by Cydney Posner

The originator of the “Pfizer model” of “plurality plus” voting for directors — Pfizer —  will be facing a shareholder proposal  (January 29, from the Chevedden folks) calling for a change to Pfizer’s governing documents and policies regarding majority voting. The “plurality plus” model requires directors to submit their resignations in the event they receive majority withhold votes.  Of course, Pfizer has long since abandoned its eponymous model in favor of majority voting, but that majority vote standard still requires directors to submit their resignations and delegates to the board the authority to determine, upon recommendation of the governance committee, whether or not to accept a director’s resignation, taking into consideration any factors deemed relevant.  The shareholder proposal requests that the board make appropriate changes to the company’s governing documents and policies so that directors who failed to obtain majority votes in favor of their re-election (retaining a plurality vote standard for contested elections) would be “removed” from the board immediately, unless the board determined that a temporary holdover was “critical to the functioning of the board.” The type of resignation policy employed at Pfizer, whether attached to plurality or majority voting, is a fairly common formulation.  In light of this proposal (and its prolific proponents), the question remains: fairly common for how long?

The proposal clearly represents an effort to address the question of “unelected” or “zombie” directors. As discussed in this PubCo post,  in a 2015 speech to the Society of Corporate Secretaries and Governance Professionals, SEC Chair May Jo White discussed  the issue of unelected directors as one of four proxy-related issues that have created tension between companies and their shareholders. 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, she noted, 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. White suggested  that, while the SEC could certainly amend the proxy rules to mandate more disclosure, at the end of the day, 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.”  Similarly, the Council of Institutional Investors, in a 2113 letter to the NYSE, noted that, even for “companies that have adopted a majority voting standard, the evidence indicates that—‘only half of directors’—ultimately step down from the board after failing to obtain a majority of the ‘For’ votes.”  CII staff’s own research (based on an ISS database) found that, of directors (both at plurality and majority voting companies) in uncontested elections who failed to receive majority support during the three-year period from 2010 to 2012 at Russell 3000 companies, 74% remained on the board as of June 14, 2013. While there are certainly legitimate reasons, in CII’s view, for directors to remain in their seats—such as to maintain compliance with securities regulations, avoid a violation of a contractual provision or avoid a violation of state law or of a provision of the company’s governing documents—CII contends that these are rarely the reasons for retention.

In its no-action request, Pfizer urged the Corp Fin staff to permit exclusion of the proposal on the basis of Rule 14a-8(i)(10), the exclusion for proposals that have already been “substantially implemented.”  The staff has previously allowed exclusion on this basis if a company’s policies, practices and procedures compared favorably with those in the proposal, even if the proposal was not implemented exactly as proposed by the proponent, so long as the “essential objective” of the proposal was satisfied.  As Pfizer characterized the proposal at issue, its essential objective was a requirement that any director who failed to receive a majority vote step down from the board unless the board determined that doing so would not be in the best interests of the corporation and its shareholders.  Pfizer contended that it had already satisfied this essential objective because, among the factors the board may consider, in deciding whether to accept a director’s resignation, was whether accepting the resignation would be in the best interests of the corporation and its shareholders.  The staff disagreed and was unable to concur with Pfizer’s view that its policies, practices and procedures compared favorably with the guidelines of the proposal; therefore, the staff believed that the proposal had not been substantially implemented.

It might be instructive (or perhaps mystifying) to compare the result in Pfizer with the SEC’s favorable position, dated February 10, 2016, in Spirit AeroSystems Holdings, Inc.  There, the proposal requested that the board initiate the appropriate process to amend the company’s governing documents to provide that director nominees be elected by majority vote, with a plurality vote standard retained for contested director elections. In addition, the proposal requested that a director who received less than a majority vote be removed from the board immediately or as soon as a replacement director could be qualified on an expedited basis. The company contended that the proposal had been substantially implemented because it planned to submit to a vote of shareholders in 2016 a company proposal to provide for majority voting for directors in uncontested elections, retain plurality voting in contested elections and include specific post-election procedures for dealing with an incumbent director who did not receive the requisite majority. The procedure required that a director who did not receive a majority vote tender his or her resignation to the board, following which the board would decide whether to accept or reject the resignation based on factors including “the director’s past and expected future contributions to the Company, the overall composition of the Board and its committees and whether accepting the resignation would result in the Company failing to meet relevant NYSE listing or federal securities law requirements.” Notably, the company believed that that its proposed post-election procedures were so different from those set forth in the shareholder proposal that it contended, as an alternative theory, that the proposal could be excluded under Rule 14a-8(i)(9) and SLB 14H because the two procedures were in direct conflict and no reasonable shareholder, although possibly preferring one proposal over the other, could logically vote for both. Nevertheless, the staff agreed that, in light of the company’s representation that shareholders would have an opportunity to approve an amendment to the bylaws to implement a majority vote standard, the shareholder proposal had been substantially implemented. Apparently, in this instance, the essential objective of the proposal was satisfied by the company’s action, notwithstanding the difference in post-election procedures.

Sidebar: Depending on your point of view, it could be argued that, while these proposals were framed differently, the substance of both proposals is the same: both concern shareholder proposals advocating majority voting for directors in uncontested elections with specified post-election procedures. It remains to be seen whether the staff will continue to follow the path of Spirit AeroSystems or adopt the course it took in Pfizer.


Posted by Cydney Posner