Today, ISS issued long-awaited FAQs regarding its policy with respect to shareholder proposals for proxy access and its position on exclusion of shareholder proposals under Rule 14a-8(i)(9). Taken together with the views that Glass Lewis has informally already expressed on this issue (which tend to emphasize a more subjective, case-by-case approach), the position of ISS on companies’ exclusion of shareholder proposals in the absence of regulatory or judicial relief will surely lead companies facing this issue to pause before making a move to exclude.
Proxy Access Proposals
ISS’ previous policy was to assess proxy access proposals on a case-by-case basis, with a focus on attempts by proponents of shareholder proposals to lower thresholds that were intended by the SEC (in SEC rules previously tossed out by the D.C. Circuit) as safeguards against abuse. In light of three years of proxy access proposals the voting results of which appear, in ISS’ view, to validate the balance struck in the SEC’s model between protecting shareholders’ rights and preventing potential abuse of the access process, together with a favorable proxy access cost-benefit analysis contained in a 2014 CFA Institute study, ISS adopted a new policy that is now in general alignment with the SEC’s formulation.
Under its new policy, ISS will generally recommend in favor of proxy access proposals, whether from management or from shareholders, with the following provisions:
- Maximum ownership threshold requirement of no more than 3% of the voting power;
- Maximum requirement for duration of ownership not to exceed three years of continuous ownership for each member of the nominating group;
- Minimal or no limits on the number of shareholders that may aggregate to form a nominating group; and
- Percentage of board members available for proxy access nominations generally set at 25% of the board.
ISS advises that it will review any other restrictions for reasonableness,warning that, if proposals are more restrictive than the provisions described above, it will likely recommend a vote against the proposal. Where companies decide to submit for votes of their shareholders in the same proxy statement both management and shareholder proxy access proposals, ISS advises that it will review each of them under the policy.
Exclusion of Shareholder Proposals
As discussed in this post, SEC Chair Mary Jo White issued a statement in January advising that the SEC Staff is reviewing the proper scope and application of the “conflicting proposal” rule, Rule 14a-8(i)(9), which allows a company to exclude a shareholder proposal where the company plans to submit to a vote of shareholders its own conflicting proposal on the same topic. At the same time, Corp Fin announced that, in light of that review, it would not express its views on the application of Rule 14a-8(i)(9) during the current proxy season. A significant number of companies had already submitted (or were planning to submit) letters to the SEC Staff this season, requesting that the Staff permit exclusion of shareholder proposals for proxy access (and other matters) on exactly that basis, and at least one, Whole Foods, had received the Staff’s concurrence (since withdrawn) to exclude a proxy access shareholder proposal. The SEC’s announcements left companies scrambling for new strategies to address the onslaught of proxy access (and other) proposals this season. Although there is no requirement that companies obtain a favorable no-action position from the SEC in advance of omitting a shareholder proposal in reliance on the exclusion, the SEC’s position leaves companies desiring to exclude a shareholder proposal on the basis of a conflicting proposal essentially on their own.
ISS’ views on the subject are as follows:
As noted above, if companies present both a shareholder proposal and a “conflicting” management proposal in the proxy statement, ISS will review each of them under the applicable policy.
To the extent that companies attempt “to circumvent the normal avenues of dispute resolution and appeal” – i.e., omitting the shareholder proposal without obtaining regulatory or judicial relief – ISS will view those efforts “with a high degree of skepticism.” Not only does that action risk litigation against the company, but it also “limits governance discourse by preventing shareholders from considering an opposing viewpoint, and only allowing them to consider and opine on the view of management.”
Applying its “governance failures” policy, “ISS will generally recommend a vote against one or more directors (individual directors, certain committee members, or the entire board based on case-specific facts and circumstances), if a company omits from itsballot a properly submitted shareholder proposal when it has not obtained:
- 1) voluntary withdrawal of the proposal by the proponent;
- 2) no-action relief from the SEC; or
- 3) a U.S. District Court ruling that it can exclude the proposal from its ballot.”
Interestingly, ISS does not limit its position to the “directly conflicting proposal” exclusion of Rule 14a-8(i)(9). Rather, ISS advises that the recommendation against directors will apply to exclusion of any shareholder proposals in the circumstances above, whether or not there is a conflicting management proposal in the same proxy statement. However, where the company “has taken unilateral steps to implement the proposal,” ISS will take into account in its assessment the “degree to which the proposal is implemented, and any material restrictions added to it.” Presumably, a company that has taken steps to implement the policy may have sought no-action relief from the SEC on the basis of Rule 14a-8(i)(10) — that the proposal may be excluded because it has been substantially implemented — or sought to have the proponent withdraw the proposal.