Shareholders' Meeting TERNA Rete Elettrica Nazionale Società per Azioni REPORT OF THE BOARD OF DIRECTORS ON THE ITEMS ON THE AGENDA AGENDA 1. Financial Statements as of December 31, 2016. Reports by the Board of Directors, the Board of Statutory Auditors and the Independent Auditors. Related resolutions. Presentation of the Consolidated Financial Statements as of December 31, 2016; 2. Allocation of the net income of the fiscal year; 3. Determination of the number of members and term of office of the of Board of Directors; 4. Appointment of the members of the Board of Directors; 5. Appointment of the Chairman of the Board of Directors; 6. Determination of the remuneration of the members of the Board of Directors; 7. Appointment of the Board of Statutory Auditors; 8. Determination of the remuneration of the Standing Auditors of the Board of Statutory Auditors; 9. Annual report on remuneration: consultation on the Remuneration Policy pursuant to Art. 123-ter, paragraph 6 of Legislative Decree no. 58/1998 (Consolidated Law on Finance). (This is a translation of the original Italian text. For any difference in meaning between the original Italian text and its translation, the Italian text will prevail)
Shareholders' Meeting TERNA Rete Elettrica Nazionale Società per Azioni REPORT OF THE BOARD OF DIRECTORS ON THE FIRST ITEM ON THE AGENDA Financial Statements as of December 31, 2016. Reports by the Board of Directors, the Board of Statutory Auditors and the Independent Auditors. Related resolutions. Presentation of the Consolidated Financial Statements as of December 31, 2016 Dear Shareholders, The dossier titled 2016 Annual Financial Report of TERNA S.p.A. and of the Terna Group, made available to you via the methods and terms specified by current law on the subject, includes the illustration of TERNA S.p.A. Financial Statements and Consolidated Financial Statements as at December 31, 2016. This report refers to the above-mentioned document. The above having been stated, we submit for your approval the following proposal TERNA S.p.A. s Shareholders Meeting, having examined the illustrative report by the Board of Directors, resolves to approve TERNA S.p.A. s financial statements as at December 31, 2016 which closed with a profit of 535,483,732.96.
Shareholders' Meeting TERNA Rete Elettrica Nazionale Società per Azioni REPORT OF THE BOARD OF DIRECTORS ON THE SECOND ITEM ON THE AGENDA Allocation of the net income of the fiscal year Dear Shareholders, Considering the results obtained, the Board of Directors proposes to allocate a dividend per share for the whole of 2016 of 0.206, corresponding to a total amount of 414,058,352.00, recalling that TERNA S.p.A. already distributed an interim dividend equal to 0.0721 per share in November 2016 for a total amount of 144,920,423.20. The above having been stated, we submit for your approval the following proposal TERNA S.p.A. s Shareholders Meeting, having examined the illustrative report by the Board of Directors, resolves to allocate TERNA S.p.A. s profit for 2016, equal to 535,483,732.96, as follows: 144,920,423.20 to cover the interim dividend paid on November 23, 2016; 269,137,928.80 as a final dividend to be distributed in the amount of 0.1339 for each one of the 2,009,992,000 ordinary shares outstanding to be paid gross of any law deductions on June 21, 2017, with the record date of coupon no. 26 set for June 19, 2017 (pursuant to Art. 83-terdecies of Legislative Decree no. 58 of February 24, 1998, the "TUF": June 20, 2017); 121,425,380.96 as retained earnings.
Shareholders' Meeting TERNA Rete Elettrica Nazionale Società per Azioni REPORT OF THE BOARD OF DIRECTORS ON THE THIRD ITEM ON THE AGENDA Determination of the number of members and the term of office of the Board of Directors Dear Shareholders, with the approval of the financial statements for 2016, the mandate of the current Directors ends due to the expiration of their term of office. Thus, the Shareholders' Meeting is asked to appoint members to the Board of Directors and determine their term of office, in compliance with the terms and provisions of Article 14 of the Bylaws. Please note that, in compliance with Article 14.1 of the Company s Bylaws, the Company is managed by a Board of Directors made up of a number of members that must not be lower than seven and must not exceed thirteen members, given that the Shareholders Meeting determines the number of Directors within these limits. The Shareholders' Meeting shall appoint the Directors according to the "slate vote" mechanism, pursuant to Article 14.3 of the Company s Bylaws time per time in force. In particular, it should be noted that, according to the Company s Bylaws, the list that has obtained the highest number of votes expressed by the Shareholders receives seven tenths of the Directors to be appointed with rounding down to the lower unit, in the event of a fraction lower than the unit. In this regard, it should be noted that the outgoing Board of Directors - according to a resolution of the ordinary Shareholders' Meeting of 27 May 2014 - is made up of nine members. With regard to the term of office, Article 14.2 of the Bylaws establishes that the Company s Board of Directors is appointed for a period lasting up to three fiscal years and may be re-appointed at the expiration of its mandate. The outgoing Board of Directors shall refrain from making specific proposals on this agenda item (as well as on other topics relating to the appointment of the Board of Directors and the determination of their remuneration) and therefore it shall call on the Shareholders Meeting to determine, within the limits set according to the Bylaws- based on proposals which may be made by the Shareholders - the number of members of the Board of Directors and their term of office.
