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Sept. 16 — Proxy access—the process that allows shareholders to nominate their own board candidates on the corporate ballot—again promises to be a flash point for companies and shareholders.
Corporate governance attorneys and shareholder proponents told Bloomberg BNA that they expect the topic to be the most common shareholder proposal for the 2017 proxy season. They also anticipate that proxy access will be a major point of contention at the Securities and Exchange Commission process in which the staff acts as referee for what companies must include in the materials they send shareholders in advance of an annual meeting.
“Proponents will continue to request adoption at companies that have not acted and, in some instances, will seek to amend proxy access terms they disagree with,” Elizabeth A. Ising, a Washington-based partner at Gibson, Dunn & Crutcher LLP and co-chair of the firm's securities regulation and corporate governance practice, said in a Sept. 14 e-mail.
Shareholder proponents likely will focus on eliminating company requirements that cap the number of shareholders that can be aggregated to use proxy access.
One outstanding question is whether the SEC will let companies use the “substantially implemented” exemption to omit proxy access shareholder proposals from their proxy materials, as many did successfully in the 2016 season.
The number of companies that have adopted proxy access has grown rapidly since 2015, when New York City Comptroller Scott M. Stringer launched the Boardroom Accountability Project (147 CARE, 8/1/16).
Every year, New York city pension funds target a slew of companies with proxy access proposals. Stringer told Bloomberg BNA in a Sept. 14 e-mail that more than 250 companies have adopted proxy access since his project began. “This is remarkable progress, and I expect the City’s pension funds to remain focused on making proxy access a market standard,” he said.
According to ISS Corporate Solutions, just under 40 percent of S&P 500 companies, and about 8 percent of Russell 3000 companies, have adopted proxy access bylaws.
In the 2016 season, companies asked the SEC for relief from proxy access proposals more often than any other shareholder resolution. According to Bloomberg BNA data, companies submitted 231 letters between Jan. 1 and Sept. 14 asking the SEC staff whether they could exclude shareholder proposals from their proxy materials. Of those 231 no-action requests, 54 involved proxy access. The second-most popular topic was environmental issues, of which there were 36 requests.
The SEC staff granted relief for a majority of the 54 proxy access no-action requests based on 1934 Securities Exchange Act Rule 14a-8(i)(10), which allows companies to omit shareholder proposals that have been substantially implemented (89 CARE, 5/9/16). However, late in the proxy season, in what shareholder activists have described as a “breakthrough,” the staff July 21 didn't agree that H&R Block Inc. could use the rule to exclude a proxy access proposal from James McRitchie and Myra Young (145 CARE, 7/28/16).
Proponents say the H&R Block decision provides them with a footing on which to get more favorable proxy access provisions from companies that already have the mechanism. The staff's no-action response there “may help shareholders to obtain more user-friendly versions of proxy access,” activist John Chevedden told Bloomberg BNA in a Sept. 13 e-mail.
In the 2016 season, Chevedden had by far the highest number of proposals—38—that companies sought to exclude through the SEC's no-action process.
Looking ahead to the 2017 season, attorneys predict that the main battleground for the SEC's relief process will be the extent to which companies can exclude a shareholder proposal as “substantially implemented” under Rule 14a-8(i)(10).
“In particular, this will be an issue in the context of proposals asking that companies revise or ‘fix' certain terms in their proxy access bylaws,” Ising said. She added that the success of no-action requests to exclude such proposals will depend on the specific facts at issue: what does the proposal ask for, what has the company already done, and are the differences substantive.
Access proposals that seek to modify the minimum percentage ownership thresholds adopted by companies won't be excludable under the rule, attorneys said. However, the SEC staff's H&R Block no-action response hasn't necessarily delineated clear parameters on what constitutes “substantially implemented” for proposals requesting to amend other types of provisions, said Keir Gumbs, a Washington-based partner at Covington & Burling LLP who is vice chair of his firm's securities and capital markets practice group.
There is still a lot of open ground in terms of additional arguments that can be made and there are “almost a limitless number of proxy access bylaw provisions that one could conceivably challenge or ask a company to tweak,” Gumbs said.
Alan Dye, a partner at Hogan Lovells in Washington who advises boards and in-house counsel, told Bloomberg BNA Sept. 14 that companies will make the argument that the essential objective of the proposal is to have a workable, meaningful or useful proxy access mechanism. Once the company has such a mechanism, it should be able to exclude a shareholder proposal that seeks tweaks in the process, he said.
Dye added that when determining whether a shareholder proposal has been substantially implemented by the company, the SEC staff may look to whether the proposed amendments affect a material provision of the company's proxy access bylaw. The question rests on what the staff will consider “core” provisions, he said.
In seeking changes to proxy access bylaws, shareholders this coming season likely will home in on the number of shareholders that can be aggregated to qualify for use of the mechanism, attorneys and proponents said.
“My emphasis, so far relatively fruitless, is to move from proxy access lite to proxy access as defined” by the SEC’s federal rule, McRitchie told Bloomberg BNA in a Sept. 13 e-mail. The SEC's federal rule, which was invalidated by the U.S. Court of Appeals for the District of Columbia Circuit in 2011, required companies to adopt a proxy access standard under which shareholders that have held at least 3 percent of the shares for three years can nominate up to 25 percent of the board.
“The primary obstacle at this point” to viable proxy access is the “fairly common” practice of companies limiting their access mechanisms to a group of up to 20 shareholders, McRitchie said. He cited a finding by the Council of Institutional Investors that even if the 20 largest public pension funds were to aggregate their shares, they wouldn't meet the 3 percent threshold at most of the companies that the council examined.
However, it isn't clear that shareholder proponents are in agreement on the matter. While shareholders are starting to focus on aggregation, “I'm not sure that all shareholders are on the same page about what level of aggregation is appropriate and what level is problematic,” Gumbs said. “Companies are going to be reluctant to make changes that aren't universally advocated by shareholders.”
Currently, most companies that have adopted proxy access provisions limit shareholders' use of the mechanism to 20 percent of the board. Dye suggested that investors this season may try to increase that to 25 percent, as set out in the SEC's revoked federal rule, and establish a minimum of two director seats.
It remains to be seen whether shareholder proponents will try to get smaller companies to adopt proxy access provisions this coming season.
There's still a lot of “open turf” out there for shareholders to approach new companies that haven't adopted proxy access bylaws, Gumbs said. However, it is not clear whether more companies will adopt proxy access, especially ones outside the S&P 500, where there hasn't been much pressure for them to do so yet, he said.
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