Proxy Access: Developments in Market Practice

This post is based on a Sullivan & Cromwell LLP publication authored by Glen T. Schleyer. The complete publication, including Annex, is available here. 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).

Looking back at the proxy access provisions adopted by U.S. companies over the past year, it is clear that there is convergence around most key terms and conditions, including exceptions and details that are not contemplated by most shareholder proposals. While this convergence does not mean that market practice will stop developing or that governance advocates will cease fighting terms that they find objectionable, companies considering whether to adopt a proxy access provision now have the benefit of significant precedents.

In addition, no-action letters issued by the staff of the Securities and Exchange Commission in February have confirmed that a company that receives a typical 3%/3-year shareholder proposal should be able to adopt a proxy access bylaw with market-standard terms and conditions and then exclude the shareholder proposal as “substantially implemented.” While governance activists have submitted, and will likely continue to submit, shareholder proposals requesting that companies modify their bylaws to remove some of these terms and conditions, the only proposal that has come to a vote to date has failed, receiving 40% of votes cast at Whole Foods.

We have attached as an annex (available in the complete publication here) a sample form of proxy access bylaw that companies can use as a starting point in crafting their own. This has been updated to reflect developments in market practice and ongoing discussions with clients.

Key Terms of Adopted Proxy Access Bylaws

Since the 2015 proxy season, 200 public companies have adopted some form of proxy access, compared to a total of only 15 companies before 2015. [1] At this point, consistency has emerged in most of the key terms of these proxy access provisions. In particular, of the proxy access bylaws adopted by U.S. companies from April 2015 through March 2016:

  • 97% have a 3% ownership threshold
  • 100% have a 3-year holding period
  • 100% require full voting and economic ownership
  • 91% allow aggregation by groups of up to 20 holders
  • 92% count funds under common management as a single holder for aggregation purposes
  • 87% limit the number of access nominees to 20% of the board, most of which (71%) provide a minimum of two access nominees
  • 79% count incumbent access nominees against the current-year maximum
  • 73% provide a nomination window of 120 to 150 days before the prior year’s proxy mailing date
  • 93% prohibit or limit the availability of proxy access in the event of a concurrent proxy contest
  • 82% prevent resubmission of a failed candidate who received less than a specified vote percentage (usually 25%) in the past few years

Many companies considering proxy access may, of course, determine that provisions that differ from the above make the most sense for their situation—this may particularly be the case for smaller and regulated companies—and market practice will likely continue to develop in these and other regards.

For some ancillary terms and conditions, practice continues to vary from company to company, and these will likely be the subject of ongoing discussion and focus. For example:

  • Loaned Stock. Bylaws vary in their treatment of stock that the nominating shareholder has loaned out. A slight majority of companies (54%) require that the shareholder actually recall the stock at some specified time, such as the annual meeting date, or the period from the record date or the nomination date through the meeting date. A significant number of companies (34%) do not require that the stock actually be recalled, but require that it can be recalled within five days (21%) or three days (13%). The latter provision is intended to exclude term stock loans, which can be viewed as more akin to a disposition of the loaned shares rather than a short-term loan.
  • Statement of Post-Meeting Intent to Hold Stock. Another developing area is whether the nominating shareholder must provide a statement of its intent to hold stock after the annual meeting. Most bylaws (69%) do not have any particular requirement in this regard. However, a significant number require either a representation that the shareholder intends to hold the stock for one year after the meeting (13%) or, consistent with the requirement of vacated SEC Rule 14a-11, a statement that describes the shareholders’ intent to hold stock after the meeting (19%).

The attached sample form of proxy access bylaw contains language that could be used to implement each of the key provisions and alternatives discussed above.

SEC Staff “Substantial Implementation” Letters

One question that has arisen in the proxy access context is whether a company’s adoption of a proxy access bylaw would permit the company to exclude the typical form of shareholder proposal on the basis that the proposal has been “substantially implemented” under Rule 14a-8(i)(10). The application of this exclusion became more important after the SEC staff narrowed the scope of Rule 14a-8(i)(9) such that a company may no longer exclude a shareholder proposal by putting forward a “conflicting” management proposal providing for similar rights but with different terms. [2]

On February 12, 2016, the SEC staff answered this question through the issuance of a number of no-action letters applying the “substantial implementation” exclusion in the proxy access context. In particular, with respect to the typical shareholder proposal (that is, 3%/3-years, nominee cap of 25% of the board or two nominees), the SEC staff permitted exclusion where the issuer’s bylaws had the same

