Registration Statement by a Closed-End Investment Company — Form N-2
Filing Table of Contents
Document/Exhibit Description Pages Size
1: N-2 Registration Statement by a Closed-End Investment 344 1.34M
Company
6: CORRESP ¶ Comment-Response or Other Letter to the SEC 1 1K
2: EX-99.AI Miscellaneous Exhibit 1 6K
3: EX-99.AII Miscellaneous Exhibit 24 101K
4: EX-99.B Miscellaneous Exhibit 16 64K
5: EX-99.Q Miscellaneous Exhibit 7 19K
‘N-2’ — Registration Statement by a Closed-End Investment Company
Document Table of Contents
As filed with the Securities and Exchange Commission on January 30, 2015
Securities Act File No. 333-_____
Investment Company Act File No. 811-23028
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. __ [ ]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. __ [ ]
WINTON DIVERSIFIED OPPORTUNITIES FUND
(Exact Name of Registrant as Specified in Charter)
ONE FREEDOM VALLEY DRIVE
OAKS, PENNSYLVANIA 19456
(Address of Principal Executive Offices, including Zip Code)
Registrant's Telephone Number, including Area Code: (800) 342-5734
MICHAEL BEATTIE
C/O SEI CORPORATION
ONE FREEDOM VALLEY DRIVE
OAKS, PENNSYLVANIA 19456
(Name and Address of Agent for Service)
Copies of all communications to:
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SEAN GRABER, ESQ. DIANNE M. DESCOTEAUX, ESQ.
MORGAN, LEWIS & BOCKIUS LLP C/O SEI CORPORATION
1701 MARKET STREET ONE FREEDOM VALLEY DRIVE
PHILADELPHIA, PENNSYLVANIA 19103 OAKS, PENNSYLVANIA 19456
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of this Registration Statement.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933,
other than securities offered in connection with a dividend reinvestment plan,
check the following box....[X]
It is proposed that this filing will become effective (check appropriate box):
[ ] when declared effective pursuant to Section 8(c)
The following boxes should only be included and completed if the registrant is
a registered closed-end management investment company or business development
company which makes periodic repurchase offers under Rule 23c-3 under the
Investment Company Act and is making this filing in accordance with Rule 486
under the Securities Act.
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)
[ ] on (date) pursuant to paragraph (a)
If appropriate, check the following box:
[ ] This [post-effective] amendment designates a new effective date for
a previously filed [post-effective amendment] [registration
statement].
[ ] This Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act and the
Securities Act registration number of the earlier effective
registration statement for the same offering is ____________.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
[Enlarge/Download Table]
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PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
SECURITIES BEING REGISTERED REGISTERED PER UNIT PRICE(1) FEE
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Class I Shares of Beneficial Interest 100,000 Shares $20.00 $2,000,000 $232.40
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(1) Estimated solely for the purpose of calculating the registration fee, in
accordance with Rule 457(o) of the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
THE INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED
UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR
DOES IT SEEK AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE THE OFFER
OR SALE IS NOT PERMITTED.
PRELIMINARY PROSPECTUS
SUBJECT TO COMPLETION
JANUARY 30, 2015
WINTON DIVERSIFIED OPPORTUNITIES FUND
CLASS I SHARES
Winton Diversified Opportunities Fund (the "Fund") is a Delaware statutory
trust registered under the Investment Company Act of 1940, as amended, as a
closed-end, diversified management investment company. The Fund's investment
objective is to achieve long-term capital appreciation through compound
growth.
The Fund's shares are only being sold to investors who meet the definition of
"qualified clients" under Rule 205-3 under the Investment Advisers Act of 1940
and related guidance provided by the U.S. Securities and Exchange Commission
(the "SEC") or its Staff. In order to purchase shares, a prospective investor
must submit a completed investor certification to SEI Investments Distribution
Co., the Fund's distributor, or a selling agent or sub-distributor prior to the
Closing Time (as defined below). The Fund generally does not accept investments
by non-U.S. persons. Non-U.S. persons may be permitted to invest in the Fund
subject to the satisfaction of enhanced due diligence. Please contact the Fund
at [___] for more information.
This Prospectus applies to the offering of Class I shares of beneficial
interest in the Fund. Class I shares will be offered at the offering price of
$20.00 per share during an initial offering period, which will terminate on or
about [_____], 2015 or such earlier or later date as Winton Capital US LLC, the
Fund's investment adviser, may determine in its discretion, and the shares
thereafter are expected to be offered monthly on a continuous basis at net
asset value ("NAV") per share. Each investor is required to make a minimum
initial investment of $10,000, unless this requirement is waived by the Fund,
as further described herein. Pending the termination of the initial offering
period and the closing of any monthly offering, funds received from prospective
investors will be placed in a non-interest-bearing account with [MUFG Union
Bank, N.A.] On the date of termination of the initial offering period or any
monthly closing, the balance in the account with respect to each investor whose
investment is accepted will be invested in the Fund on behalf of such investor.
See "THE OFFERING."
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PRICE TO PUBLIC SALES LOAD PROCEEDS TO FUND
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Per Share $20.00 None $20.00
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The Fund operates as an "interval fund," which means that the Fund, subject to
applicable law, will offer to repurchase a portion of its outstanding shares at
the NAV per share on a regular schedule. The
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schedule requires the Fund to make repurchase offers once every three months
(generally on the last business day of each calendar quarter). For each
repurchase offer, the Fund will offer to repurchase 5% of its total outstanding
shares (including all classes of shares), unless the Fund's Board of Trustees
has approved a higher amount (but not more than 25% of total outstanding
shares) for a particular repurchase offer. It is possible that a repurchase
offer may be oversubscribed, with the result that shareholders may only be able
to have a portion of the shares they request for repurchase actually
repurchased. The pricing date for the Fund's first repurchase offer is expected
to be [____], 2015. As a result, an investment in the Fund during the initial
offering will be illiquid for at least the first [____] months after
investment. For more information on the Fund's interval structure, policies and
related risks, see "RISKS--REPURCHASE OFFERS RISK" and "PERIODIC REPURCHASE
OFFERS" below.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. You must read it carefully
before you invest, and keep it for future reference. The Fund has filed with
the SEC a Statement of Additional Information ("SAI") dated [____], 2015, as
amended from time to time. The SAI is incorporated by reference into this
Prospectus, which means it is part of this Prospectus for legal purposes. The
SAI's table of contents appears at the end of this Prospectus. The SAI and
annual and semi-annual reports to shareholders, when available, will include
additional information about the Fund. You may get free copies of these
materials and other fund documents or make shareholder inquiries by calling the
Fund toll-free at [____]. You should read the SAI carefully before you invest,
and keep it for future reference.
You may also review and copy information about the Fund, including its SAI, at
the SEC's Public Reference Room in Washington, D.C. For information about the
operation of the Public Reference Room, you may call the SEC at 1-202-551-8090.
You may also access reports and other information about the Fund on the EDGAR
Database on the SEC's website at http://www.sec.gov. You may get copies of this
information, with payment of a duplication fee, by electronic request at the
following e-mail address: publicinfo@sec.gov, or by writing the SEC's Public
Reference Section, Washington, D.C. 20549-1520. You may need to refer to the
Fund's file number, which is [____].
THE FUND'S SECURITIES HAVE NO HISTORY OF PUBLIC TRADING AND THE FUND DOES NOT
CURRENTLY INTEND TO LIST ITS SHARES FOR TRADING ON ANY NATIONAL SECURITIES
EXCHANGE. THERE IS NO GUARANTEE THAT A SECONDARY MARKET FOR FUND SHARES WILL
DEVELOP. THE SHARES, THEREFORE, MAY NOT BE READILY MARKETABLE. EVEN THOUGH THE
FUND WILL MAKE PERIODIC REPURCHASE OFFERS TO REPURCHASE A PORTION OF THE SHARES
TO PROVIDE SOME LIQUIDITY TO SHAREHOLDERS, YOU SHOULD CONSIDER THE SHARES TO BE
AN ILLIQUID INVESTMENT. AN INVESTMENT IN THE FUND IS SUITABLE ONLY FOR
LONG-TERM INVESTORS WHO CAN BEAR THE RISKS ASSOCIATED WITH THE LIMITED
LIQUIDITY OF THE SHARES. THE FUND IS NOT AN APPROPRIATE INVESTMENT FOR
INVESTORS WHO DESIRE THE ABILITY TO REDUCE THEIR INVESTMENTS TO CASH ON A
TIMELY BASIS. INVESTMENT IN THE FUND INVOLVES SIGNIFICANT RISK AND IS SUITABLE
ONLY FOR PERSONS WHO CAN BEAR THE ECONOMIC RISK OF THE LOSS OF THEIR
INVESTMENT. YOU SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE INVESTING IN THE
FUND. PLEASE SEE "RISKS" IN THIS PROSPECTUS.
YOU SHOULD NOT CONSTRUE THE CONTENTS OF THIS PROSPECTUS AS LEGAL, TAX OR
FINANCIAL ADVICE. YOU SHOULD CONSULT WITH YOUR OWN PROFESSIONAL ADVISORS AS TO
LEGAL, TAX, FINANCIAL OR OTHER MATTERS RELEVANT TO THE SUITABILITY OF AN
INVESTMENT IN THE FUND.
THE SEC AND THE COMMODITIES FUTURES TRADING COMMISSION HAVE NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
2
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY XX
SUMMARY OF FUND FEES AND EXPENSES XX
FINANCIAL HIGHLIGHTS XX
THE FUND XX
USE OF PROCEEDS XX
INVESTMENT OBJECTIVE, STRATEGIES AND POLICIES XX
RISKS XX
MANAGEMENT OF THE FUND XX
RELATED PERFORMANCE DATA OF COMPARABLE ACCOUNTS XX
SERVICE PROVIDERS XX
THE OFFERING AND PLAN OF DISTRIBUTION XX
PERIODIC REPURCHASE OFFERS: REDEMPTIONS/REPURCHASES OF SHARES AND XX
TRANSFERS
DETERMINATION OF NET ASSET VALUE XX
DISTRIBUTIONS AND DISTRIBUTION REINVESTMENT XX
TAX CONSIDERATIONS XX
DESCRIPTION OF CAPITAL STRUCTURE AND SHARES XX
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION XX
3
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE MORE DETAILED INFORMATION INCLUDED ELSEWHERE IN
THIS PROSPECTUS AND THE STATEMENT OF ADDITIONAL INFORMATION ("SAI").
THE FUND Winton Diversified Opportunities Fund (the "Fund") is a Delaware
statutory trust registered as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The
Fund is a diversified, closed-end management investment company
that operates as an "interval fund." (See "PERIODIC REPURCHASE
OFFERS" below.)
The Fund will initially offer a single class of shares of
beneficial interest ("shares") designated as "Class I shares" to
investors eligible to invest in the Fund. The Fund may in the
future submit to the U.S. Securities and Exchange Commission
("SEC") an application for an exemptive order to permit the Fund
to offer additional classes of shares. Although there is no
assurance that the SEC would grant such an order, any additional
class of shares would have certain differing characteristics and
differences in the distribution and/or shareholder servicing fees
that may be charged.
THE OFFERING Class I shares of beneficial interest in the Fund are being
offered during an initial offering period that is expected to
terminate on or about [____], 2015 or such earlier or later date
as Winton Capital US LLC, the Fund's investment adviser (the
"Adviser"), may determine in its discretion. During the initial
offering period, Class I shares will be offered at the offering
price, which is $20.00 per share. Thereafter, the shares are
expected to be offered monthly on a continuous basis (generally
as of 4:00 p.m. Eastern Time on the last business day of each
month, the "Closing Time") at net asset value ("NAV") per share
at that time. At each Closing Time, purchase orders received in
proper form will be accepted by the Fund and deposited monies
will be invested in the Fund as of the first business day of the
next month following the acceptance of an investor's purchase
order. For more information regarding the offering, see "THE
OFFERING AND PLAN OF DISTRIBUTION" below.
For each investor, the Fund requires a minimum initial investment
of $10,000 and minimum subsequent investments of $5,000. If an
investor's account balance drops below $10,000 due to
participation in a periodic repurchase offer (see "PERIODIC
REPURCHASE OFFERS" below), the Fund, in its sole discretion, may
deem the investor to have tendered all of the investor's shares,
if permissible under the terms of the repurchase offer.
The Fund may waive these minimum investment requirements for one
or more investors in its sole discretion. Notwithstanding any
waiver, investors remain subject to eligibility requirements set
forth in this Prospectus. Because the Fund will pay the Adviser
an incentive fee based on the Fund's performance, each investor
must also be a "qualified client" as that term is defined in Rule
205-3 under the Investment Advisers Act of 1940, as amended, and
related guidance provided by the SEC or its Staff. In order to
purchase shares, a prospective investor must submit a completed
investor certification to the
4
Distributor (as defined below) or a selling agent or
sub-distributor, who may be an affiliate of the Adviser, prior to
the Closing Time.
Class I shares are not listed on any securities exchange. There
is no guarantee that a secondary market for Fund shares will
develop. In addition, shares are subject to transfer
restrictions, including a requirement that shares may be
transferred only to persons who meet the Fund's eligibility
requirements set forth in this Prospectus. Shareholders will not
have the right to redeem their shares. However, as described
below, in order to provide some liquidity to shareholders, the
Fund will conduct periodic repurchase offers for a portion of its
outstanding shares.
AN INVESTMENT IN THE FUND IS SUITABLE ONLY FOR LONG-TERM
INVESTORS WHO CAN BEAR THE RISKS ASSOCIATED WITH THE LIMITED
LIQUIDITY OF THE SHARES.
INTERVAL FUND; As an interval fund, the Fund will make periodic offers to
PERIODIC repurchase a portion of its outstanding shares at NAV per share.
REPURCHASE The Fund has adopted a fundamental policy, which cannot be
OFFERS changed without shareholder approval, to make repurchase offers
once every three months. The pricing date for the Fund's first
repurchase offer is expected to be [____], 2015. As a result, an
investment in the Fund made during the initial offering period
must be held by the investor for at least [____] months.
For each repurchase offer, the Fund will offer to repurchase 5%
of its total outstanding shares, unless the Fund's Board of
Trustees (each, a "Trustee" and collectively, the "Board") has
approved a higher amount (but not more than 25% of total
outstanding shares) for a particular repurchase offer. There is
no guarantee that the Fund will offer to repurchase more than 5%
of its total outstanding shares (including all classes of shares)
in any repurchase offer, and there is no guarantee that you will
be able to sell shares in an amount or at the time that you
desire.
The procedures that will apply to the Fund's repurchase offers
are described in "PERIODIC REPURCHASE OFFERS" below.
Proceeds from the repurchase of shares will be paid in cash (in
U.S. dollars).
INVESTMENT The Fund's investment objective is to seek to achieve long-term
OBJECTIVE capital appreciation through compound growth.
INVESTMENT The investment strategy of the Fund is to invest globally long
STRATEGY and short, using leverage, in a diversified range of liquid
instruments (including exchange traded futures, options and
forwards, cash equities (including stocks of small and medium
capitalization companies), depositary receipts, currency forwards
traded over the counter and other related instruments, such as
contracts for difference on equities and exchange traded funds)
by following a systematic investment process that is based on
statistical research.
The Fund may also invest a significant portion of its assets in
other instruments for cash management purposes. These other
instruments are expected to be
5
predominantly comprised of U.S. Treasury obligations but may
include debt instruments of any government, corporation or other
entity and may include other instruments such as money market
funds.
The Fund either invests directly in those instruments, or
indirectly by investing via a swap or via its wholly-owned
subsidiary organized under the laws of the Cayman Islands (the
"Subsidiary") which may then invest in such assets directly or
indirectly.
INVESTMENT The Fund seeks to achieve its investment objective in accordance
PROGRAM with its investment strategy by following the Winton Diversified
Program (the "Program"), which has been developed and is
implemented by the Adviser. The Adviser follows a disciplined
investment process that is based on statistical analysis of past
data. This research is used to develop investment strategies that
are operated as an automated, computer-based system. This
investment system is implemented, with certain variations
resulting from particular investment constraints, to create
different investment programs. The Program may invest long and
short using leverage in any markets that the Adviser believes are
sufficiently liquid, and for which there is sufficient data
available. The Program's key investment constraint is to achieve
its Risk Profile (as defined below).
For additional information about the Fund's investment
strategies, see "INVESTMENT OBJECTIVES, STRATEGIES AND POLICIES"
below.
RISK PROFILE As at the date of this Prospectus, the Program is applied to the
Fund with a target of limiting the frequency of a monthly loss
greater than 4.2% to once every two years on average and a
long-term gross annualized volatility target of 12%. The Risk
Profile may be amended at the discretion of the Adviser.
BORROWINGS To the extent consistent with the requirements of the 1940 Act,
the Fund may borrow from prime brokers or borrow from or obtain a
line of credit from other established financial institutions in
order to, among other reasons, provide the Fund with liquidity
for redemptions or other cash management purposes.
RISKS INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES SUBSTANTIAL
RISKS, INCLUDING THE RISK OF LOSS OF A SHAREHOLDER'S ENTIRE
INVESTMENT. NO GUARANTEE OR REPRESENTATION IS MADE THAT THE FUND
WILL ACHIEVE ITS INVESTMENT OBJECTIVE, AND INVESTMENT RESULTS MAY
VARY SUBSTANTIALLY FROM YEAR TO YEAR. CERTAIN INVESTMENT
TECHNIQUES UTILIZED BY THE PROGRAM, INCLUDING INVESTMENTS IN
DERIVATIVES AND SHORT SALES, CAN, IN CERTAIN CIRCUMSTANCES,
SUBSTANTIALLY INCREASE THE ADVERSE IMPACTS TO WHICH THE FUND MAY
BE SUBJECT.
RISKS ASSOCIATED WITH THE INVESTMENT SYSTEM AND THE PROGRAM
LIMITATIONS OF MATHEMATICAL MODELS RISK. The Fund utilizes the
Adviser's investment strategy, which is based on research into
historic data and the application of that research to the
development of mathematical models that attempt to forecast
returns, risk, correlation and transaction costs. Mathematical
models may be incomplete and/or flawed and there is an inherent
risk that any
6
forecasts derived from them may be inaccurate, particularly if
the research or models are based on, or incorporate, inaccurate
assumptions or data. As a result, the investment system may not
generate profitable trading signals and the Fund may suffer loss.
PROCESS EXCEPTIONS RISK. The Fund utilizes the Adviser's
investment strategy, which is based on mathematical models which
are implemented as an automated computer-based investment system.
Issues with the design, development, implementation, maintenance
or operation of the investment system; any component of the
investment system; or any processes and procedures related to the
investment system may cause losses to the Fund and such losses
may be substantial.
RELIANCE ON RISK PROFILE RISK. As at the date of this Prospectus,
the Program is applied to the Fund with a target of limiting the
frequency of a monthly loss greater than 4.2% to once every two
years on average and a long-term gross annualized volatility
target of 12 per cent. These targets are subject to change at any
time at the discretion of the Adviser and are based on the
Adviser's interpretation of the information available to it at
the relevant time. There can be no assurance that the targets
will be met and these targets are not a guarantee or prediction
of the Fund's actual losses or volatility.
LEVERAGE RISK. The use of leverage can amplify the effects of
market volatility on the Fund's share price and may also cause
the Fund to liquidate portfolio positions when it would not be
advantageous to do so in order to satisfy its obligations. The
Fund's use of leverage may result in a heightened risk of
investment loss.
RISKS ASSOCIATED WITH THE ADVISER.
INCENTIVE FEE RISK. In addition to receiving a Management Fee,
the Adviser may also receive an Incentive Fee based on the
appreciation in Fund assets. The Incentive Fee may create an
incentive for the Adviser to manage the Fund's portfolio in a
manner that is riskier than would be the case in the absence of a
fee based on the performance of the Fund.
COUNTERPARTY RISK.
COUNTERPARTY RISK. The default by a counterparty on its
obligations to the Fund could result in losses to the Fund.
RISKS ASSOCIATED WITH THE FUND'S STRUCTURE.
NON-MARKETABILITY OF SHARES RISK. The Fund's shares are not
listed on any securities exchange. There is no guarantee that a
secondary market for Fund shares will develop. The Fund's shares,
therefore, may not be readily marketable.
7
REPURCHASE OFFERS RISK. An investment in the Fund is subject to
the risk that the Fund's repurchases of shares may hurt
investment performance by forcing the Fund to maintain a higher
percentage of its assets in liquid investments or to liquidate
certain investments when it is not desirable to do so.
Repurchases may be oversubscribed, preventing shareholders from
selling some or all of their tendered shares back to the Fund.
RISKS ASSOCIATED WITH SPECIFIC INVESTMENTS.
CURRENCY RISK. As a result of the Fund's investments in
securities denominated in, and/or receiving revenues in, non-U.S.
currencies, the Fund will be subject to currency risk. Currency
risk is the risk that non-U.S. currencies will decline in value
relative to the U.S. dollar, which would adversely affect the
U.S. dollar value of an investment in the Fund. Currency exchange
rates may fluctuate in response to, among other things, changes
in interest rates, intervention (or failure to intervene) by U.S.
or non-U.S. governments, central banks or supranational entities,
or by the imposition of currency controls or other political
developments in the United States or abroad.
DERIVATIVES RISK. The Fund's use of futures contracts, forward
contracts, options and swaps is subject to market risk, leverage
risk, illiquidity of markets risk, market risk and correlation
risk. Leverage risk is described above and illiquidity of markets
risk is described below. Market risk is the risk that the market
value of an investment may move up and down, sometimes rapidly
and unpredictably. Correlation risk is the risk that changes in
the value of the derivative may not correlate perfectly with the
underlying asset, rate or index. The Fund's use of forward
contracts and swap agreements is also subject to credit risk and
valuation risk. Valuation risk is the risk that the derivative
may be difficult to value and/or may be valued incorrectly.
Credit risk is the risk that the issuer of a security or the
counterparty to a contract will default or otherwise become
unable to honor a financial obligation. Each of these risks could
cause the Fund to lose more than the principal amount invested in
a derivative instrument.
COMMODITY-RELATED INVESTMENTS RISK. Exposure to the commodities
markets (including financial futures markets) may subject the
Fund to greater volatility than investments in traditional
securities. Temporary distortions of or other disruptions to the
commodities markets may subject the Fund to losses.
CONTRACTS FOR DIFFERENCES RISK. Contracts for differences
("CFDs") are privately negotiated contracts between two parties,
buyer and seller, stipulating that the seller will pay to or
receive from the buyer the difference between the nominal value
of the underlying instrument at the opening of the contract and
that instrument's value at the end of the contract. As is the
case with owning any financial instrument, there is the risk of
loss associated with buying a CFD. There may be liquidity risk if
the underlying instrument is illiquid because the liquidity of a
CFD is based on the liquidity of the underlying instrument. A
further risk is that adverse movements in the underlying security
will require the buyer to post additional margin. CFDs also carry
counterparty risk. To the extent that there is an imperfect
correlation between the return on the Fund's obligation to its
counterparty under a CFD and the return on related assets in its
8
portfolio, the CFD transaction may increase the Fund's financial
risk.
CONTINGENT LIABILITY TRANSACTIONS RISK. Contingent liability
transactions, such as transactions in futures and CFDs, which are
margined, require the Fund to make a series of payments against
the purchase price, instead of paying the whole purchase price
immediately. The Fund may sustain a total loss of the margin
deposited to establish or maintain a position or may be called
upon to pay substantial additional margin at short notice to
maintain the position. If the Fund fails to do so within the time
required, its position may be liquidated at a loss and the Fund
will be responsible for the resulting deficit.
EQUITIES RISK. Equities represent ownership interests in a
company or corporation. Investments in equity securities in
general are subject to market risks that may cause their prices
to fluctuate over time. Fluctuations in the value of equities in
which the Fund invests will cause the value of the Fund's assets
to fluctuate.
SMALL AND MEDIUM CAPITALIZATION COMPANIES RISK. Small and medium
capitalization companies in which the Fund invests may be more
vulnerable to adverse business or economic events than larger,
more established companies. Therefore, small and medium
capitalization stocks may be more volatile than those of larger
companies.
SHORT SALES RISK. A short sale involves the sale of a security
that the Fund does not own in the expectation of purchasing the
same security (or a security exchangeable therefore) at a later
date at a lower price. Short sales expose the Fund to the risk
that it will be required to buy the security sold short (also
known as "covering" the short position) at a time when the
security has appreciated in value, thus resulting in a loss to
the Fund that is potentially unlimited. Investment in short sales
may also cause the Fund to incur expenses related to borrowing
securities.
NON-U.S. INVESTMENT/EMERGING MARKETS RISK. The Fund invests in
securities issued by non-U.S. companies. Non-U.S. securities may
be subject to additional risks due to, among other things,
political, social and economic developments abroad, currency
movements and different legal, regulatory and tax environments.
These additional risks may be heightened with respect to emerging
market countries since political turmoil and rapid changes in
economic conditions are more likely to occur in these countries.
DEPOSITARY RECEIPTS RISK. Depositary receipts are certificates
evidencing ownership of shares of a non-U.S. issuer that are
issued by depositary banks and generally trade on an established
market. Depositary receipts are subject to many of the risks
associated with investing directly in non-U.S. securities,
including, among other things, political, social and economic
developments abroad, currency movements and different legal,
regulatory and tax environments.
DEBT SECURITIES RISK. The Fund's investments in debt securities
are subject to interest rate risk and credit risk. Interest rate
risk is the risk that the value of the fixed income securities
held by the Fund will decline due to falling interest rates. A
rise in interest rates typically causes a fall in values of fixed
income securities, while a fall in interest rates typically
causes a rise in values of such securities. Credit risk is the
risk that the issuer of a security or the counterparty to a
contract will default or otherwise become unable to honor a
financial obligation. The Fund could lose money if the issuer or
guarantor of a portfolio security fails to make timely payment or
otherwise honor its obligations.
9
INVESTMENT IN THE SUBSIDIARY RISK. The Subsidiary is not
registered under the Investment Company Act of 1940, as amended
(the 1940 Act) and, unless otherwise noted in this prospectus, is
not subject to all of the investor protections of the 1940 Act.
Thus, the Fund, as an investor in the Subsidiary, will not have
all of the protections offered to investors in registered
investment companies. In addition, changes in the laws of the
United States and/or the Cayman Islands, under which the Fund and
the Subsidiary, respectively, are organized, could result in the
inability of the Fund and/or the Subsidiary to operate as
intended and could negatively affect the Fund and its
shareholders.
GENERAL INVESTMENTS RISK.
HIGH VOLATILITY RISK. The markets in which the Fund invests are
subject to high levels of volatility. Such volatility could
result in significant losses to the Fund.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS
INVOLVED IN AN INVESTMENT IN THE FUND. PROSPECTIVE INVESTORS
SHOULD CONSULT THEIR OWN LEGAL, TAX AND FINANCIAL ADVISORS AS TO
ALL OF THESE RISKS AND IN DETERMINING WHETHER AN INVESTMENT IN
THE FUND IS A SUITABLE INVESTMENT.
For additional information on these and other risks related to
the Fund, see "RISKS" below and in the SAI.
INVESTMENT The Adviser, a limited liability company organized under the laws
ADVISER of the State of Delaware and registered with the SEC as an
investment adviser, will serve as the investment adviser of the
Fund and will be responsible for its investment activities. The
Adviser is a wholly-owned subsidiary of Winton Capital Group
Limited, an English limited liability company. The Adviser
provides investment advisory services to the Fund pursuant to a
written investment advisory agreement (the "Advisory Agreement"),
as further described herein.
DISTRIBUTOR SEI Investments Distribution Co. (the "Distributor"), a
corporation organized in Pennsylvania and registered as a member
of the Financial Industry Regulatory Authority ("FINRA"), is the
principal underwriter of shares of the Fund. Shares may be
purchased through the Distributor or other broker- dealers
(referred to herein as selling agents or sub-distributors) who
have entered into a dealer agreement with the Distributor. The
Distributor acts as the distributor of shares for the Fund on a
best efforts and agency basis (not as principal). The Distributor
is not obligated to sell any specific number of shares of the
Fund.
FEES AND MANAGEMENT FEE. Pursuant to the Advisory Agreement, the Fund will
EXPENSES pay to the Adviser a monthly fee at the annual rate of 1.25%. The
Management Fee will be applied to the Fund's NAV (before the
deduction of any Incentive Fee and the repurchase of any shares
pursuant to a periodic repurchase offer). The Management Fee will
be accrued at least weekly and paid monthly.
10
INCENTIVE FEE. The Fund will pay to the Adviser a
performance-based fee ("Incentive Fee"), quarterly in arrears,
accrued as of the end of each business day, equal to 20.00% of
the Investment Profits (as defined below) attributable to each
share for such calendar quarter; PROVIDED, HOWEVER, that an
Incentive Fee with respect to a share will be paid only with
respect to Investment Profits for the applicable calendar quarter
in excess of Unrecouped Investment Losses (as defined below) as
of the end of the previous calendar quarter. See "MANAGEMENT OF
THE FUND" for a more complete discussion of the Incentive Fee.
OTHER EXPENSES. The Fund pays all other expenses incurred in the
operation of the Fund.
REIMBURSEMENT OF FUND EXPENSES. The Adviser has contractually
agreed to reduce fees and reimburse expenses to the extent
necessary to keep Total Annual Fund Operating Expenses after Fee
Reductions and/or Expense Reimbursements (excluding interest,
taxes, brokerage commissions, dividend and interest expenses on
securities sold short, Acquired Fund Fees and Expenses, Incentive
Fees and non-routine expenses) from exceeding 1.61% of the Fund's
average daily net assets until [____] (the "Expense Limitation").
This agreement may be terminated: (i) by the Board of Trustees of
the Fund for any reason at any time, or (ii) by the Adviser, upon
ninety (90) days' prior written notice to the Trust, effective as
of the close of business on [____].
For additional information on fees and expenses related to an
investment in the Fund, see "SUMMARY OF FUND FEES AND EXPENSES"
below.
DISTRIBUTIONS The Fund expects to declare and pay dividends of net investment
income annually and net realized capital gains annually. Unless
shareholders specify otherwise, dividends will be reinvested in
shares of the Fund.
TAX Generally, the dividends and distributions you receive from the
CONSIDERATIONS Fund are taxable and will be reported to you and the IRS as
ordinary income, capital gains, or some combination of both,
unless you are investing through a traditional tax deferred
arrangement, such as a 401(k) plan or an individual retirement
account, in which case your distributions generally will be taxed
when withdrawn from the tax-deferred account.
The Fund intends to elect and to qualify each year to be treated
as a RIC under the Code. In order to so qualify, the Fund must
meet certain requirements with respect to the sources of its
income, the diversification of its assets and the distribution of
its income. If the Fund qualifies as a RIC, it will not be
subject to U.S. federal income or excise tax on the income it
distributes in a timely manner to its shareholders in the form of
investment company taxable income or net capital gain
distributions.
Prospective investors should consult their tax advisors as to the
federal, state and local tax consequences to them of the
purchase, ownership and disposition of shares.
11
SUMMARY OF FUND FEES AND EXPENSES
ANNUAL EXPENSES
(AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON SHARES)
[Enlarge/Download Table]
Management Fees (of the Fund and Subsidiary) 1.25%
Management Fees of the Fund 1.25%
Management Fees of the Subsidiary None
Incentive Fee (20.00% of net profits) (of the Fund and Subsidiary)(1) 20.00%
Incentive Fee of the Fund 20.00%
Incentive Fee of the Subsidiary None
Other Expenses (of the Fund and Subsidiary) (2) 1.86%
Other Expenses of the Fund 1.52%
Other Expenses of the Subsidiary 0.34%
Total Annual Expenses (excluding Incentive Fee) 3.11%
Less Expense Reimbursements (1.50)%
Total Annual Expenses (excluding Incentive Fee) Less Expense 1.61%
Reimbursements (3)
(1) THE FUND WILL PAY TO THE ADVISER A PERFORMANCE-BASED INCENTIVE FEE,
QUARTERLY IN ARREARS, GENERALLY ACCRUED AS OF THE END OF EACH BUSINESS DAY,
EQUAL TO 20.00% OF THE INVESTMENT PROFITS ATTRIBUTABLE TO EACH SHARE FOR
SUCH CALENDAR QUARTER; PROVIDED, HOWEVER, THAT AN INCENTIVE FEE WITH
RESPECT TO A SHARE WILL BE PAID ONLY WITH RESPECT TO INVESTMENT PROFITS FOR
THE APPLICABLE CALENDAR QUARTER IN EXCESS OF UNRECOUPED INVESTMENT LOSSES
AS OF THE END OF THE PREVIOUS CALENDAR QUARTER. SEE "MANAGEMENT OF THE
FUND" FOR A MORE COMPLETE DISCUSSION OF THE INCENTIVE FEE.
(2) "OTHER EXPENSES" ARE BASED ON ESTIMATED AMOUNTS FOR THE FUND'S AND THE
SUBSIDIARY'S CURRENT FISCAL YEAR.
(3) THE ADVISER HAS CONTRACTUALLY AGREED TO REDUCE FEES AND REIMBURSE EXPENSES
TO THE EXTENT NECESSARY TO KEEP TOTAL ANNUAL FUND OPERATING EXPENSES AFTER
FEE REDUCTIONS AND/OR EXPENSE REIMBURSEMENTS (EXCLUDING INTEREST, TAXES,
BROKERAGE COMMISSIONS, DIVIDEND AND INTEREST EXPENSES ON SECURITIES SOLD
SHORT, ACQUIRED FUND FEES AND EXPENSES, INCENTIVE FEES AND NON-ROUTINE
EXPENSES) FROM EXCEEDING 1.61% OF THE FUND'S AVERAGE DAILY NET ASSETS UNTIL
FEBRUARY 28, 2017 (THE "EXPENSE LIMITATION"). THIS AGREEMENT MAY BE
TERMINATED: (I) BY THE BOARD OF TRUSTEES OF THE FUND FOR ANY REASON AT ANY
TIME, OR (II) BY THE ADVISER, UPON NINETY (90) DAYS' PRIOR WRITTEN NOTICE
TO THE TRUST, EFFECTIVE AS OF THE CLOSE OF BUSINESS ON FEBRUARY 28, 2017.
The purpose of the above table is to assist an investor in understanding the
fees and expenses that an investor in the Fund will bear directly or
indirectly.
12
EXAMPLE
This example is based on the expenses set forth in the table and should not be
considered a representation of the Fund's future expenses. Actual expenses of
the Fund may be higher or lower than those shown.
[Enlarge/Download Table]
----------------------------------------------------------------------------------------------------------
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------------------------------------------------------------------------------------------------------
You would pay the following expenses (including the $232 $960 $1,710 $3,686
Incentive Fee) on a $10,000 investment, assuming a
5% annual return
----------------------------------------------------------------------------------------------------------
The Example assumes that the Fund's annual return is 5% before expenses. The
Fund's fees and expenses, including the Incentive Fee, were then applied to the
assumed 5% return. The Fund will pay to the Adviser a performance-based
Incentive Fee, quarterly in arrears, accrued as of the end of each business
day, equal to 20.00% of the Investment Profits attributable to each share for
such calendar quarter; provided, however, that an Incentive Fee with respect to
a share will be paid only with respect to Investment Profits for the applicable
calendar quarter in excess of Unrecouped Investment Losses as of the end of the
previous calendar quarter. As a result, the dollar amounts in the example could
be (a) higher if the Fund's actual rate of return exceeds 5% or (b) lower if
Unrecouped Investment Losses exceed Investment Profits.
FINANCIAL HIGHLIGHTS
The Fund is new and does not have an operating history. Information, when
available, will be included in the Fund's first annual or semi-annual report to
shareholders.
THE FUND
The Fund is a newly organized, continuously offered, diversified, closed-end
management investment company that is operated as an interval fund. The Fund
was organized as a Delaware statutory trust on December 2, 2014 and has no
operating history. The Fund's principal office is located at One Freedom Valley
Drive, Oaks, Pennsylvania 19456, and its telephone number is [____].
USE OF PROCEEDS
Pending the termination of the initial offering period and the closing of any
monthly offering, funds received from prospective investors will be placed in a
non-interest-bearing account with [MUFG Union Bank, N.A.] On the date of
termination of the initial offering period or any monthly closing, the balance
in such account with respect to each investor whose investment is accepted will
be invested in the Fund on behalf of such investor. The Adviser will invest the
net proceeds of such offerings of shares in accordance with the Fund's
investment objective and investment policies. Except to the extent used to
satisfy periodic repurchase offers, the Adviser expects to be able to fully
invest net proceeds in accordance with the Fund's investment objective and
investment policies within three months of receipt of the proceeds. A delay in
the anticipated use of proceeds could prevent the Fund from achieving its
investment objective.
13
INVESTMENT OBJECTIVE, STRATEGIES AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek to achieve long-term capital
appreciation through compound growth.
CHANGE IN INVESTMENT OBJECTIVE. The Fund's investment objective is not
fundamental and may be changed by the Board without shareholder approval upon
thirty (30) calendar days' prior written notice to shareholders.
INVESTMENT STRATEGIES
The Fund seeks to achieve its investment objective by investing globally long
and short, using leverage, in a diversified range of liquid instruments
(including exchange traded futures, options and forwards, cash equities
(including stocks of small and medium capitalization companies), depositary
receipts, currency forwards traded over the counter and other related
instruments, such as contracts for difference on equities and exchange traded
funds) in accordance with the Adviser's Program (defined below). The Fund
either invests directly in those instruments, or indirectly by investing via a
swap or via the Subsidiary, which may then invest in such assets directly or
indirectly via a swap.
The Adviser uses an automated computer-based investment system that is
developed by its research team based on the statistical analysis of historic
data. The investment system is implemented with particular constraints
(including constraints on matters that are intrinsic to markets, such as price,
volume and open interest; and those that are external to markets, such as
economic statistics, industrial and commodity data and public company financial
data) to create different investment programs. The program used by the Fund is
the Winton Diversified Program (the "Program"). The Program constructs a
portfolio by attempting to forecast the returns of each security or instrument
in the universe (described above) using a variety of data-based signals (for
instance, using price or company account data) and selecting those securities
or instruments forecasted as having the potential for above-average returns. In
order to determine position weights in the target portfolio, the Adviser uses
its proprietary risk forecasting methodology so that lower risk securities or
instruments tend to receive larger weights than higher risk securities or
instruments. The Adviser believes this provides a good means of diversifying
the portfolio. While the Fund may buy and sell securities or instruments
frequently in certain circumstances, the Adviser takes into consideration
transaction costs in its forecasting models to seek to trade in a cost
efficient manner that encourages limited turnover and prioritizes trades with
the greatest expected overall benefit to the portfolio.
The investment system (from which the Program is derived) is modified over time
as the Adviser monitors its operation and undertakes further research. Changes
to the investment system occur as a result of, amongst other things, changes in
market liquidity, the availability of new data (such as additional detail on
historic data or data on new markets), the Adviser extracting additional
information from existing data or the Adviser refining its understanding of
existing data.
The assets of the Fund which are not being utilized directly or indirectly in
connection with the Program (i.e., which are not being used for, or set aside in
respect of, collateral or margin), which may constitute a significant portion of
the assets of the Fund, may be invested in other instruments for cash management
purposes. These other instruments are expected to be predominantly comprised of
U.S. Treasury obligations but may include debt instruments of any government,
corporation or other entity and may include other instruments such as money
market funds.
14
INVESTMENT CONSTRAINTS
The Program may invest long and short, using leverage, in any markets that the
Adviser believes are sufficiently liquid, and for which there is sufficient
data available. The Program's key investment constraint is to achieve its Risk
Profile. See the sub-section headed "RISK PROFILE" below.
INVESTMENT UNIVERSE
The Program may invest globally in exchange traded futures, options and
forwards, cash equities, currency forwards traded over the counter and other
related instruments, such as contracts for difference on equities and exchange
traded funds, to construct a diversified portfolio.
HOLDING PERIODS
The Program has no minimum holding periods for investments. However, it is
currently expected that the holding periods for the Program will be long-term,
with the average holding period across all instruments expected to be three to
eight months.
RISK MANAGEMENT
Management of the risk arising from market fluctuations is an integral part of
the Program. Such risk ("investment risk") is often understood to be the
volatility of returns, and where leverage is employed, the most important
determinant of such volatility is the extent of that leverage. By forecasting
volatility in each market and the correlation between markets daily, the
Adviser attempts to forecast the overall volatility of the Fund's portfolio and
adjust the leverage accordingly in order to target a specified level of risk.
The volatility of an investment is a statistical measurement of the dispersion
of its returns and may be measured by the annualized standard deviation of
those returns. Over the long-term, lower volatility is more likely to result in
lower profits and lower losses and higher volatility is more likely to result
in greater profits and greater losses. The Adviser measures volatility using a
proprietary model which places greater emphasis on the probability of extreme
market movements than many commonly used models.
A key aspect of the Program is the ability to manage risk. Risk is managed for
the portfolio as a whole as well as for the individual markets and sectors
within the portfolio. Risk is a multifaceted concept and the Program is
currently designed to seek to achieve its Risk Profile.
The Risk Profile of the Program is not constant and may be adjusted at the
discretion of the Adviser.
The Adviser's Investment Committee is primarily responsible for managing
investment risk and the Adviser's Risk Committee is responsible for managing
other risks, such as operational, counterparty and regulatory risks, associated
with the Program.
RISK PROFILE
As at the date of this Prospectus, the Program is applied to the Fund with a
target of limiting the frequency of a monthly loss greater than 4.2% to once
every two years on average and a long-term gross annualized volatility target
of 12%. The Adviser seeks to achieve these targets by varying the amount of
leverage in the Fund through time. These targets may be amended at the
discretion of the Adviser.
15
INVESTMENTS IN THE SUBSIDIARY
The Fund may also seek to gain exposure to certain markets, including
commodity, currency, interest rate and equity markets, in whole or in part,
through investments in the Subsidiary. The Subsidiary, unlike the Fund, may
invest to a significant extent in commodities, commodity contracts,
commodity-linked derivative instruments, including swap agreements, other
commodity investments and derivative instruments. The Subsidiary may also
invest in other instruments in which the Fund is permitted to invest, either as
investments or to serve as margin or collateral for its derivative positions.
The Fund may invest up to 25% of its total assets in the Subsidiary. The
Subsidiary is advised by the Adviser.
To the extent the Subsidiary invests in derivative instruments, including
commodity-linked instruments, the Subsidiary will comply with the same asset
coverage requirements that are applicable to the Fund's transactions in such
derivatives under the 1940 Act, as applicable. With respect to its investments,
the Subsidiary will generally be subject to the same investment restrictions
and limitations and generally follow the same compliance policies as the Fund;
however, the Subsidiary (unlike the Fund) may invest a significant amount in
commodity-linked swap agreements and other commodity-linked derivative
instruments.
This Prospectus describes the Fund's principal investment strategies and risks,
and the Fund will normally invest in the types of securities and other
instruments described in this Prospectus. In addition to the securities and
other instruments and strategies described in this Prospectus, the Fund also
may invest in other securities and instruments, use other strategies and engage
in other investment practices. These investments and strategies are described
in the SAI.
The SAI contains a list of the fundamental and non-fundamental investment
policies of the Fund under the heading "INVESTMENT LIMITATIONS."
RISKS
THERE CAN BE NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE.
AN INVESTMENT IN THE FUND IS AN APPROPRIATE INVESTMENT ONLY FOR THOSE INVESTORS
WHO CAN TOLERATE A HIGH DEGREE OF RISK AND DO NOT REQUIRE A LIQUID INVESTMENT.
INVESTORS MAY LOSE SOME OR ALL OF THEIR INVESTMENT IN THE FUND. THE FUND IS NOT
DESIGNED TO BE A COMPLETE INVESTMENT PROGRAM AND MAY NOT BE A SUITABLE
INVESTMENT FOR ALL INVESTORS. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN
LEGAL, TAX AND FINANCIAL ADVISORS AS TO ALL OF THESE RISKS AND IN DETERMINING
WHETHER AN INVESTMENT IN THE FUND IS A SUITABLE INVESTMENT.
Investment in the Fund is speculative and involves substantial risks, including
the risk of loss of a shareholder's entire investment. No guarantee or
representation is made that the Fund will achieve its investment objective, and
investment results may vary substantially from year to year. Certain investment
techniques utilized by the Program, including investments in derivatives and
short sales, can, in certain circumstances, substantially increase the adverse
impacts to which the Fund may be subject. Prospective investors should consider
all of the risks involved in an investment in the Fund including, without
limitation, the following risks before investing. The following describes some
of the risks the Fund may bear through direct investments in securities and
derivatives as well as indirectly through its investment in the Subsidiary.
RISKS ASSOCIATED WITH THE INVESTMENT SYSTEM AND THE PROGRAM
NO GUARANTEE OF PROFIT OR AGAINST LOSS RISK. There is no assurance that the
Program or the Fund will provide any return or will not incur substantial
losses.
LIMITATIONS ON MATHEMATICAL MODELS RISK. The Fund utilizes the Adviser's
investment approach, which is based on research into historic data and the
application of that research to the development of mathematical
16
models that attempt to forecast returns, risk, correlation and transaction
costs. Many of these models are trend-following models that attempt to identify
and exploit market trends. Mathematical models may be incomplete and/or flawed
and there is an inherent risk that any forecasts derived from them may be
inaccurate, particularly if the research or models are based on, or
incorporate, inaccurate assumptions or data. Assumptions or data may be
inaccurate from the outset or may become inaccurate as a result of many factors
such as, changes in market structure, increased government intervention in
markets or growth in assets managed in accordance with similar investment
strategies. In particular, such factors may make the trend-following models of
the Adviser less effective because they may lessen the prospect of identified
trends occurring or continuing in the future. As a result of the foregoing, the
investment system may not generate profitable trading signals and the Fund may
suffer losses.
CROWDING/CONVERGENCE RISK. There is significant competition among quantitative
investment managers and the ability of the Fund to deliver returns that have a
low correlation with global aggregate equity markets and other market
participants is dependent on the ability of the Adviser to employ an investment
system that is simultaneously profitable and differentiated from those employed
by other managers. To the extent that the Adviser is not able to develop a
sufficiently differentiated investment system, the investment objective of the
Fund may not be met. The growth in assets managed in accordance with similar
investment strategies may result in the Fund and other market participants
inadvertently buying and selling the same or similar investments
simultaneously, which may reduce liquidity and exacerbate market moves.
PROCESS EXCEPTIONS RISK. The Fund utilizes the Adviser's investment approach,
which is based on mathematical models that are implemented as an automated
computer-based investment system. Issues with the design, development,
implementation, maintenance or operation of the investment system; any component
of the investment system; or any processes and procedures related to the
investment system (collectively, "Process Exceptions") may cause losses to the
Fund and such losses may be substantial. Process Exceptions may include, but are
not limited to:
PROGRAMMING ERRORS. The Adviser may make programming errors in
translating its mathematical models into computer code. In addition,
as a mathematical model can be expressed in computer code in multiple
ways, the choice of code ultimately used may not result in the best
representation of the model.
FAILURE OF TECHNOLOGY. The Adviser's investment system is reliant on
proprietary and third party technology. Such technology may be
adversely affected by many issues, some of which may be outside of the
Adviser's control, including issues associated with network
infrastructure, software updates, bugs, viruses and unauthorized
access.
INCORPORATION OF DATA. The Adviser may incorporate inaccurate data, or
make errors in incorporating data, into the investment system.
Process Exceptions may be difficult to detect, may go undetected for long
periods or may never be detected. The impact of such Process Exceptions may be
compounded over time and may result in, among other things, the execution of
unanticipated trades, the failure to execute anticipated trades, the failure to
properly allocate trades, the failure to properly gather and organize available
data and/or the failure to take certain hedging or risk mitigating actions.
Although the Adviser evaluates the materiality of any Process Exceptions that it
detects, the Adviser may conclude that some are not material and may choose not
to address them. Such judgments may prove not to be correct.
17
DIRECT CONNECTIVITY TO TRADING VENUES RISK. The Adviser uses sophisticated
information technology systems to send, on the Fund's behalf, electronic
trading instructions to brokers and exchanges and has servers located close to
exchanges in multiple jurisdictions. This technology allows orders to be sent
and executed in milliseconds. This technology can increase the likelihood of
erroneous orders being made, regulatory requirements not being complied with
and/or credit and capital limits being breached due to computer malfunctions,
the speed of execution of transactions, human error or a deficiency in
algorithm design or implementation. Due to the speed of trading, the potential
impact on the Fund of such errors or series of errors could be more severe than
risks arising in other parts of the Adviser's trading infrastructure.
Trading through an electronic trading or order routing system is also subject
to risks associated with system or component failure (whether such failure
affects the hardware or software of the exchange or person offering the
relevant system or the Adviser). In the event of system or component failure,
it is possible that, for a certain time period, it might not be possible to
enter new orders, execute existing orders, or modify or cancel orders that were
previously entered. System or component failure may also result in loss of
orders or order priority. Trading venues offering an electronic trading or
order routing system typically adopt rules to limit their liability, the
liability of member brokers and software and communication system vendors, and
the amount that may be collected for system failures and delays, which rules
may vary among the venues and may not adequately compensate the Fund for the
full extent of its loss.
RELIANCE ON THE FUND'S RISK PROFILE RISK. As at the date of this Prospectus, the
Program is applied to the Fund with a target of limiting the frequency of a
monthly loss greater than 4.2% to once every two years on average and a
long-term gross annualized volatility target of 12 per cent. These targets are
subject to change at any time at the discretion of the Adviser and are based on
the Adviser's interpretation of the information available to it at the relevant
time. There can be no assurance that the targets will be met and it is not a
guarantee or prediction of the Fund's actual losses or volatility.
TEMPORARY DEFENSIVE MEASURES RISK. The Fund may, from time to time, take
temporary defensive measures which are inconsistent with the Fund's principal
investment strategies in attempting to respond to, or in anticipation of,
market, economic, political or other conditions. For example, during such
period, all or a significant portion of the Fund's assets may be invested in
high-quality fixed income securities, cash or cash equivalents, or the risk
parameters applicable to the Adviser's investment system may be altered.
Temporary defensive measures may be initiated by the Adviser when the Adviser
judges that existing market, economic, political or other conditions may make
pursuing the Fund's investment strategies inconsistent with the best interests
of its shareholders. The Adviser then may temporarily use these alternative
strategies or parameters that are mainly designed to limit the Fund's losses,
protect the Fund's gains or create liquidity in anticipation of redemptions.
When such temporary defensive measures are taken, it may be more difficult for
the Fund to achieve its investment objective.
TRADING OUTSIDE THE INVESTMENT SYSTEM RISK. Most of the Adviser's investment
decisions are made strictly in accordance with the output of its investment
system. However the Adviser may, in exceptional circumstances such as the
occurrence of events that fall outside the input parameters of the system, make
investment decisions based on other factors and take action to override the
output of the system to seek to protect the interests of its clients. However,
the investment system's signals may ultimately prove to be accurate and such
actions may not prevent losses to the Fund and may in fact cause or exacerbate
losses.
LEVERAGE RISK. The Fund may use leverage (including through borrowings) for the
purpose of making investments. The use of leverage creates particular risks and
may significantly increase the Fund's investment risk. Leverage creates an
opportunity for greater yield and total return but, at the same time,
18
increases the Fund's exposure to capital risk and, if leverage is in the form
of borrowing, interest costs. The use of leverage in a market that moves
adversely could result in substantial losses to the Fund, which would be
greater than if leverage was not used. (See the risk factor entitled "FUTURES
CONTRACTS" below.)
CORRELATION RISK. While the Program over the long-term has generally
demonstrated low correlation to other markets such as equities and fixed income,
in the short-term the Program may be highly correlated to other markets.
Accordingly, a significant price fall in a particular sector, such as equities
or fixed income, may result in a significant decline in the value of the Fund.
PORTFOLIO TURNOVER RISK. The Fund may buy and sell securities frequently. This
may result in higher transaction costs and additional capital gains tax
liabilities.
REGULATORY AND TAX RISKS.
SPECULATIVE POSITION LIMITS AND INTERNAL RISK LIMITS RISK. The CFTC and/or
exchanges both within the U.S. and outside the U.S. have established
"speculative position limits" on the maximum net long or net short position
which any person or group of persons may hold or control in particular futures,
options on futures contracts and swaps that perform a significant price
discovery function. In addition, the Adviser sets internal risk limits within
its investment system. The Adviser's instructions may have to be modified, and
positions held by the Fund may have to be liquidated in order to avoid exceeding
these limits. Such modification or liquidation could adversely affect the
operations and profitability of the Fund by increasing transaction costs to
liquidate positions and limiting potential profits on the liquidated positions.
The assets of the Adviser's clients, including those of the Fund, will be
aggregated for the purposes of speculative position limits and internal risk
limits and this may impair the operation of the Adviser's investment system and
cause losses to the Fund.
TAX RISK. The Fund intends to elect and to qualify each year to be treated as a
regulated investment company ("RIC") under the provisions of Subchapter M of
the U.S. Internal Revenue Code of 1986, as amended (the "Code"). In order to do
so it must derive at least 90% of its gross income each taxable year from
qualifying income and diversify its assets as described in more detail in the
Fund's SAI. Certain of the Fund's investments generally do not generate
qualifying income if made directly by the Fund. The Fund, however, intends to
gain exposure to certain non-qualifying investments, including commodities
investments, through its investment in its wholly-owned Subsidiary. The
Subsidiary intends to invest directly or indirectly in commodities, interest
rates, currencies, bonds and other commodity-linked derivative instruments,
including options, futures contracts, swaps, options on futures contracts.
There is the possibility that the Internal Revenue Service ("IRS") may issue
guidance providing that a RIC's investment in its own subsidiary no longer
provides qualifying income to a RIC, which would likely cause the Fund to
significantly change its investment strategy and could adversely affect the
Fund. In addition, for purposes of satisfying the asset diversification test
(as described more fully in the SAI) it may be difficult for the Fund to
identify the "issuer" of certain Fund investments including any total return
swaps used for indirect investment exposure. There is a risk that the IRS could
make an adverse determination with respect to identifying the issuer of Fund
investments and could disagree with the Fund's valuation of the underlying
issuers to a particular derivative. Such an adverse determination could,
therefore, jeopardize the Fund's status as a RIC, which would ultimately affect
a shareholder's return on its investment in the Fund.
RISKS ASSOCIATED WITH THE ADVISER.
INCENTIVE FEE RISK. In addition to receiving a Management Fee, the Adviser may
also receive an Incentive Fee based on the appreciation in Fund assets. The
Incentive Fee may create an incentive for the Adviser to
19
manage the Fund's portfolio in a manner that is riskier than would be the case
in the absence of a fee based on the performance of the Fund.
COUNTERPARTY RISK.
COUNTERPARTY RISK. The Fund will be subject to the risk of the inability of any
counterparty (including the Fund's custodian and clearing brokers and prime
brokers used by the Fund) to perform with respect to transactions, whether due
to insolvency, bankruptcy or other causes. If there is a failure or default by
the counterparty to such a transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transaction but these may be of
limited or no legal and/or commercial benefit depending on the financial
position of the defaulting counterparty. The Fund may not be able to recover
all of its cash and/or securities in the event of the insolvency and bankruptcy
of its custodian. These risks are heightened to the extent that the Fund or
the Subsidiary gains a substantial amount of investment exposure indirectly
through swaps.
The Adviser will seek to minimize the Fund's counterparty risk through the
selection of financial institutions and types of transactions employed.
However, the Fund's operational mechanisms may involve counterparty and other
risk elements that may create unforeseen exposures.
RISKS ASSOCIATED WITH THE FUND'S STRUCTURE.
NON-MARKETABILITY OF SHARES RISK. The Fund's shares are not listed on any
securities exchange. There is no guarantee that a secondary market for Fund
shares will develop. The Fund's shares, therefore, may not be readily
marketable.
REPURCHASE OFFERS RISK. An investment in the Fund is subject to the risk that
the Fund's repurchases of shares may hurt investment performance by forcing the
Fund to maintain a higher percentage of its assets in liquid investments or to
liquidate certain investments when it is not desirable to do so. Repurchases
may be oversubscribed, preventing shareholders from selling some or all of
their tendered shares back to the Fund.
LIMITED OPERATING HISTORY RISK. The Fund has not yet commenced operations and
thus has no operating history. The Fund does not have any historical financial
statements or other meaningful operating or financial data on which potential
investors may evaluate the Fund and its performance. Officers and employees of
the Adviser and its affiliates have been using the strategies described herein
in connection with the management of private investment funds for several years.
However, the past performance of these officers and employees is not an
indication of future success of the Fund.
BORROWING FOR OPERATIONS RISK. The Fund has the authority to borrow money for,
among other reasons, cash management purposes, to obtain leverage and to meet
redemptions that would otherwise result in the premature liquidation of its
investments, subject to the limitations of the 1940 Act. The use of short-term
borrowing creates several additional risks. If the Fund is unable to service the
debt, a secured lender could liquidate the Fund's position in some or all of the
Fund's investments that have been pledged as collateral and cause the Fund to
incur significant losses. The occurrence of defaults may trigger cross-defaults
under the Fund's agreements with other brokers, lenders, clearing firms or other
counterparties, creating or increasing a material adverse effect on the
performance of the Fund.
IN-KIND DISTRIBUTIONS RISK. The Fund expects to distribute cash to a shareholder
upon a redemption of shares. However, there can be no assurance that the Fund
will have sufficient cash to satisfy redemption requests or that the Fund will
be able to liquidate investments at the time of such redemption requests at
favorable prices. Under the foregoing circumstances, and under other
circumstances deemed appropriate by the
20
Fund, a shareholder may receive in-kind distributions from the Fund.
Notwithstanding the foregoing, with respect to its quarterly repurchase offers,
the Fund will repurchase its shares in cash.
RISKS ASSOCIATED WITH SPECIFIC INVESTMENTS.
CURRENCY RISK. Currency exchange rates may fluctuate in response to
factors extrinsic to that country's economy, which makes the forecasting of
currency market movements extremely difficult. Currency rates in non-U.S.
countries may fluctuate significantly over short periods of time for a number of
reasons, including changes in interest rates, intervention (or failure to
intervene) by U.S. or non-U.S. governments, central banks or supranational
entities such as the International Monetary Fund, or by the imposition of
currency controls or other political developments in the United States or
abroad. These can result in losses to the Fund if it is unable to deliver or
receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs.
CURRENCY HEDGING RISK. The Fund may seek to hedge its foreign currency exposure
but will necessarily be subject to foreign exchange risks. There can be no
assurance that such hedging, if implemented, will be effective.
FUTURES CONTRACTS RISK. The Fund invests in futures contracts. Transactions in
futures involve the obligation to make, or to take, delivery of the underlying
asset of the contract at a future date, or in some cases to settle the position
with cash (unless liquidated before expiry). They carry a high degree of risk.
The low margins normally required in futures trading permit a very high degree
of leverage. As a result, a relatively small movement in the price of a futures
contract may result in a profit or loss that is high in proportion to the
amount of assets actually placed as margin and may result in unquantifiable
further loss exceeding any margin deposited.
FOREIGN EXCHANGE FORWARD CONTRACTS RISK. The Fund may enter into foreign
exchange forward contracts. A foreign exchange forward contract is a
contractually binding obligation to purchase or sell a particular currency at a
specified date in the future. Foreign exchange forward contracts are currently
not traded on exchanges. Rather, they are effected through the interbank market.
Unlike in futures markets, there is no limitation as to daily price movements in
this market and in exceptional circumstances there have been periods during
which certain banks have refused to quote prices for foreign exchange forward
contracts or have quoted prices with an unusually wide spread between the price
at which the bank is prepared to buy and that at which it is prepared to sell.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank
Act") includes foreign exchange forward contracts in the definition of "swap,"
and therefore, contemplates that certain of these contracts may be
exchange-traded, cleared by a clearinghouse and regulated by the Commodity
Futures Trading Commission (the "CFTC"). Until the CFTC fully implements the
rules with respect to these transactions, trading by the Fund in some foreign
exchange forward contracts will not be regulated by the CFTC. Therefore, the
Fund will not receive the full benefit of CFTC regulation for certain of its
foreign exchange trading activities. Although the Dodd-Frank Act contemplates
that certain foreign exchange forward contracts may be exchange-traded and
cleared by a clearinghouse, these transactions are not currently exchange-traded
so that, generally, no clearinghouse or exchange stands ready to meet the
obligations of the contract. Thus, the Fund will be subject to the risk of the
inability or refusal of its counterparties to perform with respect to such
contracts. Any such default would eliminate any profit potential and compel the
Fund to cover its commitments for resale or repurchase, if any, at the then
current market price. These events could result in significant losses to the
Fund.
The Adviser may enter into foreign exchange forward contracts in respect of the
currencies of certain emerging markets. Many emerging markets have
underdeveloped capital market structures where the
21
risks associated with holding currency are significantly greater than in other,
less inflationary markets. Such currency exchange rates are highly volatile and
subject to severe event risks, as the political situation with regard to the
relevant non-U.S. government may itself be volatile.
FORWARD CONTRACTS RISK. The Fund may enter into forward contracts and options
thereon which are not traded on exchanges and are not standardized. Instead,
banks and dealers act as principals in these markets, negotiating each
transaction on an individual basis. Neither the CFTC nor any banking authority
currently regulates trading in forward contracts, although they may in the
future become subject to regulation under the Dodd-Frank Act, a development
which may entail increased costs and result in burdensome reporting
requirements. There is currently no limitation on daily price movements of
forward contracts and speculative position limits are not applicable. The
principals who deal in the forward markets are not required to continue to make
markets in the currencies or commodities they trade, and these markets can
experience periods of illiquidity, sometimes of significant duration. There
have been periods during which certain participants in these markets have
refused to quote prices for certain currencies or commodities, or have quoted
prices with an unusually wide spread between the price at which they were
prepared to buy and that at which they were prepared to sell. Disruptions can
occur in forward markets due to unusually high trading volume, political
intervention, or other factors.
The imposition of controls by governmental authorities or the implementation of
regulations pursuant to the Dodd-Frank Act might also limit such forward (and
futures) trading to less than that which the Adviser would otherwise recommend,
to the possible detriment of the Fund. Market illiquidity or disruption could
result in significant losses to the Fund.
OPTIONS RISK. The seller (writer) of a call option which is covered (i.e., the
writer holds the underlying security) assumes the risk of a decline in the
market price of the underlying security below the purchase price of the
underlying security less the premium received, and gives up the opportunity for
gain on the underlying security above the exercise price of the option. The
seller of an uncovered call option assumes the risk of a
theoretically-unlimited increase in the market price of the underlying security
above the exercise price of the option. The securities necessary to satisfy the
exercise of the call option may be unavailable for purchase except at much
higher prices. Purchasing securities to satisfy the exercise of the call option
can itself cause the price of the securities to rise further, sometimes by a
significant amount, thereby exacerbating the loss. The buyer of a call option
assumes the risk of losing its entire investment in the call option.
The seller (writer) of a put option which is covered (i.e., the writer has a
short position in the underlying security) assumes the risk of an increase in
the market price of the underlying security above the sales price (in
establishing the short position) of the underlying security plus the premium
received, and gives up the opportunity for gain on the underlying security
below the exercise price of the option. The seller of an uncovered put option
assumes the risk of a decline in the market price of the underlying security
below the exercise price of the option. The buyer of a put option assumes the
risk of losing its entire investment in the put option.
In the case of stock index options, successful use by the Fund of options on
stock indices will be subject to the Adviser's ability to correctly predict
movements in the direction of the stock market generally or of particular
industries or market segments. This requires different skills and techniques
than predicting changes in the price of individual stocks.
When the Fund purchases an option on a futures contract in the United States,
there is no margin requirement because the option premium is paid for in full.
The premiums for certain options traded on foreign exchanges may be paid for on
margin. When the Fund sells an option on a futures contract, it may be required
to deposit margin in an amount that may be determined by the margin requirement
established
22
for the futures contract underlying the option and, in addition, an amount
substantially equal to the current premium for the option. The margin
requirements imposed on the writing of options, although adjusted to reflect
the probability that out-of-the-money options will not be exercised, can in
fact be higher than those imposed in dealing in the futures markets directly.
Whether any margin deposit will be required for over-the-counter options (and
other over-the-counter options instruments, such as equity or currency
forwards, swaps and certain other derivative instruments), will depend on the
credit determinations and specific agreements of the parties to the
transaction, which are individually negotiated.
SWAPS RISK. The Fund may enter into swap agreements and similar derivative
transactions. Depending on their structure, swap agreements may increase or
decrease the Fund's exposure to equity securities, long-term or short-term
interest rates, foreign currency values, corporate borrowing rates or other
factors. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of the Fund's portfolio. The most significant
factors in the performance of swap agreements is the change in the individual
equity values, the specific interest rate, the currency value and other factors
that determine the amounts of payments due to the Fund. If a swap agreement
calls for payments by the Fund, the Fund must be prepared to make such payments
when due. Swap agreements and similar derivative transactions are not currently
traded on exchanges; rather, banks and dealers act as principals in these
markets. As a result, the Fund is subject to the risk of the inability or
refusal to perform with respect to such contracts on the part of the
counterparties with which the Fund trades. In addition, if a counterparty's
creditworthiness declines, the value of swap agreements with such counterparty
can be expected to decline, potentially resulting in losses by the Fund.
Speculative position limits are not currently applicable to swap transactions,
although the counterparties with which the Fund deals may limit the size or
duration of positions available to the Fund as a consequence of credit
considerations. Participants in the swap markets are not required to make
continuous markets in the swap contracts they trade. The recently enacted
Dodd-Frank Act includes provisions that comprehensively regulate the
over-the-counter derivatives markets for the first time. While the Dodd-Frank
Act is intended in part to reduce certain of the risks described above, its
success in this respect may not be evident for some time after the Dodd-Frank
Act is fully implemented, a process that may take several years.
COMMODITY-RELATED INVESTMENTS RISK. Exposure to the commodities markets
(including financial futures markets) may subject the Fund to greater volatility
than investments in traditional securities. Prices of commodities may fluctuate
significantly over short periods for a variety of factors, including: changes in
supply and demand relationships, changes in interest or currency exchange rates,
population growth and changing demographics and factors affecting a particular
industry or commodity, such as drought, floods or other weather conditions,
transportation bottlenecks or shortages, competition from substitute products,
fiscal, monetary and exchange control programs, disease, pestilence, acts of
terrorism, embargoes, tariffs and international economic, political, military,
legal and regulatory developments. Additionally, the Fund may gain exposure to
the commodities markets through investments in commodity-linked derivative
instruments, such as structured notes, the value of which may be influenced by,
among other things, time to maturity, level of supply and demand for the
instrument, interest rates, volatility and lack of liquidity in underlying
markets, the performance of the reference commodity or instrument, changes in
the issuer's credit rating and economic, legal, political or geographic events
that affect the reference commodity or instrument. Further, a lack of liquidity,
participation of speculators and government regulation and intervention, among
other factors, may subject commodity markets to temporary distortions or other
disruptions, which may, in turn, subject the Fund to losses.
CONTRACTS FOR DIFFERENCES RISK. The Adviser intends to enter into contracts for
differences ("CFDs") on individual equity securities or baskets of equity
securities. CFDs are privately negotiated contracts between two parties, buyer
and seller, stipulating that the seller will pay to or receive from the buyer
the difference between the nominal value of the underlying instrument at the
opening of the contract and that instrument's value at the end of the contract.
As is the case with owning any financial instrument, there is
23
the risk of loss associated with buying a CFD. There may be liquidity risk if
the underlying instrument is illiquid because the liquidity of a CFD is based
on the liquidity of the underlying instrument. A further risk is that adverse
movements in the underlying security will require the buyer to post additional
margin. CFDs also carry counterparty risk, I.E., the risk that the counterparty
to the CFD transaction may be unable or unwilling to make payments or to
otherwise honor its financial obligations under the terms of the contract. If
the counterparty were to do so, the value of the contract may be reduced. To
the extent that there is an imperfect correlation between the return on the
Fund's obligation to its counterparty under a CFD and the return on related
assets in its portfolio, the CFD transaction may increase the Fund's financial
risk.
CONTINGENT LIABILITY TRANSACTIONS RISK. Contingent liability transactions, which
are margined, require the Fund to make a series of payments against the purchase
price, instead of paying the whole purchase price immediately.
The Fund will trade in futures and CFDs, and therefore may sustain a total loss
of the margin deposited to establish or maintain a position. If the market
moves against the Fund, it may be called upon to pay substantial additional
margin at short notice to maintain the position. If the Fund fails to do so
within the time required, its position may be liquidated at a loss and the Fund
will be responsible for the resulting deficit. Even if a transaction is not
margined, it may still carry an obligation to make further payments in certain
circumstances over and above any amount paid when the Fund entered the
contract.
DAILY PRICE FLUCTUATION LIMITS RISK. Futures exchanges limit fluctuations in
contract prices during a single day by imposing "daily price fluctuation
limits" or "daily limits." During a single trading day no trades may be
executed at prices that are either above or below the daily limit. Once the
price of a particular futures contract has increased or decreased to the limit
point, positions in the contract can be neither established nor liquidated
unless traders are willing to effect trades at or within the limit. Futures
prices have occasionally moved the daily limit for several consecutive days
with little or no trading. Similar occurrences could prevent the Adviser from
liquidating positions and subject the Fund to losses that could exceed the
margins initially committed to such trades.
EQUITIES RISK. Equities represent ownership interests in a company or
corporation, and include common stock, preferred stock and warrants and other
rights to acquire such instruments. Investments in equity securities in general
are subject to market risks that may cause their prices to fluctuate over time.
Fluctuations in the value of equities in which the Fund invests will cause the
value of the Fund's assets to fluctuate.
SMALL AND MEDIUM CAPITALIZATION COMPANIES RISK. Small and medium capitalization
companies in which the Fund invests may be more vulnerable to adverse business
or economic events than larger, more established companies. In particular,
small and medium capitalization companies may have limited product lines,
markets and financial resources and may depend upon a relatively small
management group. Therefore, small and medium capitalization stocks may be more
volatile than those of larger companies. Small and medium capitalization stocks
may be traded over-the-counter or listed on an exchange.
SHORT SELLING RISK. The Adviser's investment system may incorporate short
selling systems whereby the Adviser sells equities that the Fund does not own. A
short sale involves the theoretically unlimited risk of an increase in the
market price of the securities sold short. There can be no guarantee that
securities and/or currencies necessary to cover a short position will be
available for purchase.
Due to regulatory or legislative action taken by regulators around the world as
a result of volatility in the global financial markets, taking short positions
on certain securities has been restricted. The levels of restriction vary
across different jurisdictions and are subject to change in the short to medium
term. These
24
restrictions have made it difficult and in some cases impossible for numerous
market participants either to continue to implement their investment strategies
or to control the risk of their open positions. Accordingly, the Adviser may
not be in a position to execute orders in accordance with the trading signals
of the investment system and its ability to fulfill the investment objective of
the Fund may be constrained.
NON-U.S. INVESTMENT/EMERGING MARKETS RISK. Investing in issuers located in
non-U.S. countries poses distinct risks since political and economic events
unique to a country or region will affect those markets and their issuers. These
events will not necessarily affect the U.S. economy or similar issuers located
in the United States. Non-U.S. issuers may not be registered with the SEC and
are generally not subject to the regulatory controls imposed on U.S. issuers
and, as a consequence, there is generally less publically available information
about non-U.S. securities than is available about domestic securities. Income
from non-U.S. securities owned by the Fund may be reduced by a withholding tax
at the source, which tax would reduce income received from the securities
comprising the portfolio.
Emerging market countries are those countries that are: (i) characterized as
developing or emerging by any of the World Bank, the United Nations, the
International Finance Corporation, or the European Bank for Reconstruction and
Development; (ii) included in an emerging markets index by a recognized index
provider; or (iii) countries with similar developing or emerging characteristics
as countries classified as emerging market countries pursuant to sub-paragraph
(i) and (ii) above, in each case determined at the time of purchase. Emerging
market countries may be more likely to experience political turmoil or rapid
changes in market or economic conditions than more developed countries. Emerging
market countries often have less uniformity in accounting and reporting
requirements and unreliable securities valuation. It is sometimes difficult to
obtain and enforce court judgments in such countries and there is often a
greater potential for nationalization and/or expropriation of assets by the
government of an emerging market country. In addition, the financial stability
of issuers (including governments) in emerging market countries may be more
precarious than in other countries. As a result, there will tend to be an
increased risk of price volatility associated with the Funds' investments in
emerging market countries, which may be magnified by currency fluctuations
relative to the U.S. dollar.
DEPOSITARY RECEIPTS RISK. American Depositary Receipts (ADRs) are
dollar-denominated depositary receipts typically issued by a U.S. financial
institution that evidence an ownership interest in a security or pool of
securities issued by a non-U.S. issuer. ADRs are listed and traded in the United
States. Global Depositary Receipts (GDRs) are similar to ADRs but represent
shares of non-U.S.-based corporations generally issued by international banks in
one or more markets around the world. ADRs and GDRs are subject to the risks
associated with investing directly in non-U.S. securities, which are described
above. In addition, investments in ADRs and GDRs may be less liquid than the
underlying shares in their primary trading markets and GDRs, many of which
represent shares issued by companies in emerging markets, may be more volatile.
Depositary receipts may be sponsored or unsponsored. Holders of unsponsored
depositary receipts generally bear all the costs associated with establishing
unsponsored depositary receipts. In addition, the issuers of the securities
underlying unsponsored depositary receipts are not obligated to disclose
material information in the United States, and, therefore, there may be less
information available regarding such issuers, and there may not be a correlation
between such information and the market value of the depositary receipts.
DEBT SECURITIES RISK. The Fund's investments in debt securities are subject to
interest rate risk and credit risk. Interest rate risk is the risk that the
value of the fixed income securities held by the Fund will decline due to
falling interest rates. A rise in interest rates typically causes a fall in
values of fixed income securities, while a fall in interest rates typically
causes a rise in values of such securities. Credit risk is the risk that the
issuer of a security or the counterparty to a contract will default or otherwise
become unable to honor a financial obligation. The Fund could lose money if the
issuer or guarantor of a portfolio security fails to make timely payment or
otherwise honor its obligations. Evaluating credit risk for debt securities
involves uncertainty because credit rating agencies throughout the world have
different standards, making comparison across countries difficult. Also, the
market for credit spreads is often inefficient and illiquid, making it difficult
to accurately calculate discounting spreads for valuing financial instruments.
The Fund may invest in debt instruments that have speculative characteristics.
The issuers of such instruments, including sovereign issuers, may face
significant ongoing uncertainties and exposure to adverse conditions that may
undermine the issuer's ability to make timely payment of interest and
principal.
EXCHANGE-TRADED FUNDS RISK. ETFs are investment companies whose shares are
bought and sold on a securities exchange. The risks of owning interests of an
ETF generally reflect the same risks as owning the underlying securities or
other instruments in which the ETF invests, although lack of liquidity in an ETF
could result in its value being more volatile than the underlying portfolio of
securities. The shares of certain ETFs may trade at a premium or discount to
their intrinsic value (I.E., the market value may differ
25
from the net asset value of an ETF's shares). For example, supply and demand for
shares of an ETF or market disruptions may cause the market price of the ETF to
deviate from the value of the ETF's investments, which may be emphasized in less
liquid markets. ETFs, like closed end funds, have expenses associated with their
operation, including advisory fees. When the Fund invests in an ETF, in addition
to directly bearing expenses associated with its own operations, it will bear a
pro rata portion of the ETF's expenses. Such ETF expenses may make owning shares
of the ETF more costly than owning the underlying securities directly.
INVESTMENT IN THE SUBSIDIARY RISK. The Fund may invest in its Subsidiary. By
investing in its Subsidiary, the Fund is indirectly exposed to the risks
associated with the Subsidiary's investments. The commodity-related instruments
held by the Subsidiary are generally similar to those that are permitted to be
held by the Fund and are subject to the same risks that apply to similar
investments if held directly by the Fund. The Subsidiary, however, is not
registered under the 1940 Act and, unless otherwise noted in this Prospectus,
will not be subject to all of the investor protections of the 1940 Act. Thus,
the Fund, as an investor in the Subsidiary, will not have all of the
protections offered to investors in registered investment companies. The Fund,
however, wholly owns and controls the Subsidiary, and the Fund and the
Subsidiaries are managed by the Adviser, making it unlikely that the Subsidiary
will take action contrary to the interests of the Fund. While the Subsidiary
has its own board of directors that is responsible for overseeing the
operations of the Subsidiary, the Fund's Board has oversight responsibility for
the investment activities of the Fund, including its investment in the
Subsidiary, and the Fund's role as the sole shareholder of the Subsidiary. It
is not currently expected that shares of the Subsidiary will be sold or offered
to investors other than the respective Fund.
Changes in the laws of the United States and/or the Cayman Islands or
governmental interpretation of such laws, under which the Fund and the
Subsidiary, respectively, are organized, could result in the inability of the
Fund and/or its Subsidiary to operate as intended and could negatively affect
the Fund and its shareholders. For example, Cayman Islands law does not
currently impose any income, corporate or capital gains tax, estate duty,
inheritance tax, gift tax or withholding tax on the Subsidiary. If Cayman
Islands law changes such that the Subsidiary must pay Cayman Islands
governmental authority taxes, Fund shareholders would likely suffer decreased
investment returns.
GENERAL INVESTMENTS RISK.
HIGH VOLATILITY RISK. The markets in which the Fund invests are subject to high
levels of volatility. Price movements are influenced by a variety of factors,
including: changing supply and demand relationships; trade, fiscal, monetary
and exchange control programs and policies of governments; political and
economic events and policies; changes in interest rates and rates of inflation;
currency devaluations and re-evaluations; and market sentiment. Such volatility
could result in significant losses to the Fund.
ILLIQUIDITY OF MARKETS RISK. Positions in financial instruments cannot always be
liquidated at the desired price. It is difficult to execute a trade at a
specific price when there is a relatively small volume of buy and sell orders
in a market. A market disruption, such as when governments take or are subject
to political actions that disrupt the markets in their currency or major
exports, can also affect the liquidity of the markets, thereby making it
difficult to liquidate a position. Periods of illiquidity and the events that
trigger them are difficult to predict and there can be no assurance that the
Adviser will be able to do so. Market illiquidity may cause losses to the
Fund.
THE FOREGOING LIST OF RISK FACTORS DOES NOT PURPORT TO BE A COMPLETE
ENUMERATION OR EXPLANATION OF THE RISKS INVOLVED IN AN INVESTMENT IN THE FUND.
PROSPECTIVE INVESTORS SHOULD READ THIS PROSPECTUS AND THE SAI IN THEIR
ENTIRETY, AND CONSULT WITH THEIR OWN ADVISORS BEFORE DECIDING WHETHER TO
INVEST
26
IN THE FUND. IN ADDITION, AS THE FUND'S INVESTMENT PROGRAM DEVELOPS AND CHANGES
OVER TIME, AN INVESTMENT IN THE FUND MAY BE SUBJECT TO ADDITIONAL AND DIFFERENT
RISK FACTORS NOT DISCUSSED HEREIN.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
The Board of Trustees of the Fund (the "Board") is responsible for the overall
management of the Fund, including the supervision of the duties performed by
the Adviser. The Board is comprised of five Trustees, four of whom are not
"interested persons" of the Fund, as that term is defined by the 1940 Act. The
Trustees are responsible for the Fund's overall management, including adopting
the investment and other policies of the Fund, electing officers of the Fund
and selecting and supervising the Adviser. The name and business address of the
Trustees and officers of the Fund and their principal occupations and other
affiliations during the past five years are set forth under "TRUSTEES AND
OFFICERS OF THE FUND" in the SAI.
INVESTMENT ADVISER AND PORTFOLIO MANAGEMENT
Winton Capital US LLC, located at 375 Park Avenue, New York, New York 10152,
serves as the investment adviser of the Fund. The Adviser makes investment
decisions for the Fund and continuously reviews, supervises and administers the
Fund's investment program. The Board supervises the Adviser and establishes
policies that the Adviser must follow in its management activities.
The Adviser is a wholly-owned subsidiary of Winton Capital Group Limited, an
English limited liability company. Winton Capital Group Limited and its
affiliated companies (together, "Winton") provide investment management services
to, among other investors, pension funds, pooled investment vehicles, fund of
funds, sovereign wealth funds and other government entities, corporations,
family offices and high net worth individuals either directly or indirectly
through the management of pooled investment vehicles. As of [____], Winton had
approximately $[____] billion in assets under management.
The Adviser does not use a traditional portfolio manager structure when managing
its clients' accounts, including the Fund. Rather, the Adviser employs a
professional research team to perform statistical analysis on historic data
related to financial markets in an attempt to identify profitable investment
opportunities for its clients. The Adviser's research team includes individuals
holding degrees in diverse fields ranging from astrophysics, machine learning,
statistics, actuarial sciences and financial mathematics and is responsible for
developing the automated computer-based investment system that forms the basis
of the Fund's investment strategy. Messrs. Harding and Beddall, in their
respective capacities as Chief Executive Officer and Chief Investment Officer of
Winton Capital Group Limited, have ultimate responsibility for the investment
system and how it operates. Therefore, Messrs. Harding and Beddall are primarily
responsible for the management of the Fund's portfolio.
Mr. Harding, Chief Executive Officer and Chairman of Winton Capital Group
Limited, founded Winton in 1997. Prior to that, Mr. Harding founded Adam Harding
and Lueck Ltd, a commodity trading adviser, in 1987. Mr. Harding holds a degree
in Natural Sciences specializing in Theoretical Physics from Cambridge
University.
Mr. Beddall, Chief Investment Officer of Winton Capital Group Limited, joined
Winton in 2001 as a researcher and was appointed Chief Investment Officer in
2008. Mr. Beddall holds a degree in Mathematics and Computer Science from
Southampton University and an MSc in Applied Statistics from Birkbeck College,
University of London.
The SAI provides additional information about the compensation, other accounts
managed and ownership of Fund shares of Messrs. Harding and Beddall.
MANAGEMENT EXPENSES
MANAGEMENT FEE. For its advisory services to the Fund, the Adviser is entitled
to a monthly fee payable at the annual rate of 1.25% . The Management Fee will
be applied to the Fund's NAV (before the deduction of any Incentive Fee and the
repurchase of any shares pursuant to a periodic repurchase offer). The
Management Fee will be accrued at least weekly and paid monthly.
INCENTIVE FEE. The Fund will pay to the Adviser a performance based Incentive
Fee, quarterly in arrears, generally accrued as of the end of each business
day, equal to 20.00% of the Investment Profits attributable to each share for
such calendar quarter; PROVIDED, HOWEVER, that an Incentive Fee with respect to
a share will be paid only with respect to Investment Profits for the applicable
calendar quarter in excess of Unrecouped Investment Losses as of the end of the
previous calendar quarter. The Adviser does not
27
need to "earn back" Incentive Fees previously paid to it in order to recognize
profits subject to additional Incentive Fees.
The term "Investment Profits" refers to an increase in the NAV of a share
attributable to the net realized and unrealized gains arising from the Fund's
investment activities during the calendar quarter (after deducting (i) interest
earned on, and net realized and unrealized gains arising from, the Fund's cash
balances and fixed income investments held for cash management purposes during
the calendar quarter; and (ii) any Management Fee accrued during the calendar
quarter and after adjusting for any repurchase of shares made during the
calendar quarter). The term "Unrecouped Investment Losses" refers to any
decrease in the NAV of a share attributable to the net realized and unrealized
losses arising from the Fund's investment activities (after deducting (i) net
realized and unrealized losses arising from the Fund's cash balances and fixed
income investments held for cash management purposes during the calendar
quarter; and (ii) any Management Fee accrued during the calendar quarter and
after adjusting for any repurchase of shares made during the calendar quarter)
that have not been offset by subsequent Investment Profits since the formation
of the Fund.
A discussion regarding the basis for the Board's approval of the Advisory
Agreement will be available in the Fund's first annual or semi-annual report to
shareholders. The Adviser has registered with the National Futures Association
as a "commodity pool operator" under the Commodities Exchange Act with respect
to the Fund. Additional information regarding the Adviser's status as a
commodity pool operator with respect to the Fund is included in the SAI.
MANAGEMENT OF THE SUBSIDIARY
The Subsidiary has entered into a separate investment advisory agreement with
the Adviser for the management of the Subsidiary's portfolio. The Subsidiary
does not pay a separate management fee to the Adviser for these services. The
services that the Adviser provides to the Subsidiary are similar to those that
the Adviser provides to the Fund, and the terms of the advisory agreement
between the Adviser and the Subsidiary are similar to those of the advisory
agreement between the Adviser and the Fund. The board of directors of the
Subsidiary supervises the Adviser with respect to its management of the
Subsidiary's portfolio and establishes policies and procedures that it must
follow in its management activities. The Subsidiary (or the Fund on behalf of
the Subsidiary) has entered into contracts for the provision of custody,
transfer agency, administrative and audit services with the same, or with
affiliates of the same, service providers that provide those services to the
Fund. The Fund bears the fees and expenses incurred in connection with such
services.
28
RELATED PERFORMANCE DATA OF COMPARABLE ACCOUNTS
Messrs. Harding and Beddall, by virtue of the positions they hold with Winton
Capital Group Limited, the parent of the Adviser, are primarily responsible for
the management of two other accounts that are managed pursuant to investment
objectives, policies and strategies that are substantially similar to those of
the Fund: Winton Diversified Strategy Master Fund Ltd. ("WDSMF") and The Winton
Evolution Fund ("WEF" and, together with WDSMF, the "Comparable Accounts").
Please refer to the section headed "Management of the Fund" above.
The following tables show the historical monthly performance of the Comparable
Accounts. The manner in which the performance was calculated for the Comparable
Accounts differs from that of registered investment companies such as the Fund.
If the performance was calculated in accordance with SEC standardized
performance methodology, the performance results may have been different. The
performance should not be viewed as an indication of how the investment strategy
will perform in the future. THE DATA DOES NOT REPRESENT THE PERFORMANCE OF THE
FUND.
The Comparable Accounts are not subject to the same type of expenses to which
the Fund is subject, and the performance information of the Comparable Accounts
has not been adjusted to reflect the expenses of the Fund. The management fees
of the Comparable Accounts were generally lower than that of the Fund, although
the incentive fees of the Comparable Accounts are the same as the Fund's
Incentive Fee. The actual total operating expenses of the Comparable Accounts
were lower than the Fund's estimated total operating expenses (inclusive of
waivers). If the performance of the Comparable Accounts was calculated using
the Fund's estimated expenses for its first fiscal year, the performance would
have been lower.
The Comparable Accounts are not subject to the diversification requirements,
specific tax restrictions, and investment limitations imposed by the federal
securities and tax laws. Consequently, the performance results for the
Comparable Accounts could have been adversely affected if the Comparable
Accounts were subject to the federal securities and tax laws as the Fund.
THE INVESTMENT RESULTS FOR THE COMPARABLE ACCOUNTS ARE NOT INTENDED TO PREDICT
OR SUGGEST THE FUTURE RETURNS OF THE FUND. THE PERFORMANCE DATA SHOWN BELOW
SHOULD NOT BE CONSIDERED A SUBSTITUTE FOR THE FUND'S OWN PERFORMANCE
INFORMATION.
