Proxy Access at FirstMerit, No Exception



Morrow&CoFirstMerit (FMER) included a management proposal for proxy access in their annual meeting agenda and excluded a shareholder proposal on the same topic from the Firefighter’s Pension System of the City of Kansas City with a higher cap on nominees. See Proposal #4 Proxy Access. What was even more startling in the ‘news’ from an April 3rd Morrow & Co. advisory was that “ISS did not make reference to the shareholder proposal that was omitted from the proxy,” recommended in favor of the proposal and was not recommending a withhold on any directors.

The advisory speculated that ISS might have considered the FirstMerit management proposal “substantial implementation.” That could have been a major blow to proxy access proponents, since issuers might be less inclined to negotiate significant issues with proponents. I am happy to report Morrow was simply uninformed of an agreement that had been reached with the Firefighters. See FirstMeritWithdrawal.

The FirstMerit proposal has a 3% / 3-year holding requirement, limits proxy access nominees to 20% of the Board, and has a 20-person limit on the nominating group. The original proposal, from the Firefighter’s Pension System of the City of Kansas City, had a higher 25% cap on proxy access nominees and had no limit on the number of shareholders in the nominating group.

On February 19, 2015, proxy advisory firm Institutional Shareholder Services (ISS) issued updated guidance proxy access indicating they will generally recommend in favor of management and shareholder proxy access proposals with a 3% / 3-year holding period and a cap on nominees of 25% of the board.

In light of the SEC’s new policy of not responding to no-action requests under Rule 14a-8(i)(9) this year as a result of my appeal of the Whole Foods no-action letter, ISS indicated that it would generally recommend a vote “against” one or more directors if a company omits a properly submitted shareholder proposal from its ballot without first obtaining voluntary withdrawal of the proposal by the proponent; no-action relief from the SEC; or a U.S. District Court ruling allowing exclusion of the proposal from the ballot.

Similarly, if Glass Lewis believes management’s proxy access proposal is materially different from a competing shareholder proposal without good reason, Glass Lewis may also recommend a vote against the election of some directors.

As reported by Morrow:

The ISS policy on this states that if a company omits from its ballot a properly submitted shareholder proposal for which it obtained voluntary withdrawal of the proposal by the proponent, ISS would not apply its governance failure policy and recommend withhold on directors. We do not have any knowledge that the shareholder proposal was voluntarily withdrawn. (my emphasis)

The ISS and Glass Lewis policies put pressure on issuers to negotiate. If the report from Morrow had been correct, such negotiations would be less likely, since it might have forced cases into court for resolution and that can be expensive.

Again, referencing Morrrow’s advisory:

The FirstMerit situation is interesting because it shows that, for the proxy advisory firms at least, a management proposal with a lower cap on directors (20%) and a lower cap on the number of nominating shareholders (20 rather than unlimited) is acceptable. We will watch closely to see the outcome of the vote on the proposal to see the level of shareholders support. We think the lower cap on the number of nominating shareholders is a strategic advantage over an unlimited number. In these days of social media, unlimited is a much more powerful threat than 20 shareholders. 

I also see the differences in threshold and cap on the number of nominating shareholders as significant. However, the thresholds negotiated by the Firefighters are similar to what I negotiated at Citigroup and offered to Whole Foods. Most of the proxy access proposals filed this year have been at large-caps, although FirstMerit is a mid-cap. The likelihood of hundreds or even dozens of small shareholders banding together through social media to implement proxy access at large companies is slim. I see it more likely at small- and micro-caps.

As I have mentioned elsewhere, I consider proxy access to be ‘on sale’ this year as proponents gather wind behind our sails. Next year and even in the mini-season, I will be less likely to settle, since a clear track record will have been established. In conclusion: I was delighted to learn the Morrow advisory was mistaken and that prospects for continued progress on proxy access remain very positive.

Thanks to Broc Romanek and‘s Proxy Season Blog for bringing the Morrow advisory to my attention and to Greg A. Kinczewski of The Marco Consulting Group for confirming my suspicions that a deal had been made.

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