Category Archives: Corporate Elections & Voting

2015 Proxy Season Review

Janet T. Geldzahler is of counsel and Marc Trevino is a partner at Sullivan & Cromwell LLP. This post is based on the Summary of a Sullivan & Cromwell publication; the complete publication is available here.

Our 2015 Proxy Season Review summarizes significant developments relating to shareholder proposals to date during the 2015 proxy season. Although shareholder activists pursuing strategic or management changes continue to dominate the headlines, they do not choose to wage those campaigns through shareholder proposals made under Rule 14a-8, which are addressed by the complete publication, choosing instead private or public pressure, and often a threatened or actual proxy contest. Nonetheless, the widespread governance changes brought about through successful 14a-8 proposals have played no small part in the continued growth and success of shareholder activism.

During the 2015 proxy season, proxy access has been the most significant development. Far more proposals have been made and support has been substantially stronger. There have been 82 proxy access proposals to date in 2015, as opposed to 17 in all of 2014. In 2015, shareholders have approved 48 proposals to date (as opposed to five for all of 2014), and the average votes cast in favor have risen to 55% from 33% in 2014. Perhaps most significantly, modestly more restrictive management-enacted proxy access provisions apparently did not deter shareholders from proposing, and, in many cases, winning on the now standard shareholder proposal format of 3%/3-year/25% of board.

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What the Allergan/Valeant Story Teaches About Staggered Boards 

Arnold Pinkston is former General Counsel at Allergan, Inc. and Beckman Coulter, Inc. This post comments on the work of institutional investors working with the Shareholder Rights Project, (discussed on the Forum here, here, and here) which successfully advocated for board declassification in about 100 S&P 500 and Fortune 500 companies.

Until March 2015, I was the Executive Vice President and General Counsel of Allergan, Inc. For much of 2014 my job was to address the hostile bid launched by Valeant and Pershing Square to acquire Allergan.

With that perspective, I followed with interest the debate surrounding staggered boards, and in particular the success of institutional investors working with the Shareholder Rights Project in bringing about board declassification in over 100 S&P 500 and Fortune 500 companies. From my perspective, the debate did not seem to fully reflect the complexity of the relationship between a company and its shareholders—i) that each company and each set of shareholders is unique; ii) that destaggering a board can affect the value of companies positively, negatively or hardly at all; and iii) that shareholders, each from their own unique perspective, will be searching for factors that will determine whether annual elections are in their own best interests—not the company’s. For that reason, I respectfully offer my thoughts regarding the campaign to destagger boards.

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The Changing Dynamics of Governance and Engagement

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. The following post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal; the full article, including footnotes, is available here. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

As anticipated, the 2015 proxy season has been the “Season of Shareholder Engagement” for U.S. public companies. Activist attacks, high-profile battles for board seats, and shifting alliances of major investors and proxy advisors have created an environment in which shareholder engagement is near the top of every well-advised board’s to-do list. There is no shortage of advice as to how, when, and why directors should pursue this agenda item, and there is no doubt that they are highly motivated to do so. Director engagement is a powerful tool if used judiciously by companies in service of their strategic goals. As companies and their advisors study the lessons of the recent proxy season and look ahead, it is worth examining recent shifts in corporate governance dynamics. With an awareness of the general trends, and by taking specific actions as appropriate, boards can prepare and adapt effectively to position themselves as well as possible to achieve their strategic objectives.

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Shareholder Proposal Developments During the 2015 Proxy Season    

Elizabeth Ising is a partner and Co-Chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Ms. Ising, Sarah E. Fortt, Madison A. Jones, Gillian McPhee, Ronald O. Mueller, Kasey Levit Robinson, and Lori Zyskowski. The complete publication, including footnotes, is available here.

This post provides an overview of shareholder proposals submitted to public companies for 2015 shareholder meetings, including statistics, notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests, and information about litigation regarding shareholder proposals.

I. Shareholder Proposal Statistics and Voting Results

A. Shareholder Proposals Submitted

According to data from Institutional Shareholder Services (“ISS”), shareholders have submitted approximately 943 proposals for 2015 shareholder meetings, which surpasses the total of 901 proposals submitted as of a comparable time last year. For 2015, across four broad categories of shareholder proposals—governance and shareholder rights; environmental and social issues; executive compensation; and corporate civic engagement (which includes proposals regarding contributions to or membership in political, lobbying, or charitable organizations)—the most frequently submitted proposals were governance and shareholder rights proposals (with approximately 352 submitted), largely due to the unprecedented number of proxy access proposals (108 proposals). If not for the dramatic rise in the number of proxy access proposals, proposals on environmental and social issues would have again comprised the largest category of proposals (with approximately 324 submitted), continuing a trend that began in 2014.

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Four Takeaways from Proxy Season 2015

Ann Yerger is an executive director at the EY Center for Board Matters at Ernst & Young LLP. The following post is based on a report from the EY Center for Board Matters.

As the 2015 proxy season concludes, some key developments stand out. Most significantly, a widespread investor campaign for proxy access ignited the season, making proxy access the defining governance topic of 2015.

The campaign for proxy access is closely tied to the increasing investor scrutiny of board composition and accountability, and yet—at the same time—the number of votes opposing director nominees is the lowest in recent years.

Also, the number of shareholder proposal submissions remains high, despite the fact that ongoing dialogue between large companies and their shareholders on governance topics is now mainstream. These developments are occurring against a backdrop of increased hedge fund activism, which continues to keep boards on alert.

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Florida SBA Proxy Contest Voting Decisions Drive Shareowner Value

Michael McCauley is Senior Officer, Investment Programs & Governance, of the Florida State Board of Administration (the “SBA”). This post relates to an SBA report authored by Mr. McCauley, Jacob Williams, Tracy Stewart, Hugh Brown, and Michael Levin.

