 |
David Lynn is co-chair of the Public Companies and Securities practice at Morrison & Foerster and also serves as co-editor of TheCorporateCounsel.net. From 2002 until 2007, he was Chief Counsel at the SEC’s Division of Corporation Finance, where he led the rulemaking team that drafted revisions to the SEC’s executive compensation and related-party disclosure rules. |
Merrill: What do you consider the most important topic that companies should be familiar with in the upcoming proxy season?
Lynn: Probably the biggest topic that dominated the 2015 proxy season and that will again be a key – or perhaps even more important – topic in the 2016 proxy season is proxy access. That is the process by which a stockholder or a group of stockholders can use the company’s proxy statement to solicit for their director/nominees. I think that this received a lot of attention in the 2015 season because of the 75 shareholder proposals that the comptroller of New York had submitted to companies on behalf of New York City pension funds. Those proposals requested that each board adopt a by-law to give shareholders owning at least 3% of the company for at least three years the right to include in the company’s proxy ballot director/candidates for up to 25% of the board. The stated objective of this campaign is a real, universal proxy-access system through private ordering by shareholder proposals, meaning companies and shareholders reach a compromise without regulatory action.
I think, in the end, the results were mixed in terms of how successful that proposal was, but it certainly motivated a lot of companies to look at proxy access, whether they received a proposal or not. I liken it to the majority voting movement back in the 2000s, when things started out with shareholder proposals, and then the movement gradually built momentum, and then ultimately the vast majority of the Fortune 500 put majority voting provisions in their bylaws. We are not at that point yet. We are at the beginning of that cycle with proxy access. From every conversation I have had with boards and governance committees and people dealing with this issue at companies, this is a topic they continue to ask about.
Merrill: Any other topics that you think are really critical?
Lynn: Another one that seems to me to be probably still in the emerging phase – just judging from the questions that ISS keeps asking about it and from the queries I hear coming in from institutional investors to clients – is the whole broader topic of board composition and qualifications, and in particular, tenure issues and diversity issues and those kinds of topics that became a significant part of the conversation about good governance. I just think that now, more and more, there is a lot of focus on these issues. I think it is incumbent on companies in their disclosures to keep trying to do a better job of laying out how each director fits within the mosaic. While we have not really seen a strict ISS policy come out in this area, it is certainly something that the institutional investors keep harping on when companies are talking to them.
To me, probably the biggest concern that I hear from everybody going into the proxy season this year is the level of activism and the ferocity with which that activism takes place – the concern about how far the company has to go to respond to one particular shareholder to avoid much larger problems. How do you best engage with your other shareholders so you can understand what their wants and needs are, when you are getting pressed by some activist who has not yet ramped up its efforts but is gradually increasing its pressure on the company? I think that is something that keeps coming up in board discussions around these topics. It seems to me that no company is too big or too famous to avoid this problem – and the more famous, it seems, the bigger the target they are. I think this is something people will be more and more concerned about each passing proxy season.
Merrill: When it comes to proxy access, what kinds of provisions would be acceptable to boards?
Lynn: What I think has transpired is that we have a fairly standardized set of provisions that people have gotten comfortable with. Three percent for three years is certainly the prevalent ownership threshold that, along with a lot of the other provisions we see today, mirrors what the SEC mandated in Exchange Act Rule 14a-11 in 2010, with some tweaks here and there (before the US Court of Appeals vacated the rule in 2011). By and large, if you are adopting something along the lines of what some companies have adopted, consistent with the SEC rule, it has been my experience that they tend to get supported by shareholders. While not always ending the debate with respect to a particular company, it goes a long way towards that.
I think most continue to fight about limitations that have developed in terms of when you have multiple nominees and the percentage of the board that could be comprised of proxy-access nominees and all those kinds of bells and whistles. I think the battleground for some of those features has still not played out fully, and we will know what the consensus is on those issues only in the years to come.
