- Preparing for the 2017 Proxy Season: Recent Developments in Proxy Access and Universal Proxy Cards
- November 25, 2016 | Authors: Monique Angelle Cenac; Dionne M. Rousseau
- Law Firms: Jones Walker LLP - Phoenix Office; Jones Walker LLP - Baton Rouge Office
Proxy access has become one of the fastest-moving corporate governance initiatives ever. In addition, the Securities and Exchange Commission (SEC) recently proposed changes to the proxy rules to mandate the use of universal proxy cards in contested director elections at annual meetings. Below is a brief primer on these areas and related measures that companies should consider in preparing for the 2017 proxy season. Some of our clients were among the first companies to adopt proxy access bylaws, and we would be pleased to answer any questions you may have.
What is proxy access?
"Proxy access" permits stockholders who meet certain ownership thresholds to have their director nominees included in a company's proxy statement and proxy card. It is typically implemented through a company's bylaws. The most common core provisions of proxy access bylaws permit a stockholder or group of up to twenty stockholders that has held 3 percent of the company's stock for three years to nominate directors for up to 20 percent of the board seats.
In 2010, Congress paved the way for a U.S. proxy access mechanism by including a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that affirmed the authority of the SEC to issue a proxy access rule. In August 2010, the SEC adopted a proxy access rule that would require companies to include in proxy statements and proxy cards stockholder-nominated director candidates for up to 25 percent of the director seats. Under the rule, the director candidates could be nominated by a shareholder (or group of shareholders) beneficially owning 3 percent or more of the company's common stock continuously for three years. In 2011, the U.S. Court of Appeals for the D.C. Circuit struck down the rule, holding that the SEC failed to adequately assess the costs and benefits. The SEC did not appeal, and instead decided to permit the implementation of proxy access bylaws through "private ordering," i.e. by allowing stockholders to submit proposals for proxy access using the existing procedures for stockholder proposals in Rule 14a-8.
Stockholder proposals seeking to have companies adopt proxy access bylaws began appearing in the 2012 proxy season. It was not until the 2015 annual meeting cycle, however, that proxy access really took off, when the New York City comptroller and various New York City pension funds launched the "Boardroom Accountability Project," filing nonbinding proxy access stockholder proposals at seventy-five companies all at once. Companies had mixed results in attempting to defeat the proposals, even when they committed to adopting proxy access unilaterally or proposed alternative management proposals.
How many companies currently have proxy access bylaws?
As of November 2016, approximately 40 percent of companies in the S&P 500 now have proxy access bylaws, up from fewer than 1 percent in 2014.
Has anyone ever used proxy access?
Not yet. However, on November 10, 2016, GAMCO Investors (Mario Gabelli) became the first investor to announce its intention to use a company's proxy access bylaw to nominate its own director candidate for the 2017 annual meeting of National Fuel Gas Company, a diversified energy company that adopted a proxy access bylaw in March 2016.
What is a universal proxy card?
On October 26, 2016, the SEC proposed rules that would require universal proxy cards in contested director elections. A "universal proxy card" is a proxy card that lists, and allows stockholders to choose among, all the director nominees up for election in a contested election at an annual meeting of stockholders. Although each party in a contested election (i.e., the company and one or more dissident stockholders) would continue to distribute its own proxy materials, and use its own proxy card to solicit votes for its preferred slate of nominees, each party's proxy card would be required to list the names of all nominees, which would enable the proxy voters to select their preferred combination of candidates. Currently, the proxy rules in contested elections effectively require at least two proxy cards, one with the company's slate of nominees and one with a dissident stockholder's slate of nominees. Stockholders voting by proxy must choose between the two slates, instead of choosing individual directors among those nominated by either side, which is what the stockholder could do if attending the annual meeting in person.
What are the primary differences between proxy access and universal proxy cards?
Proxy access allows a dissident stockholder to avoid the time, effort, and expense associated with a separate proxy solicitation for its director nominees. Stockholders making nominations under proxy access can rely on the company's proxy materials and are not required to prepare and file their own proxy materials, disseminate those materials and use them to solicit proxies. Proxy access bylaws usually require the company to include in its proxy statement not only the name of each of the dissident's nominees but also disclosure about the nominee and a statement by the nominating stockholder in support of its nominee. In addition, proxy access cannot change the control of the board (i.e. elect a majority of board seats) in one election.
In contrast, under the SEC's proposed mandatory universal proxy regime, dissident stockholders would still be required to conduct their own separate proxy solicitation, preparing and filing a separate proxy statement and soliciting stockholders having at least a majority of voting power. Moreover, a company would only be required to include the names of the dissident nominees on the universal proxy card it uses, and would not be required to include any information in the company's proxy materials about the dissident's nominees. In addition, the universal proxy card could be used in election contests that could change the majority of the directors in one election.
What should companies consider when preparing for the 2017 proxy season?
If your company has not already received a proxy access stockholder proposal, you may get one soon. For the 2017 annual meeting cycle, S&P 500 companies without proxy access bylaws may be targeted, and proponents may move to the next-largest group of companies outside the S&P 500, as we saw with majority voting stockholder proposal trends. In preparation for the 2017 proxy season, companies should consider educating the board regarding these developments, as well as the advantages and disadvantages of preemptively adopting proxy access. Companies considering the adoption of a proxy access bylaw should analyze their stockholder base and their stockholders' policies on proxy access and consider engaging their largest stockholders.
Companies that already have adopted a proxy access bylaw may continue to have particular aspects of their bylaw challenged through stockholder proposals, and the battleground there will continue to be the no-action letter process, with companies arguing they can exclude the proposal on the grounds of substantial implementation. The types of provisions being contested include limitations on the size of the stockholder nominating group, restrictions on renominating unsuccessful candidates, requirements for continued stock ownership after the annual meeting, and treatment of loaned shares.
Universal Proxy Cards
The comment period on the SEC's universal proxy proposal expires January 9, 2017, and most commenters do not expect final rules to be adopted and effective for the 2017 proxy season. In addition, with the impending change in presidential administration and recently announced intention of the current chair of the SEC to leave in January 2017, the SEC may have different views or priorities in the new year.