Executives and directors lulled into thinking the battle over proxy access had petered out may want to start paying attention again.
Three years after a federal court struck down a Securities and Exchange Commission rule that would allow shareowners to nominate directors on the corporate ballot, a new effort to put dissident directors on proxies could kick-start these campaigns once again.
Earlier this month, New York City Comptroller Scott Stringer, on behalf of the $160 billion New York City pension funds, announced an initiative to push to win shareholders the right to nominate directors not backed by the company for inclusion on the proxy ballot. The group submitted shareholder proposals to get proxy access at 75 companies.
It was a bold maneuver,” says Stephen Quinlivan a partner at law firm Stinson Leonard Street. “The comptroller has credibility and is a force to be reckoned with. The average gadfly may not have as much success as he will. Not a lot of other people would have the staff and resources to take on 75 companies.”
Traditionally, CEOs and directors pick nominees—often themselves—for election and include only those nominees on the proxy. Those looking to back other candidates would have to mount a write-in campaign, which would generally be cost prohibitive. Furthermore, because directors are still elected by a plurality of votes in uncontested elections at many companies, directors can win re-election with just a few votes, Stringer says. Of 41 directors who failed to receive majority votes in 2014, 40 remain on boards as “zombie directors.” ““The current election procedures for most corporations would make Boss Tweed blush,” Stringer said.
The Securities and Exchange Commission first proposed a plan to give shareholders greater proxy access in 2003 and rulemaking emerged in 2010. Although the Dodd-Frank Act affirmed the SEC’s authority to issue a proxy access rule, a legal challenge by the Business Roundtable and U.S. Chamber of Commerce prevailed, vacating the rule on procedural grounds. The SEC, showing little appetite for a rewrite, instead allows “private ordering” proxy access, meaning that shareholders need to pass a resolution at individual companies to win the right to nominate their own director candidates on the proxy.
Stringer’s proxy access proposals request bylaw changes that give shareholders who meet a threshold of owning three percent of a company for three or more years the right to list their director candidates, representing up to 25 percent of the board, on the company’s ballot. If the proposal garners a majority shareholder vote at a company’s 2015 annual meeting, it would become effective if shareholders approve an implementing bylaw amendment at the 2016 annual meeting.
“The only thing lacking for proxy access was volume of proposals. This campaign and others that may be associated with it are going to be a major catalyst for boards to consider whether they want to adopt access.”
Patrick McGurn, Special Counsel, Institutional Shareholder Services
Stringer targeted companies based on separate, ongoing governance debates, including efforts to address climate change, board diversity, and excessive CEO pay. His group filed resolutions at 33 carbon-intensive coal, oil and gas, and utility companies; 24 companies with few or no women directors or lacking racial or ethnic diversity; and 25 companies that received significant opposition to their 2014 advisory vote on executive compensation.
Leading the Parade
Many in the corporate governance arena say the effort could be a catalyst for a greater number of similar shareholder proposals. Proxy access is “a parade waiting for a lead float,” Patrick McGurn, executive vice president and special counsel for Institutional Shareholder Services, a leading proxy advisory firm, says.
“The only thing lacking for proxy access was volume of proposals,” he says. “This campaign and others that may be associated with it are going to be a major catalyst for boards to consider whether they want to adopt access,” he says. “We expect to see a pretty significant number of these proposals being withdrawn after the companies agree on some timetable for adopting access.”
Like many corporate governance matters, support for proxy access has taken time to build. McGurn draws a comparison between proxy access effort and the early years of majority voting. The latter started off with only a handful of proposals before it “caught fire.” “I don’t know if we are on the same exact trajectory on access, but I wouldn’t be surprised to see the rate of boards adopting access to grow exponentially,” he says.
“You just need one shareholder to pick up the baton and move forward with it,” John Laide, senior product manager for FactSet Research Systems, a firm that tracks proxy season data, says. “It takes time for something new to catch on. Initial support may be limited at first and then it grows. That may be the case here.”
Companies Push Back
A wave of proxy access proposals will force company leaders to embrace proxy access, proceed cautiously, or ramp up efforts to resist it.
When faced with an unwanted proxy access proposal, companies do have options. One approach is to negotiate with proponents, conceding to other demands in exchange for dropping the access fight. Don’t expect that strategy to be effective with Stringer’s campaign, however. Even though he targeted companies based on other governance issues, a person familiar with his office was told there will be no “horse trading.” When asked whether addressing an underlying issue could get a proposal withdrawn, “they adamantly said that was not the case.”
Public companies can also turn to the SEC and request a no-action letter, relief that allows them to exclude a proposal from proxy ballots. Under the Commission’s Rule 14a-8, submissions can be omitted if they fail to meet eligibility and procedural requirements. A shareholder may only submit one proposal per meeting, must own at least $2,000 or 1 percent of stock, limit the proposal to 500 words, and submit it at least 120 days before the annual meeting. A company may also exclude a shareholder proposal if it “directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.”
