2012 Proxy Season Review: Shareholder Proposals on Governance Structure Continue to Garner Strong Support and to Drive Structural Changes in 2012; Renewed Focus on Independent Chair; Proposals on Political, Social and Compensation Issues Remain Common, but Rarely Pass

Sullivan & Cromwell LLP - July 9, 2012

The 2012 proxy season saw a continued high rate of governance-related shareholder proposals at large U.S. public companies, including proposals on separation of the roles of the CEO and chair, the right to call special meetings, action by written consent, declassified boards and majority voting. As in prior years, these governance-related proposals received high levels of support, and were the category of proposal that had the best chance of receiving shareholder approval. Proposals on social issues (particularly those related to political contributions and lobbying costs) and compensation-related issues (including equity retention policies) also remained common but, as in the past, these proposals rarely received a majority vote, generally had lower levels of support than governance-related proposals, and served primarily as a vehicle for shareholder activists to express their views.

In this memorandum, we:

  • Quantify and discuss various categories of shareholder proposals voted on this season, and highlight important trends, legal developments and practice points for companies in navigating the shareholder proposal process, including notable exclusion determinations by the SEC staff and trends in management proposals to give shareholders that right to call special meetings and act by written consent;
  • Analyze the key reasons that directors of large companies received “withhold” or “against” recommendations in 2011 and 2012, and the situations in which these recommendations were most likely to translate into a significant reduction in shareholder support;
  • Summarize the discrepancies in director independence definitions used by various shareholders and proxy advisory firms, and the potential negative implication of an adverse independence determination under these definitions;
  • Highlight the increased use by shareholder proponents of new avenues for publicizing their arguments and counterarguments regarding their proposals;
  • Discuss developments in the SEC staff’s treatment of exclusion requests under Rule 14a-8; and
  • Address annual meeting disruptions by protest groups in 2012 and steps that companies can take to deal with the increased likelihood of disruptions at annual shareholder meetings.

2012 also saw the advent of a new class of shareholder proposals – those relating to proxy access. Proxy access was the subject of our memorandum, dated June 19, 2012, entitled “Proxy Access Proposals – Review of 2012 Results and Outlook for 2013,” an updated version of which is attached for your convenience.

This memorandum does not discuss 2012 developments in the area of management say-on-pay proposals, which will be the subject of a separate memorandum that we expect to issue within the next week.

Sullivan & Cromwell LLP will host a client podcast this summer to discuss 2012 proxy season developments, including those discussed in this memorandum, as well as proxy access and say-on-pay. Information on this podcast will be disseminated shortly.