Following the effectiveness of the SEC’s proxy access rule amendments in September 2011, shareholder proxy access proposals were submitted to at least 24 companies during the 2012 proxy season. These proposals request that the companies include in their proxy materials proposed bylaw amendments that would allow shareholders, under certain circumstances, to make board nominations that would be included in future company proxy materials.
This article (1) discusses recent developments in the SEC’s proxy access rules, (2) surveys the proxy access proposals submitted during the 2012 proxy season and (3) describes how companies have responded to such proposals.
SEC Proxy Access Rules
The SEC has undertaken efforts over the past few years to mandate proxy access, particularly though a series of proposed proxy rule amendments intended to facilitate the rights of shareholders to nominate directors to a company’s board of directors. The proposed rule changes sought to allow a shareholder or several shareholders acting together, under certain circumstances, to include their director nominees in a company’s proxy materials sent to all shareholders. The proposed rule changes also sought to limit companies’ rights, under certain circumstances, to exclude from their proxy materials shareholder proposals that would modify the company’s governing documents regarding director nomination or election procedures.
Despite the SEC’s adoption of these proxy rule amendments in 2010, the United States Court of Appeals for the District of Columbia, in July 2011, vacated the SEC’s mandated proxy access rule, holding that the SEC acted arbitrarily and capriciously by failing to adequately analyze the costs and benefits of the rule. The decision, however, did not affect the amendments limiting companies’ rights to exclude from their proxy materials shareholder proxy access proposals, which later became effective on September 20, 2011.
Prior to the effectiveness of these amendments, companies were permitted, under Rule 14a-8(i)(8) of the Securities Exchange Act of 1934, to exclude from their proxy materials shareholder proposals relating to director nominations or elections. Revised Rule 14a-8(i)(8) narrows this “exclusion” right and now allows for shareholder proposals to amend a company’s governing documents concerning shareholder nominations. The shareholder proposal must not be otherwise excludable under Rule 14a-8 and must not conflict with applicable state law or SEC rules. Thus, although the SEC’s mandated proxy access rule has been vacated by court order, shareholders may still seek to obtain proxy access by proposing their own mechanism for proxy access under revised Rule 14a-8, which could be more or less restrictive than the specified conditions contained in the SEC’s vacated mandated proxy access rule.
These amendments to Rule 14a-8 are quite significant as, without such amendments, shareholders may nominate their own director candidates in only limited ways. Shareholders may attend the annual shareholder meeting and nominate candidates at the meeting, assuming the shareholders have complied with any advance notice requirements in the company’s bylaws prior to the meeting. However, as a practical matter, such nominations are rarely effective because management will typically have obtained sufficient proxy votes by the time of the meeting to elect its candidates. A shareholder may also propose a candidate to be nominated as a management nominee, but management has no obligation to nominate the shareholder’s candidate. In most situations, the only alternative for shareholders is to launch a costly proxy contest in which they circulate their own proxy materials relating to their director nominees.
Survey of Proxy Access Proposals
At least 24 companies received proxy access shareholder proposals during the 2012 proxy season, which were submitted by a total of nine proponents.
Click here to view table.
Eligibility and Nominee Requirements
The now vacated mandated proxy access rule adopted by the SEC established certain shareholder eligibility and nominee requirements, including with respect to shareholder eligibility to nominate directors and the number of director nominees permitted. The proxy access shareholder proposals submitted during the 2012 proxy season also contained certain shareholder eligibility and nominee requirements, some of which conformed to, and some of which varied from, the shareholder eligibility and nominee requirements sought to be established by the SEC.
SEC Proposed Eligibility and Nominee Requirements
The SEC’s June 10, 2009 proposing release related to mandated proxy access provided that in order to include its nominee in a company’s proxy materials, a nominating shareholder or shareholder group, among other things:
Must have met certain ownership threshold requirements depending on the company’s size:
- 1% of voting securities for large accelerated filers (companies with a market capitalization of $700 million or more);
- 3% of voting securities for accelerated filers (companies with a market capitalization of $75 million or more but less than $700 million); and
- 5% of voting securities for non-accelerated filers (companies with a market capitalization of less than $75 million); and
- Must have beneficially owned the requisite percentage of shares continuously for at least one year (and continue to own the securities through the date of the annual meeting).
