by Cydney Posner
Today, in a speech to the Society of Corporate Secretaries and Governance Professionals, SEC Chair May Jo White discussed four proxy-related issues that have recently created tension between companies and their shareholders: the concept of a universal proxy ballot; shareholder proposals; the delivery of preliminary proxy voting results by intermediaries; and “unelected” directors. Because concerns related to these issues have been raised with SEC, the SEC and the staff of Corp Fin are currently considering what, if any, action should be taken. White indicated that the Corp Fin staff is working on a rule proposal regarding universal proxies.She also dropped a hint about the exclusion under Rule 14a-8(i)(9) for conflicting shareholder proposals – don’t be surprised if the staff determines to narrow the application of that exclusion.
Universal Proxy Cards
White announced that she has asked the staff to prepare a rulemaking on the use of universal proxies. A universal proxy is a proxy card that, when used in a contested election, includes a complete list of board candidates, thus allowing shareholders to vote for their preferred combination of shareholder and management nominees using a single proxy card. The SEC apparently considered requiring universal proxies back in 1992, and recently, there has been renewed discussion about this issue.
[Sidebar: In 2014, the Council of Institutional Investors filed with the SEC a petition for rulemaking asking the SEC to reform the proxy rules to “facilitate” the use of universal proxies in proxy contests. See this News Brief.]
Currently, in contested director elections, shareholders can choose from both slates of nominees only if they attend the meeting in person. Otherwise, they are required to choose an entire slate from one side or the other. (Proponents with “short slates” can select company nominees to round out their slates, but again, shareholders are then forced to choose between the two complete slates.) Because a later-dated proxy revokes an earlier-dated one under state law, it’s not easy to split votes between slates.
Strongly held opinions have been voiced about universal proxies, both pro and con. One hotly debated issue, White said, is whether universal proxies “would increase or decrease shareholder activism or otherwise impact the outcome of election contests. Some believed that it would embolden activists to run more contests. Others posited that it could stimulate increased cooperation and settlements between issuers and activists, thereby decreasing contests. No one specifically called into question the fundamental concept that our proxy system should allow shareholders to do through the use of a proxy ballot what they can do in person at a shareholders’ meeting.” [emphasis added.] Acknowledging that the devil will be in the details, White observed that some of those details will include issues such as when a universal proxy could be used, “whether it would be optional or mandatory and under what circumstances, whether any eligibility requirements should be imposed on shareholders to use universal ballots, what the ballot would look like, and whether both sides must use identical universal ballots.”
[Sidebar: Activists – hedge fund and otherwise – tend to favor universal proxies, while companies are more often opposed to them. In the Trian-DuPont proxy contest, Trian requested that DuPont allow stockholders to use a universal proxy card, a practice that Trian argued would “reflect best-in-class corporate governance….” DuPont rejected the request.]
In the meantime, White advocated, companies should give “meaningful consideration to using some form of a universal proxy ballot even though the proxy rules currently do not require it….Providing shareholders with the same voting rights that they would have if they were present at the meeting and eliminating procedural obstacles should be a shared goal of both companies and shareholders.”
This season, the staff received more than 300 requests from over 200 companies to exclude shareholder proposals, up approximately 10% from the prior season, but down slightly from two years ago. The hottest topic this season was Rule 14a-8(i)(9), particularly as it related to proxy access proposals, and most especially after Corp Fin announced its intent to remain silent on the application of the rule during this proxy season. Disruption notwithstanding, this suspension of staff views did, according to White, provide some benefit: it allowed a “window into some private ordering at work. More than 100 companies received proposals to adopt some form of proxy access. Proxy access proposals received majority support at more than 40 companies, as compared to four last year. At seven companies, the company’s proxy access proposal was included alongside a proxy access proposal offered by a shareholder. Shareholders preferred management’s proposals at three companies, and at three others, they preferred the shareholder’s proposal. At one company, the shareholders did not approve either proposal….” Most interesting, White contended — sardonically, as I read it — in no case did shareholders approve both proposals, a result that might reflect on the argument often made under Rule 14a-8(i)(9) “that shareholders would be confused by two ‘competing’ proposals and that companies would not know what to do if shareholders voted in favor of both proposals. Based on this year’s experience, that did not occur. It seems that shareholders were able to sort it all out and express their views. The staff is considering that fact and the other results of the season as it completes its review of Rule 14a-8(i)(9) — obviously with the goal of providing clarity for next year’s proxy season.” [emphasis added]
White also addressed the topic of shareholder proposals that issuers do not seek to exclude, estimated to be another 300 to 400 proposals. In addition, companies typically withdraw 15% to 20% of no-action requests, most likely because management and the shareholders have resolved the matter. Of course, White maintained, there are times when seeking exclusion of or opposing proposals is appropriate. But, chiding companies to play well with others, she suggested that, in many cases, companies “should consider other possible steps they could take in response to a proposal rather than just saying no. Sometimes, foregoing technical objections could be the right response. Letting shareholders state their views on matters may be a relatively low cost way of sounding out and preventing potential problems down the line.” She also cautioned shareholder proponents to “be mindful of the costs they can cause to be borne by their companies — and thus, by their fellow shareholders — and to use the shareholder proposal process responsibly. Seek engagement with the company on an issue first before turning to a shareholder proposal. Direct engagement with a company is likely to be more meaningful than a precatory vote on a 500-word proposal. Some companies are better at engagement than others, but I would urge more companies to embrace it so that more shareholders will be incentivized to choose direct engagement as their preferred first approach.”
