Securities Mosaic® Blogwatch
February 26, 2015
2015 Benchmark US Proxy Voting Policies FAQ
by Carol Bowie

Editor's Note: Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). The following post relates to ISS' 2015 Benchmark Proxy Voting Policies.

ISS is providing answers to frequently asked questions with regard to select policies and topics of interest for 2015:

Proxy Access Proposals

1. How will ISS recommend on proxy access proposals?

Drawing on the U.S. Securities and Exchange Commission's (SEC) decades-long effort to draft a market-wide rule allowing investors to place director nominees on corporate ballots, and reflecting feedback from a broad range of institutional investors and their portfolio companies, ISS is updating its policy on proxy access to generally align with the SEC's formulation.

Old Recommendation: ISS supports proxy access as an important shareholder right, one that is complementary to other best-practice corporate governance features. However, in the absence of a uniform standard, proposals to enact proxy access may vary widely; as such, ISS is not setting forth specific parameters at this time and will take a case-by-case approach when evaluating these proposals.

Vote case-by-case on proposals to enact proxy access, taking into account, among other factors:

  • Company-specific factors; and
  • Proposal-specific factors, including:
    • The ownership thresholds proposed in the resolution (i.e., percentage and duration);
    • The maximum proportion of directors that shareholders may nominate each year; and
    • The method of determining which nominations should appear on the ballot if multiple shareholders submit nominations.

New Recommendation: ISS will generally recommend in favor of management and shareholder proposals for proxy access with the following provisions:

  • Ownership threshold: maximum requirement not more than three percent (3%) of the voting power;
  • Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group;
  • Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group;
  • Cap: cap on nominees of generally twenty-five percent (25%) of the board.

Review for reasonableness any other restrictions on the right of proxy access.

Generally recommend a vote against proposals that are more restrictive than these guidelines.

Rationale for update: Vested with clear legal authority by the Dodd-Frank Act, the SEC adopted a proxy access rule (Rule 14a-11) in August 2010 that provided a thoughtful balance of a number of factors including the ownership threshold and the holding period duration. The DC Circuit Court vacated the rule in July 2011 based on its findings of procedural deficiencies in the SEC's rulemaking process. ISS' earlier policy, updated for the 2012 proxy season, largely focused on attempts by shareholder proposal proponents to lower the safeguards against abuse (for example, an extremely low ownership threshold) of the access right that the SEC's formulation addressed. As such, the policy sought to maintain the balance that the SEC struck between protecting shareholders' rights and the potential abuse of the access process. Three years of voting results on both management- and shareholder-sponsored proxy access proposals drawing on the Commission's model appear to validate the SEC's formulation. Moreover, a 2014 CFA Institute study provides a cost-benefit analysis, which the court said was lacking in the SEC's rulemaking process, and concludes that "proxy access would serve as a useful tool for shareowners in the United States and would ultimately benefit both the markets and corporate boardrooms, with little cost or disruption to companies and the markets as a whole."

For companies that present both a board and shareholder proxy access proposals on the ballot, ISS will review each of them under the policy.

Exclusion of Shareholder Proposals

2. What are ISS' expectations regarding whether a company includes a shareholder proposal on its ballot?

The ability of qualifying shareholders to include their properly presented proposals in a company's proxy materials is a fundamental right of share ownership, which is deeply rooted in state law and the federal securities statutes. Shareholder proposals promote engagement and debate in an efficient and cost-effective fashion.

Over the course of the past several decades, the SEC has played the role of referee in resolving disputes raised by corporate challenges to the inclusion of shareholder proposals in company proxy materials. While federal courts provide an additional level of review, the vast majority of shareholder proposal challenges have been resolved without the need to resort to costly and cumbersome litigation. While individual proponents and issuers often disagree with the SEC's determinations in these adversarial proceedings, the governance community recognizes the Commission's important role as an impartial arbiter of these disputes.

On Jan 16, 2015, the SEC announced that it was reviewing Rule 14a-8(i)(9), which allows companies to exclude a shareholder proposal that "directly conflicts" with a board-sponsored proposal. Additionally, SEC Chair Mary Jo White indicated that for proxy season 2015, the Commission's Division of Corporation Finance will express no view on the application of Rule 14a-8(i)(9). As a result, companies that intended to seek no-action relief on that basis are now deciding their courses of action.

