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First Proxy Access Contest Ends with Nominee Withdrawal

After National Fuel Gas declared GAMCO’s proxy access nomination to be invalid, which we previously discussed here, GAMCO filed amendment no. 10 to its Schedule 13D, announcing that its proxy access nominee has informed the investor that he has decided to withdraw his name as a candidate. The 13D then stated that “GAMCO will not pursue proxy access.”

The company’s deadline for proxy access aligned with its deadline to make director nominations under its advance notice bylaws, with both ending on November 10, 2016.
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Company Disputes Validity of First Proxy Access Nominee

National Fuel Gas (NFG) has informed GAMCO Asset Management (GAMCO) that its board has concluded that the company does not need to include GAMCO’s nominee in its 2017 proxy materials because GAMCO did not comply with the proxy access bylaws. We previously discussed the background of the nomination here.

Like other proxy access bylaws, NFG’s bylaws require a shareholder making a nomination to represent that it acquired the shares in the ordinary course of business and not with the intent to change or influence control of the company, and does not presently have such intent. NFG argues that GAMCO has failed this standard by continuing to advocate for a spinoff of parts of its business.
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First Proxy Access Nomination Surprises

The question of whether investors would use proxy access bylaws to make director nominations has been answered.

First came the Schedule 13D  with the announcement that GAMCO Asset Management and its affiliates have notified National Fuel Gas Company (NFG) that it is nominating one director pursuant to the company’s proxy access bylaws. The investor owns 7.81% of the company’s outstanding shares. This was the ninth amendment to the Schedule 13D since 2010. GAMCO indicated that it believes its nominee’s skill sets and relevant experience “will be extremely valuable to the [i]ssuer and GAMCO is confident that its [n]ominee will have an immediate positive impact on the Board.” Later in the day, GAMCO filed with the SEC the Schedule 14N required to make proxy access nominations.
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IPO Governance Practices: A Davis Polk Survey

As public company governance remains in the spotlight, we examined the governance structures of the 50 largest U.S. newly public companies at the time of their initial offerings.  Our survey of both controlled and non-controlled companies found that those companies continue to adopt various takeover defenses at the time they enter the public market, a stark contrast to the current practices of the S&P 500.
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Status of Proxy Access Shareholder Proposals, Including Binding Bylaw Proposals

At annual meetings so far this year, investors have already voted on more than 30 shareholder proposals asking companies to make proxy access rights available to shareholders who have owned 3% of common stock for at least three years, with more than 50 proposals remaining to be decided through August.  Some of these proposals have been featured at companies that already adopted bylaws providing shareholders with the right to nominate candidates at those 3%/ three-year ownership thresholds, while other proposals are being presented at companies that are adamantly opposed to proxy access in any form.

Early voting results tend to split largely along the lines of whether companies have an existing proxy access bylaw. 
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New York City Comptroller Announces Companies Targeted with Proxy Access Shareholder Proposals for 2016 Meetings

The New York City Comptroller issued a press release today announcing that the New York City pension funds (the Funds) have filed 72 new proxy access shareholder proposals, though many were sent to companies that also received the proposals in 2015.

This builds on the Boardroom Accountability Project that the Funds initiated in 2015 with 75 proposals.  According to the release, two-thirds of the proposals that went to vote received majority support and 37 of the companies agreed to enact bylaws to date.

The focus list provides the names of the companies and why they were targeted by the Funds.  It includes 36 companies that received the proposal in 2015 which have not yet enacted, or agreed to enact, proxy access bylaws. 
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ISS Issues FAQs on Voting Policies, Including Proxy Access

On Friday ISS issued new and updated FAQs to their proxy voting policies. Most notably, ISS indicated that it will evaluate a board’s implementation of proxy access in response to a shareholder proposal that received majority support by examining whether the major points of the shareholder proposal are being implemented.

In a nod to the complex nature and the evolving standards for proxy access bylaws, ISS will also examine the numerous additional provisions of the bylaws that were not part of the shareholder proposal.  With respect to these types of provisions, ISS will examine whether they “unnecessarily restrict the use of a proxy access right.”  Any vote recommendations driven by a board’s implementation of proxy access may pertain to individual directors, nominating/governance committee members, or the entire board.
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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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ISS Announces Updates to Proxy Voting Guidelines

ISS has issued its updates to its proxy voting guidelines effective for meetings on or after February 1, 2016.