BOARD OF DIRECTORS' REPORT ON THE FOURTH ITEM ON THE AGENDA Appointment of the members of the Board of Directors Dear Shareholders, You are asked to appoint members to the Board of Directors. The appointment of the Board of Directors takes place in compliance with the Law Decree no. 332 dated May 31, 1994, amended by Law no. 474 dated July 30, 1994 (so-called Law on Privatization ) and with the Italian law on listed companies according to the " slate vote " mechanism, pursuant to Article 14.3 of the Company s Bylaws and aimed at ensuring the presence within the management body of members appointed by minority shareholders in an amount equal to three tenths of Directors to be appointed with rounding up to the higher unit, in the event of a fraction lower than the unit. In this regard, the Meeting is reminded, regarding the appointment of the Directors mechanism pursuant to this item of the agenda of the Shareholders' Meeting and the appointment of the Board of Statutory Auditors mechanism pursuant to point 7 below, with notice of call already published on February 21, 2017, the Terna Shareholders' Meeting has been convened for March 23, 2017, in extraordinary session and in single call, to resolve overall on certain amendments to articles 14.3 and 26.2 of the Bylaws aimed, in particular, at supplementing the rules on slate vote for the appointment of the Board of Directors and the Board of Statutory Auditors, as better specified in the Directors illustrative report published under the terms of the law on March 2, 2017 and available on the Company's website (www.terna.it - Investor Relations section), to which you are referred. The provisions changed, if approved by the said Shareholders' Meeting, can be applied for the first time on the occasion of the present Shareholders' Meeting called upon to resolve on the renewal of the corporate bodies expiring with approval of the financial statements for the year ended December 31, 2016. The Meeting is also reminded, regarding to the above appointments, that the amendments to the Corporate Bylaws approved by the Shareholders' Meeting on May 16, 2012 shall be implemented for the second time to bring the Corporate Bylaws in line with the legislation introduced by Law no. 120 of 12 July 2011, on the subject of gender equality in listed companies' administrative and
controlling structures, which had amended articles 147-ter and 148 of Legislative Decree 58/98 (Consolidated Law on Finance or the "TUF"), by introducing paragraphs 1-ter and 1-bis, respectively. With specific reference to the Bylaws, the filing and publication of the lists are governed by the applicable terms and conditions provided by law and by the details provided by the Company in the notice convening the Shareholders' Meeting, where required by the Corporate Bylaws. Fulfilling the requirements of Art. 1.C.1 letter h) of the Governance Code 1, in view of the imminent renewal of the administrative body at the end of its period of office, the outgoing Board of Directors has formulated guidelines on the managerial and professional figures whose presence on the Board is considered desirable illustrated in the context of the annual Report on Corporate Governance and Ownership Structures. In particular, the Board of Directors, on the outcome of the assessment on the functioning, size and composition of the Board itself and of its Committees, given the areas of excellence found, noted that the Board of Directors, which has just terminated its first mandate, should be preserved as much as possible in its current size and composition guaranteeing managerial continuity with confirmation of the top management and maintaining the areas of technical, financial and legal competence, and the attention to the social and environmental aspects already present and developed by the Directors during the mandate and hoping, for the future Board of Directors, for a further increase in grid management skills and in technological innovation in the international context. The gender diversity provided for in the current laws is adequate and can be useful for the Company s development. With regard to the right to submit lists, it should be noted that under Article 14.3 of the Bylaws and the above mentioned applicable regulations (Article 4, paragraph 1-bis, of the "Law on Privatization", with amendments, and Article 147-ter of the TUF and Articles 144-ter and following of Consob Regulation no. 11971 of May 14, 1999 "Issuer Regulations"), the lists of candidates may be submitted by the outgoing Board of Directors or by Shareholders, who, individually or as a group, in compliance with the terms and conditions provided by law, own at least 1% - or a lower percentage as provided by the applicable rules and regulations - of the shares entitled to vote in the Shareholders Meeting. In this connection, it should be noted that the outgoing Board of Directors has decided to refrain from submitting its own list of candidates given the current body of Shareholders. 1 We can remind you that TERNA S.p.A. has endorsed the Governance Code of listed companies published by Borsa Italiana (accessible on the Borsa Italiana S.p.A. website at http://www.borsaitaliana.it/comitato-corporate-governance/codice/2015clean.pdf (the Governance Code ).
