Weil discusses Navigating Proxy Access: A Roadmap for the Board of Directors

The subject of “proxy access” represents another turning point in the corporate governance of public companies that many boards of directors will need to face, and for some, much sooner than later. Proxy access, which has come to the forefront through Rule 14a-8 proposals submitted by certain pension funds and other governance-oriented activists, is designed to enable shareholders to use a company’s proxy statement and proxy card to nominate one or more director candidates of their own. By all indications, the proxy access movement has the momentum to spread through large companies much in the same way as majority voting.

What to Expect for 2016

  • Pressure on boards to respond in 2016 to access proposals that received majority support in 2015
  • A wave of access proposals at companies targeted in 2015 and at new companies
  • Spotlight on provisions that certain investors and proxy advisors are labeling as “troublesome” or “problematic”
  • Demands from some proponents to adopt an access bylaw consistent with CII’s Best Practices
  • Heightened need for engagement on proxy access and other governance matters
  • More detailed voting guidance on proxy access from proxy advisors
  • SEC guidance on the “Whole Foods” issue – when a company may exclude an access (or other) shareholder proposal that “directly conflicts” with a management proposal
  • Possible first time use of access bylaws to nominate directors

Overview

During the 2015 proxy season, 113 companies of various sizes and industries received a shareholder proposal demanding that the company amend its bylaws to establish “proxy-access.”[1] To date, these proposals have gone to a vote at 95 companies. At over half, the proposals won the support of holders of a majority of shares voted (“majority support”), with votes cast in favor averaging 58.9%.[2] To date, 53 companies have adopted proxy access bylaws. These bylaws generally require 3% ownership for 3 years by the nominating shareholder, a cap at 20 on the number of shareholders that may aggregate their holdings, and a cap on the number of “access nominees” at 20% to 25% of the board.

We expect the 2016 proxy season to be dominated by access proposals. We also expect a more intense focus on provisions in proxy access bylaws that the Council on Institutional Investors deemed “troublesome”[3] and that Institutional Investor Services labeled as “problematic.”[4] As the deadlines for shareholder proposals at calendar year companies rapidly approach, boards should be prepared for the possibility of a proxy access proposal.

Strategies for 2016: A Roadmap of Alternatives for Proxy Access

Companies should thoughtfully consider their approach to proxy access for the 2016 proxy season. Whether to adopt proxy access preemptively, by way of either a company-adopted bylaw or a management proposal at the next annual meeting, or to take a wait-and-see approach, depends upon whether the company received a proxy access proposal during the 2015 season and the results of the vote, as well as the company’s shareholder base, performance, governance profile and risk tolerance.

Alternative 1: Wait-and-See, Prepare and Engage

Taking a “wait-and-see” approach is a viable alternative for companies that have not received a proxy access proposal or at which a 2015 shareholder-sponsored access proposal failed to garner majority support. Companies that take this approach should use the time to stay fully informed and to seek shareholder views on proxy access in connection with pre-annual meeting engagement efforts. The board should also consider the merits of developing a proxy access bylaw to put “on the shelf.”

Alternative 2: Adopt a Proxy Access Bylaw Prior to the 2016 Annual Meeting

In formulating a proxy access bylaw, companies should carefully consider how they respond to the standards in the shareholder-approved proposal and any subsequent feedback received from shareholders. If ISS believes a company did not adequately respond to a shareholder-supported proposal, it may recommend against the election of directors or nominating/governance committee members.

Companies that have not a received an access proposal or at which a proposal did not receive majority support may determine whether, and if so on what terms, to preemptively adopt a proxy access bylaw. While preemptive adoption will not insulate the company from future proposals on different terms, but will better position a company to negotiate with a proponent or seek no-action relief from the SEC.

Alternative 3: Submit a Management Proposal to Shareholder Vote at the 2016 Annual Meeting

A company may wish to submit a management-sponsored proxy access proposal for shareholder vote if: (i) a shareholder access proposal received majority support at the prior meeting; (ii) the company wishes to preempt a shareholder proposal; (iii) the company has received a proposal and wishes to offer a competing management proposal on its own terms;[5] or (iv) the company wishes to demonstrate its general commitment to corporate governance.

To be effective, the company must convey its intention to submit a management proposal either by engagement with shareholders or by making a public announcement; otherwise, shareholders will have no visibility into the company’s intention during the period for making a proposal.

Alternative 4: Do Nothing – Not Really an Option

A “do-nothing” approach in response to a proposal that passed or nearly passed at the prior annual meeting will delay the adoption of proxy access, but is likely to generate a negative voting recommendation from proxy advisory firms, continued pressure from institutional investors, negative publicity, and management distraction.

Investor Focus for the 2016 Proxy Season: “Troublesome” and “Problematic” Provisions

The results of all shareholder proposals voted on and settled in 2015 largely favored the adoption of proxy access with a 3% / 3 year / 20 shareholders / 20% of the board formulation. Provisions that we expect to be in the spotlight in 2016 are:

  • Ownership threshold
  • Ownership duration
  • Maximum number of shareholders that may aggregate to form a group
  • Cap on number of nominees
  • Bar on re-nomination based on failure to receive stipulate level of support
  • Disqualification based on nominee’s receipt of third party compensation
  • More restrictive advanced notice requirements for access nominees
  • More extensive information disclosures from access nominees
  • Securities loaned by shareholders expressly include as “owned”
  • Required statement of intent to hold shares after annual meeting

As with many corporate governance matters, companies should be familiar with the perspectives of different constituencies within their shareholder base – including, most importantly, their large institutional shareholders – as a part of their planning for shareholder engagement on this and other major governance topics.

What to Do Now: Prepare, Stay Informed, and Engage

  1. Understand the available alternatives for addressing proxy access depending on the company’s experience to date.
  2. Understand the positions of key shareholders on proxy access.
  3. Monitor proxy access developments and proxy advisor and institutional investor views on “troublesome” or “problematic” provisions.
  4. For companies that have not to date received a proposal, consider preparing a draft bylaw to keep “on the shelf.”
  5. Engage with shareholders – not only on proxy access, but on all key issues.

ENDNOTES

[1] Institutional Shareholder Services “Voting Analytics, Proposals” as of October 16, 2015. This number does not include management-only proposals, proposals that were omitted because the shareholder proponents were ineligible under Rule 14a-8(b), or voluntarily adopted proxy access bylaws.

[2] Institutional Shareholder Services “Voting Analytics, Proposals” as of October 16, 2015.

[3] See Council of Institutional Investors, Proxy Access: Best Practices (August 2015), at 3-5, available at http://www.cii.org/files/publications/misc/08_05_15_Best%20Practices%20-%20Proxy%20Access.pdf.

[4] See Institutional Shareholder Services, 2015-2016 ISS Global Policy Survey: Summary of Results (Sept. 28, 2015) available at http://www.issgovernance.com/file/publications/ISS2015-2016PolicySurveyResultsReport.pdf.

[5] See our Alert available here summarizing the SEC’s recent guidance on when a shareholder proposal will “directly conflict” with a management proposal pursuant to SEC Rule 14a-8(i)(9).

This post comes to us from Weil, Gotshal & Manges LLP. For a strategic roadmap for considering what to do about proxy access and when to do it and range of choices available to craft a proxy access bylaw, understand the provisions for which there is emerging consensus as well as those that appear problematic in the view of some institutional investors and proxy advisory firms, see the full text of the memorandum from Weil, Gotshal & Manges LLP, which was published on October 21, 2015, here.