The policy update is quite brief and does not address many of the questions asked in the survey period during the ISS consultation period.  Proxy access is only discussed in this update in the context of an actual contested election, while the survey questions had targeted specific bylaw terms.

For its overboarding policy, in 2016, ISS will note in its reports if a director is serving on more than five (5) public company boards.  Starting in February of 2017, ISS will recommend against directors who sit on more than five (5) public company boards. 
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CalPERS Focus on Board Tenure as Measure of Director Independence

CalPERS is considering changing its proxy voting policies to account for issues of director tenure.  New language in its governance principles could state that director independence may be “compromised” at 10 years of service.  If implicated, companies are expected to “carry out rigorous evaluations to either classify the director as non-independent or provide detailed annual explanation why the director can continue to be classified as independent.”  In addition, boards should fully evaluate their succession planning process surrounding director refreshment to maintain the necessary mix of skills, diversity and experience.

CalPERS’ presentation has several interesting data points around the topic of tenure. 
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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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Development in Proxy Access Shareholder Proposals for 2016

Those following the latest developments on proxy access may be interested in Jim McRitchie’s recent blog post, where he posted the language of a new version of proxy access that he is submitting to companies, using CII’s recent best practices that we previously discussed here.

The three key differences between proposals that companies faced during the 2015 proxy season from different proponents include reference to: (a) the nomination by a shareholder or “an unrestricted number of shareholders forming a group,” (b) the request that the number of board seats available is the greater of two or 25% of the board and (c) the 3% ownership requirement to include “recallable loaned stock.” There is also a sentence that “no additional restrictions shall be placed on re-nominations.”

Our analysis shows that since the beginning of the year, 36 Russell 3000 companies have adopted proxy access bylaws.
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Retail Shareholders Voted Against Proxy Access Proposals

The importance of the retail shareholder vote came out in force this past season, as 85% of retail shares were cast against proxy access shareholder proposals at over 80 companies. At the same time, 61% of the shares held by institutional investors supported proxy access.

ProxyPulse, a report from Broadridge and PwC’s Center for Board Governance, examined 4,280 companies that held meetings between January 1, 2015 and June 30, 2015. Over the last four years, retail investors have held about 32% of all shares. Unfortunately for companies, retail shareholders voted only 28% of the shares they owned, leaving over 97 billion shares not voted.
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Proxy Access Results and Investor Policies

Of the 63 companies that opposed proxy access shareholder proposals and have announced voting results, 36 proposals received more support than in opposition and 27 proposals did not obtain majority votes.  

Not all companies opposed the proposals. A few boards supported it and one company took a neutral position, which resulted in higher votes than the overall average vote tallies. On the other hand, companies showing very low votes supporting the proposal generally had significant insider holdings of company stock. 

Two companies argued against the shareholder proposals by adopting their own version of proxy access, usually by providing access rights requiring higher ownership threshold than those in the shareholder proposals, with mixed voting results.
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Appeals Court Rules That Wal-Mart Can Exclude a Shareholder Proposal About Its Products

As has been reported, the U.S. Court of Appeals for the Third Circuit has decided that Wal-Mart does not have to include in its 2015 proxy materials a shareholder proposal requesting that the Compensation, Nominating and Governance Committee charter be amended to add oversight of implementation of policies that would evaluate whether the company should sell certain types of guns that the proponent argues endangers public safety, has the substantial potential to impair the company’s reputation or would be considered offensive to the values that are integral to the company’s brand.

The court order was made in time for Wal-Mart to distribute its proxy materials. 
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Proxy Access Developments

Two press releases announced that the New York City Comptroller has agreed to withdraw proxy access shareholder proposals at Staples and Abercrombie & Fitch.  Agreements have also been reached with Big Lots and Whiting Petroleum.   