In addition, under the proposed rule, shareholders in the aggregate would have been permitted to nominate a number of nominees representing up to 25% of the board (but in any event at least one nominee).
The SEC’s August 25, 2010 adopting release related to mandated proxy access modified the shareholder eligibility requirements contained in its proposing release to provide that a nominating shareholder or shareholder group, among other things:
- Must have met an ownership threshold, either individually or in the aggregate, of at least 3% of the voting power of the company’s securities (regardless of the company’s size); and
- Must have held the minimum amount of securities used to satisfy the 3% ownership threshold continuously for at least three years (and continue to own the securities through the date of the annual meeting).
Shareholder Proxy Access Proposal Eligibility and Nominee Requirements
There were seven variations on shareholder eligibility and nominee requirements among the proxy access proposals submitted during the 2012 proxy season.
Click here to view table.
Companies’ Responses To Proxy Access Proposals
Companies responded to proxy access proposals in a number of ways, some seeking no-action relief from the SEC to exclude the proposals and others including the proposals in their proxy materials or agreeing to take other actions with respect to the proposals.
SEC No-Action Letters
Companies sought no-action relief from the SEC for excluding proxy access proposals from their proxy materials pursuant to various provisions of Rule 14a-8 permitting such exclusion. Exclusion was sought on several bases, including:
- Rule 14a-8(b) because the proponent failed to demonstrate eligibility to submit the proposal (Sprint Nextel);
- Rule 14a-8(c) because the proposal constituted multiple proposals (due to a problematic “change in control” provision as described below) (Bank of America, Goldman Sachs and Textron);
- Rule 14a-8(i)(1) because the proposal was not a proper subject matter for action by the company’s shareholders under state law (Forest Laboratories and Sprint Nextel);
- Rule 14a-8(i)(2) because the proposal, if implemented, would cause the company to violate state law (Chiquita Brands, Forest Laboratories, Medtronic, MEMC and Sprint Nextel);
- Rule 14a-8(i)(3) because the proposal was impermissibly vague and indefinite so as to be inherently misleading (Bank of America, Charles Schwab, Chiquita Brands, Dell, Forest Laboratories, Goldman Sachs, Medtronic, MEMC, Sprint Nextel, Staples, Textron, Wells Fargo and Western Union);
- Rule 14a-8(i)(6) because the proposal was beyond the company’s power to implement (due to, among other things, a problematic “change in control” provision as described below) (Bank of America, Chiquita Brands, Forest Laboratories, Goldman Sachs, Medtronic, MEMC and Textron);
- Rule 14a-8(i)(7) because the proposal dealt with matters relating to the company’s ordinary business (due to a problematic “change in control” provision as described below) (Bank of America, Chiquita Brands, Goldman Sachs, MEMC and Textron);
- Rule 14a-8(i)(8)(iii) because the proposal questioned the competence, business judgment and character of directors that the company expected to nominate for reelection at the annual meeting (Chiquita Brands, Forest Laboratories and Medtronic);
- Rule 14a-8(i)(9) because the proposal directly conflicted with a proposal to be submitted by the company at the annual meeting (Western Union); and
- Rule 14a-8(i)(10) because the proposal had been substantially implemented by the company (KSW).
SEC No-Action Relief Granted
The SEC granted no-action relief to eight companies, allowing exclusion of the shareholder proxy access proposals. In three instances, the SEC granted no-action relief on the basis of Rule 14a-8(c), finding that the proposal in question constituted multiple proposals. The SEC noted that several provisions of the proposal related to the inclusion of shareholder director nominees in the company’s proxy materials (i.e., proxy access), but that another provision of the proposal related to what constitutes a “change in control” of the company (the provision stated that the election of shareholder nominees would not constitute a change in control of the company). The SEC concluded that the change in control provision was a separate and distinct matter from the proxy access provisions and, as such, the proposal constituted multiple proposals in violation of Rule 14a-8(c). (See Bank of America, Goldman Sachs and Textron.)
In four instances, the SEC granted no-action relief on the basis of Rule 14a-8(i)(3), finding that the proposal in question was vague and indefinite. The SEC noted that the proposal required the company’s proxy materials to include director nominees of shareholders who satisfy the “SEC Rule 14a-8(b) eligibility requirements,” but failed to describe those eligibility requirements. The SEC concluded that many shareholders may not be familiar with those requirements, and would not be able to determine those requirements based upon the proposal’s language. (See Chiquita Brands, Dell, MEMC and Sprint Nextel.)
