When we last left the saga of proxy access, we had just started a new chapter on so-called “fix-it” shareholder proposals—efforts to revise existing proxy access bylaws to make them more “shareholder-friendly.” You might recall that, in 2016 and 2017, John Chevedden et al. submitted a slew of fix-it proposals that requested amendments to proxy access bylaws to raise the cap on the number of shareholders that could aggregate their shares to reach the necessary 3% ownership level. Target companies, in turn, submitted no-action requests seeking to exclude those proposals on the basis that they had already been “substantially implemented” under Rule 14a-8(i)(10). In response to the requests for relief, the SEC staff took a uniform no-action position allowing exclusion of these fix-it proposals. But the proponents were persistent and, in 2017, submitted to H&R Block a different formulation of a fix-it proposal that requested only one change — elimination of the cap on shareholder aggregation to achieve the 3% eligibility threshold, as opposed to simply raising the cap to a higher number. This time, the staff rejected H&R Block’s no-action request. In essence, it appears that the staff believes that a lower cap on aggregation could “substantially implement” a higher cap, but the removal of a cap entirely is a different animal that could not be substantially implemented by the lower cap. (For more history on these fix-it proposals, see this PubCo post.) This proxy season, the proponents have latched onto—and even expanded—the new formulation and have continued to find success in preventing exclusion.
For example, in BorgWarner (February 9, 2018), John Chevedden submitted a proposal requesting elimination of the cap on aggregation of shareholders to satisfy the 3% minimum ownership threshold, as well as changing the minimum number of proxy-access candidates to two, if the board size is under 12, and three if it is over 12. (The proposal doesn’t address the 12-person board.) In this instance, the company’s existing aggregation cap was 25, and the existing number of directors that could be nominated through proxy access was the greater of 20% of directors in office or two.
In its request for relief, the company relied primarily on Rule 14a-8(i)(10), contending that the company’s existing proxy access bylaw substantially implemented the proposal. The company’s current proxy access bylaw, the company explained, reflected amendments implemented in response to the results of a 2016 shareholder vote, and was otherwise designed to be consistent with shareholder feedback and evolving governance standards for proxy access. Thus, the company maintained, “when a company can demonstrate that it already has taken actions that address the ‘essential objective’ of a shareholder proposal, the Staff has concurred that the proposal has been ‘substantially implemented’ and may be excluded as moot, even where the company’s actions do not precisely mirror the terms of the shareholder proposal.” With respect to shareholder nominees, the company argued that its current number of permitted nominees compared favorably to the proposal because the current number was the greater of two or 20%, while the proposal, the company argued, would effectively cap the total number of shareholder nominees at three.
With regard to the aggregation limit to reach the 3% threshold, the company noted that the staff “has recognized in a number of no-action letters that an aggregation limit is consistent with the essential objective of proxy access even in situations in which a proponent was seeking to increase that aggregation limit.” The company’s cap was set at 25, which the company argued substantially implemented the proposal under numerous prior letters. Addressing the anomaly—at that time—of H&R Block, the company observed that it did “not know the rationale for the Staff’s decision or whether it signals a potential shift in the Staff’s position on substantial implementation of proxy access,” but advocated that the company’s proxy access bylaw should be considered against the backdrop that it was the “product of engagement and consultation with its shareholders”:
“By focusing on just one or two elements of the Company’s proxy access Bylaw, the Proponent seeks to shift the focus from whether shareholders currently have a meaningful proxy access right to secondary details of that right. To evaluate one or two elements of the Company’s proxy access Bylaw, without considering the totality of the circumstances in which that Bylaw first was adopted and then later amended, elevates form over substance and narrows long-standing Commission interpretations of ‘substantially implemented.’ To decide otherwise would permit a proponent to attack specific elements of an adopted bylaw, one or two items at a time. A shareholder aggregation limit, the number of shareholder nominated directors, or other tailored details of a proxy access bylaw always will be different than what a proponent may seek to amend, but ‘different’ should not mean that the primary objective of a proposal has not already been substantially implemented. If an analysis of substantial implementation does not take into account the reasons for the differences between an adopted proxy access bylaw and what a shareholder proponent seeks, as well as the context in which a company acted, then this exclusion is rendered meaningless. With respect to the shareholder aggregation limit, the only way to implement the Submission when this single element is considered alone would be to ‘fully effect’ the terms of the proposal in contravention of longstanding Commission interpretations.”