29
MONTHLY ABSOLUTE RETURNS OF WEF COMPARED TO ITS BENCHMARK INDEX AND THE 3
MONTH U.S. DOLLAR LIBOR INTEREST RATE
--------------------------------------------------------------------------------
HFRX 3-month
WEF WEF Global Hedge USD Libor
Monthly Monthly Fund Index (Bloomberg:
Gross Net (Bloomberg: US0003M
Date Returns Returns HFRXGL Index)* Index)**
--------------------------------------------------------------------------------
Jan-13 3.51% 3.42% 1.96% 0.02%
--------------------------------------------------------------------------------
Feb-13 1.14% 1.05% 0.43% 0.02%
--------------------------------------------------------------------------------
Mar-13 4.57% 4.43% 0.72% 0.02%
--------------------------------------------------------------------------------
Apr-13 5.77% 4.58% 0.62% 0.02%
--------------------------------------------------------------------------------
May-13 -4.11% -4.19% 0.75% 0.02%
--------------------------------------------------------------------------------
Jun-13 -1.81% -1.89% -1.33% 0.02%
--------------------------------------------------------------------------------
Jul-13 0.31% 0.23% 1.01% 0.02%
--------------------------------------------------------------------------------
Aug-13 -5.19% -5.27% -0.86% 0.02%
--------------------------------------------------------------------------------
Sep-13 4.59% 4.50% 0.96% 0.02%
--------------------------------------------------------------------------------
Oct-13 4.88% 4.54% 1.20% 0.02%
--------------------------------------------------------------------------------
Nov-13 3.66% 2.94% 0.55% 0.02%
--------------------------------------------------------------------------------
Dec-13 0.68% 0.47% 0.56% 0.02%
--------------------------------------------------------------------------------
Jan-14 -3.35% -3.43% -0.24% 0.02%
--------------------------------------------------------------------------------
Feb-14 4.16% 4.00% 1.59% 0.02%
--------------------------------------------------------------------------------
Mar-14 -0.05% -0.09% -0.23% 0.02%
--------------------------------------------------------------------------------
Apr-14 -0.15% -0.23% -0.73% 0.02%
--------------------------------------------------------------------------------
May-14 2.59% 2.08% 0.45% 0.02%
--------------------------------------------------------------------------------
Jun-14 -1.08% -0.94% 0.93% 0.02%
--------------------------------------------------------------------------------
Jul-14 -3.18% -3.26% -0.88% 0.02%
--------------------------------------------------------------------------------
Aug-14 5.44% 5.00% 1.09% 0.02%
--------------------------------------------------------------------------------
Sep-14 -0.73% -0.63% -0.77% 0.02%
--------------------------------------------------------------------------------
30
MONTHLY RELATIVE RETURNS OF WEF COMPARED TO ITS BENCHMARK INDEX AND THE 3
MONTH U.S. DOLLAR LIBOR INTEREST RATE
--------------------------------------------------------------------------------
WEF WEF
WEF WEF gross vs 3- net vs 3-
gross vs net vs month USD month USD
Date HFRXGL relative HFRXGL relative Libor relative Libor relative
returns* returns* returns** returns**
--------------------------------------------------------------------------------
Jan-13 1.55% 1.46% 3.49% 3.40%
--------------------------------------------------------------------------------
Feb-13 0.71% 0.62% 1.12% 1.03%
--------------------------------------------------------------------------------
Mar-13 3.85% 3.71% 4.55% 4.41%
--------------------------------------------------------------------------------
Apr-13 5.15% 3.96% 5.75% 4.56%
--------------------------------------------------------------------------------
May-13 -4.86% -4.94% -4.13% -4.21%
--------------------------------------------------------------------------------
Jun-13 -0.48% -0.56% -1.83% -1.91%
--------------------------------------------------------------------------------
Jul-13 -0.70% -0.78% 0.29% 0.21%
--------------------------------------------------------------------------------
Aug-13 -4.33% -4.41% -5.21% -5.29%
--------------------------------------------------------------------------------
Sep-13 3.63% 3.54% 4.57% 4.48%
--------------------------------------------------------------------------------
Oct-13 3.68% 3.34% 4.86% 4.52%
--------------------------------------------------------------------------------
Nov-13 3.11% 2.39% 3.64% 2.92%
--------------------------------------------------------------------------------
Dec-13 0.12% -0.09% 0.66% 0.45%
--------------------------------------------------------------------------------
Jan-14 -3.11% -3.19% -3.37% -3.45%
--------------------------------------------------------------------------------
Feb-14 2.57% 2.41% 4.14% 3.98%
--------------------------------------------------------------------------------
Mar-14 0.18% 0.14% -0.07% -0.11%
--------------------------------------------------------------------------------
Apr-14 0.58% 0.50% -0.17% -0.25%
--------------------------------------------------------------------------------
May-14 2.14% 1.63% 2.57% 2.06%
--------------------------------------------------------------------------------
Jun-14 -2.01% -1.87% -1.10% -0.96%
--------------------------------------------------------------------------------
Jul-14 -2.30% -2.38% -3.20% -3.28%
--------------------------------------------------------------------------------
Aug-14 4.35% 3.91% 5.42% 4.98%
--------------------------------------------------------------------------------
Sep-14 0.04% 0.14% -0.75% -0.65%
--------------------------------------------------------------------------------
31
MONTHLY ABSOLUTE RETURNS OF WDSMF COMPARED TO ITS BENCHMARK INDEX AND THE 3
MONTH U.S. DOLLAR LIBOR INTEREST RATE
--------------------------------------------------------------------------------
HFRX 3-month
WDSMF WDSMF Global Hedge USD Libor
Monthly Monthly Fund Index (Bloomberg:
Gross Net (Bloomberg: US0003M
Date Returns Returns HFRXGL Index)* Index)**
--------------------------------------------------------------------------------
Jul-13 0.87% 0.70% 1.01% 0.02%
--------------------------------------------------------------------------------
Aug-13 -5.85% -5.90% -0.86% 0.02%
--------------------------------------------------------------------------------
Sep-13 4.62% 4.53% 0.96% 0.02%
--------------------------------------------------------------------------------
Oct-13 5.59% 4.86% 1.20% 0.02%
--------------------------------------------------------------------------------
Nov-13 3.29% 2.54% 0.55% 0.02%
--------------------------------------------------------------------------------
Dec-13 0.89% 0.67% 0.56% 0.02%
--------------------------------------------------------------------------------
Jan-14 -2.63% -2.71% -0.24% 0.02%
--------------------------------------------------------------------------------
Feb-14 3.69% 3.52% 1.59% 0.02%
--------------------------------------------------------------------------------
Mar-14 -0.13% -0.18% -0.23% 0.02%
--------------------------------------------------------------------------------
Apr-14 -0.22% -0.30% -0.73% 0.02%
--------------------------------------------------------------------------------
May-14 2.74% 2.21% 0.45% 0.02%
--------------------------------------------------------------------------------
Jun-14 -1.02% -0.87% 0.93% 0.02%
--------------------------------------------------------------------------------
Jul-14 -3.00% -3.08% -0.88% 0.02%
--------------------------------------------------------------------------------
Aug-14 5.47% 4.99% 1.09% 0.02%
--------------------------------------------------------------------------------
Sep-14 -0.65% -0.57% -0.77% 0.02%
--------------------------------------------------------------------------------
32
MONTHLY RELATIVE RETURNS OF WDSMF COMPARED TO ITS BENCHMARK INDEX AND THE 3
MONTH U.S. DOLLAR LIBOR INTEREST RATE
--------------------------------------------------------------------------------
WDSMF WDSMF
WDSMF WDSMF gross vs 3- net vs 3-
gross vs net vs month USD month USD
Date HFRXGL relative HFRXGL relative Libor relative Libor relative
returns* returns* returns** returns**
--------------------------------------------------------------------------------
Jul-13 -0.14% -0.31% 0.85% 0.68%
--------------------------------------------------------------------------------
Aug-13 -4.99% -5.04% -5.87% -5.92%
--------------------------------------------------------------------------------
Sep-13 3.66% 3.57% 4.60% 4.51%
--------------------------------------------------------------------------------
Oct-13 4.39% 3.66% 5.57% 4.84%
--------------------------------------------------------------------------------
Nov-13 2.74% 1.99% 3.27% 2.52%
--------------------------------------------------------------------------------
Dec-13 0.33% 0.11% 0.87% 0.65%
--------------------------------------------------------------------------------
Jan-14 -2.39% -2.47% -2.65% -2.73%
--------------------------------------------------------------------------------
Feb-14 2.10% 1.93% 3.67% 3.50%
--------------------------------------------------------------------------------
Mar-14 0.10% 0.05% -0.15% -0.20%
--------------------------------------------------------------------------------
Apr-14 0.51% 0.43% -0.24% -0.32%
--------------------------------------------------------------------------------
May-14 2.29% 1.76% 2.72% 2.19%
--------------------------------------------------------------------------------
Jun-14 -1.95% -1.80% -1.04% -0.89%
--------------------------------------------------------------------------------
Jul-14 -2.12% -2.20% -3.02% -3.10%
--------------------------------------------------------------------------------
Aug-14 4.38% 3.90% 5.45% 4.97%
--------------------------------------------------------------------------------
Sep-14 0.12% 0.20% -0.67% -0.59%
--------------------------------------------------------------------------------
* The HFRX Global Hedge Fund Index is designed to be representative of the
overall composition of the hedge fund universe. It is comprised of all eligible
hedge fund strategies; including but not limited to convertible arbitrage,
distressed securities, equity hedge, equity market neutral, event driven,
macro, merger arbitrage, and relative value arbitrage. The strategies are asset
weighted based on the distribution of assets in the hedge fund industry. The
HFRX Global Hedge Fund Index is being used under license from Hedge Fund
Research, Inc., which does not approve of or endorse the Fund.
[Description of 3-Month USD Libor to be inserted.]
33
SERVICE PROVIDERS
ADMINISTRATOR AND FUND ACCOUNTANT
SEI Investments Global Funds Services (the "Administrator"), a Delaware
statutory trust with its principal business offices at One Freedom Valley
Drive, Oaks, Pennsylvania 19456, serves as administrator and fund accountant of
the Fund. SEI Investments Management Corporation ("SIMC"), a wholly owned
subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all
beneficial interest in the Administrator. SEI Investments and its subsidiaries
and affiliates, including the Administrator, are leading providers of funds
evaluation services, trust accounting systems, and brokerage and information
services to financial institutions, institutional investors, and money
managers. The Administrator and its affiliates also serve as administrator or
sub-administrator to other investment companies.
Under an Administration Agreement with the Fund ("Administration Agreement"),
the Administrator is responsible for managing the business affairs of the Fund,
subject to the supervision of the Board, and receives an administration fee
calculated and assessed monthly in arrears based on the aggregate net assets of
the Fund as of the prior month-end, subject to a minimum annual fee. The
Administrator's administrative services include the provision of regulatory
reporting and all necessary office space, equipment, personnel and facilities
and other administrative services necessary to conduct the Fund's business. As
fund accountant, the Administrator provides accounting and bookkeeping services
for the Fund, including the calculation of the Fund's NAV.
TRANSFER AGENT
Atlantic Fund Services, LLC, Three Canal Plaza, Portland, Maine 04101 (the
"Transfer Agent"), serves as the Fund's transfer agent and dividend disbursing
agent under a transfer agency agreement with the Fund.
CUSTODIAN
[MUFG Union Bank, N.A., 350 California Street, 6th Floor, San Francisco,
California 94104] serves as the custodian for the Fund.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, 1701 Market Street, Philadelphia, Pennsylvania
19103, serves as legal counsel to the Fund.
CONTROL PERSONS
As of the date of this Prospectus, the Fund could be deemed to be under the
control of its seed investor, who has voting authority with respect to 100% of
the value of the outstanding interests of the Fund on such date. The seed
investor is an affiliate of the Adviser. It is expected that once the Fund
commences operations and its shares are sold to the public that the seed
investor's control will be diluted until such time as the Fund is controlled by
its unaffiliated shareholders.
34
THE OFFERING AND PLAN OF DISTRIBUTION
THE OFFERING
The Fund's shares are only being sold to investors who meet the definition of
"qualified clients" under Rule 205-3 under the Investment Advisers Act of 1940
and related guidance provided by the SEC or its Staff. In order to purchase
shares, a prospective investor must submit a completed investor certification
to the Distributor or a selling agent or sub-distributor prior to the Closing
Time. The Fund generally does not accept investments by non-U.S. persons.
Non-U.S. persons may be permitted to invest in the Fund subject to the
satisfaction of enhanced due diligence. Please contact the Fund at [___] for
more information.
Shares are being offered during an initial offering period that is expected to
terminate on or about [____], 2015 or such earlier or later date as the Adviser
may determine in its discretion. Shares will be offered during the initial
offering period at the offering price, which is $20.00 per share. After the
initial offering, the shares are expected to be offered on a continuous basis
monthly (generally as of 4:00 p.m. Eastern Time on the last business day of
each month, the "Closing Time") at NAV per share. At each Closing Time,
purchase orders received in proper form will be accepted by the Fund and
deposited monies will be invested in the Fund as of the first business day of
the next month following the acceptance of an investor's purchase order. During
any continuous offering, shares may be purchased through the Distributor or
selected selling agents or sub-distributors that have entered into dealer
agreements with the Distributor. Any continuous offering, if commenced, may be
discontinued at any time. The Fund will have the sole right to accept orders to
purchase shares and reserves the right to reject any order in whole or in
part.
For each investor, the Fund requires a minimum initial investment of $10,000
and subsequent minimum investments of $5,000. If an investor's account balance
drops below $10,000 due to participation in a periodic repurchase offer (see
"PERIODIC REPURCHASE OFFERS" below), the Fund, in its sole discretion, may deem
the investor to have tendered all of the investor's shares, if permissible
under the terms of the repurchase offer.
The Fund may waive these minimum investment requirements for one or more
investors in its sole discretion. Notwithstanding any waiver, investors remain
subject to eligibility requirements set forth in this Prospectus. The Fund may
accept investments in the Fund on such other terms as it authorizes from time
to time and may reject applications for shares for any or no reason, in its
sole discretion. Subscriptions are generally subject to the receipt of cleared
funds on or prior to the acceptance date set by the Fund and notified to
prospective investors. Pending the termination of the initial offering period
and the closing of any monthly offering, funds received from prospective
investors will be placed in a non interest-bearing account with [MUFG Union
Bank, N.A.]. On the date of termination of the initial offering period or any
monthly closing, the balance in the account with respect to each investor whose
investment is accepted will be invested in the Fund on behalf of such investor.
Each prospective investor must submit a completed application, including the
investor certification, five business days prior and payment three business days
prior to the purchase date (currently as of Closing Time on the last business
day of the month) in U.S. funds. The Fund reserves the right to waive these
requirements in its sole discretion.
The shares are not listed on any securities exchange. In addition, shares are
subject to transfer restrictions, including a requirement that shares may be
transferred only to persons who meet the Fund's eligibility requirements set
forth in this Prospectus. Shareholders will not have the right to redeem their
shares. However, as described below, in order to provide some liquidity to
shareholders, the Fund will conduct periodic repurchase offers for a portion of
its outstanding shares.
35
THE PLAN OF DISTRIBUTION
SEI Investments Distribution Co. is the principal distributor of shares of the
Fund. The Distributor may enter into selected dealer agreements with other
selling agents or sub-distributors for the sale and distribution of Fund
shares. The Distributor acts as the distributor of shares for the Fund on a
best efforts and agency basis (not as principal), subject to various
conditions, pursuant to the terms of a distribution agreement with the Fund.
The Distributor is not obligated to sell any specific number or dollar amount
of the Fund's shares, but will use reasonable efforts to sell the shares. There
is no guarantee that a secondary market for Fund shares will develop.
[To the extent consistent with applicable law, the Distributor has agreed to
indemnify the Fund against certain liabilities under the Securities Act of 1933
and in connection with the services rendered to the Fund. To the extent
consistent with applicable law, the Fund has agreed to indemnify the
Distributor against certain liabilities under the Securities Act of 1933. Such
agreement does not include the indemnification of the Distributor against
liability resulting from [____] on the part of the Distributor.]
PAYMENTS TO FINANCIAL INTERMEDIARIES
From time to time, the Adviser and/or its affiliates, in their discretion, may
make payments to certain affiliated or unaffiliated financial intermediaries,
including the Distributor and affiliated selling agents or sub-distributors, to
compensate them for the costs associated with distribution, marketing,
administration and shareholder servicing support for the Fund and/or its
shareholders. These payments are sometimes characterized as "revenue sharing"
payments and are made out of the Adviser's and/or its affiliates' own
legitimate profits or other resources, and are not paid by the Fund. A
financial intermediary may provide these services with respect to Fund shares
sold or held through programs such as retirement plans, qualified tuition
programs, fund supermarkets, fee-based advisory or wrap fee programs, bank
trust programs, and insurance (e.g., individual or group annuity) programs. In
addition, financial intermediaries may receive payments for making shares of
the Fund available to their customers or registered representatives, including
providing the Fund with "shelf space," placing it on a preferred or recommended
fund list, or promoting the Fund in certain sales programs that are sponsored
by financial intermediaries. To the extent permitted by SEC and FINRA rules
and other applicable laws and regulations, the Adviser and/or its affiliates
may pay or allow other promotional incentives or payments to financial
intermediaries. For more information please see "Payments to Financial
Intermediaries" in the SAI.
The level of payments to individual financial intermediaries varies in any
given year and may be negotiated on the basis of sales of Fund shares, the
amount of Fund assets serviced by the financial intermediary or the quality of
the financial intermediary's relationship with the Adviser and/or its
affiliates. These payments may be more or less than the payments received by
the financial intermediaries from other funds and may influence a financial
intermediary to favor the sales of certain funds or share classes over others.
In certain instances, the payments could be significant and may cause a
conflict of interest for your financial intermediary. Any such payments will
not change the NAV or price of the Fund's shares. Please contact your financial
intermediary for information about any payments it may receive in connection
with the sale of Fund shares or the provision of services to Fund shareholders,
as well as information about any fees and/or commissions it charges.
36
PERIODIC REPURCHASE OFFERS:
REDEMPTIONS/REPURCHASES OF SHARES AND TRANSFERS
The Fund is a closed-end "interval" fund which, to provide some liquidity and
the ability to receive NAV on a disposition of at least a portion of your
shares, makes periodic offers to repurchase shares. Except as permitted by the
Fund's interval structure, no shareholder will have the right to require the
Fund to repurchase its shares.
The Fund has adopted, pursuant to Rule 23c-3(b) under the 1940 Act, a
fundamental policy, which cannot be changed without shareholder approval,
requiring the Fund to offer to repurchase at least 5% and up to 25% of its
shares at NAV on a regular schedule. Although the policy permits repurchases of
between 5% and 25% of the Fund's outstanding shares, for each repurchase offer,
the Fund will offer to repurchase 5% of its outstanding shares, unless the
Board has approved a higher amount (but not more than 25% of outstanding
shares) for that repurchase offer. The schedule requires the Fund to make
repurchase offers every three months. The Fund expects the initial offering of
shares to terminate on or about [____], 2015 (or such earlier or later date as
the Adviser may determine in its discretion) and the pricing date for the
Fund's first repurchase offer is expected to be [____], 2015.
When a repurchase offer commences, the Fund sends, at least 21 days before the
repurchase request deadline, written notice to each shareholder setting forth,
among other things:
o A statement that the Fund is offering to repurchase its securities from
shareholders at NAV.
o Any fees applicable to the repurchase.
o The percentage of outstanding shares that the Fund is offering to
repurchase (the "repurchase offer amount") and how the Fund will purchase
shares on a pro rata basis if the offer is oversubscribed.
o The date on which a shareholder's repurchase request is due (the
"repurchase request deadline").
o The date that will be used to determine the Fund's NAV applicable to the
repurchase offer (the "repurchase pricing date").
o The date by which the Fund will pay to shareholders the proceeds from
their shares accepted for repurchase (the "repurchase payment deadline").
o The risk of fluctuation in NAV between the repurchase request deadline and
the repurchase pricing date.
o The procedures by which shareholders may tender their shares and the right
of shareholders to withdraw or modify their tenders before the repurchase
request deadline.
o The circumstances in which the Fund may suspend or postpone the repurchase
offer.
o The NAV of the shares as of a date no more than seven days before the date
of the written notice and the means by which shareholders may ascertain the
NAV.
This notice may be included in a shareholder report or other Fund document and
may be sent electronically to those shareholders who have consented to
electronic delivery. THE REPURCHASE REQUEST DEADLINE WILL BE STRICTLY OBSERVED.
If a shareholder fails to submit a repurchase request in proper form (including
a tender of stock in response to a repurchase offer) by the repurchase request
deadline, the shareholder will be unable to liquidate shares until a subsequent
repurchase offer, and will have to resubmit a request in the next repurchase
offer. Shareholders may withdraw or change a repurchase
37
request with a proper instruction submitted in proper form at any point before
the repurchase request deadline.
DETERMINATION OF REPURCHASE PRICE AND PAYMENT FOR SHARES
The repurchase price payable in respect of a tendered share is equal to the
share's NAV as determined on the repurchase pricing date, which will be no
later than the 14th day (or the next business day if the 14th day is not a
business day) following the repurchase request deadline. The repurchase payment
deadline will be seven days after the repurchase pricing date. The Fund's NAV
per share may change materially between the date a repurchase offer is mailed
and the repurchase request deadline, and it may also change materially between
the repurchase request deadline and repurchase pricing date. The method by
which the Fund calculates NAV is discussed under "DETERMINATION OF NET ASSET
VALUE." During the period an offer to repurchase is open, the Fund calculates
its NAV daily on the five business days preceding a repurchase request
deadline. Shareholders may obtain the current NAV by calling the Administrator
at [____].
The Fund does not currently charge a repurchase fee. However, the Fund may
charge a repurchase fee of up to 2.00%, which the Fund would retain to help
offset non-DE MINIMIS estimated costs related to the repurchase incurred by the
Fund, directly or indirectly, as a result of repurchasing shares, thus
allocating estimated transaction costs to the shareholder whose shares are
being repurchased. The Fund may introduce, or modify the amount of, a
repurchase fee at any time. The Fund may also waive or reduce the repurchase
fee if the Adviser determines that the repurchase is offset by a corresponding
purchase or if for other reasons the Fund will not incur transaction costs or
will incur reduced transaction costs.
SUSPENSION OR POSTPONEMENT OF REPURCHASE OFFERS
The Fund may suspend or postpone a repurchase offer in limited circumstances
set forth in Rule 23c-3 under the 1940 Act as described below, but only with
the approval of a majority of the Trustees, including a majority of Trustees
who are not "interested persons" of the Fund ("Independent Trustees").
The Fund may suspend or postpone a repurchase offer only: (1) if the repurchase
would cause the Fund to lose its status as a regulated investment company under
the Code; (2) if making or effecting the repurchase offer would cause the
shares that are subject to the offer that are quoted in an inter-dealer
quotation system of a national securities association to not be quoted on any
inter-dealer quotation system of a national securities association; (3) for any
period during which the New York Stock Exchange ("NYSE") or any other market in
which the securities owned by the Fund are principally traded is closed, other
than customary weekend and holiday closings, or during which trading in such
market is restricted; (4) for any period during which an emergency exists as a
result of which disposal by the Fund of assets owned by it is not reasonably
practicable, or during which it is not reasonably practicable for the Fund
fairly to determine the value of its net assets; or (5) for such other periods
as the SEC may by order permit for the protection of shareholders of the Fund.
OVERSUBSCRIBED REPURCHASE OFFERS
There is no minimum number of shares that must be tendered before the Fund will
honor repurchase requests. However, the Board sets for each repurchase offer a
maximum percentage of shares that may be repurchased by the Fund. In the event
a repurchase offer by the Fund is oversubscribed, the Fund may repurchase, but
is not required to repurchase, additional shares up to a maximum amount of
2.00% of the outstanding shares of the Fund. If the Fund determines not to
repurchase additional shares beyond the repurchase offer amount, or if
shareholders tender an amount of shares greater than that which the Fund is
entitled to repurchase, the Fund will repurchase the shares tendered on a pro
rata basis.
38
If any shares that you wish to tender to the Fund are not repurchased because
of proration, you will have to wait until the next repurchase offer and
resubmit your repurchase request, and your repurchase request will not be given
any priority over other shareholders' requests. Thus, there is a risk that the
Fund may not purchase all of the shares you wish to have repurchased in a given
repurchase offer or in any subsequent repurchase offer.
THERE IS NO ASSURANCE THAT YOU WILL BE ABLE TO TENDER YOUR SHARES WHEN OR IN
THE AMOUNT THAT YOU DESIRE.
CONSEQUENCES OF REPURCHASE OFFERS
From the time the Fund distributes or publishes each repurchase offer
notification until the repurchase pricing date for that offer, the Fund must
maintain liquid assets at least equal to the percentage of its shares subject
to the repurchase offer. For this purpose, "liquid assets" means assets that
may be sold or otherwise disposed of in the ordinary course of business, at
approximately the price at which the Fund values them, within the period
between the repurchase request deadline and the repurchase payment date, or
which mature by the repurchase payment date. The Fund may, for the purpose of
paying for repurchased shares, be required to liquidate portfolio holdings
earlier than the Adviser would otherwise have liquidated these holdings. Such
liquidations may result in losses, and may increase the Fund's portfolio
turnover. The Fund is also permitted to borrow to meet repurchase requests.
If the Fund borrows to finance repurchases, interest on that borrowing will
negatively affect shareholders who do not tender their shares by increasing the
Fund's expenses and reducing any net investment income. There is no assurance
that the Fund will be able to sell a significant amount of additional shares so
as to mitigate these effects.
These and other possible risks associated with the Fund's repurchase offers are
described under "RISKS" above. In addition, the repurchase of shares by the
Fund will be a taxable event to shareholders, potentially even to those
shareholders that do not participate in the repurchase. For a discussion of
these tax consequences, see "TAX CONSIDERATIONS" below and "TAXES" in the SAI.
DETERMINATION OF NET ASSET VALUE
NAV for one Fund share is the value of that share's portion of the net assets
of the Fund. In calculating NAV, the Fund generally values its investment
portfolio at market price. You may obtain the current NAV of the Fund by
calling [____]. The Fund will generally calculate its NAV for the last business
day of every week and the last business day of every month as of the close of
regular trading on the NYSE (normally, 4:00 p.m., Eastern Time) by adding the
total value of its assets, subtracting its liabilities and then dividing the
result by the number of shares outstanding. The Fund also calculates its NAV in
connection with periodic repurchase offers as described above.
When valuing portfolio securities, the Fund values securities listed on a
securities exchange, market or automated quotation system for which quotations
are readily available (other than securities traded on the National Association
of Securities Dealers Automated Quotations ("NASDAQ")) at the last quoted sale
price on the primary exchange or market (non-U.S. or domestic) on which the
securities are traded, or, if there is no such reported sale, at the most
recent quoted bid price. The Fund values securities traded on NASDAQ at the
NASDAQ Official Closing Price. If available, debt securities and swaps, such as
those held by the Fund, are priced based upon valuations provided by
independent, third-party pricing agents. Such values generally reflect the last
reported sales price if the security is actively traded. The third-party
pricing agents may also value debt securities at an evaluated bid price by
employing methodologies that
39
utilize actual market transactions, broker-supplied valuations or other
methodologies designed to identify the market value for such securities.
Redeemable securities issued by open-end investment companies are valued at the
investment company's applicable net asset value, with the exception of ETFs,
which are priced as equity securities. The prices of non-U.S. securities are
reported in local currency and converted to U.S. dollars using currency
exchange rates. If a security's price cannot be obtained, as noted above, the
Fund will value the securities using a bid price from at least one independent
broker. If such prices are not readily available or cannot be valued using the
methodologies described above, the Fund will value the security using the
Fund's Fair Valuation Procedures, as described below.
Securities held by the Fund with remaining maturities of sixty (60) days or
less will be valued by the amortized cost method, which involves valuing a
security at its cost on the date of purchase and thereafter (absent unusual
circumstances) assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuations in general market rates of
interest on the value of the instrument. While this method provides certainty
in valuation, it may result in periods during which value, as determined by
this method, is higher or lower than the price the Fund would receive if it
sold the instrument. Further, the value of securities in the Fund can be
expected to vary inversely with changes in prevailing interest rates.
Prices for certain securities held by the Fund are provided daily by
third-party independent pricing agents. The Adviser reasonably believes that
prices provided by independent pricing agents are reliable. However, there can
be no assurance that such pricing service's prices will be reliable. The
Adviser will regularly monitor the reliability of prices obtained from any
pricing service and shall promptly notify the Administrator if it believes that
a particular pricing service is no longer a reliable source of prices. The
Administrator, in turn, will notify the Fund's Fair Valuation Committee (the
"Committee") if it receives such notification from the Adviser or if the
Administrator reasonably believes that a particular pricing service is no
longer a reliable source for prices.
The Fund's Fair Valuation Procedures provide that any change in a primary
pricing agent or a pricing methodology requires prior approval by the Board.
However, when the change would not materially affect valuation of the Fund's
net assets or involve a material departure in pricing methodology from that of
the Fund's existing pricing agent or pricing methodology, approval may be
obtained at the next regularly scheduled meeting of the Board.
Securities for which market prices are not "readily available" or may be
unreliable are valued in accordance with Fair Valuation Procedures established
by the Board. The Fund's Fair Valuation Procedures are implemented through the
Committee.
Some of the more common reasons that may necessitate that a security be valued
using Fair Valuation Procedures include: (i) the security's trading has been
halted or suspended, (ii) the security has been de-listed from a national
exchange, (iii) the security's primary trading market is temporarily closed at
a time when under normal conditions it would be open, or (iv) the security's
primary pricing source is not able or willing to provide a price. When a
security is valued in accordance with the Fair Valuation Procedures, the
Committee will determine the value after taking into consideration relevant
information reasonably available to the Committee. Examples of factors the
Committee may consider include: (i) the facts giving rise to the need to fair
value, (ii) the last trade price, (iii) the performance of the market or the
issuer's industry, (iv) the liquidity of the security, (v) the size of the
holding in the Fund, or (vi) any other appropriate information.
The determination of a security's fair value price often involves the
consideration of a number of subjective factors, and is therefore subject to
the unavoidable risk that the value assigned to a security
40
may be higher or lower than the security's value would be if a reliable market
quotation for the security was readily available.
For securities that principally trade on a non-U.S. market or exchange, a
significant gap in time can exist between the time of a particular security's
last trade and the time at which the Fund calculates its NAV. The closing
prices of such securities may no longer reflect their market value at the time
the Fund calculates NAV if an event that could materially affect the value of
those securities (a "Significant Event"), including substantial fluctuations in
domestic or non-U.S. markets or occurrences not tied directly to the securities
markets, such as natural disasters, armed conflicts or significant governmental
actions, has occurred between the time of the security's last close and the
time that the Fund calculates NAV. The Fund may invest in securities that are
primarily listed on non-U.S. exchanges that trade on weekends or other days when
the Fund does not price its shares. As a result, the NAV of the Fund's shares
may change on days when shareholders will not be able to purchase or redeem
Fund shares.
A Significant Event may relate to a single issuer or to an entire market
sector. If the Adviser becomes aware of a Significant Event that has occurred
with respect to a security or group of securities after the closing of the
exchange or market on which the security or securities principally trade, but
before the time at which the Fund calculates NAV, it may request that a
Committee meeting be called. In addition, the Administrator monitors price
movements among certain selected indices, securities and/or baskets of
securities that may be an indicator that the closing prices received earlier
from non-U.S. exchanges or markets may not reflect market value at the time the
Fund calculates NAV. If price movements in a monitored index or security exceed
levels established by the Administrator, the Administrator notifies the Adviser
that such limits have been exceeded. In such event, the Adviser makes the
determination whether a Committee meeting should be called based on the
information provided.
DISTRIBUTIONS AND DISTRIBUTION REINVESTMENT
The Fund distributes its net investment income annually and distributes its net
realized capital gains, if any, at least annually. If you own Fund shares on
the Fund's record date, you will be entitled to receive the distribution.
All distributions will be reinvested in additional shares of the Fund, unless
you choose to have distributions of net investment income or net realized
capital gains or both paid in cash. If you wish to change your distribution
option, write or call the Administrator, One Freedom Valley Drive, Oaks,
Pennsylvania 19456, [(___)-(___)-(____)] thirty (30) days in advance of the
record date for the distributions. If you elect to receive distributions of net
investment income and/or net realized capital gains paid in cash, and the U.S.
Postal Service cannot deliver the check, or if a check remains outstanding for
six months, the Fund reserves the right to reinvest the distribution check in
your account, at the Fund's current NAV, and to reinvest all subsequent
distributions.
When the Fund declares a distribution, the Administrator, on the shareholder's
behalf, will receive additional authorized shares from the Fund either newly
issued or repurchased from shareholders by the Fund and held as treasury stock.
The number of shares to be received when distributions are reinvested will be
determined by dividing the amount of the distribution by the Fund's NAV per
share.
The automatic reinvestment of distributions will not relieve participants of
any federal, state or local income tax that may be payable (or required to be
withheld) on such distributions. See "TAX CONSIDERATIONS" below.
The Fund reserves the right to amend or terminate the distribution reinvestment
policy. There is no direct service charge to participants with regard to
purchases under the distribution reinvestment policy;
41
however, the Fund reserves the right to amend the distribution reinvestment
policy to include a service charge payable by the participants.
Additional information about the policy is available from the Administrator at
the address and phone number given above.
TAX CONSIDERATIONS
You should always consult your tax advisor for specific guidance regarding the
federal, state and local tax effects of your investment in the Fund. The
following is a summary of the U.S. federal income tax consequences of investing
in the Fund. This summary does not apply to shares held in an individual
retirement account or other tax-qualified plans, which are generally not
subject to current tax. Transactions relating to shares held in such accounts
may, however, be taxable at some time in the future.
The Fund intends to distribute substantially all of its net investment income
and net realized capital gains, if any. The dividends and distributions you
receive, whether in cash or reinvested in additional shares of the Fund may be
subject to federal, state, and local taxation, depending upon your tax
situation. Income distributions, including distributions of net short-term
capital gains but excluding distributions of qualified dividend income, are
generally taxable at ordinary income tax rates. Long-term capital gains
distributions and distributions that are designated by the Fund as qualified
dividend income are generally taxable at the rates applicable to long-term
capital gains and set at a maximum tax rate for individuals at 20% (lower rates
apply to individuals in lower tax brackets). Once a year the Fund will send you
a statement showing the types and total amount of distributions you received
during the previous year.
Each sale of shares of the Fund may be a taxable event. A sale may result in a
capital gain or loss to you. The gain or loss generally will be treated as
short term if you held the shares 12 months or less, long term if you held the
shares for longer. For tax purposes, an exchange of your Fund shares for shares
of a different fund is the same as a sale.
Shareholders whose shares are repurchased by the Fund may realize a capital
gain or loss on the repurchase. For federal income tax purposes, a repurchase
generally should be treated as a sale or exchange provided that the redemption
is not essentially equivalent to a dividend, is a substantially
disproportionate redemption, is a complete redemption of a shareholder's entire
interest in the Fund, or is in partial liquidation of the Fund. If the
foregoing tests are not met, there is a risk that the proceeds from a
repurchase could be taxable as a dividend to such shareholder. Furthermore,
there is a risk that shareholders who do not participate in a repurchase could
be treated as receiving a constructive dividend as a result of their
proportionate increase in their ownership of the Fund resulting from the
repurchase of other shareholders' shares. Shareholders would be notified of
this treatment at year end and provided with a 1099-DIV form.
You should note that if you purchase shares just before a distribution, the
purchase price would reflect the amount of the upcoming distribution. In this
case, you would be taxed on the entire amount of the distribution received,
even though, as an economic matter, the distribution simply constitutes a
return of your investment. This is known as "buying a dividend" and should be
avoided by taxable investors.
42
Effective January 1, 2013, U.S. individuals with income exceeding $200,000
($250,000 if married and filing jointly) are subject to a 3.8% Medicare
contribution tax on their "net investment income," including interest,
dividends, and capital gains (including capital gains realized on the sale or
exchange of shares of the Fund).
The Fund is required to report to certain shareholders and the IRS the cost
basis of Fund shares that are repurchased by the Fund. The Fund will determine
cost basis using the average cost method unless the shareholder elects in
writing any alternate IRS-approved cost basis method. The cost basis method
elected by the Fund shareholder (or the cost basis method applied by default)
for each sale of Fund shares may not be changed after the settlement date of
each such sale of Fund shares. Fund shareholders should consult their tax
advisors to determine the best IRS-accepted cost basis method for their tax
situation and to obtain more information about how cost basis reporting applies
to them. Please see the SAI for more information regarding cost basis
reporting.
The Fund intends to elect and to qualify each year to be treated as a regulated
investment company ("RIC") under the Code. In order to do so it must derive at
least 90% of its gross income each taxable year from qualifying income and
diversify its assets as described in more detail in the Fund's SAI. Certain of
the Fund's investments generally do not generate qualifying income if made
directly by the Fund. The Fund, however, intends to gain exposure to certain
non-qualifying investments including commodities investments through their
investment in their wholly-owned Subsidiary. The Subsidiary intends to invest
directly or indirectly in commodities, interest rates, currencies, bonds and
other commodity-linked derivative instruments, including options, futures
contracts, swaps, options on futures contracts. There is the possibility that
the IRS may issue guidance providing that a RIC's investment in its own
subsidiary no longer provides qualifying income to a RIC which would likely
cause the Fund to significantly change its investment strategy and could
adversely affect the Fund. In addition, for purposes of satisfying the asset
diversification test (as described more fully in the SAI) it may be difficult
for the Fund to identify the "issuer" of certain Fund investments including any
total return swaps used for indirect investment exposure. There is a risk that
the IRS could make an adverse determination with respect to identifying the
issuer of Fund investments and could disagree with the Fund's valuation of the
underlying issuers to a particular derivative. Such an adverse determination
could therefore jeopardize the Fund's status as a RIC which would ultimately
affect a shareholder's return on its investment in the Fund.
To the extent the Fund invests in non-U.S. securities, it may be subject to
foreign withholding taxes with respect to dividends or interest the Fund
received from sources in non-U.S. countries. If more than 50% of the total
assets of the Fund consist of non-U.S. securities, the Fund will be eligible to
elect to treat some of those taxes as a distribution to shareholders, which
would allow shareholders to offset some of their U.S. federal income tax. The
Fund will notify you if it makes such an election and provide you with the
information necessary to reflect foreign taxes paid on your income tax return.
MORE INFORMATION ABOUT TAXES IS IN THE SAI.
43
DESCRIPTION OF CAPITAL STRUCTURE AND SHARES
The Fund's Agreement and Declaration of Trust (the "Declaration of Trust")
authorizes the issuance of an unlimited number of shares of the Fund, each of
which represents an equal proportionate interest in the Fund with each other
share. Shares are entitled upon liquidation to a pro rata share in the net
assets of the Fund. Shareholders have no pre-emptive rights. Currently there is
one class of shares in the Fund. The Declaration of Trust provides that the
Trustees may create additional classes of shares. Share certificates
representing shares will not be issued. The Fund's shares, when issued, are
fully paid and non-assessable. The Fund does not intend to hold annual meetings
of its shareholders.
SHARES
The Declaration of Trust, which has been filed with the SEC, permits the Fund
to issue an unlimited number of full and fractional shares of beneficial
interest, no par value. Each share of the Fund represents an equal
proportionate interest in the assets of the Fund with each other share in the
Fund. Holders of shares will be entitled to the payment of distributions when,
as and if declared by the Board. The Fund currently intends to make
distributions to its shareholders after payment of Fund operating expenses
including interest on outstanding borrowings, if any, no less frequently than
annually. Unless the registered owner of shares elects to receive cash, all
distributions declared on shares will be automatically reinvested for
shareholders in additional shares of the Fund. The 1940 Act may limit the
payment of distributions to the holders of shares. Each whole share shall be
entitled to one vote as to matters on which it is entitled to vote pursuant to
the terms of the Declaration of Trust on file with the SEC. Upon liquidation of
the Fund, after paying or adequately providing for the payment of all
liabilities of the Fund, and upon receipt of such releases, indemnities and
refunding agreements as they deem necessary for their protection, the Trustees
may distribute the remaining assets of the Fund (in cash or in kind) among its
shareholders. The shares are not liable to further calls or to assessment by
the Fund. There are no preemptive rights associated with the shares. The
Declaration of Trust provides that the Fund's shareholders are not liable for
any liabilities of the Fund.
ANTI-TAKEOVER PROVISIONS IN THE DECLARATION OF TRUST
The Declaration of Trust includes provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of the Board, and could have the effect of
depriving the Fund's shareholders of an opportunity to sell their shares at a
premium over prevailing market prices, if any, by discouraging a third party
from seeking to obtain control of the Fund. These provisions may have the
effect of discouraging attempts to acquire control of the Fund, which attempts
could have the effect of increasing the expenses of the Fund and interfering
with the normal operation of the Fund. The Trustees are elected for indefinite
terms and do not stand for reelection. A Trustee may be removed from office
without cause only by a written instrument signed or adopted by a majority of
the remaining Trustees or by a vote of the holders of at least two-thirds of
the class of shares of the Fund that are entitled to elect a Trustee and that
are entitled to vote on the matter. The Declaration of Trust does not contain
any other specific inhibiting provisions that would operate only with respect
to an extraordinary transaction such as a merger, reorganization, tender offer,
sale or transfer of substantially all of the Fund's asset, or liquidation.
Reference should be made to the Declaration of Trust on file with the SEC for
the full text of these provisions.
44
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
THE FUND
DESCRIPTION OF PERMITTED INVESTMENTS
INVESTMENT LIMITATIONS
THE ADVISER
PORTFOLIO MANAGEMENT
THE ADMINISTRATOR
THE DISTRIBUTOR
PAYMENTS TO FINANCIAL INTERMEDIARIES
THE TRANSFER AGENT
THE CUSTODIAN
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
LEGAL COUNSEL
TRUSTEES AND OFFICERS OF THE FUND
PURCHASING SHARES
DETERMINATION OF NET ASSET VALUE
TAXES
FUND TRANSACTIONS
PORTFOLIO HOLDINGS
DESCRIPTION OF SHARES
LIMITATION OF TRUSTEES' LIABILITY
PROXY VOTING
CODES OF ETHICS
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
FINANCIAL STATEMENTS
45
SUBJECT TO COMPLETION
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE
SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 30, 2015
STATEMENT OF ADDITIONAL INFORMATION
[____], 2015
WINTON DIVERSIFIED OPPORTUNITIES FUND
CLASS I SHARES
INVESTMENT ADVISER:
WINTON CAPITAL US LLC
This Statement of Additional Information ("SAI") is not a prospectus. This SAI
is intended to provide additional information regarding the activities and
operations of Winton Diversified Opportunities Fund (the "Fund"). This SAI is
incorporated by reference and should be read in conjunction with the Fund's
prospectus dated [____], 2015 (the "Prospectus"). You may obtain the Prospectus
and, when available, the Annual Report, without charge by calling the Fund at
[____]. Capitalized terms not defined herein are defined in the Prospectus.
S-1
TABLE OF CONTENTS
THE FUND S-XX
DESCRIPTION OF PERMITTED INVESTMENTS AND RELATED RISKS S-XX
INVESTMENT LIMITATIONS S-XX
THE ADVISER S-XX
PORTFOLIO MANAGEMENT S-XX
THE ADMINISTRATOR S-XX
THE TRANSFER AGENT S-XX
THE DISTRIBUTOR S-XX
PAYMENTS TO FINANCIAL INTERMEDIARIES S-XX
THE CUSTODIAN S-XX
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM S-XX
LEGAL COUNSEL S-XX
TRUSTEES AND OFFICERS OF THE FUND S-XX
PURCHASING SHARES S-XX
DETERMINATION OF NET ASSET VALUE S-XX
TAXES S-XX
FUND TRANSACTIONS S-XX
PORTFOLIO HOLDINGS S-XX
DESCRIPTION OF SHARES S-XX
LIMITATION OF TRUSTEES' LIABILITY S-XX
PROXY VOTING S-XX
CODES OF ETHICS S-XX
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS S-XX
FINANCIAL STATEMENTS S-XX
APPENDIX A -- DESCRIPTION OF RATINGS A-1
APPENDIX B - PROXY VOTING POLICIES AND PROCEDURES B-1
S-2
THE FUND
GENERAL. The Fund is a diversified closed-end investment management company
established under Delaware law as a Delaware statutory trust under an Agreement
and Declaration of Trust dated [____], 2015 (the "Declaration of Trust"). The
Fund is a continuously offered (on a monthly basis) fund that is operated as an
interval fund. Winton Capital US LLC (the "Adviser") serves as the Fund's
investment adviser.
The Fund will initially offer a single class of shares of beneficial interest
("shares") designated as "Class I shares" to investors eligible to invest in
the Fund. The Fund may in the future submit to the Securities and Exchange
Commission ("SEC") an application for an exemptive order to permit the Fund to
offer additional classes of shares. Although there is no assurance that the SEC
would grant such an order, any additional class of shares would have certain
differing characteristics, particularly in the distribution and/or shareholder
servicing fees that that each class may be charged.
Because the Fund will pay the Adviser an incentive fee based on the Fund's
performance, each investor must also be a "qualified client" as that term is
defined in Rule 205-3(d)(1) under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"), and related guidance provided by the SEC or its
Staff.
VOTING RIGHTS. Each shareholder of record is entitled to one vote for each
share held on the record date for the shareholder action or meeting. The Fund
is not required, and does not intend, to hold annual meetings of shareholders.
Approval of shareholders will be sought, however, for certain changes in the
operation of the Fund and for the election of trustees of the Fund (each, a
"Trustee") under certain circumstances. Under the Declaration of Trust, the
Trustees have the power to liquidate the Fund without shareholder approval.
While the Trustees have no present intention of exercising this power, they may
do so if the Fund fails to reach a viable size within a reasonable amount of
time or for such other reasons as may be determined by the Fund's Board of
Trustees (the "Board").
In addition, a Trustee may be removed by the remaining Trustees or by
shareholders at a special meeting called upon written request of shareholders
owning at least 10% of the outstanding shares of the Fund in the aggregate as
provided in Section 16(c) of the Investment Company Act of 1940, as amended
(the "1940 Act"). In the event that such a meeting is requested, the Fund will
provide appropriate assistance and information to the shareholders requesting
the meeting.
Shares represent proportionate interests in the Fund's assets.
DIVERSIFICATION. The Fund is classified as a "diversified" investment company
under the 1940 Act.
DESCRIPTION OF PERMITTED INVESTMENTS AND RELATED RISKS
The Fund's investment objective and principal investment strategies are
described in the Prospectus. The Fund is classified as a "diversified"
investment company under the 1940 Act. The following information supplements,
and should be read in conjunction with, the Prospectus. The following are
descriptions of the permitted investments and investment practices of the Fund
and the associated risk factors. The Fund may invest in any of the following
instruments or engage in any of the following investment practices unless such
investment or activity is inconsistent with or is not permitted by the Fund's
stated investment policies, including those stated below under the heading
"Investment Limitations."
AMERICAN DEPOSITARY RECEIPTS ("ADRS"). ADRs, as well as other "hybrid" forms of
ADRs, including European Depositary Receipts ("EDRs") and Global Depositary
Receipts ("GDRs") (together, "Depositary Receipts"), are certificates
evidencing ownership of shares of a non-US issuer. Depositary
S-3
Receipts are securities that evidence ownership interests in a security or a
pool of securities that have been deposited with a "depository" and may be
sponsored or unsponsored. These certificates are issued by depository banks and
generally trade on an established market in the United States or elsewhere. The
underlying shares are held in trust by a custodian bank or similar financial
institution in the issuer's home country. The depository bank may not have
physical custody of the underlying securities at all times and may charge fees
for various services, including forwarding dividends and interest and corporate
actions. Depositary Receipts are alternatives to directly purchasing the
underlying non-US securities in their national markets and currencies. However,
Depositary Receipts continue to be subject to many of the risks associated with
investing directly in non-US securities.
For ADRs, the depository is typically a U.S. financial institution and the
underlying securities are issued by a non-US issuer. For other depositary
receipts, the depository may be a non-US or a U.S. entity, and the underlying
securities may have a non-US or a U.S. issuer. Depositary receipts will not
necessarily be denominated in the same currency as their underlying securities.
Generally, ADRs are issued in registered form, denominated in U.S. dollars, and
designed for use in the U.S. securities markets. Other depositary receipts,
such as GDRs and EDRs, may be issued in bearer form and denominated in other
currencies, and are generally designed for use in securities markets outside
the U.S. While the two types of depositary receipt facilities (unsponsored or
sponsored) are similar, there are differences regarding a holder's rights and
obligations and the practices of market participants. A depository may
establish an unsponsored facility without participation by (or acquiescence of)
the underlying issuer; typically, however, the depository requests a letter of
non-objection from the underlying issuer prior to establishing the facility.
Holders of unsponsored depositary receipts generally bear all the costs of the
facility. The depository usually charges fees upon deposit and withdrawal of
the underlying securities, the conversion of dividends into U.S. dollars or
other currency, the disposition of non-cash distributions, and the performance
of other services. The depository of an unsponsored facility frequently is
under no obligation to distribute shareholder communications received from the
underlying issuer or to pass through voting rights to depositary receipt
holders with respect to the underlying securities.
Sponsored depositary receipt facilities are created in generally the same
manner as unsponsored facilities, except that sponsored depositary receipts are
established jointly by a depository and the underlying issuer through a deposit
agreement. The deposit agreement sets out the rights and responsibilities of
the underlying issuer, the depository, and the depositary receipt holders. With
sponsored facilities, the underlying issuer typically bears some of the costs
of the depositary receipts (such as dividend payment fees of the depository),
although most sponsored depositary receipts agree to distribute notices of
shareholders meetings, voting instructions, and other shareholder
communications and information to the depositary receipt holders at the
underlying issuer's request. The depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through, to the
holders of the receipts, voting rights with respect to the deposited
securities.
For purposes of the Fund's investment policies, investments in depositary
receipts will be deemed to be investments in the underlying securities. Thus, a
depositary receipt representing ownership of common stock will be treated as
common stock. Depositary receipts do not eliminate all of the risks associated
with directly investing in the securities of non-US issuers.
Investments in the securities of non-US issuers may subject the Fund to
investment risks that differ in some respects from those related to investments
in securities of U.S. issuers. See "Risks of Non-U.S. Securities" below.
EQUITY SECURITIES. Equity securities represent ownership interests in a company
or partnership and consist of common stocks, preferred stocks, warrants and
rights to acquire common stock, securities
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convertible into common stock, and investments in master limited partnerships
("MLPs"). Investments in equity securities in general are subject to market
risks that may cause their prices to fluctuate over time. Fluctuations in the
value of equity securities in which the Fund invests will cause the net asset
value ("NAV") of the Fund to fluctuate. The Fund purchases equity securities
traded on global securities exchanges or the over-the-counter market. Equity
securities are described in more detail below:
o COMMON STOCK. Common stock represents an equity or ownership interest in
an issuer. In the event an issuer is liquidated or declares bankruptcy, the
claims of owners of bonds and preferred stock take precedence over the
claims of those who own common stock.
o PREFERRED STOCK. Preferred stock represents an equity or ownership
interest in an issuer that pays dividends at a specified rate and that has
precedence over common stock in the payment of dividends. In the event an
issuer is liquidated or declares bankruptcy, the claims of owners of bonds
take precedence over the claims of those who own preferred and common
stock.
o ALTERNATIVE ENTITY SECURITIES. Alternative entity securities are the
securities of entities that are formed as limited partnerships, limited
liability companies, business trusts or other non-corporate entities that
are similar to common or preferred stock of corporations.
o EXCHANGE-TRADED FUNDS ("ETFS"). An ETF is a fund whose shares are bought
and sold on a securities exchange as if it were a single security. An ETF
holds a portfolio of securities that is either actively managed by its
investment adviser or is passively managed and designed to track a
particular market segment or index. The Fund could purchase an ETF to
temporarily gain exposure to a portion of the U. S. or non-US markets while
awaiting an opportunity to purchase securities directly. Similarly, the
Fund may establish a short position in an ETF to gain inverse exposure to a
portion of the U. S. or non-US markets. The risks of owning an ETF
generally reflect the risks of owning the underlying securities the ETF
holds, although lack of liquidity in an ETF could result in it being more
volatile than the underlying portfolio of securities and ETFs have
management fees that increase their costs versus the costs of owning the
underlying securities directly. See also "Investment Company Shares" below.
o WARRANTS. Warrants are instruments that entitle the holder to buy an
equity security at a specific price for a specific period of time. Changes
in the value of a warrant do not necessarily correspond to changes in the
value of its underlying security. The price of a warrant may be more
volatile than the price of its underlying security, and a warrant may offer
greater potential for capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect
to the underlying security and do not represent any rights in the assets of
the issuing company. A warrant ceases to have value if it is not exercised
prior to its expiration date. These factors can make warrants more
speculative than other types of investments.
o CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures,
notes, preferred stocks or other securities that may be converted or
exchanged (by the holder or by the issuer) into shares of the underlying
common stock (or cash or securities of equivalent value) at a stated
exchange ratio. A convertible security may also be called for redemption or
conversion by the issuer after a particular date and under certain
circumstances (including a specified price) established upon issue. If a
convertible security held by the Fund is called for redemption or
conversion, the Fund could be required to tender it for redemption, convert
it into the underlying common stock, or sell it to a third party.
Convertible securities generally have less potential for gain or loss than
common stocks. Convertible securities generally provide yields higher than
the underlying common stocks, but generally lower
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than comparable non-convertible securities. Because of this higher yield,
convertible securities generally sell at a price above their "conversion
value," which is the current market value of the stock to be received upon
conversion. The difference between this conversion value and the price of
convertible securities will vary over time depending on changes in the
value of the underlying common stocks and interest rates. When the
underlying common stocks decline in value, convertible securities will tend
not to decline to the same extent because of the interest or dividend
payments and the repayment of principal at maturity for certain types of
convertible securities. However, securities that are convertible other than
at the option of the holder generally do not limit the potential for loss
to the same extent as securities convertible at the option of the holder.
When the underlying common stocks rise in value, the value of convertible
securities may also be expected to increase. At the same time, however, the
difference between the market value of convertible securities and their
conversion value will narrow, which means that the value of convertible
securities will generally not increase to the same extent as the value of
the underlying common stocks. Because convertible securities may also be
interest-rate sensitive, their value may increase as interest rates fall
and decrease as interest rates rise. Convertible securities are also
subject to credit risk, and are often lower-quality securities.
o MASTER LIMITED PARTNERSHIPS. MLPs are limited partnerships or limited
liability companies, whose partnership units or limited liability interests
are listed and traded on a U. S. securities exchange, and are treated as
publicly traded partnerships for federal income tax purposes. To qualify to
be treated as a partnership for tax purposes, an MLP must receive at least
90% of its income from qualifying sources as set forth in Section 7704(d)
of the Internal Revenue Code of 1986, as amended (the "Code"). These
qualifying sources include activities such as the exploration, development,
mining, production, processing, refining, transportation, storage and
marketing of mineral or natural resources. MLPs that are formed as limited
partnerships generally have two classes of owners, the general partner and
limited partners, while MLPs that are formed as limited liability companies
generally have two analogous classes of owners, the managing member and the
members. For purposes of this section, references to general partners also
apply to managing members and references to limited partners also apply to
members.
The general partner is typically owned by a major energy company, an
investment fund, the direct management of the MLP or is an entity owned by
one or more of such parties. The general partner may be structured as a
private or publicly traded corporation or other entity. The general partner
typically controls the operations and management of the MLP through an
equity interest of as much as 2% in the MLP plus, in many cases, ownership
of common units and subordinated units. A holder of general partner
interests can be liable under certain circumstances for amounts greater
than the amount of the holder's investment in the general partner interest.
General partner interests are not publicly traded and generally cannot be
converted into common units. The general partner interest can be redeemed
by the MLP if the MLP unitholders choose to remove the general partner,
typically with a supermajority vote by limited partner unitholders.
Limited partners own the remainder of the MLP through ownership of common
units and have a limited role in the MLP's operations and management.
Common units are listed and traded on U. S. securities exchanges, with
their value fluctuating predominantly based on prevailing market conditions
and the success of the MLP. Unlike owners of common stock of a corporation,
owners of common units have limited voting rights and have no ability
annually to elect directors. In the event of liquidation, common units have
preference over subordinated units, but not over debt or preferred units,
to the remaining assets of the MLP.
MLPs are typically structured such that common units and general partner
interests have first priority to receive quarterly cash distributions up to
an established minimum amount ("minimum quarterly distributions" or "MQD").
Common and general partner interests also accrue arrearages in
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distributions to the extent the MQD is not paid. Once common and general
partner interests have been paid, subordinated units receive distributions
of up to the MQD; however, subordinated units do not accrue arrearages.
Distributable cash in excess of the MQD paid to both common and
subordinated units is distributed to both common and subordinated units
generally on a pro rata basis. The general partner is also eligible to
receive incentive distributions if the general partner operates the
business in a manner which results in distributions paid per common unit
surpassing specified target levels. As the general partner increases cash
distributions to the limited partners, the general partner receives an
increasingly higher percentage of the incremental cash distributions. A
common arrangement provides that the general partner can reach a tier where
it receives 50% of every incremental dollar paid to common and subordinated
unit holders. These incentive distributions encourage the general partner
to streamline costs, increase capital expenditures and acquire assets in
order to increase the partnership's cash flow and raise the quarterly cash
distribution in order to reach higher tiers. Such results benefit all
security holders of the MLP.
GENERAL RISKS OF INVESTING IN STOCKS - While investing in stocks allows
investors to participate in the benefits of owning a company, such investors
must accept the risks of ownership. Unlike bondholders, who have preference to
a company's earnings and cash flow, preferred stockholders, followed by common
stockholders in order of priority, are entitled only to the residual amount
after a company meets its other obligations. For this reason, the value of a
company's stock will usually react more strongly to actual or perceived changes
in the company's financial condition or prospects than its debt obligations.
Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising
and falling stock prices.
The value of a company's stock may fall because of:
o Factors that directly relate to that company, such as decisions made by
its management or lower demand for the company's products or services;
o Factors affecting an entire industry, such as increases in production
costs; and
o Changes in general financial market conditions that are relatively
unrelated to the company or its industry, such as changes in interest
rates, currency exchange rates or inflation rates.
Because preferred stock is generally junior to debt securities and other
obligations of the issuer, deterioration in the credit quality of the issuer
will cause greater changes in the value of a preferred stock than in a more
senior debt security with similar stated yield characteristics.
REAL ESTATE INVESTMENT TRUSTS ("REITS"). A REIT is a corporation or business
trust (that would otherwise be taxed as a corporation) which meets the
definitional requirements of the Code. The Code permits a qualifying REIT to
deduct from taxable income the dividends paid, thereby effectively eliminating
corporate level federal income tax and making the REIT a pass-through vehicle
for federal income tax purposes. To meet the definitional requirements of the
Code, a REIT must, among other things: invest substantially all of its assets
in interests in real estate (including mortgages and other REITs), cash and
government securities; derive most of its income from rents from real property
or interest on loans secured by mortgages on real property; and distribute
annually 90% or more of its otherwise taxable income to shareholders. Although
the REIT structure originated in the U.S., a number of countries around the
world have adopted, or are considering adopting, similar REIT and REIT-like
structures.
REITs are sometimes informally characterized as Equity REITs and Mortgage
REITs. An Equity REIT invests primarily in the fee ownership or leasehold
ownership of land and buildings; a Mortgage REIT
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invests primarily in mortgages on real property, which may secure construction,
development or long-term loans.
REITs in which the Fund invests may be affected by changes in underlying real
estate values, which may have an exaggerated effect to the extent that REITs in
which the Fund invests may concentrate investments in particular geographic
regions or property types. Additionally, rising interest rates may cause
investors in REITs to demand a higher annual yield from future distributions,
which may in turn decrease market prices for equity securities issued by REITs.
Rising interest rates also generally increase the costs of obtaining financing,
which could cause the value of the Fund's investments to decline. During
periods of declining interest rates, certain Mortgage REITs may hold mortgages
that the mortgagors elect to prepay, which prepayment may diminish the yield on
securities issued by such Mortgage REITs. In addition, Mortgage REITs may be
affected by the ability of borrowers to repay when due the debt extended by the
REIT and Equity REITs may be affected by the ability of tenants to pay rent.
Certain REITs have relatively small market capitalization, which may tend to
increase the volatility of the market price of securities issued by such REITs.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. By investing in REITs
indirectly through the Fund, a shareholder will bear not only his proportionate
share of the expenses of the Fund, but also, indirectly, similar expenses of
the REITs. REITs depend generally on their ability to generate cash flow to
make distributions to shareholders.
In addition to these risks, Equity REITs may be affected by changes in the
value of the underlying property owned by the trusts, while Mortgage REITs may
be affected by the quality of any credit extended. Further, Equity and Mortgage
REITs are dependent upon management skills and generally may not be
diversified. Equity and Mortgage REITs are also subject to heavy cash flow
dependency defaults by borrowers and self-liquidation. In addition, Equity and
Mortgage REITs could possibly fail to qualify for tax free pass-through of
income under the Code or to maintain their exemptions from registration under
the 1940 Act. The above factors may also adversely affect a borrower's or a
lessee's ability to meet its obligations to the REIT. In the event of default
by a borrower or lessee, the REIT may experience delays in enforcing its rights
as a mortgagee or lessor and may incur substantial costs associated with
protecting its investments.
MICRO, SMALL AND MEDIUM CAPITALIZATION ISSUERS. Investing in equity securities
of micro, small and medium capitalization companies often involves greater risk
than is customarily associated with investments in larger capitalization
companies. This increased risk may be due to the greater business risks of
smaller size, limited markets and financial resources, narrow product lines and
frequent lack of depth of management. The securities of micro and smaller
companies are often traded in the over-the-counter market and even if listed on
a national securities exchange may not be traded in volumes typical for that
exchange. Consequently, the securities of micro and smaller companies are less
likely to be liquid, may have limited market stability, and may be subject to
more abrupt or erratic market movements than securities of larger, more
established growth companies or the market averages in general.
INITIAL PUBLIC OFFERINGS ("IPOS"). The Fund may invest a portion of its assets
in securities of companies offering shares in IPOs. IPOs may have a magnified
performance impact on a fund with a small asset base. The Fund may hold IPO
shares for a very short period of time, which may increase the turnover of the
Fund's portfolio and may lead to increased expenses for the Fund, such as
commissions and transaction costs. By selling IPO shares, the Fund may realize
taxable gains it will subsequently distribute to shareholders. In addition, the
market for IPO shares can be speculative and/or inactive for extended periods
of time. The limited number of shares available for trading in some IPOs may
make it
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more difficult for the Fund to buy or sell significant amounts of shares
without an unfavorable impact on prevailing prices. Holders of IPO shares can
be affected by substantial dilution in the value of their shares, by sales of
additional shares and by concentration of control in existing management and
principal shareholders.
The Fund's investment in IPO shares may include the securities of unseasoned
companies (companies with less than three years of continuous operations),
which presents risks considerably greater than common stocks of more
established companies. These companies may have limited operating histories and
their prospects for profitability may be uncertain. These companies may be
involved in new and evolving businesses and may be vulnerable to competition
and changes in technology, markets and economic conditions. They may be more
dependent on key managers and third parties and may have limited product
lines.
NON-U.S. SECURITIES. Non-U.S. securities include equity securities of non-US
entities, obligations of non-US branches of U.S. banks and of non-U.S. banks,
including, without limitation, European Certificates of Deposit, European Time
Deposits, European Bankers' Acceptances, Canadian Time Deposits, Europaper and
Yankee Certificates of Deposit, and investments in Canadian Commercial Paper
and non-U.S. securities.
o EMERGING MARKETS. An "emerging country" is generally a country that
the International Bank for Reconstruction and Development (World Bank)
and the International Finance Corporation would consider to be an
emerging or developing country. Typically, emerging markets are in
countries that are in the process of industrialization, with lower
gross national products ("GNP") than more developed countries. There
are currently over 130 countries that the international financial
community generally considers to be emerging or developing countries,
approximately 40 of which currently have stock markets. These
countries generally include every nation in the world except the
United States, Canada, Japan, Australia, New Zealand and most nations
located in Western Europe.
o INVESTMENT FUNDS. Some emerging countries currently prohibit direct
foreign investment in the securities of their companies. Certain
emerging countries, however, permit indirect foreign investment in the
securities of companies listed and traded on their stock exchanges
through investment funds that they have specifically authorized.
Investments in these investment funds by the Fund are subject to the
provisions of the 1940 Act. If the Fund invests in such investment
funds, shareholders will bear not only their proportionate share of
the expenses (including operating expenses and the fees of the
Adviser), but also will indirectly bear similar expenses of the
underlying investment funds. In addition, these investment funds may
trade at a premium over their NAV.
RISKS OF NON-U.S. SECURITIES -- Non-U.S. securities, non-U.S. currencies, and
securities issued by U.S. entities with substantial non-U.S. operations may
involve significant risks in addition to the risks inherent in U.S. investments.
Such risks include future adverse political and economic developments, the
possible imposition of withholding taxes on interest or other income, possible
seizure, nationalization, or expropriation of non-U.S. deposits, the possible
establishment of exchange controls or taxation at source, greater fluctuations
in value due to changes in exchange rates or the adoption of other non-U.S.
governmental restrictions which might adversely affect the payment of principal
and interest on such obligations.
o POLITICAL AND ECONOMIC FACTORS -- Local political, economic,
regulatory, or social instability, military action or unrest, or
adverse diplomatic developments may affect the value of non-U.S.
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investments. Listed below are some of the more important political and
economic factors that could negatively affect an investment in
non-U.S. securities:
o The economies of non-U.S. countries may differ from the
economy of the United States in such areas as growth of GNP,
rate of inflation, capital reinvestment, resource
self-sufficiency, budget deficits and national debt;
o Non-U.S. governments sometimes participate to a significant
degree, through ownership interests or regulation, in their
respective economies. Actions by these governments could
significantly influence the market prices of securities and
payment of dividends;
o The economies of many non-U.S. countries are dependent on
international trade and their trading partners and they
could be severely affected if their trading partners were to
enact protective trade barriers and economic conditions;
o The internal policies of a particular non-U.S. country may
be less stable than in the United States. Other countries
face significant external political risks, such as possible
claims of sovereignty by other countries or tense and
sometimes hostile border clashes; and
o A non-U.S. government may act adversely to the interests of
U.S. investors, including expropriation or nationalization
of assets, confiscatory taxation and other restrictions on
U.S. investment. A country may restrict or control foreign
investments in its securities markets. These restrictions
could limit the Fund's ability to invest in a particular
country or make it very expensive for the Fund to invest in
that country. Some countries require prior governmental
approval or limit the types or amount of securities or
companies in which a foreigner can invest. Other countries
may restrict the ability of foreign investors to repatriate
their investment income and capital gains.
o INFORMATION AND SUPERVISION -- There is generally less publicly
available information about non- U. S. companies than companies based
in the United States. For example, there are often no reports and
ratings published about non-U. S. companies comparable to the ones
written about U. S. companies. Non-U. S. companies are typically not
subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable
to U. S. companies. The lack of comparable information makes
investment decisions concerning non-U. S. companies more difficult and
less reliable than domestic companies. Non-U. S. branches of U. S.
banks and non-U. S. banks may be subject to less stringent reserve
requirements than those applicable to domestic branches of U. S.
banks.
o STOCK EXCHANGE AND MARKET RISK -- The Fund's Adviser anticipates that
in most cases an exchange or over-the-counter ("OTC") market located
outside of the United States will be the best available market for
non-U. S. securities. Non-U. S. stock markets, while growing in volume
and sophistication, are generally not as developed as the markets in
the United States. Non-U. S. stock markets tend to differ from those
in the United States in a number of ways.
Non-U.S. stock markets:
o are generally more volatile than, and not as developed or
efficient as, those in the United States;
o have substantially less volume;
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o trade securities that tend to be less liquid and experience
rapid and erratic price movements;
o have generally higher commissions and are subject to set
minimum rates, as opposed to negotiated rates;
o employ trading, settlement and custodial practices less
developed than those in U.S. markets; and
o may have different settlement practices, which may cause
delays and increase the potential for failed settlements.
Non-U.S. markets may offer less protection to shareholders than U.S.
markets because:
o non-U.S. accounting, auditing, and financial reporting
requirements may render a non-U. S. corporate balance sheet
more difficult to understand and interpret than one subject
to U. S. law and standards;
o adequate public information on non-U.S. issuers may not be
available, and it may be difficult to secure dividends and
information regarding corporate actions on a timely basis;
o in general, there is less overall governmental supervision
and regulation of securities exchanges, brokers, and listed
companies than in the United States;
o OTC markets tend to be less regulated than stock exchange
markets and, in certain countries, may be totally
unregulated;
o economic or political concerns may influence regulatory
enforcement and may make it difficult for shareholders to
enforce their legal rights; and
o restrictions on transferring securities within the United
States or to U.S. persons may make a particular security
less liquid than non-U.S. securities of the same class that
are not subject to such restrictions.
o FOREIGN CURRENCY RISK -- While the Fund denominates its NAV in U. S.
dollars, the securities of non-U. S. companies are frequently
denominated in foreign currencies. Thus, a change in the value of a
foreign currency against the U. S. dollar will result in a
corresponding change in value of securities denominated in that
currency. Some of the factors that may impair the investments
denominated in a foreign currency are:
o It may be expensive to convert foreign currencies into U.
S. dollars and vice versa;
o Complex political and economic factors may significantly
affect the values of various currencies, including U. S.
dollars, and their exchange rates;
o Government intervention may increase risks involved in
purchasing or selling foreign currency options, forward
contracts and futures contracts, since exchange rates may
not be free to fluctuate in response to other market forces;
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o There may be no systematic reporting of last sale
information for foreign currencies or regulatory requirement
that quotations available through dealers or other market
sources be firm or revised on a timely basis;
o Available quotation information is generally representative
of very large round-lot transactions in the inter-bank
market and thus may not reflect exchange rates for smaller
odd-lot transactions (less than $1 million) where rates may
be less favorable; and
o The inter-bank market in foreign currencies is a global,
around-the-clock market. To the extent that a market is
closed while the markets for the underlying currencies
remain open, certain markets may not always reflect
significant price and rate movements.
o TAXES -- Certain non-U. S. governments levy withholding taxes on
dividend and interest income. Although in some countries it is
possible for the Fund to recover a portion of these taxes, the portion
that cannot be recovered will reduce the income the Fund receives from
its investments.
o EMERGING MARKETS -- Investing in emerging markets may magnify the
risks of non-U. S. investing. Security prices in emerging markets can
be significantly more volatile than those in more developed markets,
reflecting the greater uncertainties of investing in less established
markets and economies. In particular, countries with emerging markets
may:
o Have relatively unstable governments;
o Present greater risks of nationalization of businesses,
restrictions on foreign ownership and prohibitions on the
repatriation of assets;
o Offer less protection of property rights than more
developed countries; and
o Have economies that are based on only a few industries, may
be highly vulnerable to changes in local or global trade
conditions, and may suffer from extreme and volatile debt
burdens or inflation rates.
Local securities markets may trade a small number of securities and
may be unable to respond effectively to increases in trading volume,
potentially making prompt liquidation of holdings difficult or
impossible at times.
MONEY MARKET SECURITIES. Money market securities include short-term U.S.
government securities; custodial receipts evidencing separately traded interest
and principal components of securities issued by the U.S. Treasury; commercial
paper rated in the highest short-term rating category by a nationally
recognized statistical ratings organization ("NRSRO"), such as Standard &
Poor's Rating Services ("S&P") or Moody's Investor Services, Inc. ("Moody's"),
or determined by the Adviser to be of comparable quality at the time of
purchase; short-term bank obligations (certificates of deposit, time deposits
and bankers' acceptances) of U.S. commercial banks with assets of at least $1
billion as of the end of their most recent fiscal year; and repurchase
agreements involving such securities. Each of these money market securities are
described below. For a description of ratings, see "Appendix A -- Description
of Ratings" to this SAI.
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities.
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities include U.S. Treasury securities, which are backed by the
full faith and credit of the U.S. Treasury and which differ only in their
interest rates, maturities, and times of issuance. U.S. Treasury bills have
initial maturities of one-year or less; U.S.
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Treasury notes have initial maturities of one to ten years; and U.S. Treasury
bonds generally have initial maturities of greater than ten years. U.S.
Treasury notes and bonds typically pay coupon interest semi-annually and repay
the principal at maturity. Certain U.S. government securities are issued or
guaranteed by agencies or instrumentalities of the U.S. government including,
but not limited to, obligations of U.S. government agencies or
instrumentalities such as the Federal National Mortgage Association ("Fannie
Mae"), the Government National Mortgage Association ("Ginnie Mae"), the Small
Business Administration, the Federal Farm Credit Administration, the Federal
Home Loan Banks, Banks for Cooperatives (including the Central Bank for
Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks,
the Tennessee Valley Authority, the Export-Import Bank of the United States,
the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan
Marketing Association, the National Credit Union Administration and the Federal
Agricultural Mortgage Corporation ("Farmer Mac").
Some obligations issued or guaranteed by U.S. government agencies and
instrumentalities, including, for example, Ginnie Mae pass-through
certificates, are supported by the full faith and credit of the U.S. Treasury.
Other obligations issued by or guaranteed by federal agencies, such as those
securities issued by Fannie Mae, are supported by the discretionary authority
of the U.S. government to purchase certain obligations of the federal agency.
Additionally, some obligations are issued by or guaranteed by federal agencies,
such as those of the Federal Home Loan Banks, which are supported by the right
of the issuer to borrow from the U.S. Treasury. While the U.S. government
provides financial support to such U.S. government-sponsored federal agencies,
no assurance can be given that the U.S. government will always do so, since the
U.S. government is not so obligated by law. Guarantees of principal by U.S.
government agencies or instrumentalities may be a guarantee of payment at the
maturity of the obligation so that in the event of a default prior to maturity
there might not be a market and thus no means of realizing on the obligation
prior to maturity. Guarantees as to the timely payment of principal and
interest do not extend to the value or yield of these securities nor to the
value of the Fund's shares.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie
Mae and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), placing the
two federal instrumentalities in conservatorship. Under the takeover, the U.S.
Treasury agreed to acquire $1 billion of senior preferred stock of each
instrumentality and obtained warrants for the purchase of common stock of each
instrumentality (the "Senior Preferred Stock Purchase Agreement" or
"Agreement"). Under the Agreement, the U.S. Treasury pledged to provide up to
$200 billion per instrumentality as needed, including the contribution of cash
capital to the instrumentalities in the event their liabilities exceed their
assets. This was intended to ensure that the instrumentalities maintain a
positive net worth and meet their financial obligations, preventing mandatory
triggering of receivership. On December 24, 2009, the U.S. Treasury announced
that it was amending the Agreement to allow the $200 billion cap on the U.S.
Treasury's funding commitment to increase as necessary to accommodate any
cumulative reduction in net worth through the end of 2012. The unlimited
support the U.S. Treasury extended to the two companies expired at the
beginning of 2013 -- Fannie Mae's support is now capped at $125 billion and
Freddie Mac has a limit of $149 billion.
On August 17, 2012, the U.S. Treasury announced that it was again amending the
Agreement to terminate the requirement that Fannie Mae and Freddie Mac each pay
a 10% annual dividend. Instead, the companies will transfer to the U.S.
Treasury on a quarterly basis all profits earned during a quarter that exceed a
capital reserve amount of $3 billion. It is believed that the new amendment
puts Fannie Mae and Freddie Mac in a better position to service their debt
because the companies no longer have to borrow from the U.S. Treasury to make
fixed dividend payments. As part of the new terms, Fannie Mae and Freddie Mac
also will be required to reduce their investment portfolios at an annual rate
of 15 percent instead of the previous 10 percent, which puts each of them on
track to cut their portfolios to a targeted $250 billion in 2018.
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Fannie Mae and Freddie Mac are the subject of several continuing class action
lawsuits and investigations by federal regulators over certain accounting,
disclosure or corporate governance matters, which (along with any resulting
financial restatements) may adversely affect the guaranteeing entities.
Importantly, the future of the entities is in serious question as the U.S.
Government reportedly is considering multiple options, ranging from
nationalization, privatization, consolidation, or abolishment of the entities.
U.S. TREASURY OBLIGATIONS. U.S. Treasury obligations consist of direct
obligations of the U.S. Treasury, including Treasury bills, notes and bonds,
and separately traded interest and principal component parts of such
obligations, including those transferable through the Federal book-entry system
known as Separate Trading of Registered Interest and Principal of Securities
("STRIPS"). The STRIPS program lets investors hold and trade the individual
interest and principal components of eligible Treasury notes and bonds as
separate securities. Under the STRIPS program, the principal and interest
components are separately issued by the U.S. Treasury at the request of
depository financial institutions, which then trade the component parts
separately.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured
short-term promissory notes issued by corporations and other entities.
Maturities on these issues vary from a few days to 270 days.
INVESTMENT GRADE FIXED INCOME SECURITIES. Fixed income securities are
considered investment grade if they are rated in one of the four highest rating
categories by an NRSRO, or, if not rated, are determined to be of comparable
quality by the Adviser. See "Appendix A -Description of Ratings" for a
description of the bond rating categories of several NRSROs. Ratings of each
NRSRO represent its opinion of the safety of principal and interest payments
(and not the market risk) of bonds and other fixed income securities it
undertakes to rate at the time of issuance. Ratings are not absolute standards
of quality and may not reflect changes in an issuer's creditworthiness. Fixed
income securities rated BBB- or Baa3 lack outstanding investment
characteristics, and have speculative characteristics as well. Securities rated
Baa3 by Moody's or BBB- by S&P or higher are considered by those rating
agencies to be "investment grade" securities, although Moody's considers
securities rated in the Baa category to have speculative characteristics. While
issuers of bonds rated BBB by S&P are considered to have adequate capacity to
meet their financial commitments, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and principal for debt in this category than debt in higher rated categories.
In the event a security owned by the Fund is downgraded below investment grade,
the Adviser will review the situation and take appropriate action with regard
to the security, including the actions discussed below.
DEBT SECURITIES. Corporations and governments use debt securities to borrow
money from investors. Most debt securities promise a variable or fixed rate of
return and repayment of the amount borrowed at maturity. Some debt securities,
such as zero-coupon bonds, do not pay current interest and are purchased at a
discount from their face value.
TYPES OF DEBT SECURITIES:
o CORPORATE BONDS. Corporations issue bonds and notes to raise money
for working capital or for capital expenditures such as plant
construction, equipment purchases and expansion. In return for the
money loaned to the corporation by investors, the corporation promises
to pay investors interest, and repay the principal amount of the bond
or note.
o MORTGAGE-BACKED SECURITIES. Mortgage-backed securities are interests
in pools of mortgage loans that various governmental,
government-related and private organizations assemble as
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securities for sale to investors. Unlike most debt securities, which
pay interest periodically and repay principal at maturity or on
specified call dates, mortgage-backed securities make monthly payments
that consist of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the
individual borrowers on their mortgage loans, net of any fees paid to
the issuer or guarantor of such securities. Since homeowners usually
have the option of paying either part or all of the loan balance
before maturity, the effective maturity of a mortgage-backed security
is often shorter than is stated.
Governmental entities, private insurers and mortgage poolers may
insure or guarantee the timely payment of interest and principal of
these pools through various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and
letters of credit. The Adviser will consider such insurance and
guarantees and the creditworthiness of the issuers thereof in
determining whether a mortgage-related security meets its investment
quality standards. It is possible that the private insurers or
guarantors will not meet their obligations under the insurance
policies or guarantee arrangements.
Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be
readily marketable.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
financial institutions. A repurchase agreement is an agreement under which the
Fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to
resell such security to the seller at an agreed upon price and date (normally,
the next business day). Because the security purchased constitutes collateral
for the repurchase obligation, a repurchase agreement may be considered a loan
that is collateralized by the security purchased. The acquisition of a
repurchase agreement may be deemed to be an acquisition of the underlying
securities as long as the obligation of the seller to repurchase the securities
is collateralized fully. If repurchase agreements are utilized by the Fund, the
Adviser will implement policies and procedures designed to minimize the risks
inherent in such agreements and to monitor compliance with such policies and
procedures. These will include matters such as effecting repurchase transactions
only (i) with creditworthy financial institutions; (ii) which provide that the
underlying collateral at all times will have a value at least equal to 102% of
the resale price stated in the agreement and consist only of securities
permissible under Section 101(47)(A)(i) of the Bankruptcy Code and (iii) which
provide that the custodian or its agent must take possession of the underlying
collateral and in the event of a default or bankruptcy by a selling financial
institution, the Fund will seek to liquidate such collateral. However, the
exercising of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
Fund could suffer a loss. The Fund may enter into "tri-party" repurchase
agreements. In "tri-party" repurchase agreements, an unaffiliated third party
custodian maintains accounts to hold collateral for the Fund and its
counterparties and, therefore, the Fund may be subject to the credit risk of
those custodians. The investments of the Fund in repurchase agreements, at
times, may be substantial when, in the view of the Adviser, liquidity or other
considerations so warrant.
REVERSE REPURCHASE AGREEMENTS. Reverse repurchase agreements are transactions in
which the Fund sells portfolio securities to financial institutions, such as
banks and broker-dealers, and agrees to repurchase them at a mutually
agreed-upon date and price that is higher than the original sale price. Reverse
repurchase agreements are similar to a fully collateralized borrowing by the
Fund. If reverse repurchase agreements are utilized by the Fund, the Adviser
will implement policies and procedures designed to minimize the risks inherent
in such agreements and to monitor compliance with such policies and procedures.
These procedures will include matters such as the earmarking on the books of the
Fund or the placing in a segregated account of cash or liquid securities having
a value equal to the repurchase price (including accrued interest).
Reverse repurchase agreements involve risks. Reverse repurchase agreements are a
form of leverage, and the use of reverse repurchase agreements by the Fund may
increase the Fund's volatility. Reverse repurchase agreements are also subject
to the risk that the other party to the reverse repurchase agreement will be
unable or unwilling to complete the transaction as scheduled, which may result
in losses to the Fund. Reverse repurchase agreements also involve the risk that
the market value of the securities sold by the Fund may decline below the price
at which it is obligated to repurchase the securities. In addition, when the
Fund invests the proceeds it receives in a reverse repurchase transaction, there
is a risk that those investments may decline in value. In this circumstance, the
Fund could be required to sell other investments in order to meet its
obligations to repurchase the securities.
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SECURITIES OF OTHER INVESTMENT COMPANIES. The Fund may invest in shares of
other investment companies, to the extent permitted by applicable law and
subject to certain restrictions. These investment companies typically incur
fees that are separate from those fees incurred directly by the Fund. The
Fund's purchase of such investment company securities results in the layering
of expenses, such that shareholders would indirectly bear a proportionate share
of the operating expenses of such investment companies, including advisory
fees, in addition to paying the Fund's expenses. Unless an exception is
available, Section 12(d)(1)(A) of the 1940 Act prohibits a fund from (i)
acquiring more than 3% of the voting shares of any one investment company, (ii)
investing more than 5% of its total assets in any one investment company, and
(iii) investing more than 10% of its total assets in all investment companies
combined, including its ETF investments.
For hedging or other purposes, the Fund may invest in investment companies that
seek to track the composition and/or performance of specific indexes or
portions of specific indexes. Certain of these investment companies, known as
ETFs, are traded on a securities exchange. (See "Exchange Traded Funds" above).
The market prices of index-based investments will fluctuate in accordance with
changes in the underlying portfolio securities of the investment company and
also due to supply and demand of the investment company's shares on the
exchange upon which the shares are traded. Index-based investments may not
replicate or otherwise match the composition or performance of their specified
index due to transaction costs, among other things.
Pursuant to orders issued by the SEC to each of certain iShares, Market
Vectors, Vanguard, ProShares, PowerShares, Guggenheim (formerly, Claymore),
Direxion, Wisdom Tree, Rydex, First Trust and SPDR exchange-traded funds
(collectively, the "ETFs") and procedures approved by the Board, the Fund may
invest in the ETFs in excess of the 3% limit described above, provided that the
Fund otherwise complies with the conditions of the SEC order, as it may be
amended, and any other applicable investment limitations. Neither the ETFs nor
their investment advisers make any representations regarding the advisability
of investing in the ETFs.
DERIVATIVES
Derivatives are financial instruments whose value is based on an underlying
asset (such as a stock or a bond), an underlying economic factor (such as an
interest rate) or a market benchmark. Unless otherwise stated in the Fund's
Prospectuses, the Fund may use derivatives for a number of purposes including
managing risk, gaining exposure to various markets in a cost efficient manner,
reducing transaction costs, remaining fully invested and speculating. The Fund
may also invest in derivatives to protect it from broad fluctuations in market
prices, interest rates or foreign currency exchange rates (a practice known as
"hedging"). When hedging is successful, the Fund will have offset any
depreciation in the value of its portfolio securities by the appreciation in
the value of the derivative position. Although techniques other
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than the sale and purchase of derivatives could be used to control the exposure
of the Fund to market fluctuations, the use of derivatives may be a more
effective means of hedging this exposure. In the future, the Fund may use
instruments and techniques that are not presently contemplated, but which may
be subsequently developed, to the extent such use is consistent with the Fund's
investment objectives and is legally permissible.
There can be no assurance that a derivative strategy, if employed, will be
successful. Because many derivatives have a leverage or borrowing component,
adverse changes in the value or level of the underlying asset, reference rate
or index can result in a loss substantially greater than the amount invested in
the derivative itself. Certain derivatives have the potential for unlimited
loss, regardless of the size of the initial investment. Accordingly, certain
derivative transactions may be considered to constitute borrowing transactions
for purposes of the 1940 Act. Such a derivative transaction will not be
considered to constitute the issuance of a "senior security" by the Fund, and
therefore such transaction will not be subject to the 300% asset coverage
requirement otherwise applicable to borrowings by the Fund, if the Fund covers
the transaction or segregates sufficient liquid assets (or such assets are
"earmarked" on the Fund's books) in accordance with the requirements and
interpretations of the SEC and its staff. The Fund may enter into agreements
with broker-dealers that require the broker-dealers to accept physical
settlement for certain types of derivatives instruments. If this occurs, the
Fund would treat such derivative instruments as being cash settled for purposes
of determining the Fund's coverage requirements.
As a result of recent amendments to rules under the Commodity Exchange Act
("CEA") by the Commodity Futures Trading Commission ("CFTC"), the Fund must
either operate within certain guidelines and restrictions with respect to the
Fund's use of futures, options on such futures, commodity options and certain
swaps, or the Adviser will be subject to registration with the CFTC as a
"commodity pool operator" ("CPO").
Consistent with the CFTC's new regulations, the Trust, on behalf of the Fund,
has filed a notice of exclusion from the definition of the term CPO under the
CEA pursuant to CFTC Rule 4.5 and, therefore, the Fund is not subject to
registration or regulation as a CPO under the CEA. As a result, the Fund will
be limited in its ability to use futures, options on such futures, commodity
options and certain swaps. Complying with the limitations may restrict the
Adviser's ability to implement the Fund's investment strategies and may
adversely affect the Fund's performance.
TYPES OF DERIVATIVES:
FUTURES. A futures contract is an agreement between two parties whereby one
party agrees to sell and the other party agrees to buy a specified amount of a
financial instrument at an agreed upon price and time. The financial instrument
underlying the contract may be a stock, stock index, bond, bond index, interest
rate, foreign exchange rate or other similar instrument. Agreeing to buy the
underlying financial instrument is called buying a futures contract or taking a
long position in the contract. Likewise, agreeing to sell the underlying
financial instrument is called selling a futures contract or taking a short
position in the contract.
Futures contracts are traded in the United States on commodity exchanges or
boards of trade (known as "contract markets") approved for such trading and
regulated by the CFTC. These contract markets standardize the terms, including
the maturity date and underlying financial instrument, of all futures
contracts.
Unlike other securities, the parties to a futures contract do not have to pay
for or deliver the underlying financial instrument until some future date (the
delivery date). Contract markets require both the
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purchaser and seller to deposit "initial margin" with a futures broker, known
as a futures commission merchant or custodian bank, when they enter into the
contract. Initial margin deposits are typically equal to a percentage of the
contract's value. Initial margin is similar to a performance bond or good faith
deposit on a contract and is returned to the depositing party upon termination
of the futures contract if all contractual obligations have been satisfied.
After they open a futures contract, the parties to the transaction must compare
the purchase price of the contract to its daily market value. If the value of
the futures contract changes in such a way that a party's position declines,
that party must make additional "variation margin" payments so that the margin
payment is adequate. On the other hand, the value of the contract may change in
such a way that there is excess margin on deposit, possibly entitling the party
that has a gain to receive all or a portion of this amount. This process is
known as "marking to the market." Variation margin does not represent a
borrowing or loan by a party but is instead a settlement between the party and
the futures broker of the amount one party would owe the other if the futures
contract terminated. In computing daily NAV, each party marks to market its
open futures positions.
Although the terms of a futures contract call for the actual delivery of and
payment for the underlying security, in many cases the parties may close the
contract early by taking an opposite position in an identical contract. If the
sale price upon closing out the contract is less than the original purchase
price, the party closing out the contract will realize a loss. If the sale
price upon closing out the contract is more than the original purchase price,
the party closing out the contract will realize a gain. Conversely, if the
purchase price upon closing out the contract is more than the original sale
price, the party closing out the contract will realize a loss. If the purchase
price upon closing out the contract is less than the original sale price, the
party closing out the contract will realize a gain.
The Fund may incur commission expenses when it opens or closes a futures
position.
OPTIONS. An option is a contract between two parties for the purchase and sale
of a financial instrument for a specified price (known as the "strike price" or
"exercise price") at any time during the option period. Unlike a futures
contract, an option grants a right (not an obligation) to buy or sell a
financial instrument. Generally, a seller of an option can grant a buyer two
kinds of rights: a "call" (the right to buy the security) or a "put" (the right
to sell the security). Options have various types of underlying instruments,
including specific securities, indices of securities prices, foreign
currencies, interest rates and futures contracts. Options may be traded on an
exchange (exchange-traded options) or may be customized agreements between the
parties (over-the-counter or "OTC" options). Like futures, a financial
intermediary, known as a clearing corporation, financially backs
exchange-traded options. However, OTC options have no such intermediary and are
subject to the risk that the counterparty will not fulfill its obligations
under the contract. The principal factors affecting the market value of an
option include supply and demand, interest rates, the current market value of
the underlying instrument relative to the exercise price of the option, the
volatility of the underlying instrument, and the time remaining until the
option expires.
o PURCHASING PUT AND CALL OPTIONS
When the Fund purchases a put option, it buys the right to sell the instrument
underlying the option at a fixed strike price. In return for this right, the
Fund pays the current market price for the option (known as the "option
premium"). The Fund may purchase put options to offset or hedge against a
decline in the market value of its securities ("protective puts") or to benefit
from a decline in the price of securities that it does not own. The Fund would
ordinarily realize a gain if, during the option period, the value of the
underlying securities decreased below the exercise price sufficiently to cover
the premium and transaction costs. However, if the price of the underlying
instrument does not fall enough to offset the cost of purchasing the option, a
put buyer would lose the premium and related transaction costs.
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Call options are similar to put options, except that the Fund obtains the right
to purchase, rather than sell, the underlying instrument at the option's strike
price. The Fund would normally purchase call options in anticipation of an
increase in the market value of securities it owns or wants to buy. The Fund
would ordinarily realize a gain if, during the option period, the value of the
underlying instrument exceeded the exercise price plus the premium paid and
related transaction costs. Otherwise, the Fund would realize either no gain or
a loss on the purchase of the call option.
The purchaser of an option may terminate its position by:
o Allowing it to expire and losing its entire premium;
o Exercising the option and either selling (in the case of a put
option) or buying (in the case of a call option) the underlying
instrument at the strike price; or
o Closing it out in the secondary market at its current price.
o SELLING (WRITING) PUT AND CALL OPTIONS
When the Fund writes a call option it assumes an obligation to sell specified
securities to the holder of the option at a fixed strike price if the option is
exercised at any time before the expiration date. Similarly, when the Fund
writes a put option it assumes an obligation to purchase specified securities
from the option holder at a fixed strike price if the option is exercised at
any time before the expiration date. The Fund may terminate its position in an
exchange-traded put option before exercise by buying an option identical to the
one it has written. Similarly, it may cancel an OTC option by entering into an
offsetting transaction with the counterparty to the option.
The Fund could try to hedge against an increase in the value of securities it
would like to acquire by writing a put option on those securities. If security
prices rise, the Fund would expect the put option to expire and the premium it
received to offset the increase in the security's value. If security prices
remain the same over time, the Fund would hope to profit by closing out the put
option at a lower price. If security prices fall, the Fund may lose an amount
of money equal to the difference between the value of the security and the
premium it received. Writing covered put options, as described below, may
deprive the Fund of the opportunity to profit from a decrease in the market
price of the securities it would like to acquire.
The characteristics of writing call options are similar to those of writing put
options, except that call writers expect to profit if prices remain the same or
fall. The Fund could try to hedge against a decline in the value of securities
it already owns by writing a call option. If the price of that security falls
as expected, the Fund would expect the option to expire and the premium it
received to offset the decline of the security's value. However, the Fund must
be prepared to deliver the underlying instrument in return for the strike
price, which may deprive it of the opportunity to profit from an increase in
the market price of the securities it holds.
The Fund is permitted to write only "covered" options. At the time of selling a
call option, the Fund may cover the option by owning, among other things:
o The underlying security (or securities convertible into the
underlying security without additional consideration), index, interest
rate, foreign currency or futures contract;
o A call option on the same security or index with the same or lesser
exercise price;
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o A call option on the same security or index with a greater exercise
price, provided that the Fund also segregates cash or liquid
securities in an amount equal to the difference between the exercise
prices;
o Cash or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency or futures
contract; or
o In the case of an index, the portfolio of securities that corresponds
to the index.
