Council of Institutional Investors

Companies Put Their Own Spins on Proxy Access, Research Reveals
Thursday, July 30, 2015
by: Rosemary Lally

Section: CII Governance Alert

Now that the proxy season dust has settled, it is time to take stock of what all of those proxy access proposals that stole the limelight produced.

Overall, shareholders submitted 109 access proposals to companies, 81 of those have gone to a vote and 12 are still pending votes. So far, 48 of those voted have received majority support from shareholders. As a result of this intensified focus on the issue by investors, at least 32 companies have adopted proxy access provisions in their bylaws or charters. But, these adopting firms have not all strictly adhered to the access formula requested in most of the proposals. That formula, which mirrored the original SEC proxy access rule that was struck down by the D.C. Circuit Court in 2011, allows holders of at least 3 percent of a company’s common stock for at least three years to nominate up to 25 percent of a company’s board.

Instead, the companies adopting access have added all varieties of new provisions affecting ownership requirements, nominee-related provisions and notice and information provisions. CII commissioned Covington & Burling to track the key provisions of proxy access bylaws/charters adopted to date and found the following:

Ownership Requirements for those Nominating Director Candidates

• Vast majority (29) require nominating shareholders to hold the stock for at least three years
• Vast majority (28) would bar nominating shareholders from participating in other shareholder groups or proxy solicitations
• Majority (20) require a nominating shareholders to hold 3 percent of the company’s stock
• Majority (20) would allow nominating shareholder to nominate 20 percent of the directors
• Majority (18) would allow an aggregation of up to 20 shareholders to
• Large portion (12) would require nominating shareholders to hold the required percentage of stock until a year after the annual meeting

Nominee-related provisions

• Vast majority (26) would not allow nominees who fail to receive 25 percent of votes or who withdraw to be nominated again for two years
• Half (16) would require nominees who are proposed through proxy access and later withdraw or become ineligible to be counted toward the limit placed on the number of nominees.
• Just more than half (17) would require that nominees initially proposed through proxy access and later endorsed by the board as candidates be counted toward the limit placed on the number of nominees
• In situations where the number of proposed nominees exceeds the limit, half (16) would allow each shareholder to nominate one director each, starting with the shareholder who owns the most shares
• In situations where the number of proposed nominees exceeds the limit, a large portion (13) would require shareholders proposing multiple nominees to rank each nominee and nominations would be chosen beginning with the highest ranked nominee from the shareholder who owns the most shares
• If vacancies occur on the board before the date of the annual meeting and the size of the board is reduced, the majority (17) would recalculate the nominee limit based on the new number of directors
• Large portion (12) would not allow proxy access if any floor or advance notice nominations are made
• Large number (10) would not include in their proxy statements nominees made both through proxy access and on the floor or through advance notice
• Large portion (12) would not allow proxy access nominations if the nominating shareholder or shareholder nominee are participating in a proxy fight

Notice and Information Provisions

• All (32) require the nominating shareholder to include information in its SEC filing like the information its files on its Form 14-N
• Almost all (31) require the nominating shareholder to provide proof of share ownership at the time of the nomination and at the annual meeting
• Large portion (25) require nominating shareholder to provide information required by Form 13-D
• Almost half (15) require nominators to give notice of their plans 150 to 120 days before the anniversary of the mailing date of the proxy statement for the prior year’s annual meeting
• Large portion (13) require biographical and demographic information about the nominees to be submitted
• Large portion (13) require ownership information about nominees to be submitted
• Large portion (13) require an agreement from shareholders indicating that they will comply with all applicable laws applying to the use of soliciting materials

Companies adopting access also have included provisions specifying the types of qualifications director nominees must meet. The following are some of the more common:

• Must qualify as an independent director under all relevant standards (29 companies)
• Cannot be an officer or director at any competitor (25 companies)
• Cannot commit fraud or misrepresentation during nomination process or while serving as a director (25 companies)
• Cannot have a compensation arrangement with any party other than the corporation (23 companies)
• Director’s nomination or election cannot result in a violation of corporation’s bylaws, charter, stock exchange listing standards or any applicable law (23 companies)
• Cannot be subject to a pending criminal investigation (23 companies)
• Cannot be party to a voting commitment (22 companies )
• Must agree to comply with the company’s policies, confidentiality, fiduciary duties and applicable laws (22 companies)
• Cannot in the past three years have been an officer or director of any competitor (22 companies)
• Cannot have been convicted of a felony in the past 10 years (22 companies)

Keir Gumbs, a partner at Covington & Burling, says the 2015 proxy season was a productive one for shareholders with the number of companies adopting proxy access surging from five to 32. He views these adoptions as the first phase of an iterative process. Gumbs predicts that as part of the next phase, companies and shareholders will agree on the best parameters for access models, and then shareholders will begin filing proposals aimed at fine tuning the access models already adopted by companies. He notes that when this happens, the SEC will have to reach a conclusion on how to apply Rule 14-8(i)(9) to determine when a management proposal on access could bump out a shareholder one and what would constitute ‘already substantially implemented’ if the access parameters in a proposal are different from those in a model already adopted by a company.

A copy of Covington & Burling’s spreadsheet of Key Provisions of Proxy Access Bylaws/Charters Adopted to Date can be found here on the Proxy Access page of the CII Web site.
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