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By Yin Wilczek
Dec. 11 — With the anticipated ramp-up in proxy access proposals for the 2015 season, a recent development at the Securities and Exchange Commission has made the battlefront between companies and shareholder proponents even more interesting, participants at a webcast said Dec. 10.
The SEC Division of Corporation Finance Dec. 1 agreed that Whole Foods Market Inc. could exclude from its proxy materials a proxy access proposal submitted by James McRitchie because the company's board intends to seek shareholder approval of its own proposal.
Although McRitchie's resolution had proposed giving shareholders who own at least 3 percent of the company stock for three or more years the right to list their director candidates on the company's ballot, Whole Foods' resolution proposes a 9 percent/five-year threshold.
With the success of Whole Foods' strategy, many companies now are contemplating their own proxy access proposals to counter those submitted by shareholder activists, said Richard Grubaugh, senior vice president at proxy solicitation services provider D.F. King & Co. The question is what threshold ultimately will be acceptable, he said.
Grubaugh spoke with others at a 2015 proxy season preview sponsored by Foley & Lardner LLP.
Observers anticipate that more than 100 proxy access proposals will be submitted in the 2015 season, fueled by a recent initiative announced by New York City Comptroller Scott Stringer.
Based on the 2014 season, proxy access proposals with a threshold of 3 percent stock ownership for three years—similar to what the SEC wanted in its invalidated proxy access rule—have garnered the greatest support from shareholders. Nine proposals utilizing that threshold in 2014 averaged 54 percent of the votes cast (ranging from 44 percent to 69 percent). Of that nine, five received majority support.
At the webcast, Grubaugh said that Whole Foods' threshold of 9 percent for five years “obviously is not going to win any institutional support.” However, there may be an intermediate threshold between 3 percent/three years and 9 percent/five years that some institutions will support, “so many companies may be coming out with a” five percent for five years threshold in their proposals, he said.
Grubaugh suggested that many institutions will support the higher threshold because that will be the only proposal on the agenda. However, this is only the beginning of private ordering for proxy access, he added. Eventually a “happy medium” will be found.
“Where that’s going to be we don’t know yet,” he said. “This is going to take several years.”
Patrick McGurn, special counsel for Institutional Shareholder Services, Inc., disputed that shareholders automatically will accept the 5 percent/five year threshold. He warned that boards may find themselves targeted by no-vote campaigns as a result of offering more stringent proxy access thresholds. The thresholds in the SEC rule were viewed by many investors as a “balancing act” reached through compromise between the issuer and investor communities, and there may not be “a lot of room to negotiate here.”
What will play out over the course of the 2015 season is “meaningful engagement” between proxy access proponents and companies, McGurn said. The proxy access situation is “fairly fluid” right now and much depends on “how issuers respond to these resolutions,” he said.
In other comments, the panel participants warned that shareholder activism is here to stay. John Wilson, a partner in Foley & Lardner's Milwaukee office, said that activism trends “continue to exponentially increase.”
Activist funds—now with more than $100 billion in assets under management—continue to proliferate, and activists now are targeting all companies, not just the large-cap brand names like Microsoft and Walgreens, Wilson said. He also noted that in the 2014 season, activists won 72 percent of the proxy fights, either through a shareholder vote or settlement.
The most important thing companies can do to avoid targeting by activists is to have good stock performance, Wilson said. Other strategies they can employ include:
• keeping boards refreshed;
• engaging with shareholders throughout the year and explaining to them their strategies and any shortfall in results;
• continually reviewing their corporate strategies with an eye to ensuring, among other issues, that there are no underperforming businesses that should be divested or that the right capital allocation strategies are in place; and
• watching all the usual corporate governance and executive compensation triggers “so that activists don't have something to latch onto.”
McGurn also warned that activist tactics are “picking up.” He cited, as an example, the video that activist Dan Loeb and Loeb's hedge fund Third Point LLC made about Dow Chemical. The video, posted on Third Point's www.Value-Dow.com website, criticized the company for failing to meet financial targets.
Dow Chemical avoided a proxy fight by agreeing in November to add four independent directors to its board.
“The tactics for some of the activists are getting really edgy now,” McGurn said. “And with not only corporate executives' but board members’ reputations on the line, I think there is a strong urge” for companies to settle these days.
Meanwhile, Grubaugh said companies should talk to their institutional investors before they rush to settle proxy fights. “Some of these knee-jerk settlements quite often end up raising as many questions with institutional investors as they answer, simply because they’re sort of wondering why there was sometimes a disproportionate amount of board seats handed over to a dissident in these situations when there may be some strong disagreement over strategy in the investment community,” he said.
However, given that they are all potential targets, every company—including smaller entities—needs an action plan, Grubaugh added.
“The biggest thing is don't get caught flat-footed,” he said. One key action that companies should take is to address “head on” issues that are raised by their institutional investors. If the institutional investors are venting to their companies about something, they are probably sharing their frustrations with activists as well, he said.
In addition, companies must really get to know their investors, Grubaugh said. “Some of these activists are meeting with institutional investors two or three times a year because of the proxy campaigns they’re doing, and for you to meet with them only in the event of a crisis is not a level playing field anymore.”
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