Eliminating Aggregation Caps for Proxy Access? Why Didn't You Say That in the First Place? That's a Horse of a Different Color!


SEC Seal Blog

It is time once again to enjoy one of the sure signs of the approaching spring here in Washington. No, I’m not referring to the wandering packs of tourists who seem to think that they can activate the subway ticket machines by milling around and vacantly staring at them. I’m thinking of the annual ritual of breaking out the tea leaves or Ouija boards in a futile attempt to decode the meaning behind the SEC Corporation Finance staff’s cryptic "we are unable to concur in your view" language with regard to excluding shareholder proposals from company proxy materials.

It is still early in the proxy season, but the Corporation Finance staff has already processed nearly 90 requests to exclude shareholder proposals from materials for their upcoming annual meetings. This year’s review process will also be interesting as many companies and proponents will deal for the first time with Staff Legal Bulletin No. 14I (CF), issued last fall, on the ordinary business and economic relevance exceptions.

Despite the difficulty in decoding the staff’s thought processes, one early trend seems to be emerging from the frequent requests of John Chevedden on the topic of proxy access. In recent years, issuers have generally recognized a model of proxy access that allows shareholders owning at least 3 percent of a company’s outstanding shares for at least three years to nominate up to 20 percent of the board (or least two members) with an aggregation limit of 20 shareholders to reach that ownership threshold. The 3 percent level is a significant stumbling block, however, even with a group of 20 shareholders pooling their interests. For example, Borg-Warner, Inc., discussed below, has a market capitalization of nearly $12 billion. The proxy access ticket price to nominate directors to the Borg-Warner board would be roughly $360 million under the standard formula, requiring every member of a 20-shareholder group to bring an average of $18 million in share ownership to the table.

Chevedden had routinely brought so-called “fix-it” proposals calling on companies to amend their existing proxy access bylaws to make them more available to a larger group of shareholders. The Corporation Finance staff generally took a dim view of these requests, and of those that made their way on to issuer ballots, few gained much traction with shareholders. In April 2017, however, Kenneth Steiner and Chevedden submitted a proposal to H&R Block calling on the company to amend its bylaws, not to expand the number of investors that could pool their holdings but to eliminate any limits on the number of shareholders that could join together to form a proponent group.

H&R Block predictably cited the long list of fix-it proposals that the staff allowed companies to exclude under the “substantial implementation” language in Exchange Act Rule 14a-8 (i)(10). The company asserted that its proxy access bylaw provided "meaningful" proxy access to investors, and reflected a market consensus,  as approximately 89 percent of the of the 396 companies that adopted proxy access bylaws between January 2013 and February 2017 adopted a 20-shareholder aggregation limit.

The company also said that its "aggregation limit affords shareholders ample opportunity to combine with other shareholders to form a nominating group.” Finally, H&R Block asserted that “the absence of any limitation in this regard opens up the proxy access process to abuse by shareholders with special interests, including interests unrelated to long-term shareholder value.”

These arguments apparently failed to persuade the staff, as the division responded with their usual cryptic "we are unable to concur in your view that H&R Block may exclude the proposal." A proposal to reduce the maximum number of investors in a group might well fall to “substantial implementation” exclusion, but eliminating the cap altogether may well be that horse of a different color.

Fast-forwarding to 2018, Chevedden has racked up several early wins in the proxy season. The supporting statement in Alaska Air Group, Inc. is an entertaining read, as it argues that expanded proxy access is necessary "to make up for our management taking away an important shareholder right," the in-person shareholder meeting. According to the statement, "now our directors can casually flip their phones to mute during the annual shareholder meeting." In addition, "management is now free to run a make-believe meeting with Investor Relations devising softball questions in advance ... [t]op management has no incentive to avoid making mistakes for 365 days of the year out of concern that there will be an in-person accounting at the annual meeting."

Despite a supporting statement on proxy access that seemed to focus little on supporting proxy access, Chevedden prevailed and the staff concluded that Alaska Air could not exclude the proposal.

The division staff reached a similar result in response to a request by Borg-Warner to exclude another Chevedden proposal. The proponent once again pulled no punches. Chevedden said that "[t]he claim that it is too much work to vet more than 25 participants is completely bogus." According to Chevedden, “[t]he company seems to be of the opinion that a group of smaller shareholders have next to zero chance of putting forth proxy access director candidates—so they should not even be given a chance to try for the first time ever.

Once again, the Corporation Finance staff agreed with him.

Chevedden prevailed for a third time in his request submitted to Raytheon Co. Again, he called for the removal of the shareholder aggregation cap, which was 20 in this case. According to Raytheon, "the Proxy Access By-Law imposes a reasonable and appropriate limit on the number of shareholders who may aggregate their holdings.” Raytheon made many of the same arguments that Borg-Warner and Alaska Air made, that their large institutional investors could band together if they so desired. Chevedden countered that his proposal "addresses the contradiction that our company now has with proxy access for only the largest shareholders who are probably the least likely shareholders to use it." Perhaps his most telling point, however, is a very simple one—the company “does not distinguish its approach from the H&R Block case.”

It may still be too early to conclusively call the staff’s views on eliminating aggregation caps a trend, but it is safe to say that John Chevedden is enjoying a nice winning streak. It is also safe to say that he writes supporting statements that are rarely boring.

For more data and analysis on the 2018 proxy season, Bloomberg Law subscribers can access the SEC Shareholder Proposal No-Action Letters Tracker and accompanying Analytics on the Corporate Practice Center.