Proxy Access Bylaw Developments and Trends: Including List of Considerations, Analysis of Terms Adopted to Date, and Sample Bylaw

Sullivan & Cromwell LLP - August 18, 2015

The significant success of shareholder proxy access proposals this year is likely to result in even more shareholder proposals for proxy access in the 2016 proxy season.  As of August 13, 2015, 82 shareholder proxy access proposals have come to a vote in 2015, and 48 have passed. In many cases, shareholder proposals were approved despite a pre-existing bylaw (most often adopted after the receipt of the shareholder proposal) or a conflicting proposal by the company with modestly more restrictive terms.  The average vote in favor of all proposals was 54.4%, and ISS recommended for all shareholder proxy access proposals.

This memorandum summarizes developments in the area of proxy access, including an analysis of the record of company responses to shareholder proxy access proposals received during 2015 (with further detail set forth in Annex A).  Those companies that receive a proxy access shareholder proposal or that are evaluating preemptive adoption of a proxy access provision will want to consider the appropriate terms and requirements.  In all cases, as a matter of preparedness, companies should be aware of options to respond to potential shareholder proxy access proposals.  For more information regarding shareholder proposals generally, our 2015 Proxy Season Review, which we distributed on July 20, details the results of these proposals during the 2015 proxy seasons.

As a threshold matter, we emphasize that the practical consequences of adopting proxy access remain unclear.  Although a small number of proxy access bylaws have been in existence for a couple of years (four provisions predated 2011), we are not aware of any proxy access nominees to date. More importantly, in the area of activist campaigns for board seats, we do not believe proxy access is likely to play a significant role.  Activist investors are unlikely to use proxy access for several reasons.  First, like now-vacated Rule 14a-11, proxy access bylaws require that the nominating shareholders be passive investors without the intent to influence the control of the company.  Many activist investors will not meet this passivity requirement.  Second, proxy access bylaws require the nominating shareholders to meet a three-year holding period.  Such a holding period is inconsistent with some activist investors’ historical investment periods.  Proxy access bylaws restrict the number of nominations generally to 20-25% of the board, and activist proxy contests are often for more seats.  Finally, activists who threaten or wage proxy contests are unlikely to use proxy access (even if they could meet the passivity requirement) because the solicitation efforts that can be undertaken as part of a traditional proxy contest provide substantially greater flexibility and a greater likelihood of success and the cost is generally not substantial compared to the investment made in the issuer.  Other potential nominating shareholders may be deterred as well.  Depending on the market value of the issuer and the concentration of holdings, it may be difficult to accumulate sufficient shares in a “group” to nominate an individual without requiring compliance with the proxy rules—Rule 14a-2(b)(7), which exempts solicitations to form a nominating group, only applies to Rule 14a-11 nominations.  Potential nominating shareholders also may be concerned about the possible loss of 13G eligibility, or the potential formation of a 13D group.  Individuals may be reluctant to serve as proxy access nominees—in the typical activist situation, the nominated individual can rely on the activist undertaking substantial effort and expense to win the proxy contest, whereas efforts for a proxy access nominee would by their very nature likely be more limited.  In addition, activist nominees generally receive indemnification agreements from the activist, which may or may not be provided to proxy access nominees in the future.  We do expect, over time, that shareholders will make some use of proxy access, but we see no evidence that its use will become routine or widespread. It is also possible that the SEC may revise some of the ancillary rules adopted together with Rule 14a-11, to provide comparable exemptions for nominations and solicitation activities pursuant to proxy access bylaws, or consider no-action relief, eliminating some impediments to proxy access utilization.