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II. Developments in Corporate Governance and Shareholder Activism
C. ProxyAccess
As our readers know, proxy access refers to the ability of shareholders to include their candidates for election to the board in the issuer’s own proxy statement. Proxy access does not mean that insurgent candidates will necessarily be elected; rather, it is intended to reduce the costs of running a proxy fight by allowing proponents of board candidates to avoid the costs of printing and distributing their own proxy statements. In 2011, the SEC’s own proposed proxy access rule was vacated by the federal courts. The SEC’s proposed rule would have permitted holders of more than 3% of the company’s stock, who had held such stock for at least 3 years, to nominate up to 25% of the company’s board (a so-called “3/3%/25%” formula). However, in the wake of that proposal, shareholder activists began to seek so-called “private ordering” solutions to proxy access, in which issuers would adopt their own rules allowing access to the issuer’s proxy statement, generally through a bylaw amendment. Until 2015, the subject had not taken off as an issue.
In the latter half of 2014, the NYC Comptroller’s office announced that it would make proxy access proposals following the 3/3%/25% formulation at 75 large cap companies in 2015. These companies were selected by the Comptroller’s office because of perceived concerns at the issuers related to one or more of three issues: (i) the issuer’s contribution to climate change; (ii) a lack of board diversity, including gender and racial diversity; and (iii) excessive CEO pay. These proposals are precatory only – that is, they do not amount to a binding change, but request the submission to shareholders of a binding bylaw amendment that would require proxy access. Other activists got on the bandwagon; according to Georgeson, a total of 110 proxy access proposals were submitted to the S&P 1500 in 2015 (approaching 10% of all such companies), of which 88 came to a vote.
The number of shareholder proposals voted on was undoubtedly made greater by the SEC’s announcement, on January 16, 2015, that it was suspending the application of Rule 14a-8(i)(9) for the 2015 proxy season (the “Directly Conflictsrule”). Thesuspendedruleprovidesanexclusionfrom the obligation to run a shareholder proposal in management’s proxy statement when it directly conflicts with a management proposal. TheSECStaffhadformanyyearsinterpretedthisrule liberally. In the proxy access context, the Staff had permitted companies to exclude, for example, a 3/3%/25% proposal if the board itself was proposing proxy access requiring 5% ownership for at least 5 years, with a right of such holders to nominate up to 10% of the board. The SEC’s announcement stated that it would be reviewing the Directly Conflicts rule to evaluate whether it was being properly applied. In mid-2015, the SEC released Staff Legal Bulletin 14H, which announced the results of that review. Going forward, the SEC will only permit exclusion of a proposal under the Directly Conflicts rule if a person voting in favor of the shareholder proposal would by definition vote against the management proposal. The example cited by the SEC is a situation where management proposes a vote in favor of a merger, and the shareholder proposes a vote against the same merger. In this case, the proposals are in essence mutually exclusive and therefore, the shareholder proposal would be excludable.
Notwithstanding the great interest on the part of proponents in these proposals, the average vote in favor was relatively lukewarm. The 3/3% formulation continued to get the highest vote totals, but even that approach only received an average vote in favor of approximately 53% of those voting, with just over half of the proposals receiving majority support. Some institutional investors do not support proxy access as a general matter, while others do, but at levels other than 3/3%. It is useful to bear in mind that any shareholder that really wants board representation can just prepare its own proxy statement; proxy contests have been with us forever. Nevertheless, proxy access was 2015’s hot topic, and is shaping up to be hot again in 2016.
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Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review