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By Yin Wilczek
June 3 — As of May 28, 58 shareholder proxy access proposals have been put to a vote of which 36 passed and 23 failed, according to Simpson Thacher & Bartlett LLP.
One proposal was withdrawn and 24 are pending, said Yafit Cohn, an associate at Simpson Thacher's New York office.
“We've had some pretty mixed results,” Cohn said, speaking at a June 3 Practising Law Institute webcast. “We're at roughly 60/40 at this point.”
According to Simpson Thacher statistics, the average level of support so far for shareholder-submitted access proposals is 56.1 percent, compared to 30.9 percent in 2014 and 32.5 percent in 2013.
In cases where shareholders were presented with dueling management and shareholder resolutions, the average level of support was 52 percent. Where management simply voiced its opposition to a shareholder proposal without submitting its own, the average level of support was 54.6 percent.
“I think the takeaway of all of the different approaches taken by the companies is that it’s really a lot of art and not that much science, which really makes it pretty difficult to advise boards and management as to what is the best approach,” said New York-based Simpson Thacher partner A.J. Kess.
Kess added that the best path forward for each company with respect to proxy access depends on many factors, including their shareholder base, performance and governance profile. “I think it’s going to continue to be interesting for at least the next couple of years until a standard actually develops, and then it will become more routine,” he said.
The webcast panel reviewed the votes received by two companies: Avon Products and Westmoreland Coal. Avon's shareholder access proposal received a high level of support—75.7 percent—while Westmoreland's shareholder resolution received only 35.8 percent support.
Arthur Crozier, chairman of consultant Innisfree M&A Inc., noted that what drove the results included performance and the shareholder base. While the total shareholder return (TSR) for Avon in 2014 was minus 45 percent, the TSR for Westmoreland was 71 percent.
In addition, Crozier noted that Avon's shareholder base is fairly heavily represented by traditional institutional shareholders, many of whom support proxy access. On the other hand, Westmoreland's shareholder base includes many hedge funds that base their decisionmaking more on performance than corporate governance principles or proxy advisory firm recommendations, he said. He added that Westmoreland's top shareholder—Libby Frischer Family Partnership—is affiliated with the company.
“So a large part of the reason for” why some resolutions did well and some didn't largely is attributable to performance and shareholder base, Crozier said.
The panel participants also agreed that access thresholds are standardizing at eligible shareholders holding 3 percent to 5 percent of stock for three years, for the ability to nominate from 20 percent to 25 percent of the board.
• DaVita HealthCare Partners Inc., annual meeting June 16; and
• Fidelity National Financial Inc., June 17;
• Equity Residential, June 24; and
• Rite Aid Corp., June 25.
Going forward, Crozier said he expects more shareholder access proposals in 2016 given New York City Comptroller Scott Stringer's push for a “global standard” of giving eligible shareholders holding 3 percent of stock for three years the ability to nominate up to 25 percent of the board.
Cohn had three recommendations for companies preparing for the next season. The main message is that “the shareholder base is key,” she said. Accordingly, companies should start evaluating their shareholder base and understand their voting policies with respect to proxy access.
In addition, Cohn said boards should be educated about the trends that drove the 2015 season as well as the advantages and disadvantages of pursuing different approaches in response to a shareholder access proposal.
Third, if companies are considering the adoption of access bylaws, they should think about what thresholds may be appropriate and what “bells and whistles” to include, she said.
• should the access right terminate in certain circumstances?
• what happens if the access proponents start soliciting—should they lose the right to proxy access? and
• should there be a category of disqualified director candidates?
As to getting on a board through proxy access, Crozier said it largely depends on the qualifications and experience of the candidate in question. “The other thing is we’re not sure how many” institutional investors will participate in nominating directors, he added. “That’s a very big step for many of these institutions to take, particularly the fundamental active managers in that they generally don’t want to be seen to be in public opposition to a management team because it can inhibit their ability to interact with other investments.”
However, Crozier added that at this point, it is unlikely that hedge fund activists will use proxy access. “There are a lot of limitations in proxy access mechanically, substantively,” he said. Activists that are really serious about getting directors elected to the board “will want to use the traditional method—filing their own proxy statement, putting out their own proxy card and waging those kinds of proxy fights.”
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