Shareholder Proposal Developments During the 2018 Proxy Season

Ronald O. Mueller and Elizabeth Ising are partners and Aaron Briggs is of counsel at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Mueller, Ms. Ising, Mr. Briggs, Lori ZyskowskiEmily Shroder, and Victor Twu.

Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

As discussed in further detail below, based on the results of the 2018 proxy season, there are several key takeaways to consider for the coming year:

  • Shareholder proposals continue to be used by certain shareholders and to demand significant time and attention. Although the overall number of shareholder proposals submitted decreased 5% to 788, the average support for proposals voted on increased by almost 4 percentage points to 32.7%, suggesting increased traction among institutional investors. In addition, the percentage of proposals that were withdrawn increased by 6 percentage points to 15%, and the number of proponents submitting proposals increased by 20%. However, there are also some interesting ongoing developments with respect to the potential reform of the shareholder proposal rules (including the possibility of increased resubmission thresholds).

  • It is generally becoming more challenging to exclude proposals, but the Staff has applied a more nuanced analysis in certain areas. Success rates on no-action requests decreased by 12 percentage points to 64%, the lowest level since 2015. This is one reason (among several) why companies may want to consider potential engagement and negotiation opportunities with proponents as a key strategic option for dealing with certain proposals and proponents. However, it does not have to be one or the other—20% of no-action requests submitted during the 2018 proxy season were withdrawn (up from 14% in 2017), suggesting that the dialogue with proponents can (and should) continue after filing a no-action request. In addition, companies are continuing to experience high levels of success across several exclusion grounds, including substantial implementation arguments and micromanagement-focused ordinary business arguments.
  • Initial attempts at applying the Staff’s board analysis guidance from last November generally were unsuccessful, but they laid a foundation that may help develop successful arguments going forward. The Staff’s announcement that it will consider, in some cases, a board’s analysis in ordinary business and economic relevance exclusion requests provided companies with a new opportunity to exclude proposals on these bases. Among other things, under the new guidance, the Staff will consider a board’s analysis that a policy issue is not sufficiently significant to the company’s business operations and therefore the proposal is appropriately excludable as ordinary business. In practice, none of the ordinary business no‑action requests that included a board analysis were successful in persuading the Staff that the proposal was not significant to the company (although one request based on economic relevance was successful). Nevertheless, the additional guidance the Staff provided through its no-action request decisions should help provide a roadmap for successful requests next year, and, therefore, we believe that companies should not give up on trying to apply this guidance. It will be important for companies to make a determination early on as to whether they will seek to include the board’s analysis in a particular no-action request so that they have the necessary time to create a robust process to allow the board to produce a thoughtful and well-reasoned analysis.
  • Social and environmental proposals continue to be significant focus areas for proponents, representing 43% of all proposals submitted. Climate change, the largest category of these proposals, continued to do well with average support of 32.8% and a few proposals garnering majority support. We expect these proposals will continue to be popular going into next year. Board diversity is another proposal topic with continuing momentum, with many companies strengthening their board diversity commitments and policies to negotiate the withdrawal of these proposals. In addition, large asset managers are increasingly articulating their support for greater board diversity.
  • Don’t forget to monitor your EDGAR page for shareholder-submitted PX14A6G filings. Over the past two years, there has been a significant increase in the number of exempt solicitation filings, with filings for 2018 up 43% versus 2016. With John Chevedden recently starting to submit these filings, we expect this trend to continue into next year. At the same time, these filings are prone to abuse because they have, to date, escaped regulatory scrutiny.

The complete publication is available here.

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