3%/3-year threshold, but contained other conditions and limitations contrary to, or not contemplated by, the shareholder proposal. [3] Most notably, this included bylaw provisions that capped the number of nominees at 20% of the board (or two nominees, if greater), rather than 25%, and that limited the shareholder group size to 20 holders, even where the shareholder proposal specifically called for no limit on group size. In addition, the companies’ bylaw provisions contained a number of the other terms and conditions described in the prior section, including a “net long” definition of ownership, various qualification requirements for nominees, counting of incumbent access nominees against the nominee cap, restrictions on repeat nominees, and requirements to provide additional information along with the nomination notice. The staff did not permit exclusion in the case of a company that had adopted a 5% threshold, which suggests that the ownership threshold is viewed by the staff as one of the most important elements of the “essential objective” of these proposals. [4]

To some extent, this takes pressure off companies to adopt a proxy access bylaw prior to the Rule 14a-8 deadline for the 2017 annual meeting, rather than waiting to see if the company receives a 3%/3-year proxy access proposal. If the company does receive such a proposal, the company should be able to adopt a 3%/3-year bylaw that has terms and conditions consistent with market practice, and thereby exclude the shareholder proposal as substantially implemented. Of course, the application of the “substantial implementation” exclusion depends on the specifics of the shareholder proposal and the company bylaw, and the outcome may be different if shareholder proponents revise the form of their proposals in an attempt to give companies less flexibility in how they can “substantially implement” the proposal.

If a company decides not to wait and instead adopts a proxy access bylaw proactively during 2016, there is a risk that it will receive a shareholder proposal to amend the proxy access bylaw rather than a proposal to adopt one. For at least the next year or two, we expect that at least some companies with a proxy access bylaw with market-standard terms and conditions will receive a shareholder proposal to amend the bylaw to remove or modify some of those terms and conditions. Two of the more active submitters of proxy access proposals—the New York State Comptroller and James McRitchie—have in fact submitted proposals for 2016 meetings that seek such modifications, including removing the limit on shareholder groups, modifying the calculation of ownership and raising the 20% cap on nominees. So far in 2016, this shareholder proposal failed at Whole Foods, receiving the support of 40% of votes cast. The outcome of these votes in the 2016 proxy season will provide insight into whether the terms and conditions that have developed as market-standard may need to be re-examined in the future.

We expect that some companies that receive a proposal to amend an existing proxy access bylaw to modify terms other than the percent ownership threshold will seek to exclude the proposal under Rule 14a-8(i)(10) or, if the company’s bylaw is up for a shareholder vote, Rule 14a-8(i)(9). It is unclear at this point how the SEC staff may view such exclusion requests, as none of the handful of issuers who have received such proposals have sought such relief to date. [5]

The complete publication, including Annex, is available here.


[1] For a more detailed discussion of proxy access proposals during the 2015 proxy season, see our post Proxy Access Bylaw Developments and Trends. Any client that would like to receive a copy of the updated sample form marked to show changes from our prior sample form should contact any of the lawyers listed at the end of this publication or any other Sullivan & Cromwell lawyer you have dealt with.

For a comprehensive discussion of proxy access and other shareholder proposals, as well as public company governance, compensation and disclosure more generally, see the Public Company Deskbook: Complying with Federal Governance and Disclosure Requirements (Practising Law Institute) by our partners Bob Buckholz, Marc Trevino and Glen Schleyer, available at 1-800-260-4754 (1-212-824-5700 from outside the United States) or
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[2] For a further discussion of this SEC staff position, which was announced in October 2015 through Staff Legal Bulletin No. 14H, see our publication, dated October 23, 2015, entitled SEC Staff Issues Guidance on Excluding Shareholder Proposals.
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[3] See, e.g., Alaska Air Group, Inc. (Feb. 12, 2016); Baxter Int’l Inc. (Feb. 12, 2016); Capital One Financial Corp. (Feb. 12, 2016); Cognizant Tech. Solutions Corp. (Feb. 12, 2016), The Dun & Bradstreet Corp. (Feb. 12, 2016).
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[4] See SBA Communications Corp. (Feb. 12, 2016).
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[5] The SEC staff has allowed a company to exclude a shareholder proposal seeking to modify the company’s proxy access bylaw to (i) lower the threshold from 5% to 3%, (ii) lengthen the stock loan recall provision from 3 days to 5 days, (iii) remove the 20-holder group limit, and (iv) remove the requirement for an intent to own the stock for one year post-meeting, on the basis that it was substantially implemented by the company’s amendments to its bylaw that implemented only the modifications in clauses (i) and (ii) above. See NVR, Inc. (reconsideration, Mar. 25, 2016).
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