Shareholder Proposals

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Companies Argue Substantial Implementation for Proxy Access Shareholder Proposals

A number of companies have submitted no-action letters to the SEC arguing that they have already substantially implemented the proxy access shareholder proposals that they received for their 2016 meetings.

These companies had already adopted proxy access bylaws, but then received shareholder proposals from John Chevedden to be voted on at the 2016 meetings. The proposals contain additional requirements not seen in the most common proposals voted on during the last proxy season, most notably requests to not limit the number of shareholders that can form a group or impose restrictions on proxy access candidates that do not otherwise apply to all the directors.
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Proxy Access Shareholder Proposal Exclusion Request Based on State Law Requirements for Record Holders to Present Proposals

An interesting no-action letter request has been submitted to the SEC to exclude a proxy access proposal submitted by Ken Steiner.

Sunoco Products Company argues that neither the proponent nor his qualified representative appeared at last year’s meeting to present a proposal he submitted. For that meeting, Steiner submitted a declassification proposal to the company. As is his common practice, he appointed John Chevedden as his designee. The company asserts that under South Carolina law and the company’s bylaws, resolutions proposed by shareholders must be submitted 75 days in advance of the meeting, and must be proposed by a shareholder of record as of the date of the submission and the record date.
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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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SEC Issues New Guidance on Exclusion of Shareholder Proposals

A company that receives a shareholder proposal asking that proxy access rights be given to shareholders owning 3% of outstanding shares for three years, to nominate up to 25% of the board, would not be able to exclude that proposal under Rule 14a-8(i)(9) by offering its own management proposal that would allow shareholders owning at least 5% of the company’s stock for 5 years to nominate 10% of the directors. That is the punch line of the long-awaited Staff Legal Bulletin 14H (SLB 14H) from the SEC Division of Corporation Finance.

Background of SLB 14H.  As we previously described here, the Staff had suspended making no-action decisions on the basis of Rule 14a-8(i)(9) earlier this season after issuing a controversial letter to Whole Foods allowing the company to exclude a proxy access shareholder proposal.
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Corporate Political Spending Disclosure Reviewed in 2015 CPA-Zicklin Index

With the backdrop of the focus on next year’s presidential election and frequent reports regarding political spending, the Center for Political Accountability has published the 2015 CPA-Zicklin Index. In its fifth annual report, for the first time, the Index examines all S&P 500 companies, rather than only the top 300. Many companies that were not previously evaluated will find themselves with low scores. Shareholder proposals seeking information on political contributions and lobbying expenses are perennial favorites of social activists.

Among the top 300 companies that have been reviewed in past reports, an increasing number are providing more disclosure. Becton Dickinson, Noble Energy and CSX Corporation received the highest overall scores.
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CII Warns Companies of Impact on Director Elections from Proxy Access Provisions

CII indicated that shareholders plan to “get tough” on boards adopting what it calls “troublesome access provisions.” See here for the headline. CII’s data shows that one-third of companies that have adopted proxy access require ownership thresholds of 5% in order to nominate candidates, and this could turn into “votes against directors at these firms in the 2016 proxy season.”

The introduction discusses ISS’s policy survey results, which we previously discussed here. As expected, ISS could issue negative recommendations against boards if a shareholder proposal to provide proxy access receives majority support and a board adopts bylaws with restrictions not contained in the proposal.
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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.”
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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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An Economic Analysis of Universally Mandated Versus Private Ordering for Proxy Access

The SEC Office of Economic and Risk Analysis has made available on its website a lengthy working paper on proxy access, specifically on the trade-offs between universal proxy access through federal regulation and the “private ordering” of proxy access through shareholder proposals. The main question that the paper attempts to address is whether private ordering would be able to realize or surpass the enhancement in shareholder value that could result from universal proxy access. The paper concludes that while private ordering does lead to an increase in shareholder value, since the announcement of the adoption of a bylaw causes a 0.5%
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CII List of “Don’ts” for Proxy Access Bylaws

As another example of how proxy access has entered into an advance stage of the governance dialogue, we are now wading into discussions regarding specific bylaw provisions, first with the ISS policy survey discussed here, and now with the issuance of CII’s best practices for proxy access.

ISS notes that about 5% of the S&P 500 have adopted, or committed to adopting, proxy access, leading many to compare proxy access to majority voting and board declassification in terms of perhaps becoming another inevitable mainstream governance practice.  But proxy access is much more complex.  It establishes an entire alternative director nomination mechanism, adding several pages to a company’s bylaws.
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Appeals Court Opinion in Wal-Mart Case Outlines Two-Prong Test for Analyzing Ordinary Business Shareholder Proposals

The United States Court of Appeals for the Third Circuit issued its opinion that permitted Wal-Mart to exclude a shareholder proposal that had asked the board to oversee policies to evaluate the sale of certain types of guns. The proponent had argued that the products endanger public safety and could impair the company’s reputation or damage its brand as a family retailer. We discussed the proposal and the background in several prior posts.