For companies that present both a board and shareholder proposal on the ballot on a similar topic, ISS will review each of them under the applicable policy.

ISS will view attempts to circumvent the normal avenues of dispute resolution and appeal with a high degree of skepticism. [1] Omitting shareholder proposals without obtaining regulatory or judicial relief risks litigation against the company. Presenting only a management proposal on the ballot also limits governance discourse by preventing shareholders from considering an opposing viewpoint, and only allowing them to consider and opine on the view of management.

Thus, under our governance failures policy, ISS will generally recommend a vote against one or more directors (individual directors, certain committee members, or the entire board based on case-specific facts and circumstances), if a company omits from its ballot a properly submitted shareholder proposal when it has not obtained:

  • 1) voluntary withdrawal of the proposal by the proponent;
  • 2) no-action relief from the SEC; or
  • 3) a U.S. District Court ruling that it can exclude the proposal from its ballot.

The recommendation against directors in this circumstance is regardless of whether there is a board-sponsored proposal on the same topic on the ballot. If the company has taken unilateral steps to implement the proposal, however, the degree to which the proposal is implemented, and any material restrictions added to it, will factor into the assessment.

Unilateral Bylaw/Charter Amendments Policy

3. Does the Unilateral Bylaw/Charter Amendments policy create a new approach for ISS?

No. ISS has a long history of recommending its clients oppose directors who adopt, without obtaining shareholder approval, bylaw or charter amendments that materially diminish shareholder rights. Such unilateral board actions were covered under ISS' Governance Failures policy, but due to a recent increase in their occurrence, as of 2015 ISS separated these actions into a standalone policy to increase transparency to clients and issuers, and to facilitate the application of custom clients' policies.

The Governance Failures policy is designed to recognize one-off egregious actions that are not covered under other policies. If a type of corporate action that disadvantages shareholders becomes commonplace, ISS will often address such problematic practice via a standalone policy. In 2014, the three most common categories of conduct addressed under this policy were:

  • Unilateral bylaw amendments that diminish shareholders' rights;
  • Excessive share pledging, and
  • Failure to opt out of state statutes requiring a classified board (Indiana and Iowa).

4. Which types of unilateral bylaw/charter amendments are likely to be considered by ISS to materially diminish shareholders' rights?

If a unilaterally adopted amendment is deemed materially adverse to shareholder rights, ISS will recommend a vote against the board.

Materially adverse unilateral amendments include, but are not limited to:

  • Authorized capital increases that do not meet ISS' Capital Structure Framework;
  • Board classification to establish staggered director elections;
  • Director qualification bylaws that disqualify shareholders' nominees or directors who could receive third-party compensation;
  • Fee-shifting bylaws that require a suing shareholder to bear all costs of a legal action that is not 100 percent successful;
  • Increasing the vote requirement for shareholders to amend charter/bylaws;
  • Removing a majority vote standard and substituting plurality voting;
  • Removing or restricting the right of shareholders to call a special meeting (raising thresholds, restricting agenda items); and
  • Removing or materially restricting the shareholder's right to act in lieu of a meeting via written consent.

Unilaterally adopted bylaw amendments that are considered on a case-by-case basis, but generally are not considered materially adverse:

  • Advance notice bylaws that set customary and reasonable deadlines;
  • Director qualification bylaws that require disclosure of third-party compensation arrangements;
  • Exclusive Venue/Forum (when the venue is the company's state of incorporation);

In assessing bylaw and charter changes at pre-IPO companies, ISS will consider the timing of the adoption of the provisions that diminish post-IPO shareholders rights, the clarity of disclosures of such changes (including in the company's prospectus or other documents connected to the public offering) and the continuity of board membership.

5. How likely is ISS to support management proposals for fee-shifting bylaws?

As of early February 2015, approximately 50 bylaws allowing fee shifting have been adopted unilaterally, with none put to a shareholder vote. Our Litigation Rights policy states:

Generally vote against bylaws that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., in cases where the plaintiffs are partially successful).

