Executive Compensation and Employee Benefits practice groups, or any of the following: Securities Regulation and Corporate Governance Group:Elizabeth Ising – Co-Chair, Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com)James J. Moloney - Co-Chair, Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com)Brian J. Lane - Washington, D.C. (+1202-887-3646, blane@gibsondunn.com)Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, rmueller@gibsondunn.com)John F. Olson – Washington, D.C. (+1 202-955-8522, jolson@gibsondunn.com)Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com)Gillian McPhee – Washington, D.C. (+1 202-955-8201, gmcphee@gibsondunn.com)Julia Lapitskaya – New York (+1 212-351-2354, jlapitskaya@gibsondunn.com)Sarah E. Fortt – Washington, D.C. (+1 202-887-3501, sfortt@gibsondunn.com)Kasey L. Robinson – Washington, D.C. (+1 202-887-3587, krobinson@gibsondunn.com) Executive Compensation and Employee Benefits Group:Stephen W. Fackler – Co-Chair, Palo Alto/New York (+1 650-849-5385/+1 212-351-2392, sfackler@gibsondunn.com)Michael J. Collins – Co-Chair, Washington, D.C. (+1 202-887-3551, mcollins@gibsondunn.com)Sean C. Feller – Los Angeles (+1 310-551-8746, sfeller@gibsondunn.com) © 2016 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.