by Cydney Posner
Corp Fin has refined its position with regard to exclusion of proposals to amend existing proxy access bylaws. 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 had 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, this PubCo post and this PubCo post.) In a series of no-action letters recently posted, Corp Fin has permitted exclusion of some fix-it proposals under Rule 14a-8(a)(i)(10) on the basis that the proposals have been “substantially implemented,” but denied relief for others. Although the staff’s rationale is far from exquisitely clear, nevertheless, companies seeking to exclude fix-it proposals at least now have some successful models on which to base their requests. (For another theory, see this PubCo post.)
SideBar: One of the unfortunate aspects of the no-action letter process is that the staff rarely even hints at what’s in the secret sauce. As a result, although, most often, the reason for the outcome in a series of no-action letters is apparent anyway, in some instances, the basis for the staff’s decisions is something of a mystery. So, in the absence of a rosetta stone, we are left to attempt to divine the meaning and distinctions unaided and, well, uncertain that we’re necessarily on the right track. Regrettably, this is one of those instances. If a more enlightened interpretation emerges, we’ll try to update you. (See this PubCo post.)
Although the formulations varied, Chevedden et al. submitted a number of proposals to amend a single element of companies’ existing proxy access bylaws — to raise the eligibility aggregation cap from 20 to 50 shareholders (sometimes to 40 or 50). In response, the targeted companies requested no-action relief, relying once again largely on Rule 14a-8(a)(i)(10). (Although some companies also sought to exclude the proposals on the basis of Rule 14a-8(i)(3) as false and misleading, those attempts were not successful.) These companies all articulated the standard argument that the companies’ proxy access provisions then in effect were consistent with the essential objective of the proposal and, therefore, that the proposal had been “substantially implemented.” Many of the companies also argued, with varying degrees of support, that, based on their institutional ownership, there were multiple opportunities for shareholders to use the proxy access provisions as is, and that, while increasing the burden on the company, the proposed change in the aggregation cap would have only a marginal impact — that it would not make a substantial difference in the availability of proxy access.
Apparently, some of the companies were more persuasive than others. For example, in a follow-up letter in Northrop Grumman (2/17/17), the company contended that five of its institutional investors each owned more than 3% of its outstanding capital stock, that its top 20 shareholders owned approximately 48% of the outstanding capital stock and that each owned more than 0.7%. Assuming that institutional ownership had been relatively stable over the past three years, a small number of shareholders, it asserted, could easily form an eligible group: “For example, the next eleven institutional shareholders that follow the top five owned between 2.51% and 1.02% of the Company’s outstanding capital stock as of February 14, 2017, meaning that any three of these shareholders could easily form a group among themselves to submit a proxy access nomination.” Moreover, there were “plentiful opportunities” for all shareholders to form an eligible group under the 20-person cap. The company also provided specific data to make its case that the increase in the cap from 20 to 50 would not meaningfully improve the availability of proxy access, but would materially increase the burden on the company:
“To further demonstrate the ease of forming a nominating group, as of December 31, 2016, the Company had 175,068,263 shares of capital stock outstanding. Based on that number, to meet the 3% minimum ownership requirement, a shareholder or group of shareholders would have to own, and to have owned continuously for at least three years, 5,252,048 shares. A group requiring 20 shareholders would therefore hold an average of approximately 262,602 shares per member. As of February 14, 2017, over 70 shareholders owned at least 262,602 shares, which allows for numerous combinations that would enable the Company’s largest shareholders to form 20-shareholder groups (or smaller groups) for the purpose of making a proxy access nomination. In addition, as described above, smaller shareholders could combine with up to 19 of the largest shareholders, in multiple combinations, to form a nominating group.
“Increasing the aggregation limit to 50 shareholders, a 150% increase over the current 20-shareholder limit, would only expand the maximum ownership base among the top number of shareholders allowed to aggregate shares by 12% [percentage points?] to approximately 60% of the Company’s outstanding capital stock. At the same time, such an increase would more than double the potential burden on the Company in administering the proxy access provision without a commensurate increase in the percentage of the Company’s outstanding capital stock owned by the top number of shareholders allowed to aggregate shares. Further, more than doubling the aggregation limit likely would not more than double the number of shareholders who would be able to use the Company’s proxy access bylaw. Such an increase would, instead, simply reduce the average number of shares each member of a group would need to own if the maximum number of shareholders were needed to form an eligible group. There is no basis to conclude that it would be meaningfully easier to attract support from 50 holders of 0.06% of the Company’s capital stock than 20 holders of 0.15% of the Company’s capital stock. Accordingly, for this reason and those stated above, the Submission’s requested 50-shareholder aggregation limit would do little, if anything, in practical application to make the Company’s proxy access bylaw more meaningful or usable by the Company’s shareholders.”