At the time of selling a put option, the Fund may cover the option by, among
other things:
o Entering into a short position in the underlying security;
o Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with the same or greater exercise
price;
o Purchasing a put option on the same security, index, interest rate,
foreign currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the
difference between the exercise prices; or
o Maintaining the entire exercise price in liquid securities.
o OPTIONS ON SECURITIES INDICES
Options on securities indices are similar to options on securities, except that
the exercise of securities index options requires cash settlement payments and
does not involve the actual purchase or sale of securities. In addition,
securities index options are designed to reflect price fluctuations in a group
of securities or segment of the securities market rather than price
fluctuations in a single security.
o OPTIONS ON CREDIT DEFAULT SWAPS
An option on a credit default swap ("CDS") option gives the holder the right to
enter into a CDS at a specified future date and under specified terms in
exchange for a purchase price or premium. The writer of the option bears the
risk of any unfavorable move in the value of the CDS relative to the market
value on the exercise date, while the purchaser may allow the option to expire
unexercised.
o OPTIONS ON FUTURES
An option on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures contract (in
the case of a put option) at a fixed time and price. Upon exercise of the
option by the holder, the contract market clearing house establishes a
corresponding short position for the writer of the option (in the case of a
call option) or a corresponding long position (in the case of a put option). If
the option is exercised, the parties will be subject to the futures contracts.
In addition, the writer of an option on a futures contract is subject to
initial and variation margin requirements on the option position. Options on
futures contracts are traded on the same contract market as the underlying
futures contract.
The buyer or seller of an option on a futures contract may terminate the option
early by purchasing or selling an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or sold.
The difference between the premiums paid and received represents the trader's
profit or loss on the transaction.
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The Fund may purchase put and call options on futures contracts instead of
selling or buying futures contracts. The Fund may buy a put option on a futures
contract for the same reasons it would sell a futures contract. It also may
purchase such a put option in order to hedge a long position in the underlying
futures contract. The Fund may buy a call option on a futures contract for the
same purpose as the actual purchase of a futures contract, such as in
anticipation of favorable market conditions.
The Fund may write a call option on a futures contract to hedge against a
decline in the prices of the instrument underlying the futures contracts. If
the price of the futures contract at expiration were below the exercise price,
the Fund would retain the option premium, which would offset, in part, any
decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of
the futures contracts, except that, if the market price declines, the Fund
would pay more than the market price for the underlying instrument. The premium
received on the sale of the put option, less any transaction costs, would
reduce the net cost to the Fund.
o OPTIONS ON FOREIGN CURRENCIES
A put option on a foreign currency gives the purchaser of the option the right
to sell a foreign currency at the exercise price until the option expires. A
call option on a foreign currency gives the purchaser of the option the right to
purchase the currency at the exercise price until the option expires. The Fund
may purchase or write put and call options on foreign currencies for the purpose
of hedging against changes in future currency exchange rates.
The Fund may use foreign currency options under the same circumstances that it
could use forward foreign currency exchange contracts. For example, a decline
in the U.S. dollar value of a foreign currency in which the Fund's securities
are denominated would reduce the U.S. dollar value of the securities, even if
their value in the foreign currency remained constant. In order to hedge
against such a risk, the Fund may purchase a put option on the foreign
currency. If the value of the currency then declined, the Fund could sell the
currency for a fixed amount in U.S. dollars and thereby offset, at least
partially, the negative effect on its securities that otherwise would have
resulted. Conversely, if the Fund anticipates a rise in the U.S. dollar value
of a currency in which securities to be acquired are denominated, the Fund may
purchase call options on the currency in order to offset, at least partially,
the effects of negative movements in exchange rates. If currency exchange rates
do not move in the direction or to the extent anticipated, the Fund could
sustain losses on transactions in foreign currency options.
o COMBINED POSITIONS
The Fund may purchase and write options in combination with each other, or in
combination with futures or forward contracts or swap agreements, to adjust the
risk and return characteristics of the overall position. For example, the Fund
could construct a combined position whose risk and return characteristics are
similar to selling a futures contract by purchasing a put option and writing a
call option on the same underlying instrument. Alternatively, the Fund could
write a call option at one strike price and buy a call option at a lower price
to reduce the risk of the written call option in the event of a substantial
price increase. Because combined options positions involve multiple trades,
they result in higher transaction costs and may be more difficult to open and
close out.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
contract involves an obligation to purchase or sell a specific amount of
currency at a future date or date range at a specific price. In the case of a
cancelable forward contract, the holder has the unilateral right to cancel the
contract
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at maturity by paying a specified fee. Forward foreign currency exchange
contracts differ from foreign currency futures contracts in certain respects.
Unlike futures contracts, forward contracts:
o Do not have standard maturity dates or amounts (i.e., the parties to
the contract may fix the maturity date and the amount);
o Are typically traded directly between currency traders (usually large
commercial banks) and their customers in the inter-bank markets, as
opposed to on exchanges regulated by the CFTC (note, however, that
under new definitions adopted by the CFTC and SEC, many
non-deliverable foreign currency forwards will be considered swaps for
certain purposes, including determination of whether such instruments
must be traded on exchanges and centrally cleared);
o Do not require an initial margin deposit; and
o May be closed by entering into a closing transaction with the
currency trader who is a party to the original forward contract, as
opposed to with a commodities exchange.
o FOREIGN CURRENCY HEDGING STRATEGIES
A "settlement hedge" or "transaction hedge" is designed to protect the Fund
against an adverse change in foreign currency values between the date a security
is purchased or sold and the date on which payment is made or received. Entering
into a forward contract for the purchase or sale of the amount of foreign
currency involved in an underlying security transaction for a fixed amount of
U.S. dollars "locks in" the U.S. dollar price of the security. The Fund may also
use forward contracts to purchase or sell a foreign currency when it anticipates
purchasing or selling securities denominated in the foreign currency, even if it
has not yet selected the specific investments.
The Fund may use forward contracts to hedge against a decline in the value of
existing investments denominated in foreign currency. Such a hedge, sometimes
referred to as a "position hedge," would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. The Fund could also hedge the position by selling
another currency expected to perform similarly to the currency in which the
Fund's investment is denominated. This type of hedge, sometimes referred to as
a "proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally would not hedge currency exposure as effectively as a direct
hedge into U.S. dollars. Proxy hedges may result in losses if the currency used
to hedge does not perform similarly to the currency in which the hedged
securities are denominated.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities that the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange that one can achieve at some
future point in time. Additionally, these techniques tend to minimize the risk
of loss due to a decline in the value of the hedged currency and to limit any
potential gain that might result from the increase in value of such currency.
The Fund may enter into forward contracts to shift its investment exposure from
one currency into another. Such transactions may call for the delivery of one
foreign currency in exchange for another foreign currency, including currencies
in which its securities are not then denominated. This may include shifting
exposure from U.S. dollars to a foreign currency, or from one foreign currency
to another foreign currency. This type of strategy, sometimes known as a
"cross-hedge," will tend to reduce or eliminate exposure to the currency that
is sold, and increase exposure to the currency that is purchased. Cross-hedges
may protect against losses resulting from a decline in the hedged currency but
will cause the Fund
S-22
to assume the risk of fluctuations in the value of the currency it purchases.
Cross-hedging transactions also involve the risk of imperfect correlation
between changes in the values of the currencies involved.
It is difficult to forecast with precision the market value of portfolio
securities at the expiration or maturity of a forward or futures contract.
Accordingly, the Fund may have to purchase additional foreign currency on the
spot (cash) market if the market value of a security it is hedging is less than
the amount of foreign currency it is obligated to deliver. Conversely, the Fund
may have to sell on the spot market some of the foreign currency it received
upon the sale of a security if the market value of such security exceeds the
amount of foreign currency it is obligated to deliver.
EQUITY-LINKED SECURITIES. The Fund may invest in privately issued securities
whose investment results are designed to correspond generally to the
performance of a specified stock index or "basket" of securities, or sometimes
a single stock (referred to as "equity-linked securities"). These securities
are used for many of the same purposes as derivative instruments and share many
of the same risks. Equity-linked securities may be considered illiquid and thus
subject to the Fund's restrictions on investments in illiquid securities.
SWAP AGREEMENTS. A swap agreement is a financial instrument that typically
involves the exchange of cash flows between two parties on specified dates
(settlement dates), where the cash flows are based on agreed-upon prices,
rates, indices, etc. The nominal amount on which the cash flows are calculated
is called the notional amount. Swap agreements are individually negotiated and
structured to include exposure to a variety of different types of investments
or market factors, such as interest rates, foreign currency rates, mortgage
securities, corporate borrowing rates, security prices or inflation rates.
Swap agreements may increase or decrease the overall volatility of the
investments of the Fund and its share price. The performance of swap agreements
may be affected by a change in the specific interest rate, currency, or other
factors that determine the amounts of payments due to and from the Fund. If a
swap agreement calls for payments by the Fund, the Fund must be prepared to
make such payments when due. In addition, if the counterparty's
creditworthiness declined, the value of a swap agreement would be likely to
decline, potentially resulting in losses.
Generally, swap agreements have a fixed maturity date that will be agreed upon
by the parties. The agreement can be terminated before the maturity date under
certain circumstances, such as default by one of the parties or insolvency,
among others, and can be transferred by a party only with the prior written
consent of the other party. The Fund may be able to eliminate its exposure
under a swap agreement either by assignment or by other disposition, or by
entering into an offsetting swap agreement with the same party or a similarly
creditworthy party. If the counterparty is unable to meet its obligations under
the contract, declares bankruptcy, defaults or becomes insolvent, the Fund may
not be able to recover the money it expected to receive under the swap
agreement. The Fund will not enter into any swap agreement unless the Fund
believes that the counterparty to the transaction is creditworthy.
A swap agreement can be a form of leverage, which can magnify the Fund's gains
or losses. In order to reduce the risk associated with leveraging, the Fund may
cover its current obligations under swap agreements according to guidelines
established by the SEC. If the Fund enters into a swap agreement on a net
basis, it will segregate assets with a daily value at least equal to the
excess, if any, of the Fund's accrued obligations under the swap agreement over
the accrued amount the Fund is entitled to receive under the agreement. If the
Fund enters into a swap agreement on other than a net basis, it will segregate
assets with a value equal to the full amount of the Fund's accrued obligations
under the swap agreement.
S-23
o EQUITY SWAPS
In a typical equity swap, one party agrees to pay another party the return on a
stock, stock index or basket of stocks in return for a specified interest rate.
By entering into an equity index swap, for example, the index receiver can gain
exposure to stocks making up the index of securities without actually
purchasing those stocks. Equity index swaps involve not only the risk
associated with investment in the securities represented in the index, but also
the risk that the performance of such securities, including dividends, will not
exceed the return on the interest rate that the Fund will be committed to pay.
o TOTAL RETURN SWAPS
Total return swaps are contracts in which one party agrees to make payments of
the total return from a reference instrument--which may be a single asset, a
pool of assets or an index of assets--during a specified period, in return for
payments equal to a fixed or floating rate of interest or the total return from
another underlying reference instrument. The total return includes appreciation
or depreciation on the underlying asset, plus any interest or dividend
payments. Payments under the swap are based upon an agreed upon principal
amount but, since the principal amount is not exchanged, it represents neither
an asset nor a liability to either counterparty, and is referred to as
notional. Total return swaps are marked to market daily using different
sources, including quotations from counterparties, pricing services, brokers or
market makers. The unrealized appreciation or depreciation related to the
change in the valuation of the notional amount of the swap is combined with the
amount due to the Fund at termination or settlement. The primary risks
associated with total return swaps are credit risks (if the counterparty fails
to meet its obligations) and market risk (if there is no liquid market for the
swap or unfavorable changes occur to the underlying reference instrument).
o CAPS, COLLARS AND FLOORS
Caps and floors have an effect similar to buying or writing options. In a
typical cap or floor agreement, one party agrees to make payments only under
specified circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specified interest rate exceeds an
agreed-upon level. The seller of an interest rate floor is obligated to make
payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap
and selling a floor.
CONTRACTS FOR DIFFERENCES. The Adviser may enter into contracts for differences
("CFDs") on individual equity securities. CFDs are privately negotiated
contracts between two parties, buyer and seller, stipulating that the seller
will pay to or receive from the buyer the difference between the nominal value
of the underlying instrument at the opening of the contract and that
instrument's value at the end of the contract. As is the case with owning any
financial instrument, there is the risk of loss associated with buying a CFD.
There may be liquidity risk if the underlying instrument is illiquid because
the liquidity of a CFD is based on the liquidity of the underlying instrument.
A further risk is that adverse movements in the underlying security will
require the buyer to post additional margin. CFDs also carry counterparty risk,
I.E., the risk that the counterparty to the CFD transaction may be unable or
unwilling to make payments or to otherwise honour its financial obligations
under the terms of the contract. If the counterparty were to do so, the value
of the contract may be reduced. To the extent that there is an imperfect
correlation between the return on the Fund's obligation to its counterparty
under the CFDs and the return on related assets in its portfolio, the CFD
transaction may increase the Fund's financial risk.
RISKS OF DERIVATIVES:
While transactions in derivatives may reduce certain risks, these transactions
themselves entail certain other risks. For example, unanticipated changes in
interest rates, securities prices or currency exchange rates may result in a
poorer overall performance of the Fund than if it had not entered into any
derivatives
S-24
transactions. Derivatives may magnify the Fund's gains or losses, causing it to
make or lose substantially more than it invested.
When used for hedging purposes, increases in the value of the securities the
Fund holds or intends to acquire should offset any losses incurred with a
derivative. Purchasing derivatives for purposes other than hedging could expose
the Fund to greater risks.
Use of derivatives involves transaction costs, which may be significant, and
may also increase the amount of taxable income to shareholders.
CORRELATION OF PRICES. The Fund's ability to hedge its securities through
derivatives depends on the degree to which price movements in the underlying
index or instrument correlate with price movements in the relevant securities.
In the case of poor correlation, the price of the securities the Fund is
hedging may not move in the same amount, or even in the same direction as the
hedging instrument. The Adviser will try to minimize this risk by investing
only in those contracts whose behavior it expects to correlate with the
portfolio securities it is trying to hedge. However, if the Fund's prediction
of interest and currency rates, market value, volatility or other economic
factors is incorrect, the Fund may lose money, or may not make as much money as
it expected.
Derivative prices can diverge from the prices of their underlying instruments,
even if the characteristics of the underlying instruments are very similar to
the derivative. Listed below are some of the factors that may cause such a
divergence:
o current and anticipated short-term interest rates, changes in volatility
of the underlying instrument, and the time remaining until expiration of
the contract;
o a difference between the derivatives and securities markets, including
different levels of demand, how the instruments are traded, the imposition
of daily price fluctuation limits or discontinued trading of an instrument;
and
o differences between the derivatives, such as different margin
requirements, different liquidity of such markets and the participation of
speculators in such markets.
Derivatives based upon a narrower index of securities, such as those of a
particular industry group, may present greater risk than derivatives based on a
broad market index. Since narrower indices are made up of a smaller number of
securities, they are more susceptible to rapid and extreme price fluctuations
because of changes in the value of those securities.
While currency futures and options values are expected to correlate with
exchange rates, they may not reflect other factors that affect the value of the
investments of the Fund. A currency hedge, for example, should protect a
yen-denominated security from a decline in the yen, but will not protect the
Fund against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of the Fund's Non-U.S. Dollar-denominated
investments changes in response to many factors other than exchange rates, it
may not be possible to match the amount of currency options and futures to the
value of the Fund's investments precisely over time.
LACK OF LIQUIDITY. Before a futures contract or option is exercised or expires,
the Fund can terminate it only by entering into a closing purchase or sale
transaction. Moreover, the Fund may close out a futures contract only on the
exchange the contract was initially traded. Although the Fund intends to
purchase options and futures only where there appears to be an active market,
there is no guarantee that such a
S-25
liquid market will exist. If there is no secondary market for the contract, or
the market is illiquid, the Fund may not be able to close out its position. In
an illiquid market, the Fund may:
o have to sell securities to meet its daily margin requirements at a time
when it is disadvantageous to do so;
o have to purchase or sell the instrument underlying the contract;
o not be able to hedge its investments; and/or
o not be able to realize profits or limit its losses.
Derivatives may become illiquid (i.e., difficult to sell at a desired time and
price) under a variety of market conditions. For example:
o an exchange may suspend or limit trading in a particular derivative
instrument, an entire category of derivatives or all derivatives, which
sometimes occurs because of increased market volatility;
o unusual or unforeseen circumstances may interrupt normal operations of an
exchange;
o the facilities of the exchange may not be adequate to handle current
trading volume;
o equipment failures, government intervention, insolvency of a brokerage
firm or clearing house or other occurrences may disrupt normal trading
activity; or
o investors may lose interest in a particular derivative or category of
derivatives.
MANAGEMENT RISK. Successful use of derivatives by the Fund is subject to the
ability of its Adviser to forecast stock market and interest rate trends. If
the Adviser incorrectly predicts stock market and interest rate trends, the
Fund may lose money by investing in derivatives. For example, if the Fund were
to write a call option based on the Adviser's expectation that the price of the
underlying security would fall, but the price were to rise instead, the Fund
could be required to sell the security upon exercise at a price below the
current market price. Similarly, if the Fund were to write a put option based
on the Adviser's expectation that the price of the underlying security would
rise, but the price were to fall instead, the Fund could be required to
purchase the security upon exercise at a price higher than the current market
price.
PRICING RISK. At times, market conditions might make it hard to value some
investments. For example, if the Fund has valued its securities too high,
shareholders may end up paying too much for Fund shares when they buy into the
Fund. If the Fund underestimates its price, shareholders may not receive the
full market value for their Fund shares when they sell.
MARGIN. Because of the low margin deposits required upon the opening of a
derivative position, such transactions involve an extremely high degree of
leverage. Consequently, a relatively small price movement in a derivative may
result in an immediate and substantial loss (as well as gain) to the Fund and
it may lose more than it originally invested in the derivative.
If the price of a futures contract changes adversely, the Fund may have to sell
securities at a time when it is disadvantageous to do so to meet its minimum
daily margin requirement. The Fund may lose its margin deposits if a
broker-dealer with whom it has an open futures contract or related option
becomes insolvent or declares bankruptcy.
S-26
VOLATILITY AND LEVERAGE. The Fund's use of derivatives may have a leveraging
effect. Leverage generally magnifies the effect of any increase or decrease in
value of an underlying asset and results in increased volatility, which means
the Fund will have the potential for greater gains, as well as the potential
for greater losses, than if the Fund does not use derivative instruments that
have a leveraging effect. The prices of derivatives are volatile (i.e., they
may change rapidly, substantially and unpredictably) and are influenced by a
variety of factors, including:
o actual and anticipated changes in interest rates;
o fiscal and monetary policies; and
o national and international political events.
Most exchanges limit the amount by which the price of a derivative can change
during a single trading day. Daily trading limits establish the maximum amount
that the price of a derivative may vary from the settlement price of that
derivative at the end of trading on the previous day. Once the price of a
derivative reaches this value, the Fund may not trade that derivative at a
price beyond that limit. The daily limit governs only price movements during a
given day and does not limit potential gains or losses. Derivative prices have
occasionally moved to the daily limit for several consecutive trading days,
preventing prompt liquidation of the derivative.
GOVERNMENT REGULATION. The regulation of derivatives markets in the U.S. is a
rapidly changing area of law and is subject to modification by government and
judicial action. In particular, the Dodd-Frank Wall Street Reform and Consumer
Protection Act, signed into law in 2010, grants significant new authority to
the SEC and the CFTC to impose comprehensive regulations on the OTC and cleared
derivatives markets. These regulations include, but are not limited to,
mandatory clearing of certain derivatives and requirements relating to
disclosure, margin and trade reporting. The new law and regulations may
negatively impact the Fund by increasing transaction and/or regulatory
compliance costs, limiting the availability of certain derivatives or otherwise
adversely affecting the value or performance of the derivatives the Fund
trades. Other potentially adverse regulatory obligations can develop suddenly
and without notice.
INVESTMENT IN SUBSIDIARY. The Fund may seek to gain exposure to certain
markets, including commodity, currency, interest rate and equity markets, in
whole or in part, through investments in a wholly owned subsidiary of the Fund
organized under the laws of the Cayman Islands (the "Subsidiary"). The
Subsidiary, unlike the Fund, may invest to a significant extent in commodities,
commodity contracts, commodity-linked derivative instruments, including swap
agreements, other commodity investments and derivative instruments. The
Subsidiary may also invest in other instruments in which the Fund is permitted
to invest, either as investments or to serve as margin or collateral for its
derivative positions. The Fund may invest up to 25% of its total assets in the
Subsidiary.
With respect to its investments, the Subsidiary will generally be subject to
the same fundamental, non-fundamental and certain other investment restrictions
as the Fund; however, the Subsidiary (unlike the Fund) may invest in
commodity-linked swap agreements and other commodity-linked derivative
instruments. With respect to its investments in certain securities that may
involve leverage, the Subsidiary will comply with asset segregation or
"earmarking" requirements to the same extent as the Fund.
The Subsidiary is not registered under 1940 Act and, unless otherwise noted in
the Prospectus, is not subject to all of the investor protections of the 1940
Act. Thus, the Fund, as an investor in the Subsidiary, will not have all of the
protections offered to investors in registered investment companies. In
addition, changes in the laws of the United States and/or the Cayman Islands,
under which the Fund and the
S-27
Subsidiary, respectively, are organized, could result in the inability of the
Fund and/or the Subsidiary to operate as intended and could negatively affect
the Fund and its shareholders.
ILLIQUID SECURITIES. Illiquid securities are securities that cannot be sold or
disposed of in the ordinary course of business (i.e. within seven days) at
approximately the prices at which they are valued. Because of their illiquid
nature, illiquid securities must be priced at fair value as determined in good
faith pursuant to procedures approved by the Board. Despite such good faith
efforts to determine fair value prices, the Fund's illiquid securities are
subject to the risk that the security's fair value price may differ from the
actual price which the Fund may ultimately realize upon its sale or
disposition. Difficulty in selling illiquid securities may result in a loss or
may be costly to the Fund. Under the supervision of the Board, the Adviser
determines the liquidity of the Fund's investments. In determining the
liquidity of the Fund's investments, the Adviser may consider various factors,
including (1) the frequency and volume of trades and quotations, (2) the number
of dealers and prospective purchasers in the marketplace, (3) dealer
undertakings to make a market, and (4) the nature of the security and the
market in which it trades (including any demand, put or tender features, the
mechanics and other requirements for transfer, any letters of credit or other
credit enhancement features, any ratings, the number of holders, the method of
soliciting offers, the time required to dispose of the security, and the
ability to assign or offset the rights and obligations of the security). The
Fund will not hold more than 15% of its net assets in illiquid securities.
SECURITIES LENDING. The Fund may lend portfolio securities to brokers, dealers
and other financial organizations that meet capital and other credit
requirements or other criteria established by the Board. These loans, if and
when made, may not exceed 33 1/3 % of the total asset value of the Fund
(including the loan collateral). The Fund will not lend portfolio securities to
the Adviser or its affiliates unless permissible under the 1940 Act and the
rules and promulgations thereunder. Loans of portfolio securities will be fully
collateralized by cash, letters of credit or U.S. government securities, and the
collateral will be maintained in an amount equal to at least 100% of the current
market value of the loaned securities by marking to market daily. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Fund.
The Fund may pay a part of the interest earned from the investment of
collateral, or other fee, to an unaffiliated third party for acting as the
Fund's securities lending agent, but will bear all of any losses from the
investment of collateral.
By lending their securities, the Fund may increase their income by receiving
payments from the borrower that reflect the amount of any interest or any
dividends payable on the loaned securities as well as by either investing cash
collateral received from the borrower in short-term instruments or obtaining a
fee from the borrower when U.S. government securities or letters of credit are
used as collateral. Investing cash collateral subjects the Fund to market risk.
The Fund remains obligated to return all collateral to the borrower under the
terms of its securities lending arrangements, even if the value of investments
made with the collateral decline. Accordingly, if the value of a security in
which the cash collateral has been invested declines, the loss would be borne
by the Fund, and the Fund may be required to liquidate other investments in
order to return collateral to the borrower at the end of the loan. The Fund
will adhere to the following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 100% cash collateral or equivalent
securities of the type discussed in the preceding paragraph from the borrower;
(ii) the borrower must increase such collateral whenever the market value of
the securities rises above the level of such collateral; (iii) the Fund must be
able to terminate the loan on demand; (iv) the Fund must receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities and any increase in market value; (v) the Fund may pay
only reasonable fees in connection with the loan (which fees may include fees
payable to the lending agent, the borrower, the
S-28
Fund's administrator and the custodian); and (vi) voting rights on the loaned
securities may pass to the borrower, provided, however, that if a material
event adversely affecting the investment occurs, the Fund must terminate the
loan and regain the right to vote the securities. In such instances, the
Adviser will vote the securities in accordance with its proxy voting policies
and procedures. The Board has adopted procedures reasonably designed to ensure
that the foregoing criteria will be met. Loan agreements involve certain risks
in the event of default or insolvency of the borrower, including possible
delays or restrictions upon the Fund's ability to recover the loaned securities
or dispose of the collateral for the loan, which could give rise to loss
because of adverse market action, expenses and/or delays in connection with the
disposition of the underlying securities.
RESTRICTED SECURITIES. The Fund may purchase restricted securities. Restricted
securities are securities that may not be sold freely to the public absent
registration under the Securities Act of 1933, as amended (the "1933 Act") or
an exemption from registration. This generally includes securities that are
unregistered that can be sold to qualified institutional buyers in accordance
with Rule 144A under the 1933 Act or securities that are exempt from
registration under the 1933 Act, such as commercial paper. Institutional
markets for restricted securities have developed as a result of the
promulgation of Rule 144A under the 1933 Act, which provides a "safe harbor"
from 1933 Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive
investment opportunity and meet other selection criteria, the Fund may make
such investments whether or not such securities are "illiquid" depending on the
market that exists for the particular security. The Board has delegated the
responsibility for determining the liquidity of Rule 144A restricted securities
that the Fund may invest in to the Adviser.
SHORT SALES. The Fund may engage in short sales that are either "uncovered" or
"against the box." A short sale is "against the box" if at all times during
which the short position is open, the Fund owns at least an equal amount of the
securities or securities convertible into, or exchangeable without further
consideration for, securities of the same issue as the securities that are sold
short. A short sale against the box is a taxable transaction to the Fund with
respect to the securities that are sold short. The Fund will not sell a
security short if, as a result of such short sale, the aggregate market value
of all securities sold short exceeds 10% of the Fund's total assets. This
limitation does not apply to short sales against the box. Uncovered short sales
are transactions under which the Fund sells a security it does not own. To
complete such a transaction, the Fund must borrow the security to make delivery
to the buyer. The Fund then is obligated to replace the security borrowed by
purchasing the security at the market price at the time of the replacement. The
price at such time may be more or less than the price at which the security was
sold by the Fund. Until the security is replaced, the Fund is required to pay
the lender amounts equal to any dividends or interest that accrue during the
period of the loan. To borrow the security, the Fund also may be required to
pay a premium, which would increase the cost of the security sold. The proceeds
of the short sale will be retained by the broker, to the extent necessary to
meet margin requirements, until the short position is closed out.
Until the Fund closes its short position or replaces the borrowed security, the
Fund may: (a) segregate cash or liquid securities at such a level that the
amount segregated plus the amount deposited with the broker as collateral will
equal the current value of the security sold short; or (b) otherwise cover the
Fund's short position.
WHEN-ISSUED, DELAYED-DELIVERY AND FORWARD-DELIVERY TRANSACTIONS. A when-issued
security is one whose terms are available and for which a market exists, but
which has not been issued. In a forward-delivery transaction, the Fund contracts
to purchase securities for a fixed price at a future date beyond customary
settlement time. "Delayed-delivery" refers to securities transactions on the
secondary market where settlement occurs in the future. In each of these
transactions, the parties fix the payment obligation and the interest rate that
they will receive on the securities at the time the parties enter the
commitment;
S-29
however, they do not pay money or deliver securities until a later date.
Typically, no income accrues on securities the Fund has committed to purchase
before the securities are delivered, although the Fund may earn income on
securities it has in a segregated account to cover its position. The Fund will
only enter into these types of transactions with the intention of actually
acquiring the securities, but may sell them before the settlement date.
The Fund may use when-issued, delayed-delivery and forward delivery
transactions to secure what it considers an advantageous price and yield at the
time of purchase. When the Fund engages in when-issued, delayed-delivery or
forward delivery transactions, it relies on the other party to consummate the
sale. If the other party fails to complete the sale, the Fund may miss the
opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued, delayed delivery, or forward
delivery basis, the Fund assumes the rights and risks of ownership of the
security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the
purchase price. The yield available in the market when the delivery takes place
also may be higher than those obtained in the transaction itself. Because the
Fund does not pay for the security until the delivery date, these risks are in
addition to the risks associated with its other investments.
The Fund will segregate cash or liquid securities equal in value to commitments
for the when-issued, delayed delivery or forward delivery transactions. The
Fund will segregate additional liquid assets daily so that the value of such
assets is equal to the amount of the commitments.
INVESTMENT LIMITATIONS
FUNDAMENTAL POLICIES. The following investment limitations are fundamental,
which means that the Fund cannot change them without approval by the vote of a
majority of the outstanding shares of the Fund. The phrase "majority of the
outstanding shares" means the vote of (i) 67% or more of the Fund's shares
present at a meeting, if more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (ii) more than 50% of the Fund's
outstanding shares, whichever is less.
1. The Fund may purchase securities of an issuer, except if such purchase
would cause the Fund to fail to satisfy the diversification requirement for
a diversified management company under the 1940 Act, the rules or
regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended or interpreted from time to time.
2. The Fund may not concentrate its investments in a particular industry or
group of industries, as concentration is defined under the 1940 Act, the
rules or regulations thereunder or any exemption therefrom, as such
statute, rules or regulations may be amended or interpreted from time to
time, except that the Fund may invest without limitation in: (i) securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities; and (ii) tax-exempt obligations of state or municipal
governments and their political subdivisions. For purposes of this
fundamental policy, investments in securities of other investment companies
are not deemed to be "investments in a particular industry."
3. The Fund may borrow money, except as prohibited under the 1940 Act, the
rules and regulations thereunder or any exemption therefrom, as such
statute, rules or regulations may be amended or interpreted from time to
time.
4. The Fund may not issue senior securities, as such term is defined under
the 1940 Act, the rules or regulations thereunder or any exemption
therefrom as amended or interpreted from time to time,
S-30
except as permitted under the 1940 Act, the rules and regulations
thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended or interpreted from time to time.
5. The Fund may make loans, except as prohibited under the 1940 Act, the
rules and regulations thereunder or any exemption therefrom, as such
statute, rules or regulations may be amended or interpreted from time to
time.
6. The Fund may purchase or sell commodities and real estate, except as
prohibited under the 1940 Act, the rules and regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended
or interpreted from time to time.
7. The Fund may underwrite securities issued by other persons, except as
prohibited under the 1940 Act, the rules and regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended
or interpreted from time to time.
In addition, the Fund has adopted the following fundamental investment policies
relating to periodic repurchase offers:
1. The Fund will make repurchase offers at periodic intervals pursuant to
Rule 23c-3 under the 1940 Act, as such rule may be amended or interpreted
from time to time. Currently, Rule 23c-3 requires repurchase offer amounts
to be not less than 5% and not more than 25% of the common stock
outstanding on the repurchase request deadline.
2. The periodic intervals between repurchase request deadlines will be three
(3) months.
3. Each repurchase request deadline will be determined in accordance with
Rule 23c-3. Currently, Rule 23c-3 requires the repurchase request deadline
to be no less than 21 and no more than 42 days after the Fund sends a
notification to shareholders of the repurchase offer.
4. Each repurchase pricing date will be determined in accordance with Rule
23c-3. Currently, Rule 23c-3 requires the repurchase pricing date to be no
later than the 14th day after a repurchase request deadline, or the next
business day if the 14th day is not a business day.
In addition, the investment objective of the Fund is a non-fundamental policy
that may be changed by the Board without shareholder approval upon thirty (30)
calendar days' prior written notice to shareholders.
Except with respect to Fund policies concerning borrowing, if a percentage
restriction is adhered to at the time of an investment, a later increase or
decrease in percentage resulting from changes in values or assets will not
constitute a violation of such restriction.
The following descriptions of certain provisions of the 1940 Act may assist
investors in understanding the above policies and restrictions:
DIVERSIFICATION. Under the 1940 Act, a diversified investment management
company, as to 75% of its total assets, may not purchase securities of any
issuer (other than securities issued or guaranteed by the U.S. Government, its
agents or instrumentalities or securities of other investment companies) if, as
a result, more than 5% of its total assets would be invested in the securities
of such issuer, or more than 10% of the issuer's outstanding voting securities
would be held by the fund.
S-31
BORROWING. The 1940 Act presently allows a fund to borrow (including pledging,
mortgaging or hypothecating assets) in an amount up to 33 1/3% of its total
assets (including the amount borrowed) and to borrow for temporary purposes in
an amount not exceeding 5% of the value of its total assets.
SENIOR SECURITIES. Senior securities may include any obligation or instrument
issued by a fund evidencing indebtedness, and any stock of a class having
priority over any other class as to distribution of assets or payment of
dividends. The 1940 Act generally prohibits funds from issuing senior
securities, although it does not treat certain transactions as senior
securities, such as certain borrowings, short sales, reverse repurchase
agreements, firm commitment agreements and standby commitments, with
appropriate earmarking or segregation of assets to cover such obligation.
Under Section 18(a) of the 1940 Act, the Fund is not permitted to issue
preferred shares unless immediately after such issuance the value of the Fund's
total assets, less all liabilities and indebtedness of the Fund other than
senior securities, is at least 200% of the liquidation value of the outstanding
preferred shares (i.e., the liquidation value may not exceed 50% of the Fund's
total assets less all liabilities and indebtedness of the Fund other than
senior securities).
LENDING. The 1940 Act does not prohibit a fund from making loans. The Fund may
make loans to corporations or other business entities. The Fund also may
acquire securities subject to repurchase agreements.
UNDERWRITING. Under the 1940 Act, underwriting securities involves a fund
purchasing securities directly from an issuer for the purpose of selling
(distributing) them or participating in any such activity either directly or
indirectly. Under the 1940 Act, a diversified fund may not make any commitment
as underwriter, if immediately thereafter the amount of its outstanding
underwriting commitments, plus the value of its investments in securities of
issuers (other than investment companies) of which it owns more than 10% of the
outstanding voting securities, exceeds 25% of the value of its total assets.
REAL ESTATE. The Fund will not purchase or sell real estate, except that the
Fund may purchase and sell instruments secured by real estate or interests in
real estate and securities issued by companies which own or invest in real
estate (including REITs). The Fund may acquire, hold and sell real estate
acquired through default, liquidation, or other distributions of an interest in
real estate as a result of the Fund's ownership of such other assets.
CONCENTRATION. The SEC has defined concentration as investing 25% or more of an
investment company's net assets in an industry, with certain exceptions.
Securities of the U.S. Government, its agencies or instrumentalities and
securities backed by the credit of a U.S. governmental entity are not
considered to represent industries. In the case of loan participations, both
the financial intermediary and the ultimate borrower are considered issuers
where the loan participation does not shift to the Fund the direct
debtor/creditor relationship with the borrower.
THE ADVISER
GENERAL. Winton Capital US LLC, a Delaware limited liability company located at
375 Park Avenue, New York, New York 10152, is a professional investment
management firm registered with the SEC under the Advisers Act. The Adviser is a
wholly-owned subsidiary of Winton Capital Group Limited ("WCG"), an English
limited liability company located at Grove House, 27 Hammersmith Grove, London
W6 0NE, United Kingdom. As of [____], 2015, the Adviser and its affiliated
companies had approximately $[____] billion in assets under management.
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ADVISORY AGREEMENT WITH THE FUND. The Fund and the Adviser have entered into an
investment advisory agreement (the "Advisory Agreement"). Under the Advisory
Agreement, the Adviser serves as the investment adviser and makes investment
decisions for the Fund and continuously reviews, supervises and administers the
investment program of the Fund, subject to the supervision of, and policies
established by, the Trustees.
After the initial two-year term, the continuance of the Advisory Agreement must
be specifically approved at least annually: (i) by the vote of the Trustees or
by a vote of the majority of the shareholders of the Fund; and (ii) by the vote
of a majority of the Trustees who are not parties to the Advisory Agreement or
"interested persons" of any party thereto, cast in person at a meeting called
for the purpose of voting on such approval. The Advisory Agreement will
terminate automatically in the event of its assignment, and is terminable at
any time without penalty by the Fund, the Board or a majority of the
outstanding shares of the Fund, on not less than 60 days' written notice to the
Adviser, or by the Adviser on not less than 60 days' written notice to the
Fund. As used in the Advisory Agreement, the terms "majority of the outstanding
voting securities," "interested persons" and "assignment" have the same meaning
as such terms in the 1940 Act.
ADVISORY AND INCENTIVE FEES PAID TO THE ADVISER.
MANAGEMENT FEE. For its services under the Advisory Agreement, the Adviser is
entitled to a fee, which is calculated and paid monthly, at an annual rate of
1.25% of the average net assets of the Fund.
INCENTIVE FEE. The Fund will pay to the Adviser a performance based incentive
fee (the "Incentive Fee"), quarterly in arrears, generally accrued as of the
end of each business day, equal to 20.00% of the Investment Profits (as defined
below) attributable to each share for such calendar quarter; PROVIDED, HOWEVER,
that an Incentive Fee with respect to a share will be paid only with respect to
Investment Profits for the applicable calendar quarter in excess of Unrecouped
Investment Losses (as defined below) as of the end of the previous calendar
quarter. The Adviser does not need to "earn back" Incentive Fees previously
paid to it in order to recognize profits subject to additional Incentive Fees.
The term "Investment Profits" refers to an increase in the NAV of a share
attributable to the net realized and unrealized gains arising from the Fund's
investment activities during the calendar quarter (after deducting (i) interest
earned on and net realized and unrealized gains arising from the Fund's cash
balances and fixed income investments held for cash management purposes during
the calendar quarter; and (ii) any Management Fee accrued during the calendar
quarter and after adjusting for any repurchase of shares made during the
calendar quarter). The term "Unrecouped Investment Losses" refers to any
decrease in the NAV of a share attributable to the net realized and unrealized
losses arising from the Fund's investment activities (after deducting (i) net
realized and unrealized losses arising from the Fund's cash balances and fixed
income investments held for cash management purposes during the calendar
quarter; and (ii) any Management Fee accrued during the calendar quarter and
after adjusting for any repurchase of shares made during the calendar quarter)
that have not been offset by subsequent Investment Profits since the formation
of the Fund.
PORTFOLIO MANAGEMENT
This section includes information about David Winton Harding and Matthew David
Beddall, as the persons who have ultimate responsibility for the Fund's
investment system and how it operates and who are, therefore, primarily
responsible for the management of the Fund's portfolio, including information
about other accounts they manage, the dollar range of Fund shares they own and
how they are compensated.
COMPENSATION. Compensation for Messrs. Harding and Beddall is a combination
of a fixed salary and a quarterly bonus (a portion of which may be deferred).
The bonuses paid may be
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tied, in part, to the performance of the Fund or any other fund(s) advised by
the Adviser. In addition, a portion of the salary and bonus paid may be based on
a variety of factors, including the financial performance of the Adviser and
execution of Messrs. Harding and Beddall's responsibilities. Compensation is
assessed in accordance with a remuneration policy (designed to support key
business strategies without creating incentives for undue risk-taking) and is
subject to approval by a remuneration committee chaired by an independent
non-executive director of the Adviser.
FUND SHARES OWNED. The Fund is required to show the dollar amount range of each
of Messrs. Harding's and Beddall's "beneficial ownership" of shares of the Fund
as of the end of the most recently completed fiscal year. Dollar amount ranges
disclosed are established by the SEC. "Beneficial ownership" is determined in
accordance with Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as
amended (the "1934 Act"). Because the Fund has not commenced operations, as of
the date of this SAI, neither of Messrs. Harding and Beddall beneficially own
shares of the Fund.
OTHER ACCOUNTS. In addition to the Fund, Messrs. Harding and Beddall are
responsible for the day-to-day management of certain other accounts, as listed
below ("Other Accounts"). The information below is provided as of [XX], 2015.
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REGISTERED OTHER POOLED
INVESTMENT COMPANIES INVESTMENT VEHICLES OTHER ACCOUNTS
---------------------------------------------------------------------------------------
NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS NUMBER OF TOTAL ASSETS
NAME ACCOUNTS ([IN MILLIONS]) ACCOUNTS ([IN MILLIONS]) ACCOUNTS ([IN MILLIONS])
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David Winton [XX] $[XX] [XX] $[XX] [XX] $[XX]
Harding
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Matthew David [XX] $[XX] [XX] $[XX] [XX] $[XX]
Beddall
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[* This account is subject to a performance-based advisory fee.]
CONFLICTS OF INTERESTS. A potential conflict of interest may arise as a result
of the Adviser's provision of advisory services to Other Accounts. Other
Accounts may pay higher management fees and/or performance fees than the Fund,
and this could create an incentive for the Adviser to favor such funds in the
allocation of investment opportunities.
The Adviser has implemented procedures that are designed to ensure that
investment opportunities are allocated in a manner that: (i) treats all of its
clients fairly and equitably; (ii) prevents conflict regarding allocation of
investment opportunities among its clients; and (iii) complies with applicable
regulatory requirements. For example, the Adviser uses an allocation algorithm
designed to allocate all filled orders ratably based on a defined allocation
procedure. Notwithstanding the foregoing, an aggregated order may be allocated
on a different basis under certain circumstances depending on factors which
include, but are not limited to, available cash, liquidity requirements, risk
parameters and legal and/or regulatory requirements.
The Adviser and its investment personnel may hold investments in Other Accounts.
This may create an incentive for the Adviser and its investment personnel to
take investment actions based on those investment interests which might diverge,
in some cases, from the interests of other clients or favor or disfavor certain
funds over other funds. Any potential conflict that arises from these
circumstances is mitigated by several factors, including: (i) the requirement
that any material changes to the Adviser's investment system must be tested,
reviewed and approved by the Adviser's investment management meeting; (ii) the
fact that the Adviser's investment system is designed to achieve long-term
capital appreciation as opposed
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to short-term profits; and (iii) the fact that most of the Adviser's
investments are made in accordance with the signals produced by its investment
system.
Certain broker-dealers that the Adviser may use to execute Fund transactions
are also clients of the Adviser and/or may refer clients to the Adviser, which
creates potential conflicts of interest. These conflicts are addressed by the
fact that the Adviser adheres to a policy that prohibits the Adviser from
considering any factor other than best execution for its clients when the
Adviser executes client transactions.
THE ADMINISTRATOR
SEI Investments Global Funds Services (the "Administrator"), a Delaware
statutory trust with its principal business offices at One Freedom Valley
Drive, Oaks, Pennsylvania 19456, serves as administrator and fund accountant of
the Fund. SEI Investments Management Corporation ("SIMC"), a wholly owned
subsidiary of SEI Investments Company ("SEI Investments"), is the owner of all
beneficial interests in the Administrator. SEI Investments and its subsidiaries
and affiliates, including the Administrator, are leading providers of fund
evaluation services, trust accounting systems, and brokerage and information
services to financial institutions, institutional investors, and money
managers. The Administrator and its affiliates also serve as administrator or
sub-administrator to other investment companies.
Under an Administration Agreement with the Fund ("Administration Agreement"),
the Administrator is responsible for managing the business affairs of the Fund,
subject to the supervision of the Board, and receives an administration fee
calculated and assessed monthly in arrears based on the aggregate net assets of
the Fund as of the prior month-end. The Administrator's administrative services
include the provision of regulatory reporting and all necessary office space,
equipment, personnel and facilities and other administrative services necessary
to conduct the Fund's business. As fund accountant, the Administrator provides
accounting and bookkeeping services for the Fund, including the calculation of
the Fund's NAV.
ADMINISTRATION FEES PAID TO THE ADMINISTRATOR. The Fund and the Administrator
are parties to an Administration Agreement under which the Administrator
provides administrative services to the Fund. For these services, the
Administrator is paid an asset based fee, which will vary depending on the
number of share classes and the average daily net assets of the Fund.
TRANSFER AGENT
Atlantic Fund Services, LLC, Three Canal Plaza, Portland, Maine 04101 (the
"Transfer Agent"), serves as the Fund's transfer agent and dividend disbursing
agent under a transfer agency agreement with the Fund.
THE DISTRIBUTOR
GENERAL. The Fund and SEI Investments Distribution Co. (the "Distributor") are
parties to a distribution agreement ("Distribution Agreement"), whereby the
Distributor acts as principal underwriter for the Fund's shares. The principal
business address of the Distributor is One Freedom Valley Drive, Oaks,
Pennsylvania 19456. The offering of the Fund's shares is continuous on a
monthly basis and the Distributor distributes the Fund's shares on a best
efforts and agency basis (not as principal).
The continuance of the Distribution Agreement must be specifically approved at
least annually (i) by the vote of the Trustees or by a vote of the majority of
the shareholders of the Fund and (ii) by the vote of a
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majority of the Trustees who are not "interested persons" of the Fund and have
no direct or indirect financial interest in the operations of the Distribution
Agreement or any related agreement, cast in person at a meeting called for the
purpose of voting on such approval. The Distribution Agreement will terminate
automatically in the event of its assignment (as such term is defined in the
1940 Act), and is terminable at any time without penalty by the Board or, by
the holders of a majority of the outstanding shares of the Fund, upon not less
than 60 days' written notice by either party.
PAYMENTS TO FINANCIAL INTERMEDIARIES
The Adviser and/or its affiliates, in their discretion, may make payments from
their own resources and not from Fund assets to affiliated or unaffiliated
brokers, dealers, banks (including bank trust departments), trust companies,
registered investment advisers, financial planners, retirement plan
administrators, insurance companies, and any other institution having a
service, administration, or any similar arrangement with the Fund, its service
providers or their respective affiliates, as incentives to help market and
promote the Fund and/or in recognition of their distribution, marketing,
administrative services, and/or processing support.
These additional payments may be made to financial intermediaries that sell
Fund shares or provide services to the Fund, the Distributor or shareholders of
the Fund through the financial intermediary's distribution channel and/or fund
supermarkets. Payments may also be made through the financial intermediary's
retirement, qualified tuition, fee-based advisory, wrap fee, bank trust, or
insurance (e.g., individual or group annuity) programs. These payments may
include, but are not limited to, placing the Fund in a financial intermediary's
distribution channel or on a preferred or recommended fund list; providing
business or shareholder financial planning assistance; educating financial
intermediary personnel about the Fund; providing access to sales and management
representatives of the financial intermediary; promoting sales of Fund shares;
providing marketing and educational support; maintaining share balances and/or
for sub-accounting, administrative or shareholder transaction processing
services. A financial intermediary may perform the services itself or may
arrange with a third party to perform the services.
The Adviser and/or its affiliates may also make payments from their own
resources to financial intermediaries for costs associated with the purchase of
products or services used in connection with sales and marketing, participation
in and/or presentations at conferences or seminars, sales or training programs,
client and investor entertainment and other sponsored events. The costs and
expenses associated with these efforts may include travel, lodging, sponsorship
at educational seminars and conferences, entertainment and meals to the extent
permitted by law.
Revenue sharing payments may be negotiated based on a variety of factors,
including the level of sales, the amount of Fund assets attributable to
investments in the Fund by financial intermediaries' customers, a flat fee or
other measures as determined from time to time by the Adviser and/or its
affiliates. A significant purpose of these payments is to increase the sales of
Fund shares, which in turn may benefit the Adviser through increased fees as
Fund assets grow.
THE CUSTODIAN
[MUFG Union Bank, N.A. (the "Custodian"), 350 California Street, 6th Floor, San
Francisco, California 94104], serves as the custodian of the Fund. The
Custodian holds cash, securities and other assets of the Fund as required by
the 1940 Act.
S-36
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
[____], with its principal business office located at [address], serves as the
independent registered public accounting firm for the Fund.
LEGAL COUNSEL
Morgan, Lewis & Bockius LLP, with its principal business office located at 1701
Market Street, Philadelphia, Pennsylvania 19103, serves as legal counsel to the
Fund.
TRUSTEES AND OFFICERS OF THE FUND
BOARD RESPONSIBILITIES. The management and affairs of the Fund are overseen by
the Trustees. The Board has approved contracts, as described above, under which
certain companies provide essential management services to the Fund.
The day-to-day business of the Fund, including the management of risk, is
performed by third party service providers, such as the Adviser, Distributor
and Administrator. The Trustees are responsible for overseeing the Fund's
service providers and, thus, have oversight responsibility with respect to risk
management performed by those service providers. Risk management seeks to
identify and address risks, i.e., events or circumstances that could have
material adverse effects on the business, operations, shareholder services,
investment performance or reputation of the Fund. The Fund and its service
providers employ a variety of processes, procedures and controls to identify
various possible events or circumstances, to lessen the probability of their
occurrence and/or to mitigate the effects of such events or circumstances if
they do occur. Each service provider is responsible for one or more discrete
aspects of the Fund's business (e.g., the Adviser is responsible for the
day-to-day management of the Fund's portfolio investments) and, consequently,
for managing the risks associated with that business. The Board has emphasized
to the Fund's service providers the importance of maintaining vigorous risk
management.
The Trustees' role in risk oversight begins before the inception of the Fund,
at which time certain of the Fund's service providers present the Board with
information concerning the investment objective, strategies and risks of the
Fund as well as proposed investment limitations for the Fund. Additionally, the
Adviser provides the Board with an overview of, among other things, its
investment philosophy, brokerage practices and compliance infrastructure.
Thereafter, the Board continues its oversight function as various personnel,
including the Fund's Chief Compliance Officer (the "Chief Compliance Officer"),
as well as personnel of the Adviser and other service providers such as the
Fund's independent accountants, make periodic reports to the Audit Committee or
to the Board with respect to various aspects of risk management. The Board and
the Audit Committee oversee efforts by management and service providers to
manage risks to which the Fund may be exposed.
The Board is responsible for overseeing the services provided to the Fund by
the Adviser and receives information about those services at its regular
meetings. In addition, following an initial two-year term, on an annual basis,
in connection with its consideration of whether to renew the Advisory
Agreement, the Board meets with the Adviser to review such services. Among
other things, the Board regularly considers the Adviser's adherence to the
Fund's investment restrictions and compliance with various Fund policies and
procedures and with applicable securities regulations. The Board also reviews
information about the Fund's investments, including, for example, portfolio
holdings schedules.
The Chief Compliance Officer reports regularly to the Board to review and
discuss compliance issues and Fund and Adviser risk assessments. At least
annually, the Chief Compliance Officer provides the Board
S-37
with a report reviewing the adequacy and effectiveness of the Fund's policies
and procedures and those of its service providers, including the Adviser. The
report addresses the operation of the policies and procedures of the Fund and
each service provider since the date of the last report; any material changes
to the policies and procedures since the date of the last report; any
recommendations for material changes to the policies and procedures; and any
material compliance matters since the date of the last report.
The Board receives reports from the Fund's service providers regarding
operational risks and risks related to the valuation and liquidity of portfolio
securities. The Fund's Fair Valuation Committee makes regular reports to the
Board concerning investments for which market quotations are not readily
available. Annually, the Fund's independent registered public accounting firm
reviews with the Audit Committee its audit of the Fund's financial statements,
focusing on major areas of risk encountered by the Fund and noting any
significant deficiencies or material weaknesses in the Fund's internal
controls. Additionally, in connection with its oversight function, the Board
oversees Fund management's implementation of disclosure controls and
procedures, which are designed to ensure that information required to be
disclosed by the Fund in its periodic reports with the SEC are recorded,
processed, summarized, and reported within the required time periods. The Board
also oversees the Fund's internal controls over financial reporting, which
comprise policies and procedures designed to provide reasonable assurance
regarding the reliability of the Fund's financial reporting and the preparation
of the Fund's financial statements.
From their review of these reports and discussions with the Adviser, the Chief
Compliance Officer, the independent registered public accounting firm and other
service providers, the Board and the Audit Committee learn in detail about the
material risks of the Fund, thereby facilitating a dialogue about how
management and service providers identify and mitigate those risks.
The Board recognizes that not all risks that may affect the Fund can be
identified and/or quantified, that it may not be practical or cost-effective to
eliminate or mitigate certain risks, that it may be necessary to bear certain
risks (such as investment-related risks) to achieve the Fund's goals, and that
the processes, procedures and controls employed to address certain risks may be
limited in their effectiveness. Moreover, reports received by the Trustees as
to risk management matters are typically summaries of the relevant information.
Most of the Fund's investment management and business affairs are carried out
by or through the Adviser and other service providers each of which has an
independent interest in risk management but whose policies and the methods by
which one or more risk management functions are carried out may differ from the
Fund's and each other's in the setting of priorities, the resources available
or the effectiveness of relevant controls. As a result of the foregoing and
other factors, the Board's ability to monitor and manage risk, as a practical
matter, is subject to limitations.
MEMBERS OF THE BOARD. There are five members of the Board, four of whom are not
"interested persons" of the Fund, as that term is defined in the 1940 Act
("Independent Trustees"). Mr. Doran, an interested person of the Fund, serves
as Chairman of the Board. Mr. Hunt, an Independent Trustee, serves as the lead
Independent Trustee. The Fund has determined its leadership structure is
appropriate given the specific characteristics and circumstances of the Fund.
The Fund made this determination in consideration of, among other things, the
fact that the Independent Trustees constitute more than three-quarters of the
Board, the fact that the chairperson of each Committee of the Board is an
Independent Trustee, the amount of assets under management in the Fund, and the
number of funds overseen by the Board. The Board also believes that its
leadership structure facilitates the orderly and efficient flow of information
to the Independent Trustees from Fund management.
The Board has two standing committees: the Audit Committee and the Governance
Committee. The Audit Committee and Governance Committee are chaired by an
Independent Trustee and composed of all of the Independent Trustees.
S-38
In his role as Chairman, Mr. Doran, among other things: (i) presides over board
meetings; (ii) oversees the development of agendas for Board meetings; (iii)
facilitates communication between the Trustees and management; and (iv) has
such other responsibilities as the Board determines from time to time.
In his role as lead Independent Trustee, Mr. Hunt, among other things: (i)
presides over Board meetings in the absence of the Chairman of the Board; (ii)
presides over executive sessions of the Independent Trustees; (iii) along with
the Chairman of the Board, oversees the development of agendas for Board
meetings; (iv) facilitates communication between the Independent Trustees and
management, and among the Independent Trustees; (v) serves as a key point
person for dealings between the Independent Trustees and management; and (vi)
has such other responsibilities as the Board or Independent Trustees determine
from time to time.
TRUSTEES AND OFFICERS OF THE FUND. Set forth below are the names, years of
birth, position with the Fund, and the principal occupations and other
directorships held during at least the last five years of each of the persons
currently serving as a Trustee or officer of the Fund. There is no stated term
of office for the Trustees and officers of the Fund. Unless otherwise noted,
the business address of each Trustee or officer is c/o Winton Diversified
Opportunities Fund, One Freedom Valley Drive, Oaks, Pennsylvania 19456. The
Fund is the only fund in the fund complex.
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PRINCIPAL
NAME AND YEAR OF POSITION WITH OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
BIRTH TRUST IN THE PAST 5 YEARS PAST 5 YEARS
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INTERESTED TRUSTEE
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William M. Doran Chairman of the Self-Employed Current Directorships: Trustee of
(Born: 1940) Board of Consultant since The Advisors' Inner Circle Fund,
Trustees (1) 2003. Partner at The Advisors' Inner Circle Fund II,
(since 2014) Morgan, Lewis & The Advisors' Inner Circle Fund III,
Bockius LLP (law Bishop Street Funds, SEI Daily
firm) from 1976 to Income Trust, SEI Institutional
2003. Counsel to the International Trust, SEI
Trust, SEI Institutional Investments Trust,
Investments, SIMC, SEI Institutional Managed Trust,
the Administrator SEI Liquid Asset Trust, SEI Asset
and the Distributor. Allocation Trust, SEI Tax Exempt
Trust, Adviser Managed Trust, New
Covenant Funds, SEI Insurance
Products Trust, The KP Funds,
O'Connor EQUUS (closed-end investment
company), and Winton Series Trust.
Director of SEI Investments (Europe),
Limited, SEI Investments--Global Funds
Services, Limited, SEI Investments
Global, Limited, SEI Investments
(Asia), Limited, SEI Global Nominee Ltd.
and SEI Investments -- Unit Trust
Management (UK) Limited.
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PRINCIPAL
NAME AND YEAR OF POSITION WITH OCCUPATIONS OTHER DIRECTORSHIPS HELD IN THE
BIRTH TRUST IN THE PAST 5 YEARS PAST 5 YEARS
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Director of the Distributor since
2003.
Former Directorships: Director of
SEI Alpha Strategy Portfolios, LP
to 2013.
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INDEPENDENT TRUSTEES
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Jon C. Hunt Trustee Retired since 2013. Current Directorships: Trustee of
(Born: 1951) (since 2014) Consultant to City National Rochdale Funds,
Management, The Advisors' Inner Circle Fund
Convergent Capital III, O'Connor EQUUS (closed-
Management, LLC end investment company) and
("CCM") from 2012 Winton Series Trust. Member of
to 2013. Managing Independent Committee of
Director and Chief Nuveen Commodities Asset
Operating Officer, Management.
CCM from 1998 to
2012.
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Terrence O. Jones Trustee Retired. Current Directorships: Trustee of
(Born: 1963) (since 2014) Genworth Life Insurance
Company of New York, Highland
Funds, The Advisors' Inner Circle
Fund III, O'Connor EQUUS
(closed-end investment company),
and Winton Series Trust.
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Thomas P. Lemke Trustee Retired since 2013. Current Directorships:
(Born: 1954) (since 2014) Executive Vice Independent Director of Victory
President and Funds. Trustee of AXA Premier
General Counsel, VIP Trust, The Advisors' Inner
Legg Mason, Inc. Circle Fund III, O'Connor
from 2005 to 2013. EQUUS (closed-end investment
company), Winton Series Trust
and JP Morgan Active ETFs.
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Randall S. Yanker Trustee Co-Founder and Current Directorships: Trustee of
(Born: 1960) (since 2014) Senior Partner, The Advisors' Inner Circle Fund
Alternative Asset III, O'Connor EQUUS (closed-
Managers, L.P. since end investment company) and
2004. Winton Series Trust. Independent
Non-Executive Director of HFA
Holdings Limited.
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NAME AND POSITION WITH TRUST PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
YEAR OF BIRTH
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Michael President Director of Client Service, SEI Investments
Beattie (Born: (since 2014) Company, since 2004.
1965)
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NAME AND POSITION WITH TRUST PRINCIPAL OCCUPATIONS IN PAST 5 YEARS
YEAR OF BIRTH
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Robert Nesher Vice Chairman SEI employee 1974 to present; currently
(Born: 1946) (since 2014) performs various services on behalf of SEI
Investments for which Mr. Nesher is
compensated. Vice Chairman of The Advisors'
Inner Circle Fund III, O'Connor EQUUS (closed-end
investment company) and Winton Series Trust.
President and Director of SEI
Structured Credit Fund, LP. President and
Chief Executive Officer of SEI Alpha Strategy
Portfolios, LP, June 2007 to September 2013.
President and Director of SEI Opportunity
Fund, L.P. to 2010.
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Rami Abdel- Treasurer, Controller and Chief Director, SEI Investments, Fund Accounting
Rahman Financial Officer since June 2014. Fund Accounting Director,
(Born: 1974) (since 2014) BNY Mellon, from 2006 to 2014. Fund
Accounting Manager, JPMorgan Chase, from
1998 to 2006.
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Dianne M. Vice President and Secretary Counsel at SEI Investments since 2010.
Descoteaux (since 2014) Associate at Morgan, Lewis & Bockius LLP
(Born: 1977) from 2006 to 2010.
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Russell Emery Chief Compliance Officer Chief Compliance Officer of SEI Structured
(Born: 1962) (since 2014) Credit Fund, LP since June 2007. Chief
Compliance Officer of SEI Alpha Strategy
Portfolios, LP from June 2007 to September
2013. Chief Compliance Officer of The
Advisors' Inner Circle Fund, The Advisors'
Inner Circle Fund II, The Advisors' Inner
Circle Fund III, O'Connor EQUUS (closed-end
investment company), Winton Series Trust,
Bishop Street Funds, SEI Institutional
Managed Trust, SEI Asset Allocation Trust,
SEI Institutional International Trust, SEI
Institutional Investments Trust, SEI Daily
Income Trust, SEI Liquid Asset Trust, SEI Tax
Exempt Trust, Adviser Managed Trust, New
Covenant Funds, SEI Insurance Products Trust
and The KP Funds. Chief Compliance Officer
of SEI Opportunity Fund, L.P. until 2010.
------------------------------------------------------------------------------------------------------------------------------------
Lisa Whittaker Vice President and Assistant Attorney, SEI Investments Company (2012-
(Born: 1978) Secretary present). Associate Counsel and Compliance
(since 2014) Officer, The Glenmede Trust Company, N.A.
(2011-2012). Associate, Drinker Biddle &
Reath LLP (2006-2011).
------------------------------------------------------------------------------------------------------------------------------------
John Y. Kim Vice President and Assistant Attorney, SEI Investments Company (2014-
(Born: 1981) Secretary present). Associate, Stradley Ronon Stevens &
(since 2014) Young, LLP (2009-2014).
------------------------------------------------------------------------------------------------------------------------------------
Edward Anti-Money Laundering Compliance Manager of SEI Investments
McCusker Compliance Officer and Privacy Company, May 2011 -- April 2013. Project
(Born: 1983) Officer Manager and AML Operations Lead of SEI
(since 2014) Private Trust Company, September 2010 --
May 2011. Private Banking Client Service
Professional of SEI Private Banking and Trust,
September 2008 -- September 2010.
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(1) Mr. Doran is deemed to be an "interested person" of the Fund as that term
is defined in the 1940 Act by virtue of his positions with the Distributor
and its affiliates.
S-41
INDIVIDUAL TRUSTEE QUALIFICATIONS. The Fund has concluded that each of the
Trustees should serve on the Board because of their ability to review and
understand information about the Fund provided to them by management, to
identify and request other information they may deem relevant to the
performance of their duties, to question management and other service providers
regarding material factors bearing on the management and administration of the
Fund, and to exercise their business judgment in a manner that serves the best
interests of the Fund's shareholders. The Fund has concluded that each of the
Trustees should serve as a Trustee based on their own experience,
qualifications, attributes and skills as described below.
The Fund has concluded that Mr. Doran should serve as Trustee because of the
experience he gained serving as a Partner in the Investment Management and
Securities Industry Practice of a large law firm, his experience in and
knowledge of the financial services industry, and the experience he has gained
serving on other investment company boards.
The Fund has concluded that Mr. Hunt should serve as Trustee because of the
experience he gained in a variety of leadership roles with different investment
management institutions, his experience in and knowledge of the financial
services industry, and the experience he has gained as a board member of
open-end, closed-end and private funds investing in a broad range of asset
classes, including alternative asset classes.
The Fund has concluded that Mr. Lemke should serve as Trustee because of the
extensive experience he gained in the financial services industry, including
experience in various senior management positions with financial services firms
and multiple years of service with a regulatory agency, his background in
controls, including legal, compliance and risk management, and his service as
general counsel for several financial services firms.
The Fund has concluded that Mr. Yanker should serve as Trustee because of the
experience he gained in a variety of leadership roles with the alternative
asset management divisions of various financial services firms, his experience
in and knowledge of the financial services industry, and the experience he has
gained advising institutions on alternative asset management.
The Fund has concluded that Mr. Jones should serve as Trustee because of the
experience he gained in a variety of leadership roles with different investment
management institutions and in the alternative asset management industry, his
experience in and knowledge of the financial services industry, and the
experience he has gained serving on other investment company boards.
In its periodic assessment of the effectiveness of the Board, the Board
considers the complementary individual skills and experience of the individual
Trustees primarily in the broader context of the Board's overall composition so
that the Board, as a body, possesses the appropriate (and appropriately
diverse) skills and experience to oversee the business of the Fund.
BOARD COMMITTEES. The Board has established the following standing committees:
S-42
o AUDIT COMMITTEE. The Board has a standing Audit Committee that is
composed of each of the Independent Trustees. The Audit Committee
operates under a written charter approved by the Board. The principal
responsibilities of the Audit Committee include: (i) recommending
which firm to engage as the Fund's independent registered public
accounting firm and whether to terminate this relationship; (ii)
reviewing the independent registered public accounting firm's
compensation, the proposed scope and terms of its engagement, and the
firm's independence; (iii) pre-approving audit and non-audit services
provided by the Fund's independent registered public accounting firm
to the Fund and certain other affiliated entities; (iv) serving as a
channel of communication between the independent registered public
accounting firm and the Trustees; (v) reviewing the results of each
external audit, including any qualifications in the independent
registered public accounting firm's opinion, any related management
letter, management's responses to recommendations made by the
independent registered public accounting firm in connection with the
audit, reports submitted to the Committee by the internal auditing
department of the Administrator that are material to the Fund as a
whole, if any, and management's responses to any such reports; (vi)
reviewing the Fund's audited financial statements and considering any
significant disputes between the Fund's management and the independent
registered public accounting firm that arose in connection with the
preparation of those financial statements; (vii) considering, in
consultation with the independent registered public accounting firm
and the Fund's senior internal accounting executive, if any, the
independent registered public accounting firms' reports on the
adequacy of the Fund's internal financial controls; (viii) reviewing,
in consultation with the Fund's independent registered public
accounting firm, major changes regarding auditing and accounting
principles and practices to be followed when preparing the Fund's
financial statements; and (ix) other audit related matters. Mr. Hunt,
Mr. Lemke, Mr. Yanker and Mr. Jones currently serve as members of the
Audit Committee. Mr. Jones serves as the Chairman of the Audit
Committee. The Audit Committee meets periodically, as necessary.
o GOVERNANCE COMMITTEE. The Board has a standing Governance Committee
that is composed of each of the Independent Trustees. The Governance
Committee operates under a written charter approved by the Board. The
principal responsibilities of the Governance Committee include: (i)
considering and reviewing Board governance and compensation issues;
(ii) conducting a self- assessment of the Board's operations; (iii)
selecting and nominating all persons to serve as Independent Trustees
and evaluating the qualifications of "interested" Trustee candidates;
and (iv) reviewing shareholder recommendations for nominations to fill
vacancies on the Board if such recommendations are submitted in
writing and addressed to the Committee at the Fund's office. Mr. Hunt,
Mr. Jones, Mr. Lemke and Mr. Yanker currently serve as members of the
Governance Committee. Mr. Lemke serves as the Chairman of the
Governance Committee. The Governance Committee meets periodically, as
necessary.
FAIR VALUATION COMMITTEE. The Board has also established a standing Fair
Valuation Committee that is composed of various representatives of the Fund's
service providers, as appointed by the Board. The Fair Valuation Committee
operates under procedures approved by the Board. The principal responsibility
of the Fair Valuation Committee is to determine the fair value of securities
for which current market quotations are not readily available. The Fair
Valuation Committee's determinations are reviewed by the Board.
FUND SHARES OWNED BY BOARD MEMBERS. As of the date of this SAI, the Fund had
not yet commenced operations, so no Trustee beneficially owns any shares of the
Fund.
S-43
BOARD COMPENSATION. The following table sets forth information covering the
anticipated total compensation payable by the Fund during its fiscal year
ending October 31, 2015 to the persons who serve as Trustees of the Fund.
--------------------------------------------------------------------------------
ESTIMATED AGGREGATE ESTIMATED TOTAL
COMPENSATION FROM THE COMPENSATION
NAME FUND FROM THE FUND
--------------------------------------------------------------------------------
INTERESTED TRUSTEE
--------------------------------------------------------------------------------
William M. Doran $0 $0 for service on one (1) board
--------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
--------------------------------------------------------------------------------
Jon C. Hunt $[____] $[____] for service on one (1)
board
--------------------------------------------------------------------------------
Thomas P. Lemke $[____] $[____] for service on one (1)
board
--------------------------------------------------------------------------------
Randall S. Yanker $[____] $[____] for service on one (1)
board
--------------------------------------------------------------------------------
Terrence O. Jones $[____] $[____] for service on one (1)
board
--------------------------------------------------------------------------------
PURCHASING SHARES
Class I shares are being offered during an initial offering period that is
expected to terminate on or about [____], 2015 or such earlier or later date as
the Adviser may determine in its discretion. Shares will be offered during the
initial offering period at the offering price, which is $[____] per share.
After the initial offering, shares are expected to be offered on a continuous
monthly basis at NAV per share and may be purchased as of 4:00 p.m. Eastern
Time on the last business day of any month (the "Closing Time"), provided the
New York Stock Exchange ("NYSE") is open for business, or at such other times
as the Fund may determine. Currently, the Fund is closed for business when the
following holidays are observed: New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas. During any continuous offering, shares may be
purchased through the Distributor or selected selling agents or
sub-distributors that have entered into dealer agreements with the Distributor.
Any continuous offering, if commenced, may be discontinued at any time. The
Fund will have the sole right to accept orders to purchase shares and reserves
the right to reject any order in whole or in part.
The Fund requires a minimum initial investment of $10,000 and minimum
subsequent investments of $5,000. The Fund may waive these minimum investment
requirements for one or more investors in its sole discretion. Notwithstanding
any waiver, investors remain subject to eligibility requirements set forth in
the Prospectus. The Adviser may accept investments in the Fund on such other
terms as it authorizes from time to time and may reject applications for shares
for any or no reason, in its sole discretion.
Each prospective investor must submit a completed application, including the
investor certification, five business days prior, and payment in cleared U.S.
funds three business days prior, to the purchase date (currently as of the
Closing Time on the last business day of the month).
S-44
Class I shares are not listed on any securities exchange. There is no guarantee
that a secondary market for Fund shares will develop. Shareholders will not
have the right to redeem their shares. In addition, shares are subject to
transfer restrictions, including a requirement that shares may be transferred
only to persons who meet the Fund's eligibility requirements set forth in the
Prospectus. However, the Fund will conduct periodic repurchase offers for a
portion of its outstanding shares.
DETERMINATION OF NET ASSET VALUE
GENERAL POLICY. In general, securities for which market quotations are readily
available are valued at current market value, and all other securities are
valued at fair value as determined in good faith by the Board. In complying
with the 1940 Act, the Fund relies on guidance provided by the SEC and by the
SEC staff in various interpretive letters and other guidance.
The Fund will generally calculate its NAV for the last business day of every
week and the last business day of every month as of the close of regular
trading on the NYSE (normally, 4:00 p.m., Eastern Time) by adding the total
value of its assets, subtracting its liabilities and then dividing the result
by the number of shares outstanding. The Fund also calculates its NAV in
connection with periodic repurchase offers as described in the Prospectus.
EQUITY SECURITIES. Securities listed on a securities exchange, market or
automated quotation system for which quotations are readily available (except
for securities traded on NASDAQ), including securities traded over the counter,
are valued at the last quoted sale price on the primary exchange or market
(foreign or domestic) on which they are traded on the valuation date (or at
approximately 4:00 p.m., Eastern Time, if a security's primary exchange is
normally open at that time), or, if there is no such reported sale on the
valuation date, at the most recent quoted bid price. For securities traded on
NASDAQ, the NASDAQ Official Closing Price will be used. If such prices are not
available or determined to not represent the fair value of the security as of
the Fund's pricing time, the security will be valued at fair value as
determined in good faith using methods approved by the Board.
MONEY MARKET SECURITIES AND OTHER DEBT SECURITIES. If available, money market
securities and other debt securities are priced based upon valuations provided
by recognized independent, third-party pricing agents. Such values generally
reflect the last reported sales price if the security is actively traded. The
third-party pricing agents may also value debt securities by employing
methodologies that utilize actual market transactions, broker-supplied
valuations, or other methodologies designed to identify the market value for
such securities. Such methodologies generally consider such factors as security
prices, yields, maturities, call features, ratings and developments relating to
specific securities in arriving at valuations. Money market securities and
other debt securities with remaining maturities of sixty days or less may be
valued at their amortized cost, which approximates market value. If such prices
are not available or determined to not represent the fair value of the security
as of the Fund's pricing time, the security will be valued at fair value as
determined in good faith using methods approved by the Board.
DERIVATIVES AND OTHER COMPLEX SECURITIES. Exchange traded options on securities
and indices purchased by the Fund generally are valued at their last trade
price or, if there is no last trade price, the last bid price. Exchange-traded
options on securities and indices written by the Fund generally are valued at
their last trade price or, if there is no last trade price, the last asked
price. In the case of options traded in the over-the-counter market, if the OTC
option is also an exchange-traded option, the Fund will follow the rules
regarding the valuation of exchange traded options. If the OTC option is not
also an exchange traded option, the Fund will value the option at fair value in
accordance with procedures adopted by the Board. Futures contracts and options
on futures contracts are valued at the last trade price prior to the end of the
Fund's pricing cycle.
S-45
Illiquid securities, securities for which reliable quotations or pricing
services are not readily available, and all other assets will be valued either
at the average of the last bid price of the securities obtained from two or
more dealers or otherwise at their respective fair value as determined in good
faith by, or under procedures established by the Board. The Board has adopted
fair valuation procedures for the Fund and has delegated responsibility for
fair value determinations to the Fair Valuation Committee. The members of the
Fair Valuation Committee report, as necessary, to the Board regarding portfolio
valuation determination. The Board, from time to time, will review these
methods of valuation and will recommend changes which may be necessary to
assure that the investments of the Fund are valued at fair value.
USE OF THIRD-PARTY INDEPENDENT PRICING AGENTS. Pursuant to contracts with the
Administrator, market prices for most securities held by the Fund are provided
daily by third-party independent pricing agents that are approved by the Board.
The valuations provided by third-party independent pricing agents are reviewed
daily by the Administrator.
TAXES
The following is only a summary of certain additional federal income tax
considerations generally affecting the Fund and its shareholders that is
intended to supplement the discussion contained in the Prospectus. No attempt
is made to present a detailed explanation of the tax treatment of the Fund or
its shareholders, and the discussion here and in the Prospectus is not intended
as a substitute for careful tax planning. The following general discussion of
certain federal income tax consequences is based on the Code and the
regulations issued thereunder as in effect on the date of this SAI. New
legislation, as well as administrative changes or court decisions, may
significantly change the conclusions expressed herein, and may have a
retroactive effect with respect to the transactions contemplated herein.
Shareholders are urged to consult their tax advisors with specific reference to
their own tax situations, including their foreign and state and local tax
liabilities.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY. The Fund intends to qualify
and elects to be treated as a RIC. By following such a policy, the Fund expects
to eliminate or reduce to a nominal amount the federal taxes to which it may be
subject. If the Fund qualifies as a RIC, it will generally not be subject to
federal income taxes on the net investment income and net realized capital
gains that it timely distributes to its shareholders. The Board reserves the
right not to maintain the Fund's qualification as a RIC if it determines such
course of action to be beneficial to the Fund's shareholders.
In order to qualify as a RIC under the Code, the Fund must distribute annually
to its shareholders at least 90% of its net investment income (which, includes
dividends, taxable interest, and the excess of net short-term capital gains
over net long-term capital losses, less operating expenses) and at least 90% of
its net tax exempt interest income, for each tax year, if any, to its
shareholders (the "Distribution Requirement") and also must meet certain
additional requirements. Among these requirements are the following: (i) at
least 90% of the Fund's gross income each taxable year must be derived from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities, or foreign
currencies, or other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities, or currencies, and net income derived from an
interest in a qualified publicly traded partnership (the "Qualifying Income
Test"); and (ii) at the close of each quarter of the Fund's taxable year: (A)
at least 50% of the value of its total assets must be represented by cash and
cash items, U.S. Government securities, securities of other RICs and other
securities, with such other securities limited, in respect to any one issuer,
to an amount not greater than 5% of the value of the Fund's total assets and
that does not represent more than 10% of the outstanding voting securities of
such issuer, including the equity
S-46
securities of a qualified publicly traded partnership, and (B) not more than
25% of the value of its total assets is invested in the securities (other than
U.S. Government securities or securities of other RICs) of any one issuer or
the securities (other than the securities of another RIC) of two or more
issuers that the Fund controls and which are engaged in the same or similar
trades or businesses or related trades or businesses, or the securities of one
or more qualified publicly traded partnerships (the "Asset Diversification
Test"). Although the Fund intends to distribute substantially all of its net
investment company taxable income and may distribute its net capital gain for
any taxable year, the Fund will be subject to federal income taxation to the
extent such income or gains are not distributed.
For purposes of satisfying the Asset Diversification Test described above, it
may be difficult for the Fund in all cases to identify the "issuer" of a
particular Fund investment including any total return swaps used for indirect
investment exposure. There is a risk that the Internal Revenue Service ("IRS")
could make an adverse determination with respect to identifying the issuer of
Fund investments and could disagree with the Fund's valuation of the underlying
issuers to a particular derivative. Such an adverse determination could
adversely affect the Fund's ability to meet the Asset Diversification Test
described above and could therefore jeopardize the Fund's status as a RIC.
Certain securities in which the Fund may invest may not produce qualifying
income for purposes of the Qualifying Income Test (as described above) which
must be met for the Fund to maintain its status as a RIC. For example, for
purposes of the Qualifying Income Test, income derived from a partnership will
be treated as qualifying income only to the extent such income is attributable
to items of income of the partnership that would be qualifying income if
realized directly by the Fund. However, 100% of the net income derived from an
interest in a qualified publicly traded partnerships ("QPTPs") (generally, a
partnership (i) interests in which are traded on an established securities
market or are readily tradable on a secondary market or the substantial
equivalent thereof, (ii) that derives at least 90% of its income from the
passive income sources specified in Code section 7704(d), and (iii) that
derives less than 90% of its income from the qualifying income described in (i)
of the prior paragraph) will be treated as qualifying income. In addition,
although in general the passive loss rules of the Code do not apply to RICs,
such rules do apply to a RIC with respect to items attributable to an interest
in a QPTP.
In addition, for purposes of the Qualifying Income Test, income derived from
certain investments including commodity-based investments does not generally
generate qualifying income. The Fund, however, intends to gain exposure to
these non-qualifying investments including commodities investments through
their investment in their wholly-owned Subsidiary. The Subsidiary intends to
invest directly or indirectly in commodities, interest rates, currencies, bonds
and other commodity-linked derivative instruments, including options, futures
contracts, swaps, options on futures contracts. In July 2011, the IRS suspended
the issuance of private letter rulings regarding the investment by RICs into
controlled foreign corporations which principally invest in commodities, such
as the Subsidiary, indicating that it was reconsidering its policies
surrounding the issuance of these rulings. The IRS subsequently stated that it
intends to issue public guidance regarding the use of controlled foreign
corporations by RICs to indirectly invest in commodities. It is unclear whether
this guidance will continue to permit or somehow restrict the distributions
from controlled foreign corporations to be treated as "qualifying income" for
purposes of the RIC qualification rules. The IRS, however, has informally
indicated that any guidance regarding the treatment of distributions from
controlled foreign corporations will be prospective in application and provide
for transition periods for affected RICs. The Fund intends to secure an opinion
of counsel based on customary representations that actual distributions from
the Subsidiary to the Fund should be treated as "qualifying income." If the IRS
issues public guidance which results in an adverse determination relating to
the treatment of income and gain to the Fund from the Subsidiary the Fund would
likely need to significantly change its investment strategies, which could
adversely affect the Fund.
S-47
If the Fund fails to satisfy the Qualifying Income or Asset Diversification
tests in any taxable year, the Fund may be eligible for relief provisions if
the failures are due to reasonable cause and not willful neglect and if a
penalty tax is paid with respect to each failure to satisfy the applicable
requirements. Additionally, relief is provided for certain de minimis failures
of the diversification requirements where the Fund corrects the failure within
a specified period. If the Fund fails to maintain qualification as a RIC for a
tax year, and the relief provisions are not available, the Fund will be subject
to federal income tax at regular corporate rates without any deduction for
distributions to shareholders. In such case, its shareholders would be taxed as
if they received ordinary dividends, although corporate shareholders could be
eligible for the dividends received deduction (subject to certain limitations)
and individuals may be able to benefit from the lower tax rates available to
qualified dividend income. In addition, the Fund could be required to recognize
unrealized gains, pay substantial taxes and interest, and make substantial
distributions before requalifying as a RIC. The Board reserves the right not to
maintain the qualification of the Fund as a RIC if it determines such course of
action to be beneficial to shareholders.
FEDERAL EXCISE TAX. If the Fund fails to distribute in a calendar year at least
98% of its ordinary income for the year and 98.2% of its capital gain net
income (the excess of capital gains over capital losses without regard to
holding periods) for the one-year period ending October 31 of that calendar
year (and any retained amount from the prior calendar year on which the Fund
paid no federal income tax), the Fund will be subject to a nondeductible 4%
federal excise tax on the undistributed amounts. The Fund intends to make
sufficient distributions to avoid imposition of this tax, or to retain, at most
its net capital gains and pay tax thereon. The Fund may in certain
circumstances be required to liquidate Fund investments in order to make
sufficient distributions to avoid federal excise tax liability at a time when
the Adviser might not otherwise have chosen to do so, and liquidation of
investments in such circumstances may affect the ability of the Fund to satisfy
the requirement for qualification as a RIC.
The Fund may elect to treat part or all of any "qualified late year loss" as if
it had been incurred in the succeeding taxable year in determining the Fund's
taxable income, net capital gain, net short-term capital gain, and earnings and
profits. The effect of this election is to treat any such "qualified late year
loss" as if it had been incurred in the succeeding taxable year in
characterizing Fund distributions for any calendar. A "qualified late year
loss" generally includes net capital loss, net long-term capital loss, or net
short-term capital loss incurred after October 31 of the current taxable year
(commonly referred to as "post-October losses") and certain other late-year
losses.
CAPITAL LOSS CARRYOVERS. The treatment of capital loss carryovers for the Fund
is similar to the rules that apply to capital loss carryovers of individuals
which provide that such losses are carried over by the Fund indefinitely. If
the Fund has a "net capital loss" (that is, capital losses in excess of capital
gains) for a taxable year, the excess of the Fund's net short-term capital
losses over its net long-term capital gains is treated as a short-term capital
loss arising on the first day of the Fund's next taxable year, and the excess
of the Fund's net long-term capital losses over its net short-term capital
gains is treated as a long-term capital loss arising on the first day of the
Fund's next taxable year. Realized capital losses may be carried forward
indefinitely until used, subject to limitations if the Fund undergoes a change
in ownership as defined.
DISTRIBUTIONS TO SHAREHOLDERS. The Fund receives income generally in the form
of dividends and interest on investments. This income, plus net short-term
capital gains, if any, less expenses incurred in the operation of the Fund,
constitutes the Fund's net investment income from which dividends may be paid
to you. Any distributions by the Fund from such income will be taxable to you
as ordinary income or at the lower capital gains rates that apply to
individuals receiving qualified dividend income, whether you take them in cash
or in additional shares.
S-48
Distributions by the Fund are currently eligible for the reduced maximum tax
rate to individuals of 20% (lower rates apply to individuals in lower tax
brackets) to the extent that the Fund receives qualified dividend income on the
securities it holds and the Fund reports the distributions as qualified
dividend income. Qualified dividend income is, in general, dividend income from
taxable domestic corporations and certain foreign corporations (e.g., foreign
corporations incorporated in a possession of the United States or in certain
countries with a comprehensive tax treaty with the United States, or the stock
of which is readily tradable on an established securities market in the United
States). A dividend will not be treated as qualified dividend income to the
extent that: (i) the shareholder has not held the shares on which the dividend
was paid for more than 60 days during the 121-day period that begins on the
date that is 60 days before the date on which the shares become "ex-dividend"
(which is the day on which declared distributions (dividends or capital gains)
are deducted from the Fund's assets before it calculates the net asset value)
with respect to such dividend, (ii) the Fund has not satisfied similar holding
period requirements with respect to the securities it holds that paid the
dividends distributed to the shareholder), (iii) the shareholder is under an
obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to substantially similar or related property, or (iv) the
shareholder elects to treat such dividend as investment income under section
163(d)(4)(B) of the Code. Therefore, if you lend your shares in a Fund, such as
pursuant to securities lending arrangement, you may lose the ability to treat
dividends (paid while the shares are held by the borrower) as qualified
dividend income. Distributions that the Fund receives from an ETF or underlying
fund taxable as a RIC or a REIT will be treated as qualified dividend income
only to the extent so reported by such ETF, underlying fund or REIT.
Distributions by the Fund of its net short-term capital gains will be taxable
as ordinary income. Capital gain distributions consisting of the Fund's net
capital gains will be taxable as long-term capital gains for individual
shareholders currently set at a maximum rate of 20% regardless of how long you
have held your shares in the Fund.
REPURCHASES OF FUND SHARES. Shareholders whose shares are repurchased by the
Fund may realize a capital gain or loss on the repurchase. For federal income
tax purposes, a repurchase generally should be treated as a sale or exchange
provided that the redemption is not essentially equivalent to a dividend, is a
substantially disproportionate redemption, is a complete redemption of a
shareholder's entire interest in the Fund, or is in partial liquidation of the
Fund. If the foregoing tests are not met, there is a risk that the proceeds
from a repurchase could be taxable as a dividend to such shareholder.
Furthermore, there is a risk that shareholders who do not participate in a
repurchase could be treated as receiving a constructive dividend as a result of
their proportionate increase in their ownership of the Fund resulting from the
repurchase of other shareholders' shares. Shareholders would be notified of
this treatment at year end and provided with a 1099-DIV form.
If a repurchase of Fund shares is treated as a sale, the amount of the capital
gain or loss and the applicable tax rate will depend generally upon the amount
paid for the shares, the amount received from the repurchase, and the length of
time that the shares were held by the shareholder. Gain or loss realized upon a
repurchase will generally be treated as long-term capital gain or loss if the
shares have been held for more than one year, and as short-term capital gain or
loss if the shares have been held for one year or less. Any loss arising from
the repurchase of shares held for six months or less, however, is treated as a
long-term capital loss to the extent of any distributions of net capital gain
received or deemed to be received with respect to such shares. In determining
the holding period of such shares for this purpose, any period during which a
shareholder's risk of loss is offset by means of options, short sales or
similar transactions is not counted. Different rules generally apply to
shareholders who do not hold their Fund shares as a capital asset. If a
shareholder purchases Fund shares (through reinvestment of distributions or
otherwise) within thirty days before or after any Fund shares are repurchased
at a loss, all or part of such loss will not be deductible and will instead
increase the basis of the new shares.
S-49
The Fund will report to you the amount of distributions of ordinary income,
qualified dividend income and capital gain, if any, at the time they are paid
and will report to you their tax status for federal income tax purposes shortly
after the close of each calendar year. If you have not held Fund shares for a
full year, the Fund may designate and distribute to you, as ordinary income,
qualified dividend income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of your
investment in the Fund.
A dividend or distribution received shortly after the purchase of shares
reduces the NAV of the shares by the amount of the dividend or distribution
and, although in effect a return of capital, will be taxable to the
shareholder. If the NAV of shares were reduced below the shareholder's cost by
dividends or distributions representing gains realized on sales of securities,
such dividends or distributions would be a return of investment though taxable
to the shareholder in the same manner as other dividends or distributions.
In the case of corporate shareholders, the Fund's distributions (other than
capital gain distributions) generally qualify for the dividend-received
deduction to the extent such distributions are so designated and do not exceed
the gross amount of qualifying dividends received by the Fund for the year.
Generally, and subject to certain limitations (including certain holding period
limitations), a dividend will be treated as a qualifying dividend if it has
been received from a domestic corporation. All such qualifying dividends
(including the deducted portion) must be included in your alternative minimum
taxable income calculation.
To the extent that the Fund makes a distribution of income received by the Fund
in lieu of dividends (a "substitute payment") with respect to securities on
loan pursuant to a securities lending transaction, such income will not
constitute qualified dividend income to individual shareholders and will not be
eligible for the dividends received deduction for corporate shareholders.
Dividends declared to shareholders of record in October, November or December
and actually paid in January of the following year will be treated as having
been received by shareholders on December 31 of the calendar year in which
declared. Under this rule, therefore, a shareholder may be taxed in one year on
dividends or distributions actually received in January of the following year.
If the Fund's distributions exceed its current and accumulated earnings and
profits, all or a portion of the distributions made in the same taxable year
may be characterized as a return of capital to shareholders. A return of
capital distribution will generally not be taxable, but will reduce each
shareholder's cost basis in its Fund shares and result in a higher capital gain
or lower capital loss when those shares on which the distribution was received
are repurchased by the Fund.
In addition to the federal income tax, certain individuals, trusts, and estates
may be subject to a Medicare tax of 3.8% . The Medicare tax is imposed on the
lesser of a taxpayer's (i) investment income, net of deductions properly
allocable to such income, or (ii) the amount by which the taxpayer's modified
adjusted gross income exceeds certain thresholds ($250,000 for married
individuals filing jointly, $200,000 for unmarried individuals, and $125,000
for married individuals filing separately). The Fund's distributions are
includable in a shareholder's investment income for purposes of this Medicare
tax. In addition, any capital gain realized by a shareholder upon a repurchase
of Fund shares is includable in the shareholder's investment income for
purposes of this Medicare tax.
The Fund may invest in complex securities. These investments may be subject to
numerous special and complex tax rules. These rules could affect whether gains
and losses recognized by the Fund are treated as ordinary income or capital
gain and could accelerate the recognition of income to the Fund and/or defer
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the Fund's ability to recognize losses. In turn, those rules may affect the
amount, timing or character of the income distributed to you by the Fund.
With respect to investments in STRIPS, Treasury Receipts ("TRs"), and other
zero coupon securities which are sold at original issue discount and thus do
not make periodic cash interest payments, the Fund will be required to include
as part of its current income the imputed interest on such obligations even
though the Fund has not received any interest payments on such obligations
during that period. Because the Fund intends to distribute all of its
investment company taxable income to its shareholders, the Fund may have to
sell its portfolio securities to generate sufficient cash to distribute such
imputed income, which may occur at a time when the Adviser would not have
chosen to sell such securities, and which may result in taxable gain or loss.