Moreover, with Resolution No. 19856 of January 25, 2017, in implementing the provisions of Article 147-ter of the TUF and Article 144-septies of the Issuer Regulations, Consob has set the minimum shareholding requirement for submitting candidate lists for the appointment of TERNA s administrative and control bodies at 1% of the share capital, taking into account the Company s capitalization and without prejudice to the lower share contemplated by the Bylaws. For the presentation, filing and publication of candidate lists by entitled Shareholders, the following shall apply in compliance with Article 14.3 of the Bylaws and the above-mentioned law provisions, as well as with the regulations set forth in the notice of call of the Shareholders Meeting: a) the presentation and filing of lists, together with the information required by the relevant regulation, must be carried out at least 25 days prior to the date set for the Shareholders' Meeting at the Company; this can also be done using remote communication methods, based on the procedures and in compliance with the prerequisites necessary for identifying the applicants as detailed in the notice of call; b) ownership of the minimum share required to submit lists shall be determined by taking into account the shares that are registered in the name of the Shareholder(s) on the day in which the lists are filed with the Company; c) in order to prove the legitimacy of presentation of the lists, entitled Shareholders must present and/or deliver the documentation proving the ownership of the number of shares required, issued under the terms of art. 23 of the Regulation containing rules on centralised management and liquidation services, on guarantee systems and on the related management companies time per time in force (adopted by the Bank of Italy and by CONSOB on February 22, 2008 as subsequently modified, the so-called single measure ), also after the lists have been filed but within the time period set for the publication of the lists (i.e., at least 21 days prior to the day set for the Shareholders' Meeting); d) each Shareholder may present or assist in the presentation of one single list and each candidate may appear on one list only or he/she will be considered ineligible; e) the lists shall list candidates according to a progressive number; f) the provisions under Article 14 on the subject of gender equality among the Directors to be elected (so-called gender quotas ), and the provisions under the Corporate Bylaws on the subject of the requirements of honour, professionalism and independence on the part of Directors stipulated
under Article 15 are both applicable, including therefore the rules on the subject of incompatibility provided for in art. 15.5 adopted under the terms of the Unbundling Legislation 2 ; g) In order to permit a composition of the Board of Directors which complies with the current legislation regarding gender equality, the lists which offer a number of candidates equal or greater than three must include candidates of both genders. The gender less represented can obtain, at the moment of second application, at least on third of the Directors elected (if necessary, rounded up to the next unit); h) the lists indicate what candidates are in possession of the independence requirements as provided for by the law and Article 15.4 of the Bylaws, and any other information or statement required by the applicable rules and regulations and the Bylaws pertaining to their respective offices; i) regarding the personal characteristics of candidates, based on the provisions under Articles 2.P.3 and 3.C.3 and in the Comment to Article 2 of the Governance Code, in the notice convening the Shareholders' Meeting, when composing the lists, Shareholders were also specifically asked to evaluate the characteristics of the candidates including the professional, experience, and managerial characteristics, and more generally, in relation to the size of the Company and the specific sector in which it operates. Furthermore, as indicated in the Comment to Article 5 of the Governance Code, it is required that the lists of candidates should include an indication of whether they may be suitable to be qualified as independent pursuant to Article 3 of the same Code; j) together with each list, a statement must be filed with the registered office, whereby individual candidates accept their candidature and represent, under their responsibility, the inexistence of any of the causes for ineligibility and incompatibility 3, as well as the existence of the requirements prescribed by current regulations and the Corporate Bylaws for their respective appointments and any other information required by the applicable rules and regulations and the Bylaws. In particular, Article 144-octies of the Issuer Regulations provides for the filing of the following, with the list of the candidates for the position of Director: thorough information on the personal and professional characteristics of the candidates; 2 Directive no. 2009/72/EC of 13 July 2009, Italian Legislative Decree no. 93 of June 1 2011, and the resolutions of the Authority for electricity, gas and water (AEEGSI) nos ARG/com 153/11 and 142/2013/R/EEL with which the AEEGSI regulated the certification procedures of the electricity transmission operator and adopted the final decision to certify TERNA S.p.A. as electricity transmission system operator ( Unbundling Legislation ). 3 Including those provided for in art. 15.5 of the Bylaws introduced by the Shareholders' Meeting of May 27, 2014 for all Directors of the Company, to ensure compliance with the rules of Directive 2009/72/EC and of Italian Legislative Decree no. 93/2011, and with the resolutions of the Authority for electricity, gas and water (AEEGSI) nos ARG/com 153/11 and 142/2013/R/EEL with which the AEEGSI regulated the certification procedures of the electricity transmission operator and adopted the final decision to certify TERNA S.p.A. as electricity transmission system operator in an unbundling ownership.