Endnotes:

[1] As precedent, ISS recommended against the board of directors at Kinetic Concepts in 2011 for omitting a shareholder proposal when the SEC had denied the firm's request for no-action relief. ISS changed the vote recommendation when the board implemented the proposal.

February 27, 2015
This Week In Securities Litigation (Week ending February 27, 2015)
by Tom Gorman

Four SEC Commissioners addressed the annual SEC Speaks Conference, reviewing recent agency initiatives and tracing potential paths for the future. The SEC also brought another FCPA action, a misappropriation case and an action centered on a failed audit of a broker-dealer that is now defunct.

SEC

Remarks: SEC Chair White and Commissioners Kara Stein, Michael Piwowar and Daniel Gallagher each addressed the SEC Speaks Conference (here and here).

SEC Enforcement - Filed and Settled Actions

Statistics: During this period the SEC filed 1 civil injunctive action and 3 administrative proceedings, excluding 12j and tag-along-actions.

Illegal distribution: SEC v. Lefkowitz, Civil Action No. 8:12-cv-1210 (M.D. Fla.) is a previously filed action against, among others, Unico, Inc., Mark Lopez, Steven Peacock and Shane Traveller. The complaint alleged that the defendants engaged in the unregistered distribution of billions of shares of penny stocks through the repeated misuse of the exemption from registration contained in Section 3(a)(10) which permits a public company to issue common stock to public investors without a registration statement to settle bona fide debts and other claims. This week the Court entered final judgments against the four defendants prohibiting future violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 13(d). In addition, Unico will pay disgorgement of $9,350,000 along with prejudgment interest for which payment of all but $250,000 is waived along with any penalty based on financial condition; Mr. Lopez agreed to a penny stock bar but no penalty was imposed based on financial condition; Mr. Peacock will pay disgorgement of $609,763 and prejudgment interest, all of which was waived along with any penalty based on financial condition and he will return certain shares of stock; and Mr. Traveller agreed to the entry of a penny stock bar and will pay disgorgement of $169,369 and a civil penalty of $52,000. See Lit. Rel 2206 (February 24, 2015).

Fraudulent scheme: SEC v. Heart Tronics, Inc., Civil Action No. 11-1962 (C.D. Cal.) is a previously filed action against the company, attorney Mitchell Stein and others centered on a fraudulent scheme. This week the Court granted partial summary judgment against Mr. Stein and in favor of the SEC based on his criminal conviction on 14 counts of conspiracy to commit mail fraud and wire fraud, mail fraud, wire fraud, securities fraud, money laundering and conspiracy to obstruct justice. The court found violations of Securities Act Section 17(a) and Exchange Act Sections 10(b) and 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5). It entered permanent injunctions, officer and director and penny stock bars and ordered the payment of a civil penalty of $5,378,581.61, and disgorgement and prejudgment interest of $6,076,415.52. See Lit. Rel. No. 23205 (February 23, 2015).

Improper professional conduct: In the Matter of Halpern & Associates LLC, Adm. Proc. File No. 3-16399 (February 23, 2015) is a proceeding which names as Respondents the audit firm and its owner and president, Barbara Halpern. She also served as the engagement partner for the 2009 audit of Lighthouse Financial Group, LLC, a registered broker-dealer that is now in liquidation. The Order alleges that the financial statements of Lighthouse for the year ended December 31, 2009 were materially inaccurate. Those statements overstated the firm's assets since the value of its securities inventory was erroneous and inflated. In addition, its liabilities were understated because obligations to a broker-dealer through which the firm engaged in proprietary trading was omitted. As a result the firm's net capital was overstated by about 350%. Respondents audit failed to detect these errors and failed to conform to GAAS. The Order alleges violations of Exchange Act Section 17 and Rule 17a-5(a)(iv)(B) as well as various auditing provisions relating to planning the engagement, exercising due professional care, confirmations and professional conduct. The matter will be set for hearing.