Any market discount recognized on a bond is taxable as ordinary income. A
market discount bond is a bond acquired in the secondary market at a price
below redemption value or adjusted issue price if issued with original issue
discount. Absent an election by the Fund to include the market discount in
income as it accrues, gain on the Fund's disposition of such an obligation will
be treated as ordinary income rather than capital gain to the extent of the
accrued market discount.
The Fund may invest in certain MLPs which may be treated as QPTPs. Income from
QPTPs is qualifying income for purposes of the Qualifying Income Test, but the
Fund's investment in one or more of such QPTPs is limited under the Asset Test
to no more than 25% of the value of the Fund's assets. MLPs and other
partnerships that the Fund may invest in will deliver Form K-1s to the Fund to
report its share of income, gains, losses, deductions and credits of the MLP or
other partnership. These Form K-1s may be delayed and may not be received until
after the time that the Fund issues its tax reporting statements. As a result,
the Fund may at times find it necessary to reclassify the amount and character
of its distributions to you after it issues you your tax reporting statement.
The Fund may invest in REITs. Investments in REIT equity securities may require
the Fund to accrue and distribute income not yet received. To generate
sufficient cash to make the requisite distributions, the Fund may be required
to sell securities in its portfolio (including when it is not advantageous to
do so) that it otherwise would have continued to hold. The Fund's investments
in REIT equity securities may at other times result in the Fund's receipt of
cash in excess of the REIT's earnings; if the Fund distributes these amounts,
these distributions could constitute a return of capital to the Fund's
shareholders for federal income tax purposes. Dividends received by the Fund
from a REIT generally will not constitute qualified dividend income and will
not qualify for the dividends received deduction.
The Fund's transactions in foreign currencies and forward foreign currency
contracts will generally be subject to special provisions of the Code that,
among other things, may affect the character of gains and losses realized by
the Fund (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the Fund and defer losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also may require the Fund to mark-to-market
certain types of positions in its portfolio (i.e., treat them as if they were
closed out) which may cause the Fund to recognize income without receiving cash
with which to make distributions in amounts necessary to satisfy the
Distribution Requirements and for avoiding the excise tax described above. The
Fund intends to monitor its transactions, intends to make the appropriate tax
elections, and intends to make the appropriate entries in its books and records
when it acquires any foreign currency or forward foreign currency contract in
order to mitigate the effect of these rules so as to prevent disqualification
of the Fund as a RIC and minimize the imposition of income and excise taxes.
The U.S. Treasury Department has authority to issue regulations that would
exclude foreign currency gains from the Qualifying Income Test described above
if such gains are not directly related to the Fund's
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business of investing in stock or securities (or options and futures with
respect to stock or securities). Accordingly, regulations may be issued in the
future that could treat some or all of the Fund's non-U.S. currency gains as
non-qualifying income, thereby potentially jeopardizing the Fund's status as a
RIC for all years to which the regulations are applicable.
If the Fund owns shares in certain foreign investment entities, referred to as
"passive foreign investment companies" or "PFICs," the Fund will generally be
subject to one of the following special tax regimes: (i) the Fund may be liable
for U.S. federal income tax, and an additional interest charge, on a portion of
any "excess distribution" from such foreign entity or any gain from the
disposition of such shares, even if the entire distribution or gain is paid out
by the Fund as a dividend to its shareholders; (ii) if the Fund were able and
elected to treat a PFIC as a "qualified electing fund" or "QEF," the Fund would
be required each year to include in income, and distribute to shareholders in
accordance with the distribution requirements set forth above, the Fund's pro
rata share of the ordinary earnings and net capital gains of the PFIC, whether
or not such earnings or gains are distributed to the Fund; or (iii) the Fund
may be entitled to mark-to-market annually shares of the PFIC, and in such
event would be required to distribute to shareholders any such mark-to-market
gains in accordance with the distribution requirements set forth above. The
Fund may have to distribute to its shareholders certain "phantom" income and
gain the Fund accrues with respect to its investment in a PFIC in order to
satisfy the Distribution Requirement and to avoid imposition of the 4% excise
tax described above. The Fund intends to make the appropriate tax elections, if
possible, and take any additional steps that are necessary to mitigate the
effect of these rules.
The Fund (or its administrative agent) must report to the IRS and furnish to
certain Fund shareholders cost basis information for Fund shares that are
repurchased by the Fund. In addition to reporting the gross proceeds from the
repurchase of Fund shares, the Fund is also required to report the cost basis
information for such shares and indicate whether these shares had a short-term
or long-term holding period. These cost basis reporting requirements do not
apply to shares held through a tax-deferred arrangement, such as a 401(k) plan
or individual retirement account, or to shares held by tax-exempt
organizations, financial institutions, corporations (other than S
corporations), banks, credit unions, and certain other entities and
governmental bodies. For each repurchase of Fund shares, the Fund will permit
shareholders to elect from among several IRS-approved cost basis methods. In
the absence of an election, the Fund will use the average cost method as the
default cost basis method. The cost basis method elected by the Fund
shareholder (or the Fund's default cost basis method) for each repurchase of
Fund shares may not be changed after the settlement date of each such
repurchase of Fund shares. Fund shareholders should consult their tax advisors
to determine which IRS-approved cost basis method is appropriate for their tax
situation and to obtain more information about how cost basis reporting applies
to them. Shareholders also should carefully review the cost basis information
provided to them by a Fund and make any additional basis, holding period or
other adjustments that are required when reporting these amounts on their
federal income tax returns.
BACKUP WITHHOLDING. In certain cases, the Fund will be required to withhold at
the applicable withholding rate, and remit to the U.S. Treasury, backup
withholding on any distributions paid to a shareholder who (1) has failed to
provide a correct Social Security number or taxpayer identification number, (2)
is subject to backup withholding by the IRS, (3) has not certified to the Fund
that such shareholder is not subject to backup withholding, or (4) has failed
to certify that he or she is a U.S. citizen or U.S. resident alien.
NON-U.S. INVESTORS. Any non-U.S. investors in the Fund may be subject to U.S.
withholding and estate tax and are encouraged to consult their tax advisors
prior to investing in the Fund.
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A U.S. withholding tax at a 30% rate will be imposed on dividends paid after
July 1, 2014 (and proceeds of sales in respect of Fund shares (including
certain capital gain dividends) received by Fund shareholders beginning after
December 31, 2016) for shareholders who own their shares through foreign
accounts or foreign intermediaries if certain disclosure requirements related
to U.S. accounts or ownership are not satisfied. The Fund will not pay any
additional amounts in respect to any amounts withheld.
FOREIGN TAXES. Dividends, interest and gains received by the Fund may be
subject to income, capital gains, withholding or other taxes imposed by foreign
countries and U.S. possessions that would reduce the yield on the Fund's stock
or securities. Tax conventions between certain countries and the United States
may reduce or eliminate these taxes. Foreign countries generally do not impose
taxes on capital gains with respect to investments by foreign investors.
If more than 50% of the value of the Fund's total assets at the close of its
taxable year consists of stocks or securities of foreign corporations, the Fund
will be eligible to and intends to file an election with the IRS that may
enable shareholders, in effect, to receive either the benefit of a foreign tax
credit, or a deduction from such taxes, with respect to any foreign and U.S.
possessions income taxes paid by the Fund, subject to certain limitations.
Pursuant to the election, the Fund will treat those taxes as dividends paid to
its shareholders. Each such shareholder will be required to include a
proportionate share of those taxes in gross income as income received from a
foreign source and must treat the amount so included as if the shareholder had
paid the foreign tax directly. The shareholder may then either deduct the taxes
deemed paid by him or her in computing his or her taxable income or,
alternatively, use the foregoing information in calculating any foreign tax
credit they may be entitled to use against the shareholders' federal income
tax. If the Fund makes the election, the Fund will report annually to its
shareholders the respective amounts per share of the Fund's income from sources
within, and taxes paid to, foreign countries and U.S. possessions.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified
pension plans, individual retirement accounts, salary deferral arrangements,
401(k)s, and other tax-exempt entities, generally are exempt from federal
income taxation except with respect to their unrelated business taxable income
("UBTI"). Under current law, the Fund generally serves to block UBTI from being
realized by its tax-exempt shareholders. However, notwithstanding the
foregoing, the tax-exempt shareholder could realize UBTI by virtue of an
investment in the Fund where, for example: (i) the Fund invests in residual
interests of real estate mortgage investment conduits ("REMICs"), (ii) the Fund
invests in a REIT that is a taxable mortgage pool ("TMP") or that has a
subsidiary that is TMP or that invests in the residual interest of a REMIC, or
(iii) shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of section 514(b) of the Code.
Charitable remainder trusts are subject to special rules and should consult
their tax advisor. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are strongly
encouraged to consult their tax advisors regarding these issues.
TAX SHELTER REPORTING REGULATIONS. Under U.S. Treasury regulations, generally,
if a shareholder recognizes a loss of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder, the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct shareholders
of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a RIC such as the Fund
are not excepted. Future guidance may extend the current exception from this
reporting requirement to shareholders of most or all RICs. The fact that a loss
is reportable under these regulations does not affect the legal determination
of whether the taxpayer's treatment of the loss is proper. Shareholders should
consult their tax advisors to determine the applicability of these regulations
in light of their individual circumstances.
The Fund's shares held in a tax-qualified retirement account will generally not
be subject to federal taxation on income and capital gains distribution from
the Fund until a shareholder begins receiving
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payments from its retirement account. Because each shareholder's tax situation
is different, shareholders should consult their tax advisor about the tax
implications of an investment in the Fund.
Depending upon state and local law, distributions by the Fund to its
shareholders and the ownership of such shares may be subject to state and local
taxes. Rules of state and local taxation of dividend and capital gains
distributions from RICs often differ from rules for federal income taxation
described above. It is expected that the Fund will not be liable for any
corporate tax in Delaware if it qualifies as a RIC for federal income tax
purposes.
There may be other federal, state, local or foreign tax considerations
applicable to prospective shareholders. Please consult your tax advisor
regarding an investment in the Fund.
FUND TRANSACTIONS
BROKERAGE TRANSACTIONS. Generally, equity securities, both listed and
over-the-counter, are bought and sold through brokerage transactions for which
commissions are payable. Purchases from underwriters will include the
underwriting commission or concession, and purchases from dealers serving as
market makers will include a dealer's mark-up or reflect a dealer's mark-down.
Money market securities and other debt securities are usually bought and sold
directly from the issuer or an underwriter or market maker for the securities.
Generally, the Fund will not pay brokerage commissions for such purchases. When
a debt security is bought from an underwriter, the purchase price will usually
include an underwriting commission or concession. The purchase price for
securities bought from dealers serving as market makers will similarly include
the dealer's mark up or reflect a dealer's mark down. When the Fund executes
transactions in the over-the-counter market, it will generally deal with
primary market makers unless prices that are more favorable are otherwise
obtainable.
In addition, the Adviser may place a combined order for two or more accounts it
manages, including the Fund, engaged in the purchase or sale of the same
security if, in its judgment, joint execution is in the best interest of each
participant and will result in best price and execution. Transactions involving
commingled orders are allocated in a manner deemed equitable to each account or
fund. Although it is recognized that, in some cases, the joint execution of
orders could adversely affect the price or volume of the security that a
particular account or the Fund may obtain, it is the opinion of the Adviser
that the advantages of combined orders outweigh the possible disadvantages of
separate transactions.
BROKERAGE SELECTION. The Fund does not expect to use one particular broker or
dealer, and when one or more brokers is believed capable of providing the best
combination of price and execution, the Adviser may select a broker based upon
brokerage or research services provided to the Adviser. The Adviser may pay a
higher commission than otherwise obtainable from other brokers in return for
such services only if a good faith determination is made that the commission is
reasonable in relation to the services provided.
Section 28(e) of the 1934 Act permits the Adviser, under certain circumstances,
to cause the Fund to pay a broker or dealer a commission for effecting a
transaction in excess of the amount of commission another broker or dealer
would have charged for effecting the transaction in recognition of the value of
brokerage and research services provided by the broker or dealer. In addition
to agency transactions, the Adviser may receive brokerage and research services
in connection with certain riskless principal transactions, in accordance with
applicable SEC guidance. Brokerage and research services include: (1)
furnishing advice as to the value of securities, the advisability of investing
in, purchasing or selling securities, and the availability of securities or
purchasers or sellers of securities; (2) furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts; and (3) effecting
securities transactions and performing functions incidental
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thereto (such as clearance, settlement, and custody). In the case of research
services, the Adviser believes that access to independent investment research
is beneficial to its investment decision-making processes and, therefore, to
the Fund.
To the extent research services may be a factor in selecting brokers, such
services may be in written form or through direct contact with individuals and
may include information as to particular companies and securities as well as
market, economic, or institutional areas and information which assists in the
valuation and pricing of investments. Examples of research-oriented services
for which the Adviser might utilize Fund commissions include research reports
and other information on the economy, industries, sectors, groups of
securities, individual companies, statistical information, political
developments, technical market action, pricing and appraisal services, credit
analysis, risk measurement analysis, performance and other analysis. The
Adviser may use research services furnished by brokers in servicing all client
accounts and not all services may necessarily be used by the Adviser in
connection with the Fund or any other specific client account that paid
commissions to the broker providing such services. Information so received by
the Adviser will be in addition to and not in lieu of the services required to
be performed by the Adviser under the Advisory Agreement. Any advisory or other
fees paid to the Adviser are not reduced as a result of the receipt of research
services.
In some cases the Adviser may receive a service from a broker that has both a
"research" and a "non-research" use. When this occurs, the Adviser makes a good
faith allocation, under all the circumstances, between the research and
non-research uses of the service. The percentage of the service that is used
for research purposes may be paid for with client commissions, while the
Adviser will use its own funds to pay for the percentage of the service that is
used for non-research purposes. In making this good faith allocation, the
Adviser faces a potential conflict of interest, but the Adviser believes that
its allocation procedures are reasonably designed to ensure that it
appropriately allocates the anticipated use of such services to their research
and non-research uses.
From time to time, the Adviser may purchase new issues of securities for
clients, including the Fund, in a fixed price offering. In these situations,
the seller may be a member of the selling group that will, in addition to
selling securities, provide the Adviser with research services. The Financial
Industry Regulatory Authority, Inc. ("FINRA") has adopted rules expressly
permitting these types of arrangements under certain circumstances. Generally,
the seller will provide research "credits" in these situations at a rate that
is higher than that which is available for typical secondary market
transactions. These arrangements may not fall within the safe harbor of Section
28(e).
BROKERAGE WITH FUND AFFILIATES. The Fund may execute brokerage or other agency
transactions through registered broker-dealer affiliates of either the Fund,
the Adviser or the Distributor for a commission in conformity with the 1940
Act, the 1934 Act and rules promulgated by the SEC. These rules require that
commissions paid to the affiliate by the Fund for exchange transactions not
exceed "usual and customary" brokerage commissions. The rules define "usual and
customary" commissions to include amounts which are "reasonable and fair
compared to the commission, fee or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable period of time." The Trustees, including those who are not
"interested persons" of the Fund, have adopted procedures for evaluating the
reasonableness of commissions paid to affiliates and review these procedures
periodically.
As of the date of this SAI, Petershill Non-U.S. Master L.P. (the "GS
Shareholder"), which is a fund managed by Goldman Sachs Asset Management
International, held approximately 9.7 percent of the shares in WCG. The GS
Shareholder is not involved in the day-to-day management of WCG but pursuant to
a shareholders agreement has the right to approve certain limited matters in
respect of WCG.
WCG has granted the GS Shareholder and its related entities and their respective
clients an entitlement to make investments in each investment fund or other
collective investment scheme that is managed or advised by WCG or any of its
affiliates of up to 15 percent (15%) of the assets under management of such fund
or scheme. This entitlement applies to the offer of shares in the Fund.
SECURITIES OF "REGULAR BROKER-DEALERS." The Fund is required to identify any
securities of its "regular brokers and dealers" (as such term is defined in the
1940 Act) that the Fund held during its most recent fiscal year. Because the
Fund has not commenced operations, as of the date of this SAI, the Fund does
not hold any securities of "regular brokers and dealers."
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PORTFOLIO TURNOVER RATE. Portfolio turnover rate is defined under SEC rules as
the greater of the value of the securities purchased or securities sold,
excluding all securities whose maturities at the time of acquisition were
one-year or less, divided by the average monthly value of such securities owned
during the year. Based on this definition, instruments with remaining
maturities of less than one-year are excluded from the calculation of the
portfolio turnover rate. The Fund may at times hold investments in other
short-term instruments, such as repurchase agreements, which are excluded for
purposes of computing portfolio turnover. Portfolio turnover rate is not
considered a limiting factor in the execution of investment decisions for the
Fund and, therefore, the Fund's annual portfolio turnover rate may exceed 100%
under normal circumstances. Because it is difficult to predict accurately
portfolio turnover rates, actual turnover may be higher or lower than expected.
Higher portfolio turnover results in increased Fund costs, including brokerage
commissions, dealer mark-ups and other transaction costs on the sale of
securities and on the reinvestment in other securities.
PORTFOLIO HOLDINGS
The Board has approved a policy and procedures that govern the timing and
circumstances regarding the disclosure of Fund portfolio holdings information
to shareholders and third parties. These policies and procedures are designed
to ensure that disclosure of information regarding the Fund's portfolio
securities is in the best interests of Fund shareholders, and include
procedures to address conflicts between the interests of the Fund's
shareholders, on the one hand, and those of the Adviser, principal underwriter
or any affiliated person of the Fund, Adviser or principal underwriter, on the
other. Pursuant to such procedures, the Board has authorized the Adviser's
Chief Compliance Officer (the "Authorized Person") to authorize the release of
the Fund's portfolio holdings, as necessary, in conformity with the foregoing
principles. The Authorized Person reports at least quarterly to the Board
regarding the implementation of such policies and procedures.
Pursuant to applicable law, the Fund is required to disclose its complete
portfolio holdings quarterly, within 60 days of the end of each fiscal quarter
(currently, each January 31, April 30, July 31 and October 31). The Fund
discloses a complete schedule of investments in each Semi-Annual Report and
Annual Report to Fund shareholders following the second and fourth fiscal
quarters and in quarterly holdings reports filed with the SEC on Form N-Q
following the first and third fiscal quarters. Semi-Annual and Annual Reports
are distributed to Fund shareholders. Quarterly holdings reports filed with the
SEC on Form N-Q are not distributed to Fund shareholders, but are available,
free of charge, on the EDGAR database on the SEC's website at WWW.SEC.GOV.
The Fund's policies and procedures provide that the Authorized Person may
authorize disclosure of portfolio holdings information to third parties at
differing times and/or with different lag times than the information posted to
the internet; provided that the recipient is, either by contractual agreement
or otherwise by law, (i) required to maintain the confidentiality of the
information and (ii) prohibited from using the information to facilitate or
assist in any securities transactions or investment program. The Fund will
review a third party's request for portfolio holdings information to determine
whether the third party has legitimate business objectives in requesting such
information.
The Trust's policies and procedures prohibit any compensation or other
consideration from being paid to or received by any party in connection with
the disclosure of portfolio holdings information, including the Fund, Adviser
and their affiliates or any recipient of the Fund's portfolio holdings
information.
In addition, the Fund's service providers, such as the Custodian, Administrator
and Transfer Agent, may receive portfolio holdings information as frequently as
daily in connection with their services to the Fund. In addition to any
contractual provisions relating to confidentiality of information that may be
included in the service providers' contracts with the Trust, these arrangements
impose obligations on the Fund's service providers that would prohibit them
from disclosing or trading on the Fund's non-public
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information. Financial printers and pricing information vendors may receive
portfolio holdings information, as necessary, in connection with their services
to the Fund. The Administrator may disclose portfolio holdings information to
rating agencies and similar parties as part of its services to the Fund if such
disclosure is made in the best interests of shareholders, as determined by the
Trust's president and chief compliance officer. Portfolio holdings information
may be disclosed no more frequently than monthly to such parties. Monthly
disclosures will not be made sooner than three (3) days after the date of the
information.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of
shares of the Fund, each of which represents an equal proportionate interest in
the Fund with each other share. Shares are entitled upon liquidation to a pro
rata share in the net assets of the Fund. Shareholders have no pre-emptive
rights. The Declaration of Trust provides that the Trustees may create
additional classes of shares. Share certificates representing shares will not
be issued. The Fund's shares, when issued, are fully paid and non-assessable.
LIMITATION OF TRUSTEES' LIABILITY
[To be inserted]
PROXY VOTING
The Board has delegated responsibility for decisions regarding proxy voting for
securities held by the Fund to the Adviser. The Adviser will vote such proxies
in accordance with its proxy policies and procedures, which are included in
Appendix B to this SAI.
The Fund is required to disclose annually the Fund's complete proxy voting
record during the most recent 12-month period ended June 30 on Form N-PX. This
voting record is available: (i) without charge, upon request, by calling [____]
and (ii) on the SEC's website at http://www.sec.gov.
CODES OF ETHICS
The Board, on behalf of the Fund, has adopted a Code of Ethics pursuant to Rule
17j-1 under the 1940 Act. In addition, the Adviser and the Distributor have
adopted Codes of Ethics pursuant to Rule 17j-1. These Codes of Ethics apply to
the personal investing activities of trustees, directors, officers, and certain
employees ("Access Persons"). Rule 17j-1 and the Codes of Ethics are designed
to prevent unlawful practices in connection with the purchase or sale of
securities by Access Persons. Under each Code of Ethics, Access Persons are
permitted to engage in personal securities transactions, but are generally
required to pre clear their personal securities transactions, including private
investments and IPOs and must report their holdings for monitoring purposes.
Access Persons may engage in personal securities transactions in securities
that are held by the Fund, subject to the limitations of the Codes of Ethics.
Copies of these Codes of Ethics are on file with the SEC, and are available to
the public.
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CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of the date of this SAI, the Fund could be deemed to be under the control of
its seed investor, who has voting authority with respect to 100% of the value
of the outstanding interests of the Fund on such date. The seed investor is an
affiliate of the Adviser. It is expected that once the Fund commences
operations and its shares are sold to the public that the seed investor's
control will be diluted until such time as the Fund is controlled by its
unaffiliated shareholders. As of the date of this SAI, the current Trustees and
officers of the Fund did not own any shares of the Fund.
Any person who beneficially owns 25% or more of the outstanding shares of the
Fund may be presumed to "control" (as that term is defined in the 1940 Act) the
Fund. Shareholders controlling the Fund may have a significant impact on any
shareholder vote of the Fund.
FINANCIAL STATEMENTS
[To be included by amendment.]
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APPENDIX A- DESCRIPTION OF RATINGS
The following descriptions of securities ratings have been published by Moody's
Investors Services, Inc. ("Moody's"), Standard & Poor's ("S&P"), and Fitch
Ratings ("Fitch"), respectively.
DESCRIPTION OF MOODY'S GLOBAL RATINGS
Ratings assigned on Moody's global long-term and short-term rating scales are
forward-looking opinions of the relative credit risks of financial obligations
issued by non-financial corporates, financial institutions, structured finance
vehicles, project finance vehicles, and public sector entities. Long-term
ratings are assigned to issuers or obligations with an original maturity of one
year or more and reflect both on the likelihood of a default on contractually
promised payments and the expected financial loss suffered in the event of
default. Short-term ratings are assigned to obligations with an original
maturity of thirteen months or less and reflect the likelihood of a default on
contractually promised payments.
DESCRIPTION OF MOODY'S GLOBAL LONG-TERM RATINGS
Aaa Obligations rated Aaa are judged to be of the highest quality, subject to
the lowest level of credit risk.
Aa Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
A Obligations rated A are considered upper-medium grade and are subject to low
credit risk.
Baa Obligations rated Baa are judged to be medium-grade and subject to moderate
credit risk and as such may possess certain speculative characteristics.
Ba Obligations rated Ba are judged to be speculative and are subject to
substantial credit risk.
B Obligations rated B are considered speculative and are subject to high credit
risk.
Caa Obligations rated Caa are judged to be speculative of poor standing and are
subject to very high credit risk.
Ca Obligations rated Ca are highly speculative and are likely in, or very near,
default, with some prospect of recovery of principal and interest.
C Obligations rated C are the lowest rated and are typically in default, with
little prospect for recovery of principal or interest.
NOTE: Moody's appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
HYBRID INDICATOR (HYB)
The hybrid indicator (hyb) is appended to all ratings of hybrid securities
issued by banks, insurers, finance companies, and securities firms. By their
terms, hybrid securities allow for the omission of scheduled dividends,
interest, or principal payments, which can potentially result in impairment if
such an omission occurs. Hybrid securities may also be subject to contractually
allowable write-downs of principal that
A-1
could result in impairment. Together with the hybrid indicator, the long-term
obligation rating assigned to a hybrid security is an expression of the
relative credit risk associated with that security.
DESCRIPTION OF MOODY'S GLOBAL SHORT-TERM RATINGS
P-1 Issuers (or supporting institutions) rated Prime-1 have a superior ability
to repay short-term debt obligations.
P-2 Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
P-3 Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability to repay short-term obligations.
NP Issuers (or supporting institutions) rated Not Prime do not fall within any
of the Prime rating categories.
DESCRIPTION OF MOODY'S U.S. MUNICIPAL SHORT-TERM OBLIGATION RATINGS
The Municipal Investment Grade ("MIG") scale is used to rate U.S. municipal
bond anticipation notes of up to three years maturity. Municipal notes rated on
the MIG scale may be secured by either pledged revenues or proceeds of a
take-out financing received prior to note maturity. MIG ratings expire at the
maturity of the obligation, and the issuer's long-term rating is only one
consideration in assigning the MIG rating. MIG ratings are divided into three
levels--MIG 1 through MIG 3--while speculative grade short-term obligations are
designated SG.
Moody's U.S. municipal short-term obligation ratings are as follows:
MIG 1 This designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for refinancing.
MIG 2 This designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group.
MIG 3 This designation denotes acceptable credit quality. Liquidity and
cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG This designation denotes speculative-grade credit quality. Debt instruments
in this category may lack sufficient margins of protection.
DESCRIPTION OF MOODY'S DEMAND OBLIGATION RATINGS
In the case of variable rate demand obligations ("VRDOs"), a two-component
rating is assigned: a long or short-term debt rating and a demand obligation
rating. The first element represents Moody's evaluation of risk associated with
scheduled principal and interest payments. The second element represents
Moody's evaluation of risk associated with the ability to receive purchase
price upon demand ("demand feature"). The second element uses a rating from a
variation of the MIG scale called the Variable Municipal Investment Grade
("VMIG") scale.
Moody's demand obligation ratings are as follows:
A-2
VMIG 1 This designation denotes superior credit quality. Excellent protection
is afforded by the superior short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
VMIG 2 This designation denotes strong credit quality. Good protection is
afforded by the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of purchase
price upon demand.
VMIG 3 This designation denotes acceptable credit quality. Adequate protection
is afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
SG This designation denotes speculative-grade credit quality. Demand features
rated in this category may be supported by a liquidity provider that does not
have an investment grade short-term rating or may lack the structural and/or
legal protections necessary to ensure the timely payment of purchase price upon
demand.
DESCRIPTION OF S&P'S ISSUE CREDIT RATINGS
An S&P's issue credit rating is a forward-looking opinion about the
creditworthiness of an obligor with respect to a specific financial obligation,
a specific class of financial obligations, or a specific financial program
(including ratings on medium-term note programs and commercial paper programs).
It takes into consideration the creditworthiness of guarantors, insurers, or
other forms of credit enhancement on the obligation and takes into account the
currency in which the obligation is denominated. The opinion reflects S&P's
view of the obligor's capacity and willingness to meet its financial
commitments as they come due, and may assess terms, such as collateral security
and subordination, which could affect ultimate payment in the event of
default.
Issue credit ratings can be either long-term or short-term. Short-term ratings
are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days--including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. Medium-term notes are
assigned long-term ratings.
Issue credit ratings are based, in varying degrees, on S&P's analysis of the
following considerations:
o Likelihood of payment--capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
o Nature of and provisions of the obligation; and the promise S&P imputes;
o Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditors' rights.
Issue ratings are an assessment of default risk, but may incorporate an
assessment of relative seniority or ultimate recovery in the event of default.
Junior obligations are typically rated lower than senior obligations, to
reflect the lower priority in bankruptcy. (Such differentiation may apply when
an entity has both senior and subordinated obligations, secured and unsecured
obligations, or operating company and holding company obligations.)
A-3
DESCRIPTION OF S&P'S LONG-TERM ISSUE CREDIT RATINGS*
AAA An obligation rated 'AAA' has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA An obligation rated 'AA' differs from the highest-rated obligations only to
a small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A An obligation rated 'A' is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead
to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB; B; CCC; CC; AND C Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are
regarded as having significant speculative characteristics. 'BB' indicates the
least degree of speculation and 'C' the highest. While such obligations will
likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated 'BB' is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated 'CC' is currently highly vulnerable to nonpayment. The
'CC' rating is used when a default has not yet occurred, but S&P expects default
to be a virtual certainty, regardless of the anticipated time to default.
C An obligation rated 'C' is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared to obligations that are rated higher.
D An obligation rated 'D' is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the 'D' rating category is used when payments
on an obligation are not made on the date due, unless S&P believes that such
payments will be made within five business days in the absence of a stated
grace period or within the earlier of the stated grace period or 30 calendar
days. The 'D' rating also will be used upon the filing of a bankruptcy petition
or the taking of similar action and where default on an obligation is a virtual
certainty, for example due to automatic stay provisions. An obligation's rating
is lowered to 'D' if it is subject to a distressed exchange offer.
A-4
NR This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
obligation as a matter of policy.
* The ratings from 'AA' to 'CCC' may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within the major rating
categories.
DESCRIPTION OF S&P'S SHORT-TERM ISSUE CREDIT RATINGS
A-1 A short-term obligation rated 'A-1' is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2 A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
A-3 A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B A short-term obligation rated 'B' is regarded as vulnerable and has
significant speculative characteristics. The obligor currently has the capacity
to meet its financial commitments; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitments.
C A short-term obligation rated 'C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
D A short-term obligation rated 'D' is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the 'D' rating category is used
when payments on an obligation are not made on the date due, unless S&P
believes that such payments will be made within any stated grace period.
However, any stated grace period longer than five business days will be treated
as five business days. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of a similar action and where default on an
obligation is a virtual certainty, for example due to automatic stay
provisions. An obligation's rating is lowered to 'D' if it is subject to a
distressed exchange offer.
DESCRIPTION OF S&P'S MUNICIPAL SHORT-TERM NOTE RATINGS
An S&P's U.S. municipal note rating reflects S&P's opinion about the liquidity
factors and market access risks unique to the notes. Notes due in three years
or less will likely receive a note rating. Notes with an original maturity of
more than three years will most likely receive a long-term debt rating. In
determining which type of rating, if any, to assign, S&P's analysis will review
the following considerations:
o Amortization schedule--the larger the final maturity relative to other
maturities, the more likely it will be treated as a note; and
o Source of payment--the more dependent the issue is on the market for its
refinancing, the more likely it will be treated as a note.
A-5
S&P's municipal short-term note ratings are as follows:
SP-1 Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3 Speculative capacity to pay principal and interest.
DESCRIPTION OF FITCH'S CREDIT RATINGS
Fitch's credit ratings provide an opinion on the relative ability of an entity
to meet financial commitments, such as interest, preferred dividends, repayment
of principal, insurance claims or counterparty obligations. Credit ratings are
used by investors as indications of the likelihood of receiving the money owed
to them in accordance with the terms on which they invested.
The terms "investment grade" and "speculative grade" have established
themselves over time as shorthand to describe the categories 'AAA' to 'BBB'
(investment grade) and 'BB' to 'D' (speculative grade). The terms "investment
grade" and "speculative grade" are market conventions, and do not imply any
recommendation or endorsement of a specific security for investment purposes.
"Investment grade" categories indicate relatively low to moderate credit risk,
while ratings in the "speculative" categories either signal a higher level of
credit risk or that a default has already occurred.
Fitch's credit ratings do not directly address any risk other than credit risk.
In particular, ratings do not deal with the risk of a market value loss on a
rated security due to changes in interest rates, liquidity and other market
considerations. However, in terms of payment obligation on the rated liability,
market risk may be considered to the extent that it influences the ABILITY of
an issuer to pay upon a commitment. Ratings nonetheless do not reflect market
risk to the extent that they influence the size or other conditionality of the
OBLIGATION to pay upon a commitment (for example, in the case of index-linked
bonds).
In the default components of ratings assigned to individual obligations or
instruments, the agency typically rates to the likelihood of non-payment or
default in accordance with the terms of that instrument's documentation. In
limited cases, Fitch may include additional considerations (i.e. rate to a
higher or lower standard than that implied in the obligation's documentation).
In such cases, the agency will make clear the assumptions underlying the
agency's opinion in the accompanying rating commentary.
DESCRIPTION OF FITCH'S LONG-TERM CORPORATE FINANCE OBLIGATIONS RATINGS
AAA Highest credit quality. 'AAA' ratings denote the lowest expectation of
credit risk. They are assigned only in cases of exceptionally strong capacity
for payment of financial commitments. This capacity is highly unlikely to be
adversely affected by foreseeable events.
AA Very high credit quality. 'AA' ratings denote expectations of very low
credit risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable
events.
A-6
A High credit quality. 'A' ratings denote expectations of low credit risk. The
capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher ratings.
BBB Good credit quality. 'BBB' ratings indicate that expectations of credit
risk are currently low. The capacity for payment of financial commitments is
considered adequate but adverse business or economic conditions are more likely
to impair this capacity.
BB Speculative. 'BB' ratings indicate an elevated vulnerability to credit risk,
particularly in the event of adverse changes in business or economic conditions
over time; however, business or financial alternatives may be available to
allow financial commitments to be met.
B Highly speculative. 'B' ratings indicate that material credit risk is
present.
CCC Substantial credit risk. 'CCC' ratings indicate that substantial credit
risk is present.
CC Very high levels of credit risk. 'CC' ratings indicate very high levels of
credit risk.
C Exceptionally high levels of credit risk. 'C' ratings indicate exceptionally
high levels of credit risk.
NR This designation is used to denote securities not rated by Fitch where Fitch
has rated some, but not all, securities comprising an issuance capital
structure.
WD This designation indicates that the rating has been withdrawn and the issue
or issuer is no longer rated by Fitch.
Note: The modifiers "+" or "-" may be appended to a rating to denote relative
status within major rating categories. Such suffixes are not added to the 'AAA'
obligation rating category, or to corporate finance obligation ratings in the
categories below 'CCC'.
DESCRIPTION OF FITCH'S SHORT-TERM RATINGS
A short-term issuer or obligation rating is based in all cases on the
short-term vulnerability to default of the rated entity or security stream and
relates to the capacity to meet financial obligations in accordance with the
documentation governing the relevant obligation. Short-Term Ratings are
assigned to obligations whose initial maturity is viewed as "short term" based
on market convention. Typically, this means up to 13 months for corporate,
sovereign, and structured obligations, and up to 36 months for obligations in
U.S. public finance markets.
Fitch's short-term ratings are as follows:
F1 Highest short-term credit quality. Indicates the strongest intrinsic
capacity for timely payment of financial commitments; may have an added "+" to
denote any exceptionally strong credit feature.
F2 Good short-term credit quality. Good intrinsic capacity for timely payment
of financial commitments.
F3 Fair short-term credit quality. The intrinsic capacity for timely payment of
financial commitments is adequate.
B Speculative short-term credit quality. Minimal capacity for timely payment of
financial commitments, plus heightened vulnerability to near term adverse
changes in financial and economic conditions.
A-7
C High short-term default risk. Default is a real possibility.
RD Restricted default. Indicates an entity that has defaulted on one or more of
its financial commitments, although it continues to meet other financial
obligations. Applicable to entity ratings only.
D Default. Indicates a broad-based default event for an entity, or the default
of a short-term obligation.
NR This designation is used to denote securities not rated by Fitch where Fitch
has rated some, but not all, securities comprising an issuance capital
structure.
WD This designation indicates that the rating has been withdrawn and the issue
or issuer is no longer rated by Fitch.
A-8
APPENDIX B --PROXY VOTING POLICIES AND PROCEDURES
WINTON CAPITAL MANAGEMENT LIMITED [GRAPHIC OMITTED]
PROXY VOTING POLICY Grove House
October 2014 27 Hammersmith Grove
London W6 0NE
Tel: +44 (0)20 8576 5800
Fax: +44 (0)20 7610 5301
Winton Capital Group Limited and/or its affiliates ("Winton") has authority to
vote proxies on behalf of its clients, including Winton-sponsored funds and
third party funds and managed accounts, which have delegated voting authority to
Winton.
Winton has engaged Institutional Shareholder Services ("ISS") to provide proxy
voting guidelines and to vote proxies for Winton. ISS is an unaffiliated service
provider that assists institutional investors in meeting their fiduciary
requirements for proxy voting. To that end, the stated goal of ISS is to design
its proxy voting guidelines to enhance shareholders' long-term economic
interests.
Although Winton will generally rely on the recommendations of ISS, Winton
reserves the right to exercise its discretion in voting proxies and may vote
proxies in a manner other than that specifically set out by ISS.
Winton does not anticipate any conflicts in its proxy voting practices. In the
event that Winton does direct a vote, its Compliance Department will evaluate
the recommendation for any potential conflict of interest with Firm clients and
maintain documentation related to the voting decision.
In addition, there may be situations where Winton does not vote proxies. For
example, Winton may not vote proxies where:
o The cost of voting a proxy outweighs the benefit of voting the proxy;
o There are legal encumbrances to voting, including blocking restrictions
that preclude the ability to dispose of a security if Winton votes a proxy,
laws requiring the appointment of a local power of attorney to facilitate
voting instructions, laws requiring Winton to obtain additional consents
from clients or beneficial owners to vote a proxy, or other cases where
Winton is prohibited from voting by applicable legal or market
requirements;
o Winton has not been provided sufficient time to process the voting of a
proxy;
o Winton has outstanding sell orders on a company's shares, or otherwise
intends to sell a company's shares, prior to the company's meeting date; or
o Winton holds shares on a company's record date, but sells those shares
prior to the company's meeting date.
Investors may contact Winton to request information about ISS' policy
formulation process and a quarterly record of all proxy votes cast on behalf of
clients.
www.WintonCapital.com
Winton Capital Management Limited. Authorised and Regulated by The Financial
Conduct Authority Registered Office: 16 Old Bailey, London EC4M 7EG.
Registered in England & Wales No: 3311531
B-1
ISS
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AN MSCI BRAND
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Transparency. Inclusiveness. Global Expertise.
2014 U.S. Proxy Voting Summary Guidelines
March 12, 2014
Institutional Shareholder Services Inc.
Copyright [C] 2014 by ISS
www. issgovernance.com
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ISS' 2014 U.S. PROXY VOTING SUMMARY GUIDELINES
Effective for Meetings on or after Feb. 1, 2014
Published Dec. 19, 2013
Updated March 12, 2014
TABLE OF CONTENTS
1. ROUTINE/MISCELLANEOUS 7
Adjourn Meeting 7
Amend Quorum Requirements 7
Amend Minor Bylaws 7
Change Company Name 7
Change Date, Time, or Location of Annual Meeting 7
Other Business 7
AUDIT-RELATED 8
Auditor Indemnification and Limitation of Liability 8
Auditor Ratification 8
Shareholder Proposals Limiting Non-Audit Services 8
Shareholder Proposals on Audit Firm Rotation 9
2. BOARD OF DIRECTORS: 10
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS 10
1. Accountability 10
2. Responsiveness 12
3. Composition 13
4. Independence 14
2014 ISS Categorization of Directors 15
OTHER BOARD-RELATED PROPOSALS 17
Age/Term Limits 17
Board Size 17
Classification/Declassification of the Board 17
CEO Succession Planning 18
Cumulative Voting 18
Director and Officer Indemnification and Liability Protection 18
Establish/Amend Nominee Qualifications 19
Establish Other Board Committee Proposals 19
Filling Vacancies/Removal of Directors 19
Independent Chair (Separate Chair/CEO) 19
Majority of Independent Directors/Establishment of
Independent Committees 20
Majority Vote Standard for the Election of Directors 20
Proxy Access 21
Require More Nominees than Open Seats 21
Shareholder Engagement Policy (Shareholder Advisory Committee) 21
Proxy Contests--Voting for Director Nominees in
Contested Elections 21
Vote-No Campaigns 22
3. SHAREHOLDER RIGHTS & DEFENSES 23
Advance Notice Requirements for Shareholder
Proposals/Nominations 23
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Amend Bylaws without Shareholder Consent 23
Control Share Acquisition Provisions 23
Control Share Cash-Out Provisions 23
Disgorgement Provisions 24
Exclusive Venue 24
Fair Price Provisions 24
Freeze-Out Provisions 24
Greenmail 25
Net Operating Loss (NOL) Protective Amendments 25
Poison Pills (Shareholder Rights Plans) 25
Shareholder Proposals to Put Pill to a Vote and/or Adopt
a Pill Policy 25
Management Proposals to Ratify a Poison Pill 26
Management Proposals to Ratify a Pill to Preserve Net
Operating Losses (NOLs) 26
Proxy Voting Disclosure, Confidentiality, and Tabulation 26
Reimbursing Proxy Solicitation Expenses 27
Reincorporation Proposals 27
Shareholder Ability to Act by Written Consent 27
Shareholder Ability to Call Special Meetings 28
Stakeholder Provisions 28
State Antitakeover Statutes 28
Supermajority Vote Requirements 28
4. CAPITAL/RESTRUCTURING 29
CAPITAL 29
Adjustments to Par Value of Common Stock 29
Common Stock Authorization 29
Dual Class Structure 29
Issue Stock for Use with Rights Plan 30
Preemptive Rights 30
Preferred Stock Authorization 30
Recapitalization Plans 30
Reverse Stock Splits 31
Share Repurchase Programs 31
Stock Distributions: Splits and Dividends 31
Tracking Stock 31
RESTRUCTURING 31
Appraisal Rights 31
Asset Purchases 31
Asset Sales 32
Bundled Proposals 32
Conversion of Securities 32
Corporate Reorganization/Debt Restructuring/Prepackaged
Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap
Plans 32
Formation of Holding Company 33
Going Private and Going Dark Transactions (LBOs
and Minority Squeeze-outs) 33
Joint Ventures 34
Liquidations 34
Mergers and Acquisitions 34
Private Placements/Warrants/Convertible Debentures 35
Reorganization/Restructuring Plan (Bankruptcy) 36
Special Purpose Acquisition Corporations (SPACs) 36
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Spin-offs 37
Value Maximization Shareholder Proposals 37
5. COMPENSATION 38
EXECUTIVE PAY EVALUATION 38
Advisory Votes on Executive Compensation--Management Proposals
(Management Say-on-Pay) 38
Pay-for-Performance Evaluation 39
Problematic Pay Practices 40
Compensation Committee Communications and Responsiveness 41
Frequency of Advisory Vote on Executive Compensation
("Say When on Pay") 41
Voting on Golden Parachutes in an Acquisition, Merger,
Consolidation, or Proposed Sale 41
EQUITY-BASED AND OTHER INCENTIVE PLANS 42
Cost of Equity Plans 42
Repricing Provisions 42
Pay-for-Performance Misalignment--Application to Equity Plans 43
Three-Year Burn Rate/Burn Rate Commitment 43
Burn Rate Table for 2014 44
Liberal Definition of Change in Control 45
Problematic Pay Practices 45
Specific Treatment of Certain Award Types in Equity Plan
Evaluations 45
Dividend Equivalent Rights 45
Liberal Share Recycling Provisions 45
Operating Partnership (OP) Units in Equity Plan Analysis of
Real Estate Investment Trusts (REITs) 45
Option Overhang Cost 46
Other Compensation Plans 46
401(k) Employee Benefit Plans 46
Employee Stock Ownership Plans (ESOPs) 46
Employee Stock Purchase Plans--Qualified Plans 46
Employee Stock Purchase Plans--Non-Qualified Plans 47
Incentive Bonus Plans and Tax Deductibility Proposals
(OBRA-Related Compensation Proposals) 47
Option Exchange Programs/Repricing Options 48
Stock Plans in Lieu of Cash 48
Transfer Stock Option (TSO) Programs 49
DIRECTOR COMPENSATION 49
Equity Plans for Non-Employee Directors 49
Non-Employee Director Retirement Plans 50
SHAREHOLDER PROPOSALS ON COMPENSATION 50
Advisory Vote on Executive Compensation (Say-on-Pay) 50
Adopt Anti-Hedging/Pledging/Speculative Investments Policy 50
Bonus Banking/Bonus Banking "Plus" 50
Compensation Consultants--Disclosure of Board or Company's
Utilization 50
Disclosure/Setting Levels or Types of Compensation for
Executives and Directors 51
Golden Coffins/Executive Death Benefits 51
Hold Equity Past Retirement or for a Significant Period
of Time 51
Non-Deductible Compensation 52
Pay for Performance 52
Performance-Based Awards 52
Pay for Superior Performance 53
Pre-Arranged Trading Plans (10b5-1 Plans) 53
Prohibit CEOs from Serving on Compensation Committees 54
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Recoupment of Incentive or Stock Compensation in Specified
Circumstances 54
Severance Agreements for Executives/Golden Parachutes 54
Share Buyback Holding Periods 55
Supplemental Executive Retirement Plans (SERPs) 55
Tax Gross-Up Proposals 55
Termination of Employment Prior to Severance Payment/Eliminating
Accelerated Vesting of Unvested Equity 55
6. SOCIAL/ENVIRONMENTAL ISSUES 56
ANIMAL WELFARE 56
Animal Welfare Policies 56
Animal Testing 56
Animal Slaughter 57
CONSUMER ISSUES 57
Genetically Modified Ingredients 57
Reports on Potentially Controversial Business/Financial
Practices 57
Pharmaceutical Pricing, Access to Medicines, and Prescription
Drug Reimportation 57
Product Safety and Toxic/Hazardous Materials 58
Tobacco-Related Proposals 58
CLIMATE CHANGE 59
Climate Change/Greenhouse Gas (GHG) Emissions 59
Energy Efficiency 60
Renewable Energy 60
DIVERSITY 60
Board Diversity 60
Equality of Opportunity 61
Gender Identity, Sexual Orientation, and Domestic Partner
Benefits 61
ENVIRONMENT AND SUSTAINABILITY 61
Facility and Workplace Safety 61
General Environmental Proposals and Community Impact
Assessments 62
Hydraulic Fracturing 62
Operations in Protected Areas 62
Recycling 62
Sustainability Reporting 63
Water Issues 63
GENERAL CORPORATE ISSUES 63
Charitable Contributions 63
Data Security, Privacy, and Internet Issues 63
Environmental, Social, and Governance (ESG)
Compensation-Related Proposals 64
HUMAN RIGHTS, LABOR ISSUES, AND INTERNATIONAL OPERATIONS 64
Human Rights Proposals 64
Operations in High Risk Markets 65
Outsourcing/Offshoring 65
Weapons and Military Sales 65
POLITICAL ACTIVITIES 65
Lobbying 65
Political Contributions 66
Political Ties 66
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7. MUTUAL FUND PROXIES 67
Election of Directors 67
Converting Closed-end Fund to Open-end Fund 67
Proxy Contests 67
Investment Advisory Agreements 67
Approving New Classes or Series of Shares 67
Preferred Stock Proposals 68
1940 Act Policies 68
Changing a Fundamental Restriction to a Nonfundamental Restriction 68
Change Fundamental Investment Objective to Nonfundamental 68
Name Change Proposals 68
Change in Fund's Subclassification 69
Business Development Companies--Authorization to Sell Shares of
Common Stock at a Price below Net Asset Value 69
Disposition of Assets/Termination/Liquidation 69
Changes to the Charter Document 69
Changing the Domicile of a Fund 70
Authorizing the Board to Hire and Terminate Subadvisers Without
Shareholder Approval 70
Distribution Agreements 70
Master-Feeder Structure 70
Mergers 70
SHAREHOLDER PROPOSALS FOR MUTUAL FUNDS 71
Establish Director Ownership Requirement 71
Reimburse Shareholder for Expenses Incurred 71
Terminate the Investment Advisor 71
8. FOREIGN PRIVATE ISSUERS LISTED ON U.S. EXCHANGES 72
DISCLOSURE/DISCLAIMER 73
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1. ROUTINE/MISCELLANEOUS
ADJOURN MEETING
Generally vote against proposals to provide management with the authority to
adjourn an annual or special meeting absent compelling reasons to support the
proposal.
Vote for proposals that relate specifically to soliciting votes for a merger or
transaction if supporting that merger or transaction. Vote against proposals if
the wording is too vague or if the proposal includes "other business."
ooooo
AMEND QUORUM REQUIREMENTS
Vote against proposals to reduce quorum requirements for shareholder meetings
below a majority of the shares outstanding unless there are compelling reasons
to support the proposal.
ooooo
AMEND MINOR BYLAWS
Vote for bylaw or charter changes that are of a housekeeping nature (updates or
corrections).
ooooo
CHANGE COMPANY NAME
Vote for proposals to change the corporate name unless there is compelling
evidence that the change would adversely impact shareholder value.
ooooo
CHANGE DATE, TIME, OR LOCATION OF ANNUAL MEETING
Vote for management proposals to change the date, time, or location of the
annual meeting unless the proposed change is unreasonable.
Vote against shareholder proposals to change the date, time, or location of the
annual meeting unless the current scheduling or location is unreasonable.
ooooo
OTHER BUSINESS
Vote against proposals to approve other business when it appears as voting
item.
ooooo
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AUDIT-RELATED
AUDITOR INDEMNIFICATION AND LIMITATION OF LIABILITY
Vote case-by-case on the issue of auditor indemnification and limitation of
liability. Factors to be assessed include, but are not limited to:
o The terms of the auditor agreement--the degree to which these agreements
impact shareholders' rights;
o The motivation and rationale for establishing the agreements;
o The quality of the company's disclosure; and
o The company's historical practices in the audit area.
Vote against or withhold from members of an audit committee in situations where
there is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits the
ability of the company, or its shareholders, to pursue legitimate legal
recourse against the audit firm.
ooooo
AUDITOR RATIFICATION
Vote for proposals to ratify auditors unless any of the following apply:
o An auditor has a financial interest in or association with the company, and
is therefore not independent;
o There is reason to believe that the independent auditor has rendered an
opinion that is neither accurate nor
indicative of the company's financial position;
o Poor accounting practices are identified that rise to a serious level of
concern, such as: fraud; misapplication of
GAAP; and material weaknesses identified in Section 404 disclosures; or
o Fees for non-audit services ("Other" fees) are excessive.
Non-audit fees are excessive if:
o Non-audit ("other") fees > audit fees + audit-related fees + tax
compliance/preparation fees
Tax compliance and preparation include the preparation of original and amended
tax returns and refund claims, and tax payment planning. All other services in
the tax category, such as tax advice, planning, or consulting, should be added
to
"Other" fees. If the breakout of tax fees cannot be determined, add all tax
fees to "Other" fees.
In circumstances where "Other" fees include fees related to significant
one-time capital structure events (such as initial public offerings, bankruptcy
emergence, and spin-offs) and the company makes public disclosure of the amount
and nature of those fees that are an exception to the standard "non-audit fee"
category, then such fees may be excluded from the non-audit fees considered in
determining the ratio of non-audit to audit/audit-related fees/tax compliance
and preparation for purposes of determining whether non-audit fees are
excessive.
ooooo
SHAREHOLDER PROPOSALS LIMITING NON-AUDIT SERVICES
Vote case-by-case on shareholder proposals asking companies to prohibit or
limit their auditors from engaging in non-audit services.
ooooo
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SHAREHOLDER PROPOSALS ON AUDIT FIRM ROTATION
Vote case-by-case on shareholder proposals asking for audit firm rotation,
taking into account:
o The tenure of the audit firm;
o The length of rotation specified in the proposal;
o Any significant audit-related issues at the company;
o The number of Audit Committee meetings held each year;
o The number of financial experts serving on the committee; and
o Whether the company has a periodic renewal process where the auditor is
evaluated for both audit quality and
competitive price.
ooooo
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2. BOARD OF DIRECTORS:
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
Four fundamental principles apply when determining votes on director nominees:
1. ACCOUNTABILITY: Boards should be sufficiently accountable to shareholders,
including through transparency of the
company's governance practices and regular board elections, by the provision of
sufficient information for
shareholders to be able to assess directors and board composition, and through
the ability of shareholders to
remove directors.
2. RESPONSIVENESS: Directors should respond to investor input, such as that
expressed through significant opposition
to management proposals, significant support for shareholder proposals (whether
binding or non-binding), and
tender offers where a majority of shares are tendered.
3. COMPOSITION: Companies should ensure that directors add value to the board
through their specific skills and
expertise and by having sufficient time and commitment to serve effectively.
Boards should be of a size
appropriate to accommodate diversity, expertise, and independence, while
ensuring active and collaborative
participation by all members.
4. INDEPENDENCE: Boards should be sufficiently independent from management (and
significant shareholders) so as
to ensure that they are able and motivated to effectively supervise
management's performance for the benefit of
all shareholders, including in setting and monitoring the execution of
corporate strategy, with appropriate use of
shareholder capital, and in setting and monitoring executive compensation
programs that support that strategy.
The chair of the board should ideally be an independent director, and all
boards should have an independent
leadership position or a similar role in order to help provide appropriate
counterbalance to executive
management, as well as having sufficiently independent committees that focus on
key governance concerns such
as audit, compensation, and nomination of directors.
GENERALLY VOTE FOR DIRECTOR NOMINEES, EXCEPT UNDER THE FOLLOWING CIRCUMSTANCES:
1. ACCOUNTABILITY
Vote against (1) or withhold from the entire board of directors (except new
nominees (2), who should be considered case-by-case) for the following:
PROBLEMATIC TAKEOVER DEFENSES
CLASSIFIED BOARD STRUCTURE:
1.1. The board is classified, and a continuing director responsible for a
problematic governance issue at the
board/committee level that would warrant a withhold/against vote recommendation
is not up for election. All
appropriate nominees (except new) may be held accountable.
DIRECTOR PERFORMANCE EVALUATION:
(1) In general, companies with a plurality vote standard use "Withhold" as the
contrary vote option in director elections; companies with a majority vote
standard use "Against". However, it will vary by company and the proxy must be
checked to determine the valid contrary vote option for the particular company.
(2) A "new nominee" is any current nominee who has not already been elected by
shareholders and who joined the board after the problematic action in question
transpired. If ISS cannot determine whether the nominee joined the board before
or after the problematic action transpired, the nominee will be considered a
"new nominee" if he or she joined the board within the 12 months prior to the
upcoming shareholder meeting.
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1.2. The board lacks accountability and oversight, coupled with sustained poor
performance relative to peers.
Sustained poor performance is measured by one- and three-year total shareholder
returns in the bottom half of
a company's four-digit GICS industry group (Russell 3000 companies only). Take
into consideration the company's
five-year total shareholder return and operational metrics. Problematic
provisions include but are not limited to:
o A classified board structure;
o A supermajority vote requirement;
o Either a plurality vote standard in uncontested director elections or a
majority vote standard with no
plurality carve-out for contested elections;
o The inability of shareholders to call special meetings;
o The inability of shareholders to act by written consent;
o A dual-class capital structure; and/or
o A non--shareholder-approved poison pill.
POISON PILLS:
1.3. The company's poison pill has a "dead-hand" or "modified dead-hand"
feature. Vote against or withhold from
nominees every year until this feature is removed;
1.4. The board adopts a poison pill with a term of more than 12 months
("long-term pill"), or renews any existing pill,
including any "short-term" pill (12 months or less), without shareholder
approval. A commitment or policy that
puts a newly adopted pill to a binding shareholder vote may potentially offset
an adverse vote recommendation.
Review such companies with classified boards every year, and such companies
with annually elected boards at
least once every three years, and vote against or withhold votes from all
nominees if the company still maintains
a non-shareholder-approved poison pill; or
1.5. The board makes a material adverse change to an existing poison pill
without shareholder approval.
Vote case-by-case on all nominees if:
1.6. The board adopts a poison pill with a term of 12 months or less
("short-term pill") without shareholder approval,
taking into account the following factors:
o The date of the pill's adoption relative to the date of the next meeting of
shareholders--i.e. whether the
company had time to put the pill on the ballot for shareholder ratification
given the circumstances;
o The issuer's rationale;
o The issuer's governance structure and practices; and
o The issuer's track record of accountability to shareholders.
PROBLEMATIC AUDIT-RELATED PRACTICES
Generally vote against or withhold from the members of the Audit Committee if:
1.7. The non-audit fees paid to the auditor are excessive (see discussion under
"AUDITOR RATIFICATION");
1.8. The company receives an adverse opinion on the company's financial
statements from its auditor; or
1.9. There is persuasive evidence that the Audit Committee entered into an
inappropriate indemnification agreement
with its auditor that limits the ability of the company, or its shareholders,
to pursue legitimate legal recourse
against the audit firm.
Vote case-by-case on members of the Audit Committee and potentially the full
board if:
1.10. Poor accounting practices are identified that rise to a level of serious
concern, such as: fraud; misapplication of
GAAP; and material weaknesses identified in Section 404 disclosures. Examine
the severity, breadth,
chronological sequence, and duration, as well as the company's efforts at
remediation or corrective actions, in
determining whether withhold/against votes are warranted.
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PROBLEMATIC COMPENSATION PRACTICES/PAY FOR PERFORMANCE MISALIGNMENT
In the absence of an Advisory Vote on Executive Compensation ballot item or in
egregious situations, vote against or withhold from the members of the
Compensation Committee and potentially the full board if:
1.11. There is a significant misalignment between CEO pay and company
performance (PAY FOR PERFORMANCE);
1.12. The company maintains significant PROBLEMATIC PAY PRACTICES;
1.13. The board exhibits a significant level of POOR COMMUNICATION AND
RESPONSIVENESS to shareholders;
1.14. The company fails to submit one-time TRANSFERS OF STOCK OPTIONS to a
shareholder vote; or
1.15. The company fails to fulfill the terms of a BURN RATE COMMITMENT made to
shareholders.
Vote case-by-case on Compensation Committee members (or, in exceptional cases,
the full board) and the Management Say-on-Pay proposal if:
o The company's previous say-on-pay proposal received the support of less than
70 percent of votes cast,
taking into account:
o The company's response, including:
o Disclosure of engagement efforts with major institutional investors regarding
the issues that
contributed to the low level of support;
o Specific actions taken to address the issues that contributed to the low
level of support;
o Other recent compensation actions taken by the company;
o Whether the issues raised are recurring or isolated;
o The company's ownership structure; and
o Whether the support level was less than 50 percent, which would warrant the
highest degree of
responsiveness.
GOVERNANCE FAILURES
Under extraordinary circumstances, vote against or withhold from directors
individually, committee members, or the entire board, due to:
1.16. Material failures of governance, stewardship, risk oversight (3), or
fiduciary responsibilities at the company;
1.17. Failure to replace management as appropriate; or
1.18. Egregious actions related to a director's service on other boards that
raise substantial doubt about his or her
ability to effectively oversee management and serve the best interests of
shareholders at any company.
2. RESPONSIVENESS
Vote case-by-case on individual directors, committee members, or the entire
board of directors as appropriate if:
2.1. The board failed to act on a shareholder proposal that received the
support of a majority of the shares cast in the
previous year. Factors that will be considered are:
o Disclosed outreach efforts by the board to shareholders in the wake of the
vote;
o Rationale provided in the proxy statement for the level of implementation;
o The subject matter of the proposal;
o The level of support for and opposition to the resolution in past meetings;
o Actions taken by the board in response to the majority vote and its
engagement with shareholders;
(3) Examples of failure of risk oversight include, but are not limited to:
bribery; large or serial fines or sanctions from regulatory bodies; significant
adverse legal judgments or settlements; hedging of company stock; or
significant pledging of company stock.
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o The continuation of the underlying issue as a voting item on the ballot (as
either shareholder or
management proposals); and
o Other factors as appropriate.
2.2. The board failed to act on takeover offers where the majority of shares
are tendered;
2.3. At the previous board election, any director received more than 50 percent
withhold/against votes of the shares
cast and the company has failed to address the issue(s) that caused the high
withhold/against vote;
2.4. The board implements an advisory vote on executive compensation on a less
frequent basis than the frequency
that received the majority of votes cast at the most recent shareholder meeting
at which shareholders voted on
the say-on-pay frequency; or
2.5. The board implements an advisory vote on executive compensation on a less
frequent basis than the frequency
that received a plurality, but not a majority, of the votes cast at the most
recent shareholder meeting at which
shareholders voted on the say-on-pay frequency, taking into account:
o The board's rationale for selecting a frequency that is different from the
frequency that received a plurality;
o The company's ownership structure and vote results;
o ISS' analysis of whether there are compensation concerns or a history of
problematic compensation
practices; and
o The previous year's support level on the company's say-on-pay proposal.
3. COMPOSITION
ATTENDANCE AT BOARD AND COMMITTEE MEETINGS:
3.1. Generally vote against or withhold from directors (except new nominees,
who should be considered case-by-
case (4)) who attend less than 75 percent of the aggregate of their board and
committee meetings for the period
for which they served, unless an acceptable reason for absences is disclosed in
the proxy or another SEC filing.
Acceptable reasons for director absences are generally limited to the
following:
o Medical issues/illness;
o Family emergencies; and
o Missing only one meeting (when the total of all meetings is three or fewer).
3.2. If the proxy disclosure is unclear and insufficient to determine whether a
director attended at least 75 percent of
the aggregate of his/her board and committee meetings during his/her period of
service, vote against or
withhold from the director(s) in question.
OVERBOARDED DIRECTORS:
Vote against or withhold from individual directors who:
3.3. Sit on more than six public company boards; or
3.4. Are CEOs of public companies who sit on the boards of more than two public
companies besides their own--
withhold only at their outside boards (5).
(4) For new nominees only, schedule conflicts due to commitments made prior to
their appointment to the board are considered if disclosed in the proxy or
another SEC filing.
(5) Although all of a CEO's subsidiary boards will be counted as separate
boards, ISS will not recommend a withhold vote from the CEO of a parent company
board or any of the controlled (>50 percent ownership) subsidiaries of that
parent, but may do so at subsidiaries that are less than 50 percent controlled
and boards outside the parent/subsidiary relationships.
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4. INDEPENDENCE
Vote against or withhold from Inside Directors and Affiliated Outside Directors
(per the CATEGORIZATION OF DIRECTORS) when:
4.1. The inside or affiliated outside director serves on any of the three key
committees: audit, compensation, or
nominating;
4.2. The company lacks an audit, compensation, or nominating committee so that
the full board functions as that
committee;
4.3. The company lacks a formal nominating committee, even if the board attests
that the independent directors
fulfill the functions of such a committee; or
4.4. Independent directors make up less than a majority of the directors.
ooooo
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2014 ISS CATEGORIZATION OF DIRECTORS
1. INSIDE DIRECTOR (I)
1.1. Current employee or current officer (I) of the company or one of its
affiliates (II).
1.2. Beneficial owner of more than 50 percent of the company's voting power
(this may be aggregated if
voting power is distributed among more than one member of a group).
1.3. Director named in the Summary Compensation Table (excluding former interim
officers).
2. AFFILIATED OUTSIDE DIRECTOR (AO)
BOARD ATTESTATION
2.1. Board attestation that an outside director is not independent.
FORMER CEO/INTERIM OFFICER
2.2. Former CEO of the company (III,IV).
2.3. Former CEO of an acquired company within the past five years (IV).
2.4. Former interim officer if the service was longer than 18 months. If the
service was between 12 and 18
months an assessment of the interim officer's employment agreement will be made
(V).
NON-CEO EXECUTIVES
2.5. Former officer (I) of the company, an affiliate (II) or an acquired firm
within the past five years.
2.6. Officer (I) of a former parent or predecessor firm at the time the company
was sold or split off from the
parent/predecessor within the past five years.
2.7. Officer (I), former officer, or general or limited partner of a joint
venture or partnership with the company.
FAMILY MEMBERS
2.8. Immediate family member (VI) of a current or former officer (I) of the
company or its affiliates (II) within the last
five years.
2.9. Immediate family member (VI) of a current employee of company or its
affiliates (II) where additional factors
raise concern (which may include, but are not limited to, the following: a
director related to numerous
employees; the company or its affiliates employ relatives of numerous board
members; or a non-
Section 16 officer in a key strategic role).
TRANSACTIONAL, PROFESSIONAL, FINANCIAL, AND CHARITABLE RELATIONSHIPS
2.10. Currently provides (or an immediate family member (VI) provides)
professional services (VII) to the company,
to an affiliate (II) of the company or an individual officer of the company or
one of its affiliates in excess of
$10,000 per year.
2.11. Is (or an immediate family member (VI) is) a partner in, or a controlling
shareholder or an employee of, an
organization which provides professional services (VII) to the company, to an
affiliate (II) of the company, or
an individual officer of the company or one of its affiliates in excess of
$10,000 per year.
2.12. Has (or an immediate family member (VI) has) any material transactional
relationship (VIII) with the company
or its affiliates (II) (excluding investments in the company through a private
placement).
2.13. Is (or an immediate family member (VI) is) a partner in, or a controlling
shareholder or an executive officer
of, an organization which has any material transactional relationship (VIII)
with the company or its
affiliates (II) (excluding investments in the company through a private
placement).
2.14. Is (or an immediate family member (VI) is) a trustee, director, or
employee of a charitable or non-profit
organization that receives material grants or endowments (VIII) from the
company or its affiliates (II).
OTHER RELATIONSHIPS
2.15. Party to a voting agreement (IX) to vote in line with management on
proposals being brought to
shareholder vote.
2.16. Has (or an immediate family member (VI) has) an interlocking relationship
as defined by the SEC involving
members of the board of directors or its Compensation Committee (X).
2.17. Founder (XI) of the company but not currently an employee.
2.18. Any material (XII) relationship with the company.
3. INDEPENDENT OUTSIDE DIRECTOR (IO)
3.1. No material (XII) connection to the company other than a board seat.
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FOOTNOTES:
(I) The definition of officer will generally follow that of a "Section 16
officer" (officers subject to Section 16 of the Securities and Exchange Act of
1934) and includes the chief executive, operating, financial, legal,
technology, and accounting officers of a company (including the president,
treasurer, secretary, controller, or any vice president in charge of a
principal business unit, division, or policy function). Current interim
officers are included in this category. For private companies, the equivalent
positions are applicable. A non-employee director serving as an officer due to
statutory requirements (e.g. corporate secretary) will be classified as an
Affiliated Outsider under 2.18 : "Any material relationship with the company."
However, if the company provides explicit disclosure that the director is not
receiving additional compensation in excess of $10,000 per year for serving in
that capacity, then the director will be classified as an Independent Outsider.
II
"Affiliate" includes a subsidiary, sibling company, or parent company. ISS
uses 50 percent control ownership by the parent company as the standard for
applying its affiliate designation.
(III) Includes any former CEO of the company prior to the company's initial
public offering (IPO).
(IV) When there is a former CEO of a special purpose acquisition company
(SPAC) serving on the board of an acquired company,
ISS will generally classify such directors as independent unless determined
otherwise taking into account the following factors: the applicable listing
standards determination of such director's independence; any operating ties to
the firm; and the existence of any other conflicting relationships or related
party transactions.
V
ISS will look at the terms of the interim officer's employment contract to
determine if it contains severance pay, long-term health and pension benefits,
or other such standard provisions typically contained in contracts of
permanent, non-temporary CEOs. ISS will also consider if a formal search
process was under way for a full-time officer at the time.
VI
"Immediate family member" follows the SEC's definition of such and covers
spouses, parents, children, step-parents, stepchildren, siblings, in-laws, and
any person (other than a tenant or employee) sharing the household of any
director, nominee for director, executive officer, or significant shareholder
of the company.
(VII) Professional services can be characterized as advisory in nature,
generally involve access to sensitive company information or to strategic
decision-making, and typically have a commission- or fee-based payment
structure. Professional services generally include, but are not limited to the
following: investment banking/financial advisory services; commercial banking
(beyond deposit services); investment services; insurance services;
accounting/audit services; consulting services; marketing services; legal
services; property management services; realtor services; lobbying services;
executive search services; and IT consulting services. The following would
generally be considered transactional relationships and not professional
services: deposit services; IT tech support services; educational services; and
construction services. The case of participation in a banking syndicate by a
non-lead bank should be considered a transactional (and hence subject to the
associated materiality test) rather than a professional relationship. "Of
Counsel" relationships are only considered immaterial if the individual does
not receive any form of compensation (in excess of $10,000 per year) from, or
is a retired partner of, the firm providing the professional service. The case
of a company providing a professional service to one of its directors or to an
entity with which one of its directors is affiliated, will be considered a
transactional rather than a professional relationship. Insurance services and
marketing services are assumed to be professional services unless the company
explains why such services are not advisory.
(VIII) A material transactional relationship, including grants to non-profit
organizations, exists if the company makes annual payments to, or receives
annual payments from, another entity exceeding the greater of $200,000 or 5
percent of the recipient's gross revenues, in the case of a company which
follows NASDAQ listing standards; or the greater of $1,000,000 or 2 percent of
the recipient's gross revenues, in the case of a company which follows
NYSE/Amex listing standards. In the case of a
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company which follows neither of the preceding standards, ISS will apply the
NASDAQ-based materiality test. (The recipient is the party receiving the
financial proceeds from the transaction).
(IX) Dissident directors who are parties to a voting agreement pursuant to a
settlement arrangement, will generally be classified as independent unless
determined otherwise taking into account the following factors: the terms of
the agreement; the duration of the standstill provision in the agreement; the
limitations and requirements of actions that are agreed upon; if the dissident
director nominee(s) is subject to the standstill; and if there any conflicting
relationships or related party transactions.
X
Interlocks include: executive officers serving as directors on each other's
compensation or similar committees (or, in the absence of such a committee, on
the board); or executive officers sitting on each other's boards and at least
one serves on the other's compensation or similar committees (or, in the
absence of such a committee, on the board).
(XI) The operating involvement of the founder with the company will be
considered. Little to no operating involvement ever may cause ISS to deem the
founder as an independent outsider.
(XII) For purposes of ISS's director independence classification, "material"
will be defined as a standard of relationship (financial, personal or
otherwise) that a reasonable person might conclude could potentially influence
one's objectivity in the boardroom in a manner that would have a meaningful
impact on an individual's ability to satisfy requisite fiduciary standards on
behalf of shareholders.
ooooo
OTHER BOARD-RELATED PROPOSALS
AGE/TERM LIMITS
Vote against management and shareholder proposals to limit the tenure of
outside directors through mandatory retirement ages.
Vote against management proposals to limit the tenure of outside directors
through term limits. However, scrutinize boards where the average tenure of all
directors exceeds 15 years for independence from management and for sufficient
turnover to ensure that new perspectives are being added to the board.
ooooo
BOARD SIZE
Vote for proposals seeking to fix the board size or designate a range for the
board size.
Vote against proposals that give management the ability to alter the size of
the board outside of a specified range without shareholder approval.
ooooo
CLASSIFICATION/DECLASSIFICATION OF THE BOARD
Vote against proposals to classify (stagger) the board.
Vote for proposals to repeal classified boards and to elect all directors
annually.
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oooooo
CEO SUCCESSION PLANNING
Generally vote for proposals seeking disclosure on a CEO succession planning
policy, considering, at a minimum, the following factors:
o The reasonableness/scope of the request; and
o The company's existing disclosure on its current CEO succession planning
process.
ooooo
CUMULATIVE VOTING
Generally vote against management proposals to eliminate cumulate voting, and
for shareholder proposals to restore or provide for cumulative voting, unless:
o The company has proxy access, thereby allowing shareholders to nominate
directors to the company's ballot; and
o The company has adopted a majority vote standard, with a carve-out for
plurality voting in situations where there
are more nominees than seats, and a director resignation policy to address
failed elections.
Vote for proposals for cumulative voting at controlled companies (insider
voting power > 50%).
oooooo
DIRECTOR AND OFFICER INDEMNIFICATION AND LIABILITY PROTECTION
Vote case-by-case on proposals on director and officer indemnification and
liability protection.
Vote against proposals that would:
o Eliminate entirely directors' and officers' liability for monetary damages
for violating the duty of care.
o Expand coverage beyond just legal expenses to liability for acts that are
more serious violations of fiduciary
obligation than mere carelessness.
o Expand the scope of indemnification to provide for mandatory indemnification
of company officials in connection
with acts that previously the company was permitted to provide indemnification
for, at the discretion of the
company's board (I.E., "permissive indemnification"), but that previously the
company was not required to
indemnify.
Vote for only those proposals providing such expanded coverage in cases when a
director's or officer's legal defense was unsuccessful if both of the following
apply:
o If the director was found to have acted in good faith and in a manner that
s/he reasonably believed was in the best
interests of the company; and
o If only the director's legal expenses would be covered.
oooooo
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ESTABLISH/AMEND NOMINEE QUALIFICATIONS
Vote case-by-case on proposals that establish or amend director qualifications.
Votes should be based on the reasonableness of the criteria and the degree to
which they may preclude dissident nominees from joining the board.
Vote case-by-case on shareholder resolutions seeking a director nominee who
possesses a particular subject matter expertise, considering:
o The company's board committee structure, existing subject matter expertise,
and board nomination provisions
relative to that of its peers;
o The company's existing board and management oversight mechanisms regarding
the issue for which board
oversight is sought;
o The company's disclosure and performance relating to the issue for which
board oversight is sought and any
significant related controversies; and
o The scope and structure of the proposal.
ooooo
ESTABLISH OTHER BOARD COMMITTEE PROPOSALS
Generally vote against shareholder proposals to establish a new board
committee, as such proposals seek a specific oversight mechanism/structure that
potentially limits a company's flexibility to determine an appropriate
oversight mechanism for itself. However, the following factors will be
considered:
o Existing oversight mechanisms (including current committee structure)
regarding the issue for which board
oversight is sought;
o Level of disclosure regarding the issue for which board oversight is sought;
o Company performance related to the issue for which board oversight is
sought;
o Board committee structure compared to that of other companies in its
industry sector; and
o The scope and structure of the proposal.
ooooo
FILLING VACANCIES/REMOVAL OF DIRECTORS
Vote against proposals that provide that directors may be removed only for
cause.
Vote for proposals to restore shareholders' ability to remove directors with or
without cause.
Vote against proposals that provide that only continuing directors may elect
replacements to fill board vacancies.
Vote for proposals that permit shareholders to elect directors to fill board
vacancies.
ooooo
INDEPENDENT CHAIR (SEPARATE CHAIR/CEO)
Generally vote for shareholder proposals requiring that the chairman's position
be filled by an independent director, unless the company satisfies ALL of the
following criteria:
The company maintains the following counterbalancing governance structure:
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o Designated lead director, elected by and from the independent board members
with clearly delineated and
comprehensive duties. (The role may alternatively reside with a presiding
director, vice chairman, or rotating lead
director; however, the director must serve a minimum of one year in order to
qualify as a lead director.) The duties
should include, but are not limited to, the following:
o presides at all meetings of the board at which the chairman is not present,
including executive sessions of
the independent directors;
o serves as liaison between the chairman and the independent directors;
o approves information sent to the board;
o approves meeting agendas for the board;
o approves meeting schedules to assure that there is sufficient time for
discussion of all agenda items;
o has the authority to call meetings of the independent directors;
o if requested by major shareholders, ensures that he or she is available for
consultation and direct
communication;
o Two-thirds independent board;
o Fully independent key committees;
o Established governance guidelines;
o A company in the Russell 3000 universe must not have exhibited sustained
poor total shareholder return (TSR)
performance, defined as one- and three-year TSR in the bottom half of the
company's four-digit GICS industry
group (using Russell 3000 companies only), unless there has been a change in
the Chairman/CEO position within
that time. For companies not in the Russell 3000 universe, the company must not
have underperformed both its
peers and index on the basis of both one-year and three-year total shareholder
returns, unless there has been a
change in the Chairman/CEO position within that time;
o The company does not have any problematic governance or management issues,
examples of which include, but
are not limited to:
o Egregious compensation practices;
o Multiple related-party transactions or other issues putting director
independence at risk;
o Corporate or management scandals;
o Excessive problematic corporate governance provisions; or
o Flagrant actions by management or the board with potential or realized
negative impacts on
shareholders.
ooooo
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF INDEPENDENT COMMITTEES
Vote for shareholder proposals asking that a majority or more of directors be
independent unless the board composition already meets the proposed threshold
by ISS' definition of independent outsider. (See CATEGORIZATION OF DIRECTORS.)
Vote for shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors unless
they currently meet that standard.
oooooo
MAJORITY VOTE STANDARD FOR THE ELECTION OF DIRECTORS
Generally vote for management proposals to adopt a majority of votes cast
standard for directors in uncontested elections. Vote against if no carve-out
for a plurality vote standard in contested elections is included.
Generally vote for precatory and binding shareholder resolutions requesting
that the board change the company's bylaws to stipulate that directors need to
be elected with an affirmative majority of votes cast, provided it does not
conflict with the state law where the company is incorporated. Binding
resolutions need to allow for a carve-out for a plurality vote standard when
there are more nominees than board seats.
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Companies are strongly encouraged to also adopt a post-election policy (also
known as a director resignation policy) that will provide guidelines so that
the company will promptly address the situation of a holdover director.
oooooo
PROXY ACCESS
ISS supports proxy access as an important shareholder right, one that is
complementary to other best-practice corporate governance features. However, in
the absence of a uniform standard, proposals to enact proxy access may vary
widely; as such, ISS is not setting forth specific parameters at this time and
will take a case-by-case approach in evaluating these proposals.
Vote case-by-case on proposals to enact proxy access, taking into account,
among other factors:
o Company-specific factors; and
o Proposal-specific factors, including:
o The ownership thresholds proposed in the resolution (i.e., percentage and
duration);
o The maximum proportion of directors that shareholders may nominate each year;
and
o The method of determining which nominations should appear on the ballot if
multiple shareholders
submit nominations.
ooooo
REQUIRE MORE NOMINEES THAN OPEN SEATS
Vote against shareholder proposals that would require a company to nominate
more candidates than the number of open board seats.
ooooo
SHAREHOLDER ENGAGEMENT POLICY (SHAREHOLDER ADVISORY COMMITTEE)
Generally vote for shareholder proposals requesting that the board establish an
internal mechanism/process, which may include a committee, in order to improve
communications between directors and shareholders, unless the company has the
following features, as appropriate:
o Established a communication structure that goes beyond the exchange
requirements to facilitate the exchange of
information between shareholders and members of the board;
o Effectively disclosed information with respect to this structure to its
shareholders;
o Company has not ignored majority-supported shareholder proposals or a
majority withhold vote on a director
nominee; and
o The company has an independent chairman or a lead director, according to
ISS' definition. This individual must be
made available for periodic consultation and direct communication with major
shareholders.
ooooo
PROXY CONTESTS--VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Vote case-by-case on the election of directors in contested elections,
considering the following factors:
o Long-term financial performance of the target company relative to its
industry;
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o Management's track record;
o Background to the proxy contest;
o Nominee qualifications and any compensatory arrangements;
o Strategic plan of dissident slate and quality of critique against
management;
o Likelihood that the proposed goals and objectives can be achieved (both
slates);
o Stock ownership positions.
When the addition of shareholder nominees to the management card ("proxy access
nominees") results in a number of nominees on the management card which exceeds
the number of seats available for election, vote case-by-case considering the
same factors listed above.
ooooo
VOTE-NO CAMPAIGNS
In cases where companies are targeted in connection with public "vote-no"
campaigns, evaluate director nominees under the existing governance policies
for voting on director nominees in uncontested elections. Take into
consideration the arguments submitted by shareholders and other publicly
available information.
ooooo
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3. SHAREHOLDER RIGHTS & DEFENSES
ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS/NOMINATIONS
Vote case-by-case on advance notice proposals, giving support to those
proposals which allow shareholders to submit proposals/nominations as close to
the meeting date as reasonably possible and within the broadest window
possible, recognizing the need to allow sufficient notice for company,
regulatory, and shareholder review.
To be reasonable, the company's deadline for shareholder notice of a proposal/
nominations must not be more than 60 days prior to the meeting, with a
submittal window of at least 30 days prior to the deadline. The submittal
window is the period under which a shareholder must file his
proposal/nominations prior to the deadline.
In general, support additional efforts by companies to ensure full disclosure
in regard to a proponent's economic and voting position in the company so long
as the informational requirements are reasonable and aimed at providing
shareholders with the necessary information to review such proposals.
ooooo
AMEND BYLAWS WITHOUT SHAREHOLDER CONSENT
Vote against proposals giving the board exclusive authority to amend the
bylaws.
Vote for proposals giving the board the ability to amend the bylaws in addition
to shareholders.
ooooo
CONTROL SHARE ACQUISITION PROVISIONS
Control share acquisition statutes function by denying shares their voting
rights when they contribute to ownership in excess of certain thresholds.
Voting rights for those shares exceeding ownership limits may only be restored
by approval of either a majority or supermajority of disinterested shares.
Thus, control share acquisition statutes effectively require a hostile bidder
to put its offer to a shareholder vote or risk voting disenfranchisement if the
bidder continues buying up a large block of shares.
Vote for proposals to opt out of control share acquisition statutes unless
doing so would enable the completion of a takeover that would be detrimental to
shareholders.
Vote against proposals to amend the charter to include control share
acquisition provisions.
Vote for proposals to restore voting rights to the control shares.
ooooo
CONTROL SHARE CASH-OUT PROVISIONS
Control share cash-out statutes give dissident shareholders the right to
"cash-out" of their position in a company at the expense of the shareholder who
has taken a control position. In other words, when an investor crosses a preset
threshold
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level, remaining shareholders are given the right to sell their shares to the
acquirer, who must buy them at the highest acquiring price.
Vote for proposals to opt out of control share cash-out statutes.
ooooo
DISGORGEMENT PROVISIONS
Disgorgement provisions require an acquirer or potential acquirer of more than
a certain percentage of a company's stock to disgorge, or pay back, to the
company any profits realized from the sale of that company's stock purchased 24
months before achieving control status. All sales of company stock by the
acquirer occurring within a certain period of time (between 18 months and 24
months) prior to the investor's gaining control status are subject to these
recapture-of-profits provisions.
Vote for proposals to opt out of state disgorgement provisions.
o
ooooo
EXCLUSIVE VENUE
Vote case-by-case on exclusive venue proposals, taking into account:
o Whether the company has been materially harmed by shareholder litigation
outside its jurisdiction of
incorporation, based on disclosure in the company's proxy statement; and
o Whether the company has the following good governance features:
o An annually elected board;
o A majority vote standard in uncontested director elections; and
o The absence of a poison pill, unless the pill was approved by shareholders.
ooooo
FAIR PRICE PROVISIONS
Vote case-by-case on proposals to adopt fair price provisions (provisions that
stipulate that an acquirer must pay the same price to acquire all shares as it
paid to acquire the control shares), evaluating factors such as the vote
required to approve the proposed acquisition, the vote required to repeal the
fair price provision, and the mechanism for determining the fair price.
Generally, vote against fair price provisions with shareholder vote
requirements greater than a majority of disinterested shares.
ooooo
FREEZE-OUT PROVISIONS
Vote for proposals to opt out of state freeze-out provisions. Freeze-out
provisions force an investor who surpasses a certain ownership threshold in a
company to wait a specified period of time before gaining control of the
company.
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ooooo
GREENMAIL
Greenmail payments are targeted share repurchases by management of company
stock from individuals or groups seeking control of the company. Since only the
hostile party receives payment, usually at a substantial premium over the
market value of its shares, the practice discriminates against all other
shareholders.
Vote for proposals to adopt anti-greenmail charter or bylaw amendments or
otherwise restrict a company's ability to make greenmail payments.
Vote case-by-case on anti-greenmail proposals when they are bundled with other
charter or bylaw amendments.
ooooo
NET OPERATING LOSS (NOL) PROTECTIVE AMENDMENTS
Vote against proposals to adopt a protective amendment for the stated purpose
of protecting a company's net operating losses (NOL) if the effective term of
the protective amendment would exceed the shorter of three years and the
exhaustion of the NOL.
Vote case-by-case, considering the following factors, for management proposals
to adopt an NOL protective amendment that would remain in effect for the
shorter of three years (or less) and the exhaustion of the NOL:
o The ownership threshold (NOL protective amendments generally prohibit stock
ownership transfers that would
result in a new 5-percent holder or increase the stock ownership percentage of
an existing 5-percent holder);
o The value of the NOLs;
o Shareholder protection mechanisms (sunset provision or commitment to cause
expiration of the protective
amendment upon exhaustion or expiration of the NOL);
o The company's existing governance structure including: board independence,
existing takeover defenses, track
record of responsiveness to shareholders, and any other problematic governance
concerns; and
o Any other factors that may be applicable.
ooooo
POISON PILLS (SHAREHOLDER RIGHTS PLANS)
SHAREHOLDER PROPOSALS TO PUT PILL TO A VOTE AND/OR ADOPT A PILL POLICY
Vote for shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it UNLESS the company has: (1) A
shareholder approved poison pill in place; or (2) The company has adopted a
policy concerning the adoption of a pill in the future specifying that the
board will only adopt a shareholder rights plan if either:
o Shareholders have approved the adoption of the plan; or
o The board, in its exercise of its fiduciary responsibilities, determines
that it is in the best interest of shareholders
under the circumstances to adopt a pill without the delay in adoption that
would result from seeking stockholder
approval (I.E., the "fiduciary out" provision). A poison pill adopted under
this fiduciary out will be put to a
shareholder ratification vote within 12 months of adoption or expire. If the
pill is not approved by a majority of the
votes cast on this issue, the plan will immediately terminate.
If the shareholder proposal calls for a time period of less than 12 months for
shareholder ratification after adoption, vote for the proposal, but add the
caveat that a vote within 12 months would be considered sufficient
implementation.
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ooooo
MANAGEMENT PROPOSALS TO RATIFY A POISON PILL
Vote case-by-case on management proposals on poison pill ratification, focusing
on the features of the shareholder rights plan. Rights plans should contain the
following attributes:
o No lower than a 20% trigger, flip-in or flip-over;
o A term of no more than three years;
o No dead-hand, slow-hand, no-hand or similar feature that limits the ability
of a future board to redeem the pill;
o Shareholder redemption feature (qualifying offer clause); if the board
refuses to redeem the pill 90 days after a
qualifying offer is announced, 10 percent of the shares may call a special
meeting or seek a written consent to vote
on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained
by the company. In examining the request for the pill, take into consideration
the company's existing governance structure, including: board independence,
existing takeover defenses, and any problematic governance concerns.
ooooo
MANAGEMENT PROPOSALS TO RATIFY A PILL TO PRESERVE NET OPERATING LOSSES (NOLS)
Vote against proposals to adopt a poison pill for the stated purpose of
protecting a company's net operating losses (NOL) if the term of the pill would
exceed the shorter of three years and the exhaustion of the NOL.
Vote case-by-case on management proposals for poison pill ratification,
considering the following factors, if the term of the pill would be the shorter
of three years (or less) and the exhaustion of the NOL:
o The ownership threshold to transfer (NOL pills generally have a trigger
slightly below 5 percent);
o The value of the NOLs;
o Shareholder protection mechanisms (sunset provision, or commitment to cause
expiration of the pill upon
exhaustion or expiration of NOLs);
o The company's existing governance structure including: board independence,
existing takeover defenses, track
record of responsiveness to shareholders, and any other problematic governance
concerns; and
o Any other factors that may be applicable.
ooooo
PROXY VOTING DISCLOSURE, CONFIDENTIALITY, AND TABULATION
Vote case-by-case on proposals regarding proxy voting mechanics, taking into
consideration whether implementation of the proposal is likely to enhance or
protect shareholder rights. Specific issues covered under the policy include,
but are not limited to, confidential voting of individual proxies and ballots,
confidentiality of running vote tallies, and the treatment of abstentions
and/or broker non-votes in the company's vote-counting methodology.
While a variety of factors may be considered in each analysis, the guiding
principles are: transparency, consistency, and fairness in the proxy voting
process. The factors considered, as applicable to the proposal, may include:
o The scope and structure of the proposal;
o The company's stated confidential voting policy (or other relevant policies)
and whether it ensures a "level playing
field" by providing shareholder proponents with equal access to vote
information prior to the annual meeting;
o The company's vote standard for management and shareholder proposals and
whether it ensures consistency and
fairness in the proxy voting process and maintains the integrity of vote
results;
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o Whether the company's disclosure regarding its vote counting method and
other relevant voting policies with
respect to management and shareholder proposals are consistent and clear;
o Any recent controversies or concerns related to the company's proxy voting
mechanics;
o Any unintended consequences resulting from implementation of the proposal;
and
o Any other factors that may be relevant.
ooooo
REIMBURSING PROXY SOLICITATION EXPENSES
Vote case-by-case on proposals to reimburse proxy solicitation expenses. When
voting in conjunction with support of a dissident slate, vote for the
reimbursement of all appropriate proxy solicitation expenses associated with
the election.
Generally vote for shareholder proposals calling for the reimbursement of
reasonable costs incurred in connection with nominating one or more candidates
in a contested election where the following apply:
o The election of fewer than 50% of the directors to be elected is contested
in the election;
o One or more of the dissident's candidates is elected;
o Shareholders are not permitted to cumulate their votes for directors; and
o The election occurred, and the expenses were incurred, after the adoption of
this bylaw.
ooooo
REINCORPORATION PROPOSALS
Management or shareholder proposals to change a company's state of
incorporation should be evaluated case-by-case, giving consideration to both
financial and corporate governance concerns including the following:
o Reasons for reincorporation;
o Comparison of company's governance practices and provisions prior to and
following the reincorporation; and
o Comparison of corporation laws of original state and destination state.
Vote for reincorporation when the economic factors outweigh any neutral or
negative governance changes.
ooooo
SHAREHOLDER ABILITY TO ACT BY WRITTEN CONSENT
Generally vote against management and shareholder proposals to restrict or
prohibit shareholders' ability to act by written consent.
Generally vote for management and shareholder proposals that provide
shareholders with the ability to act by written consent, taking into account
the following factors:
o Shareholders' current right to act by written consent;
o The consent threshold;
o The inclusion of exclusionary or prohibitive language;
o Investor ownership structure; and
o Shareholder support of, and management's response to, previous shareholder
proposals.
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Vote case-by-case on shareholder proposals if, in addition to the
considerations above, the company has the following governance and antitakeover
provisions:
o An unfettered (6) right for shareholders to call special meetings at a 10
percent threshold;
o A majority vote standard in uncontested director elections;
o No non-shareholder-approved pill; and
o An annually elected board.
ooooo
SHAREHOLDER ABILITY TO CALL SPECIAL MEETINGS
Vote against management or shareholder proposals to restrict or prohibit
shareholders' ability to call special meetings.
