Shareholder Proposals

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The Financial CHOICE Act and the Debate Over Shareholder Proposals

A lively debate is erupting over a provision in the House-approved Financial CHOICE Act that would increase the stock ownership threshold for submitting shareholder proposals in the company’s proxy statement from the current level of $2,000 to 1% of common stock outstanding, and would extend the stockholding duration requirement from one year to three years.

The New York State Comptroller, who manages $186 billion in retirement funds but whose ownership of any particular company is often less than 1%, called it “outrageous and inequitable that we would not be able to make requests of corporate boards through shareholder resolutions.” Other critics of the proposed change have pointed out that even investors with small holdings can have good ideas, and the Wall Street Journal quoted an asset manager’s view that “Shareholder proposals provide an early warning of risks a company may not be aware of, as well as an opportunity to gauge investor sentiment on a wide range of issues.”
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Shareholder Proposal Update

A recent Bloomberg report found that 226 no-action letters requesting to exclude shareholder proposals were submitted to the SEC in the first quarter of 2017, a 10% increase over the prior year.

After the SEC staff decided that proxy access proposals seeking to change the group aggregation limit from 20 shareholders to 40 or 50 shareholders could be excluded, which we previously discussed here, more companies then sought no-action letter relief for those proposals. It is no surprise then that the report noted that the top shareholder proposal topic for no-action letters in the first quarter was proxy access, followed by social and environmental issues.
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Financial CHOICE Act Imposes Sweeping Shareholder Proposal Reforms

The modified version of the legislation, CHOICE Act 2.0, released by House Financial Services Committee Chairman Jeb Hensarling (R-TX), is mostly known for proposing major financial regulatory reforms. Tucked into the lengthy bill, however, are several significant changes that would completely overhaul the shareholder proposal process. Some are similar to proposals by the Business Roundtable, which we previously discussed here.

Ownership Threshold.  Currently, Rule 14a-8 allows any shareholder who owns at least $2,000, or 1%, of a company’s stock to offer a proposal for inclusion in the company’s proxy statement for the annual meeting. The CHOICE Act changes that ownership and holding requirement to permit submission of proposals by only a shareholder owning 1% of the company’s securities entitled to vote on the proposal, or such greater percentage as determined by the SEC, so long as the shareholder has held the stock for a minimum of three years.
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Virtual-Only Annual Meetings Come Under Criticism

The growth of holding annual meetings online (virtual-only meetings) by more than 150 companies last year, up from 21 five years ago, has agitated some investors. The New York City Comptroller has announced that this month its pension funds will decide on proposed changes to its guidelines to vote against directors on governance committees where companies host virtual-only meetings. If approved, the policy would apply to S&P 500 companies in 2017, unless companies agree to change their practices at the next meeting, and all portfolio companies in 2018. The Comptroller wants to encourage in-person or hybrid (both in-person and webcast) meetings instead.
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After Slight Text Changes, the SEC Staff Decides Proposal Governing Company Access to Vote Tallies Cannot Be Excluded

Several companies excluded proposals this season related to their receipt of periodic vote tallies from Broadridge after receiving no-action letter decisions similar to the SEC staff’s views from two years ago. The proposals asked boards to adopt bylaws so that the running tally of votes cast for matters on the proxy card would not be made available to management or the board, and cannot be used to solicit votes.

The proponent of the proposal proclaims that the objective is “confidential voting,” although the real purpose seems to be curtailing corporate solicitation. The version of the proposal that the SEC staff decided could be excluded asked for the bylaws to govern the tallies related to the “outcome of votes cast by proxy on uncontested matters,” and included all management proposals seeking approval of executive pay, proposals required by law to be subject to shareholder vote and shareholder proposals.
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CII and Others Defend Shareholder Proposal Process to the White House

A group of investor organizations sent a letter to Gary Cohn, the Director of the National Economic Council, disputing the Business Roundtable’s assertion that the shareholder proposal process under Rule 14a-8 is among the list of unduly burdensome regulations. A prior discussion of the October 2016 Business Roundtable report on possible Rule 14a-8 reforms is here.

CII, the Principles for Responsible Investment, the Interfaith Center on Corporate Responsibility, the Investor Network on Climate Risk and the Forum for Sustainable and Responsible Investment support the current SEC rule. The group argues that the shareholder proposal process is “well functioning” and does not need to be amended or repealed.
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Interview with the New York City Comptroller’s Office on Their Advocacy for Proxy Access

New York City Comptroller Scott Stringer and the New York City Pension Funds launched the Boardroom Accountability Project in the fall of 2014, by submitting shareholders proposals to 75 companies at once, and asking them to give their shareholders the right to nominate directors using the corporate ballot, known as “proxy access.” 

