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By Yin Wilczek
July 16 — Companies concerned that they will be targeted with proxy access proposals next season should talk to investors before taking any action, a consultant said July 15.
“The first step is to go out and engage,” said Patrick McGurn, special counsel for Institutional Shareholder Services Inc., speaking at a proxy season webcast sponsored by Foley & Lardner LLP.
“Boards can get themselves into hot water when they take unilateral action if it doesn’t appear that they’ve gone out and vetted the issue with institutional investors in advance,” McGurn said. “Investors on this issue want to communicate quite often, especially if the company wants to make an argument for changing” eligibility and other requirements in their proxy access measures.
Webcast participants also questioned whether DuPont Co.'s recent success at defeating a proxy campaign by Trian Fund Management LP signals a turning point in companies' fight against activist shareholders.
Proxy access is the top success for shareholder proposals this proxy season.
According to a July 14 Proxy Monitor report, as of June 30, 23 out of the 34 proxy access shareholder proposals submitted to Fortune 250 companies received majority support. Out of those 23, 19 were submitted by New York City Comptroller Scott Stringer.
Stringer recently indicated to Bloomberg BNA that he intends to submit more proposals next season.
In recent developments, Whole Foods Market Inc. announced in a June 26 filing that it adopted an access bylaw that allows 3 percent of its shareholders holding stock for at least three years to nominate up to 20 percent of its board.
The company's conflicting management and shareholder access resolutions led to the Securities and Exchange Commission's ongoing review of 1934 Securities Exchange Act Rule 14a-8(i)(9), which allows companies to omit from their proxy materials shareholder resolutions that directly conflict with a management proposal.
Whole Foods' proxy access parameters are similar to that proposed by shareholder activist James McRitchie, except the company limits nominating shareholders to 20, which McRitchie's proposal does not.
At the July 15 webcast, Milwaukee-based Foley & Lardner senior counsel Jason Hille suggested that “proxy access is a wait-and-see situation, but ‘be prepared' is a good summary of where we are.”
• wait for an access shareholder proposal and include it in their proxy statements;
• preemptively adopt access bylaws;
• issue a management proposal on access; or
• promise to adopt the mechanism in future.
In preemptively adopting their own bylaws, companies that want to tweak one or more of their access parameters will be “well served to go out and communicate” with their institutional investors in advance, McGurn advised.
Based on shareholder voting during the 2015 season, there is “limited latitude on the percentage of ownership and virtually zero latitude on the holding period,” McGurn said. He also noted that there may be “a slight bit of latitude” on the number of board seats that may be held by access nominees and some tolerance for limiting the number of shareholders that may be aggregated to reach the threshold.
Meanwhile, shareholder activism increased this year, according to a recent report.
Joshua Agen, senior counsel in Foley & Lardner's Milwaukee office, noted that while activity levels remain high, support for activist candidates in proxy fights was down.
Richard Grubaugh, senior vice president of D.F. King & Co., suggested that DuPont's defeat of Trian may be “a sign of the pendulum finally swinging back to some level of normalcy.”
Grubaugh also observed that DuPont's success depended on its strong retail investor base and the decision by several of the larger index funds to support the company in the fight. “DuPont did not have a terrible performance and the campaign did not rise to the level for the larger indexes to support, and that allowed DuPont to squeak on by.”
For his part, McGurn suggested that it remains an open question as to how boards will react to activism going forward after DuPont's experience. He said that activists' batting average so far this year, either through settlement or in the ballot box, has dropped below 50 percent to 44 percent. In contrast, activists were winning about 70 percent of their fights over the last two years, he said.
This does appear to “indicate that dissidents seem to have a tougher time getting board seats either by last-minute settlements or by outright victories at the ballot box,” McGurn said.
McGurn also said that in reviewing the results of recent proxy fights, it appears that an active versus passive schism may be opening up, rather than the traditional thinking of retail versus institutional investor voting. There are a lot of “differentiations in voting that are becoming apparent” between portfolio managers involved in passive indexing strategies versus actively managed investment managers. “So that's the space to watch.”
In other discussions, the panelists noted that there were no significant new developments on say-on-pay this year.
Almost identical to 2014, about 2 percent of companies have failed their vote and the “gray zone is now 7 percent versus 8 percent” last year, Grubaugh said.
McGurn suggested that shareholder engagement “has a lot to do” with the similar 2015 and 2014 statistics. “Companies and boards have gotten very adept now on reaching out to investors and listening to their concerns.”
McGurn added that his firm is seeing more recidivism—where companies have multiple say–on-pay failures—than in previous years. One company failed its say-on-pay vote five times while numerous others have failed two or three times, he said.
McGurn also observed that frequency on say-on-pay may be experiencing “some buzz.”
The Dodd-Frank Wall Street Reform and Consumer Protection Act requires companies—starting in 2011 and every six years after that—to hold a separate vote on the future frequency of the say-on-pay vote.
Companies and boards likely are thinking about the issue in anticipation of the upcoming vote, McGurn said. He said that his firm has heard that most boards expect to stick with the current frequency standard they have, typically one year or three years. However, some companies—especially those that have experienced five straight years of 95 percent-plus support—may be tempted to persuade shareholders to support a biennial or triennial vote.
McGurn added that most institutional investors haven't yet engaged in the frequency debate. Companies anticipating changes in their frequency voting should add it to their “list of engagement topics when going out and talking with institutional investors.”
To contact the reporter on this story: Yin Wilczek in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Ryan Tuck at email@example.com
Proxy Monitor's report is available at http://www.proxymonitor.org/Forms/2015Finding4.aspx.
Whole Foods's Form 8-K filing is available at http://www.sec.gov/Archives/edgar/data/865436/000110465915048521/a15-14941_18k.htm.
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