Proxy Access Gains Ground as Companies Reach Pacts With Shareholder Proponents

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By Yin Wilczek

March 11 — New York City Comptroller Scott Stringer March 11 announced agreements with a number of companies—including Abercrombie & Fitch and Staples Inc.—regarding proxy access proposals submitted by his office and other proponents.

Abercrombie & Fitch will ask its shareholders to approve a proxy access bylaw amendment that will allow eligible shareholders—those holding at least 3 percent of stock for three years or more—to nominate up to 25 percent of the board and place their nominees on the company's ballot.

Staples similarly will ask shareholders to vote on an access bylaw amendment that will give eligible shareholders—again, those holding at least 3 percent of stock for three years or more—to nominate up to 20 percent of the board if the board is 10 or more directors, or 25 percent if the board is nine or fewer directors.

“A three percent ownership threshold over three years to exercise that right is reasonable and meaningful,” Stringer said in a release about the agreements. “The momentum for proxy access is evident and we expect more companies to follow” Abercrombie & Fitch's and Staples’ lead.

Mixed Results

The announcement comes after Prudential Financial Inc. March 10 adopted a proxy access bylaw without prodding from shareholders.

However, although shareholders at many companies will be asked to vote on access proposals this year, some may not be ready for it. Apple Inc. shareholders defeated an access proposal submitted by James McRitchie at the company's annual meeting March 10.

Some companies also said in recent Securities and Exchange Commission filings that they are advising their shareholders to vote against shareholder-submitted access proposals, while others are putting conflicting shareholder/management resolutions to a vote.

In October 2014, Stringer—on behalf of the New York City Pension Funds—sent access proposals to 75 companies, leading to a new focus on proxy access and its adoption by U.S. companies. 

In related developments, the SEC earlier this year suspended—pending staff review—its no-action process under a provision in the shareholder proposal rule that allows companies to omit from their proxies shareholder resolutions that conflict with ones that management intends to put to a vote.

The suspension was precipitated by investor concerns that some companies were using the exemption to get around shareholder proxy access proposals with eligibility thresholds they considered too lax.

The SEC action left companies scratching their heads over how they will proceed with conflicting resolutions, including those on proxy access.

Subsequently, many institutional investors said that they are prepared to vote against directors in companies that act in bad faith against their shareholder-submitted access proposals. 

Other Companies Moving Forward 

In his March 11 announcements, Stringer also said that he has reached agreements with Big Lots Inc. and Whiting Petroleum Corp., both of which will propose access bylaws to allow shareholders eligible under the 3 percent/three year threshold to nominate up to 25 percent of their boards.

A representative also said that Stringer's office reached an agreement with McKesson Corp. last year in which the company will put up a management resolution calling for the 3 percent/three year threshold, and allowing shareholders to nominate up to 20 percent of the board.

Meanwhile, Prudential March 10 said its board approved a bylaw amendment that will allow shareholders owning 3 percent or more of the stock for at least three years to nominate up to 20 percent of the board. The bylaw—adopted without a push by a shareholder proposal—is immediately effective.

Prudential Chief Governance Officer, Vice President and Corporate Secretary Margaret Foran told Bloomberg BNA that the company adopted the bylaw after discussions with its investors over the past several months as part of its ongoing shareholder engagement cycle.

“Based on the feedback we received from shareholders and our beliefs about shareholders' rights, the board proactively adopted proxy access,” Foran said. ‘Since we did not have a shareholder proposal from N.Y. City or any of the other shareholders on this issue, it was truly a proactive step by our board.”

Other companies that have taken a step toward proxy access include General Electric Corp., which adopted an access bylaw amendment in February, and Citigroup, which said recently that it will support an access proposal submitted by McRitchie.

Beginning of ‘a Huge Wave.'

Apache Corp. said in a March 3 SEC filing that it will urge shareholders to approve a resolution submitted by Stringer. Moreover, YUM! Brands Inc. said in a Feb. 27 filing that after discussions with its shareholders, it will implement an access bylaw in the spring and that Marco Consulting Group will withdraw its resolution.

