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NYSE Rule Temporarily Extends Deadline for Brokers to Send Physical Proxy Materials

On April 23, 2020, the New York Stock Exchange (NYSE) proposed a temporary rule change of NYSE Rule 451(b)(1) with immediate effectiveness that extends the deadline by which NYSE member organizations (typically broker/dealers) under selected circumstances must send physical copies of proxy materials to beneficial owners. In light of delays related to the novel coronavirus (COVID-19) pandemic, the NYSE designed the modification with the intention of helping issuers meet their quorum requirements at shareholder meetings and possibly alleviating the need for adjournments or postponements. The temporary rule change applies only to shareholder meetings scheduled to be held up to and including May 31, 2020.
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ISS Releases Policy Application Guidance For COVID-19’s Impact

On Wednesday, April 8, 2020, Institutional Shareholder Services Inc. (ISS) issued guidance on voting policies of various corporate governance-related issues that are likely to be implicated by the coronavirus (COVID-19) pandemic during the 2020 proxy season. The guidance does not introduce any new formal policies. Rather, the guidance provides ISS’s perspective on selected market developments and application of several of its existing policies relevant to the U.S. markets. Importantly, the guidance sheds some light on which company-specific and market-specific facts and circumstances are more likely to influence the proxy advisor’s determinations during and following the pandemic.

EXECUTIVE SUMMARY

The guidance makes three points relevant to the U.S.
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SEC Staff Updates Its Guidance on Shareholder Meetings & COVID-19

The SEC Staff updated today its prior March 13, 2020 guidance relating to shareholder meetings, including virtual meetings. You may recall that the Staff’s March guidance provided welcome clarity to issuers that previously mailed and filed their proxy materials, but who wish to change the date, time or location of their meetings, allowing them to essentially issue a press release and file that on EDGAR without needing to remail all materials.

The SEC updated this guidance today to make two key changes:

  • The above relief now applies to special meetings; and
  • Issuers encountering delays because of difficulties in printing or mailing full-set proxy materials may avail themselves of the “notice-only” delivery option even if such issuer is unable to send the notice of electronic availability of proxy materials 40 calendar days before its meeting as required by Rule 14a-16, if such “delays are unavoidable due to COVID-19”.

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BlackRock Releases Its 2020 Public Company Engagement Priorities

While managing COVID-19 related risks and impacts may be the current priority for many public companies, BlackRock provided a reminder yesterday that environmental, social and governance (ESG) issues will form a core part of its engagement strategy this proxy season.  Publishing its investment stewardship team’s public company engagement priorities for 2020 (Priorities), BlackRock stressed, among other things, that it intends to hold board directors accountable for demonstrating “material progress” on ESG-related disclosures and practices.

BlackRock’s 2020 Investment Stewardship Engagement Priorities

The Priorities place an enhanced focus on sustainability-related issues and disclosures. Moreover, the Priorities articulate key performance indicators against which the asset manager will track companies’ progress and identify those directors whom it will hold responsible for demonstrating progress on these issues. 
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SEC Closely Monitors the Impact of the Coronavirus and Offers Conditional Regulatory Relief and Assistance

Yesterday, the Securities and Exchange Commission (SEC) announced that the agency was concurrently issuing an Order that provides relief, subject to certain conditions, for publicly traded companies affected by the coronavirus (COVID-19). The relief is necessitated by the fact that COVID-19 may impede certain companies’ timely communication to the trading markets, the SEC and shareholders. Chairman Clayton observed that, “The health and safety of all participants in our markets is of paramount importance. While timely public filing of Exchange Act reports is a cornerstone of well-functioning markets, [the SEC] recognize[s] that this situation may prevent certain issuers from compiling these reports within required timeframes.”
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SEC Investor Advisory Group Will Recommend Actions for Improving Proxy Plumbing

Last Thursday, the Investor Advisory Committee (IAC) of the Securities and Exchange Commission (SEC) voted to adopt a proposal revised and presented by the Investor-as-Owner Subcommittee (Subcommittee) to recommend modifications to the structure of the proxy process, commonly referred to as “proxy plumbing.” The Subcommittee originally introduced the proposal at an IAC meeting in July 2019, which we previously discussed, but the committee decided to postpone voting on the proposal for further review.

