Recently the Staff of the Division of Corporation Finance (the Staff) of the Securities and Exchange Commission (SEC) denied no-action relief to a number of issuers on the topic of proxy access bylaws. This development highlights a distinction in the manner in which the SEC views the "substantially implemented" exclusion. When an issuer amends its bylaws for the first time to adopt a proxy access provision, the company seems to enjoy greater latitude regarding how the SEC defines "substantially implemented," even if the shareholder proposal seeks certain specific elements that are not ultimately included in the adopted bylaw provision. On the other hand, the SEC is seemingly applying the "substantially implemented" exclusion much more narrowly when the shareholder proposal seeks to revise an existing proxy access bylaw. One final wrinkle exists related to companies with existing proxy access bylaw provisions. When such companies receive shareholder proposals seeking specific amendments to their current bylaw provisions, the SEC is willing to grant no-action relief when such companies make some but not all of the specified amendments. At this time it is unclear what constitutes "enough" amendments to qualify for no-action relief.

Overview and Highlights

  • The SEC appears to be applying different standards under the "substantially implemented" exclusion depending on whether the company (i) is adopting proxy access for the first time in response to a shareholder proposal or (ii) already has a proxy access bylaw provision and is trying to exclude a subsequent shareholder proposal to revise it. The former category is more favorable to companies seeking exclusion.
  • The most recent no-action responses suggest that companies that do not make any changes to an existing proxy access bylaw provision when confronted with a shareholder proposal will not be able to exclude the proposal under Rule 14a-8(i)(10). This is true even if the company has an existing proxy access bylaw provision containing market-standard terms.
  • However, it may be possible to exclude a proposal if the company makes some changes sought by the shareholder. This is a developing area.
  • The Staff appears highly reluctant to make judgment calls on proxy access terms.
  • Companies are going to become increasingly frustrated with the Staff's positions. Numerous companies have engaged in serious dialogue with long-term institutional shareholders. As a result, there appears to be a consensus on what a proxy access bylaw provision should generally provide, and the 3%/3-year requirement with a 20-shareholder limit on aggregation has become ubiquitous. The Staff's decision to allow individual activist shareholders to challenge these terms through the Rule 14a-8 process is frustrating.
  • Long-term institutional shareholders need to consider the terms being advocated by shareholder activists many of which may conflict with their own interests.
  • Finally, on November 10, 2016, GAMCO Asset Management became the first shareholder to actually use a company's proxy access bylaw provision to nominate a director a development that we believe will only heighten the already tremendous focus on proxy access.

Background Before Recent SEC Responses to No-Action Requests

On February 12, 2016, the Staff of the SEC issued responses to 18 no-action requests from issuers seeking to omit proxy access shareholder proposals from their proxy materials in reliance on the "substantially implemented" exclusion set forth in Rule 14a-8(i)(10). The Staff granted no-action relief to 15 issuers that adopted proxy access bylaw provisions containing the key elements sought by the proponents 3%/3-year holding requirements and denied relief to three issuers whose proxy access bylaw provisions contained a higher eligibility threshold than that requested in the shareholder proposals. Although the 15 issuers granted no-action relief adopted the key elements sought, they did not adopt all elements sought by the proponents. For example, the bylaws for 11 of the 15 companies included a lower cap on the number of candidates who could be nominated pursuant to proxy access (20% of the board or the greater of 20% of the board and two directors versus the greater of two directors or 25% of the board). This and other similar variances from the shareholders' proposals did not result in denial of no-action relief. As discussed below, similar latitude has not been afforded to issuers that have received proposals to amend their existing proxy access bylaw provisions.

On July 21, 2016, the Staff determined that H&R Block, Inc., which had previously adopted a proxy access bylaw provision including all of the widely accepted provisions, did not "substantially implement" a shareholder proposal requesting four specific revisions to its proxy access bylaw provision. Specifically, the proponent sought to make the following changes: (1) change the maximum number of nominees from 20% of the board to the greater of 25% of the board or two nominees; (2) eliminate the requirement that in order to be counted towards the minimum ownership threshold, loaned shares must be recallable on three business days' notice; (3) eliminate the 20-shareholder limit concerning aggregation; and (4) eliminate the provision prohibiting nominees who receive less than 25% of the votes cast from being a proxy access nominee for the next two years. The Staff's denial of H&R Block's no-action relief appears to signal a difference in the way the SEC views shareholder proposals seeking the adoption of proxy access with specified provisions and shareholder proposals that request enumerated revisions to an issuer's existing proxy access bylaw provision.

