Companies that have previously adopted mainstream proxy access bylaws received a vote of confidence from the SEC earlier this month when the agency issued 18 no-action letters on February 12th, 15 of which allowed the company to exclude related shareholder proposals on the basis of “substantial implementation” under Rule 14a-8(i)(10) of the Securities Exchange Act of 1934. Each of these companies successfully asserted that its proxy access bylaw fulfilled the “essential objective” of the shareholder proposal and, as a result, that the company had substantially implemented the proposal. These recent no-action letters provide the first important guidance on how proxy access proposals will fare under Rule 14a-8(i)(10) following the issuance of SEC Staff Legal Bulletin 14H in October 2015 which severely limits the ability for companies to exclude shareholder proposals, including proxy access proposals, on the basis that they conflicted with management proposals under Rule 14a-8(i)(9).
Each of the 15 companies had received shareholder proposals after adopting a “3/3/20/20” proxy access bylaw permitting shareholders who continuously own 3% of shares outstanding for a 3-year period to nominate up to 20% of the board (and at least 2 directors). Under the bylaws, no more than 20 shareholders can aggregate their shares to reach the 3% ownership threshold. This version of proxy access is consistent with the minimum standard articulated by ISS in its December FAQ.
The excluded shareholder proposals would have permitted shareholders who continuously own 3% of shares outstanding for a 3-year period to nominate up to 25% of the board (and at least 2 directors). Typically, the proposals had no shareholder aggregation limit and also prohibited additional restrictions that did not apply to other board nominees.
Differences between company bylaws and shareholder proposals on director nominee caps and shareholder aggregation limits did not prevent the SEC from concluding that the proposals had been substantially implemented. The companies had adopted modestly more restrictive director nominee caps (up to 20% of the board and at least 2 directors) than the shareholder proposals (up to 25% of the board and at least 2 directors). In addition, in what was shaping up to be a potentially more significant point of contention, the company bylaws stipulated that no more than 20 shareholders could aggregate their shares to nominate a candidate, while the shareholder proposals typically had no shareholder aggregation limits.
Notably, the SEC Staff granted no-action relief even in situations where the proxy access bylaw contained eligibility restrictions for proxy access candidates that may not apply to other director nominees, including a candidate
- who is nominated using the company’s advance notice provisions,
- who receives third-party compensation,
- who is not independent under applicable listing standards,
- whose election would cause the company to be in violation of its charter documents or applicable regulations,
- who is an officer or director of a competitor, as defined in Section 8 of the Clayton Antitrust Act of 1914,
- whose business or personal interests within the preceding ten years would place them in a conflict of interest with the company or any of its subsidiaries such that it would cause them to violate any fiduciary duties of directors,
- who is named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses) or who has been convicted in such a criminal proceeding,
- who is subject to any order of the type specified in Rule 506(d) of Regulation D promulgated under the Securities Act of 1933, as amended, and
- who does not receive at least 25% of the votes cast in favor of the candidate’s election at a prior annual meeting.
While these eligibility restrictions provide important protections for the adopting companies, it remains to be seen whether ISS and investors will find them problematic notwithstanding the SEC’s finding of substantial implementation.
In the three instances when the SEC denied no-action relief, the companies required 5% vs 3% ownership of shares outstanding in order for shareholders to avail themselves of proxy access.
In the wake of these no-action letters, companies considering proxy access are likely to gravitate toward the models contained in the successful no-action letters, continuing the convergence of proxy access terms during the 2016 proxy season. Proxy access adopters are expected to maintain a brisk pace, as companies now face a reduced risk of having bylaws challenged by shareholder proponents.