by Cydney Posner
The SEC has posted a number of additional Corp Fin responses to requests for no-action, as well as to requests for reconsideration of previous denials of relief, regarding shareholder proposals to amend proxy access bylaws, so-called “fix-it” proposals. In all cases, the companies argued that they should be permitted to exclude the fix-it proposals as “substantially implemented” under Rule 14a-8(i)(10). The requests were successful in obtaining no-action relief in all cases except one. As in the past, the staff has not identified the key determining factor, but companies now seem to have found a formula for successfully excluding these proposals.
As you may recall, the line that was first drawn by Corp Fin was that, where the shareholder proposal related to initial adoption of proxy access, Corp Fin granted no-action relief and permitted 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, the staff had refused to grant no-action relief on that same basis. (See this PubCo post, this PubCo post and this PubCo post.)
Following up on that success, 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). 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 the proposed change in the aggregation cap would have only a marginal impact on the availability of proxy access, but would increase the burden on the company. In a series of no-action letters posted in February, Corp Fin permitted exclusion of some fix-it proposals under Rule 14a-8(a)(i)(10) on the basis that the proposals had been “substantially implemented,” but denied relief for others. However, the basis for the staff’s determinations was somewhat opaque. (See this PubCo post.)
Now, another tranche of no-action letters regarding fix-it proposals has been posted, along with several company requests for reconsideration of prior no-action denials, all of which, with one exception, were granted relief by the Corp Fin staff. Because the staff rarely identifies the reasons for its determinations, the rationales for the staff’s decisions remain something of a mystery. However, one consistent thread that runs throughout the letters 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. In addition, in all the company letters requesting reconsideration, the original letters that were denied relief did not provide supporting data regarding institutional holders, but the successful requests for reconsideration all did provide that data.
For example, in Sempra Energy (March 2, 2017), the company offered the standard argument that it had “adopted a proxy access right that compares favorably with and substantially implements the Proposal because it achieves the Proposal’s essential purpose of providing the Company’s shareholders with a meaningful proxy access right.” Because the company’s proxy access right, and the facts supporting the company’s analysis, were “substantially similar to those provided by other companies” that were granted relief, the company contended that its no-action request did “not raise any novel issues,” citing in support a number of favorable responses to fix-it proposals. The request then maintained that the generic data from the Council of Institutional Investors (regarding public pension fund ownership at “most companies”) provided in the proposal was “irrelevant” in light of the company’s shareholder base, particularly its institutional holder base:
“Based on data from regulatory filings by institutional investors, as of December 31, 2016, the largest 20 institutional shareholders of the Company hold approximately 51.3% of the Company’s outstanding shares, and of these 20 institutional shareholders, it appears that 13 (holding 37.6% of the Company’s outstanding shares) have held shares for at least three years. Further, based on this data, it appears that three of the Company’s institutional shareholders have owned more than 3% of the Company’s outstanding shares for at least three years and 13 of the current top 20 largest institutional shareholders have held more than 0.5% for at least three years. Accordingly, any of these 13 institutional shareholders could, on their own or in combination with only a few other shareholders, achieve the 3% ownership threshold in the Proxy Access Bylaw. Moreover, utilizing proxy access at the Company is not dependent on a shareholder being one of the Company’s largest institutional shareholders.”
Moreover, the company contended, as in the other successful fix-it proposal letters, the existing proxy access bylaw, “including the 20-shareholder aggregation limit, achieves the essential purpose of the Proposal by ensuring that the Company’s shareholders are able to use proxy access effectively, while addressing administrative concerns that could arise if an unwieldy number of shareholders sought to nominate director candidates under proxy access. In this regard, it is also important to note that the Proposal provides no evidence that increasing the shareholder aggregation limit from 20 to at least 50 shareholders would meaningfully enhance the existing ability of the Company’s shareholders to form nominating groups to use the Proxy Access Bylaw.” Notably, the company did not appear to emphasize, and provided no additional data to support, the contention that the proposal’s increase in the aggregation cap failed to meaningfully enhance the company’s proxy access right, possibly lending support for the theory that most critical to the analysis was providing adequate institutional shareholder data in support of the concept that the existing bylaw provided meaningful proxy access rights.
