Including List of Considerations, Summary of Precedents and Sample Bylaw.
U.S. public companies are under continued pressure from certain shareholder groups to adopt proxy access provisions allowing shareholders to include their nominees in company proxy materials. The SEC staff’s recent decision to suspend no-action relief expressly supporting the exclusion of shareholder proposals that conflict with management proposals has introduced further uncertainty into the process by which proxy access proposals will come to a vote.1
Given the early stage of the development of market practice, there is little benefit at this time for most companies to propose or adopt a proxy access provision. Companies that have received a shareholder proposal on proxy access, however, might find themselves considering doing so as part of their response. These companies are faced with a range of options, including: excluding the shareholder proposal notwithstanding the unavailability of no-action relief; simply allowing the shareholder proposal to come to a shareholder vote; putting up conflicting shareholder and management proposals for a shareholder vote; or unilaterally adopting a proxy access provision with terms that the company believes are more appropriate and arguing that shareholders should vote against the shareholder proposal. Each of these options has its advantages and disadvantages.
Companies that have received a proxy access shareholder proposal and are considering proposing or adopting their own proxy access provision will want to consider the appropriate terms and requirements for proxy access, including potential limitations and conditions designed to prevent abuse. To assist companies in this process, we have attached as Annex A a summary of the key terms of the small number of proxy access provisions adopted by public companies so far, and have attached as Annex B a sample form of proxy access bylaw that companies can use as a starting point in crafting their own.
The appropriate terms of any proxy access bylaw will differ from company to company, but key considerations include:
- Ownership threshold and holding period for making a nomination. For example, a company may decide that 5% (or higher) for three years is an appropriate threshold, rather than 3% as contemplated in most shareholder proposals. A 5% threshold is consistent with the SEC’s proxy access proposals from 2003 and 2007, and would allow the company and other shareholders to benefit from the disclosure requirements imposed on 5% shareholders or groups by the SEC’s Section 13(d) and (g) rules. Companies should also consider limitations on the number of shareholders that can form a group (for example, up to 20 shareholders).
- Definition of ownership. Companies should consider whether ownership levels should be measured on a “net long” basis (that is, net of short sales, derivative hedges and other short positions), in order to ensure that the nominating shareholders have a true economic stake in the shares that they hold. This has been a common term in proxy access provisions adopted to date.
- Deadline for notice. The company’s existing advance notice bylaw may not provide a sufficient amount of time for the processing of candidates to be included in the company’s proxy statement. Companies may determine that the advance notice bylaw should be revised to set an earlier date— for example, within a 30-day window ending on the Rule 14a-8 120-day deadline.
- Treatment of incumbent access directors. Companies should consider whether incumbent directors who were access nominees should count against the maximum number of nominees for a number of years after their election, to prevent the board from having an incentive not to renominate them.
- Nominee eligibility. A company-proposed proxy access provision might include a number of reasonable eligibility standards for access nominees, including independence under relevant stock exchange standards, eligibility for committee memberships, lack of affiliation with competitors and the completion of a standard directors’ questionnaire.
- Required Information with respect to nominating shareholders and nominees. A company’s bylaws may require submission of reasonable information about the candidate and the nominating party, similar to what is called for by typical advance notice provisions. In this regard, it should be noted that the SEC’s Schedule 14N, which was adopted in conjunction with the SEC’s now-vacated mandatory proxy access rule, remains in effect and would apply in the case of a nomination under a company proxy access bylaw. The company bylaw should be drafted to work in conjunction with Schedule 14N.
- Other limitations. A company may determine to place reasonable limitations on the use of proxy access, including making it unavailable in a year where there is already a proxy contest in place, or restricting the resubmission of failed candidates who receive below a specified threshold of support.
These and other considerations are addressed in the form of proxy access bylaws attached as Annex B. Please contact any of the lawyers listed below or your contact person at the firm if you wish to discuss any of these matters.