We now have enough experience after this year that we are all a bit more confident in advising a company on what to do going forward if they are going to pursue a proxy-access bylaw. At the beginning of 2015, there had really been only a handful of examples out there of companies that had adopted a proxy-access bylaw.
Merrill: What advice do you give to a corporate client that is considering a proxy-access proposal, whether its own or one from a shareholder group?
Lynn: My advice has been pretty consistent in the sense that there is no one-size-fits-all answer. I do not think that any company should feel compelled to go out and adopt a proxy-access bylaw tomorrow simply because it is currently in vogue and people think that it is a useful provision to have. If a company has not had any issues with its shareholders, adverse say-on-pay votes, concerns about governance or board composition or pay, or any of those kinds of things, and if generally the company has had positive feedback from its shareholders in the course of their engagement efforts, then I would not put that company as a target for proxy access.
Unless the company felt compelled to adopt it for some other reason, I would not think they would have to adopt it now. In fact, the company might be better served by holding off until it has to deal with a proposal or until it has a concern down the road, because then proxy access is something that the company would actually give up and do to try placating whatever concerns have arisen with shareholders. My guidance is: “Do not be too quick to jump on the bandwagon here unless you absolutely have to.”
In the other case you mentioned – shareholder proposals coming in with proxy-access provisions – I think they involve very much a matter of trying to understand not only what that shareholder wants but what all of your other shareholders are interested in, in order to try to formulate your response and strategically figure out how you want to proceed. In the 2015 season, the big issue we ran into was that, because the SEC suspended its guidance around conflicting proposals, you did not have Rule 14a-8(i)(9) as an option to address the issue, and so you had people putting proposals up against other proposals. I think the battleground in the upcoming proxy season will be on the substantially implemented basis for exclusion of shareholder proposals (Rule 14a-8(i)(10)), where the task will be: “Did companies go far enough in adopting a bylaw for proxy access that they could exclude a proposal raised by a shareholder?”
Merrill: If a company does receive a shareholder proposal on proxy access, do you recommend that it introduce its own proposal?
Lynn: To that, I would say there is no one answer. If a company has a pretty good sense of how the shareholders are going to respond to the shareholder proposal and feels that the proposal would not receive majority support, then why would it adopt a proposal to try to counter that? A lot of companies, particularly in the 2015 proxy season, just take the view: “We are going to find out what the shareholders think.” Because most of the shareholder proposals are precatory proposals, a company can gauge shareholder interest to see what the outcome is and consider what to do in the future. If a company wanted to try to exclude the shareholder proposal, after the SEC bowed out of doing its job on Rule 14a-8(i)(9), then whether there would be a great advantage in adopting the company’s own proposal is significantly lessened unless the company were willing to adopt something that looked very much like what the shareholder had proposed.
Merrill: What is your initial reaction to the new SEC guidance on shareholder proposals in Staff Legal Bulletin No. 14H?
Lynn: With Staff Legal Bulletin 14H, the staff has taken a sharp turn away from its prior interpretation of Rule 14a-8(i)(9), creating a whole new standard by which potentially conflicting management and shareholder proposals will be judged. I was surprised at how much the staff changed its mind on this one. The staff used to look at whether a management proposal and a shareholder proposal presented alternative and conflicting decisions for shareholders and whether the two proposals created the potential for inconsistent and ambiguous results; but now the test is whether a reasonable shareholder could logically vote for both proposals. The Legal Bulletin indicates that this is consistent with the overall purpose of Rule 14a-8(i)(9), which is to prevent the use of Rule 14a-8 to circumvent the proxy rules governing solicitations.
The staff confirmed that this new interpretation would mean a company putting up a proxy access proposal at a different ownership threshold/timeframe would not be able to exclude a proxy access shareholder proposal – based on the argument that the two proposals directly conflict – because in the staff’s view, a shareholder could vote for both formulations.
Read the entire article here.