The new proxy access rules will allow shareholders to use a company’s proxy materials to propose proxy access bylaws and other election or nomination procedures. At this point, it is unclear how many shareholder proposals there will be on this subject, whether they will be structured as precatory requests for board action or as binding bylaw amendments, what kind of support they will receive, or how companies will respond to developments in this area.
So, what’s a precatory proposal?
Precatory proposals ask the board to take such action as may be necessary to allow proxy access, such as amending the bylaws. Individual activist stockholders may favor this approach because the language of the proposal can be standardized and submitted to multiple companies.
And how would a binding proposal work?
A binding proposal would directly amend the company’s bylaws, and would need to be customized to those bylaws. That in itself would be a big challenge. In addition, stockholders wanting to offer customized, binding proposals face a procedural limit: the 500-word count. Under this rule, proponents only have 500 words for both their proposals and their supporting statements. Some experts are concerned that bylaw amending proposals would use too many words, leaving too few words to make a case to vote for the proposal.
What are your options?
Edward Smith, a partner with Chadbourne & Parke, suggests some options companies can take if faced with a proxy access proposal:
- Exclude the proposal on one of the eligibility grounds.
- Attempt to negotiate with the proponent about the proposal. Perhaps the proponent would withdraw the proposal if the company granted some other corporate governance change.
- Include the proposal in the company’s proxy statement, recommend against it, and hope stockholders do not adopt it.
- Negotiate changes to make the proposal acceptable, include the amended proposal in the proxy statement and recommend its adoption.
- Include the company’s own proxy access proposal and seek to exclude the stockholder’s as conflicting with it. The risk with this option is that the company must obtain an SEC no-action letter to exclude the proposal, and before agreeing, the SEC will review both proposals to see how real the conflict is.
- Unilaterally amend the company’s bylaws to include proxy access and then seek to exclude the stockholder proposal on the grounds that the company has already implemented the proposal. Again, the risk is the same as in the previous point.
Don’t expect many proxy access proposals to be withdrawn
Francis Byrd, senior vice president and corporate governance risk practice leader at Laurel Hill Advisory Group, says that since investors are anxious to see what the law will allow, companies should not expect many proxy access proposals to be withdrawn. He believes early filers are more likely to force a vote than negotiate a solution because they are passionate about the issue and want to see proxy access established as an undisputed right of investors.
What do you think the new proxy access rules will bring?