2015 was a turning point for shareholder proposals seeking to implement proxy access, which gives certain shareholders the ability to nominate directors and include those nominees in a company’s proxy materials. During the 2015 proxy season, the number of shareholder proposals relating to proxy access, as well as the overall shareholder support for such proposals, increased significantly. Indeed, approximately 110 companies received proposals requesting the board to amend the company’s bylaws to allow for proxy access, and, of those proposals that went to a vote, the average support was close to 54 percent of votes cast in favor, with 52 proposals receiving majority support.1 New York City Comptroller Scott Springer and his 2015 Boardroom Accountability Project were a driving force, submitting 75 proxy access proposals at companies targeted for perceived excessive executive compensation, climate change issues and lack of board diversity. Shareholder campaigns for proxy access are expected to continue in 2016. Accordingly, we set forth below certain considerations for boards if faced with such a shareholder proposal in the future:
- Typical proxy access provisions. Although market practice continues to develop, certain features of proxy access proposals are emerging as typical. Based on proxy access bylaw provisions adopted in 2015, the most common ownership threshold for nominating shareholders is 3 percent of a company’s outstanding common shares for at least three years, with ownership being tied to possessing full voting and investment rights of such shares, as well as the full economic interest. Most companies have limited the number of board seats available to proxy access to 20 percent of the board, and the most typical limit on the number of shareholders that may comprise a nominating group is 20.
- The role of institutional investors and proxy advisory firms. Because institutional investors and proxy advisory firms are able to impact the outcome of a proxy access proposal, it is important for directors to understand the positions that such investors and firms have when determining how best to address proxy access:
- Institutional investors. Proxy access is supported by many leading institutional investors, including New York City Pension Funds, CalPERS, TIAA-CREF, California State Teachers’ Retirement System (CalSTRS), T. Rowe Price and Vanguard. In fact, a report by Broadridge and PwC found that institutional investors are four times more likely to support proxy access than retail investors.2 Additionally, CII has adopted best practice guidelines for proxy access provisions, which identify features of proxy access that it would consider troublesome if adopted by a company. These features include ownership thresholds of 5 percent or more, provisions that could result in fewer than two proxy access nominees and a limit on the number of shareholders that could be aggregated to form a nominating group.
- Proxy advisory firms. Proxy advisory firms generally favor proxy access as well. ISS will generally recommend in favor of proxy access proposals that have an ownership threshold of no more than 3 percent of the voting power, a holding period of no more than three years, minimal or no limits on the number of shareholders that may comprise a nominating group, and no less than a 25 percent cap on the number of proxy access board seats. Further, ISS will recommend a vote against directors if a company does not include a proxy access proposal that was properly submitted and was not voluntarily withdrawn by the proponent or excluded pursuant to SEC no-action relief (discussed below) or a federal court ruling. Glass Lewis reviews proxy access proposals on a case-by-case basis, but generally supports proxy access as a means to ensure that “significant, long-term shareholders have an ability to nominate candidates to the board.”
- SEC no-action relief. During the 2015 proxy season, the SEC threw a curveball to companies by suspending for the 2015 proxy season the use of Exchange Act Rule 14a-8(i)(9), which allows companies to exclude a shareholder proposal that “directly conflicts” with a management-sponsored proposal. This rule was suspended in the wake of controversy surrounding no-action relief that the SEC initially granted (and later reversed) to Whole Foods Market, Inc., who had included a management-sponsored proxy access proposal with significantly higher thresholds than those included in the shareholder proposal that it had received. The SEC recently issued guidance on the future application of Rule 14a-8(i)(9), providing that no-action relief will be granted pursuant to this rule only “if a reasonable shareholder could not logically vote in favor of both proposals, i.e., a vote for one proposal is tantamount to a vote against the other proposal.” Going forward, this narrow interpretation of Rule 14a-8(i)(9) will make it much more difficult for companies to exclude proxy access proposals on this basis.
Companies that implement their own form of proxy access may be able to exclude a proxy access shareholder proposal pursuant to Exchange Act Rule 14a-8(i)(10), which allows an exclusion if the company has already “substantially implemented” the proposal. However, if the company’s proxy access provision diverges too far in any material respect from the shareholder proposal, the SEC may very well determine that the proposal has not been substantially implemented and deny no-action relief.
- Developing a strategy. How boards address proxy access will depend on a number of factors, including the company’s performance, size, shareholder base and board composition. At a minimum, directors should stay up to speed on proxy access terms and trends and review how companies are responding to proxy access proposals. Boards should consider the company’s shareholder base and understand the positions of the company’s institutional investors to determine the likelihood of success of a proxy access proposal if received. Directors should also engage company shareholders to ensure that the board understands their concerns and trigger points.
While some boards have preemptively adopted proxy access, most companies seem to be waiting until shareholders initiate proxy access. Taking the wait-and-see approach allows more time for market practices to develop and for boards to better understand proxy access and its implications. Preemptively adopting proxy access, however, could give the board more control over the terms included in the bylaw provision and may allow the company to exclude future shareholder proposals based on the “substantially implemented” exclusion discussed above.
Companies that receive a shareholder proposal have several alternatives, including (a) submitting the proposal to shareholders with an opposing, neutral or supporting board statement; (b) submitting a competing management proposal, an approach taken by seven companies in 2015 despite being potentially confusing for shareholders; (c) negotiating with the shareholder to withdraw in exchange for the company’s commitment to adopt proxy access; or (d) seeking SEC no-action relief as discussed above.
This post was excerpted from our annual Top 10 Topic for Directors in 2016 alert. To read the full alert, please click here.
1 Georgeson, 2015 Annual Corporate Governance Review, at p. 5.
2 Broadridge and PwC, “2015 Proxy Season Wrap-Up,” ProxyPulse (3rd Edition 2015).