By all accounts, this project has led to the tremendous uptick in providing for proxy access rights through private ordering.  Almost 400 companies have enacted proxy access bylaws, including more than half of the S&P 500.  Below are some thoughts on the topic from Rhonda Brauer, Director of Corporate Engagement in the New York City Comptroller’s Office.
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Status of SEC Staff Decisions on Proxy Access Shareholder Proposals and Aggregation Limits on Nominating Shareholder Groups

SEC staff decisions for no-action letters seeking relief from proxy access shareholder proposals have divided between companies being asked to adopt proxy access for the first time and companies being asked to amend existing bylaws.  Now they have taken a further twist based on the requests in those proposals to amend proxy access bylaws.

Adopt Proxy Access Proposals.  Consistent with last year, this season the SEC staff has continued to affirm that shareholder proposals asking companies to adopt proxy access bylaws are considered to be substantially implemented if companies provide terms permitting shareholders that own 3% or more for at least three years to nominate the greater of two directors, or 20%, of the board. 
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SEC Staff Permits Exclusion of GHG Emissions Proposal

The SEC Staff determined that a shareholder proposal on greenhouses gases (GHGs) could be excluded from Apple and Deere’s proxy statements as relating to ordinary business operations because the proposal seeks to micromanage the companies by probing too deeply into matters of a complex nature. Although routinely argued, the ability to exclude proposals based on micromanagement are uncommon.  The SEC’s 1998 release indicated that this consideration may be implicated where the proposal “involves intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies.”

The proposal asked the companies’ boards to generate a plan to reach a net-zero GHG emission status by the year 2030 for all aspects of each business that are directly owned, including but not limited to manufacturing and distribution, research facilities, corporate offices and employee travel.
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Status of SEC Staff Decisions on Proposals to Amend Proxy Access Bylaws

Since the SEC staff first decided that a shareholder proposal asking to amend several terms of an existing proxy access bylaw could not be excluded from a proxy statement, which we previously discussed here, not much has changed.

The SEC staff has since made similar rulings in several other no-action letters whenever a company had already adopted a market standard 3/3/20/20 proxy access bylaw, and a shareholder proposal asked that company to amend parts of the bylaw. In the situations addressed by the staff so far, the proposals have sought to eliminate the provision that limits to 20 the number of shareholders who can form a nominating group.
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Business Roundtable Urges Improvements to Rule 14a-8 and Related Processes

The Business Roundtable recently issued a paper on Modernizing the Shareholder Proposal Process, focused on improving how shareholder proposals are submitted under Rule 14a-8.

The organization argues that the rules that were originally intended to replicate attendance and participation by shareholders at annual meetings are now outdated, as the current process is dominated by a few individuals who file common proposals across a range of companies pursuing “special interests.”  The Roundtable claims that the shareholder proposal process costs companies tens of millions of dollars and countless hours of management time, including negotiating with proponents, seeking SEC no-action relief and preparing opposition statements.
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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.”
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SEC Staff Continues to Reject Attempts to Exclude Proposals to Amend Existing Proxy Access Bylaws

The SEC staff has denied another no-action letter seeking to exclude a shareholder proposal to amend an existing proxy access bylaw on the grounds of substantial implementation, similar to its decision on the H&R Block proposal, which we previously discussed here. H&R Block’s proposal has been voted on and received about 30% support, with ISS recommending in favor and Glass Lewis opposing.

In this case, Microsoft adopted a proxy access bylaw in August 2015. The proposal that Microsoft received this summer requested an “enhancement package” to the existing bylaw that included: (a) the number of candidates not to exceed the greater of one quarter of the directors then serving or two; (b) no limit on the number of shareholders that can aggregate their shares to achieve the ownership threshold; (c) no limit on shareholder re-nomination based on the support received in a prior election; and (d) the board should defer decision about the suitability of nominees to the vote of shareholders.
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Why Individual Investors File Shareholder Resolutions

A new report from the Rock Center for Corporate Governance with the provocative title “Gadflies at the Gate” tries to answer the question so many companies have asked themselves:  Why do individual investors submit shareholder proposals?

