Proxy access is dead, right? Not so fast. Shareholder access to the proxy seemed to be finished in July after the U.S. Court of Appeals for the D.C. Circuit vacated Rule 14a-11—the most prominent “proxy access rule.” But the Court’s decision left one element of the reform alive: an amended Rule 14a-8. The amended rule could allow shareholders access to the boardroom under less stringent requirements than earlier proposed.
Originally introduced in June 2009, Rule 14a-11 was part of the Securities and Exchange Commission’s proposed rules on facilitating shareholder director nominations. It allowed for direct shareholder access to proxy materials, with eligibility dependent on specific stock ownership and holding thresholds.
Today, this modified rule requires inclusion of any shareholder proposals that either amend, or request an amendment to, the company’s bylaws concerning the director nomination process. Eligibility to submit proposals is considerably lower than Rule 14a-11’s ownership of 3 percent for three years. As for all shareholder proposals, the requirement for ownership is $2,000 or 1 percent of shares—whichever is less—for at least one year.
Not every shareholder proposal will be eligible. When removing the general “election exclusion,” the SEC added several further exclusions protecting directors. A proposal can be omitted if it would:
- disqualify a nominee who is standing for election;
- remove a director from office before his or her term expired;
- question the competence, business judgment or character of one or more nominees or directors;
- seek to include a specific individual in the company’s proxy materials for election to the board of directors, or otherwise affect the outcome of the upcoming election of directors.
Some companies can challenge the proposals as a violation of state law. Delaware corporations cannot use this argument, however, as the state’s law was changed in 2009 to allow companies to amend bylaws to provide shareholders access to proxy materials concerning the director nomination process.
Effective shareholders now have indirect access to the board’s nomination process. However, they must first change the company’s bylaws. The investment community has taken to the new rule. The U.S. Proxy Exchange (USPX), an advocacy group for retail investors, has already developed a model proposal for shareholders to use. The model asks companies to adopt proxy access bylaws that allow director nominees from any party of one or more shareholders that has owned—for two years—1 percent of the company’s securities eligible to vote for the election of directors, and/or any party of shareowners of whom 100 or more satisfy the Rule 14a-8 eligibility requirements. Any party can submit one nomination or 12 percent of the current number of directors, whichever is greater.
Investors to date have publicly announced 11 proxy access resolutions for the 2012 proxy season. Five of these resolutions came from a single retail investor— using the USPX model—and were submitted at such companies as Bank of America, Sprint Nextel and Textron. The remaining six resolutions were filed by Norges Bank Investment Management at companies including Wells Fargo, Charles Schwab, Western Union and Staples. NBIM’s proposals set a lower threshold, 1 percent ownership for one year, and place a 25 percent cap on the number of nominees a shareholder can submit.
In its policy updates for the 2012 proxy season, Institutional Shareholder Services announced it will still evaluate shareholder proposals for proxy access on a case-by-case basis, taking into account the ownership threshold proposed, the maximum proportion of directors that can be nominated by shareholders, and the method for determining which proposals should appear if multiple shareholders submit nominations. This marks a departure from ISS’s previous approach, which took into account the shareholder’s rationale behind the proposal and the company’s corporate governance practices.
While not “one size fits all,” as had been a boardroom concern, the current method of private ordering allows shareholders the ability to establish proxy access at companies of their choice. Despite the absence of Rule 14a-11, proxy access should remain a boardroom focus in the coming proxy season.
Kate Iannelli is an NACD research analyst.
Your missing several. See http://www.issgovernance.com/sites/default/files/AccessProposals2012.pdf