Generally vote for management or shareholder proposals that provide
shareholders with the ability to call special meetings taking into account the
following factors:
o Shareholders' current right to call special meetings;
o Minimum ownership threshold necessary to call special meetings (10%
preferred);
o The inclusion of exclusionary or prohibitive language;
o Investor ownership structure; and
o Shareholder support of, and management's response to, previous shareholder
proposals.
ooooo
STAKEHOLDER PROVISIONS
Vote against proposals that ask the board to consider non-shareholder
constituencies or other non-financial effects when evaluating a merger or
business combination.
ooooo
STATE ANTITAKEOVER STATUTES
Vote case-by-case on proposals to opt in or out of state takeover statutes
(including fair price provisions, stakeholder laws, poison pill endorsements,
severance pay and labor contract provisions, and anti-greenmail provisions).
ooooo
SUPERMAJORITY VOTE REQUIREMENTS
Vote against proposals to require a supermajority shareholder vote.
Vote for management or shareholder proposals to reduce supermajority vote
requirements. However, for companies with shareholder(s) who have significant
ownership levels, vote case-by-case, taking into account:
o Ownership structure;
o Quorum requirements; and
o Vote requirements.
ooooo
(6) "Unfettered" means no restrictions on agenda items, no restrictions on the
number of shareholders who can group together to reach the 10 percent
threshold, and only reasonable limits on when a meeting can be called: no
greater than 30 days after the last annual meeting and no greater than 90 prior
to the next annual meeting.
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4. CAPITAL/RESTRUCTURING
CAPITAL
ADJUSTMENTS TO PAR VALUE OF COMMON STOCK
Vote for management proposals to reduce the par value of common stock unless
the action is being taken to facilitate an anti-takeover device or some other
negative corporate governance action
Vote for management proposals to eliminate par value.
ooooo
COMMON STOCK AUTHORIZATION
Vote for proposals to increase the number of authorized common shares where the
primary purpose of the increase is to issue shares in connection with a
transaction on the same ballot that warrants support.
Vote against proposals at companies with more than one class of common stock to
increase the number of authorized shares of the class of common stock that has
superior voting rights.
Vote against proposals to increase the number of authorized common shares if a
vote for a reverse stock split on the same ballot is warranted despite the fact
that the authorized shares would not be reduced proportionally.
Vote case-by-case on all other proposals to increase the number of shares of
common stock authorized for issuance. Take into account company-specific
factors that include, at a minimum, the following:
o Past Board Performance:
o The company's use of authorized shares during the last three years
o The Current Request:
o Disclosure in the proxy statement of the specific purposes of the proposed
increase;
o Disclosure in the proxy statement of specific and severe risks to
shareholders of not approving the request;
and
o The dilutive impact of the request as determined by an allowable increase
calculated by ISS (typically 100
percent of existing authorized shares) that reflects the company's need for
shares and total shareholder
returns.
ooooo
DUAL CLASS STRUCTURE
Generally vote against proposals to create a new class of common stock unless:
o The company discloses a compelling rationale for the dual-class capital
structure, such as:
o The company's auditor has concluded that there is substantial doubt about the
company's ability to
continue as a going concern; or
o The new class of shares will be transitory;
o The new class is intended for financing purposes with minimal or no dilution
to current shareholders in both the
short term and long term; and
o The new class is not designed to preserve or increase the voting power of an
insider or significant shareholder.
ooooo
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ISSUE STOCK FOR USE WITH RIGHTS PLAN
Vote against proposals that increase authorized common stock for the explicit
purpose of implementing a non-shareholder-approved shareholder rights plan
(poison pill).
ooooo
PREEMPTIVE RIGHTS
Vote case-by-case on shareholder proposals that seek preemptive rights, taking
into consideration:
o The size of the company;
o The shareholder base; and
o The liquidity of the stock.
ooooo
PREFERRED STOCK AUTHORIZATION
Vote for proposals to increase the number of authorized preferred shares where
the primary purpose of the increase is to issue shares in connection with a
transaction on the same ballot that warrants support.
Vote against proposals at companies with more than one class or series of
preferred stock to increase the number of authorized shares of the class or
series of preferred stock that has superior voting rights.
Vote case-by-case on all other proposals to increase the number of shares of
preferred stock authorized for issuance. Take into account company-specific
factors that include, at a minimum, the following:
o Past Board Performance:
o The company's use of authorized preferred shares during the last three years;
o The Current Request:
o Disclosure in the proxy statement of the specific purposes for the proposed
increase;
o Disclosure in the proxy statement of specific and severe risks to
shareholders of not approving the request;
o In cases where the company has existing authorized preferred stock, the
dilutive impact of the request as
determined by an allowable increase calculated by ISS (typically 100 percent of
existing authorized shares)
that reflects the company's need for shares and total shareholder returns; and
o Whether the shares requested are blank check preferred shares that can be
used for antitakeover purposes.
ooooo
RECAPITALIZATION PLANS
Vote case-by-case on recapitalizations (reclassifications of securities),
taking into account the following:
o More simplified capital structure;
o Enhanced liquidity;
o Fairness of conversion terms;
o Impact on voting power and dividends;
o Reasons for the reclassification;
o Conflicts of interest; and
o Other alternatives considered.
ooooo
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REVERSE STOCK SPLITS
Vote for management proposals to implement a reverse stock split when the
number of authorized shares will be proportionately reduced.
Vote against proposals when there is not a proportionate reduction of
authorized shares, unless:
o A stock exchange has provided notice to the company of a potential
delisting; or
o The effective increase in authorized shares is equal to or less than the
allowable increase calculated in accordance
with ISS' Common Stock Authorization policy.
ooooo
SHARE REPURCHASE PROGRAMS
Vote for management proposals to institute open-market share repurchase plans
in which all shareholders may participate on equal terms.
ooooo
STOCK DISTRIBUTIONS: SPLITS AND DIVIDENDS
Vote for management proposals to increase the common share authorization for a
stock split or share dividend, provided that the increase in authorized shares
equal to or less than the allowable increase calculated in accordance with ISS'
Common Stock Authorization policy.
ooooo
TRACKING STOCK
Vote case-by-case on the creation of tracking stock, weighing the strategic
value of the transaction against such factors as:
o Adverse governance changes;
o Excessive increases in authorized capital stock;
o Unfair method of distribution;
o Diminution of voting rights;
o Adverse conversion features;
o Negative impact on stock option plans; and
o Alternatives such as spin-off.
oooooo
RESTRUCTURING
APPRAISAL RIGHTS
Vote for proposals to restore or provide shareholders with rights of
appraisal.
ooooo
ASSET PURCHASES
Vote case-by-case on asset purchase proposals, considering the following
factors:
o Purchase price;
o Fairness opinion;
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o Financial and strategic benefits;
o How the deal was negotiated;
o Conflicts of interest;
o Other alternatives for the business;
o Non-completion risk.
ooooo
ASSET SALES
Vote case-by-case on asset sales, considering the following factors:
o Impact on the balance sheet/working capital;
o Potential elimination of diseconomies;
o Anticipated financial and operating benefits;
o Anticipated use of funds;
o Value received for the asset;
o Fairness opinion;
o How the deal was negotiated;
o Conflicts of interest.
ooooo
BUNDLED PROPOSALS
Vote case-by-case on bundled or "conditional" proxy proposals. In the case of
items that are conditioned upon each other, examine the benefits and costs of
the packaged items. In instances when the joint effect of the conditioned items
is not in shareholders' best interests, vote against the proposals. If the
combined effect is positive, support such proposals.
ooooo
CONVERSION OF SECURITIES
Vote case-by-case on proposals regarding conversion of securities. When
evaluating these proposals the investor should review the dilution to existing
shareholders, the conversion price relative to market value, financial issues,
control issues, termination penalties, and conflicts of interest.
Vote for the conversion if it is expected that the company will be subject to
onerous penalties or will be forced to file for bankruptcy if the transaction
is not approved.
ooooo
CORPORATE REORGANIZATION/DEBT RESTRUCTURING/PREPACKAGED BANKRUPTCY
PLANS/REVERSE LEVERAGED BUYOUTS/WRAP PLANS
Vote case-by-case on proposals to increase common and/or preferred shares and
to issue shares as part of a debt restructuring plan, after evaluating:
o Dilution to existing shareholders' positions;
o Terms of the offer - discount/premium in purchase price to investor,
including any fairness opinion; termination
penalties; exit strategy;
o Financial issues - company's financial situation; degree of need for
capital; use of proceeds; effect of the financing
on the company's cost of capital;
o Management's efforts to pursue other alternatives;
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o Control issues - change in management; change in control, guaranteed board
and committee seats; standstill
provisions; voting agreements; veto power over certain corporate actions; and
o Conflict of interest - arm's length transaction, managerial incentives.
Vote for the debt restructuring if it is expected that the company will file
for bankruptcy if the transaction is not approved.
ooooo
FORMATION OF HOLDING COMPANY
Vote case-by-case on proposals regarding the formation of a holding company,
taking into consideration the following:
o The reasons for the change;
o Any financial or tax benefits;
o Regulatory benefits;
o Increases in capital structure; and
o Changes to the articles of incorporation or bylaws of the company.
Absent compelling financial reasons to recommend for the transaction, vote
against the formation of a holding company if the transaction would include
either of the following:
o Increases in common or preferred stock in excess of the allowable maximum
(see discussion under "Capital"); or
o Adverse changes in shareholder rights.
ooooo
GOING PRIVATE AND GOING DARK TRANSACTIONS (LBOS AND MINORITY SQUEEZE-OUTS)
Vote case-by-case on going private transactions, taking into account the
following:
o Offer price/premium;
o Fairness opinion;
o How the deal was negotiated;
o Conflicts of interest;
o Other alternatives/offers considered; and
o Non-completion risk.
Vote case-by-case on going dark transactions, determining whether the
transaction enhances shareholder value by taking into consideration:
o Whether the company has attained benefits from being publicly-traded
(examination of trading volume, liquidity,
and market research of the stock);
o Balanced interests of continuing vs. cashed-out shareholders, taking into
account the following:
o Are all shareholders able to participate in the transaction?
o Will there be a liquid market for remaining shareholders following the
transaction?
o Does the company have strong corporate governance?
o Will insiders reap the gains of control following the proposed transaction?
o Does the state of incorporation have laws requiring continued reporting that
may benefit shareholders?
ooooo
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JOINT VENTURES
Vote case-by-case on proposals to form joint ventures, taking into account the
following:
o Percentage of assets/business contributed;
o Percentage ownership;
o Financial and strategic benefits;
o Governance structure;
o Conflicts of interest;
o Other alternatives; and
o Non-completion risk.
ooooo
LIQUIDATIONS
Vote case-by-case on liquidations, taking into account the following:
o Management's efforts to pursue other alternatives;
o Appraisal value of assets; and
o The compensation plan for executives managing the liquidation.
Vote for the liquidation if the company will file for bankruptcy if the
proposal is not approved.
ooooo
MERGERS AND ACQUISITIONS
Vote case-by-case on mergers and acquisitions. Review and evaluate the merits
and drawbacks of the proposed transaction, balancing various and sometimes
countervailing factors including:
o VALUATION - Is the value to be received by the target shareholders (or paid
by the acquirer) reasonable? While the
fairness opinion may provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on
the offer premium, market reaction and strategic rationale.
o MARKET REACTION - How has the market responded to the proposed deal? A
negative market reaction should cause
closer scrutiny of a deal.
o STRATEGIC RATIONALE - Does the deal make sense strategically? From where is
the value derived? Cost and revenue
synergies should not be overly aggressive or optimistic, but reasonably
achievable. Management should also have
a favorable track record of successful integration of historical acquisitions.
o NEGOTIATIONS AND PROCESS - Were the terms of the transaction negotiated at
arm's-length? Was the process fair and
equitable? A fair process helps to ensure the best price for shareholders.
Significant negotiation "wins" can also
signify the deal makers' competency. The comprehensiveness of the sales process
(E.G., full auction, partial
auction, no auction) can also affect shareholder value.
o CONFLICTS OF INTEREST - Are insiders benefiting from the transaction
disproportionately and inappropriately as
compared to non-insider shareholders? As the result of potential conflicts, the
directors and officers of the
company may be more likely to vote to approve a merger than if they did not
hold these interests. Consider
whether these interests may have influenced these directors and officers to
support or recommend the merger.
The CIC figure presented in the "ISS Transaction Summary" section of this
report is an aggregate figure that can in
certain cases be a misleading indicator of the true value transfer from
shareholders to insiders. Where such figure
appears to be excessive, analyze the underlying assumptions to determine
whether a potential conflict exists.
o GOVERNANCE - Will the combined company have a better or worse governance
profile than the current governance
profiles of the respective parties to the transaction? If the governance
profile is to change for the worse, the
burden is on the company to prove that other issues (such as valuation)
outweigh any deterioration in governance.
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ooooo
PRIVATE PLACEMENTS/WARRANTS/CONVERTIBLE DEBENTURES
Vote case-by-case on proposals regarding private placements, warrants, and
convertible debentures taking into consideration:
o Dilution to existing shareholders' position: The amount and timing of
shareholder ownership dilution should be
weighed against the needs and proposed shareholder benefits of the capital
infusion. Although newly issued
common stock, absent preemptive rights, is typically dilutive to existing
shareholders, share price appreciation is
often the necessary event to trigger the exercise of "out of the money"
warrants and convertible debt. In these
instances from a value standpoint, the negative impact of dilution is mitigated
by the increase in the company's
stock price that must occur to trigger the dilutive event.
o Terms of the offer (discount/premium in purchase price to investor,
including any fairness opinion, conversion
features, termination penalties, exit strategy):
o The terms of the offer should be weighed against the alternatives of the
company and in light of company's
financial condition. Ideally, the conversion price for convertible debt and the
exercise price for warrants
should be at a premium to the then prevailing stock price at the time of
private placement.
o When evaluating the magnitude of a private placement discount or premium,
consider factors that influence
the discount or premium, such as, liquidity, due diligence costs, control and
monitoring costs, capital scarcity,
information asymmetry and anticipation of future performance.
o Financial issues:
o The company's financial condition;
o Degree of need for capital;
o Use of proceeds;
o Effect of the financing on the company's cost of capital;
o Current and proposed cash burn rate;
o Going concern viability and the state of the capital and credit markets.
o Management's efforts to pursue alternatives and whether the company engaged
in a process to evaluate
alternatives: A fair, unconstrained process helps to ensure the best price for
shareholders. Financing alternatives
can include joint ventures, partnership, merger or sale of part or all of the
company.
o Control issues:
o Change in management;
o Change in control;
o Guaranteed board and committee seats;
o Standstill provisions;
o Voting agreements;
o Veto power over certain corporate actions; and
o Minority versus majority ownership and corresponding minority discount or
majority control premium
o Conflicts of interest:
o Conflicts of interest should be viewed from the perspective of the company
and the investor.
o Were the terms of the transaction negotiated at arm's length? Are managerial
incentives aligned with
shareholder interests?
o Market reaction:
o The market's response to the proposed deal. A negative market reaction is a
cause for concern. Market
reaction may be addressed by analyzing the one day impact on the unaffected
stock price.
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Vote for the private placement, or for the issuance of warrants and/or
convertible debentures in a private placement, if it is expected that the
company will file for bankruptcy if the transaction is not approved.
ooooo
REORGANIZATION/RESTRUCTURING PLAN (BANKRUPTCY)
Vote case-by-case on proposals to common shareholders on bankruptcy plans of
reorganization, considering the following factors including, but not limited
to:
o Estimated value and financial prospects of the reorganized company;
o Percentage ownership of current shareholders in the reorganized company;
o Whether shareholders are adequately represented in the reorganization
process (particularly through the
existence of an Official Equity Committee);
o The cause(s) of the bankruptcy filing, and the extent to which the plan of
reorganization addresses the cause(s);
o Existence of a superior alternative to the plan of reorganization; and
o Governance of the reorganized company.
o
ooooo
SPECIAL PURPOSE ACQUISITION CORPORATIONS (SPACS)
Vote case-by-case on SPAC mergers and acquisitions taking into account the
following:
o Valuation--Is the value being paid by the SPAC reasonable? SPACs generally
lack an independent fairness opinion
and the financials on the target may be limited. Compare the conversion price
with the intrinsic value of the target
company provided in the fairness opinion. Also, evaluate the proportionate
value of the combined entity
attributable to the SPAC IPO shareholders versus the pre-merger value of SPAC.
Additionally, a private company
discount may be applied to the target, if it is a private entity.
o Market reaction--How has the market responded to the proposed deal? A
negative market reaction may be a
cause for concern. Market reaction may be addressed by analyzing the one-day
impact on the unaffected stock
price.
o Deal timing--A main driver for most transactions is that the SPAC charter
typically requires the deal to be
complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the
valuation, market reaction, and
potential conflicts of interest for deals that are announced close to the
liquidation date.
o Negotiations and process--What was the process undertaken to identify
potential target companies within
specified industry or location specified in charter? Consider the background of
the sponsors.
o Conflicts of interest--How are sponsors benefiting from the transaction
compared to IPO shareholders? Potential
onflicts could arise if a fairness opinion is issued by the insiders to qualify
the deal rather than a third party or if
management is encouraged to pay a higher price for the target because of an 80%
rule (the charter requires that
the fair market value of the target is at least equal to 80% of net assets of
the SPAC). Also, there may be sense of
urgency by the management team of the SPAC to close the deal since its charter
typically requires a transaction to
be completed within the 18-24 month timeframe.
o Voting agreements--Are the sponsors entering into enter into any voting
agreements/ tender offers with
shareholders who are likely to vote against the proposed merger or exercise
conversion rights?
o Governance--What is the impact of having the SPAC CEO or founder on key
committees following the proposed
merger?
ooooo
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SPIN-OFFS
Vote case-by-case on spin-offs, considering:
o Tax and regulatory advantages; o Planned use of the sale proceeds;o
Valuation of spinoff; o Fairness opinion; o Benefits to the parent company;
o Conflicts of interest; o Managerial incentives; o Corporate governance
changes; o Changes in the capital structure.
ooooo
VALUE MAXIMIZATION SHAREHOLDER PROPOSALS
Vote case-by-case on shareholder proposals seeking to maximize shareholder
value by:
o Hiring a financial advisor to explore strategic alternatives;
o Selling the company; or
o Liquidating the company and distributing the proceeds to shareholders.
These proposals should be evaluated based on the following factors:
o Prolonged poor performance with no turnaround in sight;
o Signs of entrenched board and management (such as the adoption of takeover
defenses);
o Strategic plan in place for improving value;
o Likelihood of receiving reasonable value in a sale or dissolution; and
o The company actively exploring its strategic options, including retaining a
financial advisor.
ooooo
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5. COMPENSATION
EXECUTIVE PAY EVALUATION
Underlying all evaluations are five global principles that most investors
expect corporations to adhere to in designing and administering executive and
director compensation programs:
1. Maintain appropriate pay-for-performance alignment, with emphasis on
long-term shareholder value: This
principle encompasses overall executive pay practices, which must be designed
to attract, retain, and
appropriately motivate the key employees who drive shareholder value creation
over the long term. It will take
into consideration, among other factors, the link between pay and performance;
the mix between fixed and
variable pay; performance goals; and equity-based plan costs;
2. Avoid arrangements that risk "pay for failure": This principle addresses the
appropriateness of long or indefinite
contracts, excessive severance packages, and guaranteed compensation;
3. Maintain an independent and effective compensation committee: This principle
promotes oversight of executive
pay programs by directors with appropriate skills, knowledge, experience, and a
sound process for compensation
decision-making (E.G., including access to independent expertise and advice
when needed);
4. Provide shareholders with clear, comprehensive compensation disclosures:
This principle underscores the
importance of informative and timely disclosures that enable shareholders to
evaluate executive pay practices fully
and fairly;
5. Avoid inappropriate pay to non-executive directors: This principle
recognizes the interests of shareholders in
ensuring that compensation to outside directors does not compromise their
independence and ability to make
appropriate judgments in overseeing managers' pay and performance. At the
market level, it may incorporate a
variety of generally accepted best practices.
ADVISORY VOTES ON EXECUTIVE COMPENSATION--MANAGEMENT PROPOSALS (MANAGEMENT
SAY-ON-PAY)
Vote case-by-case on ballot items related to executive pay and practices, as
well as certain aspects of outside director compensation.
Vote against Advisory Votes on Executive Compensation (Management
Say-on-Pay--MSOP) if:
o There is a significant misalignment between CEO pay and company performance
(PAY FOR PERFORMANCE);
o The company maintains significant PROBLEMATIC PAY PRACTICES;
o The board exhibits a significant level of POOR COMMUNICATION AND
RESPONSIVENESS to shareholders.
Vote against or withhold from the members of the Compensation Committee and
potentially the full board if:
o There is no MSOP on the ballot, and an against vote on an MSOP is warranted
due to pay for performance
misalignment, problematic pay practices, or the lack of adequate responsiveness
on compensation issues raised
previously, or a combination thereof;
o The board fails to respond adequately to a previous MSOP proposal that
received less than 70 percent support of
votes cast;
o The company has recently practiced or approved problematic pay practices,
including option repricing or option
backdating; or
o The situation is egregious.
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Vote against an equity plan on the ballot if:
o A pay for performance misalignment is found, and a significant portion of
the CEO's misaligned pay is attributed to
non-performance-based equity awards, taking into consideration:
o Magnitude of pay misalignment;
o Contribution of non-performance-based equity grants to overall pay; and
o The proportion of equity awards granted in the last three fiscal years
concentrated at the named executive officer
(NEO) level.
PRIMARY EVALUATION FACTORS FOR EXECUTIVE PAY
PAY-FOR-PERFORMANCE EVALUATION
ISS annually conducts a pay-for-performance analysis to identify strong or
satisfactory alignment between pay and performance over a sustained period.
With respect to companies in the Russell 3000 index, this analysis considers
the following:
1. Peer Group (7) Alignment:
o The degree of alignment between the company's annualized TSR rank and the
CEO's annualized total pay
rank within a peer group, each measured over a three-year period.
o The multiple of the CEO's total pay relative to the peer group median.
2. Absolute Alignment -- the absolute alignment between the trend in CEO pay
and company TSR over the prior five
fiscal years -- i.e., the difference between the trend in annual pay changes
and the trend in annualized TSR during
the period.
If the above analysis demonstrates significant unsatisfactory long-term
pay-for-performance alignment or, in the case of non-Russell 3000 index
companies, misaligned pay and performance are otherwise suggested, our analysis
may include any of the following qualitative factors, if they are relevant to
the analysis to determine how various pay elements may work to encourage or to
undermine long-term value creation and alignment with shareholder interests:
o The ratio of performance- to time-based equity awards;
o The overall ratio of performance-based compensation;
o The completeness of disclosure and rigor of performance goals;
o The company's peer group benchmarking practices;
o Actual results of financial/operational metrics, such as growth in revenue,
profit, cash flow, etc., both absolute and
relative to peers;
o Special circumstances related to, for example, a new CEO in the prior FY or
anomalous equity grant practices (e.g.,
bi-annual awards);
o Realizable pay (8) compared to grant pay; and
o Any other factors deemed relevant.
(7) The revised peer group is generally comprised of 14-24 companies that are
selected using market cap, revenue (or assets for certain financial firms),
GICS industry group and company's selected peers' GICS industry group with size
constraints, via a process designed to select peers that are closest to the
subject company in terms of revenue/assets and industry and also within a
market cap bucket that is reflective of the company's.
(8) ISS research reports will include realizable pay for S&P1500 companies.
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PROBLEMATIC PAY PRACTICES
The focus is on executive compensation practices that contravene the global pay
principles, including:
o Problematic practices related to non-performance-based compensation
elements;
o Incentives that may motivate excessive risk-taking; and
o Options Backdating.
PROBLEMATIC PAY PRACTICES RELATED TO NON-PERFORMANCE-BASED COMPENSATION
ELEMENTS
Pay elements that are not directly based on performance are generally evaluated
case-by-case considering the context of a company's overall pay program and
demonstrated pay-for-performance philosophy. Please refer to ISS' Compensation
FAQ document for detail on specific pay practices that have been identified as
potentially problematic and may lead to negative recommendations if they are
deemed to be inappropriate or unjustified relative to executive pay best
practices. The list below highlights the problematic practices that carry
significant weight in this overall consideration and may result in adverse vote
recommendations:
o Repricing or replacing of underwater stock options/SARS without prior
shareholder approval (including cash
buyouts and voluntary surrender of underwater options);
o Excessive perquisites or tax gross-ups, including any gross-up related to a
secular trust or restricted stock vesting;
o New or extended agreements that provide for:
o CIC payments exceeding 3 times base salary and average/target/most recent
bonus;
o CIC severance payments without involuntary job loss or substantial diminution
of duties ("single" or
"modified single" triggers);
o CIC payments with excise tax gross-ups (including "modified" gross-ups).
INCENTIVES THAT MAY MOTIVATE EXCESSIVE RISK-TAKING
o Multi-year guaranteed bonuses;
o A single or common performance metric used for short- and long-term plans;
o Lucrative severance packages;
o High pay opportunities relative to industry peers;
o Disproportionate supplemental pensions; or
o Mega annual equity grants that provide unlimited upside with no downside
risk.
Factors that potentially mitigate the impact of risky incentives include
rigorous claw-back provisions and robust stock ownership/holding guidelines.
OPTIONS BACKDATING
The following factors should be examined case-by-case to allow for distinctions
to be made between "sloppy" plan administration versus deliberate action or
fraud:
o Reason and motive for the options backdating issue, such as inadvertent vs.
deliberate grant date changes;
o Duration of options backdating;
o Size of restatement due to options backdating;
o Corrective actions taken by the board or compensation committee, such as
canceling or re-pricing backdated
options, the recouping of option gains on backdated grants; and
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o Adoption of a grant policy that prohibits backdating, and creates a fixed
grant schedule or window period for
equity grants in the future.
COMPENSATION COMMITTEE COMMUNICATIONS AND RESPONSIVENESS
Consider the following factors case-by-case when evaluating ballot items
related to executive pay on the board's responsiveness to investor input and
engagement on compensation issues:
o Failure to respond to majority-supported shareholder proposals on executive
pay topics; or
o Failure to adequately respond to the company's previous say-on-pay proposal
that received the support of less
than 70 percent of votes cast, taking into account:
o The company's response, including:
* Disclosure of engagement efforts with major institutional investors regarding
the issues that
contributed to the low level of support;
* Specific actions taken to address the issues that contributed to the low
level of support;
* Other recent compensation actions taken by the company;
o Whether the issues raised are recurring or isolated;
o The company's ownership structure; and
o Whether the support level was less than 50 percent, which would warrant the
highest degree of
responsiveness.
oooooo
FREQUENCY OF ADVISORY VOTE ON EXECUTIVE COMPENSATION ("SAY WHEN ON PAY")
Vote for annual advisory votes on compensation, which provide the most
consistent and clear communication channel for shareholder concerns about
companies' executive pay programs.
oooooo
VOTING ON GOLDEN PARACHUTES IN AN ACQUISITION, MERGER, CONSOLIDATION, OR
PROPOSED SALE
Vote case-by-case on say on Golden Parachute proposals, including consideration
of existing change-in-control arrangements maintained with named executive
officers rather than focusing primarily on new or extended arrangements.
Features that may result in an against recommendation include one or more of
the following, depending on the number, magnitude, and/or timing of issue(s):
o Single- or modified-single-trigger cash severance;
o Single-trigger acceleration of unvested equity awards;
o Excessive cash severance (>3x base salary and bonus);
o Excise tax gross-ups triggered and payable (as opposed to a provision to
provide excise tax gross-ups);
o Excessive golden parachute payments (on an absolute basis or as a percentage
of transaction equity value); or
o Recent amendments that incorporate any problematic features (such as those
above) or recent actions (such as
extraordinary equity grants) that may make packages so attractive as to
influence merger agreements that may
not be in the best interests of shareholders; or
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o The company's assertion that a proposed transaction is conditioned on
shareholder approval of the golden
parachute advisory vote.
Recent amendment(s) that incorporate problematic features will tend to carry
more weight on the overall analysis. However, the presence of multiple legacy
problematic features will also be closely scrutinized.
In cases where the golden parachute vote is incorporated into a company's
advisory vote on compensation (management say-on-pay), ISS will evaluate the
say-on-pay proposal in accordance with these guidelines, which may give higher
weight to that component of the overall evaluation.
oooooo
EQUITY-BASED AND OTHER INCENTIVE PLANS
Vote case-by-case on equity-based compensation plans. Vote against the equity
plan if any of the following factors apply:
o The total COST of the company's equity plans is unreasonable;
o The plan expressly permits REPRICING;
o A PAY-FOR-PERFORMANCE MISALIGNMENT is found;
o The company's three year BURN RATE exceeds the BURN RATE CAP of its industry
group;
o The plan has a LIBERAL CHANGE-OF-CONTROL DEFINITION; or
o The plan is a vehicle for PROBLEMATIC PAY PRACTICES.
Each of these factors is described below:
COST OF EQUITY PLANS
Generally, vote against equity plans if the cost is unreasonable. For
non-employee director plans, vote for the plan if certain factors are met (see
DIRECTOR COMPENSATION section).
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT),
which is measured using a binomial option pricing model that assesses the
amount of shareholders' equity flowing out of the company to employees and
directors.
SVT is expressed as both a dollar amount and as a percentage of market value,
and includes the new shares proposed, shares available under existing plans,
and shares granted but unexercised. All award types are valued. For omnibus
plans, unless limitations are placed on the most expensive types of awards (for
example, full value awards), the assumption is made that all awards to be
granted will be the most expensive types. See discussion of specific types of
awards.
The Shareholder Value Transfer is reasonable if it falls below the
company-specific allowable cap. The allowable cap is determined as follows: The
top quartile performers in each industry group (using the Global Industry
Classification Standard: GICS) are identified. Benchmark SVT levels for each
industry are established based on these top performers' historic SVT.
Regression analyses are run on each industry group to identify the variables
most strongly correlated to SVT. The benchmark industry SVT level is then
adjusted upwards or downwards for the specific company by plugging the
company-specific performance measures, size and cash compensation into the
industry cap equations to arrive at the company's allowable cap.
REPRICING PROVISIONS
Vote against plans that expressly permit the repricing or exchange of
underwater stock options/stock appreciate rights (SARs) without prior
shareholder approval. "Repricing" includes the ability to do any of the
following:
o Amend the terms of outstanding options or SARs to reduce the exercise price
of such outstanding options or SARs;
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o Cancel outstanding options or SARs in exchange for options or SARs with an
exercise price that is less than the
exercise price of the original options or SARs.
Also, vote against OR withhold from members of the Compensation Committee who
approved and/or implemented a repricing or an option/SAR exchange program, by
buying out underwater options/SARs for stock, cash or other consideration or
canceling underwater options/SARs and regranting options/SARs with a lower
exercise price, without prior shareholder approval, even if such repricings are
allowed in their equity plan.
Vote against plans if the company has a history of repricing without
shareholder approval, and the applicable listing standards would not preclude
them from doing so.
oooooo
PAY-FOR-PERFORMANCE MISALIGNMENT--APPLICATION TO EQUITY PLANS
If a significant portion of the CEO's misaligned pay is attributed to
non-performance-based equity awards, and there is an equity plan on the ballot
with the CEO as one of the participants, ISS may recommend a vote against the
equity plan. Considerations in voting against the equity plan may include, but
are not limited to:
o Magnitude of pay misalignment;
o Contribution of non--performance-based equity grants to overall pay; and
o The proportion of equity awards granted in the last three fiscal years
concentrated at the named executive officer
level.
THREE-YEAR BURN RATE/BURN RATE COMMITMENT
Generally vote against equity plans for companies whose average three-year burn
rates their burn rate caps.
Burn rate caps are calculated as the greater of: (1) the mean (o) plus one
standard deviation (o) of the company's GICS group segmented by Russell 3000
index and non-Russell 3000 index (per the Burn Rate Table published in
December); and (2) two percent of weighted common shares outstanding. In
addition, year-over-year burn-rate cap changes will be limited to a maximum of
two (2) percentage points (plus or minus) the prior year's burn-rate cap.
If a company fails to fulfill a burn rate commitment, vote against or withhold
from the compensation committee.
In the absence of demonstrating reasonable use of equity awards under the first
burn rate commitment, companies making consecutive burn rate commitments may
not garner support on their proposed equity plan proposals.
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BURN RATE TABLE FOR 2014
[Enlarge/Download Table]
RUSSELL 3000 NON-RUSSELL 3000
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STANDARD 2014 BURN STANDARD 2014 BURN
GICS DESCRIPTION MEAN DEVIATION RATE CAP* MEAN DEVIATION RATE CAP*
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1010 Energy 2.14% 2.16% 4.30% 2.66% 3.60% 7.46%
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1510 Materials 1.55% 1.30% 2.85% 3.20% 4.65% 7.85%
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2010 Capital Goods 1.81% 1.39% 3.20% 3.28% 4.88% 8.16%
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Commercial & Professional
2020 Services 2.55% 1.82% 4.37% 3.68% 3.65% 7.33%
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2030 Transportation 1.53% 1.80% 3.33% 1.71% 1.98% 3.69%
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2510 Automobiles & Components 1.78% 2.03% 3.81% 2.74% 3.21% 5.95%
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2520 Consumer Durables & Apparel 2.48% 1.80% 4.28% 3.37% 4.24% 7.61%
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2530 Consumer Services 2.55% 1.61% 4.16% 2.16% 2.12% 4.28%
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2540 Media 2.45% 1.98% 4.43% 3.23% 2.24% 5.47%
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2550 Retailing 2.41% 1.75% 4.16% 3.39% 3.21% 6.60%
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3010, 3020, Consumer Staples 1.59% 1.18% 2.13% 2.32%
3030 2.77% 4.45%
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Health Care Equipment &
3510 Services 3.00% 1.82% 4.82% 4.81% 4.27% 9.08%
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Pharmaceuticals &
3520 Biotechnology 3.65% 2.26% 5.91% 4.87% 4.11% 8.98%
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4010 Banks 1.48% 1.65% 3.13% 1.12% 1.67% 2.79%
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4020 Diversified Financials 3.65% 5.09% 8.74% 2.74% 4.43% 7.56%
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4030 Insurance 1.75% 1.55% 3.30% 1.05% 1.53% 2.58%
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4040 Real Estate 1.36% 1.50% 2.86% 1.12% 1.56% 2.68%
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4510 Software & Services 4.56% 2.69% 7.25% 5.26% 3.88% 9.14%
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Technology Hardware &
4520 Equipment 3.50% 1.99% 5.49% 3.96% 4.95% 8.91%
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4530 Semiconductor Equipment 4.34% 2.38% 4.67% 5.08%
6.72% 9.75%
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5010 Telecommunication Services 2.59% 1.63% 4.22% 3.57% 3.97% 7.54%
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5510 Utilities 0.82% 0.47% 2.00% * 1.76% 1.90% 3.66%
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THE CAP IS GENERALLY THE MEAN + STANDARD DEVIATION, SUBJECT TO MINIMUM CAP OF
2% (DE MINIMUS ALLOWANCE) AND MAXIMUM +/- 2 PERCENTAGE POINTS RELATIVE TO PRIOR
YEAR BURN RATE CAP FOR SAME INDUSTRY/INDEX GROUP.
A premium (multiplier) is applied on full value awards for the past three
fiscal years. The guideline for applying the premium is as follows:
STOCK PRICE VOLATILITY
54.6% and higher
36.1% or higher and less than 54.6%
24.9% or higher and less than 36.1%
16.5% or higher and less than 24.9%
7.9% or higher and less than 16.5%
Less than 7.9%
MULTIPLIER
1 full-value award will count as 1.5 option shares
1 full-value award will count as 2.0 option shares
1 full-value award will count as 2.5 option shares
1 full-value award will count as 3.0 option shares
1 full-value award will count as 3.5 option shares
1 full-value award will count as 4.0 option shares
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ooooo
LIBERAL DEFINITION OF CHANGE IN CONTROL
Generally vote against equity plans if the plan has a liberal definition of
change in control (it provides for the acceleration of vesting of equity awards
even though an actual change in control may not occur) and the equity awards
would automatically vest upon such liberal definition of change-in-control.
Examples of such a definition include, but are not limited to, announcement or
commencement of a tender offer, provisions for acceleration upon a "potential"
takeover, shareholder approval of a merger or other transactions, or similar
language.
PROBLEMATIC PAY PRACTICES
If the equity plan on the ballot is a vehicle for PROBLEMATIC PAY PRACTICES,
vote against the plan.
ooooo
SPECIFIC TREATMENT OF CERTAIN AWARD TYPES IN EQUITY PLAN EVALUATIONS
DIVIDEND EQUIVALENT RIGHTS
Options that have Dividend Equivalent Rights (DERs) associated with them will
have a higher calculated award value than those without DERs under the binomial
model, based on the value of these dividend streams. The higher value will be
applied to new shares, shares available under existing plans, and shares
awarded but not exercised per the plan specifications. DERS transfer more
shareholder equity to employees and non-employee directors and this cost should
be captured.
ooooo
LIBERAL SHARE RECYCLING PROVISIONS
Under net share counting provisions, shares tendered by an option holder to pay
for the exercise of an option, shares withheld for taxes or shares repurchased
by the company on the open market can be recycled back into the equity plan for
awarding again. All awards with such provisions should be valued as full-value
awards. Stock-settled stock appreciation rights (SSARs) will also be considered
as full-value awards if a company counts only the net shares issued to
employees towards their plan reserve.
ooooo
OPERATING PARTNERSHIP (OP) UNITS IN EQUITY PLAN ANALYSIS OF REAL ESTATE
INVESTMENT TRUSTS (REITS)
For Real Estate Investment Trusts (REITS), include the common shares issuable
upon conversion of outstanding Operating Partnership (OP) units in the share
count for the purposes of determining: (1) market capitalization in the
Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the
burn rate analysis.
ooooo
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OPTION OVERHANG COST
Companies with sustained positive stock performance and high overhang cost
attributable to in-the-money options outstanding in excess of six years may
warrant a carve-out of these options from the overhang as long as the dilution
attributable to the new share request is reasonable and the company exhibits
sound compensation practices. Consider case-by-case a carve-out of a portion of
cost attributable to overhang, considering the following criteria:
o PERFORMANCE: Companies with sustained positive stock performance will merit
greater scrutiny. Five-year total
shareholder return (TSR), year-over-year performance, and peer performance
could play a significant role in this
determination.
o OVERHANG DISCLOSURE: Assess whether optionees have held in-the-money options
for a prolonged period (thus
reflecting their confidence in the prospects of the company). Note that this
assessment would require additional
disclosure regarding a company's overhang. Specifically, the following
disclosure would be required:
o The number of in-the-money options outstanding in excess of six or more years
with a corresponding
weighted average exercise price and weighted average contractual remaining
term;
o The number of all options outstanding less than six years and underwater
options outstanding in excess of
six years with a corresponding weighted average exercise price and weighted
average contractual
remaining term;
o The general vesting provisions of option grants; and
o The distribution of outstanding option grants with respect to the named
executive officers;
o DILUTION: Calculate the expected duration of the new share request in
addition to all shares currently available for
grant under the equity compensation program, based on the company's three-year
average burn rate (or a burn-
rate commitment that the company makes for future years). The expected duration
will be calculated by
multiplying the company's unadjusted (options and full-value awards accounted
on a one-for-one basis) three-year
average burn rate by the most recent fiscal year's weighted average shares
outstanding (as used in the company's
calculation of basic EPS) and divide the sum of the new share request and all
available shares under the company's
equity compensation program by the product. For example, an expected duration
in excess of five years could be
considered problematic; and
o COMPENSATION PRACTICES: An evaluation of overall practices could include:
(1) stock option repricing provisions, (2)
high concentration ratios (of grants to top executives), or (3) additional
practices outlined in the Poor Pay Practices
policy.
ooooo
OTHER COMPENSATION PLANS
401(K) EMPLOYEE BENEFIT PLANS
Vote for proposals to implement a 401(k) savings plan for employees.
ooooo
EMPLOYEE STOCK OWNERSHIP PLANS (ESOPS)
Vote for proposals to implement an ESOP or increase authorized shares for
existing ESOPs, unless the number of shares allocated to the ESOP is excessive
(more than five percent of outstanding shares).
ooooo
EMPLOYEE STOCK PURCHASE PLANS--QUALIFIED PLANS
Vote case-by-case on qualified employee stock purchase plans. Vote for employee
stock purchase plans where all of the following apply:
o Purchase price is at least 85 percent of fair market value;
o Offering period is 27 months or less; and
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o The number of shares allocated to the plan is 10 percent or less of the
outstanding shares.
Vote against qualified employee stock purchase plans where any of the following
apply:
o Purchase price is less than 85 percent of fair market value; or
o Offering period is greater than 27 months; or
o The number of shares allocated to the plan is more than ten percent of the
outstanding shares.
ooooo
EMPLOYEE STOCK PURCHASE PLANS--NON-QUALIFIED PLANS
Vote case-by-case on nonqualified employee stock purchase plans. Vote for
nonqualified employee stock purchase plans with all the following features:
o Broad-based participation (I.E., all employees of the company with the
exclusion of individuals with 5 percent or
more of beneficial ownership of the company);
o Limits on employee contribution, which may be a fixed dollar amount or
expressed as a percent of base salary;
o Company matching contribution up to 25 percent of employee's contribution,
which is effectively a discount of 20
percent from market value;
o No discount on the stock price on the date of purchase since there is a
company matching contribution.
Vote against nonqualified employee stock purchase plans when any of the plan
features do not meet the above criteria. If the company matching contribution
exceeds 25 percent of employee's contribution, evaluate the cost of the plan
against its allowable cap.
ooooo
INCENTIVE BONUS PLANS AND TAX DEDUCTIBILITY PROPOSALS (OBRA-RELATED
COMPENSATION PROPOSALS)
Generally vote for proposals to approve or amend executive incentive bonus
plans if the proposal:
o Is only to include administrative features;
o Places a cap on the annual grants any one participant may receive to comply
with the provisions of Section 162(m);
o Adds performance goals to existing compensation plans to comply with the
provisions of Section 162(m) unless
they are clearly inappropriate; or
o Covers cash or cash and stock bonus plans that are submitted to shareholders
for the purpose of exempting
compensation from taxes under the provisions of Section 162(m) if no increase
in shares is requested.
Vote against such proposals if:
o The compensation committee does not fully consist of independent outsiders,
per ISS' DIRECTOR CLASSIFICATION; or
o The plan contains excessive problematic provisions.
Vote case-by-case on such proposals if:
o In addition to seeking 162(m) tax treatment, the amendment may cause the
transfer of additional shareholder
value to employees (E.G., by requesting additional shares, extending the option
term, or expanding the pool of plan
participants). Evaluate the Shareholder Value Transfer in comparison with the
company's allowable cap; or
o A company is presenting the plan to shareholders for Section 162(m)
favorable tax treatment for the first time
after the company's initial public offering (IPO). Perform a full equity plan
analysis, including consideration of total
shareholder value transfer, burn rate (if applicable), repricing, and liberal
change in control. Other factors such as
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pay-for-performance or problematic pay practices as related to Management
Say-on-Pay may be considered if appropriate.
ooooo
OPTION EXCHANGE PROGRAMS/REPRICING OPTIONS
Vote case-by-case on management proposals seeking approval to exchange/reprice
options taking into consideration:
o Historic trading patterns--the stock price should not be so volatile that
the options are likely to be back "in-the-
money" over the near term;
o Rationale for the re-pricing--was the stock price decline beyond
management's control?
o Is this a value-for-value exchange?
o Are surrendered stock options added back to the plan reserve?
o Option vesting--does the new option vest immediately or is there a black-out
period?
o Term of the option--the term should remain the same as that of the replaced
option;
o Exercise price--should be set at fair market or a premium to market;
o Participants--executive officers and directors should be excluded.
If the surrendered options are added back to the equity plans for re-issuance,
then also take into consideration the company's total cost of equity plans and
its three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale, and
timing of the repricing proposal. The proposal should clearly articulate why
the board is choosing to conduct an exchange program at this point in time.
Repricing underwater options after a recent precipitous drop in the company's
stock price demonstrates poor timing. Repricing after a recent decline in stock
price triggers additional scrutiny and a potential against vote on the
proposal. At a minimum, the decline should not have happened within the past
year. Also, consider the terms of the surrendered options, such as the grant
date, exercise price and vesting schedule. Grant dates of surrendered options
should be far enough back (two to three years) so as not to suggest that
repricings are being done to take advantage of short-term downward price
movements. Similarly, the exercise price of surrendered options should be above
the 52-week high for the stock price.
Vote for shareholder proposals to put option repricings to a shareholder vote.
ooooo
STOCK PLANS IN LIEU OF CASH
Vote case-by-case on plans that provide participants with the option of taking
all or a portion of their cash compensation in the form of stock.
Vote for non-employee director-only equity plans that provide a
dollar-for-dollar cash-for-stock exchange.
Vote case-by-case on plans which do not provide a dollar-for-dollar cash for
stock exchange. In cases where the exchange is not dollar-for-dollar, the
request for new or additional shares for such equity program will be considered
using the binomial option pricing model. In an effort to capture the total cost
of total compensation, ISS will not make any adjustments to carve out the
in-lieu-of cash compensation.
ooooo
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TRANSFER STOCK OPTION (TSO) PROGRAMS
One-time Transfers: Vote against or withhold from compensation committee
members if they fail to submit one-time transfers to shareholders for approval.
Vote case-by-case on one-time transfers. Vote for if:
o Executive officers and non-employee directors are excluded from
participating;
o Stock options are purchased by third-party financial institutions at a
discount to their fair value using option pricing
models such as Black-Scholes or a Binomial Option Valuation or other
appropriate financial models;
o There is a two-year minimum holding period for sale proceeds (cash or stock)
for all participants.
Additionally, management should provide a clear explanation of why options are
being transferred to a third-party institution and whether the events leading
up to a decline in stock price were beyond management's control. A review of
the company's historic stock price volatility should indicate if the options
are likely to be back "in-the-money" over the near term.
Ongoing TSO program: Vote against equity plan proposals if the details of
ongoing TSO programs are not provided to shareholders. Since TSOs will be one
of the award types under a stock plan, the ongoing TSO program, structure and
mechanics must be disclosed to shareholders. The specific criteria to be
considered in evaluating these proposals include, but not limited, to the
following:
o Eligibility;
o Vesting;
o Bid-price;
o Term of options;
o Cost of the program and impact of the TSOs on company's total option
expense
o Option repricing policy.
Amendments to existing plans that allow for introduction of transferability of
stock options should make clear that only options granted post-amendment shall
be transferable.
ooooo
DIRECTOR COMPENSATION
EQUITY PLANS FOR NON-EMPLOYEE DIRECTORS
Vote case-by-case on compensation plans for non-employee directors, based on
the cost of the plans against the company's allowable cap.
On occasion, director stock plans that set aside a relatively small number of
shares when combined with employee or executive stock compensation plans will
exceed the allowable cap. Vote for the plan if ALL of the following qualitative
factors in the board's compensation are met and disclosed in the proxy
statement:
o Director stock ownership guidelines with a minimum of three times the annual
cash retainer.
o Vesting schedule or mandatory holding/deferral period:
o A minimum vesting of three years for stock options or restricted stock; or
o Deferred stock payable at the end of a three-year deferral period.
o Mix between cash and equity:
o A balanced mix of cash and equity, for example 40% cash/60% equity or 50%
cash/50% equity; or
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o If the mix is heavier on the equity component, the vesting schedule or
deferral period should be more
stringent, with the lesser of five years or the term of directorship.
o No retirement/benefits and perquisites provided to non-employee directors;
and
o Detailed disclosure provided on cash and equity compensation delivered to
each non-employee director for the
most recent fiscal year in a table. The column headers for the table may
include the following: name of each non-
employee director, annual retainer, board meeting fees, committee retainer,
committee-meeting fees, and equity
grants.
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NON-EMPLOYEE DIRECTOR RETIREMENT PLANS
Vote against retirement plans for non-employee directors.
Vote for shareholder proposals to eliminate retirement plans for non-employee
directors.
ooooo
SHAREHOLDER PROPOSALS ON COMPENSATION
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY)
Generally, vote for shareholder proposals that call for non-binding shareholder
ratification of the compensation of the Named Executive Officers and the
accompanying narrative disclosure of material factors provided to understand
the Summary Compensation Table.
ooooo
ADOPT ANTI-HEDGING/PLEDGING/SPECULATIVE INVESTMENTS POLICY
Generally vote for proposals seeking a policy that prohibits named executive
officers from engaging in derivative or speculative transactions involving
company stock, including hedging, holding stock in a margin account, or
pledging stock as collateral for a loan. However, the company's existing
policies regarding responsible use of company stock will be considered.
ooooo
BONUS BANKING/BONUS BANKING "PLUS"
Vote case-by-case on proposals seeking deferral of a portion of annual bonus
pay, with ultimate payout linked to sustained results for the performance
metrics on which the bonus was earned (whether for the named executive officers
or a wider group of employees), taking into account the following factors:
o The company's past practices regarding equity and cash compensation;
o Whether the company has a holding period or stock ownership requirements in
place, such as a meaningful
retention ratio (at least 50 percent for full tenure); and
o Whether the company has a rigorous claw-back policy in place.
ooooo
COMPENSATION CONSULTANTS--DISCLOSURE OF BOARD OR COMPANY'S UTILIZATION
Generally vote for shareholder proposals seeking disclosure regarding the
Company, Board, or Compensation Committee's use of compensation consultants,
such as company name, business relationship(s), and fees paid.
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ooooo
DISCLOSURE/SETTING LEVELS OR TYPES OF COMPENSATION FOR EXECUTIVES AND DIRECTORS
Generally, vote for shareholder proposals seeking additional disclosure of
executive and director pay information, provided the information requested is
relevant to shareholders' needs, would not put the company at a competitive
disadvantage relative to its industry, and is not unduly burdensome to the
company.
Vote against shareholder proposals seeking to set absolute levels on
compensation or otherwise dictate the amount or form of compensation.
Vote against shareholder proposals seeking to eliminate stock options or any
other equity grants to employees or directors.
Vote against shareholder proposals requiring director fees be paid in stock
only.
Generally vote against shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board.
Vote case-by-case on all other shareholder proposals regarding executive and
director pay, taking into account company performance, pay level versus peers,
pay level versus industry, and long-term corporate outlook.
ooooo
GOLDEN COFFINS/EXECUTIVE DEATH BENEFITS
Generally vote for proposals calling companies to adopt a policy of obtaining
shareholder approval for any future agreements and corporate policies that
could oblige the company to make payments or awards following the death of a
senior executive in the form of unearned salary or bonuses, accelerated vesting
or the continuation in force of unvested equity grants, perquisites and other
payments or awards made in lieu of compensation. This would not apply to any
benefit programs or equity plan proposals that the broad-based employee
population is eligible.
ooooo
HOLD EQUITY PAST RETIREMENT OR FOR A SIGNIFICANT PERIOD OF TIME
Vote case-by-case on shareholder proposals asking companies to adopt policies
requiring senior executive officers to retain all or a significant portion of
the shares acquired through compensation plans, either:
o while employed and/or for two years following the termination of their
employment ; or
o for a substantial period following the lapse of all other vesting
requirements for the award ("lock-up period"), with
ratable release of a portion of the shares annually during the lock-up period.
The following factors will be taken into account:
o Whether the company has any holding period, retention ratio, or officer
ownership requirements in place. These
should consist of:
o Rigorous stock ownership guidelines;
o A holding period requirement coupled with a significant long-term ownership
requirement; or
o A meaningful retention ratio;
o Actual officer stock ownership and the degree to which it meets or exceeds
the proponent's suggested holding
period/retention ratio or the company's own stock ownership or retention
requirements;
o Post-termination holding requirement policies or any policies aimed at
mitigating risk taking by senior executives;
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o Problematic pay practices, current and past, which may promote a short-term
versus a long-term focus.
A rigorous stock ownership guideline should be at least 10x base salary for the
CEO, with the multiple declining for other executives. A meaningful retention
ratio should constitute at least 50 percent of the stock received from equity
awards (on a net proceeds basis) held on a long-term basis, such as the
executive's tenure with the company or even a few years past the executive's
termination with the company.
Vote case-by-case on shareholder proposals asking companies to adopt policies
requiring Named Executive Officers to retain 75% of the shares acquired through
compensation plans while employed and/or for two years following the
termination of their employment, and to report to shareholders regarding this
policy. The following factors will be taken into account:
o Whether the company has any holding period, retention ratio, or officer
ownership requirements in place. These
should consist of:
o Rigorous stock ownership guidelines, or
o A holding period requirement coupled with a significant long-term ownership
requirement, or
o A meaningful retention ratio,
o Actual officer stock ownership and the degree to which it meets or exceeds
the proponent's suggested holding
period/retention ratio or the company's own stock ownership or retention
requirements.
o Problematic pay practices, current and past, which may promote a short-term
versus a long-term focus.
A rigorous stock ownership guideline should be at least 10x base salary for the
CEO, with the multiple declining for other executives. A meaningful retention
ratio should constitute at least 50 percent of the stock received from equity
awards (on a net proceeds basis) held on a long-term basis, such as the
executive's tenure with the company or even a few years past the executive's
termination with the company.
Generally vote against shareholder proposals that mandate a minimum amount of
stock that directors must own in order to qualify as a director or to remain on
the board. While ISS favors stock ownership on the part of directors, the
company should determine the appropriate ownership requirement.
ooooo
NON-DEDUCTIBLE COMPENSATION
Generally vote for proposals seeking disclosure of the extent to which the
company paid non-deductible compensation to senior executives due to Internal
Revenue Code Section 162(m), while considering the company's existing
disclosure practices.
ooooo
PAY FOR PERFORMANCE
PERFORMANCE-BASED AWARDS
Vote case-by-case on shareholder proposals requesting that a significant amount
of future long-term incentive compensation awarded to senior executives shall
be performance-based and requesting that the board adopt and disclose
challenging performance metrics to shareholders, based on the following
analytical steps:
o First, vote for shareholder proposals advocating the use of
performance-based equity awards, such as
performance contingent options or restricted stock, indexed options or
premium-priced options, unless the
proposal is overly restrictive or if the company has demonstrated that it is
using a "substantial" portion of
performance-based awards for its top executives. Standard stock options and
performance-accelerated awards do
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not meet the criteria to be considered as performance-based awards. Further,
premium-priced options should have a premium of at least 25 percent and higher
to be considered performance-based awards.
o Second, assess the rigor of the company's performance-based equity program.
If the bar set for the performance-
based program is too low based on the company's historical or peer group
comparison, generally vote for the
proposal. Furthermore, if target performance results in an above target payout,
vote for the shareholder proposal
due to program's poor design. If the company does not disclose the performance
metric of the performance-
based equity program, vote for the shareholder proposal regardless of the
outcome of the first step to the test.
In general, vote for the shareholder proposal if the company does not meet both
of the above two steps.
PAY FOR SUPERIOR PERFORMANCE
Vote case-by-case on shareholder proposals that request the board establish a
pay-for-superior performance standard in the company's executive compensation
plan for senior executives. These proposals generally include the following
principles:
o Set compensation targets for the plan's annual and long-term incentive pay
components at or below the peer
group median;
o Deliver a majority of the plan's target long-term compensation through
performance-vested, not simply time-
vested, equity awards;
o Provide the strategic rationale and relative weightings of the financial and
non-financial performance metrics or
criteria used in the annual and performance-vested long-term incentive
components of the plan;
o Establish performance targets for each plan financial metric relative to the
performance of the company's peer
companies;
o Limit payment under the annual and performance-vested long-term incentive
components of the plan to when the
company's performance on its selected financial performance metrics exceeds
peer group median performance.
Consider the following factors in evaluating this proposal:
o What aspects of the company's annual and long-term equity incentive programs
are performance driven?
o If the annual and long-term equity incentive programs are performance
driven, are the performance criteria and
hurdle rates disclosed to shareholders or are they benchmarked against a
disclosed peer group?
o Can shareholders assess the correlation between pay and performance based on
the current disclosure?
o What type of industry and stage of business cycle does the company belong
to?
ooooo
PRE-ARRANGED TRADING PLANS (10B5-1 PLANS)
Generally vote for shareholder proposals calling for certain principles
regarding the use of prearranged trading plans (10b5-1 plans) for executives.
These principles include:
o Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed
within two business days in a Form 8-K;
o Amendment or early termination of a 10b5-1 Plan is allowed only under
extraordinary circumstances, as
determined by the board;
o Ninety days must elapse between adoption or amendment of a 10b5-1 Plan and
initial trading under the plan;
o Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan;
o An executive may not trade in company stock outside the 10b5-1 Plan.
o Trades under a 10b5-1 Plan must be handled by a broker who does not handle
other securities transactions for the
executive.
ooooo
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PROHIBIT CEOS FROM SERVING ON COMPENSATION COMMITTEES
Generally vote against proposals seeking a policy to prohibit any outside CEO
from serving on a company's compensation committee, unless the company has
demonstrated problematic pay practices that raise concerns about the
performance and composition of the committee.
ooooo
RECOUPMENT OF INCENTIVE OR STOCK COMPENSATION IN SPECIFIED CIRCUMSTANCES
Vote case-by-case on proposals to recoup incentive cash or stock compensation
made to senior executives if it is later determined that the figures upon which
incentive compensation is earned turn out to have been in error, or if the
senior executive has breached company policy or has engaged in misconduct that
may be significantly detrimental to the company's financial position or
reputation, or if the senior executive failed to manage or monitor risks that
subsequently led to significant financial or reputational harm to the company.
Many companies have adopted policies that permit recoupment in cases where an
executive's fraud, misconduct, or negligence significantly contributed to a
restatement of financial results that led to the awarding of unearned incentive
compensation. However, such policies may be narrow given that not all
misconduct or negligence may result in significant financial restatements.
Misconduct, negligence or lack of sufficient oversight by senior executives may
lead to significant financial loss or reputational damage that may have
long-lasting impact.
In considering whether to support such shareholder proposals, ISS will take
into consideration the following factors:
o If the company has adopted a formal recoupment policy;
o The rigor of the recoupment policy focusing on how and under what
circumstances the company may recoup
incentive or stock compensation;
o Whether the company has chronic restatement history or material financial
problems;
o Whether the company's policy substantially addresses the concerns raised by
the proponent;
o Disclosure of recoupment of incentive or stock compensation from senior
executives or lack thereof; or
o Any other relevant factors.
ooooo
SEVERANCE AGREEMENTS FOR EXECUTIVES/GOLDEN PARACHUTES
Vote for shareholder proposals requiring that golden parachutes or executive
severance agreements be submitted for shareholder ratification, unless the
proposal requires shareholder approval PRIOR to entering into employment
contracts.
Vote case-by-case on proposals to ratify or cancel golden parachutes. An
acceptable parachute should include, but is not limited to, the following:
o The triggering mechanism should be beyond the control of management;
o The amount should not exceed three times base amount (defined as the average
annual taxable W-2
compensation during the five years prior to the year in which the change of
control occurs);
o Change-in-control payments should be double-triggered, I.E., (1) after a
change in control has taken place, and (2)
termination of the executive as a result of the change in control. Change in
control is defined as a change in the
company ownership structure.
ooooo
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SHARE BUYBACK HOLDING PERIODS
Generally vote against shareholder proposals prohibiting executives from
selling shares of company stock during periods in which the company has
announced that it may or will be repurchasing shares of its stock. Vote for the
proposal when there is a pattern of abuse by executives exercising options or
selling shares during periods of share buybacks.
ooooo
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERPS)
Generally vote for shareholder proposals requesting to put extraordinary
benefits contained in SERP agreements to a shareholder vote unless the
company's executive pension plans do not contain excessive benefits beyond what
is offered under employee-wide plans.
Generally vote for shareholder proposals requesting to limit the executive
benefits provided under the company's supplemental executive retirement plan
(SERP) by limiting covered compensation to a senior executive's annual salary
and excluding of all incentive or bonus pay from the plan's definition of
covered compensation used to establish such benefits.
ooooo
TAX GROSS-UP PROPOSALS
Generally vote for proposals calling for companies to adopt a policy of not
providing tax gross-up payments to executives, except in situations where
gross-ups are provided pursuant to a plan, policy, or arrangement applicable to
management employees of the company, such as a relocation or expatriate tax
equalization policy.
ooooo
TERMINATION OF EMPLOYMENT PRIOR TO SEVERANCE PAYMENT/ELIMINATING ACCELERATED
VESTING OF UNVESTED EQUITY
Vote case-by-case on shareholder proposals seeking a policy requiring
termination of employment prior to severance payment and/or eliminating
accelerated vesting of unvested equity.
The following factors will be considered:
o The company's current treatment of equity in change-of-control situations
(i.e. is it double triggered, does it allow
for the assumption of equity by acquiring company, the treatment of performance
shares, etc.);
o Current employment agreements, including potential poor pay practices such
as gross-ups embedded in those
agreements.
Generally vote for proposals seeking a policy that prohibits acceleration of
the vesting of equity awards to senior executives in the event of a change in
control (except for pro rata vesting considering the time elapsed and
attainment of any related performance goals between the award date and the
change in control).
oooooo
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6. SOCIAL/ENVIRONMENTAL ISSUES
Global Approach
Issues covered under the policy include a wide range of topics, including
consumer and product safety, environment and energy, labor standards and human
rights, workplace and board diversity, and corporate political issues. While a
variety of factors goes into each analysis, the overall principle guiding all
vote recommendations focuses on how the proposal may enhance or protect
shareholder value in either the short or long term.
Generally vote case-by-case, taking into consideration whether implementation
of the proposal is likely to enhance or protect shareholder value, and in
addition the following will also be considered:
o If the issues presented in the proposal are more appropriately or
effectively dealt with through legislation or
government regulation;
o If the company has already responded in an appropriate and sufficient manner
to the issue(s) raised in the
proposal;
o Whether the proposal's request is unduly burdensome (scope or timeframe) or
overly prescriptive;
o The company's approach compared with any industry standard practices for
addressing the issue(s) raised by the
proposal;
o If the proposal requests increased disclosure or greater transparency,
whether or not reasonable and sufficient
information is currently available to shareholders from the company or from
other publicly available sources; and
o If the proposal requests increased disclosure or greater transparency,
whether or not implementation would
reveal proprietary or confidential information that could place the company at
a competitive disadvantage.
ooooo
ANIMAL WELFARE
ANIMAL WELFARE POLICIES
Generally vote for proposals seeking a report on a company's animal welfare
standards, unless:
o The company has already published a set of animal welfare standards and
monitors compliance;
o The company's standards are comparable to industry peers; and
o There are no recent, significant fines or litigation related to the
company's treatment of animals.
ooooo
ANIMAL TESTING
Generally vote against proposals to phase out the use of animals in product
testing, unless:
o The company is conducting animal testing programs that are unnecessary or
not required by regulation;
o The company is conducting animal testing when suitable alternatives are
commonly accepted and used at industry
peers; or
o There are recent, significant fines or litigation related to the company's
treatment of animals.
ooooo
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ANIMAL SLAUGHTER
Generally vote against proposals requesting the implementation of Controlled
Atmosphere Killing (CAK) methods at company and/or supplier operations unless
such methods are required by legislation or generally accepted as the industry
standard.
Vote case-by-case on proposals requesting a report on the feasibility of
implementing CAK methods at company and/or supplier operations considering the
availability of existing research conducted by the company or industry groups
on this topic and any fines or litigation related to current animal processing
procedures at the company.
ooooo
CONSUMER ISSUES
GENETICALLY MODIFIED INGREDIENTS
Generally vote against proposals requesting that a company voluntarily label
genetically engineered (GE) ingredients in its products. The labeling of
products with GE ingredients is best left to the appropriate regulatory
authorities.
Vote case-by-case on proposals asking for a report on the feasibility of
labeling products containing GE ingredients, taking into account:
o The potential impact of such labeling on the company's business;
o The quality of the company's disclosure on GE product labeling, related
voluntary initiatives, and how this
disclosure compares with industry peer disclosure; and
o Company's current disclosure on the feasibility of GE product labeling.
Generally vote against proposals seeking a report on the social, health, and
environmental effects of genetically modified organisms (GMOs). Studies of this
sort are better undertaken by regulators and the scientific community.
Generally vote against proposals to eliminate GE ingredients from the company's
products, or proposals asking for reports outlining the steps necessary to
eliminate GE ingredients from the company's products. Such decisions are more
appropriately made by management with consideration of current regulations.
ooooo
REPORTS ON POTENTIALLY CONTROVERSIAL BUSINESS/FINANCIAL PRACTICES
Vote case-by-case on requests for reports on a company's potentially
controversial business or financial practices or products, taking into account:
o Whether the company has adequately disclosed mechanisms in place to prevent
abuses;
o Whether the company has adequately disclosed the financial risks of the
products/practices in question;
o Whether the company has been subject to violations of related laws or
serious controversies; and
o Peer companies' policies/practices in this area.
ooooo
PHARMACEUTICAL PRICING, ACCESS TO MEDICINES, AND PRESCRIPTION DRUG
REIMPORTATION
Generally vote against proposals requesting that companies implement specific
price restraints on pharmaceutical products unless the company fails to adhere
to legislative guidelines or industry norms in its product pricing practices.
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Vote case-by-case on proposals requesting that a company report on its product
pricing or access to medicine policies, considering:
o The nature of the company's business and the potential for reputational and
market risk exposure;
o Existing disclosure of relevant policies;
o Deviation from established industry norms;
o Relevant company initiatives to provide research and/or products to
disadvantaged consumers;
o Whether the proposal focuses on specific products or geographic regions; and
o The potential burden and scope of the requested report.
Generally vote for proposals requesting that a company report on the financial
and legal impact of its prescription drug reimportation policies unless such
information is already publicly disclosed.
Generally vote against proposals requesting that companies adopt specific
policies to encourage or constrain prescription drug reimportation. Such
matters are more appropriately the province of legislative activity and may
place the company at a competitive disadvantage relative to its peers.
ooooo
PRODUCT SAFETY AND TOXIC/HAZARDOUS MATERIALS
Generally vote for proposals requesting that a company report on its policies,
initiatives/procedures, and oversight mechanisms related to toxic/hazardous
materials or product safety in its supply chain, unless:
o The company already discloses similar information through existing reports
such as a supplier code of conduct
and/or a sustainability report;
o The company has formally committed to the implementation of a
toxic/hazardous materials and/or product safety
and supply chain reporting and monitoring program based on industry norms or
similar standards within a
specified time frame; and
o The company has not been recently involved in relevant significant
controversies, fines, or litigation.
Vote case-by-case on resolutions requesting that companies develop a
feasibility assessment to phase-out of certain toxic/hazardous materials, or
evaluate and disclose the potential financial and legal risks associated with
utilizing certain materials, considering:
o The company's current level of disclosure regarding its product safety
policies, initiatives and oversight
mechanisms;
o Current regulations in the markets in which the company operates; and
o Recent significant controversies, litigation, or fines stemming from
toxic/hazardous materials at the company.
Generally vote against resolutions requiring that a company reformulate its
products.
ooooo
TOBACCO-RELATED PROPOSALS
Vote case-by-case on resolutions regarding the advertisement of tobacco
products, considering:
o Recent related fines, controversies, or significant litigation;
o Whether the company complies with relevant laws and regulations on the
marketing of tobacco;
o Whether the company's advertising restrictions deviate from those of
industry peers;
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o Whether the company entered into the Master Settlement Agreement, which
restricts marketing of tobacco to
youth; and
o Whether restrictions on marketing to youth extend to foreign countries.
Vote case-by-case on proposals regarding second-hand smoke, considering;
o Whether the company complies with all laws and regulations;
o The degree that voluntary restrictions beyond those mandated by law might
hurt the company's competitiveness;
and
o The risk of any health-related liabilities.
Generally vote against resolutions to cease production of tobacco-related
products, to avoid selling products to tobacco companies, to spin-off
tobacco-related businesses, or prohibit investment in tobacco equities. Such
business decisions are better left to company management or portfolio managers.
Generally vote against proposals regarding tobacco product warnings. Such
decisions are better left to public health authorities.
ooooo
CLIMATE CHANGE
CLIMATE CHANGE/GREENHOUSE GAS (GHG) EMISSIONS
Generally vote for resolutions requesting that a company disclose information
on the impact of climate change on its operations and investments, considering:
o Whether the company already provides current, publicly-available information
on the impacts that climate change
may have on the company as well as associated company policies and procedures
to address related risks and/or
opportunities;
o The company's level of disclosure is at least comparable to that of industry
peers; and
o There are no significant controversies, fines, penalties, or litigation
associated with the company's environmental
performance.
Generally vote for proposals requesting a report on greenhouse gas (GHG)
emissions from company operations and/or products and operations, unless:
o The company already discloses current, publicly-available information on the
impacts that GHG emissions may
have on the company as well as associated company policies and procedures to
address related risks and/or
opportunities;
o The company's level of disclosure is comparable to that of industry peers;
and
o There are no significant, controversies, fines, penalties, or litigation
associated with the company's GHG emissions.
Vote case-by-case on proposals that call for the adoption of GHG reduction
goals from products and operations, taking into account:
o Overly prescriptive requests for the reduction in GHG emissions by specific
amounts or within a specific time
frame;
o Whether company disclosure lags behind industry peers;
o Whether the company has been the subject of recent, significant violations,
fines, litigation, or controversy related
to GHG emissions;
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o The feasibility of reduction of GHGs given the company's product line and
current technology; and
o Whether the company already provides meaningful disclosure on GHG emissions
from its products and operations.
ooooo
ENERGY EFFICIENCY
Generally vote for proposals requesting that a company report on its energy
efficiency policies, unless:
o The company complies with applicable energy efficiency regulations and laws,
and discloses its participation in
energy efficiency policies and programs, including disclosure of benchmark
data, targets, and performance
measures; or
o The proponent requests adoption of specific energy efficiency goals within
specific timelines.
ooooo
RENEWABLE ENERGY
Generally vote for requests for reports on the feasibility of developing
renewable energy resources unless the report would be duplicative of existing
disclosure or irrelevant to the company's line of business.
Generally vote against proposals requesting that the company invest in
renewable energy resources. Such decisions are best left to management's
evaluation of the feasibility and financial impact that such programs may have
on the company.
ooooo
DIVERSITY
BOARD DIVERSITY
Generally vote for requests for reports on a company's efforts to diversify the
board, unless:
o The gender and racial minority representation of the company's board is
reasonably inclusive in relation to
companies of similar size and business; and
o The board already reports on its nominating procedures and gender and racial
minority initiatives on the board
and within the company.
Vote case-by-case on proposals asking a company to increase the gender and
racial minority representation on its board, taking into account:
o The degree of existing gender and racial minority diversity on the company's
board and among its executive
officers;
o The level of gender and racial minority representation that exists at the
company's industry peers;
o The company's established process for addressing gender and racial minority
board representation;
o Whether the proposal includes an overly prescriptive request to amend
nominating committee charter language;
o The independence of the company's nominating committee;
o Whether the company uses an outside search firm to identify potential
director nominees; and
o Whether the company has had recent controversies, fines, or litigation
regarding equal employment practices.
ooooo
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EQUALITY OF OPPORTUNITY
Generally vote for proposals requesting a company disclose its diversity
policies or initiatives, or proposals requesting disclosure of a company's
comprehensive workforce diversity data, including requests for EEO-1 data,
unless:
o The company publicly discloses equal opportunity policies and initiatives in
a comprehensive manner;
o The company already publicly discloses comprehensive workforce diversity
data; and
o The company has no recent significant EEO-related violations or litigation.
Generally vote against proposals seeking information on the diversity efforts
of suppliers and service providers. Such requests may pose a significant burden
on the company.
ooooo
GENDER IDENTITY, SEXUAL ORIENTATION, AND DOMESTIC PARTNER BENEFITS
Generally vote for proposals seeking to amend a company's EEO statement or
diversity policies to prohibit discrimination based on sexual orientation
and/or gender identity, unless the change would be unduly burdensome.
Generally vote against proposals to extend company benefits to, or eliminate
benefits from domestic partners. Decisions regarding benefits should be left to
the discretion of the company.
ooooo
ENVIRONMENT AND SUSTAINABILITY
FACILITY AND WORKPLACE SAFETY
Vote case-by-case on requests for workplace safety reports, including reports
on accident risk reduction efforts, taking into account:
o The company's current level of disclosure of its workplace health and safety
performance data, health and safety
management policies, initiatives, and oversight mechanisms;
o The nature of the company's business, specifically regarding company and
employee exposure to health and safety
risks;
o Recent significant controversies, fines, or violations related to workplace
health and safety; and
o The company's workplace health and safety performance relative to industry
peers.
Vote case-by-case on resolutions requesting that a company report on safety
and/or security risks associated with its operations and/or facilities,
considering:
o The company's compliance with applicable regulations and guidelines;
o The company's current level of disclosure regarding its security and safety
policies, procedures, and compliance
monitoring; and
o The existence of recent, significant violations, fines, or controversy
regarding the safety and security of the
company's operations and/or facilities.
oooooo
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GENERAL ENVIRONMENTAL PROPOSALS AND COMMUNITY IMPACT ASSESSMENTS
Vote case-by-case on requests for reports on policies and/or the potential
(community) social and/or environmental impact of company operations,
considering:
o Current disclosure of applicable policies and risk assessment report(s) and
risk management procedures;
o The impact of regulatory non-compliance, litigation, remediation, or
reputational loss that may be associated with
failure to manage the company's operations in question, including the
management of relevant community and
stakeholder relations;
o The nature, purpose, and scope of the company's operations in the specific
region(s);
o The degree to which company policies and procedures are consistent with
industry norms; and
o The scope of the resolution.
ooooo
HYDRAULIC FRACTURING
Generally vote for proposals requesting greater disclosure of a company's
(natural gas) hydraulic fracturing operations, including measures the company
has taken to manage and mitigate the potential community and environmental
impacts of those operations, considering:
o The company's current level of disclosure of relevant policies and oversight
mechanisms;
o The company's current level of such disclosure relative to its industry
peers;
o Potential relevant local, state, or national regulatory developments; and
o Controversies, fines, or litigation related to the company's hydraulic
fracturing operations.
ooooo
OPERATIONS IN PROTECTED AREAS
Generally vote for requests for reports on potential environmental damage as a
result of company operations in protected regions, unless:
o Operations in the specified regions are not permitted by current laws or
regulations;
o The company does not currently have operations or plans to develop
operations in these protected regions; or
o The company's disclosure of its operations and environmental policies in
these regions is comparable to industry
peers.
ooooo
RECYCLING
Vote case-by-case on proposals to report on an existing recycling program, or
adopt a new recycling program, taking into account:
o The nature of the company's business;
o The current level of disclosure of the company's existing related programs;
o The timetable and methods of program implementation prescribed by the
proposal;
o The company's ability to address the issues raised in the proposal; and
o How the company's recycling programs compare to similar programs of its
industry peers.
ooooo
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SUSTAINABILITY REPORTING
Generally vote for proposals requesting that a company report on its policies,
initiatives, and oversight mechanisms related to social, economic, and
environmental sustainability, unless:
o The company already discloses similar information through existing reports
or policies such as an environment,
health, and safety (EHS) report; a comprehensive code of corporate conduct;
and/or a diversity report; or
o The company has formally committed to the implementation of a reporting
program based on Global Reporting
Initiative (GRI) guidelines or a similar standard within a specified time
frame.
ooooo
WATER ISSUES
Vote case-by-case on proposals requesting a company report on, or adopt a new
policy on, water-related risks and concerns, taking into account:
o The company's current disclosure of relevant policies, initiatives,
oversight mechanisms, and water usage metrics;
o Whether or not the company's existing water-related policies and practices
are consistent with relevant
internationally recognized standards and national/local regulations;
o The potential financial impact or risk to the company associated with
water-related concerns or issues; and
o Recent, significant company controversies, fines, or litigation regarding
water use by the company and its
suppliers.
ooooo
GENERAL CORPORATE ISSUES
CHARITABLE CONTRIBUTIONS
Vote against proposals restricting a company from making charitable
contributions. Charitable contributions are generally useful for assisting
worthwhile causes and for creating goodwill in the community. In the absence of
bad faith, self-dealing, or gross negligence, management should determine
which, and if, contributions are in the best interests of the company.
ooooo
DATA SECURITY, PRIVACY, AND INTERNET ISSUES
Vote case-by-case on proposals requesting the disclosure or implementation of
data security, privacy, or information access and management policies and
procedures, considering:
o The level of disclosure of company policies and procedures relating to data
security, privacy, freedom of speech,
information access and management, and Internet censorship;
o Engagement in dialogue with governments or relevant groups with respect to
data security, privacy, or the free
flow of information on the Internet;
o The scope of business involvement and of investment in countries whose
governments censor or monitor the
Internet and other telecommunications;
o Applicable market-specific laws or regulations that may be imposed on the
company; and
o Controversies, fines, or litigation related to data security, privacy,
freedom of speech, or Internet censorship.
ooooo
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ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) COMPENSATION-RELATED PROPOSALS
Vote case-by-case on proposals to link, or report on linking, executive
compensation to sustainability (environmental and social) criteria,
considering:
o Whether the company has significant and/or persistent controversies or
regulatory violations regarding social
and/or environmental issues;
o Whether the company has management systems and oversight mechanisms in place
regarding its social and
environmental performance;
o The degree to which industry peers have incorporated similar non-financial
performance criteria in their executive
compensation practices; and
o The company's current level of disclosure regarding its environmental and
social performance.
Generally vote against proposals calling for an analysis of the pay disparity
between corporate executives and other non-executive employees. The value of
the information sought by such proposals is unclear.
ooooo
HUMAN RIGHTS, LABOR ISSUES, AND INTERNATIONAL OPERATIONS
HUMAN RIGHTS PROPOSALS
Generally vote for proposals requesting a report on company or company supplier
labor and/or human rights standards and policies unless such information is
already publicly disclosed.
Vote case-by-case on proposals to implement company or company supplier labor
and/or human rights standards and policies, considering:
o The degree to which existing relevant policies and practices are disclosed;
o Whether or not existing relevant policies are consistent with
internationally recognized standards;
o Whether company facilities and those of its suppliers are monitored and how;
o Company participation in fair labor organizations or other internationally
recognized human rights initiatives;
o Scope and nature of business conducted in markets known to have higher risk
of workplace labor/human rights
abuse;
o Recent, significant company controversies, fines, or litigation regarding
human rights at the company or its
suppliers;
o The scope of the request; and
o Deviation from industry sector peer company standards and practices.
Vote case-by-case on proposals requesting that a company conduct an assessment
of the human rights risks in its operations or in its supply chain, or report
on its human rights risk assessment process, considering:
o The degree to which existing relevant policies and practices are disclosed,
including information on the
implementation of these policies and any related oversight mechanisms;
o The company's industry and whether the company or its suppliers operate in
countries or areas where there is a
history of human rights concerns;
o Recent, significant controversies, fines, or litigation regarding human
rights involving the company or its suppliers,
and whether the company has taken remedial steps; and
o Whether the proposal is unduly burdensome or overly prescriptive.
ooooo
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OPERATIONS IN HIGH RISK MARKETS
Vote case-by-case on requests for a report on a company's potential financial
and reputational risks associated with operations in "high-risk" markets, such
as a terrorism-sponsoring state or politically/socially unstable region, taking
into account:
o The nature, purpose, and scope of the operations and business involved that
could be affected by social or political
disruption;
o Current disclosure of applicable risk assessment(s) and risk management
procedures;
o Compliance with U.S. sanctions and laws;
o Consideration of other international policies, standards, and laws; and
o Whether the company has been recently involved in recent, significant
controversies, fines or litigation related to
its operations in "high-risk" markets.
ooooo
OUTSOURCING/OFFSHORING
Vote case-by-case on proposals calling for companies to report on the risks
associated with outsourcing/plant closures, considering:
o Controversies surrounding operations in the relevant market(s); o The value
of the requested report to shareholders;
o The company's current level of disclosure of relevant information on
outsourcing and plant closure procedures; and o The company's existing human
rights standards relative to industry peers.
oooooo
WEAPONS AND MILITARY SALES
Vote against reports on foreign military sales or offsets. Such disclosures may
involve sensitive and confidential information. Moreover, companies must comply
with government controls and reporting on foreign military sales.
Generally vote against proposals asking a company to cease production or report
on the risks associated with the use of depleted uranium munitions or nuclear
weapons components and delivery systems, including disengaging from current and
proposed contracts. Such contracts are monitored by government agencies, serve
multiple military and non-military uses, and withdrawal from these contracts
could have a negative impact on the company's business.
ooooo
POLITICAL ACTIVITIES
LOBBYING
Vote case-by-case on proposals requesting information on a company's lobbying
(including direct, indirect, and grassroots lobbying) activities, policies, or
procedures, considering:
o The company's current disclosure of relevant lobbying policies, and
management and board oversight;
o The company's disclosure regarding trade associations or other groups that
it supports, or is a member of, that engage in lobbying activities; and
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o Recent significant controversies, fines, or litigation regarding the
company's lobbying-related activities.
ooooo
POLITICAL CONTRIBUTIONS
Generally vote for proposals requesting greater disclosure of a company's
political contributions and trade association spending policies and activities,
considering:
o The company's current disclosure of policies and oversight mechanisms
related to its direct political contributions
and payments to trade associations or other groups that may be used for
political purposes, including information
on the types of organizations supported and the business rationale for
supporting these organizations; and
o Recent significant controversies, fines, or litigation related to the
company's political contributions or political
activities.
Vote against proposals barring a company from making political contributions.
Businesses are affected by legislation at the federal, state, and local level;
barring political contributions can put the company at a competitive
disadvantage.
Vote against proposals to publish in newspapers and other media a company's
political contributions. Such publications could present significant cost to
the company without providing commensurate value to shareholders.
ooooo
POLITICAL TIES
Generally vote against proposals asking a company to affirm political
nonpartisanship in the workplace, so long as:
o There are no recent, significant controversies, fines, or litigation
regarding the company's political contributions or
trade association spending; and
o The company has procedures in place to ensure that employee contributions to
company-sponsored political
action committees (PACs) are strictly voluntary and prohibit coercion.
Vote against proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior
government service and whether such service had a bearing on the business of
the company. Such a list would be burdensome to prepare without providing any
meaningful information to shareholders.
oooooo
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7. MUTUAL FUND PROXIES
ELECTION OF DIRECTORS
Vote case-by-case on the election of directors and trustees, following the same
guidelines for uncontested directors for public company shareholder meetings.
However, mutual fund boards do not usually have compensation committees, so do
not withhold for the lack of this committee.
ooooo
CONVERTING CLOSED-END FUND TO OPEN-END FUND
Vote case-by-case on conversion proposals, considering the following factors:
o Past performance as a closed-end fund;
o Market in which the fund invests;
o Measures taken by the board to address the discount; and
o Past shareholder activism, board activity, and votes on related proposals.
ooooo
PROXY CONTESTS
Vote case-by-case on proxy contests, considering the following factors:
o Past performance relative to its peers;
o Market in which fund invests;
o Measures taken by the board to address the issues;
o Past shareholder activism, board activity, and votes on related proposals;
o Strategy of the incumbents versus the dissidents;
o Independence of directors;
o Experience and skills of director candidates;
o Governance profile of the company;
o Evidence of management entrenchment.
ooooo
INVESTMENT ADVISORY AGREEMENTS
Vote case-by-case on investment advisory agreements, considering the following
factors:
o Proposed and current fee schedules;
o Fund category/investment objective;
o Performance benchmarks;
o Share price performance as compared with peers;
o Resulting fees relative to peers;
o Assignments (where the advisor undergoes a change of control).
ooooo
APPROVING NEW CLASSES OR SERIES OF SHARES
Vote for the establishment of new classes or series of shares.
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ooooo
PREFERRED STOCK PROPOSALS
Vote case-by-case on the authorization for or increase in preferred shares,
considering the following factors:
o Stated specific financing purpose;
o Possible dilution for common shares;
o Whether the shares can be used for antitakeover purposes.
ooooo
1940 ACT POLICIES
Vote case-by-case on policies under the Investment Advisor Act of 1940,
considering the following factors:
o Potential competitiveness;
o Regulatory developments;
o Current and potential returns; and
o Current and potential risk.
Generally vote for these amendments as long as the proposed changes do not
fundamentally alter the investment focus of the fund and do comply with the
current SEC interpretation.
ooooo
CHANGING A FUNDAMENTAL RESTRICTION TO A NONFUNDAMENTAL RESTRICTION
Vote case-by-case on proposals to change a fundamental restriction to a
non-fundamental restriction, considering the following factors:
o The fund's target investments;
o The reasons given by the fund for the change; and
o The projected impact of the change on the portfolio.
ooooo
CHANGE FUNDAMENTAL INVESTMENT OBJECTIVE TO NONFUNDAMENTAL
Vote against proposals to change a fund's fundamental investment objective to
non-fundamental.
ooooo
NAME CHANGE PROPOSALS
Vote case-by-case on name change proposals, considering the following factors:
o Political/economic changes in the target market;
o Consolidation in the target market; and
o Current asset composition.
ooooo
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CHANGE IN FUND'S SUBCLASSIFICATION
Vote case-by-case on changes in a fund's sub-classification, considering the
following factors:
o Potential competitiveness;
o Current and potential returns;
o Risk of concentration;
o Consolidation in target industry.
ooooo
BUSINESS DEVELOPMENT COMPANIES--AUTHORIZATION TO SELL SHARES OF COMMON STOCK AT
A PRICE BELOW NET ASSET VALUE
Vote for proposals authorizing the board to issue shares below Net Asset Value
(NAV) if:
o The proposal to allow share issuances below NAV has an expiration date no
more than one year from the date
shareholders approve the underlying proposal, as required under the Investment
Company Act of 1940;
o The sale is deemed to be in the best interests of shareholders by (1) a
majority of the company's independent
directors and (2) a majority of the company's directors who have no financial
interest in the issuance; and
o The company has demonstrated responsible past use of share issuances by
either:
o Outperforming peers in its 8-digit GICS group as measured by one- and
three-year median TSRs; or
o Providing disclosure that its past share issuances were priced at levels
that resulted in only small or moderate
discounts to NAV and economic dilution to existing non-participating
shareholders.
ooooo
DISPOSITION OF ASSETS/TERMINATION/LIQUIDATION
Vote case-by-case on proposals to dispose of assets, to terminate or liquidate,
considering the following factors:
o Strategies employed to salvage the company;
o The fund's past performance;
o The terms of the liquidation.
ooooo
CHANGES TO THE CHARTER DOCUMENT
Vote case-by-case on changes to the charter document, considering the following
factors:
o The degree of change implied by the proposal;
o The efficiencies that could result;
o The state of incorporation;
o Regulatory standards and implications.
Vote against any of the following changes:
o Removal of shareholder approval requirement to reorganize or terminate the
trust or any of its series;
o Removal of shareholder approval requirement for amendments to the new
declaration of trust;
o Removal of shareholder approval requirement to amend the fund's management
contract, allowing the contract to
be modified by the investment manager and the trust management, as permitted by
the 1940 Act;
o Allow the trustees to impose other fees in addition to sales charges on
investment in a fund, such as deferred sales
charges and redemption fees that may be imposed upon redemption of a fund's
shares;
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o Removal of shareholder approval requirement to engage in and terminate
subadvisory arrangements;
o Removal of shareholder approval requirement to change the domicile of the
fund.
ooooo
CHANGING THE DOMICILE OF A FUND
Vote case-by-case on re-incorporations, considering the following factors:
o Regulations of both states;
o Required fundamental policies of both states;
o The increased flexibility available.
ooooo
AUTHORIZING THE BOARD TO HIRE AND TERMINATE SUBADVISERS WITHOUT SHAREHOLDER
APPROVAL
Vote against proposals authorizing the board to hire or terminate subadvisers
without shareholder approval if the investment adviser currently employs only
one subadviser.
ooooo
DISTRIBUTION AGREEMENTS
Vote case-by-case on distribution agreement proposals, considering the
following factors:
o Fees charged to comparably sized funds with similar objectives;
o The proposed distributor's reputation and past performance;
o The competitiveness of the fund in the industry;
o The terms of the agreement.
ooooo
MASTER-FEEDER STRUCTURE
Vote for the establishment of a master-feeder structure.
ooooo
MERGERS
Vote case-by-case on merger proposals, considering the following factors:
o Resulting fee structure;
o Performance of both funds;
o Continuity of management personnel;
o Changes in corporate governance and their impact on shareholder rights.
ooooo
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SHAREHOLDER PROPOSALS FOR MUTUAL FUNDS
ESTABLISH DIRECTOR OWNERSHIP REQUIREMENT
Generally vote against shareholder proposals that mandate a specific minimum
amount of stock that directors must own in order to qualify as a director or to
remain on the board.
ooooo
REIMBURSE SHAREHOLDER FOR EXPENSES INCURRED
Vote case-by-case on shareholder proposals to reimburse proxy solicitation
expenses. When supporting the dissidents, vote for the reimbursement of the
proxy solicitation expenses.
ooooo
TERMINATE THE INVESTMENT ADVISOR
Vote case-by-case on proposals to terminate the investment advisor, considering
the following factors:
o Performance of the fund's Net Asset Value (NAV);
o The fund's history of shareholder relations;
o The performance of other funds under the advisor's management.
oooooo
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8. FOREIGN PRIVATE ISSUERS LISTED ON U.S. EXCHANGES
Vote against (or withhold from) non-independent director nominees at companies
which fail to meet the following criteria: a majority-independent board, and
the presence of an audit, a compensation, and a nomination committee, each of
which is entirely composed of independent directors.
Where the design and disclosure levels of equity compensation plans are
comparable to those seen at U.S. companies, U.S. compensation policy will be
used to evaluate the compensation plan proposals. Otherwise, they, and all
other voting items, will be evaluated using the relevant ISS regional or market
proxy voting guidelines.
oooooo
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DISCLOSURE/DISCLAIMER
This document and all of the information contained in it, including without
limitation all text, data, graphs, and charts (collectively, the "Information")
is the property of Institutional Shareholder Services Inc. (ISS), its
subsidiaries, or, in some cases third party suppliers.
The Information has not been submitted to, nor received approval from, the
United States Securities and Exchange Commission or any other regulatory body.
