In response to proxy access proposals filed this year, both Whole Foods Market (WFM) and H&R Block (HRB) have adopted proxy access. While I had filed standard proposals seeking the ability of shareholders with 3% of shares held for 3 years to be able to nominate up to 25% of the board, both companies adopted bylaws allowing nominations only up to 20% and limiting nominating groups to 20, whereas my proposals had no such restrictions on the number of participants in nominating groups.
Proxy Access Lite
I am very pleased with these victories for shareowners that will increase board accountability. They would not have been possible without continuing pressure on the SEC and corporations around the proper interpretation of complex issues of SEC rules from the Council of Institutional Investors, CalSTRS, CalPERS, City of New York Comptroller, Domini Social Investments, Adrian Dominican Sisters, US SIF Foundation, Office of the State Comptroller (NY) and others.
Of course, organizations are important structures for bringing people together but it is people who initiate action. I’d like to call out just a few of the people who have been working diligently on these issues: Anne Sheehan of CalSTRS, Anne Simpson of CalPERS, Michael Garland of the Office of the Comptroller, City of New York, J. Robert Brown, Jr. of the University of Denver, Adam Kanzer of Domini Social Investments, Lura Mack of Adrian Dominican Sisters, Bruce Herbert of Newground Social Investment, Julie Goodridge of NorthStar Asset Management, Timothy Smith of Walden Asset Management, Lisa Woll of US SIF, Shelley Alpern and Jonas Kron of Trillium Asset Management, Emily Stone of Green Century Capital Management, Bruce Freed of the Center for Political Accountability, as well as legal advisors Paul Neuhauser, Cornish Hitchcock, Beth Young, and Sanford Lewis.
I discuss how you can add your voice to this throng at Take Action: Defend Your Vote – SEC’s Rule 14a-8(i)(9) Review.
However, proxy access lite won’t provide the same robust accountability as the requested measures. For example, allowing shareholder’s to nominate up to 20% of the board sounds better than it really is because both companies used Rule 14a-11’s provision of rounding down to the nearest whole number. Since H&R Block has 9 board members, 20% rounds down to 1. I withdrew my proposal contingent on H&R Block adding another director to their board, yielding 2 seats available for shareholder nominations.
The provision limiting proposing groups to 20 is also problematic. For example, while there are a few large funds like Vanguard that own more than 3% of Whole Foods, as far as I know Vanguard has never filed a proxy proposal, let alone nominated a director. While commercial funds like Vanguard may vote for proxy access candidates, they aren’t likely to nominate them. (As you can imagine, it might be hard to sell 401(k) services to a company where you are taking action to replace directors.)
The role of nominating candidates under proxy access seems most likely to fall to public pension funds. The largest block of stock held by a public pension fund is 0.27% of shares by New York Common Retirement Fund. Combining the six largest holdings of public pension funds gets us to less than 1.2% of Whole Foods. After that, public fund holdings drop off precipitously. Therefore, under proxy access lite, shareholder nominations are highly unlikely, because the limitation of 20 participants will make nominations extremely difficult.
Yet, Whole Foods has moved considerably beyond their sheer fantasy proposal in December of 9% held for 5 years by one shareholder. In yesterday’s post, I mentioned SEC Chair White’s recent remarks:
What if management’s proposal could be viewed as a proposal that, if adopted, may purport to provide shareholders with the ability to do something, such as call a special meeting or include a nominee for director in a company’s proxy materials, but that, in fact, no shareholder would be able to meet the criteria to do so?…
In impartially administering the rule, we must always consider whether our response would produce an unintended or unfair result. Gamesmanship has no place in the process. (my emphasis)
Proxy Access Lite: Negotiating Withdrawal at Whole Foods
In the interest of transparency, I asked the following questions and got the following answers:
Q: What actually constitutes a member of a nominating group? For example, is BlackRock one member or do each of its mutual funds, which control their investments, count as separate members of a group limited to twenty in number? I see that “Two or more funds that are part of the same family of funds under common management and investment control (a “Qualifying Fund Family”) shall be treated as one shareholder for the purpose of determining the aggregate number of shareholders in this Article II, Section 15(e).” A citation in the bylaws that explains how this is determined would be helpful.
A: In your example, article ii – section 15(e) would treat the BlackRock funds as one shareholder for counting towards the group/aggregation cap.
Proxy Access Lite: Negotiating Withdrawal at H&R Block
In the interest of transparency, I asked the following questions and got the following answers:
Q: According to the company proposal and the shareholder proposal, it appears that shareholders would be limited to nominating two directors, since both 1.8 and 2.25 round to two. But is this correct? It appears HRB’s bylaws may round down to the nearest whole number. Please cite text in the bylaws that clarify this.
A: Section 21(c) of the Company’s Amended and Restated Bylaws (the “Bylaws”) provides, in part, as follows (emphasis added):
The maximum number of Shareholder Nominees (including Shareholder Nominees that were submitted by an Eligible Shareholder for inclusion in the corporation’s proxy materials pursuant to this section 21 but either are subsequently withdrawn or that the board of directors decides to nominate as Board Nominees) appearing in the corporation’s proxy materials with respect to a meeting of shareholders shall not exceed 20 percent of the number of directors in office as of the last day on which notice of a nomination may be delivered pursuant to section 20 (the “Final Proxy Access Nomination Date”), or if such amount is not a whole number, the closest whole number below 20 percent (the “Permitted Number”); provided, however, that the Permitted Number shall be reduced, but not below zero, by the number of such director candidates for which the corporation shall have received one or more valid notices that a shareholder (other than an Eligible Shareholder) intends to nominate director candidates pursuant to section 20; provided, further, that in the event that one or more vacancies for any reason occurs on the board of directors at any time after the Final Proxy Access Nomination Date and before the date of the applicable annual meeting of shareholders and the board of directors resolves to reduce the size of the board of directors in connection therewith, the Permitted Number shall be calculated based on the number of directors in office as so reduced.