Preliminary Voting Results
The agent acting for banks and brokers in connection with proxies, most often Broadridge, typically makes available to the subject companies preliminary vote tallies that help the company to determine whether there will be a quorum at the meeting as well as “to assess the ‘direction’ a vote is taking and to adjust its proxy solicitation strategy.” Broadridge used to provide voting tallies of street name shares to shareholder proponents in exempt solicitations under certain circumstances, including execution of a confidentiality agreement; however, in May 2013, certain brokers objected to this release of preliminary voting data to shareholder proponents. To the consternation of some investor groups and academics, Broadridge then ceased sharing the information unless the issuer affirmatively consented. That position triggered requests to the SEC, including from the SEC’s Investor Advisory Committee, to make clear that brokers and their agents must deliver preliminary vote tallies to all interested participants in an impartial fashion. The staff of Corp Fin have concluded that the current rules do not address this issue. However, White remarked, there is no prohibition against issuers sharing this information voluntarily and advocated that “companies should seek to engage in a constructive dialogue with their shareholders and work to facilitate constructive solutions to issues they raise. In this context, since companies have direct access to the voting results, they should themselves consider leveling the field by agreeing or consenting to a mechanism that provides the interim vote tallies to shareholder proponents.” Possible SEC rulemaking in this area “could condition the broker’s exemption from the proxy rules on an overall ‘impartiality’ requirement to level the playing field, such that everyone gets preliminary vote tallies, or nobody gets them. Alternatively, a rule could permit brokers to provide issuers with the total votes that have been cast only in order to determine quorum, rather than a preliminary vote tally that would indicate how the shareholders have voted.” But, White suggests, instead of rulemaking, it might be a lot better if a compromise were reached and companies saw “this not as a problem to be solved, but as an opportunity to improve investor relations.”
Under plurality voting, directors who do not receive a majority of shareholder votes can still remain on the board. This can occur even if the company has a “plurality plus” voting standard, requiring directors to submit their resignations in the event they receive a majority withhold votes, if the remaining directors decide to reject the resignation. In her speech, White cited a recent study that showed that 85% of these directors were still board members two years after an unfavorable vote. Even under majority voting, directors who do not receive a majority vote can typically “hold over” under state law until the earlier of the successor’s election and qualification or the director’s resignation or removal. When directors remain on the board despite an unfavorable vote, they are sometimes referred to as “unelected” directors. White observes that, on the rare occasion when these events do occur, the “seeming indifference of management” has attracted notice. While views differ on whether unelected directors should be prohibited from serving, that is typically a state law matter. However, some have recommended that the SEC require disclosure regarding “the specific reasons why the board chose to retain a director who did not receive a majority vote regardless of the type of voting regime in place. Others favor an approach where the NYSE and NASDAQ would impose new listing standards requiring listed companies to adopt a majority voting regime that imposes reasonable limits on the ability of boards to reject the resignation of such directors.” While the SEC could certainly amend the proxy rules to mandate more disclosure, at the end of the day, White contends, companies should provide that disclosure on their own initiative: “We could certainly amend our proxy rules to, among other things, mandate more specific disclosures on these board decisions. But, any company that is serious about good corporate governance should provide such information on its own. It should share the board’s thought process and reasons with shareholders — inform the shareholders in clear terms why the board member’s resignation was not accepted, why the director was considered important for the strength of board decision-making, for the growth of the company, for the relevant experience represented, or for the expertise that would be lost. Be specific, and avoid boilerplate.”