None of the Information constitutes an offer to sell (or a solicitation of an
offer to buy), or a promotion or recommendation of, any security, financial
product or other investment vehicle or any trading strategy, and ISS does not
endorse, approve, or otherwise express any opinion regarding any issuer,
securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or
permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO
THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY,
TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A
PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by
law, in no event shall ISS have any liability regarding any of the Information
for any direct, indirect, special, punitive, consequential (including lost
profits), or any other damages even if notified of the possibility of such
damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
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AN MSCI BRAND
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2014 Canadian Proxy Voting Guidelines TSX-Listed Companies
January 13, 2014
Institutional Shareholder Services Inc.
Copyright [C] 2013 by ISS
www. issgovernance.com
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ISS' 2014 CANADIAN PROXY VOTING GUIDELINES- TSX COMPANIES
Effective for Meetings on or after Feb. 1, 2014 Published Dec. 19, 2013 Updated
Jan. 13, 2014
TABLE OF CONTENTS
1. ROUTINE/MISCELLANEOUS 4
AUDIT-RELATED 4
Financial Statements/Director and Auditor Reports 4
Ratification of Auditors 4
OTHER BUSINESS 4
2. BOARD OF DIRECTORS 5
SLATE BALLOTS (BUNDLED DIRECTOR ELECTIONS) 5
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS 5
2014 ISS Canadian Definition of Independence 7
Board Structure and Independence 8
Insiders on Key Committees 9
Audit Fee Disclosure 10
Excessive Non-Audit Fees 11
Persistent Problematic Audit Related Practices 11
Director Attendance 11
Overboarded Directors 12
Former CEO/CFO on Audit/Compensation Committee 12
Voting on Directors for Egregious Actions 13
Board Responsiveness 13
OTHER BOARD-RELATED PROPOSALS 14
Classification/Declassification of the Board 14
Independent Chairman (Separate Chairman/CEO) 14
Majority of Independent Directors/Establishment of Committees 15
Majority Vote Standard for the Election of Directors 15
Proxy Contests - Voting for Director Nominees in Contested Elections 15
3. SHAREHOLDER RIGHTS & DEFENSES 17
Advance Notice Requirement 17
Enhanced Shareholder Meeting Quorum for Contested Director Elections 18
Appointment of Additional Directors Between Annual Meetings 18
Article/Bylaw Amendments 18
Cumulative Voting 19
Confidential Voting 19
Poison Pills (Shareholder Rights Plans) 20
Reincorporation Proposals 22
Supermajority Vote Requirements 22
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4. CAPITAL/RESTRUCTURING 23
Mergers and Corporate Restructurings 23
Income Trust Conversions 23
Increases in Authorized Capital 25
Private Placement Issuances 25
Blank Cheque Preferred Stock 26
Dual-class Stock 26
Escrow Agreements 27
5. COMPENSATION 28
EXECUTIVE PAY EVALUATION 28
Advisory Vote on Executive Compensation (Say-on-Pay) Management Proposals 28
Pay for Performance Evaluation 29
Problematic Pay Practices 31
Board Communications and Responsiveness 32
EQUITY COMPENSATION PLANS 32
Cost of Equity Plans 33
Dilution and Burn Rate Assessment 33
Plan Amendment Provisions 34
Non-Employee Director Participation 36
Director Limit Considerations 36
Repricing Options 37
Repricing Proposals 37
OTHER COMPENSATION PLANS 37
Employee Stock Purchase Plans (ESPPs, ESOPs) 37
Deferred Share Unit Plans 38
SHAREHOLDER PROPOSALS ON COMPENSATION 39
Shareholder Advisory Vote Proposals 39
Supplemental Executive Retirement Plans (SERPS) Proposals 39
6. SOCIAL/ENVIRONMENTAL ISSUES 41
DISCLOSURE/DISCLAIMER 42
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1. ROUTINE/MISCELLANEOUS
AUDIT-RELATED
FINANCIAL STATEMENTS/DIRECTOR AND AUDITOR REPORTS
Companies are required under their respective Business Corporations Acts (BCAs)
to submit their financial statements and the auditor report, which is included
in the company's annual report, to shareholders at every Annual General Meeting
(AGM). This routine item is almost always non-voting.
ooooo
RATIFICATION OF AUDITORS
Vote for proposals to ratify auditors, unless the following applies:
o Non-audit related fees paid to the auditor exceed audit-related fees.
RATIONALE: Multilateral Instrument 52-110 relating to Audit Committees defines
"audit services" to include the professional services rendered by the issuer's
external auditor for the audit and review of the issuer's financial statements
or services that are normally provided by the external auditor in connection
with statutory and regulatory filings or engagements.
The Instrument also sets out disclosure requirements related to fees charged
by external auditors. Every issuer is required to disclose in its Annual
Information Form with a cross-reference in the related Proxy Circular, fees
billed by the external audit firm in each of the last two fiscal years, broken
down into four categories: Audit Fees, Audit-Related Fees, Tax Fees, and All
Other Fees.
In circumstances where "Other" fees include fees related to significant
one-time capital restructure events: initial public offerings, emergence from
bankruptcy, and spinoffs; and the company makes public disclosure of the amount
and nature of those fees which are an exception to the standard "non-audit fee"
category, then such fees may be excluded from the non-audit fees considered in
determining whether non-audit fees are excessive.
ooooo
OTHER BUSINESS
Vote against all proposals on proxy ballots seeking approval for unspecified
"other business" that may be conducted at the shareholder meeting.
ooooo
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2. BOARD OF DIRECTORS
SLATE BALLOTS (BUNDLED DIRECTOR ELECTIONS)
Generally withhold votes from all directors nominated by slate ballot at the
annual/general or annual/special shareholders' meetings. This policy will not
apply to contested director elections.
RATIONALE: The Toronto Stock Exchange released AMENDMENTS TO PART IV of the
Company Manual, on Oct. 4, 2012. The new rules focus on how a listed issuer
elects its board of directors and became effective Dec. 31, 2012.
Highlights of the new rules include requirements for the:
o Annual election of directors;
o Election of directors by way of individual resolution rather than single
slate ballots;
o Public disclosure of the votes received for the election of each director;
o Adoption of a majority voting director resignation policy or explanation of
why such policy has not been adopted;
and
o Notice to the TSX if a director receives a majority of 'withhold' votes and
the issuer has not adopted a majority
voting policy.
ooooo
VOTING ON DIRECTOR NOMINEES IN UNCONTESTED ELECTIONS
The following fundamental principles apply when determining votes on director
nominees:
BOARD ACCOUNTABILITY: Practices that promote accountability and enhance
shareholder trust begin with transparency into a company's governance practices
including risk management practices. These practices include the annual
election of all directors by a majority of votes cast by all shareholders,
provide shareholders with the ability to remove directors, and include the
detailed timely disclosure of voting results. Board accountability is
facilitated through clearly defined board roles and responsibilities, regular
peer performance review, and shareholder engagement.
BOARD RESPONSIVENESS: In addition to facilitating constructive shareholder
engagement, boards of directors should be responsive to the wishes of
shareholders as indicated by majority supported shareholder proposals or lack
of majority support for management proposals including election of directors.
In the case of a company controlled through a dual-class share structure, the
support of a majority of the minority shareholders should equate to majority
support.
BOARD INDEPENDENCE: Independent oversight of management is a primary
responsibility of the board and while true independence of thought and deed is
difficult to assess, there are corporate governance practices with regard to
board structure and management of conflicts of interest that are meant to
promote independent oversight. Such practices include the selection of an
independent chair to lead the board; structuring board pay practices to
eliminate the potential for self-dealing, reducing risky decision-making, and
ensuring the alignment of director interests with those of shareholders rather
than the interests of management; and structuring separate independent key
committees with defined mandates. Complete disclosure of all conflicts of
interest and how they are managed is a critical indicator of independent
oversight.
BOARD CAPABILITY: The skills, experience and competencies of board members
should be a priority in director selection, but consideration should also be
given to a board candidate's ability to devote sufficient time and commitment
to the increasing responsibilities of a public company director. Directors who
are unable to attend board and committee meetings
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and/or who are overextended (i.e., serving on too many boards) raise concern
regarding the director's ability to effectively serve in shareholders' best
interests.
ooooo
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2014 ISS CANADIAN DEFINITION OF INDEPENDENCE
1. Inside Director (I)
1.1 Employees of the Company or its affiliates (i);
1.2 Non-employee officer of the Company if he/she is among the five most highly
compensated; 1.3 Current interim CEO or any other current interim executives;
1.4 Beneficial owner of Company shares with more than 50 percent of the
outstanding voting rights (this may be aggregated if voting power is
distributed among more than one member of a group) (ii).
2. Affiliated Outside Director (AO) FORMER/INTERIM CEO
2.1 Former CEO of the company or its affiliates, (no cooling off period) or of
an acquired company within the past three years.
2.2 Former interim CEO if the service was longer than 18 months or if the
service was between 12 and 18 months and the compensation was high relative to
that of the other directors or in line with a CEO's compensation (iii) at that
time.
2.3 CEO of a former parent or predecessor firm at the time the Company was sold
or split off from the parent/predecessor (no cooling off period).
NON-CEO EXECUTIVES
2.4 Former executive of the Company, an affiliate, or a firm acquired within
the past three years;
2.5 Former interim executive if the service was longer than 18 months or if the
service was between 12 and 18 months, an assessment of the interim executive's
terms of employment including compensation relative to other directors or in
line with the top five NEOs at that time.
2.6 Executive of a former parent or predecessor firm at the time the
Company was sold or split off from parent/predecessor (subject to three year
cooling off); 2.7 Executive, former executive within the last three years,
general or limited partner of a joint venture or partnership with the Company;
RELATIVES 2.8 Relative (iv) of current executive officer (v) of the Company;
2.9 Relative of a person who has served as an executive officer of the Company
within the last three years; TRANSACTIONAL, PROFESSIONAL, FINANCIAL, AND
CHARITABLE RELATIONSHIPS 2.10 Currently provides (or a relative provides)
professional services to the Company or to its officers; 2.11 Is (or a relative
is) a partner, controlling shareholder or an employee of, an organization that
provides professional services to the Company, to an affiliate of the Company,
or to an individual officer of the Company or one of its affiliates.
2.12 Currently employed by (or a relative is employed by) a significant
customer or supplier (vi); 2.13 Is (or a relative is) a trustee, director or
employee of a charitable or non-profit organization that receives material
(vii) grants or endowments from the Company; 2.14 Has (or a relative has) a
transactional relationship with the Company excluding investments in the
Company through a private placement; OTHER RELATIONSHIPS 2.15Has a
contractual/guaranteed board seat and is party to a voting agreement to vote in
line with management on proposals being brought to shareholders; 2.16 Founder
(viii) of the Company but not currently an employee; BOARD ATTESTATION 2.17
Board attestation that an outside director is not independent.
3. Independent Directors (IO)
3.1 No material ties to the corporation other than board seat.
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(i) "Affiliate" includes a subsidiary, sibling company, or parent company. ISS
uses 50 percent control ownership by the parent company as the standard for
applying its affiliate designation. (ii) Under this definition, officers of an
entity and/or its affiliates holding more than 50% of the outstanding voting
rights will be considered insiders. (iii) ISS will look at the terms of the
interim CEO's compensation or employment contract to determine if it contains
severance pay, long-term health and pension benefits or other such standard
provisions typically contained in contracts of permanent, non-temporary CEOs.
ISS will also consider if a formal search process was underway for a full-time
CEO. (iv) Relative refers to immediate family members including spouse,
parents, children, siblings, in-laws and anyone sharing the director's home.
(v) Executive Officer will include: the CEO or CFO of the entity; the president
of the entity; a vice-president of the entity in charge of a principal business
unit, division or function; an officer of the entity or any of its subsidiary
entities who performs a policy making function in respect of the entity; any
other individual who performs a policy-making function in respect of the
entity; or any executive named in the Summary Compensation Table. (vi) If the
company makes or receives annual payments exceeding the greater of $200,000 or
5 percent of recipient's gross revenues (the recipient is the party receiving
proceeds from the transaction). (vii) "Material" is defined as a standard of
relationship (financial, personal or otherwise) that a reasonable person might
conclude could potentially influence one's objectivity in the boardroom in a
manner that would have a meaningful impact on an individual's ability to
satisfy requisite fiduciary standards on behalf of shareholders. (viii) The
operating involvement of the Founder with the company will be considered.
Little or no operating involvement may cause ISS to deem the Founder as an
independent outsider.
Vote case-by-case on director nominees, examining the following factors when
disclosed:
o Independence of the board and key board committees;
o Attendance at board and committee meetings;
o Corporate governance provisions and takeover activity;
o Long-term company performance;
o Directors' ownership stake in the company;
o Compensation practices;
o Responsiveness to shareholder proposals;
o Board accountability; and
o Adoption of a Majority Voting (director resignation) policy.
BOARD STRUCTURE AND INDEPENDENCE
Generally vote withhold from any insider or affiliated outside director where:
o The board is less than majority independent, OR
o The board lacks a separate compensation or nominating committee.
RATIONALE: The balance of board influence should reside with independent
directors free of any pressures or conflicts which might prevent them from
objectively overseeing strategic direction, evaluating management
effectiveness, setting appropriate executive compensation, maintaining internal
control processes, and ultimately driving long-term shareholder value creation.
Best practice corporate governance standards do not advocate that no inside
directors sit on boards. Company insiders have extensive company knowledge and
experience that provides a significant contribution to business decisions at
the board level. In order to maintain the independent balance of power
necessary for independent directors to fulfill their oversight mandate and make
difficult decisions that may run counter to management's self-interests,
insiders, former insiders, and other related directors should not dominate the
board or continue to be involved on key board committees charged with the
audit, compensation, and nomination responsibilities.
Best practice as set out in National Policy 58-201 Corporate Governance
Guidelines recommends that the board should have:
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o A majority of independent directors.
o A nominating committee and a compensation committee composed entirely of
independent directors (Nomination
of Directors 3.10; Compensation 3.15) .
Guideline Six of the CCGG publication "2010 Building High Performance Boards"
indicates that boards "Establish mandates for board committees and ensure
committee independence." It is further recommended that key board committees
"review committee charters every year and amend or confirm the mandate and
procedures based on information received from the board and committee
evaluation process."
INSIDERS ON KEY COMMITTEES
Vote withhold from individual directors who:
o Are insiders on the audit, compensation, or nominating committee.
Include cautionary language for all affiliated outside directors who sit on the
audit, compensation, or nominating committee, to the effect that corporate
governance best practices dictate that such committees should be comprised
entirely of independent directors.
RATIONALE: In order to promote independent oversight of management, the board
as a whole and its key board committees should meet minimum best practice
expectations of no less than majority independence. Director elections are seen
to be the single most important use of the shareholder franchise.
Multilateral Instrument 52-110 Audit Committees sets out best practice with
regard to the composition of the audit committee. The Instrument requires that
every reporting issuer, other than an investment fund, issuer of asset-backed
securities, designated foreign issuer, SEC issuer, or issuers that are
subsidiary entities as long as the subsidiary does not issue securities and the
parent is subject to compliance with this instrument, must have an audit
committee and that the committee must comprise a minimum of three members and
that every audit committee member must be independent.
POLICY CONSIDERATIONS FOR MAJORITY OWNED COMPANIES (1)
ISS policies support a one-share, one-vote principle. In recognition of the
substantial equity stake held by certain shareholders, on a case-by-case basis,
director nominees who are or who represent a controlling shareholder of a
majority owned company, who will be designated as controlling insiders, may
generally be supported under ISS' board and committee independence policies, if
the company meets ALL of the following independence and governance criteria:
o Individually elected directors;
o The number of Related Directors should not exceed the proportion of the
common shares controlled by the
Controlling Shareholder, to a maximum of two-thirds, however if the CEO is
related to the Controlling Shareholder,
then at least two-thirds of the directors should be independent of management;
o If the CEO and chair roles are combined or the CEO is or is related to the
Controlling Shareholder, then there
should be an independent lead director AND the board should have an effective
and transparent process to deal
with any conflicts of interest between the company, minority shareholders, and
the Controlling Shareholder;
(1) A majority owned company is defined for the purpose of this policy as a
company controlled by a shareholder or group of shareholders who together have
an economic ownership interest under a single class common share capital
structure that is commensurate with their voting entitlement of 50% or more of
the outstanding common shares.
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o A majority of the Audit and Nominating committees should be either
Independent Directors or Related Directors
who are independent of management. All members of the compensation committee
should be independent of
management and if the CEO is related to the Controlling Shareholder, no more
than one member of the
compensation committee should be a Related Director;
o Prompt disclosure of detailed vote results following each shareholder
meeting; and
o Adoption of a majority vote standard with director resignation policy for
uncontested elections OR public
commitment to adopt a majority voting standard with director resignation policy
for uncontested elections if the
controlling shareholder ceases to control 50 percent or more of the common
shares (2).
ISS will also consider the following:
o The nominating committee's process to receive and discuss suggestions from
shareholders for potential director
nominees;
o If the CEO is related to the Controlling Shareholder, the board's process to
evaluate the performance, leadership,
compensation, and succession of management should be led by independent
directors;
ISS will also take into consideration any other concerns related to the conduct
of the subject director and any controversy or questionable actions on the part
of the subject director that are deemed not to be in the best interests of all
shareholders.
RATIONALE: Canadian corporate law provides significant shareholder protections,
for example a shareholder or group of shareholders having a 5 percent ownership
stake in a company may requisition a special meeting for the purposes of
replacing or removing directors. Directors may be removed by a simple majority
vote. Shareholders also benefit from the ability to bring an oppression action
against the board or individual directors of Canadian incorporated public
companies.
Against this legal backdrop, Canadian institutions have taken steps to
acknowledge and support the premise that a shareholder who has an equity stake
in the common shares of a reporting issuer under a single class common share
structure has a significant interest in protecting the value of that equity
stake in the company and is therefore deemed to have significant alignment of
interests with minority shareholders. This policy firmly supports the
one-share, one-vote principle and is intended to recognize the commonality of
interests between certain shareholders having a majority equity stake under a
single class share structure and minority shareholders in protecting the value
of their investment.
This policy will not be considered at dual class companies having common shares
with unequal voting or board representation rights.
AUDIT FEE DISCLOSURE
Generally vote withhold from the members of the audit committee as reported in
the most recently filed public documents if:
o No audit fee information is disclosed by the company within a reasonable
period of time prior to a shareholders'
meeting at which ratification of auditors is a voting item.
RATIONALE: In addition to audit fee disclosure by category now being a
regulatory requirement, such information is of great importance because of the
concern that audit firms could compromise the independence of a company audit
in order to secure lucrative consulting services from the company.
(2) On October 4, 2012, the TSX announced a further amendment to proposed
listing requirements for TSX listed companies mandating majority voting which
may take the form of a policy with a director resignation requirement, and
disclosure of detailed vote results for director elections, which are intended
to take effect as of December 31, 2013.
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EXCESSIVE NON-AUDIT FEES
Generally vote withhold from individual directors who are members of the audit
committee as constituted in the most recently completed fiscal year if:
o Non-audit fees (Other Fees) paid to the external audit firm exceed audit and
audit-related fees.
RATIONALE: Part 2 of Multilateral Instrument 52-110 Audit Committees states
that the audit committee must be directly responsible for overseeing the work
of the external auditor and the audit committee must pre-approve all non-audit
services provided to the issuer or its subsidiary entities by the issuer's
external auditor. It is therefore appropriate to hold the audit committee
accountable for payment of excessive non-audit fees.
PERSISTENT PROBLEMATIC AUDIT RELATED PRACTICES
Vote case-by-case on members of the Audit Committee and potentially the full
board if adverse accounting practices are identified that rise to a level of
serious concern, such as: accounting fraud; misapplication of applicable
accounting standards; or material weaknesses identified in the internal control
process.
Severity, breadth, chronological sequence and duration, as well as the
company's efforts at remediation or corrective actions, should be examined in
determining whether withhold votes are warranted.
RATIONALE: The policy addresses those cases that would be determined to raise
serious concern with respect to the Audit Committee's oversight of the
implementation by management of effective internal controls over the accounting
process and financial reporting. As well, the Audit Committee has primary
responsibility for selecting and overseeing the external audit firm that would
be expected to raise concerns related to problematic accounting practices,
misapplication of applicable accounting practices, or any material weakness it
may identify in the company's internal controls, as well as whether fraudulent
activity is uncovered during the course of the audit assignment.
DIRECTOR ATTENDANCE
Generally withhold from individual director nominees if:
o The company has not adopted a majority voting policy AND the individual
director has attended less than 75
percent of the board and committee meetings (3) held within the past year
without a valid reason for these absences;
o The company has adopted a majority voting policy AND the individual director
has attended less than 75 percent
of the board and committee meetings held within the past year without a valid
reason for the absences AND a
pattern of low attendance exists based on prior years' meeting attendance.
The following should be taken into account:
o Valid reasons for absence at meetings include illness or absence due to
company business;
o Participation via telephone is acceptable;
o If the director missed one meeting or one day's meetings, votes should not
be withheld even if such absence
dropped the director's attendance below 75 percent;
o Board and committee meetings include all regular and special meetings of the
board duly called for the purpose of
conducting board business;
o Out of country location or residence is not a sufficient excuse not to
attend board meetings, especially given
technological advances in communications equipment.
(3) If a withhold is based on meeting attendance for board meetings only due
to lack of disclosure on committee meeting attendance, then this will be
specified in ISS' report.
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RATIONALE: Corporate governance best practice supports board structures and
processes that promote independent oversight and accountability. Nominating
competent, committed, and engaged directors to the board also necessitates full
participation in the conduct of board business in order to fulfill the many
responsibilities and duties now required to meet requisite standards of care. A
director who commits to serve on a public company board should be prepared and
able to make attendance at and contribution to the board's meetings a priority.
A pattern of absenteeism may be an indicator of a more serious concern with a
director's ability to serve, warranting a board review and potentially the
director's resignation.
OVERBOARDED DIRECTORS
Generally withhold from individual director nominees if:
o Irrespective of whether the company has adopted a majority voting policy,
the director is overboarded (4) AND the
individual director has attended less than 75 percent of his/her respective
board and committee meetings held
within the past year without a valid reason for these absences.
Cautionary language will be included in ISS reports where directors are
overboarded regardless of attendance.
RATIONALE: Directors must be able to devote sufficient time and energy to a
board in order to be effective representatives of shareholders' interests.
While experience gained by directors on multiple public company boards is
highly valued, as director responsibilities continue to become increasingly
complex, time commitments required for board and key committee memberships are
also rising. As such, a balance between insight gained by a director's
participation on different boards and a reasonable number of commitments that
provides the director with sufficient time for the preparation for, attendance
at, and effective participation in board and committee meetings is warranted.
Within the Canadian market, which is based on a "comply-or-explain" regulatory
regime of suggested best practices, there are mixed investor views on the
appropriateness of evaluating directors' ability to contribute based solely on
the number of boards on which they serve. Feedback has indicated that
overboarding in conjunction with other governance concerns, such as
unacceptably low board and committee meeting attendance, may be a better
indicator of a director's inability to commit the necessary time and attention
to the increasing demands of a board seat and may also provide an opportunity
for board renewal. There are also mixed views on the need to include service on
venture company boards as these start-up companies are, for several reasons,
seen to require less time and effort of board directors when compared to TSX
reporting issuers. Given this feedback, a double-triggered overboarding policy
is deemed appropriate for the Canadian market.
FORMER CEO/CFO ON AUDIT/COMPENSATION COMMITTEE
Generally vote withhold from any director on the audit or compensation
committee if:
o The director has served as the CEO of the company at any time;
o The director has served as the CFO of the company within the past three
years.
RATIONALE: Although such directors are designated as affiliated outsiders under
ISS policy, a withhold vote will be recommended as if they were insiders on
these key committees due to concerns of independent oversight of financials for
which they were previously responsible or compensation arrangements that they
may have orchestrated and over which
(4) "Overboarded" is defined as: a CEO of a public company who sits on more
than 2 outside public company boards in addition to the company of which he/she
is CEO (withholds would only apply on outside boards these directors sit on),
OR the director is not a CEO of a public company and sits on more than 6 public
company boards in total.
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they may still wield considerable influence thus potentially compromising the
Audit or Compensation Committee's independence.
VOTING ON DIRECTORS FOR EGREGIOUS ACTIONS
Under extraordinary circumstances, withhold from directors individually, one or
more committee members, or the entire board, due to:
o Material failures of governance, stewardship, risk oversight (5) or
fiduciary responsibilities at the company;
o Failure to replace management as appropriate; or
o Egregious actions related to the director(s)' service on other boards that
raise substantial doubt about his or her
ability to effectively oversee management and serve the best interests of
shareholders at any company.
RATIONALE: Director accountability and competence have become issues of prime
importance given the failings in oversight exposed by the global financial
crisis and subsequent events. There is also concern over the environment in the
boardrooms of certain markets, where past failures appear to be no impediment
to continued or new appointments at major companies and may not be part of the
evaluation process at companies in considering whether an individual is, or
continues to be, fit for the role and best able to serve shareholders'
interests.
Under exceptional circumstances that raise substantial doubt on a director's
ability to serve as an effective monitor of management and in the best
interests of shareholders including past performance on other boards, we may
consider a negative recommendation on directors.
ooooo
BOARD RESPONSIVENESS
In keeping with Canadian market expectations and improvements to provide
shareholders with the ability to affect board change, a lack of board response
to shareholder majority votes or majority withhold votes on directors is
unacceptable and would result in one of the following:
Generally withhold from continuing individual directors, committee members, or
the continuing members of the entire board of directors if:
o At the previous board election, any director received more than 50 percent
withhold votes of the votes cast under
a majority voting/director resignation policy and the Nominating Committee (6)
has not required that the director
leave the board after 90 days, or has not provided another form of acceptable
response to the shareholder vote,
which will be reviewed on a case-by-case basis;
o At the previous board election, any director received more than 50 percent
withhold votes of the votes cast under
a plurality voting standard and the company has failed to address the issue(s)
that caused the majority withheld
vote; or
o The board failed to act (7) on a shareholder proposal that received the
support of a majority of the votes cast For and
Against at the previous shareholder meeting.
(5) Examples of failure of risk oversight include, but are not limited to:
bribery, large or serial fines or sanctions from regulatory bodies; significant
adverse legal judgments or settlements; or hedging of company stock.
(6) Or other board committee charged with the duties of a nominating committee
as specified in the company's majority voting director resignation policy.
(7) Responding to the shareholder proposal will generally mean either full
implementation of the proposal or, if the matter requires a vote by
shareholders, a management proposal on the next annual ballot to implement the
proposal. Responses that involve less than full implementation will be
considered on a case-by-case basis.
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As indicated at the beginning of the guidelines for Voting on Director Nominees
in Uncontested Elections, board responsiveness is a fundamental principle that
should apply when determining votes on director nominees.
RATIONALE: Follow-up action or response by the board is warranted in the
instance where a director is not supported by a majority of the votes cast by
shareholders but remains on the board at the next election. A reasonable period
of time within which the board or nominating committee is expected to deal with
a director resignation under these circumstances is indicated in the widely
accepted version of Canadian majority-voting, director-resignation policies
endorsed by the Canadian Coalition for Good Governance.
Disclosed board response and rationale will be taken into consideration in
limited extraordinary circumstances in the event that a director's resignation
is not accepted by the board or the concern that caused majority shareholder
opposition has not been addressed. The vote recommendation will be determined
on a case-by-case basis that is deemed to be in the best interests of
shareholders.
ooooo
OTHER BOARD-RELATED PROPOSALS
CLASSIFICATION/DECLASSIFICATION OF THE BOARD
Vote against proposals to classify the board.
Vote for proposals to repeal classified boards and to elect all directors
annually.
ooooo
INDEPENDENT CHAIRMAN (SEPARATE CHAIRMAN/CEO)
Generally vote for shareholder proposals seeking separation of the offices of
CEO and chair if the company has a single executive occupying both positions.
RATIONALE: The separation of the positions of chairman and CEO in favour of an
independent chairman of the board is superior to the lead director concept. The
positions of chairman and CEO are two distinct jobs with different job
responsibilities. The chairman is the leader of the board of directors, which
is responsible for selecting and replacing the CEO, setting executive pay,
evaluating managerial and company performance, and representing shareholder
interests. The CEO, by contrast, is responsible for maintaining the day-to-day
operations of the company and being the company's spokesperson. It therefore
follows that one person cannot fulfill both roles without conflict. An
independent lead director may be an acceptable alternative as long as the lead
director has clearly delineated and comprehensive duties including the full
authority to call board meetings and approve meeting materials and engage with
shareholders. A counterbalancing lead director alternative must be accompanied
by majority independence on the board and key committees, and the absence of
any problematic governance practices.
Best practice as set out in National Policy 58-201 Corporate Governance
Guidelines recommends that: The chair of the board should be an independent
director or where this is not appropriate, an independent director should be
appointed as "lead director."
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ooooo
MAJORITY OF INDEPENDENT DIRECTORS/ESTABLISHMENT OF COMMITTEES
Vote for shareholder proposals asking that a majority or up to two-thirds of
directors be independent unless:
o The board composition already meets the proposed threshold based on the ISS
definition of independence.
Vote for shareholder proposals asking that board audit, compensation, and/or
nominating committees be composed exclusively of independent directors unless:
o The board's committees already meet that standard.
ooooo
MAJORITY VOTE STANDARD FOR THE ELECTION OF DIRECTORS
Vote for resolutions requesting that: (i) the board adopt a majority vote
standard and director resignation policy for director elections or (ii) the
company amend its bylaws to provide for majority voting, whereby director
nominees are elected by the affirmative vote of the majority of votes cast,
unless:
o A majority voting policy is codified in the company's bylaws, corporate
governance guidelines, or other governing
documents prior to an election to be considered; and
o The company has adopted formal corporate governance principles that provide
an adequate response to both new
nominees as well as "holdover" nominees (i.e. incumbent nominees who fail to
receive 50 percent of votes cast).
ooooo
PROXY CONTESTS - VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Vote case-by-case in contested elections taking into account:
o Long-term financial performance of the target company relative to its
industry;
o Management's track record;
o Background to the proxy contest;
o Nominee qualifications and any compensatory arrangements;
o Strategic plan of dissident slate and quality of critique against
management;
o Likelihood that the proposed goals and objectives can be achieved (both
slates); and
o Stock ownership positions
OVERALL APPROACH
When analyzing proxy contests, ISS focuses on two central questions:
1. Have the dissidents met the burden of proving that board change is
warranted? And, if so;
2. Will the dissident nominees be more likely to affect positive change (i.e.,
increase shareholder value) versus the
incumbent nominees?
When a dissident seeks a majority of board seats, ISS will require from the
dissident a well-reasoned and detailed business plan, including the dissident's
strategic initiatives, a transition plan and the identification of a qualified
and credible new
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management team. ISS will then compare the detailed dissident plan against the
incumbent plan and the dissident director nominees and management team against
the incumbent team in order to arrive at our vote recommendation.
When a dissident seeks a minority of board seats, the burden of proof imposed
on the dissident is lower. In such cases, ISS will not require from the
dissident a detailed plan of action, nor is the dissident required to prove
that its plan is preferable to the incumbent plan. Instead, the dissident will
be required to prove that board change is preferable to the status quo and that
the dissident director slate will add value to board deliberations including
by, among other factors, considering issues from a different viewpoint than the
current board members.
REIMBURSING PROXY SOLICITATION EXPENSES
Vote case-by-case taking into account:
o Whether ISS recommends in favour of the dissidents, in which case we may
recommend approving the dissident's
out of pocket expenses if they are successfully elected and the expenses are
reasonable.
ooooo
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3. SHAREHOLDER RIGHTS & DEFENSES
ADVANCE NOTICE REQUIREMENT
Vote case-by-case on proposals to adopt an Advance Notice Board Policy or to
adopt or amend bylaws containing or adding an advance notice requirement,
giving support to those proposals which provide a reasonable framework for
shareholders to nominate directors by allowing shareholders to submit director
nominations as close to the meeting date as reasonably possible and within the
broadest window possible, recognizing the need to allow sufficient notice for
company, regulatory, and shareholder review, and to allow the board to waive
any provision of the advance notice requirement.
To be reasonable, the company's deadline for notice of shareholders' director
nominations must not be more than 65 days and not fewer than 30 days prior to
the meeting date. If notice of annual meeting is given fewer than 50 days prior
to the meeting date, a provision to require shareholder notice by close of
business on the 10th day following first public announcement of the annual
meeting is supportable. In the case of a special meeting, a requirement that a
nominating shareholder must provide notice by close of business on the 15th day
following first public announcement of the special shareholders' meeting is
also acceptable.
In general, support additional efforts by companies to ensure full disclosure
of a dissident shareholder's economic and voting position in the company so
long as the informational requirements are reasonable and aimed at providing
shareholders with the necessary information to review any proposed director
nominees within a timely manner.
Generally, vote against if:
o The board may only waive a portion of the advance notice provisions under
the policy or by-law, in its sole
discretion; or
o The company requires any proposed nominee to deliver a written agreement
wherein the proposed nominee
acknowledges and agrees that he or she will comply with all policies and
guidelines of the company that are
applicable to directors.
RATIONALE: All shareholders should be provided with sufficient disclosure and
time to make appropriate decisions on the election of their board
representatives. Advance Notice Requirement Policies typically provide a
transparent, structured and fair director nomination process, whereby all
shareholders, irrespective of whether they are voting by proxy or attending the
meeting, are made aware of potential proxy contests in advance of the meeting.
Shareholders are also provided with important information pertaining to
proposed dissident director nominees within a specified time frame, allowing
shareholders to fully participate in the director election process in an
informed and effective manner.
Overall, advance notice requirements that limit the board's ability to waive
all provisions of the policy are viewed as unacceptable and may potentially be
used by the board to deny shareholder nominees access to the board and prevent
the possibility of shareholder recourse through the courts.
The added condition stipulating that in order to be eligible for nomination to
the board, a shareholder nominee is required to agree in advance and in writing
to comply with all current and future board policies and guidelines, may raise
concerns in situations where these board policies or guidelines are considered
unacceptable from a corporate governance perspective, or may prevent new board
candidates from affecting change if supported by shareholders under such a
mandate. Limiting the board's ability to waive provisions in the policy and/or
requiring advance written agreement by any shareholder nominee to comply with
all board policies and guidelines goes beyond the legitimate and acceptable
stated purpose of advance notice requirements from a corporate governance
perspective. This stated purpose in all cases has been to provide shareholders
with timely and complete information regarding director nominees so they may
cast informed votes, and so
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that the board may properly consider said nominees for board service. Any
further requirements for potential nominees or limitations on the board are
outside of this purview and therefore are unacceptable within the provisions of
advance notice requirements.
ooooo
ENHANCED SHAREHOLDER MEETING QUORUM FOR CONTESTED DIRECTOR ELECTIONS
Generally vote against new By-Laws or amended By-Laws that would establish two
different quorum levels which would result in implementing a higher quorum
solely for those shareholder meetings where common share investors seek to
replace the majority of current board members ("Enhanced Quorum").
RATIONALE: With Enhanced Quorum, the ability to hold a shareholders' meeting is
subject to management's predetermination that a contested election to replace a
majority of directors is the singularly most important corporate issue, thus
justifying a significantly higher shareholder (or proxy) presence before the
meeting can commence. From a corporate governance perspective, this higher
threshold appears to be inconsistent with the view that shareholder votes on
any voting item should carry equal importance and should therefore be approved
under the same quorum requirement for all items.
Companies have indicated in examples to date that Enhanced Quorum is not
designed to block the potential consequence of a majority change in board
memberships. In the absence of Enhanced Quorum being met, the affected
shareholder meeting will be adjourned for up to 65 days. Notwithstanding the
equality of all voting issues, shareholders may question the benefits of a
delayed shareholder meeting resulting from a requirement of a 50 percent quorum
for the initial meeting.
ooooo
APPOINTMENT OF ADDITIONAL DIRECTORS BETWEEN ANNUAL MEETINGS
Generally vote for these resolutions where:
o The company is incorporated under a statute (such as the CBCA) that permits
removal of directors by simple
majority vote;
o The number of directors to be appointed between meetings does not exceed
one-third of the number of directors
appointed at the previous annual meeting; and
o Such appointments must be ratified by shareholders at the annual meeting
immediately following the date of their
appointment.
ooooo
ARTICLE/BYLAW AMENDMENTS
o
Generally vote for proposals to adopt or amend Articles/Bylaws unless the
resulting document contains any of the following:
o The quorum for a meeting of shareholders is set below two persons holding 25
percent of the eligible vote (this
may be reduced to no less than 10 percent in the case of a small company that
can demonstrate, based on publicly
disclosed voting results, that it is unable to achieve a higher quorum and
where there is no controlling
shareholder);
o The quorum for a meeting of directors is less than 50 percent of the number
of directors;
o The chair of the board has a casting vote in the event of a deadlock at a
meeting of directors;
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o An alternate director provision that permits a director to appoint another
person to serve as an alternate director
to attend board or committee meetings in place of the duly elected director;
o Other corporate governance concerns, such as granting blanket authority to
the board with regard to future capital
authorizations or alteration of capital structure without further shareholder
approval.
RATIONALE: Alternate directors have neither been elected nor has their
appointment been ratified by shareholders. As such, the use of a director
substitute or replacement to fill in for a duly elected board representative
raises serious concerns, including whether an alternate may be bound to serve
in the best interests of shareholders. Also, regular directors must be willing
to earmark sufficient time and effort to serving on the board, once they have
accepted the responsibility entrusted to them by shareholders.
Article or bylaw provisions permitting alternate directors generally indicate
that the alternate director will be counted for quorum purposes, may attend and
vote on matters raised at board meetings and act on behalf of the regular
elected director in all respects, and may act as alternate for more than one
director in some cases. As well, this provision may also provide that there is
no limit to the number of alternates that may be appointed for any meeting.
Allowing shareholders the opportunity to elect directors is a fundamental
shareholder right. As shareholders continue to push for increased rights such
as majority voting with a director resignation policy to ensure that they have
a meaningful voice in the election of their board representatives, the
inclusion of an alternate director provision in a reporting issuer's articles
or bylaws runs counter to the higher director accountability being sought by
these shareholder rights improvements. Furthermore, based on discussions with
several institutional investors, the majority of them raised concerns with
alternate director provisions.
o
ooooo
CUMULATIVE VOTING
In general, support cumulative voting. However there may be situations where
such a structure may be detrimental to shareholder interests.
Generally vote against proposals to eliminate cumulative voting.
Generally vote for proposals to restore or permit cumulative voting but
exceptions may be made depending on the company's other governance provisions
such as the adoption of a majority vote standard for the election of directors.
ooooo
CONFIDENTIAL VOTING
Generally vote for shareholder proposals requesting that corporations adopt
confidential voting, use independent vote tabulators, and use independent
inspectors of election, as long as:
o The proposal includes a provision for proxy contests as follows: In the case
of a contested election, management
should be permitted to request that the dissident group honor its confidential
voting policy. If the dissidents agree,
the policy remains in place. If the dissidents will not agree, the confidential
voting policy is waived for that
particular vote.
Generally vote for management proposals to adopt confidential voting.
ooooo
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POISON PILLS (SHAREHOLDER RIGHTS PLANS)
As required by the Toronto Stock Exchange, the adoption of a shareholder rights
plan must be ratified by shareholders within six months of adoption.
Vote case-by-case on management proposals to ratify a shareholder rights plan
(poison pill) taking into account whether it conforms to 'new generation'
rights plans and its scope is limited to the following two specific purposes:
o To give the board more time to find an alternative value enhancing
transaction; and
o To ensure the equal treatment of all shareholders.
Vote against plans that go beyond these purposes if:
(a) The plan gives discretion to the board to either:
o Determine whether actions by shareholders constitute a change in control;
o Amend material provisions without shareholder approval;
o Interpret other provisions;
o Redeem the rights or waive the plan's application without a shareholder vote;
or
o Prevent a bid from going to shareholders.
(b) The plan has any of the following characteristics:
o Unacceptable key definitions;
o Reference to Derivatives Contracts within the definition of Beneficial Owner;
o Flip over provision;
o Permitted bid period greater than 60 days;
o Maximum triggering threshold set at less than 20 percent of outstanding
shares;
o Does not permit partial bids;
o Includes a Shareholder Endorsed Insider Bid (SEIB) provision;
o Bidder must frequently update holdings;
o Requirement for a shareholder meeting to approve a bid; and
o Requirement that the bidder provide evidence of financing.
(c) The plan does not:
o Include an exemption for a "permitted lock up agreement";
o Include clear exemptions for money managers, pension funds, mutual funds,
trustees, and custodians
who are not making a takeover bid; and
o Exclude reference to voting agreements among shareholders.
RATIONALE: The evolution of "new generation" shareholder rights plans in Canada
has been the result of reshaping the early antitakeover provision known as a
"poison pill" into a shareholder protection rights plan that serves only two
legitimate purposes: (i) to increase the time period during which a Permitted
Bid may remain outstanding to a maximum of 60 days in order to the give the
board of directors of a target company sufficient time over and above the
current statutory 35 day limit, to find an alternative to a takeover bid that
would increase shareholder value; and (ii) to ensure that all shareholders are
treated equally in the event of a bid for their company.
Elimination of board discretion to interpret the key elements of the plan was
critical to this evolution. Definitions of Acquiring Person, Beneficial
Ownership, Affiliates, Associates and Acting Jointly or in Concert are the
terms that set out the who, how, and when of a triggering event. These
definitions in early poison pills contained repetitive, circular, and
duplicative layering of similar terms which created confusion and made
interpretation difficult. Directors were given broad discretion to interpret
the terms of a rights plan to determine when it was triggered, in other words,
whether a takeover bid could proceed. This in turn, created enough uncertainty
for bidders or potential purchasers, to effectively discourage non-board
negotiated transactions. It can be seen how the early poison pill became
synonymous with board and management entrenchment.
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"New generation" rights plans have therefore been drafted to remove repetitive
and duplicative elements along with language that gives the board discretion to
interpret the terms of the plan. Also absent from "new generation" plans are
references to similar definitions in regulation. Definitions found in various
regulations often contain repetitive elements, but more importantly they
cross-reference other definitions in regulation that are unacceptable to and
not intended to serve the same purpose as those found in a "new generation"
rights plan.
A number of other definitions are relevant to the key definitions mentioned
above and are therefore equally scrutinized. Exemptions under the definition of
Acquiring Person, for example, such as Exempt Acquisitions and Pro Rata
Acquisitions, are sometimes inappropriately drafted to permit acquisitions that
should trigger a rights plan. In order for an acquisition to be pro rata, the
definition must ensure that a person may not, by any means, acquire a greater
percentage of the shares outstanding that the percentage owned immediately
prior to the acquisition. It should also be noted that "new generation" rights
plans are premised on the acquisition of common shares and ownership at law or
in equity. Therefore references to the voting of securities or the extension of
beneficial ownership to encompass derivative securities that may result in
deemed beneficial ownership of securities that a person has no right to acquire
goes beyond the acceptable purpose of a rights plan.
Equally important to the acceptability of a shareholder rights plan is the
treatment of institutional investors who have a fiduciary duty to carry out
corporate governance activities in the best interests of the beneficial owners
of the investments that they oversee. These institutional investors should not
trigger a rights plan through their investment and corporate governance
activities for the accounts of others. The definition of Independent
Shareholders should make absolutely clear these institutional investors acting
in a fiduciary capacity for the accounts of others are independent for purposes
of approving a takeover bid or other similar transaction, as well as approving
future amendments to the rights plan.
Probably one of the most important and most contentious definitions in a
shareholder rights plan is that of a Permitted Bid. ISS guidelines provide that
an acceptable Permitted Bid definition must permit partial bids. Canadian
takeover bid legislation is premised on the ability of shareholders to make the
determination of the acceptability of any bid for their shares, partial or
otherwise, provided that it complies with regulatory requirements. In the event
that a partial bid is accepted by shareholders, regulation requires that their
shares be taken up on a pro rata basis. Shareholders of a company may welcome
the addition of a significant new shareholder for a number of reasons.
Also unacceptable to the purpose of a rights plan is the inclusion of a
"Shareholder Endorsed Insider Bid" (SEIB) provision which would allow an
"Insider" and parties acting jointly or in concert with an Insider an
additional less rigorous avenue to proceed with a take-over bid without
triggering the rights plan, in addition to making a Permitted Bid or proceeding
with board approval. The SEIB provision allows Insiders the ability to take
advantage of a less stringent bid provision that is not offered to other
bidders who must make a Permitted Bid or negotiate with the board for support.
Finally, a "new generation" rights plan must contain an exemption for lockup
agreements and the definition of a permitted lockup agreement must strike the
proper balance so as not to discourage either (i) the potential for a bidder to
lock up a significant shareholder and thus give some comfort of a certain
degree of success, or (ii) the potential for competitive bids offering a
greater consideration and which would also necessitate a locked up person be
able to withdraw the locked up shares from the first bid in order to support
the higher competing bid.
New generation rights plans are limited to achieving the two purposes
identified here. They ensure that shareholders are treated equally in a control
transaction by precluding creeping acquisitions or the acquisition of a control
block through private agreements between a few large shareholders; and they
provide a reasonable time period to allow a corporation's directors and
management to develop an alternative to maximize shareholder value.
ooooo
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REINCORPORATION PROPOSALS
Vote case-by-case on proposals to change a company's jurisdiction of
incorporation taking into account:
o Financial and corporate governance concerns, including: the reasons for
reincorporating, a comparison of the
governance provisions, and a comparison of the jurisdictional laws.
Generally vote for reincorporation when:
o Positive financial factors outweigh negative governance implications; or
o Governance implications are positive.
Generally vote against reincorporation if business implications are secondary
to negative governance implications.
ooooo
SUPERMAJORITY VOTE REQUIREMENTS
Vote against proposals to require a supermajority shareholder vote at a level
above that required by statute.
Vote for proposals to lower supermajority vote requirements.
ooooo
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4. CAPITAL/RESTRUCTURING
MERGERS AND CORPORATE RESTRUCTURINGS
Overall Approach
For mergers and acquisitions, review and evaluate the merits and drawbacks of
the proposed transaction, balancing the various and sometimes countervailing
factors including:
o VALUATION -- Is the value to be received by the target shareholders (or paid
by the acquirer) reasonable? While the
fairness opinion may provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on
the offer premium, market reaction and strategic rationale.
o MARKET REACTION -- How has the market responded to the proposed deal? A
negative market reaction should cause
closer scrutiny of a deal.
o STRATEGIC RATIONALE -- Does the deal make sense strategically? From where is
value derived? Cost and revenue
synergies should not be overly aggressive or optimistic, but reasonably
achievable. Management should also have
a favourable track record of successful integration of historical acquisitions.
o NEGOTIATIONS AND PROCESS -- Were the terms of the transaction negotiated at
arms-length? Was the process fair and
equitable? A fair process helps to ensure the best price for shareholders.
Significant negotiation "wins" can also
signify the deal makers' competency. The comprehensiveness of the sales process
(e.g., full auction, partial
auction, no auction) can also affect shareholder value.
o CONFLICTS OF INTEREST -- Are insiders benefiting from the transaction
disproportionately and inappropriately as
compared to non-insider shareholders? As the result of potential conflicts, the
directors and officers of the
company may be more likely to vote to approve a merger than if they did not
hold these interests. Consider
whether these interests may have influenced these directors and officers to
support or recommend the merger.
The CIC figure presented in the "ISS Transaction Summary" section of this
report is an aggregate figure that can in
certain cases be a misleading indicator of the true value transfer from
shareholders to insiders. Where such figure
appears to be excessive, analyze the underlying assumptions to determine
whether a potential conflict exists.
o GOVERNANCE -- Will the combined company have a better or worse governance
profile than the current governance
profiles of the respective parties to the transaction? If the governance
profile is to change for the worse, the
burden is on the company to prove that other issues (such as valuation)
outweigh any deterioration in governance.
ooooo
INCOME TRUST CONVERSIONS
For an income trust, or in a broader sense, a Specified Investment Flow-Through
Trust (SIFT), including REITs, ISS will recommend votes as follows:
o Generally against a trust conversion if the conversion itself will trigger
any change-in-control payments or
acceleration of options vesting;
o Generally against a trust conversion if bundled with an equity compensation
plan resolution and the equity
compensation plan itself does not warrant shareholder support;
o Generally against an equity compensation plan proposal on the same agenda if
the vesting of options is
accelerated under the plan in connection with a trust conversion.
In addition, the authorization of newly created blank cheque preferred shares,
particularly on an unlimited basis, as part of the new capital structure of the
resulting corporate entity is unacceptable from a corporate governance
perspective and will generally result in a vote against the proposed
conversion.
Otherwise, recommendations will be on a case-by-case basis taking into account
the following factors:
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o METHOD OF CONVERSION -- Exchange Method by way of a statutory plan of
arrangement; Distribution Method;
o RATIONALE OF CONVERSION AHEAD OF EXPIRY OF TAX BENEFIT -- Pursuing growth
rate higher than the rate limited by the
"normal growth guideline"; enhancing access to capital; overcoming the foreign
ownership restriction; timing of
the conversion versus availability of unused pool of tax credits (certain tax
credits may offset the unused pool);
superiority to other strategic alternatives;
o CHANGE OF ANNUALIZED PAYOUT LEVEL -- Comparison of one-year and three-year
annualized distribution yield prior to
the conversion and the proposed annualized dividend yield;
o EQUITY BASED COMPENSATION PLAN -- Effect on the old plan (Vote against if
the vesting of options is accelerated),
features of the new plan; whether or not bundled with the conversion as a
single agenda item (a bundled agenda
might trigger a vote against its approval);
o CHANGE-IN-CONTROL -- Whether or not the conversion will be treated as a
change-in-control event (vote against if the
conversion by itself will trigger change-in-control payment); note both 4) and
5) are related to conflicts of interest;
o COST OF IMPLEMENTING THE CONVERSION -- Legal fees, investment bank fees,
etc., if disclosed;
o MARKET REACTION -- Historical market performance dating back to Oct. 30,
2006, the day before the announcement
of changing tax rules; market response to the conversion announcement;
o CORPORATE GOVERNANCE -- Examine the relative strength of the company's
corporate governance going forward
(from two-tier board structure to one-tier board; equity capital from unit plus
exchangeable shares to common
shares); and
o DISSENT RIGHTS -- Whether or not unit holders are specifically granted
dissent rights for the conversion.
RATIONALE: The criteria as set out here were developed based on the principle
that early Trust conversion to a corporate structure results in a loss of the
tax benefit for SIFTs, and therefore must be justified on the basis of the
trade-off between cost and benefit of the conversion. In addition, it is
unacceptable from a corporate governance perspective for a Trust conversion to
be treated as a change in control and trigger change in control payments. The
successive equity compensation plan for the corporation should be considered
and voted on its own merits and should not be bundled with a trust conversion
resolution.
The authorization of blank cheque preferred shares, particularly on an
unlimited basis, that may subordinate the rights and value of outstanding
common shares is unsupportable from a corporate governance perspective. Board
discretion to issue one or more classes of preferred shares for which the terms
and rights have not been defined and disclosed in order to afford shareholders
the ability to give fully informed approval is anathema to the preservation of
the full integrity and value of the ownership characteristics of issued and
outstanding common shares. Furthermore, issuances of blank cheque preferreds
may be used as an antitakeover mechanism at the discretion of the board by
placing these shares in management friendly hands in the event of a takeover
bid not supported by management, the result of which may be to deny
shareholders of the ability to consider a bid for their shares.
1. Income Trust Overview
An income trust (including a REIT), or in a broader sense, a Specified
Investment Flow-Through Trust (SIFT), is an exchange traded equity-type
investment that is similar to common stock. By owning securities or assets of
an underlying business (or businesses), an income trust is structured to
distribute cash flows from those businesses to unit holders in a tax efficient
manner. That is, by maintaining a certain distribution ratio, a trust will pay
little to no corporate income tax. Because of the focus on distributions,
income trusts are usually based on mature businesses with steady cash flows.
2. SIFT Rules
On Oct. 31, 2006, the Canadian federal government announced a new tax regime
for specified investment flow-through trusts (SIFTs) under which certain
amounts distributed by SIFTs will be subject to tax at corporate income tax
rates. SIFT trusts will not be able to deduct distributions for tax purposes,
and distributions will be treated as dividends to unit holders. The new tax was
deferred until 2011 for SIFTs that were publicly traded on Oct. 31, 2006,
subject to "normal growth
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guidelines" which permit SIFTs to grow their equity capital through new equity
issuances by the greater of $50 million and a "safe harbour" amount of up to
100 percent of the SIFT's market cap as of Oct. 31, 2006, over the four-year
transition period, without triggering the new tax treatment.
As a result of the new tax treatment it was expected that SIFTs would want to
convert into corporations prior to 2011. On July 14, 2008, the government
released the long-awaited draft amendments (the "Conversion Amendments") to the
Income
Tax Act (Canada), allowing the conversion of certain income trusts into
corporations on a tax-deferred basis. The Conversion Amendments apply to
conversions which occur after July 14, 2008, and before 2013, and are
applicable to SIFT trusts, SIFT partnerships, or REITs that were in existence
at any time between the period of Oct. 31, 2006, and July 14, 2008
(a "Qualifying SIFT"). The Conversion Amendments were necessary to facilitate
conversions prior to 2011 without unit holders or SIFTs having adverse tax
implications. The final tranche of tax-deferred REIT conversions were
anticipated prior to the 2013 deadline.
ooooo
INCREASES IN AUTHORIZED CAPITAL
Vote case-by-case on proposals to increase the number of shares of common stock
authorized for issuance. Generally vote for proposals to approve increased
authorized capital if:
o A company's shares are in danger of being de-listed;
o A company's ability to continue to operate as a going concern is uncertain.
Generally vote against proposals to approve unlimited capital authorization.
RATIONALE: Canadian jurisdictions generally, and most recently the British
Columbia Corporations Act (BCCA), permit companies to have an unlimited
authorized capital. ISS prefers to see companies with a fixed maximum limit on
authorized capital, with at least 30 percent of the authorized stock issued and
outstanding. Limited capital structures protect against excessive dilution and
can be increased when needed with shareholder approval.
ooooo
PRIVATE PLACEMENT ISSUANCES
Vote case-by-case on private placement issuances taking into account:
o Whether other resolutions are bundled with the issuance;
o The financial consequences for the company if the issuance is not approved.
Generally vote for private placement proposals if:
o The issuance represents no more than 30 percent of the company's outstanding
shares;
o The use of the proceeds from the issuance is disclosed.
RATIONALE: The Toronto Stock Exchange (TSX) requires shareholder approval for
private placements:
o For an aggregate number of listed securities issuable greater than 25
percent of the number of securities of the
issuer which are listed and outstanding, on a non-diluted basis, prior to the
date of closing of the transaction if the
price per security is less than the market price; or
o That during any six month period are placed with insiders for listed
securities or options, rights or other
entitlements to listed securities greater than 10 percent of the number of the
issuer's listed and outstanding
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securities, on a non-diluted basis, prior to the date of closing of the first
private placement to an insider during the six-month period.
o Allowable discounts for private placements not requiring shareholder
approval are as follows:
[Download Table]
MARKET PRICE MAXIMUM DISCOUNT
============== ================
$0.50 or less 25%
-------------- ----------------
$0.51 to $2.00 20%
-------------- ----------------
Above $2.00 15%
The TSX will allow the price per listed security for a particular transaction
to be less than that specified above provided that the listed issuer has
received the approval of non-interested shareholders.
ooooo
BLANK CHEQUE PREFERRED STOCK
Generally vote against proposals to create UNLIMITED blank cheque preferred
shares or increase blank cheque preferred shares where:
o The shares carry unspecified rights, restrictions, and terms;
o The company does not specify any specific purpose for the increase in such
shares.
Generally vote for proposals to create a reasonably limited (8) number of
preferred shares where both of the following apply:
o The company has stated in writing and publicly disclosed that the shares
will not be used for antitakeover
purposes;
o The voting, conversion, and other rights, restrictions, and terms of such
stock are specified in the articles and are
reasonable.
ooooo
DUAL-CLASS STOCK
Generally vote against proposals to create a new class of common stock that
will create a class of common shareholders with diminished voting rights.
The following is an exceptional set of circumstances under which we would
generally support a dual class capital structure. Such a structure must meet
ALL of the following criteria:
o It is required due to foreign ownership restrictions and financing is
required to be done out of country;
(8) Institutional investors have indicated low tolerance for dilutive
preferred share issuances, therefore if the authorized preferreds may be
assigned conversion rights or voting rights when issued, the authorization
should be limited to no more than 20% of the outstanding common shares as of
record date. If the preferred share authorization proposal prohibits the
assignment of conversion, voting or any other right attached to the that could
dilute or negatively impact the common shares or the rights of common
shareholders when such preferred shares are issued, a maximum authorization
limit of 50% of the outstanding common shares as of record date may be
supported taking into account the stated purpose for the authorization and
other details of the proposal.
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o It is not designed to preserve the voting power of an insider or significant
shareholder;
o The subordinate class may elect some board nominees;
o There is a sunset provision; and
o There is a coattail provision that places a prohibition on any change in
control transaction without approval of the
subordinate class shareholders.
o
ooooo
ESCROW AGREEMENTS
Generally vote against an amendment to an existing escrow agreement where the
company is proposing to delete all performance-based release requirements in
favour of time-driven release requirements.
RATIONALE: On going public, certain insiders of smaller issuers must place a
portion of their shares in escrow. The primary objective of holding shares in
escrow is to ensure that the key principals of a company continue their
interest and involvement in the company for a reasonable period after public
listing.
ooooooooo
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5. COMPENSATION
EXECUTIVE PAY EVALUATION
Evaluate executive pay and practices, as well as certain aspects of outside
director compensation on a case-by-case basis.
Vote against management say-on-pay (MSOP) proposals, withhold from compensation
committee members (or in rare cases where the full board is deemed responsible,
all directors including the CEO), and/or against an equity-based incentive plan
proposal if:
o There is a misalignment between CEO pay and company performance (pay for
performance);
o The company maintains problematic pay practices;
o The board exhibits poor communication and responsiveness to shareholders.
ADVISORY VOTE ON EXECUTIVE COMPENSATION (SAY-ON-PAY) MANAGEMENT PROPOSALS
Vote case-by-case on management proposals for an advisory shareholder vote on
executive compensation. Vote against these resolutions in cases where boards
have failed to demonstrate good stewardship of investors' interests regarding
executive compensation practices.
The following five global principles apply to all markets:
o MAINTAIN APPROPRIATE PAY-FOR-PERFORMANCE ALIGNMENT WITH EMPHASIS ON
LONG-TERM SHAREHOLDER VALUE: This principle
encompasses overall executive pay practices, which must be designed to attract,
retain, and appropriately
motivate the key employees who drive shareholder value creation over the long
term. It will take into
consideration, among other factors: the linkage between pay and performance;
the mix between fixed and
variable pay; performance goals; and equity-based plan costs;
o AVOID ARRANGEMENTS THAT RISK "PAY FOR FAILURE": This principle addresses the
use and appropriateness of long or
indefinite contracts, excessive severance packages, and guaranteed
compensation;
o MAINTAIN AN INDEPENDENT AND EFFECTIVE COMPENSATION COMMITTEE: This principle
promotes oversight of executive
pay programs by directors with appropriate skills, knowledge, experience, and a
sound process for compensation
decision-making (e.g., including access to independent expertise and advice
when needed);
o PROVIDE SHAREHOLDERS WITH CLEAR, COMPREHENSIVE COMPENSATION DISCLOSURES:
This principle underscores the
importance of informative and timely disclosures that enable shareholders to
evaluate executive pay practices fully
and fairly;
o AVOID INAPPROPRIATE PAY TO NON-EXECUTIVE DIRECTORS: This principle
recognizes the interests of shareholders in
ensuring that compensation to outside directors does not compromise their
independence and ability to make
appropriate judgments in overseeing managers' pay and performance. At the
market level, it may incorporate a
variety of generally accepted best practices.
VOTING ALTERNATIVES
In general, the management say-on-pay (MSOP) ballot item is the primary focus
of voting on executive pay practices-- dissatisfaction with compensation
practices can be expressed by voting against MSOP rather than withholding or
voting against the compensation committee. If, however, there is no MSOP on the
ballot, then the negative vote will apply to members of the compensation
committee. In addition, in egregious cases or if the board fails to respond to
concerns raised by a prior MSOP proposal, vote withhold or against compensation
committee members (or, if the full board is deemed accountable, all directors).
If the negative factors involve equity-based compensation, then vote against an
equity-based plan proposal presented for shareholder approval.
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PAY FOR PERFORMANCE:
o Rationale for determining compensation (e.g., why certain elements and pay
targets are used, how they are used
in relation to the company's business strategy, and specific incentive plan
goals, especially retrospective goals) and
linkage of compensation to long-term performance;
o Evaluation of peer group benchmarking used to set target pay or award
opportunities;
o Analysis of company performance and executive pay trends over time, taking
into account ISS' Pay for
Performance policy;
o Mix of fixed versus variable and performance versus non-performance-based
pay.
PAY PRACTICES:
o Assessment of compensation components included in the Problematic Pay
Practices policy such as: perks,
severance packages, employee loans, supplemental executive pension plans,
internal pay disparity, and equity plan
practices (including option backdating, repricing, option exchanges, or
cancellations/surrenders and re-grants,
etc.);
o Existence of measures that discourage excessive risk taking which include
but are not limited to: clawbacks,
holdbacks, stock ownership requirements, deferred compensation practices, etc.
BOARD COMMUNICATIONS AND RESPONSIVENESS:
o Clarity of disclosure (e.g., whether the company's Form 51-102F6 disclosure
provides timely, accurate, clear
information about compensation practices in both tabular format and narrative
discussion);
o Assessment of board's responsiveness to investor concerns on compensation
issues (e.g., whether the company
engaged with shareholders and / or responded to majority-supported shareholder
proposals relating to executive
pay).
PAY FOR PERFORMANCE EVALUATION
This policy will be applied at all S&P/TSX Composite Index Companies and for
all Management Say-On-Pay Resolutions.
On a case-by-case basis, ISS will evaluate the alignment of the CEO's total
compensation with company performance over time, focusing particularly on
companies that have underperformed their peers over a sustained period. From a
shareholder's perspective, performance is predominantly gauged by the company's
share price performance over time. Even when financial or operational measures
are used as the basis for incentive awards, the achievement related to these
measures should ultimately translate into superior shareholder returns in the
long term.
Generally vote against management say-on-pay (MSOP) proposals, and/or
against/withhold on compensation committee members (or, in rare cases where the
full board is deemed responsible, all directors including the CEO), and/or
against an equity-based incentive plan proposal if:
o There is SIGNIFICANT LONG-TERM misalignment between CEO pay and company
performance.
The determination of long-term pay for performance alignment is a two-step
process: step one is a quantitative screen, which includes a relative and
absolute analysis on pay for performance, and step two is a qualitative
assessment of the CEO's pay and company performance. A pay for performance
disconnect will be determined as follows:
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STEP I: QUANTITATIVE SCREEN
RELATIVE:
1. The Relative Degree of Alignment (RDA) is the difference between the
company's annualized TSR rank and the
CEO's annualized total pay rank within a peer group (9), each measured over a
three-year period or less if pay or
performance data is unavailable for the full three years;
2. Multiple of Median (MOM) is the total compensation in the last reported
fiscal year relative to the median
compensation of the peer group; and
ABSOLUTE:
3. The CEO pay-to-TSR Alignment (PTA) over the prior five fiscal years, i.e.,
the difference between absolute pay
changes and absolute TSR changes during the prior five-year period (or less as
company disclosure permits);
STEP II: QUALITATIVE ANALYSIS
Companies identified by the methodology as having potential P4P misalignment
will receive a qualitative assessment to determine the ultimate recommendation,
considering a range of case-by-case factors which may include:
o The ratio of performance- to time-based equity grants and the overall mix of
performance-based compensation
relative to total compensation (considering whether the ratio is more than 50
percent); standard time-vested stock
options and restricted shares are not considered to be performance-based for
this consideration;
o The quality of disclosure and appropriateness of the performance measure(s)
and goal(s) utilized, so that
shareholders can assess the rigor of the performance program. The use of
non-GAAP financial metrics also makes
it challenging for shareholders to ascertain the rigor of the program as
shareholders often cannot tell the type of
adjustments being made and if the adjustments were made consistently. Complete
and transparent disclosure
helps shareholders to better understand the company's pay for performance
linkage;
o The trend in other financial metrics, such as growth in revenue, earnings,
return measures such as ROE, ROA, ROIC,
etc.;
o The trend considering prior years' P4P concern;
o Extraordinary situation due to a new CEO in the last reported FY; (10)
o Any other factors deemed relevant.
RATIONALE: The two part methodology is a combination of quantitative and
qualitative factors that more effectively drive a Case-by-case evaluation and
will improve the analysis of: longer term compensation versus company
performance and weight the longer term factors accordingly; absolute CEO pay
levels; and, circumstances under which there is a change in CEO during the most
recent year. Please refer to CANADIAN PAY FOR PERFORMANCE EVALUATION FAQ for a
more detailed discussion of ISS' quantitative pay-for-performance screen and
peer group construction methodology.
(9) The peer group is generally comprised of 11-24 companies that meet the
following criteria:
o Revenue/assets between 0.25X and 4X the subject company's size;
o In the closest GICS industry group (8-digit, 6-digit, 4-digit, or 2-digit)
to the subject company's GICS category; and
o Market Cap between 0.25X and 4X of the company's market cap expanded out to
four market cap buckets (micro, small,
mid, and large) as needed.
In exceptional cases, peer groups may be determined on a customized basis.
(10) Note that the longer-term emphasis of the new methodology alleviates
concern about impact of CEO turnover. Thus, except in extenuating
circumstances, a "new" CEO will not exempt the company from consideration under
the methodology since the compensation committee is also accountable when a
company is compelled to significantly "overpay" for new leadership due to prior
poor performance.
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PROBLEMATIC PAY PRACTICES
Generally, vote against management advisory vote proposals, and/or withhold
from compensation committee members if the company has problematic compensation
practices. In general, withhold on the entire slate if individual director
elections are not permitted and the company has demonstrated problematic
compensation practices. Also, generally vote against equity plans if the plan
is a vehicle for problematic compensation practices.
Generally vote based on the preponderance of problematic elements; however,
certain adverse practices may warrant withhold or against votes on a
stand-alone basis in particularly egregious cases. The following practices,
while not an exhaustive list, are examples of problematic compensation
practices that may warrant a vote against or withholding votes:
o Poor disclosure practices:
o General omission of timely information necessary to understand the rationale
for compensation setting
process and outcomes, or omission of material contracts, agreements or
shareholder disclosure
documents;
o New CEO with overly generous new hire package:
o Excessive "make whole" provisions;
o Any of the problematic pay practices listed in this policy;
o Egregious employment contracts:
o Contracts containing multiyear guarantees for salary increases, bonuses and
equity compensation;
o Employee Loans:
o Interest free or low interest loans extended by the company to employees for
the purpose of exercising
options or acquiring equity to meet holding requirements or as compensation;
o Excessive severance and/or change-in-control provisions:
o Inclusion of excessive change-in-control or severance payments, especially
those with a multiple in excess
of 2X cash pay (salary + bonus);
o Severance paid for a "performance termination" (i.e., due to the executive's
failure to perform job
functions at the appropriate level);
o Employment or severance agreements that provide for modified single triggers,
under which an executive
may voluntarily leave following a change of control for any reason and still
receive the change-in-control
severance package;
o Perquisites for former executives such as car allowance, personal use of
corporate aircraft, or other
inappropriate arrangements;
o Change-in-control payouts without loss of job or substantial diminution of
job duties (single-triggered);
o Abnormally large bonus payouts without justifiable performance linkage or
proper disclosure:
o Performance metrics that are changed, canceled, or replaced during the
performance period without
adequate explanation of the action and the link to performance;
o Egregious pension/SERP (supplemental executive retirement plan) payouts:
o Inclusion of performance-based equity awards in the pension calculation;
o Inclusion of target (unearned) or excessive bonus amounts in the pension
calculation;
o Addition of extra years of service credited without compelling rationale;
o No absolute limit on SERP annual pension benefits (any limit should ideally
be expressed in $ terms);
o No reduction in benefits on a pro-rata basis in the case of early retirement;
o Excessive perks:
o Overly generous cost and/or reimbursement of taxes for personal use of
corporate aircraft, personal
security systems maintenance and/or installation, car allowances, and/or other
excessive arrangements
relative to base salary;
o Payment of dividends on performance awards:
o Performance award grants for which dividends are paid during the period
before the performance criteria
or goals have been achieved, and therefore not yet earned;
o Problematic option granting practices:
o Backdating options, or retroactively setting a stock option's exercise price
lower than the prevailing
market value at the grant date;
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o Springloading options, or timing the grant of options;
o Cancellation and subsequent re-grant of options;
o Internal Pay Disparity:
o Excessive differential between CEO total pay and that of next highest-paid
named executive officer (NEO);
o Absence of pay practices that discourage excessive risk taking:
o These provisions include but are not limited to: clawbacks, holdbacks, stock
ownership requirements,
deferred bonus and equity award compensation practices, etc.;
o Financial institutions will be expected to have adopted or at least addressed
the provisions listed above in
accordance with the Financial Stability Board's (FSB) Compensation Practices
and standards for financial
companies;
o Other excessive compensation payouts or problematic pay practices at the
company.
RATIONALE: Shareholders are not generally permitted to vote on provisions such
as change-in-control provisions or the ability of an issuer to extend loans to
employees to exercise stock options, for example, when reviewing equity based
compensation plan proposals. Nor do shareholders in Canada have the ability to
approve employment agreements, severance agreements, or pensions; however,
these types of provisions, agreements, and contractual obligations continue to
raise shareholder concerns. Therefore, ISS will review disclosure related to
the various components of executive compensation and may recommend withholding
from the compensation committee or against an equity plan proposal if
compensation practices are unacceptable from a corporate governance
perspective.
BOARD COMMUNICATIONS AND RESPONSIVENESS
Consider the following on a case-by-case basis when evaluating ballot items
related to executive pay:
o Poor disclosure practices, including: insufficient disclosure to explain the
pay setting process for the CEO and how
CEO pay is linked to company performance and shareholder return; lack of
disclosure of performance metrics and
their impact on incentive payouts; no disclosure of rationale related to the
use of board discretion when
compensation is increased or performance criteria or metrics are changed
resulting in greater amounts paid than
that supported by previously established goals.
o Board's responsiveness to investor input and engagement on compensation
issues, including:
o Failure to respond to majority-supported shareholder proposals on executive
pay topics;
o Failure to respond to concerns raised in connection with significant
opposition to MSOP proposals;
o Failure to respond to the company's previous say-on-pay proposal that
received support of less than 70
percent of the votes cast taking into account the ownership structure of the
company.
Examples of board response include, but are not limited to: disclosure of
engagement efforts regarding the issues that contributed to the low level of
support, specific actions taken to address the issues that contributed to the
low level of support, and more rationale on pay practices.
ooooo
EQUITY COMPENSATION PLANS
Vote case-by-case on equity-based compensation plans. Vote against the plan if
any of the following factors applies:
o COST OF EQUITY PLANS: The total cost of the company's equity plans is
unreasonable;
o DILUTION AND BURN RATE: Dilution and burn rate are unreasonable, where the
cost of the plan cannot be calculated
due to lack of relevant historical data.
o PLAN AMENDMENT PROVISIONS: The provisions do not meet ISS guidelines as set
out in this section.
o NON-EMPLOYEE DIRECTOR PARTICIPATION: Participation of directors is
discretionary or unreasonable.
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o PAY FOR PERFORMANCE: There is a disconnect between CEO pay and the company's
performance.
o REPRICING STOCK OPTIONS: The plan expressly permits the repricing of stock
options without shareholder approval
and the company has repriced options within the past three years.
o PROBLEMATIC PAY PRACTICES: The plan is a vehicle for problematic pay
practices.
Each of these factors is examined below.
COST OF EQUITY PLANS
Generally vote against equity plans if the cost is unreasonable.
RATIONALE: Section 613 of the TSX Company Manual, requires shareholder approval
for equity-based compensation arrangements under which securities listed on the
TSX may be issued from treasury. Such approval is also required for
equity-based plans that provide that awards issued may be settled either in
treasury shares or cash. Cash only settled arrangements or those which are only
funded by securities purchased on the secondary market are not subject to
shareholder approval.
In addition, certain equity awards made outside of an equity plan, stock
purchase plans using treasury shares where financial assistance or share
matching is provided, and security purchases from treasury where financial
assistance is provided, are also subject to shareholder approval.
Our methodology for reviewing share-based compensation plans primarily focuses
on the transfer of shareholder wealth (the dollar cost of share plans to
shareholders) instead of simply focusing on dilution. Using information
disclosed by the company and assuming the broadest definition of plan terms,
ISS will value equity-based awards using a binomial option pricing model. ISS
will include in its analyses an estimated dollar cost for the proposed plan and
all continuing plans. This total cost will be expressed as a percentage of
market value (i.e. 200-day average share price times common shares
outstanding). This result is tested for reasonableness by comparing the figure
to an allowable cap derived from compensation plan costs of the top performing
quartile of peer companies in each industry group (using Global Industry
Classification Standard or "GICS" codes). Benchmark SVT levels for each
industry are established based on these top performers' historic SVT.
Regression analyses are run on 44 different variables including company size,
market-based performance metrics, and accounting-based performance metrics in
order to identify the variables most strongly correlated to SVT within each
industry group. The benchmark industry SVT level is then adjusted upwards or
downwards for the specific company by incorporating company-specific
performance measures, size, and cash compensation into the industry cap
equations to arrive at the company's allowable cap.
Shareholder Value Transfer is reasonable if it falls below the company-specific
allowable cap.
VOLATILITY AND STOCK PRICE ASSUMPTIONS IN EQUITY PLAN PROPOSALS (SVT)
The 200-day volatility and 200-day average stock price will be calculated and
used for the shareholder value transfer policy.
DILUTION AND BURN RATE ASSESSMENT
In cases where the cost of the plan cannot be calculated using the binomial
model due to lack of historic data for a newly created or merged corporate
entity, ISS will apply a dilution and burn rate analysis.
Generally vote against the proposed equity plan if:
o Dilution under all company plans would be more than 10 percent of the
outstanding shares on a non-diluted basis;
or
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o The historic burn rate for all company plans has been more than 2 percent
per year (generally averaged over most
recent three-year period). If equity has been granted as part of the resolution
subject to shareholder approval and
the grants made exceed 2 percent of the outstanding shares a vote against is
warranted.
ooooo
PLAN AMENDMENT PROVISIONS
Generally vote against the approval of proposed Amendment Procedures that do
not require shareholder approval for the following types of amendments under
any security based compensation arrangement, whether or not such approval is
required under current regulatory rules:
o Any increase in the number of shares reserved for issuance under a plan or
plan maximum;
o Any reduction in exercise price or cancellation and reissue of options or
other entitlements;
o Any amendment that extends the term of options beyond the original expiry;
o Amendments to eligible participants that may permit the introduction or
reintroduction of non-employee directors
on a discretionary basis or amendments that increase limits previously imposed
on non-employee director
participation;
o Any amendment which would permit options granted under the Plan to be
transferable or assignable other than
for normal estate settlement purposes;
o Amendments to the plan amendment provisions.
To clarify application of the above criteria, all items will apply to all
equity-based compensation arrangements under which treasury shares are reserved
for grants of, for example: restricted stock, restricted share units, or
deferred share units, except those items that specifically refer to option
grants.
RATIONALE: In response to the rule changes affected by the Toronto Stock
Exchange (TSX) related to Part IV, Subsection 613 of the TSX Company Manual and
Staff Notices #2004-0002, and #2006-0001 which came into effect in 2007, ISS
has revised its policy with regard to Equity Compensation Plan Amendment
Procedures. This policy addresses the removal by the TSX of previously
established requirements for shareholder approval of certain types of
amendments to Security-Based Compensation Arrangements of its listed issuers.
For the purposes of the rule change, security-based compensation arrangements
include: stock option plans for the benefit of employees, insiders and service
providers; individual stock options granted to any of these specified parties
outside of a plan; stock purchase plans where the issuer provides financial
assistance or where the employee contribution is matched in whole or in part by
an issuer funded contribution; stock appreciation rights involving the issuance
of treasury shares; any other compensation or incentive mechanism involving the
issuance or potential issuance of securities of the listed issuer; security
purchases from treasury by an employee, insider or service provider which is
financially assisted by the issuer in any manner. Issuers had until June 30,
2007, to adopt the proper Amendment Procedure in their Plans. After such date,
issuers who have "general amendment" provisions in their
Plans are no longer able to make any amendments to their Plans without security
holder approval, including amendments considered to be of a "housekeeping"
nature until they have put a shareholder approved detailed Plan Amendment
Provision in place.
According to the TSX Guide to Security-Based Compensation Arrangements, the
following amendments will continue to be subject to security holder approval
according to TSX rules notwithstanding the amendment provisions included in the
plan:
o Any increase in the number of shares reserved for issuance under a plan or
plan maximum;
o Any reduction in exercise price of options or other entitlements which
benefits an insider (11);
(11) Security holder approval, excluding the votes of securities held by
insiders benefiting from the amendment, is required for a reduction in the
exercise price, purchase price, or an extension of the term of options or
similar securities held by insiders. If an issuer cancels
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o Any amendment that extends the term of options beyond the original expiry
and that benefits an insider of the
issuer;
o Changes to insider participation limits which result in the security holder
approval to be required on a
disinterested basis;
o Amendment provisions granting additional powers to the board of directors to
amend the plan or entitlements
without security holder approval.
The TSX has further clarified that shareholder approval is required for any
amendment to the Plan Amendment Provision.
In addition, the TSX requires that the exercise price for any stock option
granted under a security based compensation arrangement or otherwise, must not
be lower than the market price of the securities at the time the option is
granted.
Any proposal to increase the maximum number of shares reserved under a plan
requires specific shareholder approval for the increase even if the plan
includes a shareholder-approved general amendment procedure permitting
increases to such maximum numbers.
Sections 613(d) and (g) set out a list of disclosure requirements in respect of
materials that must be provided to security holders in meeting materials issued
prior to a meeting at which the approval of any security based compensation
arrangement is requested. The disclosure requirements include annual disclosure
by listed issuers in their information circular or other annual disclosure
document distributed to all security holders, the terms of any security based
compensation arrangement as well as any amendments that were adopted in the
most recently completed fiscal year, including whether or not security holder
approval was obtained for the amendment. Staff Notice #2005-0001 goes on to
clarify that such disclosure must be as of the date of the information circular
containing the relevant disclosure and that issuers must update disclosure for
the most recently completed fiscal year end to include grants, exercises,
amendments, etc. which may occur after the fiscal year-end is completed, but
prior to the filing of the information circular.
ISS has reiterated the need for shareholder approval for the amendments that
currently still require shareholder approval by the TSX due to the ability of
the TSX to change or eliminate these requirements at any time in future which
we believe would not be in the best interests of shareholders or consistent
with institutional investor proxy voting guidelines. Note however that from a
corporate governance viewpoint, ISS does not support re-pricing of any
outstanding options and does not limit this policy to only those options held
by insiders. ISS has for many years recommended against any re-pricing of
outstanding options. Our reasons are based on the original purpose of stock
options as at-risk, incentive compensation that is meant to align the interests
of option-holders with those of shareholders. The incentive value of stock
options is diminished when the exercise price of out-of-the-money options can
be adjusted downwards, and is not supportable when shareholders must suffer the
consequences of a downturn in share price.
Discretionary participation by non-employee directors in equity compensation
plans is unacceptable from a corporate governance and accountability viewpoint
because administrators of the plan should not have the unrestricted ability to
issue awards to themselves. Directors who are able to grant themselves equity
awards without limit could find their independence compromised. Therefore, the
inclusion of non-employee directors in management equity based compensation
plans, while not preferable, must at a minimum be subject to
shareholder-approved limits. Issuer discretion to change eligible participants
may result in discretionary director participation. For clarification purposes,
in keeping with ISS' policy regarding acceptable limits on non-employee
director participation, if directors are included in an employee
options or similar securities held by insiders and then reissues those
securities under different terms, the TSX will consider this an amendment to
those securities and will require security holder approval, unless the re-grant
occurs at least 3 months after the related cancellation. Staff Notice
#2005-0001, Section 613 Security Based Compensation Arrangements, S.613(h)(iii)
Amendments to Insider Securities.
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equity compensation plan according to a shareholder approved limit, then any
amendment that would remove or increase such limit should be approved by
shareholders.
The ability of plan participants to assign options by means of Option Transfer
Programs or any other similar program which results in option holders receiving
value for underwater options when shareholders must suffer the consequences of
declining share prices does not align the interests of option holders with
those of shareholders and removes the intended incentive to increase share
price which was originally approved by shareholders.
ooooo
NON-EMPLOYEE DIRECTOR PARTICIPATION
Vote against a management equity compensation plan that permits discretionary
non-employee director participation.
RATIONALE: Due to the continuing use of options in compensation plans in
Canada, we have not opposed the use of options for outside directors per se,
but have tried to address potential governance concerns by ensuring a
reasonable limit on grants to independent non-employee directors who are
charged with overseeing not only a company's compensation scheme but also
corporate governance and long-term sustainability.
DIRECTOR LIMIT CONSIDERATIONS
Generally vote against an equity compensation plan proposal where:
o The non-employee director aggregate share reserve under the plan exceeds the
ISS established maximum limit of 1
percent of the outstanding common shares; or
o The equity plan document does not specify an ANNUAL INDIVIDUAL non-employee
director grant limit with a
maximum value of (i) $100,000 worth of stock options in the case of a stock
option or omnibus plan, or (ii)
$150,000 worth of shares in the case of an equity plan that does not grant
stock options.
INDIVIDUAL NON-EMPLOYEE DIRECTOR GRANTS
Generally vote against individual equity grants to non-employee directors in
the following circumstances:
o In conjunction with an equity compensation plan that is on the agenda at the
shareholder meeting if voting against
the underlying equity compensation plan; and
o Outside of an equity compensation plan if the director's annual grant would
exceed the above individual director
limit.
Shares taken in lieu of cash fees and a one-time initial equity grant upon a
director joining the board will not be included in the maximum award limit.
RATIONALE:
To address investor concerns related to discretionary or unreasonable
non-employee director participation in management equity compensation plans,
ISS established an acceptable limit on grants to such directors who are not
only charged with the administration of a company's compensation program but
are also responsible and accountable for the company's overall corporate
governance and long term sustainability. The established acceptable range for
aggregate non-employee director option grants is 0.25 percent to 1 percent of
the outstanding shares. Within that range an individual annual director limit
was established based on market practice.
Canadian institutional investors do not generally support stock options as an
appropriate form of equity compensation for non-employee directors, and, at a
minimum, require that option grants to NEDs be substantially restricted. ISS
has maintained the previously established maximum limit on stock option grants
to NEDs of $100,000 per director per year.
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However, based on current market practice, an updated ANNUAL INDIVIDUAL
non-employee director share-based (non-option) award limit of $150,000 may be
reasonable taking into consideration the increased demands on directors.
Please refer to the ISS Canada FAQ CANADIAN EQUITY PLAN METHODOLOGY for further
details and discussion related to the NED limit policy.
ooooo
REPRICING OPTIONS
Generally vote against an equity-based compensation plan proposal if the plan
expressly permits the repricing of options without shareholder approval and the
company has repriced options within the past three years.
ooooo
REPRICING PROPOSALS
Generally vote against proposals to reprice outstanding options. The following
and any other adjustments that can be reasonably considered repricing will
generally not be supported: reduction in exercise price or purchase price,
extension of term for outstanding options, cancellation and reissuance of
options, substitution of options with other awards.
RATIONALE: Security Based Compensation Arrangements Section 613(h)(iii) of the
TSX Company Manual requires security holder approval (excluding the votes of
securities held directly or indirectly by insiders benefiting from the
amendment) for a reduction in the exercise price or purchase price or an
extension of the term of an award under a security based compensation
arrangement benefiting an insider of the issuer notwithstanding that the
compensation plan may have been approved by security holders.
ISS has long opposed option repricing. Market deterioration is not an
acceptable reason for companies to reprice stock options.
Although not required by TSX rules, ISS believes that any proposal to reduce
the price of outstanding options, including those held by non-insiders, should
be approved by shareholders before being implemented (see discussion under Plan
Amendment Provisions).
The extension of option terms is also unacceptable. Options are not meant to be
a no-risk proposition and may lose their incentive value if the term can be
extended when the share price dips below the exercise price. Shareholders
approve option grants on the basis that recipients have a finite period during
which to increase shareholder value, typically five to ten years. As a company
would not shorten the term of an option to rein in compensation during, for
example, a commodities bull market run, it is not expected to extend the term
during a market downturn when shareholders suffer a decrease in share value.
ooooo
OTHER COMPENSATION PLANS
EMPLOYEE STOCK PURCHASE PLANS (ESPPS, ESOPS)
Generally vote for broadly based (preferably all employees of the company with
the exclusion of individuals with 5 percent or more beneficial ownership of the
company) employee stock purchase plans where the following apply:
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o Reasonable limit on employee contribution (may be expressed as a fixed
dollar amount or as a percentage of base
salary excluding bonus, commissions and special compensation);
o Employer contribution of up to 25 percent of employee contribution and no
purchase price discount or employer
contribution of more than 25 percent of employee contribution and SVT cost of
the company's equity plans is
within the allowable cap for the company;
o Purchase price is at least 80 percent of fair market value with no employer
contribution;
o Potential dilution together with all other equity-based plans is 10 percent
of outstanding common shares or less;
and
o The Plan Amendment Provision requires shareholder approval for amendments
to:
o The number of shares reserved for the plan;
o The allowable purchase price discount;
o The employer matching contribution amount.
Treasury funded ESPPs, as well as market purchase funded ESPPs requesting
shareholder approval, will be considered to be incentive based compensation if
the employer match is greater than 25 percent of the employee contribution. In
this case, the plan will be run through the ISS compensation model to assess
the Shareholder Value Transfer (SVT) cost of the plan together with the
company's other equity-based compensation plans.
Eligibility and administration are also key factors in determining the
acceptability of an ESPP/ESOP plan.
ISS will also take into account other compensation and benefit programs, in
particular pensions.
ooooo
DEFERRED SHARE UNIT PLANS
Generally vote for Deferred Compensation Plans if:
o Potential dilution together with all other equity-based compensation is 10
percent of the outstanding common
shares or less.
Other elements of director compensation to evaluate in conjunction with
deferred share units include:
o Director stock ownership guidelines of a minimum of three times annual cash
retainer
o Vesting schedule or mandatory deferral period which requires that shares in
payment of deferred units may not be
paid out until the end of three years
o The mix of remuneration between cash and equity
o Other forms of equity-based compensation, i.e. stock options, restricted
stock.
RATIONALE: Deferred compensation plans generally encourage a sense of ownership
in the company. These types of deferred compensation arrangements are usually
designed to compensate outside directors by allowing them the opportunity to
take all or a portion of their annual retainer in the form of deferred units,
the payment of which is postponed to some future time, typically retirement or
termination of directorship and may be in cash and/or stock.
A DSU plan only requires shareholder approval if it reserves treasury shares.
However, a number of companies continue to request shareholder approval for DSU
plans funded by shares purchased in the open market. This type of plan will be
evaluated on a qualitative basis in the same manner that ESPPs (see above) are
evaluated. Eligibility and administration are key factors in determining the
acceptability of such plans.
Treasury Funded Plans
Deferred share units awarded under any equity compensation plan where: i) the
authorization of treasury shares for issuance is in payment of the DSUs; and
ii) the DSU grants are not in-lieu of cash, would be evaluated by running the
compensation model.
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ooooo
SHAREHOLDER PROPOSALS ON COMPENSATION
Vote on a case-by-case basis for shareholder proposals targeting executive and
director pay, taking into account:
o The target company's performance, absolute and relative pay levels as well
as the wording of the proposal itself.
Generally vote for shareholder proposals requesting that the exercise of some,
but not all stock options be tied to the achievement of performance hurdles.
ooooo
SHAREHOLDER ADVISORY VOTE PROPOSALS
Generally vote for shareholder proposals requesting the adoption of a
non-binding advisory shareholder vote to ratify the report of the compensation
committee.
Generally vote against shareholder proposals requesting a binding vote on
executive or director compensation as being overly prescriptive and which may
lead to shareholder micro-management of compensation issues that are more
appropriately within the purview of the compensation committee of the board of
directors.
RATIONALE: Based on the experience of other global markets where advisory votes
are permitted, the consensus view is that advisory votes serve as a catalyst
for dialogue between investors and public issuers on questionable or
contentious compensation practices and can lead to a higher level of board
accountability, a stronger link between pay and performance, significantly
improved disclosure, and in some cases a noticed deceleration in the rate of
increase in executive compensation overall.
ooooo
SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS (SERPS) PROPOSALS
Generally vote against shareholder proposals requesting the exclusion of bonus
amounts and extra service credits to determine SERP payouts, unless the
company's SERP disclosure includes the following problematic pay practices:
o Inclusion of equity-based compensation in the pension calculation;
o Inclusion of target (unearned) or excessive bonus amounts in the pension
calculation;
o Addition of extra years' service credited in other than exceptional
circumstances and without compelling rationale;
o No absolute limit on SERP annual pension benefits (ideally expressed in
money terms);
o No reduction in benefits on a pro-rata basis in the case of early
retirement.
In addition, consideration will also be given to the extent to which executive
compensation is performance driven and "at risk," as well as whether bonus
payouts can exceed 100 percent of base salary.
RATIONALE: The inclusion of bonus and incentive compensation amounts along with
base salary as the basis for calculating supplemental pension benefits is
generally viewed as an unacceptable market practice. Proposals that aim to
limit excessive pension payments for executives are laudable. The inclusion of
variable compensation or other enhancements under SERP provisions can
significantly drive up the cost of such plans, a cost that is ultimately
absorbed by the company and its shareholders.
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Investor pressure to structure executive compensation so that the majority is
"at risk" has driven down base salary and therefore it may be reasonable in
certain cases to include short-term cash bonus amounts in the bonus
calculation. Therefore, ISS will assess limits imposed on extra service credits
and the overall mix of guaranteed (salary) and at risk (performance driven
incentive compensation) executive compensation, as well as the size of
potential cash bonus amounts, when determining vote recommendations on SERP
shareholder proposals asking for elimination of these elements in SERP
calculations. Given the conservative general market practice in this regard,
support for such proposals should be limited to those companies that exceed
standard market practice thus qualifying as problematic pay practices as
outlined above.
ooooo
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6. SOCIAL/ENVIRONMENTAL ISSUES
Global Approach
Issues covered under the policy include a wide range of topics, including
consumer and product safety, environment and energy, labor standards and human
rights, workplace and board diversity, and corporate political issues. While a
variety of factors goes into each analysis, the overall principle guiding all
vote recommendations focuses on how the proposal may enhance or protect
shareholder value in either the short term or long term.
