H&R Block Inc. (HRB) has informed me, without any attempt to negotiate terms over my submitted proposal, that their board has gone ahead and adopted proxy access bylaws. In their words:
The key provisions included in the Company’s proxy access bylaw provision are substantially consistent with the Proposal. Given that the purpose of the Proposal has been fulfilled, we request that you promptly withdraw the Proposal.
Should I withdrawal my proposal and declare victory? Let’s examine.
H&R Block’s Proxy Access Bylaws
H&R Block filed an 8-K reflecting amendments to their bylaws made on June 17, 2015.
…Pursuant to these amendments, a shareholder, or group of not more than twenty shareholders (collectively, an “eligible shareholder”), meeting specified eligibility requirements, may include director nominees in the Company’s proxy materials for annual meetings of its shareholders. In order to be eligible to use these proxy access provisions, an eligible shareholder must, among other requirements:
- have owned 3% or more of the Company’s outstanding common stock continuously for at least three years;
- represent that such stock was acquired in the ordinary course of business and not with the intent to change or influence control at the Company and that such eligible shareholder does not presently have such intent;
- and provide a notice requesting the inclusion of director nominees in the Company’s proxy materials and provide other required information to the Company not less than 90 days nor more than 120 days prior to the anniversary of the date of the proxy statement for the prior year’s annual meeting of shareholders.
Additionally, all director nominees submitted through these provisions (“shareholder nominees”) must be independent and meet specified additional criteria, and shareholders will not be entitled to utilize this proxy access right at an annual meeting if the Company receives notice through its traditional advance notice bylaw provisions set forth in Section 20 of the Bylaws that a shareholder intends to nominate a director at such meeting. The maximum number of shareholder nominees that may be included in the proxy statement pursuant to these proxy access provisions may not exceed 20% of the number of directors in office as of the last day a notice for nomination may be timely received. In addition, an eligible shareholder may include a written statement, not to exceed 500 words, in support of the candidacy of the shareholder nominees proposed by the eligible shareholder.The foregoing proxy access provisions are subject to additional eligibility, procedural and disclosure requirements set forth in Sections 20 and 21 of the Bylaws, and the foregoing description of the amendments to the Bylaws does not purport to be complete and is qualified in its entirety by reference to the full text of the Bylaws, a copy of which is filed as Exhibit 3.1 hereto and incorporated herein by reference.
Differences Between H&R Block Proxy Access & My Proposal
The most significant differences between their adopted bylaws and my proposal appear to be their nominations limit of 20% of the board, compared to my 25%, and allowing no more than 20 shareholders to combine into a nominating group, compared to my proposal with no such limit.
H&R Block indicated that in drafting their amendments the board sought to “appropriately balance differing views regarding proxy access among our shareholders and to evaluate the implications of proxy access.” They didn’t contact me. Nor did they indicate what shareholders they did contact to hear “differing views” so it is difficult to assess their process.
Other than asserting appropriate balance, the remaining argument in their proposed opposition statement is that they have “strong corporate governance practices,” (they list several) and “a record of accountability.” Since they make no mention of why they ratcheted down proxy access to 20% of the board and 20 shareholder participants I’m not initially inclined to withdraw and don’t see any downside to allowing shareholders to vote on the better terms of my proposal.
Under either my version or theirs, shareholders would be limited to nominating two directors, since both 1.8 and 2.25 round to two. Why the change? It wouldn’t matter… unless they thinking of adding more directors, eh?
Shareholder proposal are limited to 500 words, so many of the terms of implementation are expected to be negotiated, especially those that deviate from the overturned SEC Rule 14a-11. Bylaw amendments face no quantity limitations.
For example, the rule denied access to any shareholder that has a direct or indirect agreement with the company regarding his or her nomination. I don’t see that covered in the amendments H&R Block filed. Perhaps elsewhere? How do the bylaws address timely filings from competing groups nominating more in total than the maximum? Are we to assume H&R Block would use provisions similar to Rule 14a-11, which allocated first to groups holding the largest number of shares? What about how to demonstrate ownership? There are a plethora of such details, included in Rule 14a-11 but lacking in HRB’s bylaws.
The second major difference in their bylaws is the idea of imposing a limit on the number of group participants in making nominations to 20. I don’t understand the need but I do understand it disenfranchises smaller shareholders. Rule 14a-11 was developed over many years of public debate and dialogue, including two prior rulemaking attempts. That process settled on the concept of voting power, not the number of participants in a group. I would rather stick with the wisdom of that process, which involved vetting thousands of comments from issuers and shareholders.
When the SEC proposed Rule 14a-11 they did so with a sliding scale of the percent of ownership required from 1% to 3%. I and many others supported lower thresholds than the 3% finally settled on. In its final release, the SEC stated:
Of course, to the extent that shareholders believe the 3% threshold is too high our amendments to Rule 14a-8 will facilitate their ability to adopt a lower ownership percentage. (Rule 14a-11, page 91)
Unlimited participants forming a 3% group was meant to be a backstop, not a starting place. Although some appear to think 20 participants is enough (and I was willing to make that compromise earlier this year with Citigroup and others), I have my doubts. For example, CalSTRS owns 0.18% of H&R Block. Twenty funds their size would have enough to invoke proxy access. The trouble is that CalSTRS is the second largest public pension fund. There aren’t nineteen other funds that might reasonably be expected to join them in most circumstances. And a limit of twenty certainly cuts out any meaningful role by retail shareholders.
Yes, I understand trying to coordinate a lot of shareholders would be difficult but that’s a problem nominating shareholders would have to deal. I don’t see it causing a problem for the company… other than increasing the likelihood proxy access will be invoked.
Moving Forward at H&R Block
For the reasons stated above, my inclination is to press forward with the proposal as submitted. However, as always, I would welcome comments and suggestions from readers on this issue. Is there anything to be gained by withdrawing the proposal? What am I missing?
A reader alerted me via email to the fact that Rule 14a-11 required rounding down. In more closely examining H&R Block’s bylaw amendments, they appear to do the same. Therefore 20 of the board would be one director, whereas 25% would allow for two. I think that is a deal breaker. One board member nominated by shareholders feels too much like a token member of the board. Since they may not be able to get a ‘second’ on issues they want to raise, their insights and opinions may not get a proper hearing.
Other thoughts from readers?