"Large Number" of Proxy Access Bylaws Predicted: Battle Lines Drawn for American Dream & Ownership Society

According to a recent November 15 newsletter from Latham & Watkins LLP, most companies will adopt a “wait and see” approach for now.  However…

If and when a company receives a shareholder proposal recommending board adoption of a proxy access bylaw, the board may respond (and seek to exclude the proposal from the ballot) by (i) adopting a proxy access bylaw (and claiming the Rule 14a-8 exclusion for substantial implementation) or (ii) proposing a proxy access bylaw for approval by shareholders at the annual meeting (and claiming the Rule 14a-8 exclusion for conflicting proposals).

Other companies will let the shareholder proposal go to a vote and try to beat it at the polls. If shareholders approve the proposal, the company may then consider adoption of a proxy access bylaw, either to head off a withhold vote recommendation for directors by Institutional Shareholder Services (ISS) at a subsequent annual meeting based on the board’s failure to implement a proxy access regime or merely to resolve the matter.

Whatever approach is taken, we believe that over the next several years proxy access bylaws will be adopted at a large number of companies as a result of shareholder pressure under Rule 14a-8. Accordingly, we have prepared a form of proxy access bylaw for such circumstances.

The newsletter then goes on to describe their form of proxy access bylaw as mirroring many of the substantive provisions of the SEC’s failed Proxy Access Rule, including:

  • Adopting the 3 percent and three year continuous net long beneficial ownership requirements
  • Permitting any number of shareholders to combine to meet the 3 percent and three year continuous net long beneficial ownership test
  • Limiting the number of proxy access directors on the board at any one time to 25 percent of the full board
  • Precluding proxy access for shareholders that have a control intent and precluding proxy access sponsors from participating in a simultaneous proxy contest or circulating a different proxy card

We do not believe any of these provisions in our form of proxy access bylaw will prove particularly controversial, with the exception of the 3 percent/three year holding period tests. We think it is likely, if not certain, that many corporate governance proponents of proxy access will take issue with the 3 percent/three year threshold as being too onerous and effectively eviscerating the practical utility of proxy access, particularly at large cap companies. Most likely this group will advocate a 1 percent/one year standard and vote against higher thresholds.

The United States Proxy Exchange (USPX)  Model Proxy Access Proposal, released on November 10, is mentioned in a footnote. The Latham & Watkins newsletter goes on to conclude:

Many public companies, rather than accepting proxy access initiatives contained in shareholder proposals, will proactively adopt a company drafted proxy access bylaw or propose that its shareholders do so in response to or in anticipation of a shareholder proposal. We believe our form of proxy access bylaw sets forth a reasoned approach for private ordering that takes into account, and in some important respects improves upon, the SEC’s thinking on proxy access, as embodied in the invalidated SEC’s Proxy Access Rule and its related adopting release.

Although their model access proposal makes some tweaks to the SEC’s failed Rule 14a-11, it is clear that Latham & Watkins see that standard as more of a floor than a ceiling. The SEC predicted Rule 14a-11 would rarely be used. Yet, Latham & Watkins predict that “over the next several years proxy access bylaws will be adopted at a large number of companies as a result of shareholder pressure under Rule 14a-8.” (my emphasis) If so, why was so much of a fuss made by the Business Roundtable and the US Chamber of Commerce?

It seems to me that if they had simply let Rule 14a-11 take effect, that may have been the standard. Now, it appears companies will use that failed standard, with some modification, in an attempt to forestal access proposals with lower thresholds advocated by shareowners. At this point, it looks like proxy access is coming. The question remains, how long will it take before most shareowners will be able to play at least a minor role in nominating directors. Under the USPX model it could take as little as a year or two. Under the Latham & Watkins model we could see many years of counter proposals as boards fight a rear guard action. That opinion is shared by Lawrence A. Hamermesh who wrote (Random Thoughts on Proxy Access and Judicial Review):

there is every reason to think that proxy access proposals will become as ubiquitous as majority voting initiatives, that the fights over the content of such proposals will be much more heated and vexatious, and that the terms of the proxy access that will result from those fights will be less appealing to incumbent directors than the relatively mild rule that the court struck down.

When I was growing up our leaders in the US had a few big ideas. Enacting civil rights and going to the moon were two that I remember. These ideas captured the imagination and the human spirit. President George W. Bush championed the concept of an “ownership society” when he was running for re-election in 2004. He envisioned a world in which every American family owned a house and a stock portfolio.

Bush pushed the “zero-down-payment initiative,” enabling people to get mortgages without a down payment. And he allowed financial “innovations,” such as derivatives built on other derivatives, packaged and repackaged until no one could identify what they were worth. Obama mocked it, saying, “in Washington they call this the ownership society, but what it really means is, you’re on your own.”

A real ownership society based on hard work, transparency and knowledge could be one of those big ideas, like civil rights or going to the moon. However, the Great Recession sent people running in the other direction. More are now renting; fewer are buying stock. Proxy access at thresholds that encourage meaningful participation by shareowners could be one reform that would help investors begin to think of themselves as owners, rather than stock holders.

Today’s corporate elections have the look of very poor greenwashing. They don’t fool anyone. That’s one of the reasons why the vast majority of retail shareowners throw their proxies away. Vote for Tweedledum. Since no one is running against him, one vote is all it takes to get him elected. If the company has a majority vote requirement and a majority vote against Tweedledum AND the existing board excepts his resignation, Tweedledee gets appointed. That’s far from democracy.

A more democratic model, including proxy access as envisioned by the USPX model, might get investors thinking they actually have a say in running the companies they invest in. One individual voice is a cry in the wilderness (“you’re on your own”) but if they know they can band together with other like-minded investors we might get investors thinking like owners… not only investing their money but investing their brain-power. That kind of ownership society wouldn’t be a joke. In fact, it could be start of rebuilding the American Dream.

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