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By Yin Wilczek
March 24 — So far this proxy season, the jury is still out on whether the market will coalesce around a proxy access eligibility threshold of 3 or 5 percent, panelists said March 24.
Glen Schleyer, a partner with Sullivan & Cromwell LLP, New York, noted that of the 25 or so companies that have adopted proxy access bylaws or put forward management access proposals, the numbers are “pretty evenly split” between allowing shareowners holding 3 percent or 5 percent of stock to be eligible to nominate directors and have their candidates included in the company's proxy materials.
While early adopters generally favored the 3 percent threshold, more recent adopters—particularly small and medium companies—are putting their thresholds at 5 percent, Schleyer said.
Looking ahead, when these measures are put to the vote, “we'll really get a sense of whether” the 3 and 5 percent is a “meaningful difference for shareholders,” Schleyer said.
Schleyer spoke with others at a webcast sponsored by TheCorporateCounsel.net.
Proxy access is the big story of the 2015 season. More than 100 access proposals have been submitted to companies by shareholder proponents, fueled in most part by an initiative from New York City Comptroller Scott Stringer. Securities and Exchange Commission Chair Mary Jo White also addressed the topic during March 24 congressional testimony, saying that she was not planning a rulemaking on the subject at this time.
Apart from the split between the 3 and 5 percent thresholds, there is a “lot of consistency” in how companies are adopting or will adopt proxy access, Schleyer continued.
Most adopting companies favor a three-year holding period and allowing eligible shareholders to nominate up to 20 percent of their boards, Schleyer said. He observed that the companies also require “pretty significant information and commitments” from nominating shareholders. “It's become common to require” such shareholders to express their intent to hold their shares “not just through the meeting, but for a year after the meeting,” he added.
Moreover, there is “some market practice” developing around nominee eligibility, Schleyer said. These include requirements that the nominee be independent, lack affiliations with competitors or be free of a criminal history, he said. If companies are moving to adopt access bylaws, they should think about whether it makes sense to build such eligibility requirements generally into their director qualifications rather than adopt them for—and limit them to—access nominees, he added.
Schleyer further suggested that “private ordering and some market practice” will start to develop in how companies handle “the creeping control concern.” For example, he noted that Bank of America had a “limited variation” on that in its bylaw amendment, passed March 17, by barring nominating shareholders who are successful in getting their candidates elected from using proxy access for the next two years.
Meanwhile, stockholders at three companies have voted on shareholder-submitted access proposals this year, said Elizabeth Ising, a Washington-based partner at Gibson, Dunn & Crutcher LLP. She observed that the access proposal submitted to Monsanto Co. won shareholder support (53.5 percent) in January, but those at CSP Inc. and Apple Inc. were defeated: CSP (48 percent); Apple (39.2 percent).
The next access proposals coming up for a vote are at EQT and FirstMerit, Ising continued. After that, there are about 17 more votes on such resolutions through the end of April, and “many more to come in May,” she said.
Ning Chiu, counsel in Davis, Polk & Wardwell LLP's New York office, noted that according to the 30 or so companies that have filed preliminary or definitive proxies, there are a “fair number of variations” in how the shareholder-submitted proposals are being handled in the wake of the SEC's suspension of no-action relief under 1934 Securities Exchange Act Rule 14a-8(i)(9) pending staff review.
In one variation, companies—such as HCP—are including the shareholder proposal in their proxy materials, but are urging their stockholders to vote against it because they already adopted or intend to adopt a different version, Chiu said. In another variation, companies—such as Apache Corp. and Citigroup—are including the shareholder proposal and supporting it, Chiu said.
Yet other companies—such as Exelon and Chipotle—are including conflicting management and shareholder resolutions, Chiu said.
Looking ahead, Keir Gumbs, a Washington-based partner at Covington & Burling LLP and co-author of Bloomberg BNA's shareholder proposal portfolio, predicted that the SEC staff, in its review of Rule 14a-8(i)(9), will ultimately conclude that its handling of the Whole Foods Market Inc. no-action request was in line with its historical approach and legal precedent.
“If staff were to look at the body of law, the only conclusion they can make is that the Whole Foods letter was consistent with that body of law,” Gumbs said. “If the staff wants to change it they would have to do a rulemaking in order to do so.”
At the same time that it announced the review of the provision, the SEC also withdrew the staff letter allowing Whole Foods to omit from its proxy materials a shareholder's access proposal.
In the meantime, Tom Ball, senior managing director at proxy advisory and solicitation firm Morrow & Co., offered some tips for companies who are putting conflicting access proposals to a vote and want shareholders to vote for the management resolution with perhaps tougher eligibility thresholds.
Companies must explain in proxy statements and in letters why the management proposal is in the best interests of the company and conversely, why the shareholder proposal puts the company at risk, he said. “I think you need to be as granular and as company-specific as possible,” he added. “Arguments based on broad concerns,” such as that proxy access will be disruptive, will not be as effective as arguments that are specific to the company.
Ball said that examples of persuasive arguments include:
• explaining company shareholder profiles and showing how lower eligibility thresholds would make the company more vulnerable;
• showing the company already has good corporate governance practices;
• showing the company's strong performance; and
• showing the company is engaging with shareholders, which is shaping the company's approach to proxy access.
Among other examples, Ball cited American Electric Power's response to a shareholder access proposal in which the company included a chart showing its five-year returns.
Ball added that the disruption argument can be made, but will be more convincing if it is company-specific. He noted, for example, Marathon Oil's disclosure in which it provided a good description of the unique environment in which it operates and why proxy access might be a cause for concern.
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