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E-MailDerek O. Zaba is a Principal and Sharo M. Atmeh is an Associate at CamberView Partners. This post is based on an article authored by Mr. Zaba & Mr. Atmeh. Related research from the Program on Corporate Governance includes Lucian Bebchuk’s The Case for Shareholder Access to the Ballot and The Myth of the Shareholder Franchise (discussed on the Forum here), and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).
On February 12, 2016, the SEC published 18 no-action letters related to proxy access, granting relief to 15 companies and denying relief to three on the basis of substantial implementation pursuant to Section 14a-8(i)(10) of the Securities Exchange Act. These no-action letters, read together, suggest that issuers may exclude proxy access shareholder proposals on the basis of substantial implementation if the issuer adopts a proxy access bylaw with reasonable terms within the bounds of current market practice. As discussed below, in order to appropriately gauge reasonableness of a bylaw (among other items) it is important that companies proactively engage their shareholders to understand and assess their views prior to action.
An examination of these no-action letters reveals three important points—
- Ownership Threshold is Central to Relief: Each of the 15 companies granted no-action relief implemented proxy access with a 3% ownership threshold, with the proposal requesting the same threshold. The three companies denied relief have an ownership threshold of 5%. Notably, the proposals at two of the three companies denied no-action relief were submitted as binding bylaw amendments to eliminate aggregation and reduce the 5% ownership threshold to 3% (among other changes).
- Differences in Board Representation & Aggregation Do Not Appear to Impact No-Action Relief: It does not appear that variations between the terms of the company-adopted bylaw and the shareholder proposal regarding shareholder aggregation limits, director caps or other varying bylaw provisions impacted the SEC’s analysis. Many of the bylaws at issue were implemented with a limit of 20 for shareholder aggregation and a 20% director cap, although the proposal requested unlimited aggregation and a 25% director cap. Significantly, two companies granted no-action relief have a 20% director cap without a 2-seat minimum, which is favored by some investors and is a requirement for some shareholder proponents to withdraw previously submitted proposals.
- Discretion Regarding Reasonable Secondary Provisions May Increase: In light of these no-action letters, the ability of a shareholder proponent to challenge reasonable secondary provisions (e.g., those provisions other than the ownership percentage and duration thresholds) implemented by companies appears somewhat constrained. Going forward, companies may have increased flexibility in drafting secondary bylaw provisions (within acceptable market terms to investors) if the SEC continues to grant similar no-action relief.
Companies should be careful to understand the particular concerns of their investor base and market practices regarding secondary bylaw provisions before taking action. Investor opposition to onerous provisions played a large part in the SEC declining to issue no-action letters on the basis of direct conflict for the 2015 proxy season, culminating in Staff Legal Bulletin 14H in October 2015 which considerably narrowed the scope of the direct conflict exclusion. Inclusion of onerous secondary provisions in a proxy access bylaw may result in a denial of proxy access no-action relief.
Furthermore, companies that implement proxy access after a proxy access shareholder proposal receives majority support face additional hurdles, including that directors at these companies will be evaluated based on their perceived level of responsiveness to such a proposal. The approach to assessing a board’s responsiveness to majority-supported shareholder proposals varies significantly among investors, which highlights the importance of engagement with a company’s investors in order to craft a responsive proxy access bylaw.
ISS recently noted in its December 2015 Proxy Voting Frequently Asked Questions Document that one important element “[i]n instances where the cap or aggregation limit differs from what was specifically stated in the shareholder proposal, [is] disclosure by the company regarding shareholder outreach efforts and engagement.” If directors are assessed to be insufficiently responsive, ISS may issue a negative vote recommendation against one or more board nominees.
The proxy access landscape will continue to evolve as the SEC issues additional no-action letters, investors update their proxy voting polices, and shareholder proponents adapt. This recent development underscores the importance of developing a strategy to engage with investors on business, compensation and corporate governance issues, including on proxy access.