Looking ahead to the 2013 proxy season, proponents are likely to draft proxy access proposals to avoid the problems indicated in these no-action letters. Indeed, the United States Proxy Exchange revised the language of its initial model proxy access proposal following certain of these no-action rulings to delete the problematic change in control provision and reference to Rule 14a-8(b).
The SEC also granted no-action relief to Staples on the basis of Rule 14a-8(i)(3) as vague and indefinite where the proposed proxy access bylaw amendment conflicted with a provision in the company’s existing bylaws disclaiming shareholders’ rights to include director nominees in the company’s proxy materials. The SEC noted that the proposal did not address this direct conflict and, as such, neither the company nor its shareholders would be able to determine with reasonable certainty exactly what actions or measures would be required by the proposal.
SEC No-Action Relief Denied
The SEC denied no-action relief to six companies. In three instances, the SEC denied no-action relief on the basis of Rule 14a-8(i)(3) where the company sought to exclude the proponent’s proposal as vague and indefinite based upon a website referenced in the proposal that was not yet functional at the time of submission of the proposal. The SEC noted that (i) the proponent had provided the company with the information that would be included on the website, (ii) the company had not asserted that the content to be included on the website was false or misleading and (iii) the proponent had represented that it intended to include the information on the referenced website upon the company’s filing of its proxy materials. (See Charles Schwab, Wells Fargo and Western Union.)
The SEC also denied no-action relief to KSW, which sought to exclude a proxy access proposal on the basis that KSW substantially implemented the proposal by unilaterally adopting a proxy access bylaw amendment with an ownership threshold of 5% for 1 year (which differed from the proponent’s proposal of 2% for 1 year). The SEC noted, in particular, the difference in ownership levels required for eligibility between the adopted bylaw and the proponent’s proposal. The SEC did not provide guidance as to whether a smaller difference in ownership levels would have led the SEC to conclude that the company had substantially implemented the proposal.
Additionally, the SEC denied no-action relief to Forest Laboratories and Medtronic, both of which sought exclusion on the basis of Rule 14a-8(i)(2) (among others) because implementation of the proposal would violate state law. In each case, the SEC noted that an assumption made in the opinion of the company’s counsel that certain provisions of the proposal would impermissibly modify the fiduciary duties of directors in violation of state law was not necessarily supported by the language of the proposal.
Rather than seek no-action relief, Cadus Corporation, Chesapeake Energy, CME Group, Ferro Corporation, H&R Block, Nabors Industries and Princeton National Bancorp included proxy access proposals in their proxy materials and recommended a vote against the proposals. Charles Schwab, Forest Laboratories, KSW, Medtronic, Wells Fargo and Western Union also included proxy access proposals in their proxy materials (as a result of the SEC’s denial of no-action relief) and recommended a vote against the proposals. The proposals have been approved by shareholders at only two companies — Chesapeake Energy and Nabors Industries.
Hewlett-Packard agreed with Amalgamated Bank to include a management proxy access proposal in its proxy materials for its 2013 annual meeting with an ownership requirement of 3% for 3 years and a 20% cap on board seats (which differed slightly from Amalgamated Bank’s proposal, which had a 25% cap on board seats).
Furlong Fund filed its own proxy statement in connection with Microwave Filter Company’s annual meeting, seeking, among other things, shareholder approval of its proxy access proposal. Microwave Filter Company recommended to its shareholders a vote against the proposal. According to publicly available documents, Furlong Fund’s proposal was not presented before the annual meeting.
Norges Bank appears to have withdrawn its proxy access proposal submitted to Pioneer Natural Resources, perhaps as a result of Pioneer’s adoption of other corporate governance changes (including majority voting for the election of directors and declassification of its board).
The limited number of shareholder proxy access proposals submitted for the 2012 proxy season likely reflects the fact that the proxy access rule amendments became effective not long before the deadline for submitting proxy proposals at many companies for the 2012 proxy season. Many industry professionals expect the number of proxy access proposals to increase significantly over the next several years. It is clear that proxy access will remain a hot button topic for shareholders in the years to come. Companies should therefore carefully evaluate their options and strategies with respect to proxy access proposals and procedures.