Chapman and Cutler LLP corporate governance quarterly update titled “Look Who Crashed the 2015 Proxy Season! Proxy Access, SEC Uncertainty and Related Issues.”
Look Who Crashed the 2015 Proxy Season!
The rise of shareholder activism in the realm of corporate governance has increasingly focused on board performance and the right of shareholders to replace those directors who are perceived to underperform. One proposed approach to facilitate the replacement of underperforming directors is to give shareholders direct access to the company’s proxy materials, including permitting the inclusion of a shareholder-proposed director nominee (or slate of nominees) and a statement in support thereof in the company’s proxy statement (which such approach is more commonly referred to as “proxy access”). Although current U.S. securities regulations do not grant shareholders access to company proxy materials, proxy access may be available to shareholders by way of a company’s organizational documents (e.g., articles of incorporation, bylaws or corporate governance guidelines), as permitted by state corporate law.
While proxy access did not garner significant attention over the past two proxy seasons, it is one of the most notable early developments of the 2015 proxy season. It has been reported that shareholders have submitted an estimated 100 proxy access proposals to U.S. companies, a considerable number of which will be voted upon by shareholders over the next several months. Proxy access will very likely be one of the most contentious corporate governance issues this proxy season.
This corporate governance update (1) provides general information concerning proxy access (including a synopsis of arguments for and against), (2) summarizes the proxy access position of several of the largest asset managers and public pension funds, select proxy advisory firms and certain corporate governance advocates and (3) presents other related proxy access considerations to facilitate boardroom and C-suite discussion, including issues to consider during the current proxy season and elements of a potential proxy access bylaw.
Proxy Access, SEC Uncertainty and Related Issues
Background. Proxy access generally provides shareholders that meet certain requirements (such as minimum stock ownership thresholds) the opportunity to nominate directors to a company’s board and include those nominees in the company’s proxy materials without going through a typical proxy contest. The Securities and Exchange Commission (“SEC”) initially proposed a proxy access rule in 2003 and again in 2007.3 A final rule, authorized under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”), was adopted by the SEC in August 2010.4 That rule, which became effective in November 2010, required companies to include shareholder director nominees in proxy materials under certain circumstances, the most important of which mandated that the shareholder (or shareholder group) nominating the director candidate hold at least 3% of the voting power of a company’s securities for at least three years. In July 2011, the SEC’s proxy access rule was vacated by the U.S. Court of Appeals for the District of Columbia Circuit.5 Over the past several years, however, the 3%/3-year ownership thresholds (which would have applied under the SEC’s mandatory proxy access rule) have become the unofficial standards by which proxy access threshold provisions (and subsequently, proxy access proposals) are typically evaluated.
Arguments in Support of and Against. There are conflicting views as to whether or not proxy access promotes better corporate governance. Arguments in support of and against companies providing their shareholders with proxy access include the following:
Past and Current Proxy Seasons; Related SEC Action. In recent years, proxy access (unlike other corporate governance topics, such as the separation of the CEO/chair positions, the declassification of boards and the ability of shareholders to act by written consent) has not been the focus of shareholder activists’ initiatives. The following chart details the proxy access shareholder proposals received by Russell 3000 companies over the past three proxy seasons:
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