Staples will include a management proposal to amend its bylaws to be voted on at its 2016 meeting.  The press release includes a quote from Staples’ CEO indicating that the agreement is a result of ongoing discussions with the company’s shareholders.  Comptroller Stringer stated that “[t]he momentum for proxy access is evident and we expect more companies to follow Staples’ lead.”

The terms of the agreement with Staples permit a group of no more than 25 shareholders holding at least 3% of the shares for 3 years to nominate up to 20% of the directors if the board has 10 or more directors, or 25% of the directors if the board has 9 or fewer directors.  
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BlackRock Issues U.S. Proxy Voting Guidelines for 2015 Season

BlackRock has revised its U.S. proxy voting guidelinesfollowing their annual review of governance and proxy voting trends. The guidelines are not expected to result in significant differences from how BlackRock has voted in the past.

As expected, board composition is very much an issue of investor focus. BlackRock encourages boards to disclose their views on the director skill sets they view as necessary to effectively oversee management; the process for identifying candidates and whether sources outside of the incumbent directors’ networks have been engaged; the board evaluation process and its significant outcomes, if appropriate and without divulging sensitive information; considerations of diversity in terms of gender, race, age, experience and skills; and any other factors considered in the nomination process.
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Investors Weigh in on Proxy Disclosure

Even with the intense focus on improving proxy disclosure, a recent survey of investors from RR Donnelley indicates that few read all the details. 60% responded that they skip directly to specific sections, usually the CD&A executive summary. That, along with the proxy statement summary if one is available, and the CD&A, are considered the key sections. 12% reported they don’t read proxies at all, and only 6% review the entire document.

Disclosure that received high marks includes director nominee information, director independence, corporate governance profiles and company opposition statements to shareholder proposals. While investors also generally liked the discussion of compensation philosophy, they were lukewarm about the clarity of specific compensation disclosure surrounding pay-for-performance alignment and performance measures, which is unfortunate given investors’ sentiments that these areas are two of the most important considerations affecting voting decisions. 
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Companies Challenge Proposals Submitted on Behalf of Shareholders

Two companies are challenging shareholder proposals submitted by an individual or entity on behalf of the actual shareholder, under different grounds, in two no-action letters to the SEC staff.

Apple argues that John Chevedden is not eligible to submit a proxy access proposal on behalf of Jim McRitchie, citing to a case filed by Waste Connections during the last proxy season in the Southern District of Texas. The court ruled in favor of Waste Connections in a summary judgment motion, and Chevedden has appealed to the Fifth Circuit.

In its no-action letter, Apple claims that McRitchie’s initial correspondence sent two days before the deadline that purports to give Chevedden the ability to act as his proxy for submitting a proposal is generic, appears to be a copy of letters previously used and, most importantly, does not identify the actual proposal.
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Another Proxy Access Proposal Wins

Since the SEC rules were struck down in 2011, proxy access shareholder proposals have not disrupted the corporate governance landscape as many had feared, but they are slowly gaining momentum. Recently, a proposal to allow shareholders owning 3% or more for at least three years to nominate directors on the company’s ballot received a strong showing of 62% in support at Darden Restaurants, home of Red Lobster and Olive Garden, among others.

This type of proposal has now received a majority of votes cast at four out of six companies this season, including at Century Link (72%) and Verizon (53%). At Nabors, the company waded into some controversy after it claimed under Bermuda law that abstentions and broker non-votes both count against the proposal, and put the final tally at 47% support even though a majority of the votes actually cast for the proposal favored it.
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Examining Hewlett-Packard’s Proposed Proxy Access Rights

HP’s preliminary proxy statement filed recently included a company proposal to allow any shareholder, or no more than 20 in number, who hold 3% or more of HP shares continuously for 3 years to nominate candidates to the company’s board. This threshold tracks the previously adopted SEC proxy access rules. However, HP limits the number of candidates to 20% of the board, or the closest whole number below 20%, while the SEC rules had allowed for 25% and a minimum of one director. Currently, HP has 11 directors so the company’s proposal would permit 2 nominees.

Also similar to the SEC rules, if HP decides to include a shareholder nominee on the company proxy card as a company nominee, the company can count that nominee toward the 20% cap.
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