Private Ordering for Proxy Access

A couple of pieces were posted this morning about the status of proxy access after the demise of Rule 14a-11. The Wall Street Journal reports that H-P has negotiated with a shareholder proponent, LongView Fund, which owns around 400,000 shares of H-P, to include a proxy access proposal in 2013, provided the shareholder withdrew its proxy access proposal for the current proxy season.  According to the WSJ, the 2013 binding proposal would allow shareholders who have owned at least 3% of H-P shares for at least three years to nominate up to 20% of the company's directors. Apparently, only four H-P shareholders own 3%, but the article does not address whether the proposal would apply to groups of shareholders formed to meet the threshold.

Compliance Week reports that two other companies, Western Union and KSW Inc., have advanced management-supported proxy access proposals.  The author observes that both cases appear to be "defensive measures intended to block what the companies view as more onerous proposals from investment groups that would make many more shareholders eligible to directly nominate candidates for board seats." Both companies selected a 5% ownership threshold, but each selected different requirements for duration of ownership. Western Union's proposal, which will be presented for a vote this spring, will require that the 5% stake have been held for at least three years, while KSW adopted a bylaw that requires only one year of 5% stock ownership. Western Union was presented with a shareholder proposal for a binding resolution that would set the threshold at only 1% and has requested that the SEC permit exclusion. KSW faced a shareholder proposal that set the ownership threshold at 2%.

The article reports that, as of early February, 18 proposals for proxy access had been submitted in time for the 2012 proxy season, according to ISS Governance: " ‘We're in private ordering land now. I think we'll be there for the extended future,' says Patrick McGurn, executive director at Institutional Shareholder Services." McGurn divides the proposals into three categories: A group of proposals filed by public pension and labor funds, mostly patterned after the vacated Rule 14a-11 using a 3%/3-year threshold and a 25% cap on the number of board nominees that shareholders can propose. These proponents seek to present their proposals as "reasonable" and target companies with lingering problems, such as H-P ("which is on its fourth CEO in six years") or companies with high negative "say-on-pay" votes. Another group consists of proposals were submitted to more than six companies (including Western Union) by one entity, Norges Bank Investment Management. This proposal uses a 1%/1-year threshold and a 25% cap. Commentators quoted in the article expected this group of proposals to have credibility with institutional investors, because NBIM is an institutional investor. McGurn characterizes the last group, individual investors, as a "wild card." These proposals tend to follow a template developed by the non-profit U.S. Proxy Exchange and use a threshold of 1%/2 years, or any group of shareholders, at least 100 of whom satisfy SEC Rule 14a-8(b) eligibility requirements ($2000 in market value or 1% of the voting securities, held for at least one year).

So far, few companies have adopted proxy access amendments and, the article observes, organizations like the Council of Institutional Investors do not appear to be vigorously promoting proxy access at this point. Rather, the approach is "wait and see." If the proposals submitted this season do well, there may be an onslaught of proposals next season. Likely targets are companies that have experienced a significant loss in value, score low on board independence measures, lose "say-on-pay" votes or are viewed to have poor corporate governance practices.

The article suggests that companies may want to review their minimum requirements for qualification as a board nominee or consider moving to majority voting. (In plurality voting, an uncontested nominee could be elected with just one affirmative vote.) Of course, these requirements would have to apply to other board nominees as well.

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