Overview of the Written Recommendations

The revised written proposal proposal largely reflects the original proposal presented at the July meeting. The revised written recommendations are the same four recommendations for “short-term” improvements to the following areas of proxy plumbing: (1) End-to-End Confirmation; (2) Reconciling Ownership and Voting Information; (3) Shareholder Identity and Share Lending; and (4) Adopting the Universal Proxy Rule.
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BlackRock Releases Its Quarterly Engagement and Voting Numbers

BlackRock has released its Investment Stewardship Report for the Americas region (United States, Canada and Latin America) for the second quarter of 2019.  The majority of the investor’s stewardship activities during this quarter entail voting and direct engagements to inform its voting decisions given that a majority of its portfolio companies’ shareholder meetings are scheduled in this time period. In sum, in comparison to the second quarter of 2018, BlackRock has engaged with approximately 9% fewer companies in the Americas, and for North America (United States and Canada) the percentage of proposals BlackRock has voted against managements’ recommendations, while still low, has increased from 4% to 7%.
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SEC Investor Advisory Group Considers Proposal for Improving Proxy Plumbing

This past Thursday, the Investor Advisory Committee (IAC) of the Securities and Exchange Commission (SEC) reviewed and discussed the written proposal from the Investor-as-Owner Subcommittee (Subcommittee) for a recommendation to the Commission on modifying and improving the structure of the proxy process, commonly referred to as “proxy plumbing.”  The discussion was a continuation of the discussion the IAC previously held at its September 2018 public meeting.  That meeting preceded the SEC Roundtable on the Proxy Process in November 2018, which we previously discussed.

At the July 25, 2019 meeting, the Subcommittee made the following four recommendations on proxy plumbing:

  • The SEC should require end-to-end vote confirmations to end-users of the proxy system, potentially commencing with a pilot involving the largest companies;
  • The SEC should require all involved in the system to cooperate in reconciling vote-related information, on a regular schedule, including outside specific votes, to provide a basis for continuously uncovering and remediating flaws in the basic “plumbing” of the system;
  • The SEC should conduct studies on (a) investor views on anonymity and (b) share lending, and
  • The SEC should adopt its proposed “universal proxy” rule, with the modest changes that would be needed to address objections that have been raised to that proposal.

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Beware the Universal Proxy Card

One of the most high-profile proxy contests to use a universal proxy card ended on Tuesday, with some last-minute drama thrown in.

The board of SandRidge was engaged in a proxy contest with Icahn Capital.  In May, it announced that it had expanded its board to seven members in order to include two Icahn nominees on its ballot.  Icahn had refused to settle with the company after it offered to appoint those nominees to the board.

The company’s white proxy card contained five company nominees and two Icahn nominees.  Icahn’s gold proxy card included only five of his nominees.  The company stated that both ISS and Glass Lewis supported Icahn having minority, but not controlling, representation on the board, by recommending in favor of four of the company’s nominees and three Icahn nominees.
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Company Declines to Use Universal Proxy Card in Contest, Citing Lack of Proven Processes and Potential for Shareholder Confusion

ADP rejected Pershing Square’s recommendation to use a universal proxy card, arguing that given the solicitation has already commenced, changing the voting procedures for a new and untested process could disenfranchise shareholders.

Pershing Square has nominated three candidates to ADP’s board.  In September the activist wrote to the board calling for both sides to use a universal proxy card that would list all the nominees, calling it a “hallmark of good corporate governance” and citing to the CII report advocating for the practice.  The activist had to seek approval from the company because the company nominees must consent to be named in its proxy statement. 
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A Look at BlackRock’s Engagement Activity

We are in the busiest annual meeting week of the year, with 350 meetings expected to take place during this week alone, making it the appropriate time to examine how investors view voting and engagement.

BlackRock reported that it conducted 126 engagements in the first quarter of 2016 with issuers in the Americas region (U.S., Canada and Latin America), focused on corporate strategy, board composition and skills, executive compensation, bylaw amendments, as well as issues related to capital structure, executive succession planning and sustainability reporting. The first quarter tends to have lower meeting volume, and BlackRock voted at only 379 meetings in the U.S.,
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Plurality Carve-Out in Majority Voting Standards

Ethan Allen’s seven nominees for the company’s board received overwhelming support in the recent proxy contest against the six candidates proposed by Sandell Asset Management.

