SEC Rule to Play Major Role in Proxy Access: Attorneys

By Michael Greene

Jan. 21 — As companies mull how they will proceed on proxy access, the SEC's “substantially implemented” rule may be emerging as a key route by which they exclude shareholder resolutions on the matter, attorneys said Jan. 20.

Some companies already have requested no-action relief under 1934 Securities Exchange Act Rule 14a-8(i)(10), said Lillian Brown, a Washington-based partner at Wilmer Cutler Pickering Hale & Dorr LLP. The provision allows companies to exclude from their proxy materials shareholder proposals asking for actions that have been substantially implemented.

Brown added that it will be interesting to see how the Securities and Exchange Commission staff comes out on the pending letters.

The rule “is going to be an important area for staff guidance this year,” agreed Keir Gumbs, a Washington-based partner at Covington & Burling LLP. “There are a bunch of no-action letters pending and I would expect that there will be a bunch more that will get submitted” in 2016.

The attorneys spoke at a Bloomberg Law: Corporate Transactions webinar.

Success in 2015 Season

Under proxy access, shareholders are allowed to nominate directors and have their nominees included in the company's annual meeting proxy materials. The 2015 season was a watershed year for the mechanism, spurred largely by the efforts of some institutional and retail investors such as New York City Comptroller Scott Stringer (29 CCW 362, 11/26/14).

In the face of strong investor support, more than 100 companies adopted proxy access last year, according to Bloomberg BNA data.

Shareholder proponents previously told Bloomberg BNA that they intend to make a strong push for proxy access this year as well (31 CCW 17, 1/20/16).

At the webinar, Gumbs and Brown said companies may now be turning to Rule 14a-8(i)(10) to exclude shareholder proxy access resolutions partly as a response to SEC staff guidance that makes it more difficult to obtain no-action relief under the commission's “directly conflicts” exemption—Rule 14a-8(i)(9).

Next Option?

In a legal bulletin, the SEC's Division of Corporation Finance clarified in October 2015 that contrary to past practices, the staff won't view a shareholder proposal to be directly conflicting with a management proposal if a reasonable shareholder could logically vote for both (30 CCW 322, 10/28/15).

The SEC initiated its review of the “directly conflicts” rule after some investors complained that companies were using it to counter shareholder access resolutions with management resolutions that had more stringent eligibility thresholds.

Brown noted that the staff guidance took away one of the major means companies had to address shareholder access proposals, and companies may now be looking at the “substantially implemented” rule as the next option.

However, Brown warned that while General Electric Co. was able to successfully use Rule 14a-8(i)(10) last year to exclude a shareholder access resolution, there still is some uncertainty over the application of the provision.

In light of what happened to Rule (i)(9), “everybody is a little bit wary” about how Rule (i)(10) will be applied, particularly in the context of proxy access, she said.

Gumbs also noted that in shareholder proposals this year, proponents such as the New York City Comptroller, James McRitchie and John Chevedden are including “catchall language” to target some companies that adopted proxy access bylaws that they view as problematic. He said the activists' resolutions call on companies not to impose “additional restrictions” on shareholder director nominees that are not placed on other board nominees.

In looking at a no-action request, the SEC staff will focus on whether the company has imposed “additional restrictions” in determining whether it has substantially implemented what the shareholder proponent is asking for, Gumbs said.

Best Practices

This proxy season, companies and shareholders will be negotiating what would constitute best practices for organizations seeking to adopt access bylaws and provisions, Brown and Gumbs said.

Brown suggested that companies keep in mind guidance from the Council of Institutional Investors and proxy advisory firms that outline some of the key concerns of investors.

In the structuring of bylaws, Gumbs noted that of the 120 or so companies that now allow proxy access, 54 eliminate the right if shareholders intend to make another nomination at the same meeting.

Gumbs also noted that there are “tons of variations” in how some corporate bylaws deal with compensation arrangements by shareholders seeking to nominate directors. Many bylaws say that shareholders can enter into compensation arrangements with third parties as to how they will vote or act as long as the deal is disclosed, he said. Other bylaws provide that you can enter into compensation arrangements as long as the deals don't impact any fiduciary duties, he said.

To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com