In its ruling, the Appeals Court provided a clear set of tests under which to analyze these types of proposals.

  1. What is the subject matter of the proposal (and its ultimate consequence)?

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Proponent of Whole Foods Proxy Access Proposal Analyzes Whether to Withdraw

Jim McRitchie at corpgov.net provides an interesting discussion on whether he should withdraw his shareholder proposal at Whole Foods, since the company has now adopted proxy access.   

The company is permitting shareholders owning at least 3% for three years to make proxy access nominations for up to 20% of the board, rather than 25% as sought in his proposal. At the moment, both alternatives would allow for two directors when rounded down to the nearest whole number. He also questions whether the company’s definition of ownership that permits funds under common management and investment control to count as one shareholder is sufficient and believes that the provision that prohibits any proxy access nominee who did not receive at least 25% of the votes in favor of his or her election from being a proxy access nominee again for two years to be a high threshold.  
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Investors Seeks to Influence the SEC’s Rule 14a-8(i)(9) Conflicting Proposal Review

Seven companies this proxy season are offering investors with alternative management and shareholder proposals on proxy access. The two competing proposals provide different ownership thresholds for when a shareholder can make a proxy access nomination. Some of the management proposals are binding, while the shareholder proposals are always precatory. Four of the proposals have come to a vote so far, with mixed result.

Providing alternative proposals became necessary after the SEC shut down the availability of Rule 14a-8(i)(9) as a basis to exclude shareholder proposals, which we previously discussed here. In past proxy seasons, the inclusion of a management proposal with different ownership thresholds than what the shareholder proposal asks for would likely have caused the shareholder proposal to be excluded from the proxy statement.
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Significant Decrease in Traditional Governance Shareholder Proposals Filed

This season ISS is tracking only 10 proposals seeking to declassify boards, a two-third drop from the number of proposals in 2014. This is likely attributable to the absence of assistance from the Harvard Shareholder Rights Project. The Harvard group indicated that it has completed the declassification project that it started in 2011 and the clinic is not operating during the current academic year. Of S&P 500 companies, 75% now have annually elected boards.

Majority voting proposals also dropped, from 50 in 2014 to 10 this year. 86% of large-cap companies use majority voting standards for election of directors.

Even the number of independent chair proposals decreased, to 42 compared to 63 in 2014.
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Proxy Access Shareholder Proposals Show Mixed Voting Results So Far

At ten companies where shareholders have cast votes on proxy access shareholder proposals this season, four companies received more votes in favor of the proposal than against it, while a majority of shareholders did not support the proposal at six companies.

Counting only “for” and “against” votes, Arch Coal’s proposal received the lowest support at 36%. The company had previously adopted proxy access bylaws allowing shareholders owning at least 5% of shares holding for three years to nominate access candidates, with a maximum number of 20 shareholders permitted to aggregate their holdings.

Other proposals that did not receive majority support ranged from 39% in favor at Apple, which we previously discussed here, and 42% to 46% support at Domino’s Pizza, PACCAR, Cabot Oil & Gas and VCA.
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Solicitation Filings in Support of Proxy Access by CalPERS and New York City Pension Funds

Companies with proxy access shareholder proposals on their annual meeting ballots are confronting a notice of exempt solicitation filed by the California Public Employees Retirement System (CalPERS) and the New York City Pension Funds urging shareholders to vote in favor of the proposals.

A notice of exempt solicitation is coded as PX14A6G and can be a surprise to companies when it appears on the company’s SEC EDGAR website.

The exempt solicitation argues that providing access to a company’s proxy to allow shareholders (or “shareowners” according to the notice) the ability to nominate directors to the board is “one of the most important rights given to the owners of a company.”
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Spotlight on Pro Rata Vesting, Rather than Accelerated Vesting, of Awards in Change in Control Events

According to Amalgamated Bank, the Trustee to the LongView Funds, five companies have agreed to adopt new measures to limit payments in the event of a change in control. Amalgamated Bank submitted several shareholder proposals asking boards to adopt a policy that there will only be vesting on a partial, pro rata basis upon a senior executive’s termination in a change in control situation, instead of acceleration of vesting. In 2014, four companies received more votes in favor of these proposals than against them. Valero Energy has adopted such a policy, which is posted on its website.

