by Cydney Posner
What’s the latest on proxy access proposals? As you may recall, the line drawn so far by Corp Fin has been that, where the shareholder proposal related to initial adoption of proxy access, Corp Fin has continued to grant no-action relief and permit exclusion of proxy access proposals as “substantially implemented” under Rule 14a-8(i)(10), so long as the bylaw provisions adopted by the companies contained the same eligibility percentage and duration of ownership thresholds (3%/3 years) as in the proposal, even though the bylaws also included a number of “procedural limitations or restrictions that were inconsistent with or not contemplated by the proposals.” However, with regard to shareholder proposals to amend a company’s existing proxy access bylaw — so-called “fix-it” proposals — the staff has refused to grant no-action relief on that same basis. Meanwhile, both proponents and companies have been exploring the contours of those staff positions, trying to determine how best to advance their opposing arguments. (See this PubCo post and this PubCo post.)
The McRitchie/Chevedden group has been exploring how they might be able to persuade the staff to refuse to grant no-action relief for proposals related to initial adoption of proxy access. One approach they explored was to identify four or five specific elements in the proposal as “essential elements for substantial implementation.” The question was whether the identification of specific elements as “essential” would distinguish this type of proposal from the many others (discussed in this PubCo post) that received favorable no-action letters from Corp Fin; that is, would this presentation deter the staff from concluding that the proposal had been substantially implemented if any of the terms deemed “essential” by the proponent were not included. As discussed in this PubCo post, in these instances, notwithstanding the identification several “essential elements,” the SEC still allowed exclusion, agreeing with the companies that there was some basis for the view that the proposals could be excluded under rule 14a-8(i)(10).
More recently, the group has further refined this approach. In Discover Financial Services, Inc. (January 17, 2017), the proposal submitted for initial adoption of proxy access specified only one feature — that up to 40 shareholders should be able to aggregate their shares to achieve the 3% threshold. No other criteria were specified in the proposal, which left the other conditions of proxy access “to the Board’s judgment.” The proxy access provision that the company had adopted allowed a group of up to 20 shareholders to satisfy the eligibility threshold, the number used in the vast majority of bylaws. In correspondence to the staff, the proponents acknowledged that, in the numerous prior initial adoption cases, the “SEC Staff has a good argument that if a company adopts 90% of what is requested in a shareholder proposal, the proposal has been substantially implemented.” But, they argued, that was not the case here, where there was only one specific request. In response, the company maintained that its recently adopted proxy access provisions satisfied the proposal’s “essential objective” — “the adoption of a meaningful proxy access right for shareholders that ‘will match or exceed common best practices for proxy access,’ not the adoption of any single component of proxy access specifically called out by the Proponent.” The company also contended that, based on the number and holdings of its institutional holders, increasing the shareholder aggregation cap would not have a meaningful impact. Noting the company’s representation the company’s proxy access bylaw addressed the proposal’s essential objective, consistent with numerous prior letters related to initial adoption, the staff granted relief.
From the company perspective, a number of additional no-action requests have been submitted in connection with fix-it proposals. Although formulations of the proposals varied, many of them sought to amend a single element of the proxy access bylaws — to raise the eligibility aggregation cap to 50 shareholders. These no-action requests have continued to rely largely on Rule 14a-8(a)(i)(10), typically contending that the proposal had been “substantially implemented” by the companies’ proxy access provisions then in effect and that, based on the composition of their shareholder bases, the proposed change would not make a substantial difference. In some cases, the companies questioned the disparity in the staff’s treatment of the two types of proposals. For example, in Flowserve (January 17, 2017), the company argued that it “would be incongruous under the facts to treat a 20 shareholder group provision as failing to fulfill the Proposal’s essential objective, when identical 20 shareholder group provisions previously were found by the Staff to be non-essential to fulfilling the purposes of shareholder proxy access.” The company also argued that the proposal should be excluded under Rule 14a-8(i)(3) as contrary to the SEC’s rules because it did not comply with the proxy solicitation safe harbor of Rule 14a-2(b) or “otherwise ensure that its limitation on the number of shareholders that may form a group avoids illegal proxy solicitation.” In Northrop Grumman (January 10, 2017), the company also relied on Rule 14a-8(i)(3), contending that the proposal as submitted — which requested the board to take steps to “enable up to 50 shareholders to aggregate their shares to equal 3% of our stock owned continuously for 3-years in order to make use of shareholder proxy access” — was vague and indefinite because it referred generically to proxy access, without making clear whether it proposed an amendment to the company’s existing proxy access bylaw or whether it was requesting the adoption of a new shareholder proxy access right. In addition, the company disagreed with the staff’s position on prior fix-it proposals and requested reconsideration of those conclusions, maintaining that the proposed change failed to make the proxy access right substantially more meaningful.
A somewhat different course was taken by The Dun & Bradstreet Corporation (January 6, 2017), which followed the type of approach used in the successful no-action request from Oshkosh Corporation (November 4, 2016).
SideBar: However, as noted in this PubCo post, it was not clear whether Oshkosh received a favorable response from the Staff because a sufficient number of changes were made to satisfy the essential objective of the proposal or because one of the changes made related to an element that the staff viewed as critical — a reduction in the eligibility threshold from 5% to 3%.
When faced with the proposed increase in the aggregation cap to 50 persons, the company’s Nominating & Governance Committee attempted to split the difference, recommending adoption of an amendment to the company’s existing proxy access bylaw to increase the aggregation cap from 20 to 35 shareholders. The company argued that exclusion of the shareholder proposal should be permitted under Rule 14a-8(i)(10) even without the need for the recommended bylaw amendment because, in its view, the change requested in the proposal was insignificant in light of the number and holdings of the institutional holders among the company’s stockholder base (i.e., the largest 21 institutional holders owned in excess of 63% of the outstanding common stock, and each owned more than 1%). As with Northrop, the company also requested relief on the basis of vagueness under Rule 14a-8(i)(3), likewise contending that it was unclear whether the proponent was asking for an amendment to existing proxy access provisions or original adoption, and made arguments related to both possibilities. But ultimately, the company contended that, with the company’s proposed bylaw amendment, the company must certainly have substantially implemented the proposal because the amendment would compare favorably to, and address the essential objective of, the shareholder proposal.
These and other similar no-action requests related to (what appear to be) proposals to amend existing proxy access bylaws are still awaiting the staff’s responses. That both initial-adoption and fix-it proposals are now focused on the same element — the cap on aggregation — may force into sharp relief the disparity in the staff’s positions on these two types of proposals. Even some of the formulations of the fix-it proposals, characterized by the companies as vague and indefinite, could be viewed to erode the differences in the proposals. Accordingly, it remains to be seen if, in granting relief, the staff will continue to follow the relatively strict division between proposals for initial adoption and proposals for amendments to existing proxy access bylaws.
Notably, of the McRitchie/Chevedden group fix-it proposals submitted to the shareholders for a vote so far this season, all have been resoundingly rejected by the shareholders.