The company also took issue with the proponent’s contention that the 25-person aggregation cap was inadequate, pointing out that the company had four shareholders with holdings in excess of 3%, without aggregation, each of which had held those securities continuously for 3 years, and which together owned approximately 26% of the outstanding shares. In the aggregate, the top 25 shareholders held approximately 48% of the outstanding shares.
Proponents John Chevedden and Harrington Investments submitted a similar proposal in Alaska Air (February 12, 2018). In this instance, the existing aggregation cap was 20, and the existing number of proxy access nominees was the greater of 20% of the directors in office or two. Interestingly, the proposal’s supporting statement spends more space denigrating virtual annual meetings than it does arguing for the proxy access amendments, contending that proxy access is a way to compensate for the loss of the fundamental right to in-person annual meetings. (See this PubCo post and this PubCo post.)
In its request for relief, the company also relied primarily on Rule 14a-8(i)(10). In this instance, the existing aggregation cap was 20, and the number of permitted proxy access nominees was the greater of 20% of directors in office or two. With regard to H&R Block, the company made arguments similar to those made in BorgWarner, and advocated that the staff consider that, in the prior year, Mr Chevedden’s proposal to amend the company’s proxy access bylaw to lift the aggregation cap to 50 shareholders had been submitted to shareholders and soundly defeated, receiving only a 23% vote in favor:
“The 2017 Proposal received the support of only approximately 23.3% of the votes cast by stockholders at the 2017 Meeting. Thus, at the 2017 Meeting, the Company’s stockholders sent to the Board a clear signal that the 20-stockholder aggregation limit was appropriate, which the Staff should consider along with the other facts and circumstances of the 2018 Proposal. It would be contrary to the Staff’s regulatory objective that led the Commission to revise its interpretation of the ‘substantial implementation’ standard in 1983 if stockholders could avoid exclusion under Rule 14a-8(i)(10) simply by requesting variations in the nominating group size, which is precisely what the Proponents have attempted to do after Mr. Chevedden’s ‘variation’ proposal was squarely rejected at the 2017 Meeting. By focusing on just one or two elements of the Company’s existing proxy access provisions, the Proponents attempt to shift the focus from whether the Company’s stockholders currently have a meaningful proxy access right to the secondary details of that right.” If proposals focusing only on these details are required to be submitted, “companies will have an ever-moving target that allows stockholders to escape exclusion under Rule 14a-8(i)(10) by simply changing one or two words of an existing proxy access bylaw. Such an approach would turn the Staff’s ‘substantial implementation’ analysis on its head.”
The company also took issue with the proponents’ contention that the current 20-person cap was inadequate by pointing out that six of the company’s shareholders held in excess of 3%, without aggregation, and five had held those shares continuously for three years, that, together, these five owned approximately 31.7% of the outstanding shares of common stock, and that the top 25 institutional shareholders held approximately 57% the outstanding shares, 19 of which had held their shares for at least three years.
With regard to the number of proxy access nominees, the company explained that the proposal would effect only minor differences. Where the board was composed of 13 or more directors, there could be three proxy-access nominees under the proposal, while under the existing bylaws, three nominees would be permitted only when the board consisted of 15 or more directors. However, the company maintained, for the past decade, the board had never exceeded 11, and the company had no present intent of increasing the size beyond 11.
But, in both cases, these arguments were to no avail. In each case, the staff was unable to conclude that the companies’ proxy access bylaws compared favorably with the guidelines of the proposals. (Both companies also took a stab at arguments under Rule 14a-8(i)(3), but those also failed.