Prior to this season, the SEC staff permitted companies that were asking shareholders to approve equity plans to exclude those types of shareholder proposals.
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SEC Staff Allows Shareholder Proposal to Be Excluded Due to False and Misleading Supporting Statement

The SEC staff has determined that a shareholder proposal can be excluded under Rule 14a-8(i)(3) because the supporting statement is false and misleading, a position that they have generally been reluctant to take in numerous other requests.

Every season, without exception, companies write no-action letters to the staff arguing that the supporting statement in shareholder proposals contain objectively incorrect information, either directly or by implication. These tend to be proposals seeking an independent chair of the board, and the supporting statement make claims that essentially question the independence and qualifications of not only the current chair, but also other directors. Sometimes the information is blatantly wrong because the data is outdated, or perhaps is relevant to another company.
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What We Can Expect from the Review of the SEC Rule 14a-8 Conflicting Proposal Framework

As companies that received proxy access shareholder proposals for this proxy season are determining their the best course of action, which we recently discussed here, others are waiting and watching to see how the developments may impact future proposals.  One open question is whether the conflicting proposal provision under Rule 14a-8(i)(9), that Whole Foods originally relied on to put forth its own management proposal instead of the shareholder proponent’s version, could be available again as a basis to exclude proxy access shareholder proposals, and under what terms.

In a recent speech, Chair White discussed her direction to the staff to examine the application of the rule, noting that there has been “some not insignificant consternation” over her decision. 
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Apple Defeats Proxy Access Shareholder Proposal

At its annual meeting on March 10, Apple’s shareholder proposal on proxy access received a little more than 39% of the votes cast in favor of the proposal. The proposal asked the board to provide access rights to shareholders owning 3% for at least 3 years, which is the same threshold others are using this season.

The company’s opposition statement argued that the proposal is an “unconventional and potentially risky version of proxy access, which not only lacks protection against abuse but may actually invite it.” They note that the proposal does not provide many of the safeguards that were in SEC Rule 14a-11 at the time of adoption, including nominees who must be independent and represent that they do not have a control intent and agree to retain shares through the meeting date.
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ESG Proposals in 2015

433 resolutions have been filed so far on a wide range of environmental and social issues, a record number, according to Proxy Preview 2015, a publication by As You Sow, the Sustainable Investments Institute and Proxy Impact.  The report provides a detailed examination of the wide range of topic areas covered in the proposals, an index of the companies that received them and brief discussions with some of the most prominent and prolific proponents about specific proposals.

39% of the topics focus on environmental and sustainability matters, predominately climate change, with political activity accounting for another 26%.  The primary filers are socially responsible investors, such as Calvert Investments, Walden Asset Management and Trillium Asset Management, as well as faith-based institutions.  
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Whole Foods Delays Its Annual Meeting Due to SEC Decision on Its Proxy Access Proposal

As a result of the SEC decision to withdraw its no-action letter decision granting Whole Foods the ability to exclude a proxy access shareholder proposal on January 16, the company has decided to delay its annual meeting. According to the company’s announcement in an 8-K filed on Friday, the company had planned to file a definitive proxy statement on January 22 for an annual meeting scheduled to be held on March 10. The company views the postponement of the meeting as necessary to allow its board adequate time to review and evaluate the company’s alternatives, and meet applicable deadlines.

We previously discussed the company’s original no-action letter request here and the SEC’s determination regarding Rule 14a-8(i)(9) this season here.
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SEC Division Director Discusses Current Staff Review on Conflicting Shareholder Proposals, Wal-Mart Case and False and Misleading Exclusion Standard

In a recent speech on shareholder proposals, Keith Higgins, the SEC director of the Division of Corporation Finance, indicated that the rights under Rule 14a-8 for shareholder proposals is a fundamental one permitted under state law: to appear at a meeting, make a proposal for a proper purpose and have that proposal be voted on by other shareholders.

In addressing the Commission announcement about the suspension of the application of Rule 14a-8(i)(9) for this season, which we most recently discussed here, the Division is looking for public comments and has established a special mailbox for that purpose at i9review@sec.gov.
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Chamber Tells SEC that Its Decision Regarding Conflicting Proposals Places Companies in a Bind

The Chamber of Commerce has sent a letter to SEC Chair White to “express significant concern” regarding the announcement that the SEC staff will express no views on the application of Rule 14a-8(i)(9) during the season, which we previously discussed here.

According to the letter, the no-action letter process at least provides assurance that exclusion will not lead to an SEC enforcement action. The recent SEC decision adds an additional layer of uncertainty into an already complex rule and benefits neither issuers nor investors. Issuers must now face “an untenable position” with respect to whether they risk litigation if they present their own proposal, or shareholder confusion if they include both management and shareholder proposals.
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