Proxy Access Update—Current Status and Outlook

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PROXY ACCESS
Andrew Ledbetter Louis Lehot Nicole Hatcher

By Andrew Ledbetter, Louis Lehot, and Nicole Hatcher

Andrew Ledbetter is the co-chair of DLA Piper’s Public Company and Corporate Governance practice. He regularly represents public companies in SEC periodic and current reporting, proxy statements, and related corporate and disclosure advice, and he has advised in dozens of initial public offerings, stock exchange listings, secondary offerings, M&A deals and other transactions.

Louis Lehot is a partner with DLA Piper. His corporate, securities and M&A law practice focuses on advising public and private companies and their financial sponsors from formation to liquidity, and he regularly represents U.S. and non-U.S. registrants before the SEC, FINRA, NYSE and Nasdaq.

Nicole Hatcher is an associate in DLA Piper’s Corporate and Securities group, based in San Francisco and Silicon Valley. Her practice focuses on counselling public and private companies, and in corporate and securities matters.

In 2017 proxy access continues to be the hottest topic among shareholders in the annual meeting process, especially for Fortune 500 companies. We believe that proxy access will move into Russell 3000 companies over the course of the next few years. And, while it is possible that the new administration will make some changes to the corporate governance landscape that will impact public companies, so far the new administration’s focus on health care and deregulation has had little impact on corporate governance matters. The forces driving proxy access ( e.g., shareholder activism, governance reform, scrutiny of board composition, concerns regarding board oversight of risk management and director-shareholder engagement) are likely to continue under the new administration and may even gain additional momentum if the administration successfully pushes its deregulation agenda. We currently expect the status quo to remain in effect for the 2017 proxy season and beyond.

Proxy access allows shareholders to nominate directors and include such shareholder nominees with a company’s own proxy materials as opposed to a shareholder submitting its own, separate proxy materials. Shareholder nominations via proxy access allow shareholders an opportunity to exert greater influence over the members of boards of directors and the board’s decision making. Shareholder activists look to facilitate proxy access by suggesting changes to a company’s bylaws.

There are four primary factors to consider related to proxy access:

  •  What is the ownership threshold for proxy access?
  •  What is the ownership duration threshold for proxy access?
  •  What is the cap on shareholder nominees to fill board seats from proxy access?
  •  What is the aggregation limit on shareholders to form a nominating group for proxy access?
As a result of Rule 14a-11, which has been vacated by the Securities and Exchange Commission, and the developments of the 2016 proxy season, the primary features of a proxy access bylaw have largely settled on allowing a single or group of up to 20 shareholders who have owned at least 3 percent of the company’s stock for at least three years to include in the company’s proxy materials director nominees for up to 20 percent of the board (the so-called 3/3/20/20 formulation).

The number of U.S. corporations that have adopted proxy access bylaws has dramatically increased, but, so far, we have not seen a parallel rise in the number of shareholder-appointed directors. This could be because of the so-called “secondary” features of proxy access bylaws ( e.g., representations and prohibitions). While the primary features of proxy access bylaws focus on the 3/3/20/20 formulation, the secondary features include additional requirements with which hopeful shareholder nominators and, in some cases, nominees must comply.

These secondary features played a part in the withdrawal of at least one shareholder nominee. In November 2016, a fund associated with a well-known activist investor filed a Schedule 14N and a Schedule 13D/A (this was the ninth amendment to the Schedule 13D) and submitted a proxy access director nomination to a public company, which had previously adopted a proxy access bylaw. The public company rejected the director nomination on the basis that the fund was not able to comply with the company’s bylaws since the fund could not represent that it did not intend to change or influence control over the company. The fund withdrew its director nomination shortly thereafter.

For the 2017 proxy season, we have seen an increase in shareholders asking companies that have previously adopted a proxy access bylaw to amend certain provisions (so-called Fix-It Proposals). Companies that have adopted a proxy access bylaw in an effort to guard against onerous provisions proposed by shareholders may still be faced with Fix-It Proposals asking them to amend the previously adopted proxy access bylaw. As of April 2017, there have been 41 Fix-It Proposals in the 2017 proxy season, nine of which focused on secondary features of proxy access bylaws. Not surprisingly, companies have sought relief from the SEC staff on Fix-It Proposals, asserting that they can be excluded under Rule 14a-8(i)(10) since the company has “substantially implemented” the proposal. The results of such requests have not been generally favorable to companies, and the SEC staff appears to have two standards--one for initial adoption of a proxy access bylaw provision and a second for the amendment of a previously adopted proxy access bylaw provision. However, despite the SEC’s reluctance to provide relief to companies for Fix-It Proposals, these proposals are not gaining much shareholder support. The Fix-It Proposals that have been voted on to-date in 2017 have only received between 24 to 37 percent support.

Another trend for the 2017 proxy season has been shareholder proposals to allow shareholders to nominate up to one-quarter of the board of directors and increase the number of shareholders who can aggregate their shares to achieve the 3 percent holding requirement.

It remains to be seen how the primary and secondary features of proxy access will impact the board nomination/election process in actual terms. Given the trend towards increased Fix-It Proposals, a company must carefully draft its proxy access bylaw provisions, whether such provisions are adopted prophylactically before a shareholder proposal or in response to a shareholder proposal already received.

ACTION ITEMS

  •  Consider whether to adopt proxy access bylaws, even in the absence of a shareholder proposal, and otherwise prepare in the event a proposal is received.
  •  Monitor large shareholders and their prior actions.
  •  Engage with large shareholders so that they are well informed of the company’s strategic goals and business plans.
  •  Consider current trends and understand that, while a company may be able to implement its preferred version of a proxy access bylaw, if it deviates from the 3/3/20/20 model, it may nevertheless be vulnerable to a future Fix-It Proposal.
  •  When implementing proxy access bylaws, consider the secondary features and how they may limit proxy access in practice and make the company susceptible to a future Fix-It Proposal.
In short, as the forces driving proxy access may gain momentum under the current administration’s deregulation agenda, companies should consider taking steps to head off shareholder proposals for unfavorable proxy access bylaw provisions. Committing to shareholder engagement may avoid the pressure to adopt a proxy access bylaw at all, and preparing for proxy access before receiving a proposal may help avoid making hasty decisions on a controversial and complicated governance matter.

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