the declaration regarding the possible possession of the independence requirements as provided for by Article 148, paragraph 3 of the TUF and/or of the requirements of independence required by the industry regulations possibly applicable because of the activity performed by the Company; the indication of identity of the shareholders who have submitted the lists and the percentage of the total shares held. Furthermore, with reference to the independence requirements of the Directors, a candidate's statement is required, his/her own responsibility, regarding the possible suitability to be qualified as independent pursuant to Article 3 of the above-stated Governance Code. Lastly, Shareholders with voting rights who submit a minority list are the recipients of Consob Communication No. DEM/9017893 of February 26, 2009 concerning the Appointment of management and control bodies. With this Resolution, Consob recommends «to members who submit a minority list to file, along with the list, a statement certifying the absence of relationships, also indirect, as set forth in Article 147-ter, paragraph 3, of the TUF and Article 144-quinquies of the Issuer Regulations, with Shareholders who individually or as a group hold a controlling or relative majority where identifiable on the basis of reports of major shareholding, pursuant to Article 120 of the TUF or of the publication of Shareholders' agreements pursuant to Article 122 of the same Decree. This statement shall also certify the existence of any relationship, if relevant, with Shareholders who individually or as a group hold a controlling or relative majority where identifiable as well as the reasons why these relationships were not considered decisive to the existence of the above mentioned relationships or the absence of such relationships». The appointment to the position of Director will be made conditional upon the same satisfying the requirements of integrity, professional skills and independence stipulated in the current Corporate Bylaws. With regard to the Directors integrity requirements, Article 15.2 of the Bylaws establishes that the appointment to the position of Director shall be precluded and, in case of appointment, the position shall be forfeited in the following cases: a) those who are in one of the conditions of ineligibility or forfeiture set forth in Article 2382 of the Civil Code; b) those who have been subject to preventive measures pursuant to Law No. 1423 of December 27, 1956, or Law No. 575 of May 31, 1965, and subsequent amendments and additions, without prejudice to the effects of rehabilitation;
c) those who have been convicted by final judgment, without prejudice to the effects of rehabilitation: 1. sentence of imprisonment for one of the offences provided for by legislation governing banking, finance and insurance and by laws governing financial markets and instruments, fiscal matters and payment instruments; 2. sentence of imprisonment for one of the offences provided for under title XI of book V of the Civil Code and in Royal Decree No. 267 of March 16, 1942; 3. imprisonment for a term not less than six months for a crime against the public administration, against public faith, financially-related offences, public order offences and fraudulent acts involving public funds; 4. imprisonment for a term not less than a year for any willful crime; d) when, on request of the parties, one of the punishments provided for under the foregoing letter c) has been applied, without prejudice to the case of extinguishment of the offence. The preclusion set forth in this Article 15.2 is also applied with respect to the cases ascertained as equivalent by the Board of Directors and governed, either wholly or in part, by foreign legislations. With regard to the Directors required professional skills, Article 15.3 of the Bylaws establishes that the appointment to the position of Director will be precluded - and in case of appointment the position will be forfeited - to those who have not acquired overall three years experience in the exercise of: a) administration and auditing activities or the holding of management positions with joint-stock companies whose share capital amount shall not be inferior to 2 million Euros, or b) professional activities or university teaching with tenure in the following subjects: law, economics, finance and technical/scientific subjects strictly related to the Company s business, as set forth in Article 26.1 of the Bylaws; or c) executive positions with government authorities or public administrations operating in the credit, finance and insurance sectors or, in any case, in sectors such as are strictly related with the Company s business, as set forth in Article 26.1 of the Bylaws; Article 26.1 of the Bylaws considers, in turn, as strictly relating to the Company s scope of activity the subject matters concerning commercial law and tax law, business economy and business finance, as well as the subject matters and activity sectors relating to energy in general, communications and network structures.
As far as the Directors independence requirements are concerned, Article 15.4 of the Bylaws which is in line with Article 147 ter, paragraph 4, of the TUF establishes that at least one third of the Directors in office rounding down to the unit below, in case of fractional number inferior to the unit shall meet the requirements of independence established for the Auditors by Article 148, paragraph 3, of the TUF. Again on the subject of Directors independence, article 15.5 of the Bylaws states that the Directors of the Company may not, on penalty of forfeiture, hold positions of director, member of the oversight committee or of other bodies that legally represent a company that carries on the business of electricity or gas generation or supply. As far as the preparation of the lists is concerned, if the minimum number of independent Directors provided for by the law and Article 15.4 of the Bylaws is not elected, then articles 14.3, letter c) and letter c-bis) of the Corporate Bylaws, time per time in force, shall apply. The lists, together with the information and documentation as provided for by the applicable rules and regulations and the Bylaws, will be promptly made available to the public at the Company, Borsa Italiana S.p.A. and posted on the Company's website (www.terna.it - Investor Relations section) at least 21 days before the date of the Shareholders Meeting. As regards the procedure for appointment of the Directors governed by article 14.3 of the Bylaws, we can note that as indicated above a number of amendments to the Bylaws regarding the rules in articles 14.3 and 26.2 aimed at supplementing the rules on list voting for the appointment of the Board of Directors and the Board of Statutory Auditors were proposed to the Shareholders' Meeting of TERNA S.p.A. convened in extraordinary session and in single call for March 23, 2017 and, therefore, after the publication date of the present Report. The provisions changed, if approved by the said Shareholders' Meeting, are being applied for the first time already on the occasion of the present renewal of the corporate bodies expiring with approval of the financial statements for the year ended December 31, 2016. In this regard the procedure for appointing the Directors according to the "slate vote" mechanism pursuant to Article 14.3 of the Company s Bylaws is presented below. In order to provide a clearer overall picture, the additions that derive from approval of the above statutory amendments are also presented below. The procedure for appointing the Directors according to the " slate vote " mechanism pursuant to Article 14.3 of the Company s Bylaws states that: o o each subject entitled to vote may vote one list only at the Shareholders Meeting; seven tenths of the Directors to be appointed are taken from the list that has obtained the highest number of votes expressed by the Shareholders (so-called majority list), according
