Shareholders May Be Voting on Tweaks to Proxy Access Bylaws

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By Michael Greene

Nov. 18 — Companies that have adopted proxy access bylaws will have a tough time blocking shareholders from voting on resolutions asking for modifications to the provisions.

About 300 companies have such bylaws, which allow shareholders to include their director nominees in the company's proxy statement. The Securities and Exchange Commission staff told Walt Disney Co., Apple Inc., Walgreens Boots Alliance Inc. and Whole Foods Market Inc. in recent letters that they couldn't exclude from their proxy materials shareholder proposals calling for changes to their access bylaws.

That means that shareholders will get to vote on the nonbinding resolutions, unless the proponent withdraws the proposal or the company successfully litigates in federal court to exclude it.

However, the staff agreed Nov. 4 that Oshkosh Corp. could omit a similar shareholder resolution. The staff's response to Oshkosh suggests that if companies act on the shareholder's request, they may still be able to omit the resolution under the SEC's “substantially implemented” exemption, attorneys told Bloomberg BNA.

“The company must take some action to implement some or all of the requested modifications to be deemed to have substantially implemented the proposal,” said Alan Dye, a partner at Hogan Lovells in Washington who advises boards and in-house counsel.

Keith Higgins, director of the SEC's Division of Corporation Finance, Nov. 18 confirmed that the key message from the recent staff letters is that companies won't have a “prevailing argument” under the “substantially implemented” exemption if they don't implement anything requested by the shareholder proponent.

The SEC official, speaking at an American Bar Association event, also said that the staff, when dealing with corporate requests for relief to exclude proxy access shareholder proposals, will consider the proposal and the requested amendments rather than how the company's proxy access procedures will be modified by the proposal.

`Substantially Implemented' Provision

Earlier this year, the staff sided with the overwhelming majority of companies that sought to keep shareholder proxy access proposals from going to a stockholder vote based on 1934 Securities Exchange Act Rule 14a-8(i)(10). The provision allows companies to exclude shareholder proposals requesting corporate actions that have been substantially implemented. The resolutions called on the companies to adopt proxy access bylaws, and the companies countered that they were implementing, or taking steps to implement, management proposals on the matter.

In July, the staff declined to grant relief to H&R Block Inc. Attorneys and shareholder proponents said at the time that the company was unsuccessful in obtaining SEC no-action relief because it already had proxy access bylaws, and the proponent asked for changes to the provisions. The recent staff correspondence denying relief to Walt Disney, Apple and others appears to confirm this trend.

In Oshkosh's situation, shareholder activist John Chevedden sought six changes to the company's access bylaws. The company implemented three of the requested tweaks, including lowering its eligibility threshold from at least 5 percent of stock ownership to 3 percent. That may have been critical to the staff's decision, said Yafit Cohn, an associate based in Simpson Thacher & Bartlett LLP's New York office who comments frequently on corporate governance matters.

Expansion of Shareholder Right

The essential objective of Oshkosh's shareholder proposal was to expand shareholders' ability to use proxy access, and the company did that by reducing the ownership threshold, Cohn told Bloomberg BNA.

While each situation is unique, the staff's response to Oshkosh and the other companies may suggest that companies that already have access bylaws may not have too many substantive grounds upon which to exclude “fix-it” proposals, Cohn said.

Other questions remain, attorneys said.

One issue is whether a shareholder proposal that seeks to amend only one element of an existing proxy access bylaw may be excluded as substantially implemented, “on the ground that the requested amendment is immaterial or out of the mainstream, or for some other reason does not enhance the essential objectives of proxy access,” Dye said.


Another question is whether the timing of a company's changes will affect the SEC staff's no-action determinations.

“It would be interesting to know whether the fact that Oshkosh changed its proxy access bylaw after it received the shareholder proposal factored into the staff’s decision,” or whether the differences stand on their own, no matter when they were adopted, said Michael Hermsen, a Chicago-based partner at Mayer Brown LLP’s Corporate and Securities group. “We are keeping on the lookout for more proposals on this point to see if they provide any helpful information on how to read the tea leaves and see what is important to the SEC.”

Hermsen said companies also should monitor how shareholders vote on the proposals. “If well-received, we could expect to see more proposals next season, unless companies voluntarily amend their proxy access bylaws before then,” he said.

Proxy Access Shareholder Proposals Since Oct. 1
NameDate of SEC ResponseResult
Costco Wholesale Corp.10/6/16Withdrawn
Apple Inc.10/27/16Relief Denied
Walgreens Boots Alliance Inc.11/3/16Relief Denied
Walt Disney Co.11/3/16Relief Denied
Whole Foods Market Inc.11/3/16Relief Denied
Oshkosh Corp.11/4/16Relief Granted

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