The staff granted no-action relief, concluding that, based on the information “presented, it appears that Northrop Grumman’s policies, practices and procedures compare favorably with the guidelines of the proposal and that Northrop Grumman has, therefore, substantially implemented the proposal.”
Similarly, in The Dun & Bradstreet Corporation (2/10/17), 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. However, the company also argued that exclusion of the shareholder proposal should be permitted under Rule 14a-8(i)(10) even without 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. After providing data regarding the company’s largest institutional holders, the company argued that its 20-stockholder aggregation limit provided
“abundant opportunities for all holders of less than 3% of the common stock to combine with other stockholders to reach the 3% minimum ownership requirement. The Proposal’s requested 50-stockholder aggregation limit merely increases the inestimable number of stockholder combinations that could yield a group owning more than 3% of the common stock. And to be clear, the Proposal would only affect the limited scenario in which the maximum number of stockholders under the aggregation limit is required to be utilized in order to reach the 3% minimum ownership requirement. Under the existing aggregation limit of the Company’s Proxy Access By-Law, the minimum percentage of stock required to be owned by each individual stockholder is 0.15%; the Proposal, by increasing the aggregation limit to 50 stockholders, would lower this minimum percentage to 0.06%. However, stockholders that fall into this category of owning between 0.06% to 0.15% of the Company’s stock own, in aggregate, less than 5% of the Company’s common stock. Put differently, decreasing the minimum holding percentage from 0.15% to 0.06% would only increase availability in the limited scenario where the maximum aggregation limit must be utilized in order to meet the ownership requirement, and such increased availability would only apply to additional holders of less than 5% of the Company’s stock: those that own between 0.06% to 0.15%. In any other situation, as was explained above, these stockholders may join a stockholder group formed by some of the Company’s larger investors to utilize proxy access, as may any other stockholder including those that may hold far fewer shares than the proposed 0.06% minimum.”
The staff granted no-action relief.
In NextEra Energy (2/10/17), the company argued that three of its institutional shareholders each owned more than 4% of the outstanding common stock, that the largest 20 institutional shareholders owned approximately 38% of the outstanding common stock, and each of these 20 institutional shareholders owned more than 0.7%. The company also responded directly to the proponent’s contention that pension funds were the key to effective use of proxy access, again contending that the proposal’s impact would be only “marginal at best”:
“[E]ven if the essential objective of an aggregation limit were to assure that public pension funds may nominate candidates without the support of any other stockholder(s), the Proponent’s own data demonstrate that the Proposal would not achieve that objective. According to the Proponent, the Company’s stockholders include 31 public pension funds and members of the Council of Institutional Investors, who own a total of 2.98% of the Company’s outstanding common stock. Assuming the Proponent’s data is correct, and assuming further that all 31 investors of these investors have owned their shares for at least three years, an aggregation limit of 40 or 50 would not enable public pension funds to meet the 3%/3 year minimum ownership requirement. Moreover, again according to the Proponent’s data, the 20 pension funds with the largest holdings of the Company’s common stock own a total of 2.81 % of the shares outstanding. Accordingly, increasing the aggregation limit to 40 or 50 would add only 0.17% of the outstanding stock to the potential intra-class group, assuming that all 11 additional pension funds were willing to join a nominating group. This impact is marginal at best, and establishes that the Company’s existing aggregation limit compares favorably with that proposed by the Proponent.”
Once again, the staff granted no-action relief.
In some instances where relief was not granted, the companies did not frame their responses with regard to institutional ownership to support their contention that the existing provisions were adequate or directly address the issue of whether the proposal would materially enhance the companies’ proxy access rights. In other instances where the subject was broached, it’s possible that the staff made the judgment that the companies’ assertions regarding the proposals’ minimal impact were not convincingly supported. Without more, in these cases, the staff was unable to conclude that the company had “met its burden of establishing that it may exclude the proposal under rule 14a-8(i)(10),” and did not grant relief. [Emphasis added.]
However, in some instances, the distinctions drawn by the staff in granting, or refusing to grant, no-action relief remain a puzzle. Hopefully, these differences will become more apparent as the staff continues to issue additional responses to requests for no-action on fix-it proposals.