As set forth above, Section 21(c) provides that the maximum number of Shareholder Nominees appearing in the Company’s proxy materials shall not exceed 20 percent of the number of directors in office as of the Final Proxy Access Nomination Date, or if such amount is not a whole number, the closest whole number below 20 percent (referred to in the Bylaws as the “Permitted Number”). By comparison, Rule 14a-11 (the SEC’s now-vacated rule that you cited in your email) would have provided similar mechanics for rounding the number down to the closest whole number.
While the Company’s Board is currently comprised of nine directors, please note that the Company’s Board has historically been comprised of ten directors (from 2006 until the Company’s 2014 annual meeting), and the Company intends to restore the size of its Board to ten directors in connection with the 2015 annual meeting. In fact, the Company would be willing to accept your withdrawal of the Proposal even if it is conditioned on there being a total of ten directors nominated for election at the 2015 annual meeting. With ten directors, the Permitted Number would be two under Section 21(c), the same result as under the Proposal, which we believe eliminates the concern you noted in your email.
Q: Also what actually constitutes a member of a nominating group? For example, is BlackRock one member or do each of its mutual funds count as separate members? Again, a citation to bylaw text would help to clarify this.
A: Section 21 of the Bylaws, like Rule 14a-11, doesn’t define the conduct or circumstances under which Eligible Shareholders will be deemed to be acting as a group. Presumably, the Company would rely, in part, on the Eligible Shareholders’ certifications in their Schedule 14N and notices and statements delivered pursuant to Section 21(d) of the Bylaws (each of which require disclosure as to whether the Eligible Shareholders are acting as a group), as supplemented by existing SEC rules, interpretations and case law (i.e., whether such Eligible Shareholders are acting pursuant to any agreement to act together under Rule 13d-5(b)). With respect to the specific question regarding funds like BlackRock, note that Section 21(d) provides, in part, that, “a group of funds under common management and investment control shall be treated as one shareholder or person” for purposes of determining whether Eligible Shareholders own the required shares to be eligible to include Shareholder Nominees in the Company’s proxy materials pursuant to Section 21.
Q: Rule 14a-11 denied access to any shareholder who has a direct or indirect agreement with the company regarding his or her nomination. Is that covered in the amendments H&R Block filed? If so where?
A: The Company’s Bylaws do not contain any prohibitions on direct or indirect agreements with the Company regarding the nominations of Shareholder Nominees. Although Rule 14a-11 included a general prohibition on such agreements, the Company’s Bylaws do not take such an approach. The Company’s Bylaws do require certain representations and agreements from Shareholder Nominees. For example, Section 20(c)(i) requires the following:
(11) a written representation and agreement (in the form provided by the secretary upon written request) that the Shareholder Nominee (a) is not and will not become a party to (i) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how the Shareholder Nominee, if elected as a director of the corporation, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the corporation or (ii) any Voting Commitment that could limit or interfere with the Shareholder Nominee’s ability to comply, if elected as a director of the corporation, with the Shareholder Nominee’s fiduciary duties under applicable law, (b) is not and will not become a party to any agreement, arrangement or reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein, including, without limitation, any right or expectation of receiving any compensation to be paid to the Shareholder Nominee by anyone other than the corporation in connection with or arising out of the Shareholder Nominee’s service as a director or willingness to serve as a director, and (c) in the Shareholder Nominee’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a director of the corporation, and will comply with all the corporation’s corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines, and any other corporation policies and guidelines applicable to directors, as well as any applicable law, rule or regulation or listing requirement[.]
Accordingly, unlike Rule 14a-11, a settlement between the Company and an Eligible Shareholder regarding a Shareholder Nominee would not limit that Eligible Shareholder’s ability to submit Shareholder Nominees for that shareholder meeting or future meetings.
Q: How do the bylaws address timely filings from competing groups nominating more in total than the maximum? Can you cite bylaw text to clarify this?
A: Section 21(c) of the Bylaws provides, in part, as follows:
In the event that the number of Shareholder Nominees submitted by Eligible Shareholders pursuant to this section 21 exceeds the Permitted Number, promptly upon notice from the corporation, each Eligible Shareholder shall select one Shareholder Nominee for inclusion in the corporation’s proxy materials until the Permitted Number is reached, going in the order of the amount (largest to smallest) of shares of the corporation’s capital stock each Eligible Shareholder disclosed as owned in the written notice of the nomination submitted to the corporation. If the Permitted Number is not reached after each Eligible Shareholder has selected one Shareholder Nominee, this selection process shall continue as many times as necessary, following the same order each time, until the Permitted Number is reached.
As set forth above, Section 21(c) provides that the Company will be required to include in its proxy materials the Shareholder Nominees of the Eligible Shareholders with the highest qualifying voting power percentage up to the Permitted Number. This approach is consistent with that of Rule 14a-11.
Proxy Access Lite: Going Forward
I am concerned that many companies will adopt proxy access lite. However, progress does not have to end with watered-down versions of proxy access. I am thinking about circling back and either filing precatory or binding bylaw resolutions in the future to try to bring these and other companies up to the 25% of board level, to eliminate the limitation on group participants, and to address other possible issues to be discovered upon closer examination of adopted bylaws. As always, I would appreciate the wise counsel of readers. Without you, the road would be cut from under our feet and our impact would certainly be minimal.