The contest received some unusual attention, as noted in this WSJ article, after ISS criticized the company for using majority voting for the election of directors as a “potential entrenchment device.”  Over 40% of the Russell 3000 companies require directors to be elected by a majority of the votes cast.  However, in a contested election, most often the standard reverts back to plurality, meaning that nominees who receive the most number of votes are elected regardless of whether they obtained a majority.
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Post-Season Review from Vanguard

In preparing for the upcoming proxy season, it is helpful to examine the information that investors provide about their most recent voting and engagement efforts.  We start with Vanguard.

In the 12 months ended June 30 of this year, Vanguard funds voted at more than 13,000 meetings covering 120,000 items.  The funds supported 93% of director nominees, voting against candidates for reasons related to attendance, independence or committee actions.  Similarly, Vanguard supported 95% of say-on-pay proposals and 88% of equity compensation plans, but did vote against nearly 350 compensation committee members.

On shareholder proposals, Vanguard tended to vote in favor of certain types of governance proposals, such as declassifying boards, while generally abstaining on environmental or social matters. 
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Delaware Court Finds “On or About” Did Not Specify Actual Date to Trigger Advance Notice Bylaw Notification Requirements

A company’s reference to the next annual meeting date as “on or about” June 10 refers to an approximate or anticipated time frame, and not an actual specified date, held the Supreme Court of the State of Delaware in a case on appeal. As a result, a shareholder did not need to provide notice of proposals within the time period disclosed in the proxy statement under the company’s advance notice bylaws. 

Hill International disclosed in its 2014 proxy statement that its 2015 annual meeting would be held on or about June 10, 2015, and that shareholders must submit nominations or proposals under its bylaws between March 15 and April 15, 2015, which was 60 and 90 days before the meeting.
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Reliance on Proxy Advisory Firm Recommendations May Have Contributed to Majority Withhold Votes for Directors

According to a filing by Nabors, four directors received less than a majority of the shares voted (or withheld) and tendered their resignations, in accordance with the company’s majority vote policy. After considering the structure and needs of the board and the company and the contributions of the directors, especially in the strategic review process that included an important merger transaction recently, the board decided to reject the resignations.  

The company noted that feedback from shareholders revealed three reasons underlying the withhold votes, which were considered in the board decision. First, the company stated that “several institutional shareholders’ voting policies call for their shares to be automatically voted solely in accordance with the recommendations of certain proxy advisory services,” which had recommended against the election of these directors.
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How Equity Plan Proposals Fared in the 2014 Proxy Season and ISS Equity Plan Data Verification

Shareholders were asked to vote on almost 1,200 equity plan proposals in the first half of 2014, according to the ISS U.S. Proxy Season Review Report, with an average approval rate of 89%. Slightly more than half of the proposals amended existing plans, while 150 proposals were made solely to comply with Section 162(m) tax deductibility and did not ask for any increased shares.

While it appears that ISS did not support at least a quarter of the proposals, only eight failed to pass, including two that ISS recommended that shareholder vote in favor. Two failures were at S&P 500 companies.
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Company Disputes Claims Related to Vote Counting for Equity Plan Approval

As we previously discussed here, in May, a shareholder challenged the validity of an amendment to Cheniere Energy’s 2011 incentive plan that was voted on at the company’s February 2013 meeting. In the complaint, the plaintiff questioned whether abstentions should have been counted as votes “against” the plan, based on the company’s bylaws. According to the plaintiff, treating abstentions as “no” votes would have meant that the plan was not approved by shareholders.

Citing the litigation, Cheniere Energy postponed its annual meeting originally scheduled for June to September 11, 2004. It also decided to remove proposals to further amend the plan that had been scheduled for that meeting.
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Eliminating Shareholder Ability to Call a Special Meeting

Approximately 60% of S&P 500 companies provide shareholders with the right to call special meetings. Coupled with the move away from classified boards and toward annual director elections, which generally permit shareholders to remove directors for cause, there has been increasing concern that companies are dismantling their defensive mechanism and leaving themselves vulnerable to activist attacks. 