o o to the progressive number by which they are listed in the list (with rounding down to the lower unit, in the event of a fraction lower than the unit); the remaining Directors (the remaining three tenths of the total) are taken from the other lists (so-called minority list), thus applying for this purpose the specific rules set forth under letters b) and c) of Article 14.3. In addition to the above rules and on the basis of the proposed statutory amendments submitted to the extraordinary Shareholders' Meeting of March 23, 2017, if, on the outcome of the voting, the majority list does not contain a number of candidates sufficient to ensure that it reaches the number of candidates to be elected, all the candidates listed therein can be taken from the said list, without further voting taking place, according to the progressive order with which they are listed in the said list and - after covering the number of positions reserved for the minority lists as indicated in the aforementioned letter b) of art. 14.3 the remaining Directors can be taken from the list which obtained the largest number of votes among the minority lists (the First Minority List ) in relation to the size of this list. If this list is of an insufficient number, the remaining Directors will be taken, with the same methods, from the following list ( Second Minority List ) or if necessary from the next ones, according to the number of votes and the size of the lists themselves. Finally, if the total number of candidates included in the lists presented, both in the majority list and in the minority lists, is less than that of the Directors to be elected, the remaining Directors will be elected by the Shareholders' Meeting with the legal majorities and without observing the slate vote procedure in such a way as to ensure in any case the presence of the necessary number of Directors in possession of the requisites of independence laid down in the law and in art. 15.4 of the Bylaws, and observance of the current legislation on the subject of balance between genders; if, following the application of the above-stated procedure, the regulations applicable on the issue of gender balance are not complied with, where these guarantee - in its second application - that the least represented gender accounts for at least one third of those elected, rounded-up to the nearest whole number in case of a fraction, the specific rules indicated in the Bylaws shall be applicable. Specifically, a single list in descending order shall be prepared from among all the candidates that were elected in the different lists (including the list that obtained the highest number of votes), based on the mechanism of replacing the candidate from the better represented gender with the lowest quotient in that category, with the first candidate from the lesser represented gender that was not elected and belongs to the same list, subject to the minimum number of independent Board members required by the Corporate Bylaws. A similar mechanism, shall be adopted also if it is necessary to make
replacements on the basis of the provisions of art. 14.3 letter c) of the Bylaws if, on the outcome of the voting, the minimum number of independent Directors provided for in the law and in the Bylaws has not been appointed. The statutory amendments if made by the Shareholders' Meeting of March 23, 2017 are on this point merely formal. In the event of a tie in the quotients, without affecting the observance of the minimum number of independent directors provided for in the Bylaws, the replacement is taken from the list that has obtained the highest number of votes (to be understood, on the basis of the proposal put forward to the Shareholders' Meeting of March 23, 2017, as the list from which the highest number of candidates would be taken on the basis of the mechanism illustrated). Should there be no candidates from this list, according to the provisions of art. 14.3 lett. c-bis) of the Bylaws, the majority set by law shall be enforced, complying with the proportional representation of the minorities on the Board of Directors. Where it becomes necessary to appoint more than one candidate from a gender other than that of the elected candidates, the replacement shall be made working up from the bottom of the list, until the regulation is complied with. For appointments of Directors which, for any reason, take place other than in the case of renewal of the entire body as also in all other cases in which, for any reason, it is not possible to proceed with the slate vote, the Shareholders' Meeting shall resolve with the legal majorities. This principle, already implicit in the regulations and in the context of the closing provision already present in art. 14.3 letter d) of the Bylaws, for greater clarity has been made more explicit in the context of the proposal submitted to the extraordinary Shareholders' Meeting of March 23, 2017. It should be noted that pursuant to Article 147-ter, paragraph 3, of the TUF, at least one of the Board members is appointed from the minority list obtaining the highest number of votes which is not associated, even indirectly, with the Shareholders who have submitted or voted for the list that won according to the number of votes. Moreover, for the purposes of appointing Directors, Article 14.3, letter e) of the Bylaws, provides that no operator of the electricity generation, importation, distribution, supply and transmission sectors including by means of subsidiaries, parent companies, or subsidiaries controlled by the same Parent Company may exercise voting rights for more than 5% of the share capital, according to the above mentioned provisions.
These restrictions combine with those provided for, more in general, for exercising the right to vote in shareholders' meetings implementing the legislation on the subject of privatisations time per time in force and connected with the limits on share ownership governed by article 6.4 of the Bylaws. In relation to the above, Shareholders are called upon to vote at Shareholders' Meetings for one of the candidate lists to be appointed to the position of Director from among those submitted, filed and published in compliance with the law and the Bylaws.
BOARD OF DIRECTORS' REPORT ON THE FIFTH ITEM ON THE AGENDA Appointment of the Chairman of the Board of Directors Dear Shareholders, the Shareholders Meeting has the power to appoint the Chairman of the Board of Directors among its elected members. With regard to the above, the Shareholders Meeting is called upon to appoint on the basis of the proposals that may be expressed by Shareholders the Chairman of the Board of Directors.
BOARD OF DIRECTORS' REPORT ON THE SIXTH ITEM ON THE AGENDA Determination of the remuneration of the members of the Board of Directors Dear Shareholders, Article 24.1 of the Company s Bylaws provides that the members of the Board of Directors are entitled to a remuneration as determined by the Shareholders Meeting and that the relevant resolution, once it is passed, shall remain valid also for the following fiscal years until otherwise determined by the Shareholders Meeting. With regard to the above, the Shareholders Meeting is called upon to determine on the basis of the proposals that may be submitted by the Shareholders the remuneration to be given to the members of the Board of Directors.