Investment fund fraud: SEC v. GLR Capital Management LLC, Civil Action No. 12-cv-2663 (N.D. Cal.) is a previously filed action against John Geringer and the company. It alleged the operation of a Ponzi scheme. Following the entry of a guilty plea by Mr. Geringer in a parallel criminal action the two defendants resolved the case with the SEC. The Court entered, by consent, permanent injunctions based on Securities Act Section 17(a) and Exchange Act Sections 10(b) and 26 along with Advisers Act Sections 206(1), 206(2) and 206(4). The Court also ordered the payment of disgorgement and prejudgment interest, on a joint and several basis, of $2,772,475 which will be satisfied by the restitution and forfeiture order in the parallel criminal case. In a related action Mr. Geringer consented to the entry of a bar from the securities business. See Lit. Rel. 23204 (February 23, 2015).

Misappropriation: SEC v. Premier Power, LLC, Civil Action No. 15-cv-1248 (S.D.N.Y. Filed February 20, 2015) is an action against the company, its Chairman, Jerry Jankovic, and his son, CEO John Jankovic. After raising about $1.95 million for energy related projects for the company, the defendants diverted about $1 million to cover the costs of an unrelated lawsuit against Jerry Jankovic and a business associate, Sandra Dyche. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). It also alleges control person liability as to Jerry Janovic under Exchange Act Section 20(a). The case is pending. See also In the Matter of Sandra Dyche, Adm. Proc. File No. 3-16398 (February 20, 2015)(Ms. Dyche settled the action, consenting to the entry of a cease and desist order based on Securities Act Section 17(a) and Exchange Act Sections 10(b) and 15(a) and agreeing to pay disgorgement and prejudgment interest of $1,164,000 and a civil penalty of $250,000; the settlement also prohibits her from soliciting or accepting funds in any unregistered securities offering for five years in addition to other restrictions). See Lit. Rel. No. 23203 (February 20, 2015).

Criminal cases

Investment fund fraud: U.S. v. Perkins (E.D. N.Y.) is an action in which Frank Perkins, formerly the CFO of Harbor Funding Group, Inc., was sentenced to serve 9 years in prison after pleading guilty to two counts of conspiracy to commit wire fraud and conspiracy to commit securities fraud and wire fraud. The charges were based on two schemes. In one victims of Hurricane Katrina were defrauded out of over $9 million through a claimed loan arrangement which required the investors to put 10% of the loan in a supposedly secure account. The funds were immediately misappropriated. In the second he engaged in a gold mine investment scheme. Investors were told that the firm would mine gold and other precious metals on Sitkinak Island in Alaska. Through various presentations, cold calls and webinars Mr. Perkins and others convinced investors to purchase shares in their firm. Almost $1 million was raised which went to Mr. Perkins and his confederates.

FCPA

In the Matter of Goodyear Tire and Rubber Company, Adm. Proc. File No. 3-16400 (February 24, 2015). The action focuses on the period from 2007 through 2011 and involves the payment of bribes by two subsidiaries, one in Kenya and the other in Angola. In Kenya Goodyear acquired a local business by purchasing a minority stake in 2002 and later taking control. During the period the management regularly authorized and paid bribes to employees of government owned or affiliated entities and private companies to obtain business beginning before the firm was acquired. Overall about $1.5 million in bribes were paid in connection with the sale of tires. Goodyear did not detect or prevent the payments because it failed to conduct adequate due diligence when acquiring the firm.

In Angola the company set up a subsidiary in 2007. Over the same time period the subsidiary paid over $1.6 million in bribes to employees of government owned or affiliated entities and private companies to obtain tire sales. The bribes were paid to a variety of entities. The scheme was instituted by the former general manager of the subsidiary. To conceal the payments the firm falsely marked-up the costs of its tires by adding to the invoice price phony freight and customs clearing costs. The scheme was not detected because Goodyear failed to implement adequate FCPA compliance training and controls over the subsidiary. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). To resolve the proceeding the firm consented to the entry of a cease and desist order based on the Sections cited in the order. It also agreed to pay disgorgement of $14,122,525 along with prejudgment interest. No penalty was imposed in view of Goodyear's cooperation. The firm will, however, report to the Commission for three years and submit a report within one year which includes a complete description of its FCPA and anti-corruption remedial efforts.