Generally vote case-by-case, taking into consideration whether implementation
of the proposal is likely to enhance or protect shareholder value, and in
addition the following will be considered:
o If the issues presented in the proposal are more appropriately or
effectively dealt with through legislation or
government regulation;
o If the company has already responded in an appropriate and sufficient manner
to the issue(s) raised in the
proposal;
o Whether the proposal's request is unduly burdensome (scope, timeframe, or
cost) or overly prescriptive;
o The company's approach compared with any industry standard practices for
addressing the issue(s) raised by
the proposal;
o If the proposal requests increased disclosure or greater transparency,
whether or not reasonable and
sufficient information is currently available to shareholders from the company
or from other publicly available
sources; and
o If the proposal requests increased disclosure or greater transparency,
whether or not implementation would
reveal proprietary or confidential information that could place the company at
a competitive disadvantage.
RATIONALE: This policy update codifies the overarching principles that are
applied to all markets, globally, and clarifies the factors that ISS considers
in its case-by-case evaluation of environmental and social shareholder
proposals. In markets where shareholder proposals on specific environment and
social issues are routinely or frequently observed on company ballots, ISS has
more nuanced policies that stem from these principles to address those issues.
ooooo
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DISCLOSURE/DISCLAIMER
This document and all of the information contained in it, including without
limitation all text, data, graphs, and charts (collectively, the "Information")
is the property of Institutional Shareholder Services Inc. (ISS), its
subsidiaries, or, in some cases third party suppliers.
The Information has not been submitted to, nor received approval from, the
United States Securities and Exchange Commission or any other regulatory body.
None of the Information constitutes an offer to sell (or a solicitation of an
offer to buy), or a promotion or recommendation of, any security, financial
product or other investment vehicle or any trading strategy, and ISS does not
endorse, approve, or otherwise express any opinion regarding any issuer,
securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or
permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO
THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY,
TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS FOR A
PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by
law, in no event shall ISS have any liability regarding any of the Information
for any direct, indirect, special, punitive, consequential (including lost
profits), or any other damages even if notified of the possibility of such
damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
oooooo
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Transparency. Inclusiveness. Global Expertise.
2014 EUROPEAN PROXY VOTING SUMMARY GUIDELINES
April 4, 2014
Institutional Shareholder Services Inc.
Copyright [C] 2014 by ISS
www. issgovernance.com
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ISS' 2014 EUROPEAN PROXY VOTING SUMMARY GUIDELINES
Effective for Meetings on or after Feb. 1, 2014
Published Dec. 19, 2013
Updated: April 4, 2014
The following is a condensed version of the proxy voting recommendations
contained in ISS' European Proxy Voting Manual.
Table of Contents
COVERAGE UNIVERSE 4
DEFINITIONS AND EXPLANATIONS 5
1. OPERATIONAL ITEMS 6
Financial Results/Director and Auditor Reports 6
Appointment of Auditors and Auditor Fees 6
Appointment of Internal Statutory Auditors 6
Allocation of Income 6
Amendments to Articles of Association 7
Change in Company Fiscal Term 7
Lower Disclosure Threshold for Stock Ownership 7
Amend Quorum Requirements 7
Transact Other Business 7
2. BOARD OF DIRECTORS 8
Non-Contested Director Elections 8
Director Terms 8
Bundling of Proposal to Elect Directors 9
Board Independence 9
Exception for Companies with a Majority Shareholder
(Excludes Italy and Portugal) 10
Disclosure of Names of Nominees 10
Combined Chairman/CEO 10
Election of a Former CEO as Chairman of the Board 10
Overboarded Directors 11
Voto di Lista (Italy) 11
One Board Seat per Director 12
Composition of Committees 12
Composition Nomination Committee (Sweden, Norway, and Finland) 12
Election of Censors (France) 13
ISS Classification of Directors - European Policy 2014 14
Contested Director Elections 15
Voting on Directors for Egregious Actions 16
Committee of Representatives and Corporate Assembly Elections
(Denmark and Norway) 16
Discharge of Directors 16
Director, Officer, and Auditor Indemnification and Liability Provisions 16
Board Structure 16
3. CAPITAL STRUCTURE 17
Share Issuance Requests 17
General Issuances 17
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Specific Issuances 17
Increases in Authorized Capital 17
Reduction of Capital 17
Capital Structures 18
Preferred Stock 18
Debt Issuance Requests 18
Pledging of Assets for Debt 18
Increase in Borrowing Powers 18
Share Repurchase Plans 19
Reissuance of Repurchased Shares 19
Capitalization of Reserves for Bonus Issues/Increase in Par Value 20
4. COMPENSATION 21
Compensation Guidelines 21
Preamble 21
Executive compensation-related proposals 21
Non-Executive Director Compensation 22
Equity-based compensation Guidelines 23
French Burn Rate Table 23
Compensation-Related Voting Sanctions 24
Stock Option Plans -- Adjustment for Dividend (Nordic Region) 24
Share Matching Plans (Sweden and Norway) 24
5. ENVIRONMENTAL AND SOCIAL ISSUES 26
Voting on Social and Environmental Proposals 26
6. OTHER ITEMS 27
Reorganizations/Restructurings 27
Mergers and Acquisitions 27
Mandatory Takeover Bid Waivers 27
Reincorporation Proposals 27
Expansion of Business Activities 28
Related-Party Transactions 28
Antitakeover Mechanisms 28
Shareholder Proposals 28
Authority to Reduce Minimum Notice Period for Calling a Meeting 29
Auditor Report Including Related Party Transactions (France) 29
DISCLOSURE/DISCLAIMER 31
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COVERAGE UNIVERSE
ISS' European Policy applies to Member States of the European Union (EU) or the
European Free Trade Association (EFTA), with the exception of the United
Kingdom and Ireland, which are subject to the separate National Association of
Pension Funds (NAPF) policy. In both cases, European territories that are
politically associated with a given Member State are subject to the same policy
as that Member State. Other European territories are subject to either ISS'
separate, market-specific policies, or ISS' EMEA Regional Policy.
Specifically, ISS' European Policy applies to companies incorporated in the
following territories: Austria, Belgium, Bulgaria, Croatia, the Czech Republic,
Cyprus, Denmark, Estonia, the Faroe Islands, Finland, France, Germany, Greece,
Greenland, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania,
Luxembourg, Malta, the Netherlands, Norway, Poland, Portugal, Romania, Spain,
Slovakia, Slovenia, Sweden, and Switzerland.
ISS' approach is not "one-size-fits-all" and takes relevant market-specific
factors into account in our research and recommendations. Therefore this
document distinguishes in various places between different markets and on the
basis of other differentiating factors. These distinctions are based on
different market practices and best practice recommendations throughout
Europe.
ooooo
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DEFINITIONS AND EXPLANATIONS
The term "widely held" refers to companies that ISS designates as such based on
their membership in a major index and/or the number of ISS clients holding the
securities.
For stylistic purposes, this document may use the adjectival form of country
names to refer to companies incorporated or listed in a given market.
ooooo
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1. OPERATIONAL ITEMS
FINANCIAL RESULTS/DIRECTOR AND AUDITOR REPORTS
Vote for approval of financial statements and director and auditor reports,
unless:
o There are concerns about the accounts presented or audit procedures used; or
o The company is not responsive to shareholder questions about specific items
that should be publicly disclosed.
o
ooooo
APPOINTMENT OF AUDITORS AND AUDITOR FEES
Vote for proposals to ratify auditors and/or proposals authorizing the board to
fix auditor fees, unless:
o There are serious concerns about the procedures used by the auditor;
o There is reason to believe that the auditor has rendered an opinion which is
neither accurate nor indicative of the
company's financial position;
o External auditors have previously served the company in an executive
capacity or can otherwise be considered
affiliated with the company;
o Name of the proposed auditors has not been published;
o The auditors are being changed without explanation; or
o Fees for non-audit services exceed standard annual audit-related fees (only
applies to companies on the MSCI-
EAFE index and/or listed on any country main index).
In circumstances where fees for non-audit services include fees related to
significant one-time capital structure events: initial public offerings,
bankruptcy emergence, and spin-offs; and the company makes public disclosure of
the amount and nature of those fees which are an exception to the standard
"non-audit fee" category, then such fees may be excluded from the non-audit
fees considered in determining the ratio of non-audit to audit fees.
For concerns relating to the audit procedures, independence of auditors, and/or
name of auditors, ISS will target the auditor election. For concerns relating
to fees paid to the auditors, ISS will target remuneration of auditors if this
is a separate voting item, otherwise ISS would target the auditor election.
ooooo
APPOINTMENT OF INTERNAL STATUTORY AUDITORS
Vote for the appointment or reelection of statutory auditors, unless:
o There are serious concerns about the statutory reports presented or the
audit procedures used; or
o Questions exist concerning any of the statutory auditors being appointed; or
o The auditors have previously served the company in an executive capacity or
can otherwise be considered
affiliated with the company.
ooooo
ALLOCATION OF INCOME
Vote for approval of the allocation of income, unless:
o The dividend payout ratio has been consistently below 30 percent without
adequate explanation; or
o The payout is excessive given the company's financial position.
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ooooo
AMENDMENTS TO ARTICLES OF ASSOCIATION
Vote amendments to the articles of association on a case-by-case basis.
ooooo
CHANGE IN COMPANY FISCAL TERM
Vote for resolutions to change a company's fiscal term unless a company's
motivation for the change is to postpone its AGM.o
ooooo
LOWER DISCLOSURE THRESHOLD FOR STOCK OWNERSHIP
Vote against resolutions to lower the stock ownership disclosure threshold
below 5 percent unless specific reasons exist to implement a lower
threshold.o
ooooo
AMEND QUORUM REQUIREMENTS
Vote proposals to amend quorum requirements for shareholder meetings on a
case-by-case basis.o
ooooo
TRANSACT OTHER BUSINESS
Vote against other business when it appears as a voting item.o
oooooo
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2. BOARD OF DIRECTORS
NON-CONTESTED DIRECTOR ELECTIONS
Vote for management nominees in the election of directors, unless:
o Adequate disclosure has not been provided in a timely manner;
o There are clear concerns over questionable finances or restatements;
o There have been questionable transactions with conflicts of interest;
o There are any records of abuses against minority shareholder interests;
o The board fails to meet minimum corporate governance standards;
o There are specific concerns about the individual, such as criminal
wrongdoing or breach of fiduciary
responsibilities; and
o Repeated absences at board meetings have not been explained (in countries
where this information is disclosed).
In addition to these general factors, ISS may recommend against due to concerns
related to at least one of the following specific factors, which are presented
below as separate subsections:
I. Director Terms
II. Bundling of Proposals to Elect Directors
III. Board independence
IV. Disclosure of Names of Nominees
V. Combined Chairman/CEO
VI. Election of a Former CEO as Chairman of the Board
VII. Overboarded Directors
VIII. Voto di Lista (Italy)
IX. One Board Seat per Director
X. Composition of Committees
XI. Composition Nominating Committee (Sweden and Norway)
XII. Election of Censors (France)
Note that this policy is distinct from ISS' policy on contested director
elections, which is presented as a separate policy item.
Note also that this policy is complemented by three additional policies:
"Compensation-Related Voting Sanctions" and "Voting on Directors for Egregious
Actions," which both address a comparatively rare set of additional
circumstances, and "Corporate Assembly and Committee of Representatives
Elections," which states how ISS applies its director election policy in Norway
and Denmark in cases where the board is not directly elected by shareholders.
DIRECTOR TERMS
For BELGIUM, FRANCE, ITALY, NETHERLANDS, SPAIN, and SWITZERLAND, vote against
the election or re-election of any director when his/her term is not disclosed
or when it exceeds four years and adequate explanation for non-compliance has
not been provided. In these markets, the maximum board terms are either
recommended best practice or required by legislation. Under best practice
recommendations, companies should shorten the terms for directors when the
terms exceed the limits suggested by best practices. The policy will be applied
to all companies in these markets, for bundled as well as unbundled items.
Clients will also be advised to vote against article amendment proposals to
extend board terms. In cases where a company's articles provide for a shorter
limit and where the company wishes to extend director terms from three or fewer
years to four years, for example, ISS will recommend a vote against, based on
the general principle that director accountability is maximized by elections
with a short period of renewal.
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BUNDLING OF PROPOSAL TO ELECT DIRECTORS
For the markets of BULGARIA, CROATIA, CZECH REPUBLIC, ESTONIA, FRANCE, GERMANY,
HUNGARY, LATVIA, LITHUANIA, POLAND,
ROMANIA, SLOVAKIA, SLOVENIA, and SPAIN vote against the election or reelection
of any directors if individual director elections are an established market
practice and the company proposes a single slate of directors.
In France, unbundled director elections are market practice, in Germany it has
been recommended best practice since July 20, 2005, and in Spain it has been
recommended best practice since Jan. 1, 2007. The policy will be applied to all
companies in these markets.
Bundling together proposals that could be presented as separate voting items is
not considered good market practice, because bundled resolutions leave
shareholders with an all-or-nothing choice, skewing power disproportionately
towards the board and away from shareholders. As director elections are one of
the most important voting decisions that shareholders make, directors should be
elected individually.
BOARD INDEPENDENCE
Please see ISS' European Classification of Directors, presented separately in
this document (page 14), regarding ISS' classification of the independence
status of individual directors.
Note that this section is subject to an exception for companies with a majority
shareholder. This exception is presented at the end of this subsection.
For AUSTRIA, BELGIUM, FRANCE, GERMANY, HUNGARY, the NETHERLANDS, SPAIN, and
SWITZERLAND, vote against the election or reelection of any non-independent
directors (excluding the CEO) if the proposed board is not at least 50 percent
independent. If a nominee cannot be categorized, ISS will consider that person
non-independent and include that nominee in the calculation. The policy will
apply to widely held companies in these markets.
For DENMARK, NORWAY, FINLAND, SWEDEN, and LUXEMBOURG, ISS will apply the same
policy only for those companies that are part of a local main index market
index and/or the MSCI-EAFE index.
For widely held companies in AUSTRIA and GERMANY that must by law include labor
representatives who are by definition not independent, ISS will require that a
minimum of one-third of the total board be independent. For SWEDISH, NORWEGIAN,
and DANISH local main index and/or MSCI-EAFE companies, as well as widely-held
HUNGARIAN companies, with labor representatives, the above policy will apply to
shareholder-elected board members. In addition, ISS will require that one-third
of the total board (shareholder-elected members and labor representatives) be
independent non-executive directors.
In PORTUGAL, companies that belong to the PSI-20 and/or MSCI-EAFE index will be
required to have at least 25 percent of the board independent, as recommended
by the Code of Corporate Governance issued by the Portuguese Securities
Exchange. ISS will recommend a vote against the entire slate of candidates
(bundled elections) or a vote against the election of any non-independent
directors (unbundled elections) if board independence level does not meet the
recommended 25-percent threshold.
In ITALY, for companies that are part of a local main index market index and/or
MSCI-EAFE index with a controlling shareholder, companies will be required to
have a board consisting of at least one-third independent members (33 percent),
and, for all other companies, at least half of the board should be independent
(50 percent).
For GREECE, vote against the election or reelection of any non-independent
directors if the proposed board is not at least one-third independent (as
defined by ISS' director classification guidelines). If elections are bundled
and the proposed
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board is not at least one-third independent, vote against the entire slate. If
a nominee cannot be categorized, ISS will assume that person is non-independent
and include that nominee in the calculation. This policy will be applied to
widely held companies incorporated in Greece.
EXCEPTION FOR COMPANIES WITH A MAJORITY SHAREHOLDER (EXCLUDES ITALY AND
PORTUGAL)
For companies with a majority shareholder, generally vote against the election
or reelection of any non-independent directors (excluding the CEO) if the level
of independence on the board will be lower than minority shareholders'
percentage of equity ownership, or if the board will be less than one-third
independent (whichever is higher). Minority shareholders' ownership percentage
is calculated by subtracting the majority shareholder's equity ownership
percentage from 100 percent. Majority control is defined in terms of economic
interest and not voting rights, and is considered to be any shareholder or
group of shareholders acting collectively that control at least 50 percent + 1
share of the company's equity capital.
This independence threshold is applied to controlled widely held companies or
main index-listed/MSCI-EAFE member companies which would otherwise fall under a
50-percent independence guideline as described in the Board Independence
Policy.
Carve Out: In markets where the local corporate governance code addresses board
independence at controlled companies, ISS will generally recommend against the
election or reelection of any non-independent directors (excluding the CEO) if
the level of independence on the board is lower than the local code
recommendation, but in any case if the level of board independence is below
one-third.
DISCLOSURE OF NAMES OF NOMINEES
Vote against the election or reelection of any and all director nominees when
the names of the nominees are not available at the time the ISS analysis is
being written. This policy will be applied to all companies in these markets,
for bundled and unbundled items.
COMBINED CHAIRMAN/CEO
Generally, vote against (re)election of combined chair/CEOs at widely held
European companies.
However, when the company provides assurance that the chair/CEO would only
serve in the combined role on an interim basis (no more than two years), with
the intent of separating the roles within a given time frame, considerations
should be given to these exceptional circumstances. In this respect, the vote
recommendation would be made on a case-by-case basis. In order for ISS to
consider a favorable vote recommendation for a combined chair/CEO to serve on
an interim basis, the company would need to provide adequate control mechanisms
on the board (such as a lead independent director, a high overall level of
board independence, and a high level of independence on the board's key
committees).
This policy will be applied to all widely held European companies that propose
the (re)election of a combined chair/CEO to the board, including cases where
the chair/CEO is included in an election by slate.
ELECTION OF A FORMER CEO AS CHAIRMAN OF THE BOARD
Generally vote against the election or reelection of a former CEO as chairman
to the supervisory board or board of directors at widely held companies in
GERMANY, AUSTRIA, and the NETHERLANDS. In markets such as GERMANY, where the
general meeting only elects the nominees and, subsequently, the new board's
chairman, ISS will generally recommend a vote
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against the election or election of a former CEO, unless the company has
publicly confirmed prior to the general meeting that he will not proceed to
become chairman of the board.
Considerations should be given to any of the following exceptional
circumstances on a case-by-case basis if:
o There are compelling reasons that justify the election or reelection of a
former CEO as chairman; or
o The former CEO is proposed to become the board's chairman only on an interim
or temporary basis; or
o The former CEO is proposed to be elected as the board's chairman for the
first time after a reasonable cooling-off
period; or
o The board chairman will not receive a level of compensation comparable to
the company's executives nor assume
executive functions in markets where this is applicable.
OVERBOARDED DIRECTORS
In AUSTRIA, BELGIUM, FRANCE, GERMANY, ITALY, LUXEMBOURG, the NETHERLANDS,
SPAIN, and SWITZERLAND, at widely held companies, ISS will generally recommend
a vote against a candidate when s/he holds an excessive number of board
appointments, as referenced by the more stringent of the provisions prescribed
in local law or best practice governance codes, or the following guidelines:
o Executive directors are expected not to hold other executive or chairmanship
positions. They may, however, hold
up to two other non-executive directorships.
o Non-executive chairmen are expected not to hold executive positions
elsewhere or more than one other
chairmanship position. They may, however, hold up to three other non-executive
directorships.
o Non-executive directors who do not hold executive or chairmanship positions
may hold up to four other non-
executive directorships.
An adverse vote recommendation will not be applied to a director within a
company where he/she serves as CEO or chair; instead, any adverse vote
recommendations will be applied to his/her additional seats on other company
boards.
ISS will take into account board positions held in global publicly listed
companies.
For directors standing for (re)election at French companies, ISS will take into
account board appointments as censors in French publicly listed companies.
VOTO DI LISTA (ITALY)
In ITALY, director elections generally take place through the VOTO DI LISTA
mechanism (similar to slate elections). Since the Italian implementation of the
European Shareholder Rights Directive (effective since Nov. 1, 2010), issuers
must publish the various lists 21 days in advance of the meeting.
Since shareholders only have the option to support one such list, where lists
are published in sufficient time, ISS will recommend a vote on a case-by-case
basis, determining which list of nominees it considers is best suited to add
value for shareholders based, as applicable, on ISS European policies for
Director Elections and for Contested Director Elections.
Those companies that are excluded from the provisions of the European
Shareholder Rights Directive publish lists of nominees 10 days before the
meeting. In the case where nominees are not published in sufficient time, ISS
will recommend a vote against the director elections before the lists of
director nominees are disclosed. Once the various lists of nominees are
disclosed, ISS will issue an alert to its clients and, if appropriate, change
its vote recommendation to support one particular list.
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ONE BOARD SEAT PER DIRECTOR
In cases where a director holds more than one board seat on a single board and
the corresponding votes, manifested as one seat as a physical person plus an
additional seat(s) as a representative of a legal entity, vote against the
election/reelection of such legal entities and in favor of the physical person.
However, an exception is made if the representative of the legal entity holds
the position of CEO. In such circumstances, ISS will typically recommend a vote
in favor of the legal entity and against the election/reelection of the
physical person.
While such occurrences are rare, there have been cases where a board member may
have multiple board seats and corresponding votes. Holding several board seats
concurrently within one board increases this person's direct influence on board
decisions and creates an inequality among board members.
This situation has manifested in BELGIUM, LUXEMBOURG, and FRANCE. This is not a
good corporate governance practice, as it places disproportionate influence and
control in one person.
COMPOSITION OF COMMITTEES
In BELGIUM, DENMARK, FINLAND, FRANCE, LUXEMBOURG, the NETHERLANDS, NORWAY,
SPAIN, SWEDEN, and SWITZERLAND, vote against the (re)election of executives who
serve on the company's audit or remuneration committee. ISS may recommend
against if the disclosure is too poor to determine whether an executive serves
or will serve on a committee. If a company does not have an audit or a
remuneration committee, ISS may consider that the entire board fulfills the
role of a committee. In such case, ISS may recommend against the executives,
including the CEO, up for election to the board.
For BELGIUM, the NETHERLANDS, and SWITZERLAND, vote against the (re)election of
non-independent members of the audit committee and/or the remuneration
committee if their (re)election would lead to a non-independent majority on the
respective committee.
These policies apply only to companies for which ISS includes overall board
independence as a factor in its analysis of board elections.
Markets where local corporate governance codes prescribe specific composition
requirements are assessed in accordance with compliance with their local codes.
More stringent requirements are applied to those markets where local corporate
governance codes prescribe more robust composition requirements.
Separation of power is one of the fundamental tenets of good corporate
governance. The primary objective of the board is to provide independent
oversight of executive management, and because board committees are entrusted
with carrying out crucial functions for this purpose, such as assessing the
veracity of the independent audit and carrying out board succession planning,
it is important that committees be sufficiently independent of management. The
presence of executive directors on audit and compensation committees represents
clear and widely recognized conflicts of interest. Executive audit committee
members may compromise the integrity of the independent audit, and the presence
of executives on the compensation committee means that executives are allowed
to select the directors who determine their pay. Corporate governance codes in
a number of European markets have already introduced amendments in recent years
which recommend majority independence on key committees such as the audit and
remuneration committees, and even the outright ban of executive members on
these committees, and this policy is intended to reflect these code
recommendations as well as market practice.
COMPOSITION NOMINATION COMMITTEE (SWEDEN, NORWAY, AND FINLAND)
Vote for proposals in SWEDEN, NORWAY, and FINLAND to elect or appoint a
nominating committee consisting mainly of non-board members.
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Vote for shareholder proposals calling for disclosure of the names of the
proposed candidates at the meeting, as well as the inclusion of a
representative of minority shareholders in the committee.
The above policy notwithstanding, vote against proposals in SWEDEN to elect or
appoint such a committee if the company is on the MSCI-EAFE or local main index
and the following conditions exist:
1. A member of the executive management would be a member of the committee;
2. More than one board member who is dependent on a major shareholder would be
on the committee; or 3. The chair of the board would also be the chair of the
committee.
In cases where the principles for the establishment of the nominating
committee, rather than the election of the committee itself, are being voted
on, vote against the adoption of the principles if any of the above conditions
are met for the current committee, and there is no publicly available
information indicating that this would no longer be the case for the new
nominating committee.
ELECTION OF CENSORS (FRANCE)
For widely held companies, ISS will generally recommend a vote against
proposals seeking shareholder approval to elect a censor, to amend bylaws to
authorize the appointment of censors, or to extend the maximum number of
censors to the board.
However, ISS will recommend a vote on a case-by-case basis when the company
provides assurance that the censor would serve on a short-term basis (maximum
one year) with the intent to retain the nominee before his/her election as
director. In this case, consideration shall also be given to the nominee's
situation (notably overboarding or other factors of concern).
In consideration of the principle that censors should be appointed on a
short-term basis, vote against any proposal to renew the term of a censor or to
extend the statutory term of censors.
o
ooooo
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ISS CLASSIFICATION OF DIRECTORS - EUROPEAN POLICY 2014
EXECUTIVE DIRECTOR
o Employee or executive of the company;
o Any director who is classified as a non-executive, but receives salary,
fees, bonus, and/or other benefits that are in
line with the highest-paid executives of the company.
NON-INDEPENDENT NON-EXECUTIVE DIRECTOR (NED)
o Any director who is attested by the board to be a non-independent NED;
o Any director specifically designated as a representative of a significant
shareholder of the company;
o Any director who is also an employee or executive of a significant
shareholder of the company;
o Any director who is nominated by a dissenting significant shareholder unless
there is a clear lack of material (4)
connection with the dissident, either currently or historically;
o Beneficial owner (direct or indirect) of at least 10 percent of the
company's stock, either in economic terms or in
voting rights (this may be aggregated if voting power is distributed among more
than one member of a defined
group, e.g., members of a family that beneficially own less than 10 percent
individually, but collectively own more
than 10 percent), unless market best practice dictates a lower ownership and/or
disclosure threshold (and in other
special market-specific circumstances);
o Government representative;
o Currently provides (or a relativeo provides) professional services (2) to
the company, to an affiliate of the company, or
to an individual officer of the company or of one of its affiliates in excess
of $10,000 per year;
o Represents customer, supplier, creditor, banker, or other entity with which
the company maintains a
transactional/commercial relationship (unless the company discloses information
to apply a materiality test (3));
o Any director who has conflicting or cross-directorships with executive
directors or the chairman of the company;
o Relativeo of a current or former executive of the company or its
affiliates;
o A new appointee elected other than by a formal process through the general
meeting (such as a contractual
appointment by a substantial shareholder);
o Founder/co-founder/member of founding family but not currently an employee;
o Former executive (five-year cooling off period);
o Excessive years of service from date of first appointment, as determined by
the EC Recommendation 2005/162/EC,
local corporate governance codes, or local best practice, is generally a
determining factor in evaluating director
independence. (4) ;
o Any additional relationship or principle considered to compromise
independence under local corporate
governance best practice guidance.
INDEPENDENT NED
o Not classified as non-independent by ISS (see above);
o No material (5) connection, either direct or indirect, to the company (other
than a board seat) or to a significant
shareholder.
EMPLOYEE REPRESENTATIVE
o Represents employees or employee shareholders of the company (classified as
"employee representative" and
considered a non-independent NED).
FOOTNOTES
(1) "Relative" follows the definition of "immediate family members" which
covers spouses, parents, children, stepparents, step-children, siblings,
in-laws, and any person (other than a tenant or employee) sharing the household
of any director, nominee for director, executive officer, or significant
shareholder of the company.
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(2) Professional services can be characterized as advisory in nature and
generally include the following: investment banking/financial advisory
services; commercial banking (beyond deposit services); investment services;
insurance services; accounting/audit services; consulting services; marketing
services; and legal services. The case of participation in a banking syndicate
by a non-lead bank should be considered a transaction (and hence subject to the
associated materiality test) rather than a professional relationship.
(3) A business relationship may be material if the transaction value (of all
outstanding transactions) entered into between the company and the company or
organization with which the director is associated is equivalent to either 1
percent of the company's turnover or 1 percent of the turnover of the company
or organization with which the director is associated; or
A business relationship may be material if the transaction value (of all
outstanding financing operations) entered into between the company and the
company or organization with which the director is associated is more than 10
percent of the company's shareholder equity or the transaction value (of all
outstanding financing operations) compared to the company's total assets is
more than 5 percent.
(4) For example, the EC recommendation 2005/162/EC's definition of
independence provides that in order to remain independent, a non-executive
director shall have served on the [supervisory] board for no more than 12
years. For countries governed by ISS' European policy, ISS will follow the EC
recommendation and apply stricter tenure limits where recommended by local
corporate governance codes or established by local best practice.
(5) For purposes of ISS' director independence classification, "material" will
be defined as a standard of relationship (financial, personal, or otherwise)
that a reasonable person might conclude could potentially influence one's
objectivity in the boardroom in a manner that would have a meaningful impact on
an individual's ability to satisfy requisite fiduciary standards on behalf of
shareholders.
ooooo
CONTESTED DIRECTOR ELECTIONS
For contested elections of directors, e.g. the election of shareholder nominees
or the dismissal of incumbent directors, ISS will make its recommendation on a
case-by-case basis, determining which directors are considered best suited to
add value for shareholders.
The analysis will generally be based on, but not limited to, the following
major decision factors:
o Company performance relative to its peers;
o Strategy of the incumbents versus the dissidents;
o Independence of directors/nominees;
o Experience and skills of board candidates;
o Governance profile of the company;
o Evidence of management entrenchment;
o Responsiveness to shareholders;
o Whether a takeover offer has been rebuffed;
o Whether minority or majority representation is being sought.
When analyzing a contested election of directors, ISS will generally focus on
two central questions: (1) Have the proponents proved that board change is
warranted? And if so, (2) Are the proponent board nominees likely to effect
positive change (i.e., maximize long-term shareholder value).
ooooo
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VOTING ON DIRECTORS FOR EGREGIOUS ACTIONS
Under extraordinary circumstances, vote against or withhold from directors
individually, on a committee, or the entire board, due to:
o Material failures of governance, stewardship, risk oversight, or fiduciary
responsibilities at the company;
o Failure to replace management as appropriate; or
o Egregious actions related to the director(s)'service on other boards that
raise substantial doubt about his or her
ability to effectively oversee management and serve the best interests of
shareholders at any company.
oooooo
COMMITTEE OF REPRESENTATIVES AND CORPORATE ASSEMBLY ELECTIONS (DENMARK AND
NORWAY)
For Norwegian and Danish companies where shareholders vote on elections for
members of the corporate assembly or committee of representatives, but not
directly on the board of directors, vote case-by-case on corporate assembly and
committee of representative elections based on the board of directors'
compliance with ISS' director election policy.
oooooo
DISCHARGE OF DIRECTORS
Vote for the discharge of directors, including members of the management board
and/or supervisory board, unless there is reliable information about
significant and compelling concerns that the board is not fulfilling its
fiduciary duties, warranted on a case-by-case basis, by:
o A lack of oversight or actions by board members which invoke shareholder
distrust related to malfeasance or poor
supervision, such as operating in private or company interest rather than in
shareholder interest;
o Any legal issues (e.g. civil/criminal) aiming to hold the board responsible
for breach of trust in the past or related to
currently alleged action yet to be confirmed (and not only in the fiscal year
in question) such as price fixing, insider
trading, bribery, fraud, and other illegal actions;
o Other egregious governance issues where shareholders will bring legal action
against the company or its directors.
For markets which do not routinely request discharge resolutions (e.g. common
law countries or markets where discharge is not mandatory), analysts may voice
concern in other appropriate agenda items, such as approval of the annual
accounts or other relevant resolutions, to enable shareholders to express
discontent with the board.
oooooo
DIRECTOR, OFFICER, AND AUDITOR INDEMNIFICATION AND LIABILITY PROVISIONS
Vote proposals seeking indemnification and liability protection for directors
and officers on a case-by-case basis.
Vote against proposals to indemnify external auditors.
ooooo
BOARD STRUCTURE
Vote for routine proposals to fix board size.
Vote against the introduction of classified boards and/or mandatory retirement
ages for directors.
Vote against proposals to alter board structure or size in the context of a
fight for control of the company or the board.
ooooo
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3. CAPITAL STRUCTURE
SHARE ISSUANCE REQUESTS
GENERAL ISSUANCES
Vote for issuance authorities with pre-emptive rights to a maximum of 100
percent over currently issued capital and as long as the share issuance
authorities' periods are clearly disclosed (or implied by the application of a
legal maximum duration) and in line with market-specific practices and/or
recommended guidelines (e.g. issuance periods limited to 18 months for the
NETHERLANDS).
Vote for issuance authorities without pre-emptive rights to a maximum of 20
percent (or a lower limit if local market best practice recommendations
provide) of currently issued capital as long as the share issuance authorities'
periods are clearly disclosed (or implied by the application of a legal maximum
duration) and in line with market-specific practices and/or recommended
guidelines (e.g. issuance periods limited to 18 months for the NETHERLANDS).
For FRENCH companies, vote for general issuance requests with pre-emptive
rights, or without pre-emptive rights but with a binding "priority right," for
a maximum of 50 percent over currently issued capital.
For FRENCH companies, generally vote for general authorities to issue shares
without preemptive rights up to a maximum of 10 percent of share capital.
SPECIFIC ISSUANCES
Vote on a case-by-case basis on all requests, with or without preemptive
rights.
ooooo
INCREASES IN AUTHORIZED CAPITAL
Vote for non-specific proposals to increase authorized capital up to 100
percent over the current authorization unless the increase would leave the
company with less than 30 percent of its new authorization outstanding.
Vote for specific proposals to increase authorized capital to any amount,
unless:
o The specific purpose of the increase (such as a share-based acquisition or
merger) does not meet ISS guidelines for
the purpose being proposed; or
o The increase would leave the company with less than 30 percent of its new
authorization outstanding after
adjusting for all proposed issuances.
Vote against proposals to adopt unlimited capital authorizations.
ooooo
REDUCTION OF CAPITAL
Vote for proposals to reduce capital for routine accounting purposes unless the
terms are unfavorable to shareholders.
Vote proposals to reduce capital in connection with corporate restructuring on
a case-by-case basis.
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ooooo
CAPITAL STRUCTURES
Vote for resolutions that seek to maintain, or convert to, a one-share,
one-vote capital structure.
Vote against requests for the creation or continuation of dual-class capital
structures or the creation of new or additional super voting shares.
ooooo
PREFERRED STOCK
Vote for the creation of a new class of preferred stock or for issuances of
preferred stock up to 50 percent of issued capital unless the terms of the
preferred stock would adversely affect the rights of existing shareholders.
Vote for the creation/issuance of convertible preferred stock as long as the
maximum number of common shares that could be issued upon conversion meets ISS'
guidelines on equity issuance requests.
Vote against the creation of a new class of preference shares that would carry
superior voting rights to the common shares.
Vote against the creation of blank check preferred stock unless the board
clearly states that the authorization will not be used to thwart a takeover
bid.
Vote proposals to increase blank check preferred authorizations on a
case-by-case basis.
ooooo
DEBT ISSUANCE REQUESTS
Vote non-convertible debt issuance requests on a case-by-case basis, with or
without pre-emptive rights.
Vote for the creation/issuance of convertible debt instruments as long as the
maximum number of common shares that could be issued upon conversion meets ISS'
guidelines on equity issuance requests.
Vote for proposals to restructure existing debt arrangements unless the terms
of the restructuring would adversely affect the rights of shareholders.
ooooo
PLEDGING OF ASSETS FOR DEBT
Vote proposals to approve the pledging of assets for debt on a case-by-case
basis.o
ooooo
INCREASE IN BORROWING POWERS
Vote proposals to approve increases in a company's borrowing powers on a
case-by-case basis.
ooooo
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SHARE REPURCHASE PLANS
ISS will generally recommend for market repurchase authorities (share
repurchase programs) if the terms comply with the following criteria:
o A repurchase limit of up to 10 percent of outstanding issued share capital;
o A holding limit of up to 10 percent of a company's issued share capital in
treasury ("on the shelf"); and
o Duration of no more than 5 years, or such lower threshold as may be set by
applicable law, regulation, or code of
governance best practice.
Authorities to repurchase shares in excess of the 10 percent repurchase limit
will be assessed on a case-by-case basis. ISS may support such share repurchase
authorities under special circumstances, which are required to be publicly
disclosed by the company, provided that, on balance, the proposal is in
shareholders' interests. In such cases, the authority must comply with the
following criteria:
o A holding limit of up to 10 percent of a company's issued share capital in
treasury ("on the shelf");, and
o Duration of no more than 18 months.
In markets where it is normal practice not to provide a repurchase limit, ISS
will evaluate the proposal based on the company's historical practice. However,
ISS expects companies to disclose such limits and, in the future, may recommend
a vote against companies that fail to do so. In such cases, the authority must
comply with the following criteria:
o A holding limit of up to 10 percent of a company's issued share capital in
treasury ("on the shelf"); and
o Duration of no more than 18 months.
In addition, ISS will recommend against any proposal where:
o The repurchase can be used for takeover defenses;
o There is clear evidence of abuse;
o There is no safeguard against selective buybacks;
o Pricing provisions and safeguards are deemed to be unreasonable in light of
market practice.
MARKET-SPECIFIC EXCEPTIONS
For ITALY and GERMANY, vote for share-repurchase plans and share reissuance
plans that would use call and put options if the following criteria are met:
o The duration of the authorization is limited in time to no more than 18
months;
o The total number of shares covered by the authorization is disclosed;
o The number of shares that would be purchased with call options and/or sold
with put options is limited to a
maximum of 5 percent of currently outstanding capital (or half of the total
amounts allowed by law in Italy and
Germany);
o A financial institution, with experience conducting sophisticated
transactions, is indicated as the party responsible
for the trading; and
o The company has a clean track record regarding repurchases.
oooooo
REISSUANCE OF REPURCHASED SHARES
Vote for requests to reissue any repurchased shares unless there is clear
evidence of abuse of this authority in the past.
ooooo
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CAPITALIZATION OF RESERVES FOR BONUS ISSUES/INCREASE IN PAR VALUE
Vote for requests to capitalize reserves for bonus issues of shares or to
increase par value.
ooooo
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4. COMPENSATION
COMPENSATION GUIDELINES
PREAMBLE
The assessment of compensation follows the ISS Global Principles on Executive
and Director Compensation which are detailed below. These principles take into
account global corporate governance best practice.
The ISS Global Principles on Compensation underlie market-specific policies in
all markets:
1. Provide shareholders with clear, comprehensive compensation disclosures;
2. Maintain appropriate pay-for-performance alignment with emphasis on
long-term shareholder value;
3. Avoid arrangements that risk "pay for failure;"
4. Maintain an independent and effective compensation committee;
5. Avoid inappropriate pay to non-executive directors.
In line with European Commission Recommendation 2004/913/EC, ISS believes that
seeking annual shareholder approval for a company's compensation policy is a
positive corporate governance provision.
In applying the Five Global Principles, ISS has formulated European
Compensation Guidelines which take into account local codes of governance,
market best practice, and the Recommendations published by the European
Commission. ISS analyzes compensation-related proposals based on the role of
the beneficiaries and has therefore divided its executive and director
compensation policy into two domains:
I. Executive compensation-related proposals; and
II. Non-executive director compensation-related proposals
EXECUTIVE COMPENSATION-RELATED PROPOSALS
ISS will evaluate management proposals seeking ratification of a company's
executive compensation-related items on a case-by-case basis, and will
generally recommend a vote against a company's compensation-related proposal if
such proposal fails to comply with one or a combination of several of the
global principles and their corresponding rules:
1. Provide shareholders with clear and comprehensive compensation disclosures:
1.1. Information on compensation-related proposals shall be made available to
shareholders in a timely manner;
1.2. The level of disclosure of the proposed compensation policy shall be
sufficient for shareholders to make an
informed decision and shall be in line with what local market best practice
standards dictate;
1.3. Companies shall adequately disclose all elements of the compensation,
including:
1.3.1. Any short- or long-term compensation component must include a maximum
award limit.
1.3.2. Long-term incentive plans must provide sufficient disclosure of (i) the
exercise price/strike price
(options); (ii) discount on grant; (iii) grant date/period; (iv)
exercise/vesting period; and, if applicable, (v) performance criteria.
1.3.3. Discretionary payments, if applicable.
2. Maintain appropriate pay-for-performance alignment with emphasis on
long-term shareholder value:
2.1. The structure of the company's short-term incentive plan shall be
appropriate.
2.1.1. The compensation policy must notably avoid guaranteed or discretionary
compensation.
2.2. The structure of the company's long-term incentives shall be appropriate,
including, but not limited to,
dilution, vesting period, and, if applicable, performance conditions.
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2.2.1. Equity-based plans or awards that are linked to long-term company
performance will be evaluated using ISS' general policy for equity-based plans;
and 2.2.2. For awards granted to executives, ISS will generally require a clear
link between shareholder value and awards, and stringent performance-based
elements.
2.3. The balance between short- and long-term variable compensation shall be
appropriate
2.3.1. The company's executive compensation policy must notably avoid
disproportionate focus on short-term
variable element(s)
3. Avoid arrangements that risk "pay for failure":
3.1. The board shall demonstrate good stewardship of investor's interests
regarding executive compensation
practices.
3.1.1. There shall be a clear link between the company's performance and
variable awards.
3.1.2. There shall not be significant discrepancies between the company's
performance and real executive
payouts.
3.1.3. The level of pay for the CEO and members of executive management should
not be excessive relative to peers, company performance, and market practices.
3.1.4. Significant pay increases shall be explained by a detailed and
compelling disclosure.
3.2. Severance pay agreements must not be in excess of (i) 24 months' pay or of
(ii) any more restrictive provision
pursuant to local legal requirements and/or market best practices.
3.3. Arrangements with a company executive regarding pensions and post-mandate
exercise of equity-based
awards must not result in an adverse impact on shareholders' interests or be
misaligned with good market
practices.
4. Maintain an independent and effective compensation committee: 4.1. No
executives may serve on the compensation committee.
4.2. In certain markets the compensation committee shall be composed of a
majority of independent members, as per ISS policies on director election and
board or committee composition.
In addition to the above, ISS will generally recommend a vote against a
compensation-related proposal if such proposal is in breach of any other
supplemental market-specific ISS voting policies.
NON-EXECUTIVE DIRECTOR COMPENSATION
5. Avoid inappropriate pay to non-executive directors.
ISS will generally recommend a vote for proposals to award cash fees to
non-executive directors, and will otherwise:
Recommend a vote against where:
o Documents (including general meeting documents, annual report) provided
prior to the general meeting do not mention fees paid to non-executive
directors.
o Proposed amounts are excessive relative to other companies in the country or
industry.
o The company intends to increase the fees excessively in comparison with
market/sector practices, without stating compelling reasons that justify the
increase.
o Proposals provide for the granting of stock options, or similarly structured
equity-based compensation, to non-executive directors.
o Proposals introduce retirement benefits for non-executive directors.
And recommend a vote on a case-by-case basis where:
o Proposals include both cash and share-based components to non-executive
directors.
o Proposals bundle compensation for both non-executive and executive directors
into a single resolution.
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EQUITY-BASED COMPENSATION GUIDELINES
ISS will generally recommend a vote for equity based compensation proposals for
employees if the plan(s) are in line with long-term shareholder interests and
align the award with shareholder value. This assessment includes, but is not
limited to, the following factors:
The volume of awards transferred to participants must not be excessive: the
potential volume of fully diluted issued share capital from equity-based
compensation plans must not exceed the following ISS guidelines:
o The shares reserved for all share plans may not exceed 5 percent of a
company's issued share capital, except in the
case of high-growth companies or particularly well-designed plans, in which
case we allow dilution of between 5
and 10 percent: in this case, we will need to have performance conditions
attached to the plans which should be
acceptable under ISS criteria (challenging criteria);
o The plan(s) must be sufficiently long-term in nature/structure: the minimum
vesting period must be no less than
three years from date of grant;
o The awards must be granted at market price. Discounts, if any, must be
mitigated by performance criteria or other
features that justify such discount.
o If applicable, performance standards must be fully disclosed, quantified,
and long-term, with relative performance
measures preferred.
MARKET-SPECIFIC PROVISIONS FOR FRANCE:
o The potential volume from equity-based compensation plans must not exceed 10
percent of fully diluted issued
share capital.
o In addition, for companies that refer to the AFEP-MEDEF Code, all awards
(including stock options and warrants) to
executives shall be conditional upon challenging performance criteria or
premium pricing. For companies referring
to the Middlenext Code (or not referring to any code) at least part of the
awards to executives shall be conditional
upon performance criteria or premium pricing. In both cases, free shares shall
remain subject to performance
criteria for all beneficiaries.
Finally, for large- and mid-cap companies, the company's average three year
unadjusted burn rate (or, if lower, on the maximum volume per year implied by
the proposal made at the general meeting) must not exceed the mean plus one
standard deviation of its sector but no more than one percentage point from the
prior year sector cap.
FRENCH BURN RATE TABLE FOR 2014
[Enlarge/Download Table]
GICS SECTOR MEAN STANDARD DEVIATION 2014 BURN RATE CAP
========= ====================== ==== ===== ===================== ======================
1010 ENERGY 0.83% 0.57% 1.40%
--------- ---------------------- ---- ----- --------------------- ----------------------
1510 MATERIALS 0.43% 0.30% 0.73%
--------- ---------------------- ---- ----- --------------------- ----------------------
2010-2030 INDUSTRIALS 0.55% 0.37% 0.92%
--------- ---------------------- ---- ----- --------------------- ----------------------
2510-2550 CONSUMER DISCRETIONARY 0.61% 0.50% 1.11%
--------- ---------------------- ---- ----- --------------------- ----------------------
3010-3030 CONSUMER STAPLES 0.23% 0.15% 0.38%
--------- ---------------------- ---- ----- --------------------- ----------------------
3510-3520 HEALTHCARE 0.91% 1.61% 2.02%
--------- ---------------------- ---- ----- --------------------- ----------------------
4010-4040 FINANCIALS 0.40% 0.44% 0.84%
--------- ---------------------- ---- ----- --------------------- ----------------------
4510-5010 TECHNOLOGY & TELECOM 0.94% 1.00% 1.94%
--------- ---------------------- ---- ----- --------------------- ----------------------
5510 UTILITIES 0.31% 0.32% 0.63%
--------- ---------------------- ---- ----- --------------------- ----------------------
o
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oooooo
COMPENSATION-RELATED VOTING SANCTIONS
Should a company be deemed to have egregious remuneration practices (as a
result of one or a combination of several factors highlighted above) and has
not followed market practice by submitting a resolution on executive
compensation, vote against other "appropriate" resolutions as a mark of
discontent against such practices.
An adverse vote recommendation could be applied to any of the following on a
case-by case basis: 1. The (re)election of members of the remuneration
committee; 2. The discharge of directors; or 3. The annual report and
accounts.
Failure to propose a resolution on executive compensation to shareholders in a
market where this is routine practice may, by itself, lead to one of the above
adverse vote recommendations regardless of the companies remuneration
practices.
oooooo
STOCK OPTION PLANS -- ADJUSTMENT FOR DIVIDEND (NORDIC REGION)o
Vote against stock option plans in DENMARK, FINLAND, NORWAY, and SWEDEN if
evidence is found that they contain provisions that may result in a disconnect
between shareholder value and employee/executive reward.
This includes one or a combination of the following:
o Adjusting the strike price for future ordinary dividends AND including
expected dividend yield above 0 percent
when determining the number of options awarded under the plan;
o Having significantly higher expected dividends than actual historical
dividends;
o Favorably adjusting the terms of existing options plans without valid
reason; and/or
o Any other provisions or performance measures that result in undue award.
This policy applies to both new plans and amendments to introduce the
provisions into already existing stock option plans. ISS will make an exception
if a company proposes to reduce the strike price by the amount of future
special (extraordinary) dividends only.
Generally vote against if the potential increase of share capital amounts to
more than 5 percent for mature companies or 10 percent for growth companies or
if options may be exercised below the market price of the share at the date of
grant, or that employee options do not lapse if employment is terminated.
oooooo
SHARE MATCHING PLANS (SWEDEN AND NORWAY)
ISS considers the following factors when evaluating share matching plans:
o For every share matching plan, ISS requires a holding period.
o For plans without performance criteria, the shares must be purchased at
market price.
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o "For broad-based share matching plans directed at all employees, ISS accepts
an arrangement up to a 1:1 ratio, i.e. no more than one free share is awarded
for every share purchased at market value..
o In addition, for plans directed at executives, we require that sufficiently
challenging performance criteria be attached to the plan. Higher discounts
demand proportionally higher performance criteria.
The dilution of the plan when combined with the dilution from any other
proposed or outstanding employee stock purchase/stock matching plans, must
comply with ISS' guidelines.
oooooo
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5. ENVIRONMENTAL AND SOCIAL ISSUES
VOTING ON SOCIAL AND ENVIRONMENTAL PROPOSALS
Issues covered under the policy include a wide range of topics, including
consumer and product safety, environment and energy, labor standards and human
rights, workplace and board diversity, and corporate political issues. While a
variety of factors goes into each analysis, the overall principle guiding all
vote recommendations focuses on how the proposal may enhance or protect
shareholder value in either the short-term or long-term.
ISS will generally recommend a vote on a case-by-case basis, taking into
consideration whether implementation of the proposal is likely to enhance or
protect shareholder value, and in addition the following will be considered:
o If the issues presented in the proposal are more appropriately or
effectively dealt with through legislation or
government regulation;
o If the company has already responded in an appropriate and sufficient manner
to the issue(s) raised in the
proposal;
o Whether the proposal's request is unduly burdensome (scope, timeframe, or
cost) or overly prescriptive;
o The company's approach compared with any industry standard practices for
addressing the issue(s) raised by the
proposal;
o If the proposal requests increased disclosure or greater transparency,
whether or not reasonable and sufficient
information is currently available to shareholders from the company or from
other publicly available sources; and
o If the proposal requests increased disclosure or greater transparency,
whether or not implementation would
reveal proprietary or confidential information that could place the company at
a competitive disadvantage.
oooooo
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6. OTHER ITEMS
REORGANIZATIONS/RESTRUCTURINGS
Vote reorganizations and restructurings on a case-by-case basis.
oooooo
MERGERS AND ACQUISITIONS
Vote case-by-case on mergers and acquisitions taking into account the
following:
For every M&A analysis, ISS reviews publicly available information as of the
date of the report and evaluates the merits and drawbacks of the proposed
transaction, balancing various and sometimes countervailing factors including:
o Valuation - Is the value to be received by the target shareholders (or paid
by the acquirer) reasonable? While the
fairness opinion may provide an initial starting point for assessing valuation
reasonableness, ISS places emphasis
on the offer premium, market reaction, and strategic rationale.
o Market reaction - How has the market responded to the proposed deal? A
negative market reaction will cause ISS
to scrutinize a deal more closely.
o Strategic rationale - Does the deal make sense strategically? From where is
the value derived? Cost and revenue
synergies should not be overly aggressive or optimistic, but reasonably
achievable. Management should also have
a favorable track record of successful integration of historical acquisitions.
o Conflicts of interest - Are insiders benefiting from the transaction
disproportionately and inappropriately as
compared to non-insider shareholders? ISS will consider whether any special
interests may have influenced these
directors and officers to support or recommend the merger.
o Governance - Will the combined company have a better or worse governance
profile than the current governance
profiles of the respective parties to the transaction? If the governance
profile is to change for the worse, the
burden is on the company to prove that other issues (such as valuation)
outweigh any deterioration in governance.
Vote against if the companies do not provide sufficient information upon
request to allow shareholders to make an informed voting decision.
ooooo
MANDATORY TAKEOVER BID WAIVERS
Vote proposals to waive mandatory takeover bid requirements on a case-by-case
basis.
ooooo
REINCORPORATION PROPOSALS
Vote reincorporation proposals on a case-by-case basis.
o
ooooo
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EXPANSION OF BUSINESS ACTIVITIES
Vote for resolutions to expand business activities unless the new business
takes the company into risky areas.
oooooo
RELATED-PARTY TRANSACTIONS
In evaluating resolutions that seek shareholder approval on related-party
transactions (RPTs), vote on a case-by-case basis, considering factors
including, but not limited to, the following:
o The parties on either side of the transaction;
o The nature of the asset to be transferred/service to be provided;
o The pricing of the transaction (and any associated professional valuation);
o The views of independent directors (where provided);
o The views of an independent financial adviser (where appointed);
o Whether any entities party to the transaction (including advisers) is
conflicted; and
o The stated rationale for the transaction, including discussions of timing.
If there is a transaction that ISS deemed problematic and that was not put to a
shareholder vote, ISS may recommend against the election of the director
involved in the related-party transaction or the full board.
oooooo
ANTITAKEOVER MECHANISMS
Generally vote against all antitakeover proposals, unless they are structured
in such a way that they give shareholders the ultimate decision on any proposal
or offer.
For the NETHERLANDS, vote recommendations regarding management proposals to
approve protective preference shares will be determined on a case-by-case
basis. In general, ISS will recommend voting for protective preference shares
(PPS) only if:
o The supervisory board needs to approve an issuance of shares and the
supervisory board is independent within the
meaning of ISS' categorization rules (ISS' EUROPEAN DIRECTOR INDEPENDENCE
GUIDELINES) and the Dutch Corporate
Governance Code (i.e. a maximum of one member can be non-independent);
o No call / put option agreement exists between the company and a foundation
for the issuance of PPS;
o The issuance authority is for a maximum of 18 months;
o The board of the company-friendly foundation is fully independent;
o There are no priority shares or other egregious protective or entrenchment
tools;
o The company states specifically that the issue of PPS is not meant to block
a takeover, but will only be used to
investigate alternative bids or to negotiate a better deal;
o The foundation buying the PPS does not have as a statutory goal to block a
takeover; and
o The PPS will be outstanding for a period of maximum 6 months (an EGM must be
called to determine the
continued use of such shares after this period).
ooooo
SHAREHOLDER PROPOSALS
Vote all shareholder proposals on a case-by-case basis.
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Vote for proposals that would improve the company's corporate governance or
business profile at a reasonable cost.
Vote against proposals that limit the company's business activities or
capabilities or result in significant costs being incurred with little or no
benefit.
Note that policies dealing with environmental and social themes are covered by
their own dedicated policy, presented separately in this document.
oooooo
o
AUTHORITY TO REDUCE MINIMUM NOTICE PERIOD FOR CALLING A MEETING
A recommendation to approve the "enabling" authority proposal would be on the
basis that ISS would generally expect companies to call EGMs/GMs using a notice
period of less than 21 days only in limited circumstances where a shorter
notice period will be to the advantage of shareholders as a whole, for example,
to keep a period of uncertainty about the future of the company to a minimum.
This is particularly true of capital raising proposals or other price sensitive
transactions. By definition, AGMs, being regular meetings of the company,
should not merit a notice period of less than 21 days.
In a market where local legislation permits an EGM/GM to be called at no less
than 14-day's notice, ISS will generally recommend in favor of a resolution to
approve the enabling authority if the company discloses that the shorter notice
period of between 20 and 14 days would not be used as a matter of routine for
such meetings, but only when the flexibility is merited by the business of the
meeting. Where the proposal(s) at a given EGM/GM is (are) not time-sensitive,
such as the approval of incentive plans, ISS would not expect a company to
invoke the shorter notice notwithstanding any prior approval of the enabling
authority proposal by shareholders.
In evaluating an enabling authority proposal, ISS would first require that the
company make a clear disclosure of its compliance with any hurdle conditions
for the authority imposed by applicable law, such as the provision of an
electronic voting facility for shareholders. In addition, with the exception of
the first AGM at which approval of the enabling authority is sought following
implementation of the European Shareholder Rights Directive, when evaluating an
enabling authority proposal ISS will take into consideration the company's use
(if any) of shorter notice periods in the preceding year to ensure that such
shorter notice periods were invoked solely in connection with genuinely
time-sensitive matters. Where the company has not limited its use of the
shorter notice periods to such time sensitive-matters and fails to provide a
clear explanation for this, ISS will consider a vote against the enabling
authority for the coming year.
oooooo
AUDITOR REPORT INCLUDING RELATED PARTY TRANSACTIONS (FRANCE)
ISS will review all auditor reports on related-party transactions and screen
for and evaluate agreements with respect to the following issues:
o Director Remuneration (including Severance Packages and Pension Benefits)
o Consulting Services
o Liability Coverage
o Certain Business Transactions
In general, ISS expects companies to provide the following regarding
related-party transactions:
o Adequate disclosure of terms under listed transactions (including individual
details of any severance, consulting, or
other remuneration agreements with directors and for any asset sales and/or
acquisitions);
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o Sufficient justification on transactions that appear to be unrelated to
operations and/or not in shareholders' best
interests;
o Fairness opinion (if applicable in special business transactions); and
o Any other relevant information that may affect or impair shareholder value,
rights, and/or judgment.
In the event that the company fails to provide an annual report in a timely
manner, generally at least 21 days prior to the meeting, ISS will recommend
votes against these proposals.
oooooo
o
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DISCLOSURE/DISCLAIMER
This document and all of the information contained in it, including without
limitation all text, data, graphs, and charts
(collectively, the "Information") is the property of Institutional Shareholder
Services Inc. ("ISS"), its subsidiaries, or, in some cases third party
suppliers.
The Information has not been submitted to, nor received approval from, the
United States Securities and Exchange Commission or any other regulatory body.
None of the Information constitutes an offer to sell (or a solicitation of an
offer to buy), or a promotion or recommendation of, any security, financial
product or other investment vehicle or any trading strategy, and ISS does not
endorse, approve or otherwise express any opinion regarding any issuer,
securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or
permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO
THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY,
TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by
law, in no event shall ISS have any liability regarding any of the Information
for any direct, indirect, special, punitive, consequential (including lost
profits) or any other damages even if notified of the possibility of such
damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
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ISS
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AN MSCI BRAND
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Transparency. Inclusiveness. Global Expertise.
2014 Australian Proxy Voting Recommendations
Benchmark Policy
August 22, 2014
Institutional Shareholder Services Inc.
Copyright [C] 2014 by ISS
www. issgovernance.com
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ISS' 2014 AUSTRALIAN PROXY VOTING RECOMMENDATIONS
BENCHMARK POLICY
Effective for Meetings on or after October 1, 2014
Published August 22, 2014
THE FOLLOWING GUIDELINES APPLY TO ASX-REGISTERED ISSUERS AND THOSE ENTITIES
LISTED ON THE ASX AND DOMICILED IN COUNTRIES NOT COVERED BY A SEPARATE ISS
POLICY.
TABLE OF CONTENTS
INTRODUCTION 4
OVERVIEW 4
GENERAL 5
Company Name Change 5
Authority to Postpone or Adjourn Meeting 5
Significant Change in Activities 5
Capital Structure 5
Multiple Voting Rights 5
Non-Voting Shares 5
Mergers and Demergers 6
Financial Statements 6
1. SHARE CAPITAL 7
1.1 Reduction of Share Capital: Cash Consideration Payable to
Shareholders 7
1.2 Reduction of Share Capital: Absorption of Losses 7
1.3 Buybacks 7
1.4 Issue of Shares (Placement): Advance Approval 7
1.5 Issue of Shares (Placement): Retrospective Approval 8
2. BOARD OF DIRECTORS 9
2.1 Director Age Limits 9
2.2 Alteration of the Number of Directors 9
2.3 Classification of Directors 9
2.4 Election of Directors 10
2.5 Combination of CEO and Chairperson 12
2.6 Removal of Directors 12
3. REMUNERATION 13
3.1 Remuneration Report 13
3.2 Remuneration of Non-Executive Directors: Increase in
Aggregate Fee Cap 13
3.3 Remuneration of Non-Executive Directors: Approval of
Share Plan 14
3.4 Remuneration of Executive Directors: Share Incentive Schemes 14
3.5 Remuneration of Executives: Long-Term Incentives 14
3.6 Long-Term Incentive Plan Amendments 17
3.7 Termination Benefit Approvals 17
4. AUDITORS 18
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4.1 Reappointment of Auditor, and Authorization for the
Directors to Set Auditor's Remuneration 18
4.2 Appointment of a New Auditor 18
5. ENVIRONMENTAL AND SOCIAL ISSUES 19
5.1 Global Approach 19
5.2 Board diversity 19
5.3 Economic, Environmental, and Sustainability Risks 20
MISCELLANEOUS 21
Constitutional Amendment 21
Renewal of "Proportional Takeover" Clause in Constitution 21
DISCLOSURE/DISCLAIMER 22
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INTRODUCTION
The principle underpinning all ISS' recommendations is that shareholders are
the owners of listed companies. (1) As such, they are entitled to assess every
resolution that seeks their approval in terms of how it affects their interests
as the owners of the company.
OVERVIEW
Regularly occurring agenda items include:
o Consideration of the financial statements and reports (not normally a voting
item);
o Election of directors;
o Non-binding vote on the remuneration report;
o Approving issue of equity securities to directors;
o Approving an increase in the aggregate non-executive director fee cap;
o Approving changes to the company's constitution (requiring a 75-percent
majority of votes cast).
(1) The same principles will be applied to listed entities that are not 'pure'
companies, such as trusts and stapled securities.
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GENERAL
COMPANY NAME CHANGE
ISS RECOMMENDATION: GENERALLY FOR
ISS views decisions about the company name as best left to management.
Typically, name changes are proposed to align the company name more closely
with its primary businesses and activities and/or to simplify the company name.
Such changes are usually made without detracting from market recognition of the
company's identity and activities.
AUTHORITY TO POSTPONE OR ADJOURN MEETING
ISS RECOMMENDATION: CASE-BY-CASE
ISS will consider proposals to provide the board with the authority to adjourn
annual or special meetings as a change to the company constitution on a case by
case basis, considering the board's rationale for proposing the amendment, as
well as past practices in acting in the best interests of shareholders.
If there is evidence of the misuse of the authority to adjourn an annual or
special meeting, ISS may consider recommending against the re-election of the
chairperson, and if the chairperson is not up for re-election, any
non-executive directors up for re-election that were present at the relevant
meeting.
SIGNIFICANT CHANGE IN ACTIVITIES
ISS RECOMMENDATION: GENERALLY FOR
ISS generally recommends for resolutions to change the nature or scale of
business activities (ASX Listing Rule 11.1) provided the notice of meeting and
explanatory statement provide a sound business case for the proposed change.
CAPITAL STRUCTURE
Capital structures are generally non-contentious in Australia. Each fully paid
ordinary share carries one vote on a poll and equal dividends. Partly paid
shares, which are rare, normally carry votes proportional to the percentage of
the share paid-up. Companies may also issue redeemable shares, preference
shares, and shares with special, limited, or conditional voting rights. Shares
with differing amounts of votes constitute different classes of shares, but, in
practice, shares with limited or enhanced voting rights are seldom, if ever,
seen in Australia outside of a handful of externally managed infrastructure
entities.
MULTIPLE VOTING RIGHTS
ISS RECOMMENDATION: GENERALLY AGAINST
ISS will recommend against proposals to create a new class of shares with
superior voting rights.
Shareholders are better off opposing dual-class proposals on the grounds that
they contribute to the entrenchment of management and allow for the possibility
of management acquiring superior voting shares in the future. Empirical
evidence also suggests that companies with simple capital structures also tend
toward higher valuation because they are easier for investors to understand.
NON-VOTING SHARES
ISS RECOMMENDATION FOR INTRODUCTION: CASE-BY-CASE
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ISS RECOMMENDATION FOR CANCELLATION: GENERALLY FOR
ISS will recommend for proposals to create a new class of non-voting or
subvoting shares only if:
o It is intended for financing purposes with minimal or no dilution to current
shareholders;
o It is not designed to preserve the voting power of an insider or significant
shareholder.
MERGERS AND DEMERGERS
ISS RECOMMENDATION FOR INTRODUCTION: CASE-BY-CASE
ISS will generally recommend for mergers and acquisitions, and
demergers/spinoffs, unless:
o The impact on earnings or voting rights for one class of shareholders is
disproportionate to the relative
contributions of the group;
o The company's structure following the acquisition or merger does not reflect
good corporate governance;
o There are concerns over the process of negotiation that may have had an
adverse impact on the valuation of the
terms of the offer.
ISS will recommend against if the company does not provide sufficient
information upon request to make an informed voting decision.
FINANCIAL STATEMENTS
ISS RECOMMENDATION: GENERALLY FOR
ISS will recommend for approval of financial statements and director and
auditor reports, unless:
o There are concerns about the accounts presented or the audit procedures
used;
o The company is not responsive to shareholder questions about specific items
that should be publicly disclosed.
Australian companies are not required to submit their annual accounts and
reports to a shareholder vote.
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1. SHARE CAPITAL
1.1 REDUCTION OF SHARE CAPITAL: CASH CONSIDERATION PAYABLE TO SHAREHOLDERS
ISS RECOMMENDATION: GENERALLY FOR
A company's decision to reduce its share capital, with an accompanying return
of funds to shareholders, is usually part of a capital-management strategy. It
is commonly an alternative to a buyback or a special dividend.
Such a reduction is normally effected proportionately against all outstanding
capital, and therefore does not involve any material change relative to
shareholder value. Thus, ISS generally recommends that shareholders vote for
these proposals.
1.2 REDUCTION OF SHARE CAPITAL: ABSORPTION OF LOSSES
ISS RECOMMENDATION: GENERALLY FOR
This type of capital reduction does not involve any funds being returned to
shareholders. A company may take this action if its net assets are in danger of
falling below the aggregate of its liabilities and its stated capital. ISS
usually supports such proposals as they are considered to be routine accounting
measures.
1.3 BUYBACKS
ISS RECOMMENDATION: GENERALLY FOR
ISS generally recommends for requests to repurchase shares, unless:
o There is clear evidence available of past abuse of this authority;
o It is a selective buyback, and the notice of meeting and explanatory
statement does not provide a sound business
case for it.
ISS considers the following conditions in buyback plans: limitations on a
company's ability to use the plan to repurchase shares from third parties at a
premium; limitations on the exercise of the authority to thwart takeover
threats; and a requirement that repurchases be made at arms-length through
independent third parties.
Some shareholders object to companies repurchasing shares, preferring to see
extra cash invested in new businesses or paid out as dividends. ISS considers
that, when timed correctly, buybacks are a legitimate use of corporate funds
and can add to long-term shareholder returns.
1.4 ISSUE OF SHARES (PLACEMENT): ADVANCE APPROVAL
ISS RECOMMENDATION: CASE-BY-CASE
The ASX Listing Rules contain a general cap on non-pro rata share issues of 15
percent of total equity in a rolling 12-month period. Listing Rule 7.1 allows
shareholders to vote to carve out from the "15-percent-in-12-months" cap a
particular, proposed issue of shares. If shareholders vote to approve this type
of resolution, then the share allotments in question will not be counted in
calculating the 15-percent-in-12-months cap for the company.
Vote case-by-case on all requests taking into consideration:
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o Dilution to shareholders;
o In some cases, companies may need the ability to raise funds for routine
business contingencies without the
expense of carrying out a rights issue. Such contingencies could include the
servicing of option plans, small
acquisitions, or payment for services. When companies make issuance requests
without preemptive rights,
shareholders not participating in the placement will suffer dilution. While
conventions regarding this type of
authority vary widely among countries, ISS routinely supports issuance requests
without preemptive rights for up
to 20 percent of a company's outstanding capital;
o Discount/premium in purchase price to the investor;
o Use of proceeds;
o Any fairness opinion;
o Results in a change in control;
o Financing or strategic alternatives explored by the company;
o Arms-length negotiations;
o Conversion rates on convertible equity (if applicable).
1.5 ISSUE OF SHARES (PLACEMENT): RETROSPECTIVE APPROVAL
ISS RECOMMENDATION: CASE-BY-CASE
Listing Rule 7.4 allows shareholders to vote to carve out from the
15-percent-in-12-months cap an issue of shares made some time in the previous
12 months. If shareholders vote to approve this type of resolution, then the
share allotments in question will not be counted in calculating the 15-percent
in-12-months cap for the company.
Australian companies routinely seek approval of previous share distributions.
As long as the prior issuances conform to ISS guidelines on share issuances in
terms of dilution (see above), ISS routinely recommends in favor of such
proposals.
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2. BOARD OF DIRECTORS
2.1 DIRECTOR AGE LIMITS
ISS RECOMMENDATION: GENERALLY AGAINST
The Australian Corporations Act no longer includes an age limit for directors
of public companies. ISS supports resolutions seeking to remove the age
limitation contained in companies' constitutions in order to bring them in line
with the Australian Corporations Act.
ISS considers that age should not be the sole factor in determining a
director's value to a company. Rather, each director's performance should be
evaluated on the basis of his or her individual contribution and experience. As
long as directors are able to fulfill their fiduciary responsibility to
shareholders, ISS does not consider they should be disqualified from remaining
in office.
2.2 ALTERATION OF THE NUMBER OF DIRECTORS
ISS RECOMMENDATION: CASE-BY-CASE
The Australian Corporations Act requires a minimum of three directors for
public companies. There is no maximum limit set out in the Act, although
company constitutions may set a maximum limit. ISS considers these proposals
seeking to alter board size on a case-by-case basis, evaluating the request of
the proposal and the board's rationale.
In general, proposals to alter board size during a proxy fight or other
possible contests for control should be opposed. Allowing directors to alter
the terms of a contest while it is under way is not in shareholders' interests,
as this tactic could be used to thwart a takeover that is in shareholders'
interests.
2.3 CLASSIFICATION OF DIRECTORS
ISS classifies directors as executive, non-independent non-executive, or
independent non-executive. ISS' definition of an independent director uses the
Financial Services Council (FSC, formerly the Investment and Financial Services
Association or IFSA) definition as its core. The FSC definition closely
reflects the definition used by the ASX Corporate Governance Council. The FSC
defines an independent director as a non-executive director who:
o Is not a substantial shareholder (or an executive or associate of a
substantial shareholder) of the company;
o Has not within the last three years been employed by the company in an
executive capacity, or been a director
after ceasing to hold any such employment;
o Has not within the last three years been a principal or employee of a
material professional adviser or material
consultant to the corporate group;
o Is not a material supplier/customer of the corporate group (or an executive
or associate of a material
supplier/customer);
o Does not have a material contractual relationship with the corporate group;
o Is free from any other interest and any business or other relationship with
the corporate group.
ISS interprets this definition as follows:
SUBSTANTIAL SHAREHOLDERS
o A "substantial" shareholder is a shareholder controlling 5 percent or more
of the voting rights in the company.
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o Where a person is a non-executive director of a substantial shareholder, he
or she is classified as independent (unless a separate reason exists for
classifying as non-independent). However, if the person is specifically
designated as a representative of the substantial shareholder, he or she is
classified as non-independent.
FORMER EXECUTIVES
o The three-year rule is treated as a genuine "cooling off" period. Therefore,
a non-executive director is treated as
affiliated if he or she has previously been employed in an executive capacity
by the company or another group
member, and there was not a period of at least three years between ceasing such
employment and serving on the
board.
ADVISERS, SUPPLIERS, CUSTOMERS, CLOSE FAMILY TIES
Where a person is a non-executive director of a material
adviser/supplier/customer, and not a major shareholder (or partner) in the
material adviser/supplier/customer, he or she is classified as independent,
(unless a separate reason exists for classifying as non-independent).
o The materiality threshold for transactions is A$500,000 per annum for large
advisers/suppliers/customers and
A$50,000 per annum for small advisers/suppliers/customers. "Large" advisers
include all major law, accounting,
and investment banking firms. These thresholds are assessed by looking at
transactions during the three most
recent financial years.
RESIDUAL
o A company founder is classified as non-independent under the "residual"
category (other interests or
relationships) even if he or she is no longer a substantial shareholder.
o A relative (or a person with close family ties) of a substantial
shareholder, or of a current or former executive, is
classified as non-independent under the residual category.
o If the company's annual report classifies a director as non-independent
without further information, he or she is
classified as non-independent under the residual category.
o There is no hard and fast rule about tenure (length of time on the board)
impacting independence. However, a
non-executive director who has served 12 or more years may be classified as
non-independent under the residual
category.
2.4 ELECTION OF DIRECTORS
ISS considers the overall composition of the board, and of the audit,
remuneration, risk (if applicable), and nomination committees, as well as
individual directors' attendance records.
As a matter of best practice, the board of a listed entity should also have a
committee or committees to oversee risk. Such a committee(s) could be a
stand-alone risk committee, a combined audit and risk committee or a
combination of board committees addressing different elements of risk. ISS will
include the level of disclosure related to a risk committee in our reports as
additional information to institutional investors. Under certain circumstances,
ISS may consider such disclosure in our vote recommendations on election of
directors, as warranted.
In addition, ISS will include the disclosure provided by the company in a
Skills Matrix of the board's composition. The skills matrix need not be
prospective; instead it could be retrospective; which may alleviate commercial
confidentiality issues around disclosure. Generally the skills matrix will
identify the gaps in skills by the board to address the company's business
strategy. ISS will include such disclosure in our reports as additional
information to institutional investors. Under certain circumstances, ISS may
consider such disclosure in our vote recommendations on election of directors,
as warranted.
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ISS will also consider the history of a particular director when deciding
whether to recommend in favor of a director's (re)election. Examples of
circumstances where ISS will consider recommending against a director's
(re)election, regardless of board composition, are when a director has had
significant involvement with a failed company and/or where a director has in
the past appeared not to have acted in the best interests of all shareholders
(such as adjourning an annual or special meeting in circumstances or manner
which is not in the best interest of shareholders).
Where there is a majority-independent board (greater than 50 percent), ISS will
recommend for the (re)election of a board-nominated director unless:
o He or she is executive and chairperson, and no "lead director" has been
appointed from among the independent
directors (recommend against; but if he or she is company founder and integral
to the company, recommend for);
o He or she is executive (but not the CEO) and is on the audit committee
(recommend against);
o He or she is non-independent due to being a former partner or employee of
the company's auditor, and is on audit
committee (recommend against);
o He or she is executive (but not the CEO) and is on the remuneration
committee, and the remuneration committee
is not majority-independent (recommend against);
o He or she has attended less than 75 percent of board and committee meetings
over the most recent two years,
without a satisfactory explanation (recommend against);
o He or she sits on more than five other listed company boards (counting a
chair as equivalent to two board
positions), or is an executive director and holds more than one non-executive
directorship at unrelated listed
companies (recommend against, in the absence of exceptional circumstances).
Where there is not a majority-independent board (less than or equal to 50
percent):
o Generally recommend against executive directors (except the CEO and founders
integral to the company) because
executives do not need to sit on the board for directors to access their
expertise. It is common in Australia for
senior executives to be invited to board meetings to make presentations and
answer questions;
o Recommend against a representative of a substantial shareholder on a board
where the reason independent
directors constitute a minority of the board is because of a preponderance of
executive directors and
representatives of one substantial shareholder. In these cases, ISS will
recommend against only one representative
of the substantial shareholder (typically, the director with the worst
attendance record);
o Recommend against any director who is non-independent due to being a former
partner or employee of the
company's auditor, and is on the audit committee;
o Recommend against any director who has attended less than 75 percent of
board and committee meetings over
the most recent two years, without a satisfactory explanation;
o Recommend against any director who sits on more than five other listed
company boards (counting a chair as
equivalent to two board positions), or is an executive director and holds more
than one non-executive directorship
at unrelated listed companies, unless exceptional circumstances exist.
Recommend against shareholder-nominated candidates who lack board endorsement,
unless they demonstrate a clear ability to contribute positively to board
deliberations.
EXCESSIVE NON-AUDIT FEES
Generally vote against the reelection of individual directors who are members
of the audit committee as constituted in the most recently completed fiscal
year if Non-audit fees (Other Fees) paid to the external audit firm exceeds
audit and audit-related fees, and tax compliance/preparation fees.
In circumstances where "Other" fees include fees related to significant
one-time capital structure events (such as initial public offerings) and the
Company makes public disclosure of the amount and nature of those fees that are
an exception to the standard "non-audit fee" category, then such fees may be
excluded from the non-audit fees considered in determining the ratio of
non-audit to audit/audit-related fees/tax compliance and preparation for
purposes of determining whether non-audit fees are excessive.
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Under extraordinary circumstances, recommend against directors individually, on
a committee, or the entire board, due to:
o Material failures of governance, stewardship, risk oversight, or fiduciary
responsibilities at the company; or
o Failure to replace management as appropriate; or
o Egregious actions related to the director(s)' service on other boards that
raise substantial doubt about his or her
ability to effectively oversee management and serve the best interests of
shareholders at any company.
2.5 COMBINATION OF CEO AND CHAIRPERSON
ISS RECOMMENDATION: CASE-BY-CASE
ISS supports the separation of the roles of chairperson and CEO in principle
but acknowledges that there may be certain mitigating factors to counterbalance
a board structure where the roles are combined, such as the appointment of a
lead director. ISS also considers companies should be allowed the discretion in
exceptional circumstances to temporarily combine the roles if adequate
justification is provided. If the company combines these two positions into one
person, then the company must provide for adequate control mechanisms.
2.6 REMOVAL OF DIRECTORS
ISS RECOMMENDATION: CASE-BY-CASE
The major decision factors are:
o Company performance relative to its peers;
o Strategy of the incumbents versus the dissidents;
o Independence of directors/nominees;
o Experience and skills of board candidates;
o Governance profile of the company;
o Evidence of management entrenchment;
o Responsiveness to shareholders.
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3. REMUNERATION
3.1 REMUNERATION REPORT
ISS RECOMMENDATION: CASE-BY-CASE
ISS' approach is to ascertain, from the remuneration report, the key positive
and negative features of the company's approach to executive and non-executive
remuneration, and then make a voting recommendation after balancing those
positive and negative features. An assessment is made of: (a) the way in which
the company pays its executives and non-executive directors; (b) the adequacy
and quality of the company's disclosure generally; and (c) the appropriateness
and quality of the company's disclosure linking identified material business
risks and the predetermined key performance indicators (KPI) that determine
annual variable executive compensation outcomes.
The Australian Securities and Investment Commission (ASIC) released Regulatory
Guide (RG) 247 on 27 March 2013 to give guidance to companies on their
compliance to disclosure under section 299A of the Corporations Act 2001 (Cth)
(the Act) --Annual directors' report -- additional and general requirements for
listed entities. Specifically sub sections (1) -- (a) to (c) of section 299A of
the Act. RG 247 sets out the required disclosure in the Operating and Financial
Review (OFR) in terms of the company's prospects for FUTURE FINANCIAL YEARS in
terms of the company's business strategies and material business risks.
ISS' approach is to ascertain from the OFR if the company has linked, in the
remuneration report, the management of its material business risks to its key
performance indicators (KPI) in determining remuneration for key management
personnel (KMP).
In relation to (a), ISS' approach to long-term incentive plans is covered in
"Remuneration of Executives: Long-Term
Incentives" below.
3.2 REMUNERATION OF NON-EXECUTIVE DIRECTORS: INCREASE IN AGGREGATE FEE CAP
ISS RECOMMENDATION: CASE-BY-CASE
This type of resolution seeks shareholder approval for an increase in the
maximum aggregate level of fees able to be paid to the company's non-executive
directors. It is a requirement of the ASX Listing Rules for companies to obtain
shareholder approval for any increase in the fee cap.
When assessing requests for an increase in the fee cap, ISS applies a
case-by-case approach, taking into account the following factors:
o The size of the proposed increase;
o The level of fees compared to those at peer companies;
o The explanation the board has given for the proposed increase;
o Whether the company has discontinued retirement benefits;
o The company's absolute and relative performance over (at least) the past
three years based on measures such as
(but not limited to) share price, earnings per share and return on capital
employed;
o The company's policy and practices on non-executive director remuneration,
including equity ownership;
o The number of directors presently on the board and any planned increases to
the size of the board;
o The level of board turnover.
If the company has an active retirement benefits plan for non-executive
directors, recommend against the increase. ISS also will recommend against a
fee cap increase where a company is seeking an increase after a period of poor
absolute and
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relative performance, where the same board (or largely the same board) has
overseen this period of poor performance and where the fee cap increase is not
being sought for the purposes of board renewal.
3.3 REMUNERATION OF NON-EXECUTIVE DIRECTORS: APPROVAL OF SHARE PLAN
ISS RECOMMENDATION: GENERALLY FOR
This type of resolution seeks shareholder approval for the company's
non-executive directors to receive some of their fees in the form of shares
rather than cash. The reason for the resolution is that listed companies can
only issue equity securities to directors if shareholders approve such
issuances in advance (Listing Rule 10.14) .
The ISS recommendation in such cases is generally for because all three key
sets of guidelines in Australia (ASX Corporate Governance Council, FSC, and
those of the Australian Council of Super Investors - ACSI) support companies
taking steps to encourage non-executive directors to acquire a material
shareholding.
3.4 REMUNERATION OF EXECUTIVE DIRECTORS: SHARE INCENTIVE SCHEMES
ISS RECOMMENDATION: CASE-BY-CASE
Share incentive schemes in Australia usually provide for "performance rights,"
"performance shares," "conditional rights," or similar instruments, all of
which are economically zero exercise price options (ZEPOs).
The use of share option plans has significantly declined to a level which makes
them rare. This is largely because of the introduction in Division 83A (the
Income Tax Assessment Act 1997 (Cth) effective from 1 July 2009) of taxation at
vesting. In addition, the elimination of tax refunds for vested but "out of the
money" options has also exacerbated the situation following the introduction of
Division 83A of the Income Tax Assessment Act 1997 (Cth) effective from 1 July
2009.
A smaller number of share incentive schemes are structured as loan-funded share
plans.
3.5 REMUNERATION OF EXECUTIVES: LONG-TERM INCENTIVES
ISS RECOMMENDATION: CASE-BY-CASE
In Australia, there is no statutory or listing rule requirement for companies
to put long-term incentive plans before shareholders for approval. Some
companies choose to seek shareholder approval of a plan so that equity
instruments issued under it do not count toward the "15 percent in 12 months"
dilution cap (see "Issue of Shares (Placement): Advance Approval", above).
Under ASX Listing Rule 10.14, companies must seek shareholder approval for any
grant of equity awards to a director. However, there is a carve-out for grants
of shares where those shares were purchased on-market rather than being newly
issued. This carve-out was introduced in a controversial amendment to Listing
Rule 10.14 in October 2005. ISS believes that long-term incentive grants of
shares to executive directors should be put to shareholders for a vote,
regardless of whether the shares are newly issued or purchased on market. If a
company utilizes the Listing Rule 10.14 carve-out, this is treated as a
negative factor in ISS' assessment of the Remuneration Report.
ISS reviews long-term incentive plans (and proposed grants of equity awards to
particular directors) according to the following criteria:
EXERCISE PRICE
o Option exercise prices should not be at a discount to the market price at
the grant date. (Many Australian
companies now issue performance rights or performance shares, which are ZEPOs.
These are not treated as
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"discounted" rights, but the following requirements in terms of vesting
period, performance hurdles, etc., apply equally.)o Plans should not allow the
repricing of underwater options.
VESTING PERIOD
o Should be appropriate time restrictions before rights can be exercised (if
50 percent or more of securities can vest
in two years or less, this is too short).
PERFORMANCE HURDLES
o Generally, a hurdle that relates to total shareholder return (TSR) is
preferable to a hurdle that specifies an absolute
share price target or an accounting measure of performance (such as earnings
per share (EPS)).
o Where a relative hurdle is used (comparing the company's performance against
a group of peers or against an
index), no vesting should occur for sub-median performance, and the peer group
should be defensible (e.g. not too
small, and not "cherry picked").
o A sliding-scale hurdle -- under which the percentage of rights that vest
increases according to a sliding scale of
performance (whether absolute or relative) -- is generally preferable to a
hurdle under which 100 percent of
options vest once a single target is achieved.
o Where an absolute share-price target is used, executives can be rewarded by
a rising market even if their company
does relatively poorly. In addition, even if a share-price hurdle is set at a
significantly higher level than the
prevailing share price, then the hurdle may not be particularly stretching if
the option has a long life and there are
generous retesting provisions.
o An accounting-related hurdle does not necessarily require that shareholder
value be improved before the
incentive vests. In other words, with an accounting performance hurdle, it is
possible for incentives to vest -- and
executives to be rewarded -- without any medium to long-term improvement in
shareholder return having been
delivered. Growth in EPS may, but does not always, translate into a material
increase in share price and dividends
over the medium to long term.
o Two different types of options should be distinguished: (1) grants of
market-exercise-price options (traditional
options), and (2) ZEPOs. Traditional options have an in-built share price
appreciation hurdle, because the share
price must increase above its level at the grant date for the executive to have
an incentive to exercise. ZEPOs have
no exercise price; the executive pays nothing to the company on exercising the
rights. An EPS hurdle can lead to
executive reward without any increase in shareholder return if the instruments
are ZEPOs, but not if they are
traditional options. Therefore, an EPS hurdle can more readily be supported if
traditional options, rather than
ZEPOs, are being granted.
o For an EPS target to be sufficiently stretching, the target should specify a
hurdle that will require EPS to have
grown significantly. In assessing whether an EPS hurdle is sufficiently
stretching for a particular company, ISS will
consider the EPS forecasts for a particular company produced and published by
analysts and any earnings guidance
provided by management. If a sliding-scale EPS hurdle is used, a significant
proportion of the options should vest
only for EPS performance that exceeds consensus analyst forecasts.
RETESTING
o A retest is where the performance hurdle has not been achieved during the
initial vesting period, and the plan
permits further testing of the performance hurdle on a later date or dates.
Many investors, in markets like the
U.K., do not support retesting of performance criteria on share options or
other share-based incentive awards,
arguing that retesting undermines the incentive value of such awards. However,
such provisions have not been
uncommon in the Australian market. At the same time, however, as companies have
moved toward annual grants
of awards that mitigate the concerns over "cliff-vesting," and the increasingly
held view among institutions that
retesting does not constitute best practice, companies are encouraged to review
such practices and move toward
reducing the number of retests to a small number, if not eliminating retesting
altogether.
o In cases where retesting exists, ISS will evaluate the type of retesting,
either fixed-base or rolling, and the
frequency of the retesting. (Fixed-base testing means performance is always
tested over an ever-increasing period,
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starting from grant date. This is less concerning than retesting from a rolling
start date.) Where a company has a particularly generous retesting regime, and
has not committed to reduce the number of retests to a small number, ISS will
recommend against a resolution to approve the scheme in question, or a grant of
rights under the scheme. This may also lead to an against recommendation on the
remuneration report, depending on other aspects of executive and non-executive
pay. In the case of new plans, ISS considers that companies should not include
retesting provisions as a matter of best practice, but will take a case-by-case
approach in such instances.
TRANSPARENCY
o Methodology for determining exercise price should be disclosed.
o Shareholders should be presented with sufficient information to determine
whether the scheme will reward superior future performance.
o Proposed volume of securities which may be issued should be disclosed to
enable shareholders to assess dilutionary impact.
o Time restrictions before options can be exercised should be disclosed.o Any
restrictions on disposing of shares received should be disclosed. o Full cost
of options to the company should be disclosed.
o Method used to calculate cost of options should be disclosed, including any
discount applied to account for the probability of equity incentives not
vesting.
o Method of purchase or issue of shares on exercise of options should be
disclosed.
DILUTION OF EXISTING SHAREHOLDERS' EQUITY
o Aggregate number of shares and options issued under all employee and
executive incentive schemes should not
exceed 10 percent of issued capital.
LEVEL OF REWARD
o Value of options granted (assuming performance hurdles are met) should be
consistent with comparable schemes
operating in similar companies.
ELIGIBILITY FOR PARTICIPATION IN THE SCHEME
o Scheme should be open to all key executives.
o Scheme should not be open to non-executive directors.
OTHER
o Plans should include reasonable change-in-control provisions (i.e. pro rata
vesting time and size of awards).
o Plans should include "good" leaver/"bad" leaver provisions to minimize
excessive and unearned payouts (see
below for a discussion of ISS specific approach to resolutions seeking approval
for termination benefits to
executives generally and under equity plans).
In summary, ISS generally opposes plans, and proposed grants under plans, if
any of the following apply:
o Exercise price is discounted;
o Vesting period is too short;
o Performance hurdles are not sufficiently demanding (although ISS will take
into account whether the plan is used
for a wide group of employees in evaluating performance hurdles under a
particular plan);
o Extensive retesting of performance criteria is permitted over an extended
time period if the original performance
criteria are not met during the initial testing period;
o Plan allows for excessive dilution;
o Company failed to disclose adequate information regarding any element of the
scheme.
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3.6 LONG-TERM INCENTIVE PLAN AMENDMENTS
ISS RECOMMENDATION: CASE-BY-CASE
When evaluating amendments to existing plans ISS initially uses its long-term
incentive plan guidelines (see above). ISS then determines if the amendment is
improving/removing negative features or if it is exacerbating such features. If
the amendment is eliminating negative features, the amendment could potentially
be supported. However, if the amendment is neutral, ISS would recommend against
the amendment to express dissatisfaction with the underlying terms of the plan.
3.7 TERMINATION BENEFIT APPROVALS
ISS RECOMMENDATION: CASE-BY-CASE
Amendments to the Australian Corporations Act in November 2009 capped allowable
(i.e. without shareholder approval) "termination benefits" to senior executives
at 12 months' base pay. Formerly the Corporations Act required shareholder
approval only where the termination payment was in excess of seven times total
remuneration. Companies are able to seek approval of such payments, including
benefits from unvested equity grants on termination, in advance including by
seeking general approval for vesting of equity incentives on termination under
a specific equity plan.
ISS will generally recommend against resolutions seeking approval of
termination payments for executives in excess of the statutory maximum (i.e. 12
months' base pay), except where there is clear evidence that the termination
payment would provide a benefit to shareholders.
In cases where approval is sought for termination benefits under any equity
plan, vote for the provision of termination benefits under the plan in excess
of 12 months' base salary, only if the approval is for three years or less and
no vesting without satisfaction of sufficiently demanding performance hurdles
is permitted.
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4. AUDITORS
4.1 REAPPOINTMENT OF AUDITOR, AND AUTHORIZATION FOR THE DIRECTORS TO SET
AUDITOR'S REMUNERATION
ISS RECOMMENDATION: GENERALLY FOR
This type of resolution is not required under Australian law, and so it arises
for ASX-listed companies that are incorporated in the United Kingdom, Papua New
Guinea, and other countries where annual reappointment of the auditor is a
statutory requirement.
ISS will recommend for the appointment of auditors and authorizing the board to
fix their remuneration, unless:
o There are serious concerns about the accounts presented or the audit
procedures used;
o Non-audit related fees are substantial or are routinely in excess of
standard annual audit fees.
