by Cydney Posner
If you’ve been following the saga regarding shareholder proposals for proxy access this proxy season, you know that around 100 companies received proxy access proposals and that the staff of Corp Fin has refused to express its view on the application of the exclusion, Rule 14a-8(i)(9) (conflicting proposals), frequently used to exclude proxy access proposals from proxy statements, leaving companies scrambling for other strategies to address the proxy access proposal. (If you haven’t been following, see this post.) Well, push has finally come to shove for many proposal recipients, and there does not yet appear to be a predominant choice among the alternatives.
As reported in thecorporatecounsel.net blog, a few companies have chosen to submit “dueling proposals” to their shareholders, both a management proposal and a shareholder proposal for proxy access. In the cases of Chipotle, Cloud Peak Energy, Exelon and The AES Corporation, the nonbinding shareholder proposal uses the standard 3%/3-year/25% of the board formula. The competing management proposals for Exelon and AES are also both precatory and use a 5% /3-year/20% of the board formula. One of the management proposals, for Exelon, caps at 20 the number of holders permitted to aggregate to reach the 5% threshold, while AES uses only a reasonableness standard for aggregation and, presumably,the board will subsequently determine an appropriate cap. Chipotle and Cloud Peak Energy’s management proposals are binding (but both require 2/3 votes to approve); Chipotle uses a 5%/3-year/20% of the board formula with an aggregation cap of 20 holders, while Cloud Peak uses a 5%/3-year/10% of the board formula and does not permit any aggregation of holdings to reach the required threshold. Chipotle, Exelon and Cloud Peak make ineligible for nomination for the next two annual meetings shareholder nominees who are included in the proxy materials but do not receive at least 25% of the vote in favor. In all cases, the nominating shareholder or shareholder group must hold full voting and investment rights and the full economic interest, including the opportunity for profit and risk of loss, and must satisfy specified procedural and information requirements.
Going another direction is GE, which received a proxy access proposal in late 2014 and attempted to exclude it on a procedural basis, but was unable to obtain relief from the SEC. Subsequently, GE instead determined to adopt a 3%/3-year/20% of the board proxy access proposal, which was consistent with the shareholder proposal with a number of exceptions: first, GE’s bylaw includes a 20-holder cap on aggregation.The GE bylaw also includes a provision for two-year ineligibility for nominees not receiving at least 25% of the vote in favor. In addition, the nominating shareholder or shareholder group must hold full voting and investment rights and the full economic interest, including the opportunity for profit and risk of loss, and must satisfy specified procedural and information requirements, including holding the shares for at least a year following the annual meeting, provisions that appear in most of the management proposals. The nominee must also satisfy specified independence and other requirements, including representing that the nominee has made no commitments regarding voting and has no undisclosed understanding regarding receipt of compensation, likewise provisions that are common to many of the management proposals. Corp Fin, in a rare instance of 14a-8 correspondence signed by Corp Fin’s chief counsel, has just permitted GE to exclude the shareholder proposal under Rule 14a-8(i)(10), on the basis that, in light of GE’s adoption of its proxy access bylaw that “addresses the proposal’s essential objective,” the shareholder proposal was “substantially implemented.” At least two other companies that received proxy access proposals are following the same course of action: HCP, Inc. has adopted a 5%/3-year/20% formula, with aggregation capped at ten stockholders, while CF Industries Holdings adopted the same formula, with aggregation capped at 20 stockholders. CF had previously sought to exclude the proxy access proposal submitted by a shareholder on the basis of Rule 14a-8(i)(9). It will be interesting to see if the SEC grants relief if these companies ultimately seek to exclude the shareholder proposals on the basis that they have been “substantially implemented.”
Citigroup, which had also previously attempted to exclude a shareholder’s proxy access proposal on the basis of a conflicting proposal, announced plans, according to the WSJ, to support a nonbinding “proxy access” shareholder proposal submitted by James McRitchie. Originally, the proposal included a 3%/3-year/ 25% formula with no cap on aggregation, but has been modified as a result of negotiations. Now, the resolution Citigroup supports would allow aggregation with a cap of 20 holders and would reduce the percentage of the board available for proxy access nominations to 20%. Apache Corp. is taking the same general approach — supporting the nonbinding 3%/3-year/25% shareholder proposal — but no significant modifications to the proposal are apparent.
Although at least two companies, Noble Energy and VCA, Inc., have decided to include — but contest — proxy access shareholder proposals without more, it is still too early in the proxy season to get a sense of whether many companies will follow this approach.
Finally, as reported in thecorporatecounsel.net blog and the WSJ, Prudential is one of the first companies to adopt proxy access without the impetus of a pending shareholder proposal. It is using a 3%/3-year/20% formula, allowing aggregation by up to 20 holders. As do many of the management proposals or bylaws described above, the Prudential bylaw includes a provision for two-year ineligibility for nominees not receiving at least 25% of the vote in favor.
