It ain’t over till it’s over, as they say. You may have thought that, after the series of staff no-action positions allowing exclusion of so-called “fix-it” proposals during the last proxy season, we had seen the last of them. If so, you would be forgetting how persistent (or relentless, depending on your point of view) these proponents are. And this time, the staff has rejected the no-action request of H&R Block—once again the unfortunate trailblazer— which had sought exclusion of another proxy access fix-it proposal—this time to eliminate the cap on shareholder aggregation to achieve the 3% eligibility threshold—from the prolific John Chevedden et al. Given the result, you can expect to see more of this form of fix-it proposal next proxy season.
Back in 2015, faced with a proxy access proposal from James McRitchie (one of the group working with Chevedden), H&R Block adopted a 3%/3-year proxy access bylaw with a right to nominate 20% of the board and an aggregation cap of 20 holders. McRitchie then withdrew his proposal, but came back in 2016 with a proposal to make a number of revisions to the company’s then-existing proxy access bylaw, including increasing the number of possible shareholder-nominated candidates and eliminating the cap on shareholder aggregation to achieve the required 3% share ownership threshold for eligibility.
H&R Block then submitted a no-action request seeking to exclude the so-called “fix-it” proposal on the basis that it had already been “substantially implemented” under Rule 14a-8(i)(10). After all, the company contended, the staff had previously allowed exclusion of dozens of proposals as substantially implemented based on the companies’ representations that the proxy access bylaws that had been adopted addressed the proposals’ “essential objectives.” (See this PubCo post.) No-action relief had been granted in those cases so long as the companies’ bylaw provisions contained the same percentage and duration of ownership thresholds (3%/3 years) as in the proposal, even though the bylaws also included “certain procedural limitations or restrictions that were inconsistent with or not contemplated by the proposals.”
However, the staff apparently viewed a fix-it proposal differently, and, in H&R Block I, refused to allow the company to exclude the proposal, responding that it 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).” (See this PubCo post.) When submitted to the shareholders, however, the vote in favor of the proposal was only about 30%.
In light of the staff response in H&R Block I, in 2016 and again in early 2017, Chevedden et al. submitted a number of fix-it proposals to amend existing proxy access bylaws, with most proposals— at least initially—seeking to amend a single element of the bylaws to raise the eligibility aggregation cap from 20 to 50 shareholders (sometimes to 40 or 50). (Presumably, the cap was only raised but not eliminated in an effort to woo more votes.) In response, the targeted companies requested no-action relief, relying once again largely on Rule 14a-8(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 institutional 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. Although there were varied staff responses to the no-action requests initially, by March of last year, it appeared that most companies had found a formula for success, as the staff generally permitted exclusion of these types of fix-it proposals.
Even though, on submission for a shareholder vote, the 2016 fix-it proposal to H&R Block could muster only around 30% in favor, the Chevedden group decided to give it another go this year. The current proposal had a single ask, but with a twist: the fix proposed was not to lift the aggregation cap to 50, but rather, as originally, to eliminate entirely any limitation on the number of shareholders permitted to aggregate their shares to achieve the 3% ownership threshold. The proponent contended in the proposal that the ability of shareholders to use proxy access was significantly impaired “because of the large average amount of common shares each is required to hold for three years given the current aggregation limit of 20. Adoption of the requested amendment would lower the average required common shares allowed to be aggregated, thus allowing more shareholders to form an ‘Eligible Shareholder.’”
In its request for no-action relief in H&R Block II, the company made the same type of argument that had succeeded for fix-it proposals last year, contending that its existing proxy access bylaws compared favorably to, and implemented “the essential objectives of the Proposal,” and that, therefore, the proposal was excludable as substantially implemented under Rule 14a-8(i)(10). Much like successful requests submitted last year, the company provided empirical data regarding the share ownership by institutional and other investors, demonstrating that there were multiple opportunities for shareholders to use the proxy access provisions as is and purporting to establish the insignificance of the difference between the existing aggregation limit and the absence of a limitation as proposed.
In response, James McRitchie took the wheel for the proponent. He maintained that the company had not met the required burden of proof, having failed to analyze the impact of the holding period on the number of eligible shares, misinterpreting the meaning of “substantial implementation,” and presenting many arguments that addressed the merits of the proposal rather than whether it was excludable. The company countered with additional data and no-action precedent supporting the view it had previously expressed. This back and forth went on and on…and on from mid-April to mid-July.
As noted above, the company’s arguments were once again to no avail. The Corp Fin staff was unable to conclude that H&R Block’s proxy access bylaw compared favorably with the guidelines of the proposal and refused to provide relief. Although Corp Fin is almost always opaque as to the rationale for its decision, it appears that the staff did not believe that the proposal to eliminate the cap entirely was “substantially implemented,” within the meaning of Rule 14a-8(i)(10), by the company’s existing 20-person cap.