BOARD OF DIRECTORS' REPORT ON THE SEVENTH ITEM ON THE AGENDA Appointment of the Board of Statutory Auditors Dear Shareholders, you have been convened in an ordinary meeting to discuss and resolve on the renewal of the Board of Statutory Auditors, whose term of office expires with the approval of the Financial Statements of 2016. The Shareholders' Meeting is thus invited to appoint the Board of Statutory Auditors in compliance with the terms and provisions of Article 26 of the Bylaws. According to the appointment mechanism, it should be noted that both Statutory Auditors and Substitute Auditors are appointed by the Shareholders Meeting, in compliance with Legislative Decree No. 332 of May 31, 1994, converted into law with amendments by Law No. 474 of July 30, 1994, (the so-called "Law on Privatization"), the Italian law on listed companies and related implementing regulations, according to the voting list mechanism governed by Article 26.2 of the Bylaws aimed at ensuring the presence of a Statutory Auditor and a Substitute Auditor in the control body appointed by the minority Shareholders. In this regard, the Meeting is reminded, regarding the appointment of the Board of Statutory Auditors mechanism pursuant to this item of the agenda as it is and the appointment of the Directors mechanism pursuant to point 4 below, with notice already published on February 21, 2017, the Terna Shareholders' Meeting has been convened for March 23, 2017, in extraordinary session and in single call, to resolve overall on certain amendments to articles 14.3 and 26.2 of the Bylaws aimed, in particular, at supplementing the rules on slate vote for the appointment of the Board of Directors and the Board of Statutory Auditors, as better specified in the Directors illustrative report published under the terms of the law on March 2, 2017 and available on the Company's website (www.terna.it - Investor Relations section), to which you are referred. The provisions changed, approved by the said Shareholders' Meeting, can be applied for the first time on the occasion of the present Shareholders' Meeting called upon to resolve on the renewal of the corporate bodies expiring with approval of the financial statements for the year ended December 31, 2016.
The Meeting is also reminded, regarding to the above appointments, that the amendments to the Corporate Bylaws approved by the Shareholders' Meeting on May 16, 2012 will be applied for the second time. These amendments were made to bring the Corporate Bylaws in line with the legislation introduced by Law no. 120 of 12 July 2011, on the subject of gender equality in listed companies' administrative and controlling structures, which had amended articles 147 ter and 148 of Legislative Decree 58/98 (Consolidated Law on Finance or "TUF"), by introducing paragraphs 1-ter and 1-bis, respectively. With specific reference to the Corporate Bylaws, the filing and publication of the lists are governed by current legislation and regulations, and where applicable, by the details provided by the Company in the notice convening the Shareholders' Meeting, where required by the Corporate Bylaws. With regard to the right to submit lists, it should be noted that under Article 26.2 of the Bylaws and the above mentioned applicable regulations (Article 4, paragraph 1-bis of the new Privatisations Law, Article 148 of the TUF and articles 144-ter et seq. of Consob Regulation no. 11971 of 14 May 1999, Issuer Regulations ), the lists of candidates may be submitted by Shareholders, who, individually or as a group, own at least 1% - or a lower percentage as provided by the applicable rules and regulations of the shares entitled to vote in the Shareholders Meeting. Moreover, with Resolution No. 19856 of January 25, 2017, Consob has set the minimum shareholding requirement for submitting candidate lists for the election of TERNA s administrative and control bodies at 1% of the share capital, taking into account the Company s capitalization and without prejudice to the lower share contemplated by the Bylaws. Accordingly, it should be noted that pursuant to Article 26.1 and Article 31.2 of the Bylaws, the Board will consist of three Statutory Auditors and three Substitute Auditors who may be re-appointed at the expiration of their term of office. For the presentation, filing and publication of candidate lists, it is worth mentioning, in compliance with Article 26.2 of the Bylaws and with the regulations mentioned therein, as well as with the regulations set forth in the notice of call of the Shareholders Meeting, that: the presentation and filing of lists must be carried out at least 25 days prior to the date set for the Shareholders' Meeting at the Company; this can also be done using remote communication methods, based on the procedures and in compliance with the prerequisites necessary for identifying the applicants as detailed in the convocation notice;
ownership of the minimum share required to submit lists shall be determined by taking into account the shares that are registered in the name of the Shareholder(s) on the day in which the lists are filed with the Company; in order to prove the legitimacy of presentation of the lists, entitled Shareholders must present and/or deliver the documentation proving the ownership of the number of shares required, issued under the terms of art. 23 of the Regulation containing rules on centralised management and liquidation services, on guarantee systems and on the related management companies time per time in force (adopted by the Bank of Italy and by CONSOB on February 22, 2008 as subsequently modified, the so-called single measure ), also after the lists have been filed but within the time period set for the publication of the lists (i.e., at least 21 days prior to the day set for the Shareholders' Meeting); each Shareholder may present or assist in the presentation of one single list and each candidate may be on one list only or he will be considered ineligible; the lists shall list no more candidates than the number to be elected, and the names shall be assigned a progressive number; the lists are divided into two sections, one for the candidates to the office of Statutory Auditor and the other for the candidates to the office of Substitute Auditor; the first one of the candidates of each section of the lists must be registered in the register of statutory auditors and must have exercised the activity of legal control of the accounts for a period of at least three years; both the provisions under Article 26.2 on the subject of gender equality among the Statutory Auditors to be elected (so-called gender quotas ), and the provisions under the Corporate Bylaws on the subject of the requirements of the honour and professionalism on the part of Statutory Auditors stipulated under Article 26.1 are applicable; In order to permit a composition of the Board of Statutory Auditors that complies with the current legislation regarding gender equality, the lists present a number of candidates equal to or greater than three must include, both in the first two positions of the list relative to the Standing Auditors, and in the first two positions of the list relative to Alternate Auditors, candidates of both genders. In its second application, the lesser represented gender must obtain at least one third of the Statutory Auditors elected; regarding the personal characteristics of candidates and based on the provisions under Articles 8.C.1 of the Governance Code 4, in the notice convening the Shareholders' Meeting, when 4 We can remind you that TERNA S.p.A. has endorsed the Corporate Governance Code of listed companies published by Borsa Italiana (accessible on the Borsa Italiana S.p.A. website at http://www.borsaitaliana.it/comitato-corporate-governance/codice/2015clean.pdf (the Governance Code ).