WHOLE FOODS SEEKS NO-ACTION RELIEF
The following, submitted to the Securities and Exchange Commission by the law firm Baker Botts on behalf of Whole Foods, details the grocery chain’s request for no-action relief from a proxy access proposal submitted by activist investor James McRitchie.
The proponent’s proposal seeks a non-binding shareholder resolution to request that the Company’s Board of Directors amend the company’s governing documents to implement proxy access for director nominations. Under the proponent’s proposal, any shareholder or group of shareholders that collectively hold at least 3 percent of the company’s shares continuously for three years would be permitted to nominate candidates for election to the Board, and the company would be required to list such nominees with the Board’s nominees in the company’s proxy statement. Under the proponent’s proposal, shareholders would be permitted to nominate up to 20 percent of the Ccmpany’s Board, or not less than two nominees if the Board size is reduced.
We believe that the proponent’s proposal may properly be excluded from the 2015 Proxy Materials pursuant to Rule 14a-8(i)(9) because the proponent’s proposal directly conflicts with a proposal to be submitted by the company in the 2015 Proxy Materials.
The Board has determined to submit a proposal to shareholders at the 2015 Annual Meeting with respect to proxy access for director nominations. Specifically, the Board intends to seek shareholder approval of amendments to the company’s Amended and Restated Bylaws to permit any shareholder (but not a group of shareholders) owning 9 percent or more of the company’s common stock for five years to nominate candidates for election to the Board and require the company to list such nominees with the Board’s nominees in the company’s proxy statement. Under the company proposal, such a shareholder would be permitted to nominate the greater of (x) one director or (y) 10 percent of the Board, rounding down to the nearest whole number of Board seats. The specific text of the proposed Bylaw amendments implementing the Company Proposal will be included in the 2015
The proponent’s proposal may Be excluded Under Rule 14a-8(i)(9) because it directly conflicts with a proposal to be submitted by the company in the 2015 proxy materials.
Supporters and critics of proxy access are eagerly awaiting an SEC decision on a no-action request by Whole Foods, one that hinges on whether or not a shareholder proposal is too similar to its own. A proposal by activist investor Jim McRitchie would give proxy access to any group of shareholders that collectively owns at least 3 percent of the company’s shares continuously for at least three years, allowing them to place nominees on the ballot for up to 20 percent of the board. Whole Foods countered with a proposal of its own: amending its bylaws to limit access to individual, not aggregated, shareholders who maintain a 9 percent ownership for at least five years. The counter proposal limits nominations to 10 percent of the board or one director if the board is less than 10 members.
“That is the one wild card that has to play out for the 2015 proxy season,” McGurn says. The Whole Foods request is unique because it sets a much higher threshold than the shareholder proposal, which sticks with the metric the SEC settled on before it abandoned its proxy access rule. “Now that most proposals are settling on 3 percent for three years there is no room for significant negotiation on the part of issuers,” he says. Most every major institutional proposal has used the three-and-three formulation. “Adopting something more to your liking and then claiming substantial implementation may not work,” Quinlivan adds.
There are a series of steps that any company requesting no-action relief should take, Warren de Wied, a partner at the law firm Wilson Sonsini Goodrich & Rosat, says. His advice to companies:
Review the proposal to determine whether it satisfies all of the procedural requirements.
Assess the likelihood that a shareholder proposal will prevail. Recommendations from ISS and Glass Lewis may be influential; they are not necessarily the final word.
Review whether the SEC has granted no-action relief for a substantially similar proposal in the past, and consider whether “novel circumstances or new arguments” could influence the review.
Negotiate with proponents if they are willing. A proxy access proposal at Walt Disney in 2014 was withdrawn in exchange for unrelated governance changes, for example.
Prepare an opposition statement and begin shareholder outreach.
“In the three years since the SEC first permitted shareholder proposals on proxy access, approval rates have been mixed,” David Katz, a partner at Wachtell, Lipton, Rosen & Katz, says. Proposals with a three-and-three threshold have had the most success, with a majority of votes cast at such companies as Verizon, Darden Restaurants, and Abercrombie & Fitch.
Companies will continue to see increased support for access proposals, McGurn says. Thus far this year, access proposals garnered an average of just 33.3 percent support. Separating institutional proposals from those filed by retail investors, however, boosts that to an average of nearly 54 percent. “Given those majority votes, it is pretty clear that if these start showing up on ballots they are probably going to get a high level, if not a majority level, of support,” he says. “Boards are going to have to think long and hard when they have these initial proposals about whether they accept the inevitable.”