Individual investors can represent up to 25% of the total number of shareholder proposals annually, with over 1,100 submissions in a ten-year time span.  Although those proposals received only 29% support on average, and only a handful of subject matters brought forth by individual investors had any kind of meaningful, favorable vote tallies, the report notes that individual investors can have influence.  The first individual shareholder activism, which dates back to the 1930s, focused on topics that were then viewed as highly controversial, including elimination of classified boards and allowing shareholders to ratify the selection of auditors.
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SEC Staff Rejects No-Action Letter Request on Proposal to Revise Existing Proxy Access Bylaw

In what appears to be the first of its kind, the SEC staff has determined that a company cannot exclude a proposal that a board amend its existing proxy access bylaw on the basis of substantial implementation.

The company adopted a proxy access bylaw in July 2015 with fairly common terms permitting shareholders owning 3% or more of shares for at least three years to make nominations, and received a proposal to revise that bylaw in March 2016. The key points in the proposal and the company’s rebuttal were:

  • One shareholder or an unrestricted number of shareholders should be able to form a group.

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Gender Pay Gap Becomes a Proxy Season Issue

The White House recently announced an initiative by 28 companies that have pledged to conduct annual gender pay analysis, similar to a shareholder proposal this proxy season that received a fair amount of press attention.

Arjuna Capital sent proposals to nine major technology companies, including Apple, Alphabet, Facebook, Intel and Microsoft, asking them to prepare reports on their policies and goals to reduce the gender pay gap. This was defined as the difference between male and female earnings expressed as a percentage of male earnings. According to the proposal, the median income for working women is 78% that of their male counterparts.
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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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Board Diversity and Sustainability Proposals Achieve Majority Support

While still early in the season, two ESG proposals have passed, in an unusual level of support for those types of resolutions.

A proposal from Amalgamated Bank to enhance board diversity at a company that the proponent claims has not had any women on its board in over a decade received 52% votes cast in favor.  The resolution asks for a policy to ensure that a wider range of female and minority candidates are included in the pool of potential board nominees.

The company’s statement notes that its corporate governance principles already contain a policy that the nominating committee should include diverse candidates, including women and minorities, in its review of potential nominees. 
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SEC Staff Agrees Company Proposal to Retain Supermajority Provisions Directly Conflicts with Simple Majority Vote Shareholder Proposal

Since the SEC staff substantially narrowed the use of Rule 14a-8(i)(9) as a basis to exclude shareholder proposals in Staff Legal Bulletin 14H back in October 2015, which we previously discussed here, that argument has not been used this season, until now.

A company has successfully demonstrated how its own proposal can conform to the legal bulletin that requires it to “directly conflict” with a shareholder proposal.

In response to a fairly common shareholder proposal asking the board to take the necessary steps to change voting requirements from supermajority, in this case 66 2/3%, to a majority of votes cast to effect amendments to its charter and bylaws, the board decided to submit its own proposal asking shareholders instead to ratify those supermajority provisions.
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Vanguard Updates Proxy Voting Guidelines on Proxy Access Proposals

Vanguard has shifted its voting policy on proxy access proposals. The major institutional investor indicates that it will continue to evaluate proposals on a case by case basis but has lowered the ownership threshold likely for support from 5% to 3%.

Vanguard believes that proxy access improves shareholders’ ability to participate in director elections while possibly increasing board accountability, but at the same time proxy access should be limited to those with a meaningful long-term interest in the company in order to avoid abuse. As a result, Vanguard indicates that a shareholder or group of shareholders representing 3% of a company’s outstanding shares held for at least three years should be able to nominate directors for up to 20% of the seats on the board.
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Shareholder Proposal Pressure Shifts to the Investors Who Vote on Them

The battle over shareholder proposals is turning to the investors who make voting decisions about them.

Several investors lost the ability to exclude shareholder proposals that requested their boards to issue climate change reports assessing any incongruities between the companies’ proxy voting practices and their policy positions. In the supporting statements, the proponent noted that the investors’ parent companies may tout the importance of sustainable investing or ESG factors in deciding where to invest, and yet the investment arms that make voting decisions will abstain from supporting or actually vote against climate change shareholder proposals on the proxies of the investee companies.
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SEC Denies No-Action Requests on Proposals Preferring Buybacks over Dividends

Shareholders at several companies will vote on proposals asking boards to adopt a payout policy that gives preference to share repurchases instead of cash dividends. The proponents’ supporting statement extolled the advantages of repurchases as more flexible than dividends and indicated some concern that dividends automatically caused a tax liability for some shareholders.

Companies did not convince the SEC staff in their arguments that the proposals should be excluded. The most common assertion was that the proposal focused on an ordinary business topic. Companies cited numerous prior no-action letters that permitted proposals asking boards to implement share repurchase programs with specific terms to be excluded.
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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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