John Olson, a Washington-based partner at Gibson Dunn & Crutcher LLP, told BBNA that proxy access does appear to be gaining ground this season. One reason for that may be that proponents generally are “following the outlines of the SEC rules that were struck down in court and are presenting proposals that are more moderate in their thresholds and other details than was the case in past proxy seasons,” he said.

The SEC's federal proxy access rule—1934 Securities Exchange Act Rule 14a-11—included a 3 percent/three year threshold. The U.S. Court of Appeals for the District of Columbia invalidated the rule in July 2011 on the basis that the agency failed to conduct an adequate economic analysis. 

According to McRitchie, this is just the beginning “of a huge wave on proxy access.”

“Adoption of the 14a-11 standards will go much more quickly than majority voting for directors, since this issue is like a Magna Carta for investors,” McRitchie told BBNA. “I began shifting my own proposals to that standard in submissions late last year, after failing to get traction for something more creative that might have involved large numbers of retail investors.”

McRitchie noted that even with the “admittedly flawed language” in the proposal submitted at Apple, “we got almost 40 percent of the preliminary vote.” He added that he has additional proposals at Amazon, United Guardian and Wal-Mart. “I will submit more that will conform strictly to the vacated Rule 14a-11 standards as the opportunity arises for the rest of the season and on into 2016,” he said.

Others Balking 

Conversely, some companies are urging their shareholders not to approve access proposals submitted by the New York City Comptroller. These include EQT Corp., Cimarex Energy Co., PACCAR Inc. and VCA Inc.

In an SEC filing, Cimarex said that the proposal failed to strike the right balance of enhancing the rights of significant, long-term shareholders without undue disruption and distraction.

“Specifically, because this proposal (i) seeks an inappropriately low proxy access ownership threshold (3 percent); (ii) fails to expressly provide for reasonable limits on permitted aggregation or `grouping' of shares to meet the low ownership threshold, and (iii) contemplates an inordinately high fraction of the Board (25 percent) being available for proxy access candidates, it risks introducing a disruptive and potentially destabilizing dynamic into the Board election process—a particularly unjustified outcome given the significant extent to which our existing corporate governance structure promotes responsiveness and accountability to shareholders,” the company said.

At the same time, other companies have put up conflicting proposals. For example, Cloud Peak Energy Inc. asked shareholders to approve a bylaw amendment that would allow shareholders holding 5 percent or more of stock for at least three years to nominate the greater of one director or up to 10 percent of the board. Cloud Peak also urged shareholders to vote against a resolution submitted by Stringer.

Similarly, AES Corp. asked shareholders to approve a nonbinding management resolution under which shareholders holding at least 5 percent of company stock for three years can nominate up to 20 percent of its board. It also asked that shareholders reject the access proposal submitted by Stringer.

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

Stringer's announcements are available at http://comptroller.nyc.gov/newsroom/abercrombie-fitch-and-comptroller-stringer-and-the-new-york-city-pension-funds-announce-proxy-access-agreement/ and http://comptroller.nyc.gov/newsroom/comptroller-stringer-and-the-new-york-city-pension-funds-reach-agreement-with-staples-on-proxy-access/.

Prudential's SEC filing is available at http://www.sec.gov/Archives/edgar/data/1137774/000119312515085494/d888962d8k.htm.

Apache Corp.'s filing is available at http://www.sec.gov/Archives/edgar/data/6769/000119312515075198/d864221dpre14a.htm.

YUM! Brands Inc.'s filing is available at http://www.sec.gov/Archives/edgar/data/1041061/000104106115000009/form8-k22715.htm.

EQT's filing is available at http://www.sec.gov/Archives/edgar/data/33213/000110465915018650/a15-5792_1defa14a.htm.

Cimarex Energy Co.'s filing is available at http://www.sec.gov/Archives/edgar/data/1168054/000110465915018561/a15-1556_1pre14a.htm.

Cloud Peak's filing is available at http://www.sec.gov/Archives/edgar/data/1441849/000110465915018559/a15-1708_1pre14a.htm.

AES Corp.'s filing is available at http://www.sec.gov/Archives/edgar/data/874761/000087476115000021/a2015proxystatement1.htm.