4.2 APPOINTMENT OF A NEW AUDITOR
ISS RECOMMENDATION: GENERALLY FOR
Whenever an Australian public company changes its auditor during the year, it
is required to put the auditor up for election by shareholders at the next AGM.
Often a new auditor is selected by the board during the year and may or may not
have started work by the time the shareholders vote on its election.
Unless there is some compelling reason why a new auditor selected by the board
should not be endorsed, the recommendation is for. A compelling reason might be
a past association as auditor during a period of financial trouble.
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5. ENVIRONMENTAL AND SOCIAL ISSUES
5.1 GLOBAL APPROACH
ISS RECOMMENDATION: CASE-BY-CASE
Issues covered under the policy include a wide range of topics, including
consumer and product safety, environment and energy, labor covered standards
and human rights, workplace and board diversity, and corporate political
issues. While a variety of factors goes into each analysis, the overall
principle guiding all vote recommendations focuses on how the proposal may
enhance or protect shareholder value in either the short term or long term.
Generally vote case-by-case, taking into consideration whether implementation
of the proposal is likely to enhance or protect shareholder value, and in
addition the following will be considered:
o If the issues presented in the proposal are more appropriately or
effectively dealt with through legislation or
government regulation;
o If the company has already responded in an appropriate and sufficient manner
to the issue(s) raised in the
proposal;
o Whether the proposal's request is unduly burdensome (scope, timeframe, or
cost) or overly prescriptive;
o The company's approach compared with any industry standard practices for
addressing the issue(s) raised by the
proposal;
o If the proposal requests increased disclosure or greater transparency,
whether or not reasonable and sufficient
information is currently available to shareholders from the company or from
other publicly available sources; and
o If the proposal requests increased disclosure or greater transparency,
whether or not implementation would
reveal proprietary or confidential information that could place the company at
a competitive disadvantage.
5.2 BOARD DIVERSITY
ISS views diversity on boards as an important topic for engagement with the
company. We examine diversity as part of board refreshment so as to provide our
clients with the best information on which to base an informed voting decision.
ISS will report on the company's disclosure on the measures to achieve greater
diversity. A company may take a broader definition of diversity in its approach
than only gender. Such a definition may include matters of age, disability,
ethnicity, marital or family status, religious or cultural background, sexual
orientation and gender identity.
ISS reports on whether a company:
o has a diversity policy;
o has measurable objectives on promoting gender diversity;
o reports on progress against those measurable objectives; and
o reports on the respective proportions of men and women on the board, in
senior executive positions and across
the whole organisation (including how the company has defined "senior
executive" for these purposes); or
o if the entity is a "relevant employer" under the Workplace Gender Equality
Act, the entity's most recent
"Gender Equality Indicators", as defined in and published under that Act;
o Whether the company uses Box 1.5 of the ASX Guidelines 3rd Ed. to create the
company's diversity policy.
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5.3 ECONOMIC, ENVIRONMENTAL, AND SUSTAINABILITY RISKS
Where appropriate, ISS will report on the quality of the company's disclosure
on its economic, environmental, and sustainability risks and how it regards
these risks.
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MISCELLANEOUS
CONSTITUTIONAL AMENDMENT
ISS RECOMMENDATION: CASE-BY-CASE
Proposals to amend the company's constitution are required to be approved by a
special resolution (75-percent majority of votes cast).
Proposals range from a general updating of various clauses to reflect changes
in corporate law and ASX Listing Rules, to complete replacement of an existing
constitution with a new "plain language," and updated, version.
RENEWAL OF "PROPORTIONAL TAKEOVER" CLAUSE IN CONSTITUTION
ISS RECOMMENDATION: GENERALLY FOR
The Australian Corporations Act allows a company to include in its constitution
a clause that requires shareholder approval for a proportional (partial)
takeover offer to be made. Under this type of clause, a proportional takeover
offer cannot proceed to be mailed out to shareholders until after the company
has held a general meeting at which shareholders vote on whether to allow the
offer to be made. The clause can remain in the constitution for a maximum of
three years. It is standard practice among ASX-listed companies to ask their
shareholders to reinsert the clause into the constitution, at every third AGM.
The clause cannot be used as a management entrenchment device given that if a
shareholder meeting to vote on the approval of the making of a proportional bid
is not held within 14 days of the bid expiry deadline, allowing the bid to be
made will be taken as approved.
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DISCLOSURE/DISCLAIMER
This document and all of the information contained in it, including without
limitation all text, data, graphs, and charts
(collectively, the "Information") is the property of Institutional Shareholder
Services Inc. ("ISS"), its subsidiaries, or, in some cases third party
suppliers. The Information may not be reproduced or redisseminated in whole or
in part without prior written permission of ISS.
The Information has not been submitted to, nor received approval from, the
United States Securities and Exchange Commission or any other regulatory body.
None of the Information constitutes an offer to sell (or a solicitation of an
offer to buy), or a promotion or recommendation of, any security, financial
product or other investment vehicle or any trading strategy, and ISS does not
endorse, approve or otherwise express any opinion regarding any issuer,
securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or
permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO
THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY,
TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by
law, in no event shall ISS have any liability regarding any of the Information
for any direct, indirect, special, punitive, consequential (including lost
profits) or any other damages even if notified of the possibility of such
damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
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AN MSCI BRAND
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Transparency. Inclusiveness. Global Expertise.
2014 Japan Proxy Voting Summary Guidelines
December 19, 2013
Institutional Shareholder Services Inc.
Copyright [C] 2013 by ISS
www. issgovernance.com
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ISS' 2014 JAPAN PROXY VOTING SUMMARY GUIDELINES
Effective for Meetings on or after Feb. 1, 2014
Published December 19, 2013
TABLE OF CONTENTS
1. APPROVAL OF FINANCIAL STATEMENTS 4
2. INCOME ALLOCATION 4
3. ELECTION OF DIRECTORS 4
Independence criteria for Japan 5
4. ELECTION OF STATUTORY AUDITORS 6
5. ARTICLE AMENDMENTS 6
Expansion of business activities 6
Adoption of a U.S.-style three committee board structure 6
Increase in authorized capital 6
Creation/modification of preferred shares/class shares 6
Repurchase of shares at board's discretion 6
Allow company to make rules governing the exercise of
shareholders' rights 7
Limit rights of odd shareholders 7
Lower quorum requirement 7
Amendments related to takeover defenses 7
Decrease in maximum board size 7
Supermajority vote requirement to remove a director 7
Reduce directors' term in office from two years to one year 7
Remove language preventing classification of board 7
Limitations of liability for directors/statutory auditors 7
Limitations of liability for external auditors 7
Payment of dividends at the board's discretion 7
Management buyout related amendments 7
6. ANNUAL BONUSES FOR DIRECTORS/STATUTORY AUDITORS 7
7. RETIREMENT BONUSES/SPECIAL PAYMENTS IN CONNECTION WITH
ABOLITION OF RETIREMENT BONUS SYSTEM 8
Retirement Bonuses 8
Special Payments in Connection with Abolition of Retirement
Bonus System 8
8. STOCK OPTION PLANS/DEEP-DISCOUNTED STOCK OPTION PLANS 8
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Stock Option Plans 8
Deep-Discounted Stock Option Plans 8
9. DIRECTOR COMPENSATION CEILING 9
10. STATUTORY AUDITOR COMPENSATION CEILING 9
11. AUDIT FIRM APPOINTMENTS 9
12. SHARE REPURCHASE PLANS 9
13. TAKEOVER DEFENSE PLANS (POISON PILLS) 9
14. MERGERS & ACQUISITIONS, THIRD-PARTY SHARE ISSUANCES
(PRIVATE PLACEMENTS) 10
15. SHAREHOLDER PROPOSALS 10
16. SOCIAL/ENVIRONMENTAL ISSUES 11
Global Approach 11
DISCLOSURE/DISCLAIMER 12
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1. APPROVAL OF FINANCIAL STATEMENTS
Vote for approval of financial statements, unless:
o External auditor expressed no opinion, or raised concerns; or
o Statutory auditors/audit committee raised concerns; or
o There are concerns about the financial statements presented or audit
procedures used.
2. INCOME ALLOCATION
Vote for approval of income allocation, unless:
o Payout ratio is consistently low without adequate justification; or
o Payout ratio is too high, potentially damaging financial health.
3. ELECTION OF DIRECTORS
ISS has two policies for director elections in Japan: one for companies with a
statutory auditor board structure, and the other for companies with a U.S.-type
three committee structure. Regardless of governance structure, vote for the
election of directors, except for:
o A top executive (1) if the board, after the shareholder meeting, does not
include at least one outsider, regardless of
independence; or
o A top executive at a company that has a controlling shareholder, where the
board, after the shareholder meeting,
does not include at least two independent directors based on ISS independence
criteria for Japan; or
o An outside director nominee who attended less than 75 percent of board
meetings during the year under review (2);
or
o A top executive who is responsible for not implementing a shareholder
proposal which has received a majority (3) of
votes cast, or not putting a similar proposal on the ballot as a management
proposal the following year (with a
management recommendation of for), when that proposal is deemed to be in the
interest of independent
shareholders.
In addition, at companies with a U.S.-type three committee structure, vote for
the election of directors, unless:
o The outside director nominee is regarded as non-independent based on ISS
independence criteria for Japan, and
the board, after the shareholder meeting, is not majority independent; or
o Where a company has a controlling shareholder, the director nominee who sits
on the nomination committee and
is an insider, or non-independent outsider, when the board, after the
shareholder meeting, does not include at
least two independent directors based on ISS independence criteria for Japan.
1. In most cases, the top executive will be the "shacho" (president). However,
there are companies where the ultimate decision-making authority rests with the
"kaicho" (executive chairman) or "daihyo torishimariyaku" (representative
director).
2. The attendance of inside directors is not disclosed in Japan.
3. Many Japanese shareholder proposals are submitted as article amendments,
which require supermajority support in order to pass.
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Regardless of governance structure, under extraordinary circumstances, vote
against individual directors, members of a committee, or the entire board, due
to:
o Material failures of governance, stewardship, risk oversight, or fiduciary
responsibilities at the company; or
o Failure to replace management as appropriate; or
o Egregious actions related to a director's service on other boards that raise
substantial doubt about his or her ability
to effectively oversee management and serve the best interests of shareholders
at any company.
INDEPENDENCE CRITERIA FOR JAPAN
Those outside director candidates falling into any of the following categories
should be regarded as non-independent.
o Individuals who work or worked at major shareholders of the company in
question;
o Individuals who work or worked at main lenders/banks to the company in
question;
o Individuals who work or worked at the lead underwriter(s) of the company in
question;
o Individuals who work or worked at business partners of the company in
question and the transaction value is
material from the recipient's perspective or is not disclosed;
o Individuals who worked at the company's audit firm;
o Individuals who offer or offered professional services such as legal advice,
financial advice, tax advice or consulting
services to the company in question; or
o Individuals who have a relative(s) working at the company in question.
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4. ELECTION OF STATUTORY AUDITORS
Vote for the election of statutory auditors, unless:
o The outside statutory auditor nominee is regarded as non-independent based
on ISS independence criteria for Japan (4); or o The outside statutory nominee
attended less than 75 percent of meetings of the board of directors or board of
statutory auditors during the year under review; or o The statutory auditor is
judged to be responsible for clear mismanagement or shareholder-unfriendly
behavior. o Egregious actions related to a statutory auditor's service on
other boards that raise substantial doubt about his or her ability to
effectively oversee management and serve the best interests of shareholders at
any company.
5. ARTICLE AMENDMENTS
Amendments are nearly always bundled together as a single voting resolution,
and ISS' general approach is to oppose article amendments as a whole when they
include changes ISS opposes. The following are some of the most common or
significant types of changes to articles.
EXPANSION OF BUSINESS ACTIVITIES
Vote for this change, unless:
o A company has performed poorly for several years and seeks business
expansion into a risky enterprise unrelated
to its core business.
ADOPTION OF A U.S.-STYLE THREE COMMITTEE BOARD STRUCTURE
Vote for this change, unless:
o None of the outside director candidates meets ISS criteria on independence
(5).
INCREASE IN AUTHORIZED CAPITAL
Vote case-by-case on this request if the company explicitly provides reasons
for the increase. Otherwise,
Vote for this change, unless:
o The increase in authorized capital exceeds 100 percent of the currently
authorized capital; or
o The increase leaves the company with less than 30 percent of the proposed
authorized capital outstanding; or
o The increase is intended for a poison pill, which ISS opposes.
CREATION/MODIFICATION OF PREFERRED SHARES/CLASS SHARES
Vote case-by-case on this request.
REPURCHASE OF SHARES AT BOARD'S DISCRETION
Vote against this change.
4. ISS uses the same independence criteria for directors and statutory
auditors. See "Election of Directors."
5. See "Election of Directors" for ISS criteria on independence.
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ALLOW COMPANY TO MAKE RULES GOVERNING THE EXERCISE OF SHAREHOLDERS' RIGHTS
Vote against this change.
LIMIT RIGHTS OF ODD SHAREHOLDERS
Vote for this change.
LOWER QUORUM REQUIREMENT
Vote against this change.
AMENDMENTS RELATED TO TAKEOVER DEFENSES
Vote for this change, unless:
o ISS opposes or has opposed the poison pill proposal by itself.
DECREASE IN MAXIMUM BOARD SIZE
Vote for this change, unless:
o The decrease eliminates all vacant seats, leaving no flexibility to add
shareholder nominees or other outsiders to
the board without removing an incumbent director.
SUPERMAJORITY VOTE REQUIREMENT TO REMOVE A DIRECTOR
Vote against this change.
REDUCE DIRECTORS' TERM IN OFFICE FROM TWO YEARS TO ONE YEAR
Vote for this change.
REMOVE LANGUAGE PREVENTING CLASSIFICATION OF BOARD
Vote against this change.
LIMITATIONS OF LIABILITY FOR DIRECTORS/STATUTORY AUDITORS
Vote for this change.
LIMITATIONS OF LIABILITY FOR EXTERNAL AUDITORS
Vote against this change.
PAYMENT OF DIVIDENDS AT THE BOARD'S DISCRETION
Vote against this change.
MANAGEMENT BUYOUT RELATED AMENDMENTS
Vote case-by-case on this request.
6. ANNUAL BONUSES FOR DIRECTORS/STATUTORY AUDITORS
Vote for approval of annual bonuses, unless:
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o Recipients include those who are judged to be responsible for clear
mismanagement or shareholder-unfriendly
behavior.
7. RETIREMENT BONUSES/SPECIAL PAYMENTS IN CONNECTION WITH ABOLITION OF
RETIREMENT BONUS SYSTEM
RETIREMENT BONUSES
Vote for approval of retirement bonuses, unless:
o Recipients include outsiders (6); or
o Neither the individual payments nor the aggregate amount of the payments is
disclosed; or
o Recipients include those who are judged to be responsible for clear
mismanagement or shareholder-unfriendly
behavior.
SPECIAL PAYMENTS IN CONNECTION WITH ABOLITION OF RETIREMENT BONUS SYSTEM
Vote for approval of special payments in connection with abolition of
retirement bonus system, unless:
o Recipients include outsiders (7); or
o Neither the individual payments nor the aggregate amount of the payments is
disclosed; or
o Recipients include those who are judged to be responsible for clear
mismanagement or shareholder-unfriendly
behavior.
8. STOCK OPTION PLANS/DEEP-DISCOUNTED STOCK OPTION PLANS
STOCK OPTION PLANS
Vote for approval of stock option plans, unless:
o Total dilution from proposed plan(s) and previous option plans exceeds 5
percent for mature companies, or 10
percent for growth companies; or;
o Recipients include individuals who are not in a position to affect the
company's stock price, including employees of
business partners or unspecified "collaborators;" or
o The maximum number of options that can be issued per year is not disclosed.
DEEP-DISCOUNTED STOCK OPTION PLANS
Vote for approval of deep-discounted stock option plans, unless:
o Total dilution from proposed plan(s) and previous option plans exceeds 5
percent for mature companies, or 10
percent for growth companies; or
6. However, in rare occasions, ISS may support payment to outsiders on a
case-by-case basis, if the individual amount is disclosed and the amount is not
excessive.
7. Id.
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o Recipients include individuals who are not in a position to affect the
company's stock price, including employees of
business partners or unspecified "collaborators;" or
o The maximum number of options that can be issued per year is not disclosed;
or
o No specific performance hurdles are specified (However, if the vesting
period before exercise lasts for at least
three years, this policy may not apply).
9. DIRECTOR COMPENSATION CEILING
Vote for proposals seeking to increase director fees, if:
o The specific reason(s) for the increase are explained; or
o The company is introducing or increasing a ceiling for performance-based
compensation.
Vote case-by-case on proposals seeking to increase director fees, taking into
account the company's stock price performance and capital efficiency if:
o The proposals are intended to increase fixed cash compensation or do not
specify whether it is fixed or
performance-based compensation which will be increased.
Generally vote against proposals seeking to increase director fees if there are
serious concerns about corporate malfeasance.
10. STATUTORY AUDITOR COMPENSATION CEILING
Vote for proposals seeking to increase statutory auditor compensation ceiling,
unless:
o Statutory auditors are judged to be responsible for clear mismanagement or
shareholder-unfriendly behavior.
11. AUDIT FIRM APPOINTMENTS
Vote for the appointment of audit firms, unless:
o There are serious concerns related to changing auditors.
12. SHARE REPURCHASE PLANS
Vote for the share repurchase plans, unless:
o The proposed repurchase plan exceeds 10 percent of issued share capital
without explanation; or
o There are serious concerns about a possible adverse impact on shareholder
value.
13. TAKEOVER DEFENSE PLANS (POISON PILLS)
Vote for approval of takeover defense plans (poison pills), unless:
(Necessary conditions)
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o The board does not include at least 20 percent (but no fewer than two)
independent directors (8) after the
shareholder meeting; or
o These independent directors fail to meet ISS guidelines on board meeting
attendance (9); or
o The directors are not subject to annual election; or
o One or more members of the bid evaluation committee cannot be regarded as
independent based on ISS criteria
for independence; or
o The trigger threshold is set at less than 20 percent of shares outstanding;
or
o The duration of the poison pill exceeds three years; or
o There are other protective or entrenchment tools that can serve as takeover
defenses, including blocking stakes
held by management-friendly shareholders, or setting the maximum board size to
the actual board size to
eliminate vacant seats, or tightening of procedures for removing a director
from office; or
o The company fails to release its proxy circular at least three weeks prior
to the meeting, to give shareholders
sufficient time to study the details of the proposal and question management
about them.
(Second stage of analysis)
o The company has not disclosed what specific steps it is taking to address
the vulnerability to a takeover by
enhancing shareholder value.
14. MERGERS & ACQUISITIONS, THIRD-PARTY SHARE ISSUANCES (PRIVATE PLACEMENTS)
Vote case-by-case on mergers, acquisitions, and third-party placements, taking
into account the following:
For every M&A and Third-Party Placement analysis, ISS reviews publicly
available information as of the date of the report and evaluates the merits and
drawbacks of the proposed transaction, balancing various and sometimes
countervailing factors including:
o Valuation -- Is the value to be received by the target shareholders (or paid
by the acquirer) reasonable?
o Market reaction -- How has the market responded to the proposed deal? A
negative market reaction will cause ISS
to scrutinize a deal more closely.
o Strategic rationale -- Does the deal make sense strategically? From where is
the value derived? Cost and revenue
synergies should not be overly aggressive or optimistic, but reasonably
achievable. Management should also have
a favorable track record of successful integration of historical acquisitions.
o Conflicts of interest -- Are insiders benefiting from the transaction
disproportionately and inappropriately as
compared to non-insider shareholders? ISS will consider whether any special
interests may have influenced these
directors and officers to support or recommend the merger.
o Governance -- Will the combined company have a better or worse governance
profile than the current governance
profiles of the respective parties to the transaction? If the governance
profile is to change for the worse, the
burden is on the company to prove that other issues (such as valuation)
outweigh any deterioration in governance.
15. SHAREHOLDER PROPOSALS
Vote all shareholder proposals on a case-by-case basis.
Vote for proposals that would improve the company's corporate governance or
business profile at a reasonable cost.
Vote against proposals that limit the company's business activities or
capabilities or result in significant costs being incurred with little or no
benefit.
8. See "Election of Directors" for ISS criteria on independence.
9. See "Election of Directors" for ISS criteria on board meeting attendance.
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16. SOCIAL/ENVIRONMENTAL ISSUES
GLOBAL APPROACH
Issues covered under the policy include a wide range of topics, including
consumer and product safety, environment and energy, labor covered standards
and human rights, workplace and board diversity, and corporate political
issues. While a variety of factors goes into each analysis, the overall
principle guiding all vote recommendations focuses on how the proposal may
enhance or protect shareholder value in either the short term or long term.
Generally vote case-by-case, taking into consideration whether implementation
of the proposal is likely to enhance or protect shareholder value, and in
addition the following will be considered:
o If the issues presented in the proposal are more appropriately or
effectively dealt with through legislation or
government regulation;
o If the company has already responded in an appropriate and sufficient manner
to the issue(s) raised in the
proposal;
o Whether the proposal's request is unduly burdensome (scope, timeframe, or
cost) or overly prescriptive;
o The company's approach compared with any industry standard practices for
addressing the issue(s) raised by the
proposal;
o If the proposal requests increased disclosure or greater transparency,
whether or not reasonable and sufficient
information is currently available to shareholders from the company or from
other publicly available sources; and
o If the proposal requests increased disclosure or greater transparency,
whether or not implementation would
reveal proprietary or confidential information that could place the company at
a competitive disadvantage.
ooooo
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DISCLOSURE/DISCLAIMER
This document and all of the information contained in it, including without
limitation all text, data, graphs, and charts
(collectively, the "Information") is the property of Institutional Shareholder
Services Inc. ("ISS"), its subsidiaries, or, in some cases third party
suppliers.
The Information has not been submitted to, nor received approval from, the
United States Securities and Exchange Commission or any other regulatory body.
None of the Information constitutes an offer to sell (or a solicitation of an
offer to buy), or a promotion or recommendation of, any security, financial
product or other investment vehicle or any trading strategy, and ISS does not
endorse, approve or otherwise express any opinion regarding any issuer,
securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or
permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO
THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY,
TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by
law, in no event shall ISS have any liability regarding any of the Information
for any direct, indirect, special, punitive, consequential (including lost
profits) or any other damages even if notified of the possibility of such
damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
ISS' 2014 JAPAN PROXY VOTING SUMMARY GUIDELINES - 12 -
ISS
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AN MSCI BRAND
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Transparency. Inclusiveness. Global Expertise.
2014 Korea Proxy Voting Summary Guidelines
December 19, 2013
Institutional Shareholder Services Inc.
Copyright [C] 2013 by ISS
www. issgovernance.com
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ISS' 2014 KOREA PROXY VOTING SUMMARY GUIDELINES
Effective for Meetings on or after Feb. 1, 2014
Published December 19, 2013
TABLE OF CONTENTS
1. APPROVAL OF FINANCIAL STATEMENTS (AND DECLARATION OF CASH
OR STOCK DIVIDENDS) 3
2. AMENDMENTS TO THE ARTICLES OF INCORPORATION 3
Issuance limit on new shares or convertible securities 3
Increase in authorized capital 3
Stock split / reverse stock split 3
Preferred stock / non-voting common shares 3
Diversification / expansion of business objectives 3
Establishment of audit committee 3
Stock option grant 4
Amend quorum requirements 4
Cumulative voting 4
Golden parachute clause 4
Authorizing board to approve financial statements and income
allocation 4
3. ELECTION OF DIRECTORS 4
4. ELECTION OF AUDIT COMMITTEE MEMBERS (OR INTERNAL AUDITOR) 5
Election of Audit Committee Member(s) 5
Election of Internal Auditor(s) 5
5. REMUNERATION CAP ON DIRECTORS (AND INTERNAL AUDITOR) 6
6. REDUCTION IN CAPITAL 6
Reduction in capital accompanied by cash consideration 6
Reduction in capital not accompanied by cash consideration 6
7. STOCK OPTION GRANTS 6
8. SPINOFF AGREEMENT 7
9. MERGER AGREEMENT, SALES/ACQUISITION OF COMPANY ASSETS, AND
FORMATION OF HOLDING COMPANY 7
10. AMENDMENTS TO TERMS OF SEVERANCE PAYMENTS TO EXECUTIVES 8
11. SHAREHOLDER PROPOSALS 9
12. SOCIAL/ENVIRONMENTAL ISSUES 9
Global Approach 9
DISCLOSURE/DISCLAIMER 10
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1. APPROVAL OF FINANCIAL STATEMENTS (AND DECLARATION OF CASH OR STOCK
DIVIDENDS)
Generally vote for the approval of financial statements (and declaration of
cash or stock dividends), unless:
o The dividend payout ratio has been consistently low without adequate
justification;
o The payout is excessive given the company's financial position;
o There are concerns about the accounts presented or audit procedures used; or
o The company is not responsive to shareholder questions about specific items
that should be publicly disclosed.
2. AMENDMENTS TO THE ARTICLES OF INCORPORATION
Proposals are always presented in a bundled manner. As such, in cases where the
negative provisions proposed in a resolution outweigh any positive ones, vote
against the whole resolution. Shareholders are advised to carefully scrutinize
any changes to a company's articles as shareholders will not likely have any
chance in the future to reverse the amendments once the amended articles are in
place.
The following are frequently proposed amendments in Korea:
ISSUANCE LIMIT ON NEW SHARES OR CONVERTIBLE SECURITIES
The most contentious aspect in this proposal pertains to articles that permit
companies to issue new shares, convertible bonds, and/or bonds with warrants to
non-shareholders without triggering existing shareholders' preemptive rights.
When such articles are sought to be amended, only vote for the amendments if:
o The potential dilution ratio to existing shareholders does not exceed 20
percent; and
o The proposed issuance limit of new shares is set at no higher than 20
percent of issued shares.
INCREASE IN AUTHORIZED CAPITAL
Generally vote for increases in authorized capital, unless:
o The increase in authorized capital exceeds 100 percent of the current
authorized capital without any justification;
or
o The increase in the authorized capital results in less than 30 percent of
the proposed authorized capital on issue.
STOCK SPLIT / REVERSE STOCK SPLIT
Generally vote for stock splits or reverse stock splits unless there is
potential dilution impact on existing shareholders as a result of stock split
and/or reverse stock split.
PREFERRED STOCK / NON-VOTING COMMON SHARES
Generally vote for the creation of a new class of preferred stock, or the
issuance of preferred stock up to 50 percent of the issued capital, unless the
terms of the preferred stock would adversely affect the rights of existing
shareholders.
DIVERSIFICATION / EXPANSION OF BUSINESS OBJECTIVES
Generally vote for proposals to expand business objectives unless the new
business takes the company into risky areas.
ESTABLISHMENT OF AUDIT COMMITTEE
Generally vote for the establishment of an audit committee as a replacement for
the internal auditor system.
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STOCK OPTION GRANT
Generally vote for a proposed stock option grant, unless:
o The maximum dilution level under the plan exceeds 5 percent of issued
capital for a mature company; or
o The maximum dilution level under the plan exceeds 10 percent for a growth
company.
AMEND QUORUM REQUIREMENTS
Vote case-by-case on proposals to amend quorum requirements. Vote against
proposals to adopt a supermajority voting requirement for the removal of
directors or internal auditors.
CUMULATIVE VOTING
Generally vote against proposals to introduce a provision that will prohibit
the use of cumulative voting in director elections.
GOLDEN PARACHUTE CLAUSE
Generally vote against proposals to introduce a provision that entitles the
company's directors to an excessive level of remuneration in the event that
they are dismissed or terminated.
AUTHORIZING BOARD TO APPROVE FINANCIAL STATEMENTS AND INCOME ALLOCATION
Generally vote against proposals to introduce a provision that gives the board
of directors the authority to approve financial statements and income
allocation (including dividend payout). Insertion of such a clause would
potentially take away shareholders' right to approve the company's dividend
payment decision without any countervailing benefits.
3. ELECTION OF DIRECTORS
Korean law imposes two different sets of corporate governance standards on
listed companies -- one for companies whose asset size is greater than KRW 2
trillion (large companies) and the other for companies whose asset size is
below KRW 2 trillion (small companies). Under Korean law, large company boards
must have a majority of outside directors, and small companies are required to
have a board on which one-fourth of the directors are outsiders.
Consider the history of a particular director when deciding whether to vote in
favor of his or her (re)election. Examples of circumstances where a vote
against a director's (re)election should be considered include:
o Adequate disclosure has not been provided in a timely manner;
o There are clear concerns over questionable finances or restatements;
o There have been questionable transactions with conflicts of interest;
o There is any record of abuses against minority shareholder interests;
o The board fails to meet minimum corporate governance standards;
o A director has had significant involvement with a failed company;
o A director has in the past appeared not to have acted in the best interests
of all shareholders;
o A director has breached fiduciary duties or engaged in willful misconduct or
gross negligence in his/her capacity as
a director (irrespective of whether such wrongdoing brings claims of losses and
damages to the company);
o A director has been indicted by the Prosecutors' Office and there are
pending investigations;
o An outside director has attended less than 75 percent of board meetings in
the most recent financial year, without
a satisfactory explanation; or
o An outside director sits on more than two public company boards, in
violation of the Commercial Act and
accompanying presidential decree.
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For large companies, in a case where independent non-executive directors (per
ISS' classification of directors) represent less than a majority of the board,
vote against the following directors:
o Inside/executive directors who are neither CEO nor a member of the founding
family; and/or
o The most recently appointed non-independent non-executive director (per ISS'
classification of directors) who
represents a substantial shareholder, where the percentage of board seats held
by representatives of the
substantial shareholder are disproportionate to its holdings in the company.
Under extraordinary circumstances, vote against individual directors, members
of committee, or the entire board, due to:
o Material failures of governance, stewardship, risk oversight, or fiduciary
responsibilities at the company;
o Failure to replace management as appropriate; or
o Egregious actions related to a director's service on other boards that raise
substantial doubt about his/her ability
to effectively oversee management and serve the best interests of shareholders
at any company.
4. ELECTION OF AUDIT COMMITTEE MEMBERS (OR INTERNAL AUDITOR)
ELECTION OF AUDIT COMMITTEE MEMBER(S)
Under Korean law, large companies are required to establish an audit committee
comprising a minimum of three members, two-thirds of whom should be outside
directors (including the chair). Korean law also requires that at least one
audit committee member possess accounting or related financial management
expertise or experience.
Consider the history of a particular audit committee member when deciding
whether to vote in favor of his or her (re)election. Examples of circumstances
where a vote against an audit committee member's (re)election should be
considered include:
o There are serious concerns about the statutory reports presented or audit
procedures used;
o A director has had significant involvement with a failed company;
o A director has in the past appeared not to have acted in the best interests
of all shareholders;
o A director has breached fiduciary duties or engaged in willful misconduct or
gross negligence in his/her capacity as
a director (irrespective of whether such wrongdoing brings claims of losses and
damages to the company);
o A director has been indicted by the Prosecutors' Office and there are
pending investigations;
o An outside director has attended less than 75 percent of board meetings in
the most recent financial year, without
a satisfactory explanation;
o An outside director sits on more than two public company boards, in
violation of the Commercial Act and
accompanying presidential decree;
o An inside director seeks to become an audit committee member (for large
companies only);
o A director has engaged in some significant transactions with the company in
the last three years and he/she
cannot reasonably be seen to have the necessary objectivity and independence;
or
o Other questions exist concerning any of the audit committee members being
appointed.
ELECTION OF INTERNAL AUDITOR(S)
Under Korean law, small companies are required to appoint at least one internal
auditor. These companies may alternatively choose to establish an audit
committee.
Consider the history of a particular internal auditor when deciding whether to
vote in favor of his or her (re)appointment.
Examples of circumstances where a vote against an internal auditor's
(re)appointment should be considered include:
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o There are serious concerns about the statutory reports presented or audit
procedures used;
o The internal auditor(s) has previously served the company in an executive
capacity or can otherwise be considered
affiliated with the company;
o A nominee has had significant involvement with a failed company;
o A nominee has breached fiduciary duties or engaged in willful misconduct or
gross negligence in his/her capacity as
an internal auditor (irrespective of whether such wrongdoing brings claims of
losses and damages to the
company);
o A nominee has been indicted by the Prosecutor's Office and there are pending
investigations;
o A nominee has engaged in some significant transactions with the company in
the last three years and he/she
cannot reasonably be seen to have the necessary objectivity and independence;
or
o Other questions exist concerning any of the internal auditors being
appointed.
For those small companies which choose to create an audit committee in place of
the internal auditor system vote for the election of an inside director as an
audit committee member only if the company's audit committee, after the
election, satisfies the legal requirement.
5. REMUNERATION CAP ON DIRECTORS (AND INTERNAL AUDITOR)
Generally vote for the approval of a remuneration cap on directors (or the
internal auditor), unless:
o The proposed limit on directors' remuneration is excessive relative to peer
companies' remuneration caps; and/or
o The company is asking for a significant fee cap increase where:
o The company reported sound financial performance but its dividend payout
ratio has been low in the past
couple of years (or for the most recent five years for widely held companies)
without any reasonable
justification; and/or
o The company has generated a net loss in the most recent two financial years.
6. REDUCTION IN CAPITAL
Generally vote for proposals to reduce capital for routine purposes unless the
terms are unfavorable to shareholders.
REDUCTION IN CAPITAL ACCOMPANIED BY CASH CONSIDERATION
Generally vote for proposals to reduce a company's capital that accompany
return of funds to shareholders and is part of a capital-management strategy
and an alternative to a buyback or a special dividend. Such a resolution is
normally implemented proportionately against all outstanding capital, and
therefore does not involve any material change relative to shareholder value.
REDUCTION IN CAPITAL NOT ACCOMPANIED BY CASH CONSIDERATION
Generally vote for proposals to reduce capital that do not involve any funds
being returned to shareholders. A company may take this action if its net
assets are in danger of falling below the aggregate of its liabilities and its
stated capital. Such proposals are considered to be routine accounting
measures.
7. STOCK OPTION GRANTS
Generally vote for stock option grant proposals, unless:
o The maximum dilution level under the plan exceeds 5 percent of issued
capital for a mature company; or
o The maximum dilution level under the plan exceeds 10 percent for a growth
company.
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In Korea, the manner in which stock options are granted and exercised is
stipulated under the law.
Under Korean law, companies are allowed to grant stock options up to 15 percent
of the total number of issued shares pursuant to a shareholder meeting
resolution. The board is also allowed to grant stock options up to 3 percent of
the total issued shares and to seek shareholders' approval retrospectively at
the first general meeting after the grant.
8. SPINOFF AGREEMENT
Generally vote for the approval of a spinoff agreement, unless:
o The impact on earnings or voting rights for one class of shareholders is
disproportionate to the relative
contributions of the group;
o The company's structure following the spinoff does not reflect good
corporate governance;
o There are concerns over the process of negotiation that may have had an
adverse impact on the valuation of the
terms of the offer; and/or
o The company does not provide sufficient information upon request to make an
informed voting decision.
9. MERGER AGREEMENT, SALES/ACQUISITION OF COMPANY ASSETS, AND FORMATION OF
HOLDING COMPANY
Generally vote for the approval of a sale of company assets, merger agreement,
and/or formation of a holding company, unless:
o The impact on earnings or voting rights for one class of shareholders is
disproportionate to the relative
contributions of the group;
o The company's structure following such transactions does not reflect good
corporate governance;
o There are concerns over the process of negotiation that may have had an
adverse impact on the valuation of the
terms of the offer;
o The company does not provide sufficient information upon request to make an
informed voting decision; and/or
o The proposed buyback price carries a significant premium at the date of
writing, conferring on shareholders a
trading opportunity.
The company-level transactions that require shareholders' approval include:
sale/acquisition of a company's assets or business unit; merger agreements; and
formation of a holding company. For every analysis, ISS reviews publicly
available information as of the date of the report and evaluates the merits and
drawbacks of the proposed transaction, balancing various and sometimes
countervailing factors.
VALUATION
Is the value to be received by the target shareholders (or paid by the
acquirer) reasonable? While the fairness opinion may provide an initial
starting point for assessing valuation reasonableness, ISS places emphasis on
the offer premium, market reaction, and strategic rationale.
In Korea, under the Capital Market and Financial Investment Business Act
(CMFIB), a fairness opinion is not required for companies with listed shares
because the Act specifically sets out all relevant steps and the manner in
which the proportion of shares should be divided between the acquirer and
target. The CMFIB requires the stock swap ratio between listed companies to be
determined by a specific formula which is based on the historical prices and
trading volumes.
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For transactions between an unlisted company and a listed company, a fairness
opinion should be obtained from the independent advisers who review the
fairness of the stock swap ratio and the compliance with the governing laws and
regulations.
MARKET REACTION
How has the market responded to the proposed deal? How did the company's stock
price react following the announcement compared to those of its peers? A
negative market reaction will cause ISS to scrutinize a deal more closely.
STRATEGIC RATIONALE
Does the deal make sense strategically? From where is the value derived? Cost
and revenue synergies should not be overly aggressive or optimistic, but
reasonably achievable. Management should also have a favorable track record of
successful integration of historical acquisitions.
CONFLICTS OF INTEREST
Are insiders benefiting from the transaction disproportionately and
inappropriately as compared to non-inside shareholders? ISS will consider
whether any special interests may have influenced these directors and officers
to support or recommend the merger.
GOVERNANCE
Will the combined company have a better or worse governance profile than the
current governance profiles of the respective parties to the transaction? If
the governance profile is to change for the worse, the burden is on the company
to prove that other issues (such as valuation) outweigh any deterioration in
governance.
TRADING OPPORTUNITY FROM THE DISSIDENT'S RIGHT
Does the proposed buyback price carry a premium or confer on shareholders a
trading opportunity?
In Korea, the Corporate Act entitles shareholders to exercise a dissident's
right (also known as a right of withdrawal, appraisal right, or buyback right)
when the company resolves to engage in such transactions as a sale/acquisition
of business, merger, or formation of a holding company.
A dissident's right is the right of shareholders to have their shares bought
back by the company at a pre-determined buyback price in the event that
shareholders dissent with management on a proposed merger. The manner in which
the share buyback price is determined is stipulated under Korean law.
ISS considers whether the proposed buyback price carries a significant premium
as of the date of analysis and states in the analysis whether the proposed
buyback price confers on shareholders a trading opportunity at the time of
analysis. However, shareholders who are interested in exercising the right of
withdrawal are advised to reevaluate the size of premium/discount attached to
the proposed buyback price, if any, closer to the meeting date and ensure that
a written notice of intention of dissent is submitted well in advance of the
general meeting.
10. AMENDMENTS TO TERMS OF SEVERANCE PAYMENTS TO EXECUTIVES
Generally vote for the establishment of, or amendments, to executives'
severance payment terms, unless:
o The company fails to provide any information in regard to the changes to the
terms of severance payments to
executives;
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o The negative provisions proposed in a resolution outweigh any positive ones;
and/or
o The company proposes to introduce a new clause that is effectively a golden
parachute clause.
11. SHAREHOLDER PROPOSALS
Vote for shareholder proposals that would improve the company's corporate
governance or business profile at a reasonable cost. However, vote against
proposals that potentially limit the company's business activities or
capabilities or result in significant costs being incurred with little or no
benefit.
In addition, vote against shareholder-nominated candidates who lack board
endorsement, unless they demonstrate a clear ability to contribute positively
to board deliberations.
12. SOCIAL/ENVIRONMENTAL ISSUES
GLOBAL APPROACH
Issues covered under the policy include a wide range of topics, including
consumer and product safety, environment and energy, labor covered standards
and human rights, workplace and board diversity, and corporate political
issues. While a variety of factors goes into each analysis, the overall
principle guiding all vote recommendations focuses on how the proposal may
enhance or protect shareholder value in either the short term or long term.
Generally vote case-by-case, taking into consideration whether implementation
of the proposal is likely to enhance or protect shareholder value, and in
addition the following will be considered:
o If the issues presented in the proposal are more appropriately or
effectively dealt with through legislation or
government regulation;
o If the company has already responded in an appropriate and sufficient manner
to the issue(s) raised in the
proposal;
o Whether the proposal's request is unduly burdensome (scope, timeframe, or
cost) or overly prescriptive;
o The company's approach compared with any industry standard practices for
addressing the issue(s) raised by the
proposal;
o If the proposal requests increased disclosure or greater transparency,
whether or not reasonable and sufficient
information is currently available to shareholders from the company or from
other publicly available sources; and
o If the proposal requests increased disclosure or greater transparency,
whether or not implementation would
reveal proprietary or confidential information that could place the company at
a competitive disadvantage.
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DISCLOSURE/DISCLAIMER
This document and all of the information contained in it, including without
limitation all text, data, graphs, and charts
(collectively, the "Information") is the property of Institutional Shareholder
Services Inc. ("ISS"), its subsidiaries, or, in some cases third party
suppliers.
The Information has not been submitted to, nor received approval from, the
United States Securities and Exchange Commission or any other regulatory body.
None of the Information constitutes an offer to sell (or a solicitation of an
offer to buy), or a promotion or recommendation of, any security, financial
product or other investment vehicle or any trading strategy, and ISS does not
endorse, approve or otherwise express any opinion regarding any issuer,
securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or
permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO
THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY,
TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by
law, in no event shall ISS have any liability regarding any of the Information
for any direct, indirect, special, punitive, consequential (including lost
profits) or any other damages even if notified of the possibility of such
damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
ISS' 2014 KOREA PROXY VOTING SUMMARY GUIDELINES - 10 -
ISS
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AN MSCI BRAND
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Transparency. Inclusiveness. Global Expertise.
2014 Singapore Proxy Voting Guidelines
December 19, 2013
Institutional Shareholder Services Inc.
Copyright [C] 2013 by ISS
www. issgovernance.com
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ISS' 2014 SINGAPORE PROXY VOTING SUMMARY GUIDELINES
Effective for Meetings on or after Feb. 1, 2014
Published December 19, 2013
TABLE OF CONTENTS
OVERVIEW 3
OPERATIONAL ITEMS 4
Approval of Financial Statements and Statutory Reports 4
Dividend Distribution 4
BOARD OF DIRECTORS 5
Election of Directors 5
Director Tenure 5
Voting for Director Nominees in Contested Elections 5
REMUNERATION 7
Directors Fees 7
Stock Option Plans 7
Performance Share Plans 7
AUDIT 8
SHARE ISSUANCE REQUESTS 9
General Issuance Requests 9
Specific Issuance Requests 9
Share Repurchase Plans 9
RELATED-PARTY TRANSACTIONS 10
CAPITAL 11
Debt Issuance Requests 11
MERGERS & ACQUISITIONS 12
SOCIAL/ENVIRONMENTAL ISSUES 13
DISCLOSURE/DISCLAIMER 14
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OVERVIEW
Singapore companies are required to provide meeting notices at a minimum of 14
days before the meeting while accounts presented at the annual general meeting
(AGM) shall be made up to a date of not more than four months before the AGM.
o Approval of financial statements and statutory reports;
o Dividend distribution;
o Election of directors;
o Approval of remuneration of directors;
o Auditor appointment and approval of auditor remuneration;
o Capital raising requests;
o Compensation proposals.
Other items that may be submitted for shareholder approval include:
o Debt issuance requests;
o Amendments to articles of associations;
o Related-party transactions;
o Mergers and acquisition.
Policies in this document are presented in the order that generally appears on
the ballot.
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OPERATIONAL ITEMS
APPROVAL OF FINANCIAL STATEMENTS AND STATUTORY REPORTS
Vote for approval of financial statements and director and auditor reports,
unless:
o There are concerns about the accounts presented or audit procedures used; or
o The company is not responsive to shareholder questions about specific items
that should be publicly disclosed.
DIVIDEND DISTRIBUTION
IGenerally vote for approval of the allocation of income, unless:
o The dividend payout ratio has been consistently below 30 percent without
adequate explanation; or
o The payout is excessive given the company's financial position.
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BOARD OF DIRECTORS
ELECTION OF DIRECTORS
Generally vote for the re/election of directors, unless:
o The nominee has been a partner of the company's auditor within the last
three years, and serves on the audit
committee;
o The nominee has attended less than 75 percent of board and key committee
meetings over the most recent fiscal
year, without a satisfactory explanation. Acceptable reasons for director
absences are generally limited to the
following:
o Medical issues/illness;
o Family emergencies;
o The director has served on the board for less than a year; and
o Missing only one meeting (when the total of all meetings is three or fewer).
o The nominee is an executive director serving on the audit, remuneration, or
nomination committee;
o The nominee sits on a total of more than six public company boards (ISS will
accept a commitment by an
overboarded director to step down from one or more boards at the next annual
meeting of the company or
companies in question, if that will bring the total number of boards to no more
than six); or
o Any non-independent director nominees where the board is less than one-third
independent under ISS
classification of directors.
In making these recommendations, ISS generally will not recommend against the
election of a CEO, managing director, executive chairman, or founder who is
integral to the company.
Generally vote against all members of the audit committee up for reelection if:
o The non-audit fees paid to the auditor are excessive; or
o The company did not disclose the audit fees and/or non-audit fees in the
latest fiscal year.
Under extraordinary circumstances, vote against or withhold from individual
directors, members of a committee, or the entire board, due to:
o Material failures of governance, stewardship, risk oversight, or fiduciary
responsibilities at the company;
o Failure to replace management as appropriate; or
o Egregious actions related to a director's service on other boards that raise
substantial doubt about his or her ability
to effectively oversee management and serve the best interests of shareholders
at any company.
DIRECTOR TENURE
Under ISS' Classification of Directors, an independent non-executive director
shall be considered non-independent if such director serves as a director for
more than 9 years, if the company fails to disclose the reasons why such
director should still be considered independent, or where such reasons raise
concerns regarding the director's true level of independence.
VOTING FOR DIRECTOR NOMINEES IN CONTESTED ELECTIONS
Vote case-by-case on the election of directors in contested elections,
including election of shareholder nominees or the dismissal of incumbent
directors. For shareholder nominees, ISS places the persuasive burden on the
nominee or the proposing shareholder to prove that they are better suited to
serve on the board than management's nominees. Serious consideration of
shareholder nominees will be given only if there are clear and compelling
reasons for the nominee to join the board. These nominees must also demonstrate
a clear ability to contribute positively to board deliberations; some nominees
may have hidden or narrow agendas and may unnecessarily contribute to
divisiveness among directors.
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The major decision factors are:
o Company performance relative to its peers;
o Strategy of the incumbents versus the dissidents;
o Independence of directors/nominees;
o Experience and skills of board candidates;
o Governance profile of the company;
o Evidence of management entrenchment;
o Responsiveness to shareholders;
o Whether a takeover offer has been rebuffed.
When analyzing proxy contests/ shareholder nominees, ISS focuses on two central
questions: (1) Have the dissidents proved that board change is warranted? and
(2) if so, are the dissident board nominees likely to effect positive change
(i.e., maximize long-term shareholder value)?
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REMUNERATION
DIRECTORS FEES
Generally vote for resolutions regarding directors' fees unless they are
excessive relative to fees paid by other companies of similar size.
STOCK OPTION PLANS
ISS has historically recommended voting against a proposed option plan if the
maximum dilution level for the plan exceeds ISS guidelines of 5 percent of
issued capital for a mature company and 10 percent for a growth company. ISS
has also recommended voting against stock option plans that allow for the
granting of options with an exercise price at a discount to the current market
price.
ISS will recommend voting against an option plan if:
o The maximum dilution level for the scheme exceeds ISS guidelines of 5
percent of issued capital for a mature
company and 10 percent for a growth company. However, ISS will support plans at
mature companies with dilution
levels up to 10 percent if the plan includes other positive features such as
challenging performance criteria and
meaningful vesting periods as these features partially offset dilution concerns
by reducing the likelihood that
options will become exercisable unless there is a clear improvement in
shareholder value;
o The plan permits options to be issued with an exercise price at a discount
to the current market price; or
o Directors eligible to receive options under the scheme are involved in the
administration of the scheme and the
administrator has the discretion over their awards (1).
This rationale recognizes the benefit of well-structured option plans at plans
at mature companies, provided that performance criteria are sufficiently
robust.
PERFORMANCE SHARE PLANS
For performance-based plans alone, ISS supports a maximum dilution of 10
percent of a company's issued capital provided that appropriate performance
hurdles are employed.
ISS will recommend voting against a performance share plan or restricted share
plan if:
o The maximum dilution level for the plan exceeds ISS guidelines of 5 percent
of issued capital for a mature company
and 10 percent for a growth company. However, ISS will support plans at mature
companies with dilution levels up
to 10 percent if the plan includes other positive features such as challenging
performance criteria and meaningful
vesting periods as these features partially offset dilution concerns by
reducing the likelihood that awards will
become exercisable unless there is a clear improvement in shareholder value; or
o Directors eligible to receive shares under the plan are involved in the
administration of the plan and the
administrator has the discretion over their awards (2).
In principle, the shares should be subject to performance criteria for all
participants except for shares granted to non-executive directors in lieu of
cash fees, and in order to evaluate performance criteria, full disclosure on
the performance requirements is recommended.
(1) Equity awards granted or taken in lieu of cash fees generally would not be
considered discretionary awards.
(2) Equity awards granted or taken in lieu of cash fees generally would not be
considered discretionary awards.
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AUDIT
ISS recognizes that Singapore is in the forefront of good corporate governance
practices in Asia regarding auditors, as the Companies Act mandates the
appointment of an audit committee.
However, the practice of auditors providing non-audit services to companies is
problematic. While large auditors may have effective internal barriers to
ensure that there are no conflicts of interest, an auditor's ability to remain
objective becomes questionable when fees paid to the auditor for non-audit
services such as management consulting, general bookkeeping, and special
situation audits exceed the standard annual audit fees. While some compensation
for non-audit services is customary, the importance of maintaining the
independence of the auditor is paramount. If fees from non-audit services
become significant without any clear safeguards against conflicts of interest,
ISS recommends opposing the auditor's reappointment.
With regard to the proposals to (re)appoint auditors, ISS will recommend
supporting the appointment of auditors and authorizing the board to fix their
remuneration, unless:
o There are serious concerns about the accounts presented or the audit
procedures used;
o The auditor is being changed without explanation; or
o The non-audit fees exceed the total fees paid to the external auditor in the
latest fiscal year without satisfactory
explanation.
Whilst ISS will consider the nature and scope of non-audit fees when assessing
their magnitude, where non-audit fees have constituted more than 50 percent of
total auditor compensation during the most recent fiscal year, ISS will
ordinarily not recommend support for the reappointment of the audit firm. ISS
will make an exception to this policy if excessive non-audit fees are related
to special projects or due to unusual circumstance, and are not recurring in
nature and are unlikely to create conflicts of interest. An example of
acceptable "non-audit" fees would be fees for a special audit in connection
with an IPO.
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SHARE ISSUANCE REQUESTS
GENERAL ISSUANCE REQUESTS
Share issuance authorizations are good for only one year. The listing manual of
the SGX, as amended in 1999, allows companies to seek an annual mandate for the
issuance of ordinary shares up to 50 percent of issued capital, with a
sub-limit of 20 percent of issued capital on shares that may be issued without
preemptive rights. Most companies seek such a mandate every year, to prevent
the need to convene a shareholder meeting for each share issuance, however
small. ISS believes shareholders should have preemptive rights for large stock
issuances, but also believes companies should have the flexibility to transact
ordinary business and should not have to incur the extra expense of providing
preemptive rights for small issuances.
SPECIFIC ISSUANCE REQUESTS
Because all share issuance authorities last for only one year, companies must
regularly request these authorities. There are two routine types of specific
issuance requests. The first type is to service share option plans, usually for
a maximum of 15 percent of outstanding capital -- the maximum allowable size,
under the listing rules, for option plans using unissued shares. Companies
generally do not use the entire authority, but ISS does not support requests to
issue more than 5 percent of capital for option plans (10 percent in the case
of growth companies, or where challenging performance criteria and meaningful
vesting periods are applied to plans in mature companies) as the potential
dilution to ordinary shareholders is unacceptably high (see "Stock Option
Plans" above). The second type of special authorization request is for a
specific purpose such as a bonus issue, a rights issue, or the financing of an
acquisition or merger if it will require shares to be issued in excess of the
limits in the general mandate. ISS reviews these requests on a case-by-case
basis.
SHARE REPURCHASE PLANS
These are routine items asking shareholders to authorize a company to
repurchase its own shares within the limits imposed by company law and the
company's articles. Upon requesting the authority, companies must inform
shareholders of the maximum number of shares that may be repurchased (which may
be no more than 10 percent of issued capital), the reasons for the proposed
buyback, and details of any share repurchases conducted during the previous 12
months. Shares may be repurchased either on market or off market by way of an
"equal access scheme" designed to ensure that all shareholders have an
opportunity to tender their shares. Market share repurchases must be at a price
not more than 5 percent above the average closing market price over the five
trading days before the day on which the purchases are made. Share repurchases
may be made out of capital or profits that are available for distribution as
dividends. Companies must cancel the repurchased shares or hold them as
treasury shares. The right to attend and vote at meetings as well as to receive
dividends will be suspended for as long as the repurchased shares are held in
treasury. Legal mandates and SGX listing requirements limit the potential for
abuses of this authority, making these requests routine.
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RELATED-PARTY TRANSACTIONS
Singapore's related-party transaction rules provide shareholders with
substantial protection against insider trading abuses. Under the country's
related-party transaction rules, shares considered affiliated are excluded from
voting on the related issues. A broad range of commercial transactions by
companies or their subsidiaries require shareholder approval as related-party
transactions. A company may seek a shareholder mandate for recurrent interested
party transactions of a revenue or trading nature or those necessary for its
day-to-day operations, such as purchases of supplies and materials, but not for
the purchase or sale of assets, undertakings, or businesses. Such mandates are
intended to facilitate transactions that occur in the normal course of the
company's business. Provided that such transactions are carried out at
arms-length and on normal commercial terms, such requests are reasonable.
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CAPITAL
DEBT ISSUANCE REQUESTS
Vote non-convertible debt issuance requests on a case-by-case basis, with or
without preemptive rights.
Vote for the creation/issuance of convertible debt instruments as long as the
maximum number of common shares that could be issued upon conversion meets ISS'
guidelines on equity-issuance requests.
Vote for proposals to restructure existing debt arrangements unless the terms
of the restructuring would adversely affect the rights of shareholders.
In evaluating debt-related proposals, the following factors will be considered:
o Rationale/use of proceeds: Why does the company need additional capital? How
will that capital be used?
o Terms of the debts: Are the debt instruments convertible into equity? What
are the interest rate and maturity
dates? Any call or put options? Often these terms will not be determined until
the time of issuance of debt
instruments (or when the actual loan agreement is signed). The terms of the
debts would generally be determined
by the market conditions, and lack of disclosure concerning these terms should
not be a cause for significant
concern so long as the debt is not convertible into equity.
o Size: At a minimum, the size of the debt issuance/potential borrowing should
be disclosed.
o The company's financial position: What is the company's current leverage and
how does that compare to its peers?
o The risk of non-approval: What might happen if the proposal is not approved?
Are there any alternative sources of
funding? Could the company continue to fund its operations? Would it hinder the
company's ability to realize
opportunities?
A distinction will be made between a specific debt issuance or pledging of
assets, and authority to issue or increase debt; as in the case of specific
equity issuances and requests for authority to issue equity. For specific debt
issuances or pledging of assets, while the above factors will be examined, in
general a vote for these proposals will be warranted if:
o The size of the debt being requested is disclosed;
o A credible reason for the need for additional funding is provided;
o Details regarding the assets to be pledged are disclosed (for specific asset
pledge proposals); AND
o There are no significant causes for shareholder concern regarding the terms
and conditions of the debt.
So long as the proposal meets the above conditions, a vote for will be
warranted even if the company has a high level of debt or the proposed issuance
could result in a large increase in debt. A vote against will be warranted only
in extremely egregious cases or where the company fails to provide sufficient
information to enable a meaningful shareholder review.
Where a general authority to issue debt or pledge assets is requested, in
addition to the above criteria, ISS will oppose such proposal if it could
result in a potentially excessive increase in debt. A potential increase in
debt may be considered excessive when:
o The proposed maximum amount is more than twice the company's total debt;
o It could result in the company's debt-to-equity ratio exceeding 300 percent
(for non-financial companies); AND
o The maximum hypothetical debt-to-equity ratio is more than three times the
industry and/or market norm.
When the above conditions are met, the proposed increase in debt may be
considered excessive and thus the proposal may warrant an against vote. If ISS
does not have data regarding the normal level of debt in that particular
industry or market, only the company-specific information will be considered.
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MERGERS & ACQUISITIONS
ISS evaluates any merger or acquisition on case-by-case bases, taking into
consideration of following factors:
o Valuation - Is the value to be received by the target shareholders (or paid
by the acquirer) reasonable? If a fairness
opinion has been prepared, it provides an initial starting point for assessing
valuation reasonableness, but ISS also
places emphasis on the offer premium, market reaction, and strategic rationale.
o Market reaction - How has the market responded to the proposed deal? A
negative market reaction will cause ISS
to scrutinize a deal more closely.
o Strategic rationale - Does the deal make sense strategically? From where is
the value derived? Cost and revenue
synergies should not be overly aggressive or optimistic, but reasonably
achievable. Management should also have
a favorable track record of successful integration of historical acquisitions.
o Negotiations and process - Were the terms of the transaction negotiated at
arms-length? Was the process fair and
equitable? A fair process helps to ensure the best price for shareholders.
o Conflicts of interest - Are insiders benefiting from the transaction
disproportionately and inappropriately as
compared to non-insider shareholders? As the result of potential conflicts, the
directors and officers of the
company may be more likely to vote to approve a merger than if they did not
hold these interests. ISS will consider
whether these interests may have influenced these directors and officers to
support or recommend the merger.
o Governance - Will the combined company have a better or worse governance
profile than the respective current
governance profiles of the respective parties to the transaction? If the
governance profile is to change for the
worse, the burden is on the company to prove that other issues (such as
valuation) outweigh any deterioration in
governance.
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SOCIAL/ENVIRONMENTAL ISSUES
Issues covered under the policy include a wide range of topics, including
consumer and product safety, environment and energy, labor covered standards
and human rights, workplace and board diversity, and corporate political
issues. While a variety of factors goes into each analysis, the overall
principle guiding all vote recommendations focuses on how the proposal may
enhance or protect shareholder value in either the short term or long term.
Generally vote case-by-case, taking into consideration whether implementation
of the proposal is likely to enhance or protect shareholder value, and in
addition the following will be considered:
o If the issues presented in the proposal are more appropriately or
effectively dealt with through legislation or
government regulation;
o If the company has already responded in an appropriate and sufficient manner
to the issue(s) raised in the
proposal;
o Whether the proposal's request is unduly burdensome (scope, timeframe, or
cost) or overly prescriptive;
o The company's approach compared with any industry standard practices for
addressing the issue(s) raised by the
proposal;
o If the proposal requests increased disclosure or greater transparency,
whether or not reasonable and sufficient
information is currently available to shareholders from the company or from
other publicly available sources; and
o If the proposal requests increased disclosure or greater transparency,
whether or not implementation would
reveal proprietary or confidential information that could place the company at
a competitive disadvantage.
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DISCLOSURE/DISCLAIMER
This document and all of the information contained in it, including without
limitation all text, data, graphs, and charts
(collectively, the "Information") is the property of Institutional Shareholder
Services Inc. ("ISS"), its subsidiaries, or, in some cases third party
suppliers.
The Information has not been submitted to, nor received approval from, the
United States Securities and Exchange Commission or any other regulatory body.
None of the Information constitutes an offer to sell (or a solicitation of an
offer to buy), or a promotion or recommendation of, any security, financial
product or other investment vehicle or any trading strategy, and ISS does not
endorse, approve or otherwise express any opinion regarding any issuer,
securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or
permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO
THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY,
TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by
law, in no event shall ISS have any liability regarding any of the Information
for any direct, indirect, special, punitive, consequential (including lost
profits) or any other damages even if notified of the possibility of such
damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
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Transparency. Inclusiveness. Global Expertise.
2014 Taiwan Proxy Voting Guidelines
December 19, 2013
Institutional Shareholder Services Inc.
Copyright [C] 2013 by ISS
www. issgovernance.com
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ISS' 2014 TAIWAN PROXY VOTING GUIDELINES
Effective for Meetings on or after Feb. 1, 2014
Published Dec. 19, 2013
TABLE OF CONTENTS
OVERVIEW 3
FINANCIAL RESULTS AND BUSINESS OPERATIONS REPORTS 4
ALLOCATION OF INCOME AND DIVIDENDS 5
CASH DIVIDENDS FROM EARNINGS 5
CASH DIVIDENDS OR NEW SHARES FROM CAPITAL RESERVES 5
STOCK DIVIDENDS 6
CAPITAL REDUCTION TO OFFSET LOSSES OR BY DISTRIBUTING CASH TO SHAREHOLDERS 7
AMENDMENTS TO COMPANY BYLAWS 8
ARTICLES OF ASSOCIATION 8
Increase in authorized capital 8
Establishment of an audit committee to replace supervisors 8
Adoption of the nomination system for the election of directors
and supervisors 8
Change of board size 8
OTHER COMPANY BYLAWS 8
CAPITAL RAISING 10
EQUITY-BASED COMPENSATION 11
ELECTION OF DIRECTORS AND SUPERVISORS 12
RELEASE OF RESTRICTIONS ON COMPETITIVE ACTIVITIES OF DIRECTORS 14
MERGERS & ACQUISITIONS 15
TRANSACT OTHER BUSINESS 16
DISCLOSURE/DISCLAIMER 17
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Overview
Companies must hold their annual general meetings (AGMs) within six months of
the close of each fiscal year. The following resolutions are commonly seen at a
shareholder meeting:
o Approval of business operations reports and financial statements;
o Allocation of income or loss offsetting proposals;
o Amendments to articles of association or other company bylaws;
o Capital raising requests;
o Election of directors and supervisors;
o Release of restrictions on competitive activities of directors;
o Transact other business.
Other items that may be submitted for shareholder approval include:
o Capital reduction to offset losses or by distributing cash to shareholders;
o Equity-based compensation;
o Merger, consolidation, or split-off.
Policies in this document are presented in the order that generally appears on
the ballot.
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Financial Results and Business Operations Reports
Article 20 of the Company Act requires Taiwanese companies to submit their
annual reports, financial statements, surplus earnings distribution or loss
offsetting proposals to shareholders for approval after the end of each fiscal
year. External audit is required for the financial statements. Pursuant to
Article 36 of the Securities and Exchange Act, audited financial reports shall
be prepared and released within three months after the close of each fiscal
year.
These statutory reports are normally non-contentious in nature. ISS generally
recommends voting for such requests unless:
o There are concerns about the accounts presented or audit procedures used;
o The external auditor expresses no opinion or qualified opinion over the
financial statements; or
o The company is not responsive to shareholder questions about specific items
that should be publicly disclosed.
VOTING REQUIREMENT: this is an ordinary resolution.
Ordinary resolutions can be adopted by a majority of the shareholders present,
who represent more than one half of the issued shares.
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Allocation of Income and Dividends
Companies usually provide shareholders one or a combination of the following:
o Cash dividends from earnings;
o Cash dividends from capital reserves;
o New shares from capital reserves;
o Stock dividends.
When losses are posted for the year, companies are required to
submitloss-offsetting proposals, usually included in the statement of profit
and loss appropriation, for shareholder approval, along with the business
operations reports and financial statements. A vote for is generally
recommended for such resolutions.
CASH DIVIDENDS FROM EARNINGS
According to Article 112 and 232 of the Company Act, if there are no surplus
earnings for the current year, no dividends or bonuses shall be paid out. In
addition, before the company may pay out dividends and bonuses, the company
shall:
1. Cover its losses and pay all its taxes and dues;
2. Set aside 10 percent of its surplus profit as a legal reserve when the
amount of legal reserve is less than the
authorized capital;
3. Allocate another sum of its surplus profits as a special reserve, if a
special reserve is specified in the Articles of
Association or approved by shareholders.
ISS generally recommends voting for such resolution unless:
o The dividend payout ratio has been consistently below 30 percent without
adequate explanation;
o The proposed payout is excessive given the company's financial position.
VOTING REQUIREMENT: this is an ordinary resolution.
Ordinary resolutions can be adopted by a majority of the shareholders present,
who represent more than one half of the issued shares.
CASH DIVIDENDS OR NEW SHARES FROM CAPITAL RESERVES
In accordance with Article 241 of the Company Act, when there is no loss
incurred, a company may distribute all or part of its legal reserve and capital
reserves by cash or by issuing new shares to its existing shareholders based on
their proportionate holdings. The distributable legal reserve shall be capped
at 25 percent of the paid-in capital.
ISS generally supports such resolution.
VOTING REQUIREMENT: this is a special resolution.
Special resolutions can be adopted by a majority of the shareholders present,
who represent two-thirds or more of the issued shares. If the attending
shareholders represent less than two thirds of the issued shares, such
resolutions may be adopted by a supermajority vote (2/3 or more) of the
attending shareholders who represent more than one-half of the issued shares.
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STOCK DIVIDENDS
Pursuant to Article 240 of the Company Act, a company can distribute all or
part of its distributable earnings to its shareholders in the form of stock
dividends.
A vote for is generally recommended for such resolution.
VOTING REQUIREMENT: this is a special resolution.
Special resolutions can be adopted by a majority of the shareholders present,
who represent two-thirds or more of the issued shares. If the attending
shareholders represent less than two thirds of the issued shares, such
resolutions may be adopted by a super majority vote (2/3 or more) of the
attending shareholders who represent more than one-half of the issued shares.
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Capital Reduction to Offset Losses or by Distributing Cash to Shareholders
According to Article 168 of the Company Act, a company shall not cancel its
shares unless a resolution on capital reduction has been adopted by its
shareholders' meeting, and capital reduction shall be effected based on the
percentage of shareholding of the shareholders, pro rata, unless otherwise
provided for in the Act or any other governing laws.
Taiwanese companies sometimes may propose to offset cumulative losses by
reducing their capital. On the other hand, cash may be given to shareholders
when a company has extra cash on hand and there is no significant investment
foreseen in the near future. The total number of the outstanding shares will
then be reduced. A smaller share base will result in higher earnings per share
and return on net assets.
ISS generally recommends voting for such requests unless:
o The proposed capital reduction is not conducted on a proportionate basis
according to the shareholding structure
of the company, but instead favors certain shareholders; or
o The proposed cash distribution is expected to negatively affect the
company's day-to-day operations.
VOTING REQUIREMENT: this is an ordinary resolution.
Ordinary resolutions can be adopted by a majority of the shareholders present,
who represent more than one half of the issued shares.
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Amendments to Company Bylaws
Proposals to amend company bylaws are commonly seen at shareholder meetings.
Companies usually disclose the details of the proposed amendments in their
meeting circulars. Amendments are nearly always bundled together as a single
voting resolution, and ISS' general approach is to oppose article amendments as
a whole when they include changes ISS opposes. In general, ISS reviews
amendments to company bylaws on a case-by-case basis.
ARTICLES OF ASSOCIATION
The following are some of the most common or significant types of changes.
Increase in authorized capital
Vote case-by-case on this request if the company explicitly provides reasons
for the increase. Otherwise, vote for this change, unless:
o The increase in authorized capital exceeds 100 percent of the currently
authorized capital; or
o The increase leaves the company with less than 30 percent of the proposed
authorized capital outstanding; or
o The increase is intended for a poison pill, which ISS opposes.
Establishment of an audit committee to replace supervisors
This change is pursuant to the regulators' push for the establishment of an
audit committee, which is mandatory for certain big companies. ISS generally
recommends voting for this change.
Adoption of the nomination system for the election of directors and supervisors
This change is pursuant to the regulators' push for the adoption of a
nomination system for director and supervisor elections. ISS generally
recommends voting for this change.
Change of board size
ISS generally recommends voting for this change unless it is used as
antitakeover mechanism or to alter board structure or size in the context of a
fight for control of the company or the board.
VOTING REQUIREMENT: This is a special resolution.
Special resolutions can be adopted by a majority of the shareholders present,
who represent two-thirds or more of the issued shares. If the attending
shareholders represent less than two thirds of the issued shares, such
resolutions may be adopted by a super majority vote (2/3 or more) of the
attending shareholders who represent more than one-half of the issued shares.
OTHER COMPANY BYLAWS
Other company bylaws include but are not limited to:
o Procedures Governing the Acquisition or Disposal of Assets;
o Rules and Procedures Regarding Shareholder's Meeting;
o Rules and Procedures for Election of Directors and Supervisors;
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o Procedures for Lending Funds to Other Parties;
o Rules and Procedures Regarding Board of Directors' Meeting;
o Procedures for Lending Funds to Other Parties and Procedures for Endorsement
and Guarantees;
o Procedures for Endorsement and Guarantees.
Regarding these bylaw proposals, ISS recommends voting on a case-by-case basis.
VOTING REQUIREMENT: this is an ordinary resolution.
Ordinary resolutions can be adopted by a majority of the shareholders present,
who represent more than one half of the issued shares.
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Capital Raising
There are four capital-raising channels that require shareholder approval in
Taiwan:
o Issuance of new ordinary shares via a private placement;
o Issuance of convertible bonds via a private placement;
o Public issuance of new ordinary shares via book building;
o Participation in global depositary receipt (GDR) issuance.
Taiwanese companies normally seek authority to raise capital through one or a
combination of the abovementioned channels, with the authority lasting for one
year. This is, in essence, a general issuance mandate allowing companies to
issue shares, convertible bonds, or participate in (a) GDR issuance(s) up to a
preapproved limit. The specific capital-raising channel and usage of raised
proceeds will be determined by the board should the board decide to exercise
this authority.
Additionally, not all listed companies are mandated to appoint independent
directors, and the vast majority of Taiwanese boards have minimal or no
independent representation. Given the prevalence of insider-dominated boards in
Taiwan, ISS believes that stricter limits should be placed on a general mandate
that allows for issuance by way of a private placement so as to reduce the risk
of abuse by insiders for their own benefit.
ISS generally recommends voting for
o a general share issuance mandate that includes a private placement as one of
the financing channels if the
resulting dilution is limited to no more than 10 percent.
o a general mandate for public share issuance if the issue size is limited to
no more than 20 percent of the existing
issued share capital.
Requests to issue shares for a specific purpose, such as the financing of a
particular project, an acquisition, or a merger, are reviewed on a case-by-case
basis.
VOTING REQUIREMENT: private placement of new shares and convertible bonds are
special resolutions. Public issuance of new shares via book building and
participation in GDR issuance are ordinary resolutions.
Ordinary resolutions can be adopted by a majority of the shareholders present,
who represent more than one half of the issued shares.
Special resolutions can be adopted by a majority of the shareholders present,
who represent two-thirds or more of the issued shares. If the attending
shareholders represent less than two thirds of the issued shares, such
resolutions may be adopted by a super majority vote (2/3 or more) of the
attending shareholders who represent more than one-half of the issued shares.
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Equity-based Compensation
Restricted stock awards (RSAs) were first introduced in Taiwan in 2012,
following amendments to the Regulations Governing the Offering and Issuance of
Securities by Securities Issuers promulgated by the FSC. The amount of
restricted stock to be issued is capped under the law at five percent of the
number of shares outstanding, and the restricted shares can be granted free of
charge. In addition, companies are mandated to make the following disclosure on
their RSA proposals:
o Issue amount;
o Issue conditions (including issue price, vesting conditions, type of stocks,
arrangements when the employees fail to
meet the vesting conditions);
o Qualifications of employees to be eligible for RSAs and the number of shares
to be granted;
o Rationale for implementing the RSA program;
o Estimated accounting cost to the company, dilution effect on the company's
EPS, and other shareholder rights.
ISS' vote recommendations on RSA proposals are made on a case-by-case basis
taking into account the following features:
o Existing substantial shareholders are restricted in participation;
o Presence of challenging performance hurdles if restricted stocks are issued
for free or at a deep discount;
o Reasonable vesting period (at least two years) is set.
VOTING REQUIREMENT: this is a special resolution.
Special resolutions can be adopted by a majority of the shareholders present,
who represent two-thirds or more of the issued shares. If the attending
shareholders represent less than two thirds of the issued shares, such
resolutions may be adopted by a super majority vote (2/3 or more) of the
attending shareholders who represent more than one-half of the issued shares.
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Election of Directors and Supervisors
The board of directors of a listed Taiwanese company must have at least five
directors who must stand for re-election once every three years. Listed
financial institutions and listed non-financial institutions with paid-in
capital exceeding TWD 10 billion are required to appoint at least two
independent directors that comprise no less than one-fifth of the number of
directors.
A listed company in Taiwan can choose to establish either an audit committee or
a supervisory board. Early in 2013, the Financial Supervisory Commission (FSC)
issued a new regulation stipulating the mandatory establishment of an audit
committee for listed financial companies and listed non-financial companies
with paid-in capital of TWD 50 billion or more. This requirement will be
applied upon the expiration of the tenure of the incumbent directors and
supervisors. A grace period of three years was given to companies that held
elections in 2013. The audit committee must be composed of at least three
independent directors and at least one member must have accounting or financial
expertise. Further, all independent directors on the board are required to
serve on the audit committee.
Listed companies adopting a supervisory board are required to have two or more
supervisors and at least one of them must be domiciled in Taiwan. The
supervisory board oversees the execution of business operations of the company,
and may at any time investigate the business and financial conditions of the
company, examine the accounting books and documents, as well as request that
the board of directors or management prepare reports if deemed necessary. In
performing their functional duties, supervisors may appoint, on behalf of the
company, a practicing lawyer or a certified public accountant to conduct the
examination. As with directors, supervisors also must stand for re-election
once every three years.
The election of directors and supervisors in Taiwan is unique. One notable
characteristic is that legal entities such as governmental organizations and
corporations, not just a natural person, can serve as directors and
supervisors. Legal entities can either appoint individuals as candidates or run
for election themselves and then appoint representatives to perform the
fiduciary duties. As a result, it is not uncommon in Taiwan to see only the
name of the legal entity being nominated for a board seat and not the identity
of the actual individual who will serve on the board to represent that entity's
interest.
Additionally, shareholder ID or personal ID of candidates are required to be
filled in the ballots by shareholders in order to cast a valid vote. However,
such information is usually disclosed only one week before the meeting date and
in many cases, at the meeting.
Another notable characteristic is that, in Taiwan, only the election of
independent directors is through the standard nomination system. The election
of non-independent directors and supervisors, on the other hand, uses a
traditional election system which is commonly referred to as the
"non-nomination system". Under this non-nomination system, any shareholder can
nominate any person of legal age to the board. Companies are not obliged to
provide a roster of candidates and their profiles before the meeting, and many
firms disclose candidate names and profiles at the meeting or only a few days
beforehand. Further, whether the candidates are supported by management or not
is often not disclosed.
Election by the non-nomination system poses a great challenge to investors,
particularly overseas investors voting by proxy who must cast their votes well
in advance of the meeting. The non-nomination system disenfranchises minority
shareholders and greatly limits their ability to cast an informed vote. In
contrast, under the nomination system, the board of directors reviews the
qualifications of each candidate nominated by either the board itself or any
shareholder holding one percent or more of the company's outstanding shares,
and then provides the final roster of candidates together with their profiles
to shareholders prior to the meeting.
ISS recommends voting against all directors and supervisors where the company
employs the non-nomination system for election. When the company employs the
nomination system, ISS generally recommends voting for the candidate.
Under extraordinary circumstances, ISS will recommend against directors or
supervisors, members of a committee, or the entire board, due to:
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o Material failures of governance, stewardship, risk oversight, or fiduciary
responsibilities at the company;
o Failure to replace management as appropriate; or
o Egregious actions related to a director's or supervisor's service on other
boards that raise substantial doubt about
his or her ability to effectively oversee management and serve the best
interests of shareholders at any company.
VOTING REQUIREMENT: cumulative voting is mandatory for all elections. There is
no majority vote requirement.
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Release of Restrictions on Competitive Activities of Directors
Article 209 of the Company Act states that "a director who does anything for
himself or on behalf of another person that is within the scope of the
company's business, shall explain to the meeting of shareholders the essential
contents of such an act and secure its approval". Therefore, this request is
frequently seen at Taiwanese AGMs, mostly in conjunction with director
elections.
As is so defined in the Company Act, a director's service on a non-wholly owned
subsidiary triggers this restriction as it is considered a separate legal
entity operating within the same industry, even though the entity is a
subsidiary of the company in question. As a result, without this waiver, many
directors will not be able to serve concurrently on subsidiaries' boards, which
may limit the company's ability to monitor the conducts of these subsidiaries.
Therefore, the release of restrictions is acknowledged as instrumental at large
conglomerates that need the flexibility to spread board expertise and transact
business throughout companies within the group. However, the lack of a proper
protection mechanism against abusive usage of this permission, particularly the
absence of a strong corporate governance structure, calls for a detailed
disclosure including the identity of the directors in question, current
positions in the company, and the outside boards they are serving on in order
to analyze each individual case.
ISS recommends voting against such resolutions if:
o There is lack of disclosure of key information, including identities of the
directors in question, current positions
in the company, and outside boards they are serving on; or
o The non-nomination system is employed by the company for the director
election
VOTING REQUIREMENT: this is a special resolution.
Special resolutions can be adopted by a majority of the shareholders present,
who represent two-thirds or more of the issued shares. If the attending
shareholders represent less than two thirds of the issued shares, such
resolutions may be adopted by a super majority vote (2/3 or more) of the
attending shareholders who represent more than one-half of the issued shares.
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Mergers & Acquisitions
ISS recommendations on mergers or acquisitions are made on a case-by-case
basis, taking into consideration the following factors:
o Valuation - Is the value to be received by the target shareholders (or paid
by the acquirer) reasonable? If a fairness opinion has been prepared, it
provides an initial starting point for assessing valuation reasonableness, but
ISS also places emphasis on the offer premium, market reaction, and strategic
rationale.
o Market reaction - How has the market responded to the proposed deal? A
negative market reaction will cause ISS to scrutinize a deal more closely.
o Strategic rationale - Does the deal make sense strategically? From where is
the value derived? Cost and revenue synergies should not be overly aggressive
or optimistic, but reasonably achievable. Management should also have a
favorable track record of successful integration of historical acquisitions.
o Negotiations and process - Were the terms of the transaction negotiated at
arms-length? Was the process fair and equitable? A fair process helps to ensure
the best price for shareholders.
o Conflicts of interest - Are insiders benefiting from the transaction
disproportionately and inappropriately as compared to non-insider shareholders?
As the result of potential conflicts, the directors and officers of the company
may be more likely to vote to approve a merger than if they did not hold these
interests. ISS will consider whether these interests may have influenced these
directors and officers to support or recommend the merger. o Governance - Will
the combined company have a better or worse governance profile than the
respective current governance profiles of the respective parties to the
transaction? If the governance profile is to change for the worse, the burden
is on the company to prove that other issues (such as valuation) outweigh any
deterioration in governance.
Shareholders who dissent from the merger or acquisition have the right to
require the company to buy back their shares at the prevailing fair price,
which is also commonly known as "appraisal right of dissenting shareholders".
VOTING REQUIREMENT: this is a special resolution.
Special resolutions can be adopted by a majority of the shareholders present,
who represent two-thirds or more of the issued shares. If the attending
shareholders represent less than two thirds of the issued shares, such
resolutions may be adopted by a super majority vote (2/3 or more) of the
attending shareholders who represent more than one-half of the issued shares.
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Transact Other Business
Taiwan companies allow the board and shareholders to raise issues not contained
in the meeting agenda for shareholder approval during the shareholder meetings.
Pursuant to Article 172 of the Company Act, election or dismissal of directors
or supervisors, amendments to the Articles of Association, and other special
resolutions, shall not be brought up as extemporary motions.
ISS does not consider such resolution to be in the best interest of
shareholders and will generally recommend a vote against.
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Disclosure/Disclaimer
This document and all of the information contained in it, including without
limitation all text, data, graphs, and charts
(collectively, the "Information") is the property of Institutional Shareholder
Services Inc. ("ISS"), its subsidiaries, or, in some cases third party
suppliers.
The Information has not been submitted to, nor received approval from, the
United States Securities and Exchange Commission or any other regulatory body.
None of the Information constitutes an offer to sell (or a solicitation of an
offer to buy), or a promotion or recommendation of, any security, financial
product or other investment vehicle or any trading strategy, and ISS does not
endorse, approve or otherwise express any opinion regarding any issuer,
securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or
permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO
THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,
WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY,
TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by
law, in no event shall ISS have any liability regarding any of the Information
for any direct, indirect, special, punitive, consequential (including lost
profits) or any other damages even if notified of the possibility of such
damages. The foregoing shall not exclude or limit any liability that may not by
applicable law be excluded or limited.
ISS' 2014 TAIWAN PROXY VOTING SUMMARY GUIDELINES - 17 -
WINTON DIVERSIFIED OPPORTUNITIES FUND
PART C
OTHER INFORMATION
ITEM 25. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements: to be filed by amendment.
(2) EXHIBITS
(a)(i) Certificate of Trust, dated December 2, 2014, is filed herewith.
(a)(ii) Agreement and Declaration of Trust, dated December 2, 2014, is
filed herewith.
(b) By-Laws, dated December 11, 2014, are filed herewith.
(c) Voting Trust Agreement -- NOT APPLICABLE.
(d) Instruments Defining Rights of Shareholders -- none other than the
Declaration of Trust and By-laws.
(e) Dividend Reinvestment Plan -- NOT APPLICABLE.
(f) NOT APPLICABLE.
(g) Investment Advisory Agreement, dated [XX], between Registrant and
Winton Capital US LLC (the "Adviser") to be filed by amendment.
(h) Distribution Agreement, dated [XX], between Registrant and SEI
Investments Distribution Co. to be filed by amendment.
(i) Bonus or Profit Sharing -- NOT APPLICABLE.
(j) Custody Agreement, dated [XX], between Registrant and [MUFG Union
Bank, N.A.] to be filed by amendment.
(k) Other Material Contracts:
(i) Administration Agreement, dated [XX], between Registrant
and SEI Investments Global Funds Services to be filed by
amendment.
(ii) Transfer Agency Agreement, dated [XX], between Registrant
and Atlantic Fund Services, LLC to be filed by amendment.
(iii) Expense Limitation Agreement, dated [XX], between
Registrant and the Adviser to be filed by amendment.
(l) Opinion and Consent of Morgan, Lewis & Bockius LLP to be filed by
amendment.
(m) NOT APPLICABLE.
C-1
(n) Consent of Independent Registered Public Accounting Firm to be
filed by amendment.
(o) Omitted Financial Statements -- NOT APPLICABLE.
(p) Initial Capital Agreement, dated [XX], to be filed by amendment.
(q) NOT APPLICABLE.
(r) Code of Ethics:
(i) The Code of Ethics for the Registrant to be filed by
amendment.
(ii) The Code of Ethics for the Adviser to be filed by
amendment.
(iii) The Code of Ethics for SEI Investments Distribution Co. to
be filed by amendment.
(iv) The Code of Ethics for SEI Investments Global Funds
Services to be filed by amendment.
(s) Powers of Attorney for Mssrs. William M. Doran, Jon C. Hunt, Thomas
P. Lemke, Randall S. Yanker, Terrence O. Jones, Rami Abdel-Rahman
and Michael Beattie are filed herewith.
ITEM 26. MARKETING ARRANGEMENTS.
The information contained under the heading "The Plan of Distribution" in this
Registration Statement is incorporated by reference.
ITEM 27. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (ESTIMATED).
SEC registration fee $[XX]
FINRA filing fee $[XX]
Printing and mailing expenses $[XX]
Blue sky filing fees and expenses $[XX]
Legal fees and expenses $[XX]
Accounting fees and expenses $[XX]
Transfer agent fees $[XX]
Advertising and sales literature $[XX]
Miscellaneous $[XX]
-----
Total $[XX]
ITEM 28. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL.
The information in the Statement of Additional Information under the headings
"Control Persons and Principal Shareholders" and "Trustees and Officers of the
Fund" is incorporated by reference.
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The Registrant wholly owns and controls the [XX], a company organized under the
laws of the Cayman Islands. The [XX]'s financial statements will be included,
on a consolidated basis, in the Registrant's annual and semi-annual reports to
shareholders.
ITEM 29. NUMBERS OF HOLDERS OF SECURITIES.
The following table sets forth the number of record holders of the Registrant's
common stock as of [XX], 2015:
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
Class I shares [XX]
ITEM 30. INDEMNIFICATION.
[Reference is made to Article VII of the Registrant's Agreement and Declaration
of Trust and Article VI of the Registrant's Bylaws. Article VII, Section 2 of
the Agreement and Declaration of Trust provides that the Trustees shall not be
responsible or liable in any event for any neglect or wrongdoing of any
officer, agent, employee, investment adviser or principal underwriter of the
Registrant, nor for the act or omission of any other Trustee, and, subject to
the provisions of the Registrant's Bylaws, the Registrant out of its assets may
indemnify and hold harmless each and every Trustee and officer of the
Registrant from and against any and all claims, demands, costs, losses,
expenses and damages whatsoever arising out of or related to such Trustee's or
officer's performance of his or her duties as a Trustee or officer of the
Registrant; provided that nothing therein contained shall indemnify, hold
harmless or protect any Trustee or officer from or against any liability to the
Registrant or any Shareholder to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Article VI, Section 2 of the Bylaws provides generally that the Registrant
shall indemnify any Trustee or officer of the Registrant who was or is a party
or is threatened to be made a party to any proceeding (other than an action by
or in the right of the Registrant) by reason of the fact that such person is or
was a Trustee or officer of the Registrant, against expenses, judgments, fines,
settlements and other amounts actually and reasonably incurred in connection
with such proceeding, if it is determined that such person acted in good faith
and reasonably believed: (a) in the case of conduct in his official capacity as
an agent of the Registrant, that his conduct was in the Registrant's best
interests; (b) in all other cases, that his conduct was at least not opposed to
the Registrant's best interests; and (c) in the case of a criminal proceeding,
that he had no reasonable cause to believe the conduct of that person was
unlawful.]
Pursuant to Rule 484 under the Securities Act of 1933, as amended (the
"Securities Act"), the Registrant furnishes the following undertaking: "Insofar
as indemnification for liability arising under the Securities Act may be
permitted to trustees, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that, in the opinion of the Securities and Exchange Commission ("SEC")
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against
C-3
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue."
ITEM 31. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Adviser's principal address is 375 Park Avenue, New York, New York 10152.
The Adviser is an investment adviser registered under the Investment Advisers
Act of 1940, as amended. None of the Adviser, and/or director, officer or
partner of the Adviser, is or has been engaged within the last two fiscal years
in any other business, profession, vocation or employment of a substantial
nature for his or her own account or in the capacity of director, officer,
employee, partner or trustee.
ITEM 32. LOCATION OF ACCOUNTS AND RECORDS.
The books and records required to be maintained by Section 31(a) of the
Investment Company Act of 1940, as amended, are maintained at the following
locations:
[Download Table]
RECORDS RELATING TO: ARE LOCATED AT:
Registrant's Investment Adviser Winton Capital US LLC
375 Park Avenue
New York, New York 10152
Registrant's Fund Administrator and Fund SEI Investments Global Funds Services
Accountant One Freedom Valley Drive
Oaks, Pennsylvania 19456
Registrant's Custodian [MUFG Union Bank, N.A.
350 California Street, 6th Floor
San Francisco, California 94104]
Registrant's Distributor SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
Registrant's Transfer Agent Atlantic Fund Services, LLC
Three Canal Plaza
Portland, Maine 04101
ITEM 33. MANAGEMENT SERVICES.
Not applicable.
ITEM 34. UNDERTAKINGS.
(1) Not applicable.
(2) Not applicable.
(3) Not applicable.
(4) The Registrant undertakes:
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(a) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(b) that, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of those securities at that time shall be deemed to be the initial
bona fide offering thereof; and
(c) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(d) that, for the purpose of determining liability under the Securities Act of
1933 to any purchaser, if the Registrant is subject to Rule 430C under the
Securities Act of 1933; each prospectus filed pursuant to Rule 497(b), (c),
(d) or (e) under the Securities Act of 1933 as part of a registration
statement relating to an offering, other than prospectuses filed in
reliance on Rule 430A under the Securities Act of 1933, shall be deemed to
be part of and included in the registration statement as of the date it is
first used after effectiveness. PROVIDED, HOWEVER, that no statement made
in a registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of
sale prior to such first use, supersede or modify any statement that was
made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to
such date of first use.
(e) that for the purpose of determining liability of the Registrant under the
Securities Act of 1933 to any purchaser in the initial distribution of
securities, the Registrant undertakes that in a primary offering of
securities of the Registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned Registrant will be
a seller to the purchaser and will be considered to offer or sell such
securities to the purchaser:
(i) any preliminary prospectus or prospectus of the Registrant relating
to the offering required to be filed pursuant to Rule 497 under the
Securities Act of 1933;
(ii) the portion of any advertisement pursuant to Rule 482 under the
Securities Act of 1933 relating to the offering containing material
information about the Registrant or its securities provided by or on
behalf of the Registrant; and
C-5
(iii) any other communication that is an offer in the offering made by the
Registrant to the purchaser.
(5) Not applicable.
(6) The Registrant undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, its Statement of Additional
Information.
C-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement on Form N-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Oaks, Commonwealth of
Pennsylvania on the 30th day of January, 2015.
Winton Diversified Opportunities Fund
(Registrant)
By: *
---------------
Michael Beattie
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement on Form N-2 has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
* Trustee January 30, 2015
-----------------
William M. Doran
* Trustee January 30, 2015
-----------------
Jon C. Hunt
* Trustee January 30, 2015
-----------------
Thomas P. Lemke
* Trustee January 30, 2015
-----------------
Randall S. Yanker
* Trustee January 30, 2015
-----------------
Terrence O. Jones
* President January 30, 2015
-----------------
Michael Beattie
* Treasurer, Controller January 30, 2015
----------------- & Chief Financial
Rami Abdel-Rahman Officer
* By: /s/ Dianne M. Descoteaux
------------------------
Dianne M. Descoteaux
Attorney-in-Fact
C-7
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
(a)(i) Certificate of Trust
(a)(ii) Agreement and Declaration of Trust
(b) By-Laws
(s) Powers of Attorney for Mssrs. William M. Doran, Jon C. Hunt,
Thomas P. Lemke, Randall S. Yanker, Terrence O. Jones, Rami
Abdel-Rahman and Michael Beattie
C-8
Dates Referenced Herein and Documents Incorporated by Reference
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