by Cydney Posner
Corp Fin has refined its position with regard to exclusion of proposals to amend existing proxy access bylaws. However, the basis for the staff’s determination to grant or refuse no-action relief in that context remains a conundrum.
A previous post speculated about one theory that had some potential, but left a few perplexing discrepancies when applied — some outcomes just did not fit the theory. (That’s usually a clue!) This post posits another theory, the rationale for which remains somewhat opaque, but which offers the decided advantage of providing a consistent result when applied. Consequently, this theory might have more to recommend it.
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. (See this PubCo post, this PubCo post and this PubCo post.)
In a series of no-action letters recently posted, Corp Fin has now 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.
SideBar: As previously noted, 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. This remains one of those instances.
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 shareholder bases and stock 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 on the availability of proxy access.
One element that consistently distinguishes the requests that were granted relief from those that were not is that, in providing data supporting their assertions that their existing proxy access provisions already offered a meaningful proxy access right, the successful requests all framed their discussions, at least in part, in terms of the ownership of institutional holders, as opposed to all holders or large holders.
For example, 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. 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.” [Emphasis added.] No-action relief was granted.
However, in an instance where relief was not granted, the company, disclaiming the relevance of the cited study by the Council of Institutional Investors, contended that its “five largest shareholders in the aggregate held approximately 45% of the Company’s common stock, and the Company’s 10 largest shareholders in the aggregate held approximately 64.5% of the Company’s common stock…. Thus, the existing 20 shareholder provision does not prevent the Company’s shareholders from effectively creating a nominating group and achieving proxy access.” In another instance, the company maintained that the “availability of proxy access to all shareholders under a 20-shareholder aggregation limit is particularly demonstrable in the Company’s case. Based on data from NASDAQ, as of September 30, 2016, the Company’s six largest shareholders each owned more than 3% of its outstanding common stock. Moreover, its largest 20 shareholders collectively owned over 50% of the Company’s outstanding common stock, and each owned more than 0.6%. In addition to these 20 shareholders, there are over 70 additional shareholders who owned at least 0.15% of the Company’s outstanding common stock — the minimum percentage that a shareholder must own to form a group of 20 shareholders of an equal size to satisfy the 3% minimum ownership requirement. Shareholders who own less than 0.15% may easily form a group with any number of these larger shareholders to reach the 3% minimum ownership requirement. Assuming ownership has been stable for three years, this distribution of shareholdings reflects that a 20-shareholder aggregation limit provides abundant opportunities for shareholders of all sizes to combine with other shareholders to achieve the minimum required ownership.” [Emphasis added.] Once again, the staff was unable to conclude that the company had “met its burden.”
The headscratcher here is why should this distinction matter? Again, the answer is not entirely clear.
We might speculate that one possible reason relates to the emphasis that the SEC placed on institutional investors in its prior analyses in connection with the proxy access rules adopted by the SEC in the past (although the rules were later jettisoned by the courts). The SEC’s adopting release for proxy access rules, in discussing its determination to use a 3% eligibility threshold and the possibilities of aggregation, relied principally on data relating to institutional investors. That discussion referred extensively to a Memorandum from the Division of Risk, Strategy, and Financial Innovation regarding the Share Ownership and Holding Period Patterns in 13F data (November 24, 2009) (the “November 2009 Memorandum”), which analyzed the ownership and holding period data regarding institutional investment managers. That Memorandum indicated, among other things related to institutional holders, that 33% of public companies had at least one institutional investor owning at least 3% of their securities for at least three years. Moreover, notwithstanding some limitations on the data, the SEC “considered the data in the November 2009 Memorandum to be the most pertinent to our selection of a uniform minimum ownership percentage.” However, the SEC also relied on other studies providing data on institutional investors in large companies that offered “some additional indication about the number of shareholders potentially available to form a group to meet the 3% ownership threshold. One study indicated that in the top 50 companies by market capitalization as of March 31, 2009, the five largest institutional investors held from 9.1% to 33.5% of the shares, and an average of 18.4% of the shares…. Another study that was reported to us similarly suggests relatively high concentration of share ownership. According to that analysis of S&P 500 companies, 14 institutional investors could satisfy a 1% threshold at more than 100 companies, eight could meet that threshold at over 200 companies, five could meet it at over 300 companies, and three could meet it at 499 of the 500. Information from specific large issuers likewise suggests the achievability of shareholder groups aggregating 3%.”
Interestingly, in contending that the 20-holder aggregation limit makes proxy access ineffective, the standard fix-it proposals focus only on the ownership by public pension funds and discount the role of other institutional investors. Citing a study by the Council of Institutional Investors, the standard proposals indicate that even “if the 20 largest public pension funds were able to aggregate their shares, they would not meet the 3% criteria for a continuous 3-years at most companies examined by the Council of Institutional Investors. Additionally many of the largest investors of major companies are routinely passive investors who would be unlikely to be part of the proxy access.” And as indicated in the correspondence in connection with the no-action request by NextEra Energy (2/10/17), the proponent asserted that the data regarding public pension funds was “significant because public pension funds are the most likely users of proxy access. As we have seen recently with GAMCO’s attempt, [see this PubCo post] hedge funds are unlikely to be participants in proxy access. Additionally, mainstream funds … have never even filed a proxy proposal, so would also be unlikely participants in nominating proxy access candidates…. [NextEra] contends their largest 20 institutional shareholders own approximately 38% of the outstanding common stock. Maybe so, but how likely are any of these 5 shareholders to participate in forming a nominating group?” Nevertheless, when challenged that even aggregating the shares held by all of NextEra’s pension fund holders would not reach the 3% eligibility threshold, the proponent acknowledged that, indeed, institutional holders may well join a group; in fact, the proponent points out, nine of the company’s largest institutional holders had participated in more than one activist campaign, so they might be potential participants.
There are a number of new requests for no action currently pending with Corp Fin regarding fix-it proposals. Several of these requests focus on making the case regarding the holdings of institutional holders, but give relatively short shrift to making the case that the increase in the cap from 20 to 50 would not meaningfully improve the availability of proxy access. The responses to these requests may tell us a lot, so stay tuned.