Australia

Disclosure/advertising: Equity Trustees Ltd. and Como Financial Services Pty Ltd. were each fined $20,400 in relation to the promotion of the Good Super superannuation fund. The Australian Securities and Investment Commission was concerned that investors would be mislead by solicitations for Good Super and were not being told about fees to exit and withdraw and current insurance entitlements that might be lost.

Suitability: The ASIC banned David Wilkins, formerly of RBS Morgans Ltd., Romad Financial Services Pty Ltd and later MDS Financial Planning Pty Ltd. During the period he solicited clients to participate in his Options Strategy. He represented to clients that trading options carried little or no risk while failing to evaluate their personal circumstances for such trading.

Hong Kong

Internal controls/AML: He Zhi Hau, the former CEO of Ping An of China Securities (Hong Kong) was barred from the securities business for 12 months, reprimanded and fined $6 million. The Securities and Futures Commission concluded that the firm failed to have in place sufficient AML procedures or to provide adequate training to its staff and that there were insufficient procedures in place to protect client funds.

February 27, 2015
Proxy Access: Citigroup Joins GE & Others (Sorta Kinda)
by Broc Romanek

A few weeks ago, I blogged that General Electric and two other companies had adopted proxy access bylaws in the face of shareholder proposals seeking access. Now comes the news from this WSJ article - in this case, Citi will support the adoption of the 3%/3-year formula sought by the shareholder proponent, Jim McRitchie, after he changed his formula as noted in this blog. Here's the draft support language for Citi's proxy statement. So the Citi situation isn't quite like the other companies because the company hasn't adopted proxy access - rather, it has just agreed to support an amended non-binding shareholder proposal.

Meanwhile, a coalition of 17 groups sent this letter to the SEC on Wednesday expressing concern about the SEC's decision to review its (i)(9) views in the midst of the proxy season.

SEC Probing How Companies Treat Whistleblowers

Here's an excerpt from this Reuters article:

The U.S. Securities and Exchange Commission has sent letters to several companies asking for years of nondisclosure agreements, employment contracts and other documents to investigate whether companies are muzzling corporate whistleblowers, the Wall Street Journal reported. The inquiries come as SEC officials have expressed concern about a possible corporate backlash against whistleblowers, the newspaper said. It couldn't be determined how many or which companies were sent the letters or what penalties the SEC could potentially levy in the probe, the Journal said.

Transcript: "Proxy Solicitation Tactics in M&A"

We have posted the transcript for the recent DealLawyers.com webcast: "Proxy Solicitation Tactics in M&A."

I just love how Kevin LaCroix details his trips in his blog - the latest is about Australia! And coming this weekend, the first site redesign for TheCorporateCounsel.net in over 12 years! Email me if you want a preview.

– Broc Romanek

February 27, 2015
Robert Bach, et al v. Amedisys: District Court's Dismissal Reversed and Remanded
by John Kivett

In Bach v. Amedisys Inc., No. 13-30580, 2014 BL 291495 (5th Cir. May 20, 2014), the United States Court of Appeals for the Fifth Circuit reversed and vacated the district court's decision granting the defendant's motion to dismiss and, accordingly, remanded the case for further proceedings.

Amedisys is a home health company and, as provided by federal law, receives Medicare reimbursement only when providing patients with medically necessary services. From 2005 - 2009, Medicare reimbursements accounted for approximately 90% of the company's total reimbursements for services rendered.

The Public Employee's Retirement System of Mississippi and Puerto Rico Teacher's Retirement System (together, "Plaintiffs") filed suit against Amedisys, Inc. ("Amedisys") and seven prior and current board members (collectively, "Defendants") for violating sections 10(b) and 20(a) the Securities Exchange Act of 1934 alleging Defendants defrauded investors by concealing a Medicare fraud scheme.  Plaintiffs alleged that Amedisys engaged in fraud when it (1) pressured employees to perform unnecessary service visits in order to maximize Medicare reimbursements, and (2) released materially false or misleading statements causing Amedisys's stock to be traded at an inflated price. Plaintiffs further alleged that when information regarding potential fraud became publicly available, Amedisys' stock values dropped, causing significant financial loss to shareholders.  The district court dismissed the claim, finding that plaintiffs had not sufficiently alleged loss causation. 

