Last month, an activist investor's attempt to nominate a director gave rise to two proxy access milestones—the first attempted use of a proxy access bylaw, and the first rejection of a nomination submitted through proxy access.
On November 9, 2016, an investor group led by Mario Gabelli notified National Fuel Gas Company that it intended to use the company's proxy access bylaw to nominate a director candidate. National Fuel's bylaws required a stockholder to represent to the company that it did not acquire its shares with the intent to change or influence control of the company, and that it did not presently have the intent to do so. This representation is derived from the standard that governs whether an investor must file a Schedule 13D instead of a Schedule 13G under the federal securities laws. The investor group's notice to National Fuel of its intent to nominate a director included the required representation.
National Fuel's board of directors determined that the investor group did in fact have a control intent with respect to its National Fuel shares, and therefore did not meet the bylaw's eligibility requirements. The board noted the investor group had acquired at least some of its shares while urging that National Fuel pursue a spin-off transaction to divide its regulated and nonregulated businesses. The board also determined that the investor group possessed a present control intent based on recent SEC filings and contemporaneous press reports, notwithstanding the group's representation to the contrary.
This first attempted use of a proxy access bylaw ended quietly. On November 23, 2016, the day before Thanksgiving, National Fuel's board sent the investor group a letter with its findings; on November 28, the Monday after Thanksgiving, the candidate withdrew, and the investor group indicated that it would not use proxy access to nominate another candidate. Although this short-lived situation did not fully test the operation of a standard proxy access bylaw, a few questions relating to proxy access have been answered in advance of the 2017 proxy season.
National Fuel's actions demonstrate that proxy access is not open access to a company's proxy statement. Companies must be thoughtful when drafting proxy access bylaws and attentive when faced with nominations that invoke them, in order to decide at the outset what sort of access is being provided and, when invoked, whether a particular nomination meets those eligibility requirements. Certainly, and on a more fundamental level, National Fuel reminds us that companies can effectively exclude investors with a control intent from proxy access mechanism as a side door to a proxy contest.
We will, of course, continue to keep you apprised of further developments on proxy access and other corporate governance topics as the 2017 proxy season approaches.