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Trends in Proxy Access: 2012 Proxy Season Overview

Posted in Deal Strategy

In an earlier blog post this year, I highlighted how due to rule changes effected in September 2011, companies would be required in the 2012 proxy season to include in their proxy materials shareholder proposals that address the director nomination process, if the shareholder has held at least 1% (or $2,000 worth) of the company’s voting securities for at least a year.  Many of the proposals of this kind that were submitted in the 2012 proxy season were technically deficient under the SEC’s rules, and thus were excluded from proxy materials and never voted upon.

What can we learn from those proposals addressing proxy access that were brought to a vote? 

While sample size is small and trends may continue to evolve over time, we note the following trends and thank the Harvard Law School Forum on Corporate Governance for its publication of company-specific results regarding proxy access proposals that had been voted on in the 2012 proxy season as of June 28, 2012.

Interestingly, shareholder proxy access proposals that have won majority support tend to have ownership requirements that are fairly substantial – for example, that stockholders have held at least 3% of the outstanding stock of the company for at least three years, similar to the requirements of the SEC’s mandatory proxy access Rule 14a-11 that was vacated after legal challenge.

Precatory proposals, which are proposals fashioned as a request to the company’s board, seemed to get more traction than proposals that would, if adopted, function to directly amend a company’s charter documents to effect a  desired change in the company’s director nomination process.

An example of both of the above: a majority of votes cast by shareholders of both Chesapeake Energy and Nabors Industries approved precatory proposals giving shareholders the right to include director nominees in the company’s proxy materials.  In each case the passing proposal contained an ownership requirement that the shareholder have held 3% of the company’s outstanding stock for 3 years.

Although precatory proposals are not binding on companies, companies risk significant pressure from proxy advisory firms and shareholder activists if they do not act to adopt measures substantially as proposed.

Take-aways

  • As always, companies are well advised to maintain good dialogue with significant shareholders, which, among other benefits, will help color a company’s response in the event that a  proxy access proposal is submitted by a shareholder.
  • Consistently maintain good governance standards.  This goes a long way toward earning and maintaining shareholder trust.  Among other benefits, this trust is valuable in the context of a company’s response to a proxy access proposal.

Conclusion

In responding to a shareholder proxy access proposal with which the company disagrees, management can review with its counsel whether the proposal may be properly excluded under SEC rules.  In addition, management may consider the possibility of submitting its own proposal to implement a conflicting proxy access amendment, if management believes a binding shareholder proposal is otherwise non-excludable and has a decent chance of passing as submitted.