composing the lists, shareholders are also specifically asked to evaluate the characteristics of the candidates including that of independence as required by Article 3 of the above-stated Code with reference to Directors, and to consider that, on the basis of the provisions of art. 19 of Italian Legislative Decree 39/2010 as most recently amended by art. 18 of Italian Legislative Decree no. 135 of July 17, 2016, the members of the Board of Statutory Auditors, as a whole, must be competent in the sector in which TERNA S.p.A. operates. the lists must be filed and include the following: o information on the identity of the shareholders who have submitted the lists, indicating the total percentage of the shares held; o a declaration by shareholders other than those who hold, also as a group, a controlling interest or relative majority, indicating the absence of relationships as set forth in Article 144-quinquies of the Consob Issuer Regulations No. 11971 of May 14, 1999 with them. Moreover, entitled Shareholders who submit a minority list are subject to the recommendations made by Consob Communication No. DEM/9017893 of February 26, 2009 concerning the Appointment of management and control bodies. With this resolution relating to the election of the controlling bodies, Consob recommends that shareholders who are presenting a minority list need to provide the information indicated in the aforementioned declaration: relations where these exist, and where significant with shareholders that hold, also jointly, a relevant controlling or majority shareholding, where these are identifiable on the basis of the significant shareholdings notification pursuant to Article 120 of the TUF or the publication of shareholder agreements pursuant to Article 122 of the Decree. Specifically, among the relationships, those relating at least to those listed under point 2 should be included [referring to electing the administrative body]. Alternatively, the absence of any significant relationships should be noted; the reasons for these relationships not to be considered as significant in terms of an associative relationship existing pursuant to Article 148, paragraph 2 of the TUF and Article 144-quinquies of Issuer Regulations". o a description of the candidates' personal and professional characteristics, accompanied by pursuant to Article 2400, last paragraph, of the Civil Code a statement indicating the offices held by them on the boards of directors and boards of statutory auditors of other companies; which, it is recommended, should be updated until the actual date of the Shareholders Meeting;
o a statement whereby individual candidates accept their candidature and represent, under their responsibility, the inexistence of any of the causes for ineligibility and incompatibility, as well as any other information required by the applicable rules and regulations and the Bylaws. With regard to the causes of ineligibility and restrictions on the number of administrative and control offices that may be held by Members of the Board of Statutory Auditors on the boards of other companies, the provisions contained in the Bylaws, the current law and regulations, in particular the provisions set forth in Article 148 bis of the TUF and Article 144-terdecies of the Issuer Regulations shall be applied. As far as the ineligibility of the members of the Board of Statutory Auditors provided by law is concerned, Article 148, paragraph 3 of the TUF shall be applied. With regard to the requirements of professional skills and integrity, Article 26.1 of the Bylaws provides that the members of the Board of Statutory Auditors are chosen among subjects in possession of the requirements of professional skills and integrity set forth in Legislative Decree No. 162 of March 30, 2000, as integrated (exclusively for the professional skills requirements) by the same provisions of existing Article 26.1 of the Bylaws; while only the first candidate of each section of the lists must necessarily be enrolled in the registry of the auditors and have exercised the activity of legal control of accounts for a period of at least three years. The lists, together with the information and documentation as provided for by the applicable rules and regulations and the Bylaws, will be made available to the public at the Company, Borsa Italiana S.p.A. and posted on the Company's website (www.terna.it - Investor Relations section) at least 21 days before the date of the Shareholders Meeting. As far as the submission of the lists is concerned, according to Article 144- sexies, paragraph 5, of the Issuer Regulations, in the event that on the date due for the submission of the lists for the Board of Auditors (i.e., 25 days before the date set for the Shareholders Meeting) only one list has been filed, that is only lists submitted by members who are connected to each other pursuant to Article 144-quinquies of the Issuer Regulations, as specifically detailed in the convocation notice of call, lists may be submitted up to the third day following said date (i.e., 22 days before the date set for the Shareholders Meeting) without prejudice to the provisions under Article 147 ter, paragraph 1 bis, last section of the TUF. In this case the thresholds set forth above shall be reduced by half.
