The Finer Points of Proxy Access Bylaws Come Under the Microscope

Peter Kimball is Associate Director and Head of Advisory Services, and Alexandra Higgins is a Senior Associate at ISS Corporate Solutions, a subsidiary of Institutional Shareholder Services. This post is based on an ISS Corporate Solutions publication. Related research from the Program on Corporate Governance includes The Case for Shareholder Access to the Ballot by Lucian Bebchuk; and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

U.S. companies’ adoption of proxy access bylaws—which give qualifying shareholders the right to nominate director candidates on the company’s proxy ballot—in response to shareholder pressure has been the big corporate governance story of 2015 and 2016.

As of August 31, 39 percent of S&P 500 companies provide a proxy access right, and 264 U.S. companies in the Russell 3000 have adopted some form of proxy access; only 16 of these companies had adopted proxy access before 2015. By summer 2017, the majority of the companies in the S&P 500 may provide proxy access, along with 15-20 percent of the S&P 400 index.

The most noteworthy issues to surface this year involving proxy access include:

  • Shareholder scrutiny of the secondary features in proxy access bylaws, such as the treatment of loaned shares, nominees’ potential conflicts of interest, and re-nomination restrictions; and
  • The SEC’s Division of Corporation Finance’s decision this summer to allow a shareholder proposal on the ballot at H&R Block to modify secondary features of the company’s existing proxy access bylaw.

While much of the discussion around proxy access centers on its growing currency across corporate America, the secondary features that set important boundaries around the right are coming into clearer focus.

Consensus Reached on Basic Proxy Access Features

The basic features of proxy access bylaws are largely consistent—they generally enable a shareholder or a group of up to 20 shareholders who have held 3 percent of the company’s stock for 3 years to nominate up to 20 percent of the board. This so-called 3/3/20/20 structure, which is similar in some respects to the standard the SEC set forth when it promulgated Rule 14a-11 mandating proxy access in 2010, has taken hold as the most widely adopted model. Only 16 companies that adopted proxy access bylaws in 2015 and 2016 have more restrictive basic features.

Bylaw Focus Shifts to the Detailed Parameters of the Proxy Access Right

With a greater degree of conformity on the basic attributes, the focus is shifting to the bylaws’ secondary features, such as the treatment of loaned shares, nominees’ conflicts of interest, and re-nomination restrictions. An understanding of how these features can shape the right is critical for companies considering adopting a right, shareholders evaluating the reasonableness of companies’ actions, regulators monitoring shareholder proposals, and journalists covering all of these developments.

These secondary features are on the verge of receiving more scrutiny than they ever have, in light of a decision in July by the SEC’s Division of Corporation Finance to allow a shareholder proposal seeking to modify secondary features of H&R Block’s existing proxy access bylaw on the ballot at its upcoming shareholder meeting (see inset). It’s an important precedent that has ramifications for similar proposals at other companies, such as one recently submitted to Microsoft, and if the H&R Block proposal is successful at the ballot, expect to see a proliferation of these proposals.

We examined sixteen secondary bylaw features and grouped them into five categories—nuances of the basic features, managing potential conflicts of interest, the interplay between proxy access and proxy contests, the aftermath of a nomination, and general considerations.

The following is a chart briefly summarizing the prevalence of the secondary features.

Secondary Feature Category Number Percent
The company restricts or disqualifies nominees who are officers or directors of competitors Potential conflicts of interest 215 85.3%
The company restricts or prohibits proxy access and proxy contests at the same meeting Interplay with proxy contests 191 75.8%
The proxy access nomination deadline is different from the advance notice deadline Interplay with proxy contests 181 71.8%
The company restricts the resubmission of failed nominees Aftermath of a nomination 179 71%
The max number of proxy access candidates may be reduced by elected nominees Aftermath of a nomination 178 70.6%
The company has a post-meeting holding requirement Nuances of the basic features 88 34.9%
The allowed period for recalling loaned shares is shorter than 5 days or is not specified Nuances of the basic features 84 33.3%
The board has broad authority to interpret the proxy access bylaw provisions General considerations 70 27.8%
The max number of proxy access candidates may be reduced by advance notice nominees Interplay with proxy contests 48 19%
Loaned shares do not count as owned Nuances of the basic features 37 14.7%
The company prohibits voting commitments Potential conflicts of interest 36 14.3%
The company prohibits third-party compensation in connection with directorship Potential conflicts of interest 35 13.9%
Funds within the same mutual fund family do not count as one shareholder Nuances of the basic features 27 10.7%
Shareholders are disqualified from nominating future candidates if their nominee is elected Aftermath of a nomination 26 10.3%
The bylaw does not expressly allow for a 500-word shareholder supporting statement General considerations 8 3.2%
The company prohibits third-party compensation in connection with candidacy Potential conflicts of interest 2 0.8%

Source: ISS Corporate Solutions; SEC filings. Data as of June 40, 2016 (n=252)

Most companies have inserted certain nomination and re-nomination restrictions in their proxy access bylaws, and have taken steps to avoid having proxy access and a proxy contest occur at the same meeting. A significant number of companies do not count loaned shares as owned, or make it difficult to recall loaned shares before nominating a candidate. Many companies also require that a nominating shareholder continue to hold shares after the shareholder meeting. Prohibitions on third-party compensation and voting commitments appear with some frequency.

Watch for these restrictions to become the new fulcrum of the ongoing proxy access discussions between shareholders and issuers, and we will continue to monitor these provisions—and shareholder proposals to address these provisions—as these defining features of the proxy access right evolve.

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