The State Board of Administration (SBA) of Florida recently completed a first-of-its-kind empirical analysis of an institutional investor’s proxy voting decisions involving dual board nominees and their impact on portfolio value. The study examined the SBA’s own voting decisions covering proxy contests occurring between January 1, 2006 and December 31, 2014 at U.S.-domiciled companies with market capitalizations exceeding $100 million. The SBA’s total investment across all examined companies, at the time of the initial announcement of the proxy contest, equaled $1.9 billion. The study also provides coverage of the types of activist fund campaigns, level of activity, and several specific proxy vote case studies.

The authors of the study believe the quantitative results provide evidence of a sound analytical framework employed by SBA staff in evaluating proxy contests, and the historical proxy voting decisions enhanced portfolio performance through improved investment returns over both short and long time periods. Among SBA votes to support one or more dissident nominees where the dissident won seats, the company’s subsequent 1, 3, and 5-year relative cumulative stock performance was positive, at levels of 12%, 21%, and 26%, respectively. The same returns for cases where SBA supported the dissident but management won all seats were negative, at -14%, -16%, and -15%. The study demonstrates that the proxy voting decisions of investors can have significant and positive economic effects on portfolio value.

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Proxy Access: The 2015 Proxy Season and Beyond

Marc S. Gerber and Richard J. Grossman are partners in the Mergers & Acquisitions practice at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden alert.

Although the 2015 annual meeting season is still winding down, there is no doubt that proxy access has gained considerable momentum and will remain a front-and-center corporate governance issue for the foreseeable future. For the boards of directors of the many companies who were bystanders on this issue for the 2015 proxy season, the question will be whether to act now or wait and watch for further developments. In any event, as proxy access is likely to be a topic of discussion during companies’ “off season” shareholder engagement efforts, companies and their boards should understand how the proxy access landscape has evolved.

The Lead-Up to 2015

In important ways, the groundwork for the 2015 proxy access campaign was carefully laid in the 2012-14 proxy seasons. Targets of proxy access shareholder proposals modeled on the vacated SEC proxy access rule—granting holders of 3 percent of a company’s shares for three years access to the company’s proxy statement for nominees for up to 25 percent of the board—were carefully selected, and a coalition of institutional investors came together to provide majority support for most of these proposals. As a result, a small number of large companies—including Hewlett-Packard, Western Union, CenturyLink and Verizon Communications—walked through the proxy access door, making it only a matter of time before other companies—willingly or unwillingly—would have to follow.

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Public Pension Funds’ Shareholder-Proposal Activism

James R. Copland is the director of the Manhattan Institute’s Center for Legal Policy. The following post is based on a report from the Proxy Monitor project; the complete publication, including footnotes, is available here.

America’s largest publicly traded companies are facing more shareholder proposals in 2015, driven principally by a “proxy access” campaign led by New York City Comptroller Scott Stringer, who oversees the city’s $160 billion pension funds for public employees. Elected in 2013, Stringer has launched a Boardroom Accountability Project seeking, in part, proxy access, which grants shareholders with a certain percentage of a company’s outstanding shares the right to list a certain number of candidates for the company’s board of directors on the company’s proxy statement. As noted in an earlier finding, Comptroller Stringer’s proxy-access campaign has won substantial shareholder support at most companies where his proposal was introduced.

Although it is too soon to assess the impact of Comptroller Stringer’s push for proxy access, we can evaluate shareholder-proposal activism by state and municipal public employee pension funds in previous years. From 2006 to the present, state and municipal pension funds have sponsored 300 shareholder proposals at Fortune 250 companies. More than two-thirds of these were introduced by the pension funds for the public employees of New York City and State.

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Shareholder Activism and Executive Compensation

Jeremy L. Goldstein is founder of Jeremy L. Goldstein & Associates, LLC. This post is based on a publication by Mr. Goldstein. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

In today’s environment in which all public companies—no matter their size, industry, or performance—are potential targets of shareholder activists, companies should review their compensation programs with an eye toward making sure that the programs take into account the potential effects of the current wave of shareholder activism. In this regard, we have provided below some considerations for public company directors and management teams.

“Say on Pay”: Early Warning Sign

Low levels of support for a company’s “say on pay” vote can serve as an early warning sign for both companies and activists that shareholders may have mixed feelings about management’s performance or a board’s oversight. An activist attack following a failed vote may be particularly inopportune for target companies because a failed vote can result in tension between managements and boards. Moreover, activists will not hesitate to use pay as a wedge issue, even if there is nothing wrong with a company’s pay program. Companies should get ahead of potential activists by (1) understanding how their pay programs diverge from standards of shareholders and proxy advisors, (2) developing a robust, year-round program of shareholder engagement by management and independent directors, and (3) considering appropriate changes to pay and governance structures if advisable. Companies that are the most aggressive at shareholder outreach and develop the best relationships with both the investment and the governance representatives of their major holders will be best able to address an activist attack if it occurs.

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Proxy Monitor 2015 Mid-Season Report

James R. Copland is the director of the Manhattan Institute’s Center for Legal Policy. The following post is based on a memorandum from the Proxy Monitor project, available here.

As we near the close of corporate America’s “proxy season”—the period between mid-April and mid-June when most large, publicly traded corporations in the United States hold annual meetings to vote on company business, including resolutions introduced by shareholders—a clear picture has begun to emerge. By May 27, 2015, 211 of the nation’s 250 largest companies by revenues, as listed by Fortune magazine and in the Manhattan Institute’s ProxyMonitor.org database, had filed proxy documents with the Securities and Exchange Commission. This post bases its analysis on those companies’ filings, as well as voting results for 186 of those companies that had held their annual meetings by May 22.

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