Rob Swystun, Pristine Advisers
Proxy access — the right of a shareholder to include board nominees, at no cost to the shareholder, in a company’s proxy statement and proxy card — dominated corporate governance matters this past proxy season. Over 100 proposals were submitted on the topic of proxy access in 2015 compared to just 18 the previous year.
Of the 88 proposals that came to a vote, 54% of them passed, also a big step up from the 34% pass rate in 2014. As reported by corporate counsel firm Perkins Coie on the JD Supra Business Advisor website, negotiations and implementations of proxy access by board action or submission of a binding management proposal increased in 2015 and will likely continue to increase in 2016.
Over 70 companies have implemented proxy access in 2015 and at least some of those did so simply to avoid expending corporate resources trying to resist a corporate governance trend that many consider to be inevitable.
What Public Companies Should Be Doing Now
If this corporate governance trend is, indeed, inevitable, then this is what Perkins Coie suggests companies do to prepare for it in the upcoming proxy season:
Evaluate if the company is a ripe target for a proxy access proposal.
Review the company’s shareholder base and also review the voting policies of its major institutional investors to gauge whether a proxy access proposal would be successful.
At the very least, consider engaging with the company’s largest shareholders.
Prepare a summary of the terms and conditions of a proxy access bylaw, or go one step further and prepare a draft bylaw, that would be appropriate for the company. This is so the company can be in a position to respond quickly if a proposal is received.
Brief the board about developing proxy access trends (also tell them it’s something they need to be keeping an eye on) and the advantages and disadvantages of the various options at their disposal for responding to proxy access proposals.
Develop a response plan for if (or most likely when) a proxy access proposal is received.
Review board composition disclosure, and consider enhancing disclosure on independence, diversity, the experience and skills of each director, tenure, refreshment and board self-evaluation.
Formulating a Strategic Plan
Perkins Coie suggest that companies have a couple of alternatives when preparing for proxy access in the upcoming 2016 proxy season:
- Adopt proxy access proactively in advance of the 2016 proxy season, or
- Take a wait-and-see approach.
Most companies don’t proactively adopt proxy access unless they’ve received a proposal from shareholders and, as the corporate counsel firm points out, companies aren’t likely to believe there is anything to gain by proactively adopting proxy access.
The conciliatory approach: In the interests of heading off a shareholder proposal for proxy access, companies can adopt a bylaw with appropriate safeguards for the company, but which will also be acceptable to shareholder proponents.
The aggressive approach: This approach sees companies also being proactive and adopting a bylaw for proxy access, but with terms that shareholder proponents may not necessarily like (limitations on group size, for example). The goal of this approach is to lock in the most favorable terms to the company before any proposals come and/or diminishing support for a competing shareholder proposal. However, just because a company has a bylaw in place already doesn’t mean a proposal won’t be forthcoming. If shareholders don’t like the existing bylaw’s terms, they’ll submit a proposal to modify its terms.
This approach has several advantages:
- The company retains the flexibility to respond to the specifics of the shareholder proposal.
- The company avoids the possibility of adopting a bylaw that is more liberal than a shareholder would propose or more restrictive than a shareholder would accept.
- The company is afforded more time to monitor developing market trends.
When You Receive a Proxy Access Proposal
A company that receives a proxy access proposal has the following tactical choices:
Simply Oppose: Submit the proposal to shareholders and include an opposing board statement. Support your decision with a vote analysis and shareholder engagement. If the proposal passes, the board may receive negative voting recommendations if it does not implement the proposal in a manner deemed responsive by the proxy advisory services.
Be Neutral or Support: Submit the proposal to shareholders, with a neutral or supporting board statement. If necessary, seek revisions to the proposal favored by the company in exchange for this support.
Include a Competing Management Proposal: Include the shareholder proposal and a competing management proposal.
Negotiate in Exchange for Commitment to Adopt: Prepare a draft bylaw or summary of terms acceptable to the company and palatable to shareholders, and negotiate for withdrawal in exchange for a commitment to adopt a proxy access bylaw that placates both sides.
Adopt a Bylaw and Seek Exclusion: Prepare a draft bylaw acceptable to the company and, after adoption by the board, seek US Securities and Exchange Commission no-action relief to exclude the shareholder proposal on substantial implementation grounds.
The choice a company makes, the team at Perkins Coie says, will depend on the following:
- shareholder profile,
- governance issues that may trigger access proposals or affect shareholder voting,
- the board’s views on proxy access,
- the company’s analysis of the costs and benefits of resisting what will mostly likely become a persistent governance issue, and
- the potential for negative director vote recommendations by proxy advisory services.
Companies would do well to also consider these factors:
- There is no consensus among institutional investors on the benefits or preferred terms of proxy access, yet.
- Proxy access is untested, as there has yet to be any proxy access nominees to date (that Perkins Coie is aware of, anyway).
- The impact of proxy access on corporate governance may turn out to be largely symbolic. As the counsel firm says, activist investors are unlikely to use proxy access because of limitations that have been placed on it like the no control intent requirement, the significant holding period requirement and limitations on nominee support statements.
- Institutional investors may find it difficult to meet the percentage ownership thresholds required to make a nomination to the board and to find candidates who are willing to be part of a contested election.
As companies consider their response to proxy access in the 2016 proxy season (and all companies should prepare themselves to have to do this), they should focus on their shareholder profile, trends in market practice in regards to proxy access, developing proxy advisor and institutional investor positions, and changes in SEC guidance. In the leadup to the 2016 proxy season, companies should also consider whether they have any governance issues that may trigger access proposals or affect shareholder voting.