Several fix-it proposals was also permitted to be excluded on reconsideration after denial of the original requests for no-action. For example, in Citigroup, Inc. (February 10, 2017), the company argued that the proponent of the proposal appeared to be concerned that the 20-stockholder aggregation limit in the company’s existing proxy access bylaws “meaningfully restricts a stockholder’s ability to use proxy access,” relying again on data regarding pension fund ownership at “most companies” provided by the Council of Institutional Investors. However, with regard to the company:
“the 20-stockholder aggregation limit included in the Company Proxy Access By-law does not prevent stockholders from making use of proxy access. As of September 30, 2016, five of the Company’s largest stockholders each own over 3% of the Company’s common stock, the Company’s 20 largest stockholders in the aggregate own approximately 35% of the Company’s outstanding common stock, and the Company’s 31 largest stockholders each own at least 0.5% of the Company’s outstanding common stock. As a result of this stock ownership profile, there are more than 200 combinations of Company stockholders that could aggregate their shares to own more than 3% of the Company’s common stock. As a result, the 20-stockholder aggregation limit does not meaningfully restrict a stockholder’s ability to exercise the proxy access right included in the Company Proxy Access By-Law.”
However, the company did not frame its support in terms of its institutional shareholder base, and the staff was “unable to conclude that Citigroup has met its burden of establishing that it may exclude the proposal under rule 14a-8(i)(10).”
Nevertheless, on reconsideration (March 2, 2017), Citigroup successfully argued that the fix-it proposal was excludable. This time, based on data from Morningstar, the company maintained that
“four of the Company’s largest institutional stockholders each owned more than 3% of the Company’s outstanding common stock as of September 30, 2016…. Moreover, the largest 20 institutional stockholders of the Company own approximately 33% of the Company’s outstanding common stock, and each of these 20 institutional stockholders owns at least 0.7% of the outstanding common stock. Assuming institutional ownership has been stable for three years, the concentration of significant stockholdings in 20 stockholders means that some of those stockholders may utilize proxy access individually, and that a small number of others may easily form a group among themselves to make a proxy access nomination….More importantly, any stockholder seeking to form a group to nominate a director candidate, regardless of the size of its holdings, could meet the ownership threshold in any number of ways, by combining with one or a small number of the 20 largest investors. A stockholder group is not limited to these known institutional investors, of course, and a stockholder seeking to nominate a director candidate may approach any other stockholders to meet the 3% threshold. The 20-stockholder aggregation limit therefore does not unduly restrict any stockholder from forming a group to make a proxy access nomination.”
Citigroup also addressed the proposal’s failure to materially enhance the proxy access bylaws: “To be clear, the Proposal’s requested 50-stockholder limit would not necessarily increase the number of stockholders who might be able to utilize proxy access by a multiplier of 2.5. [2.5 x 20=50] Instead, it would simply reduce by 60% the average number of shares each member of a group would need to own if the maximum number of stockholders were needed to form an eligible group.”
Significantly, in the single letter where relief was denied, Lowe’s Companies, Inc., the request letter framed its supporting analysis primarily in terms of the largest shareholders, with only scant reference to institutional holders (as not critical to assembling a group of 20 holding 3%). The staff was unable to conclude that Lowe’s had met its burden of establishing that it may exclude the proposal under Rule 14a-8(i)(10).
See this PubCo post for my speculation as to why this distinction may have mattered to the staff.
Interestingly, there were also several instances where the proponent requested reconsideration following a no-action response that permitted exclusion of the fix-it proposal. None was successful. For example, in NextEra Energy, the proponent questioned whether the company was justified in assuming three-year stable stock ownership by its institutional holders and in including hedge funds among the institutional holders in its supporting data. The company responded that the proponent’s analysis of ownership stability was flawed, demonstrating instead that its assumption regarding stable ownership was reasonable. The staff found no basis to reconsider its position granting relief.