Regarding the appointment of the Statutory Auditors, according to the slate vote mechanism it is governed by art. 26.2 of the Bylaws and by art. 148, paragraph 2, of the TUF and by art. 144-sexies, Issuer Regulations. It is laid down that each holder of the right to vote may vote in for only one list at the Shareholders' Meeting. We can note that as indicated above a number of amendments to the Bylaws regarding the rules in articles 14.3 and 26.2 aimed at supplementing the rules on list voting for the appointment of the Board of Directors and the Board of Statutory Auditors were proposed to the Shareholders' Meeting of TERNA S.p.A. convened in extraordinary session and in single call for March 23, 2017 and, therefore, after the publication date of the present Report. The provisions changed, if approved by the said Shareholders' Meeting, are being applied for the first time already on the occasion of the present renewal of the corporate bodies expiring with approval of the financial statements for the year ended December 31, 2016. In this regard the procedure for appointing the Statutory Auditors according to the "slate vote" mechanism pursuant to Article 26.2 of the Company s Bylaws is presented below. In order to provide a clearer overall picture, the additions that derive from approval of the above amendments are also presented below. The procedure for appointing the Statutory Auditors according to the "slate vote mechanism pursuant to Article 26.2 of the Company s Bylaws states that: two Statutory Auditors and two Substitute Auditors are taken from the list that has obtained the highest number of votes (so-called majority list) and in the progressive order by which they were entered in each section of the list; the remaining Statutory Auditor and the Substitute Auditor are instead taken from the other lists (so-called minority lists) taking into account the one that obtained the highest number of votes according to the mechanism described in letter b) of article 14.3 of the Bylaws concerning the appointment of Directors, to be applied distinctly to each of the sections in which the lists are divided and which was submitted and voted by Members who are not associated, even indirectly according to Article 144-quinquies of the Issuer Regulations, with the Shareholders who have submitted or voted for the majority list; the chairmanship of the Board of Statutory Auditors pertains to the Standing Auditor appointed by the minority list to be understood, on the basis of the proposal put forward to the Shareholders' Meeting of March 23, 2017, as the candidate elected with the methods set forth in Article 14.3, letter b) of the Bylaws as outlined above.
The slate vote procedure applies therefore only in the event of renewal of the entire board of statutory auditors. This principle is already implicit in the regulations and in the context of the said art. 26.2 of the Bylaws. The bylaws amendments if made by the Shareholders' Meeting of March 23, 2017 are on this point merely formal to clarify expressly that for the appointment of statutory auditors who, for any reason, are not elected under the terms of the slate vote procedure described above, the Shareholders' Meeting resolves with the legal majorities and without observing this procedure, so as to ensure in any case a composition of the Board of Statutory Auditors compliant with the provisions of the current legislation also on the subject of gender balance. The appointed Board of Statutory Auditors will remain in office - according to Article 2400 of the Civil Code - for three years and will expire on the date of the Shareholders Meeting summoned to approve the Financial Statements as of December 31, 2019. In relation to the above, Shareholders are invited to vote at the Meeting for one of the candidate lists for the position of member of the Board of Statutory Auditors from among those submitted, filed and published in compliance with the above-mentioned provisions and the Bylaws.
BOARD OF DIRECTORS' REPORT ON THE EIGHTH ITEM ON THE AGENDA Determination of the remuneration of the standing Auditors of the Board of Statutory Auditors Dear Shareholders, you have been convened in an ordinary Meeting to discuss and determine the remuneration of the Statutory Auditors of the Board of Statutory Auditors, whom the present Meeting is called upon to appoint in a separate, previous item on the agenda. Actually, according to the provisions of Article 2402 of the Civil Code and Article 26.1 of the Company s Bylaws, when the Board of Statutory Auditors is appointed, the Shareholders Meeting determines the annual remuneration of the Statutory Auditors for their entire term of office. Having stated the foregoing, the Board of Directors is refraining from making any specific proposal on this item on the agenda and thus requests the Shareholders to decide in this regard on the basis of the proposals that they themselves may make. As regards the proposals on remuneration of the Statutory Auditors, the Shareholders are asked to take into account the provisions of article 8.C.3 of the Governance Code 5 and, therefore, to formulate proposals for a remuneration commensurate with the commitment required, the significance of the position held, and the size and sectoral characteristics of TERNA S.p.A.. 5 We can remind you that TERNA S.p.A. has endorsed the Governance Code of listed companies published by Borsa Italiana (accessible on the Borsa Italiana S.p.A. website athttp://www.borsaitaliana.it/comitato-corporate-governance/codice/2015clean.pdf (the Corporate Governance Code ). Art. 8.C.3. Of the Governance Code states that the remuneration of Statutory Auditors is commensurate with the commitment required, the significance of the position held, and the size and sectoral characteristics of the company.