New SEC Responses to No-Action Requests

On September 27, 2016, the SEC confirmed this understanding. Cisco Systems, Inc. and WD-40 Company received substantially identical shareholder proposals requesting the companies to adopt proxy access bylaw provisions with certain "essential elements for substantial implementation," including: (1) an unlimited number of shareholders who can be aggregated to form a group; (2) the number of shareholdernominated candidates shall be 25% of the directors then serving or two, whichever is greater; and (3) no restrictions shall be imposed on re-nominations when nominees fail to receive a specific percentage of votes. Prior to receiving these shareholder proposals, neither Cisco nor WD-40 had a proxy access bylaw provision. Both Cisco and WD-40 amended their respective bylaws to adopt proxy access, but neither implemented all of the elements requested by the proponents. In their request for no-action relief from the SEC, both Cisco and WD-40 argued that although they did not implement the proposals exactly as proposed (including some of the "essential elements" called out in the proposals), they had "substantially implemented" the shareholder proposals and, therefore, should be permitted to exclude the shareholder proposals from their proxy materials under Rule 14a-8(i)(10). The Staff agreed and permitted the exclusion of the shareholder proposals.

More recently the SEC has reached decisions that reiterate the conclusion that it views an initial request to implement a proxy access proposal differently than a request to revise certain aspects of an existing proxy access bylaw provision. Each Microsoft, Walgreens, Disney and Whole Foods received a shareholder proposal requesting their boards "to adopt, and present for shareholder approval, an enhancement package [concerning the company's existing proxy access bylaw provision], with essential elements" similar to those elements discussed above regarding the Cisco and WD-40 shareholder proposals. In their respective requests for no-action relief, the issuers each argued that, although their current proxy access bylaw provisions do not include the revisions sought, their previously adopted proxy access bylaw provisions already satisfy the "substantial implementation" standard and achieve the proponent's essential purpose. Despite its decisions regarding Cisco and WD-40 and a persuasive argument that permitting such proposals to be included in the companies' proxy materials will only lead to endless requests for minor revisions and edits, the SEC disagreed and denied no-action relief to each of Microsoft, Walgreens, Disney and Whole Foods.

Finally, on November 4, 2016, the SEC granted no-action relief to Oshkosh Corporation, which similar to Microsoft, Walgreens, Disney and Whole Foods had previously adopted a proxy access bylaw provision and received a shareholder proposal seeking specific amendments to its current bylaw provision. In response to the proposal, Oshkosh made three of the six amendments sought by the shareholder proponent. Specifically, Oshkosh amended its bylaws to reduce the minimum eligibility threshold from 5% to 3%, eliminate the 25% votes-needed threshold for re-nomination and eliminate the requirement that the nominating shareholder represent its intent to continue to own the shares for one year following the annual meeting. Oshkosh did not make the following three changes, which were also described as "essential elements" by the proponent:

  • raise the cap on the percentage of shareholder-nominated candidates from 20% of the board or two to the greater of 25% of the board or two;
  • eliminate the 20-person cap on aggregation; and
  • remove the requirement that loan shares must be recallable on five business days' notice.

Despite not enacting the above mentioned "essential elements" sought by the proponent, the SEC granted no-action relief, agreeing with Oshkosh that the amendments to the bylaws satisfied the proposal's essential objective. Specifically the SEC stated, "Oshkosh's policies, practices and procedures compare favorably with the guidelines of the proposal and that Oshkosh has, therefore, substantially implemented the proposal." It seems the Staff distinguished Oshkosh from H&R Block on the basis of the action taken (or not taken) in response to the shareholder proposal: H&R Block did not make any amendments to its proxy access bylaw provision in response to the shareholder proposal; Oshkosh adopted enough of the desired amendments to satisfy the essential objective of the shareholder proposal. Unfortunately, Oshkosh is the only example so far highlighting this distinction and the Staff does not articulate its analysis in detail; therefore, issuers are left to guess what amendments are "enough" to satisfy the Staff's interpretation of "substantially implemented" under Rule 14a-8(i)(10).

Conclusion and Implications

Given the SEC's unwillingness to grant no-action relief concerning shareholder proposals seeking revisions to existing proxy access bylaw provisions unless some or all of the sought changes are made and the uncertainty regarding what changes constitute "enough" to qualify for "substantially implemented" under Rule 14a-8(i)(10), issuers that have already adopted proxy access bylaw provisions should be prepared for an increase in the number of shareholder proposals seeking amendments. With that said, companies that have adopted market standard proxy access bylaw provisions 3%/3-year holding period, cap on shareholder nominees set at the greater of two directors or 20% of the board, a limit on aggregation of 20 shareholders and the disqualification for two years of a shareholder nominee that fails to obtain 25% of the votes cast should feel fairly confident taking such proposals to a vote at their annual meetings. It appears many institutional investors are backing the company in these votes. In the case of H&R Block, less than 30% of shares voted in favor of the shareholder's proposal even with the support of ISS.

Finally, on November 10, 2016, GAMCO Asset Management became the first shareholder to actually use a company's proxy access bylaw to nominate a director. GAMCO filed a Schedule 13D/A and a Schedule 14N announcing its use of National Fuel Gas Company's proxy access bylaw to nominate Lance A. Bakrow as a candidate for election at the 2017 annual meeting of shareholders. The Schedule 13D/A discloses that GAMCO and its affiliates own 7.81% of the common stock of National Fuel Gas Company. We expect this action by GAMCO will only heighten the focus on shareholder proposals seeking proxy access bylaw provisions and shareholder proposals seeking amendments to existing proxy access bylaw provisions.