by Cydney Posner
As noted in this article from Compliance Week, the Corp Fin staff have refused to issue no-action relief to Citigroup agreeing that it could exclude from its proxy statement a proposal from the prolific John Chevedden regarding audit committee composition. It may be worth noting because, while the proposal appears to be relatively novel, Chevedden does tend to reprise his proposals at other companies.
More specifically, the precatory proposal seeks a bylaw amendment that would exclude from the audit committee “any director who was a director at a public company while that company filed for reorganization under Chapter 11 of the federal bankruptcy law. The board would have the discretion to phase in this requirement as soon as a qualified replacement candidate or candidates can be selected. This would permit temporary deviation from this bylaw if the board publicly discloses that the only qualified audit committee member or members are directors with such a bankruptcy history.”
The proponent identified two Citigroup directors who had served on boards of airline companies that had previously filed for bankruptcy. In its no-action request, Citigroup argued, first, that the proposal, even though it was facially neutral, indirectly impugned the competence, business judgment and character of the two directors; second, that, because compliance with the bylaw would depend on preventing independent third parties on whose boards a company director may serve from filing bankruptcy petitions and because there was no real opportunity to cure a violation after the initial phase-in, the company did not have the power and authority to implement the proposal; and three, that the proposal was inherently vague and indefinite with regard to material provisions. The Corp Fin staff didn’t buy any of it.
The article cites a former member of the Public Company Accounting Oversight Board, who cautioned that audit committee members may continue to experience increased scrutiny in the form of shareholder proposals and that, in the event the PCAOB adopted a much debated and delayed rule that would require disclosure – somewhere — of the name of the audit engagement partner, shareholders might subject audit engagement partners to similar scrutiny of their prior involvements with clients that have filed restatements or bankruptcies.
And while we’re on the subject of Citi and shareholder proposals, as reported in this WSJ article, Citigroup was a recipient of a 3%/3-year proxy access shareholder proposal submitted by James McRitchie and has now concluded, following negotiation of some of the terms, that it will support the proposal. Specifically, the revised terms of the proposal impose a cap of 20 on the number of shareholders permitted to aggregate to reach the 3% threshold and reduce the proportion of the board subject to proxy access to 20%, down from 25% in the original proposal. A couple of substantial holders notwithstanding, reaching the 3% threshold may still be a challenge given that Citigroup has reported that, as of January 31, 2015, it had over 3 billion common shares outstanding. Citigroup had originally sought to exclude the proposal on the basis of Rule 14a-8(i)(9) because the proposal directly conflicted with a company-sponsored proposal to provide a 5%/5-year proxy access proposal to nominate one board member, but was tripped up by Corp Fin’s recent refusal to express any views in connection with the conflicting proposal exclusion.