To bring an action under Section 10(b) and Rule 10b-5, plaintiff must allege that the "misrepresentations (or omissions) proximately caused Plaintiff's economic loss." To demonstrate proximate cause, a plaintiff must allege that when a "relevant truth" regarding fraud became public, it caused stock prices to fall, thereby proximately causing the economic harm. The court emphasized the "test for 'relevant truth' simply means the truth disclosed must make the existence of actionable fraud more probable than it would be without that alleged fact, taken as true."

In applying the standard, the court found that plaintiffs had sufficiently alleged the requisite causation. 

  • The Complaint consists of over 200 pages of allegations regarding, among other things, Defendants' fraudulent Medicare billing practices. Where the Complaint sets forth specific allegations of a series of partial corrective disclosures, joined with the subsequent fall in Amedisys stock value, and in the absence of any other contravening negative event, the plaintiffs have complied with Dura's analysis of loss causation. 

In so holding, the court asserted that it was evident "the whole is greater than the sum of its parts."

Accordingly, the United States Court of Appeals for the Fifth Circuit reversed and vacated the district court's decision granting Defendant's motion to dismiss, and remanded the case for further proceedings.

The primary material for this case may be found on the DU Corporate Governance website.

February 26, 2015
Proxy Access Developments: ISS Issues FAQs on Voting Policies and Several Companies Voluntarily Adopt Proxy Access Bylaws
by Staff

by Andrew J. Brady, Jeffrey Lazar Kochian, Gerald Brant & Sophia Ahern Dwosh
Capital Markets, Corporate Governance, Proxies, SEC

On February 20, (ISS) published long-awaited FAQs clarifying its voting policies on proxy access proposals that would allow investors to include director nominees in the company's proxy materials.

Proxy Access

Moving away from its historical case-by-case approach, ISS generally will now recommend in favor of management and shareholder proposals with the following parameters:

  • a maximum ownership threshold of not more than 3 percent;
  • a maximum holding period of not more than three years of continuous ownership for each member of the nominating group
  • "minimal or no limits" on the number of shareholders that can form a nominating group
  • a cap on the number of nominees to "generally" 25 percent of the board.

ISS will review "for reasonableness" any other restrictions on the right of proxy access and generally will recommend a vote against proposals that are more restrictive than the guidelines described above.

Competing Management-Sponsored and Shareholder-Sponsored Proposals

If a company submits a management-sponsored proxy access proposal along with a shareholder-sponsored proxy access proposal, ISS will review each proposal under its new policy.

Exclusion of Shareholder Proposals

ISS views the ability of qualifying shareholders to submit properly presented shareholder proposals for inclusion in the company's proxy materials as a fundamental right of share ownership. Accordingly, ISS will view attempts to circumvent the normal avenues of dispute resolution and appeal relating to shareholder proposals "with a high degree of skepticism."

To this end, under its governance failures policy, ISS generally will recommend a vote against one or more directors (individual directors, certain committee members, or the entire board based on case-specific facts and circumstances), if a company omits from its proxy materials a properly submitted shareholder proposal when it has not obtained:

  • voluntary withdrawal of the proposal by the proponent
  • no-action relief from the Securities and Exchange Commission (SEC);
  • a U.S. District Court ruling that it can exclude the proposal from its ballot.

The negative voting recommendation will be made regardless of whether there is a management-sponsored proposal on the same topic on the ballot. If the company has taken unilateral steps to implement the proposal, however, the degree to which the proposal is implemented, and any material restrictions added to it, will factor into the ISS assessment.

