The SEC has recently provided guidance on the permissibility of excluding shareholder proxy access bylaw proposals under Proxy Rule 14a-8(i)(10). Rule 14a-8(i)(10) allows a company to exclude a shareholder proposal that has already been “substantially implemented” by the company. These recent no-action letters from the SEC demonstrate the scope of the “substantially implemented” exemption in the context of shareholder proxy access bylaw proposals.
Proxy access allows shareholders to place their favored nominees for election to the board of directors on a company’s proxy card, thereby saving the considerable expense and effort of running a separate proxy solicitation. Companies have sought to limit the impact of shareholder proxy access proposals, most recently by relying on the “substantially implemented” exemption provided by Rule 14a-8(i)(10). Proxy access “substantially implemented” fights generally hinge on four factors: (1) the ownership threshold, (2) the minimum period of ownership, (3) the number of nominees that may be put forward by the shareholders and (4) the ability to aggregate shares among different shareholders to reach the ownership threshold. A general consensus has emerged on the reasonableness of a bylaw provision permitting shareholders who own 3 percent of the company’s shares for 3 years to nominate up to 20 percent of the board of directors, with a maximum of 20 shareholders allowed to aggregate their holdings to reach the 3 percent ownership threshold (colloquially known as “3/3/20/20”).
By preemptively adopting a proxy access bylaw provision, a company likely intends to ward off a more offensive proposal brought by activist investors. Rule 14a-8(i)(10) may enable a company to exclude a rival shareholder proxy access bylaw proposal on the grounds that the proposal was “substantially implemented” through the adoption of an alternative proxy access bylaw provision where it accomplishes the “essential objective” of the shareholder proposal.
The vast majority of recent proxy access bylaw proposals were submitted by activist investor John Chevedden. Mr. Chevedden’s standard proposal submitted to multiple companies would enhance shareholder power by allowing for up to 25 percent of the board of directors to be nominated by the shareholders and unlimited aggregation of shareholder votes to reach the required ownership threshold. On February 12, 2016, the SEC granted relief through no-action letters to 15 companies to exclude a competing shareholder proposal under Rule 14a-8(i)(10), even though the existing or competing company model differed from the shareholder proposed model with respect to one or more of the four factors discussed above.
These SEC no-action letters provide insight into what types of company-initiated proxy access bylaws will be deemed to have “substantially implemented” an activist investor counterproposal. The SEC granted relief to companies that had adopted proxy access bylaw provisions allowing for up to 20 percent of the board of directors to be nominated by shareholders, instead of the proposed 25 percent maximum. The SEC also was not troubled by bylaw provisions that limited shareholder groups seeking to reach the ownership threshold to 20 members. Finally, the SEC granted relief even where the company’s bylaws imposed additional restrictions on shareholder nominees, such as banning candidates who do not meet the relevant independence requirements or who did not obtain a certain threshold of support at the previous annual meeting. It is important to note that the SEC denied relief to three companies that had imposed an ownership threshold of 5 percent instead of the generally accepted 3 percent because the greater threshold did not “compare favorably” with the shareholder proposal, i.e., it was deemed not to have been “substantially implemented.”
Many companies have noted the SEC’s guidance, and over a dozen subsequently were granted relief under 14a-8(i)(10), often citing the relevant precedents approved of in the February 12th no-action letters. Interestingly, two attempts to defeat an activist investor proxy access proposal by alleging the proposal was impermissibly vague or indefinite under Rule 14a-8(i)(3) failed.
The SEC’s no-action letters provide some guidance for companies seeking to manage the proxy access issue. A company weighing whether to preemptively adopt a 3/3/20/20 proxy access bylaw provision should feel confident that shareholders will not succeed in obtaining additional rights under a more liberal 3/3/25/unlimited proxy access bylaw proposal. It also appears that companies may impose some qualification restrictions on shareholder nominees. However, it appears that establishing an ownership threshold above the consensus 3 percent level will not qualify for no-action relief against a competing shareholder proposal. The “compare favorably” standard provides new regulatory guidance, and we believe it will have utility for 14a-8(i)(10) no-action requests beyond just proxy access proposals.