Time Warner announced on Monday in a Form 8-K that its board has amended the company’s bylaws, effective immediately, to delete provisions regarding shareholders’ ability to call a special meeting. No reason was given in the company’s filing, although reports in the press indicate that the company recently rejected an unsolicited takeover bid.
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ISS Reports on Preliminary Postseason Results

According to the ISS US preliminary postseason update, the win rate for dissidents, measured by whether they won at least one board seat through negotiations or a vote, was 59% at 22 contested elections in the first half of 2014, compared to 24 contests with a 68% success rate by June 2013.  The size of the target continues to increase, as seven of the companies had market capitalizations greater than $1 billion.  Notable for 2014 were what ISS dubbed “hydra-headed activist challenges,” where multiple dissidents targeted the same company but with competing visions, including at Darden and Sotheby’s.

Boards were also the focus through 13 “vote no” campaigns. 
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Success of Proxy Access Proposals Depends on Threshold Ownership Levels

McKesson Corporation announced that it intends to submit a proxy access bylaw amendment for shareholder vote at the company’s 2015 annual meeting. The company has not yet filed its proxy statement for this year’s meeting.

This season, proxy access shareholder proposals have divided along two fronts, seeking different threshold ownership levels before nominations can occur by using either the original SEC rulemaking of 3% ownership for three years or following what is known as the retail approach. That approach, submitted by individual shareholder proponents, asks boards to allow shareholders who own at least 1% but less than 5% to nominate directors onto company proxies, or any party where 25 or more shareholders have held at least $2,000 of shares.
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Litigation Alleging Failure to Properly Count Abstentions for Determining Approval of Existing Equity Plan Causes Company to Delay Annual Meeting

Facing a lawsuit alleging that shares were improperly awarded because of the failure to count abstentions in determining whether an equity plan received shareholder approval, Cheniere Energy announced that it is delaying its annual meeting, originally scheduled for June 12, until September. A copy of the complaint is attached as an exhibit to the company’s release.

Plaintiff filed suit in the Delaware Court of Chancery to recover 25 million shares that it accuses the company of improperly awarding to employees, consultants and directors under a 2011 incentive plan and to enjoin the upcoming 2014 until a recent bylaw amending the voting standard is invalidated. 
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SEC Staff Guidance on Proxy Advisory Firms May be Issued This Week

The WSJ is reporting that the SEC staff may issue guidance as early as this week to cause proxy advisory firms to disclose more information about potential conflicts of interests. According to the article, the guidance will indicate that it is not sufficient for the firms to require investors to simply contact them about potential conflicts. 

ISS is the only firm that also provides corporate services. The advisory firm has been in the news lately by taking the unusual and harsh step of recommending against the election of a majority of the directors, 7 of the 10, at Target, finding them accountable for the company’s cybersecurity breach.
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Broadridge Explains Its Current Policies on Interim Vote Tallies with Issuers as Decision-Makers, while CII Pursues Regulatory Solutions

There remains some confusion about who exactly is getting information about vote tallies before an annual meeting, since the controversy in May 2013 surrounding the independent chair proposal at J.P. Morgan. Broadridge’s recent report clarifies this and other mysteries about the proxy voting process. As the report emphasizes, there are no SEC rules or other rules governing the practice of providing voting information in advance of the meeting, including to issuers.

Contested meetings. At meetings where there is more than one proxy card, Broadridge will continue its practice of providing all soliciting parties with interim vote information at the same time.
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Will Shareholders Ask About the New COSO Framework at Annual Meetings?

The list of possible topics that shareholders may raise at an annual meeting compiled by BDO USA includes many that companies would expect, such as questions about strategic business decisions, global economic concerns, cybersecurity and executive compensation. Perhaps surprisingly, however, the firm advises companies to also be prepared for questions about the new COSO framework.

As summarized in this March Deloitte briefing, in May 2013, the Committee of Sponsoring Organizations of the Treadway Commission’s (COSO) updated the Internal Control-Integrated Framework. The older framework from 1992 is expected to be transitioned out by the end of 2014, and the SEC staff has publicly stated that they are monitoring the changes to the new model since SEC rules require the use of a “suitable, recognized control framework” in companies’ internal control over financial reporting.
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