Several Companies Voluntarily Adopt Proxy Access

Recently, four prominent public companies, each of which faced proxy access shareholder proposals, voluntarily amended or announced that they would amend their bylaws to adopt proxy access:

  • General Electric Co.'s (GE) bylaw amendments permit an individual shareholder, or a group of up to 20 shareholders, owning at least 3 percent of outstanding common stock continuously for a minimum of three years, to nominate and include in the company's proxy materials director nominees constituting up to 20 percent of the board.
  • CF Industries' bylaw amendments allow an individual shareholder, or a group of up to 20 shareholders, owning at least 5 percent of outstanding common stock continuously for a minimum of three years, to nominate and include in the company's proxy materials director nominees constituting up to 20 percent of the board.
  • HCP, Inc.'s bylaw amendments allow an individual shareholder, or a group of up to 10 shareholders, owning at least 5 percent of outstanding common stock continuously for a minimum of three years, to nominate and include in the company's proxy materials director nominees constituting up to 20 percent of the board.
  • Citigroup Inc. announced bylaw amendments that would permit an individual shareholder, or a group of up to 20 shareholders, owning at least 3 percent of outstanding common stock continuously for a minimum of three years, to nominate and include in the company's proxy materials director nominees constituting up to 20 percent of the board.

These companies join a very small handful of other public companies that have adopted process access bylaws, including, most prominently, Hewlett-Packard and Verizon.

What It All Means

Currently, 96 shareholder proposals calling for proxy access are pending. Companies that had hoped to exclude a shareholder proposal on the basis of a competing management proposal now have to proceed without the benefit of the Rule 14a-8 process following the announcement from the SEC staff that it would refuse to grant no-action relief during the 2015 proxy season to companies seeking to exclude any shareholder proposal on the basis that the shareholder proposal conflicts with a management proposal on the same topic.

As a consequence of the SEC staff's action, companies facing a proxy access shareholder proposal had been considering a number of different options, such as:

  • including the shareholder proposal in the proxy materials and opposing it through written arguments and shareholder engagement
  • including both the shareholder proposal and the management proposal in the same proxy and advocating for the management proposal
  • including the shareholder proposal and recommending in favor of it
  • excluding the competing shareholder proposal after seeking a declaratory judgment in court.

After GE, CF Industries and HCP, commenters speculated whether other companies currently facing proxy access shareholder proposals would follow suit and proactively amend their bylaws to adopt proxy access on their own terms. Under this scenario, companies would include the shareholder proposal (unless withdrawn) in their proxy materials, but oppose it by highlighting the recently adopted (and more management friendly) proxy access bylaw.

ISS' revised voting guidelines reveal the potential limitations of this approach where the company adopts a more management-friendly proxy access bylaw, since the updated guidelines clearly are aimed at steering all companies toward a universal proxy access standard (3 percent/three years/25 percent) rooted in the now-vacated SEC proxy access rule and currently reflected in the proxy access proposals submitted by the New York City comptroller's office under its multiyear Boardroom Accountability Project. We note, however, that Citi, which announced that it would adopt a proxy access bylaw after ISS posted its revised voting guidelines, determined to adopt a 3 percent/three years/20 percent framework similar to GE instead of the 3 percent/three years/25 percent framework favored by ISS. In this case, Citi appears to be taking advantage of the fact that ISS (i) "generally" favors a 25 percent cap on nominees as compared to insisting on a 25 percent cap, and (ii) chose a principle-based approach on aggregation as compared to a black-and-white standard.

While the ISS revised voting guidelines will be one of many factors that boards will take into account in deciding how to respond to proxy access shareholder proposals, it is unclear whether they will result in a "tipping point" of investor support that pushes a substantial majority of companies facing proxy access shareholder proposals to a 3 percent/three years/25 percent framework. We continue to believe that a company's analyses of the myriad of issues presented by proxy access should be based on its particular facts and circumstances as compared to a one-size-fits-all approach.

2/27/2015 posts

HLS Forum on Corporate Governance and Financial Regulation: 2015 Benchmark US Proxy Voting Policies FAQ
SEC Actions Blog: This Week In Securities Litigation (Week ending February 27, 2015)
CorporateCounsel.net Blog: Proxy Access: Citigroup Joins GE & Others (Sorta Kinda)
Race to the Bottom: Robert Bach, et al v. Amedisys: District Court's Dismissal Reversed and Remanded
AG Deal Diary: Proxy Access Developments: ISS Issues FAQs on Voting Policies and Several Companies Voluntarily Adopt Proxy Access Bylaws

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