by Cydney Posner
Today, at a meeting of the SEC’s Investor Advisory Committee, the committee heard various updates regarding proxy season, shareholder rights and related matters.
Pat McGurn of ISS discussed the past proxy season, which he viewed as “one of the strangest” ever. Why strange? Because of the impact of momentum on the season. For example, proxy access proposals certainly had the Big Mo this season. In the last couple of years, he said, proxy access was just a second- or third-tier issue but, once the NYC Comptroller’s Office decided to submit 75 shareholder proposals for proxy access, proxy access suddenly became the biggest issue. That ascendancy to top of the heap was helped along, of course, by the SEC’s decision to withhold its views on the availability of the Rule 14a-8(i)(9) exclusion. Proxy access was so big, it was a kind of black hole that sucked in all the other proposals. Moreover, average support was up significantly to over 60%. Another theme for this season was the loss of momentum for hedge fund activism – not that hedge funds lost interest, but rather that many of the contests settled out before a vote, and, in more than half of those that went to a vote, the dissident slate lost. Nor was there as much activity as usual in the category of exempt solicitations, such as “vote no” campaigns. Shareholder engagement also played a big role this season in connection with shareholder proposals,he reported, leading a number of proponents of environmental and social shareholder proposals to settle and withdraw their proposals. Similarly, he believed that shareholder engagement led to a “high water mark” for disclosure in connection with say-on-pay proposals, creating “more light and less heat.” More engagement on management say-on-pay proposals also led to high approval rates: for the Russell 3000, he reported, the average level of director support was 96.3%.
Mike Garland of the NYC Comptroller’s office provided an update on their proxy access proposals. Of the 75 submitted, 63 went to a vote, with 56% average support. Of the 63 proposals, 41 received majority support. Garland noted that the stage was now set for the SEC to revisit a universal proxy access rule. While “private ordering” has been effective to some extent, sometimes it resulted in proxy access provisions adopted by companies that included restrictions he viewed to be inappropriate, such as limitations on the ability of shareholders to aggregate their shares to reach the threshold ownership requirement and prohibitions on compensation paid to third-party nominees.
Jonathan Ingram, Deputy Chief Counsel of the SEC, reported that there was a 10% uptick in the number of shareholder proposals submitted to the SEC. He also discussed the status of the staff’s project to review Rule 14a-8(i)(9), which allows a company to exclude from its proxy statement a shareholder proposal that conflicts with a management proposal on the same topic. (For a more detailed discussion, see this post.) He reported that the staff had completed its research on the topic, and he expected that the staff will now be developing a number of alternative approaches, as he believed that a lot of reasonable conclusions could be drawn from the research. More insight than that into the staff’s direction he would not provide. It was not even clear at this point whether further rulemaking would be required or whether the staff could just clarify its views in another staff legal bulletin. He indicated that “sequencing” is where the analysis gets difficult, that is, whether the analysis should change if the company’s proposal does not precede the shareholder proposal but may have been made in response to it. Some of the questions being tossed around are whether the current test – generally, whether the inclusion of both proposals in the proxy materials could present alternative and conflicting decisions for shareholders and submitting both proposals to a vote could provide inconsistent and ambiguous results — is correct and, if it is, is the application correct? He also acknowledged that other exclusions that may be affected by the (i)(9) decision are also “on the radar screen.” For example, companies stymied by the unavailability of the (i)(9) exclusion sometimes turn instead to Rule 14a-8(i)(10), the exclusion for proposals that the company has “substantially implemented.”
