Fair Treatment of Shareholder Nominees Progress & Holdouts

Fair Treatment of Shareholder Nominees: Progress & Holdouts

As indicated previously (ABT: Fair Treatment of Shareholder Nominees), James McRitchie filed several proposals this season to ensure that universal proxies do not go the same route as proxy access, which became worthless when most companies limited groups of nominating shareholders to 20. Together with The Shareholder Commons, we are trying to prevent universal proxy rules from being used as an excuse for erecting barriers to shareholder nominees.

Diversified investors have an interest in ensuring our companies do not profit from practices that threaten social and environmental systems upon which diversified portfolios depend. Company directors influenced by executives, in contrast, may prioritize Company profitability over systems that are of critical importance to shareholders.

I am happy to report we have reached agreements with most of the companies where we filed.

Fair Treatment of Shareholder Nominees: No-Action Objections

Three companies filed “no-action” requests with the SEC. If granted, the SEC will take no action against a company for excluding the shareholder proposal. I rebutted all three requests. Two proposals were withdrawn after reaching agreements to implement the Proposal. (3M Company and Abbott Laboratories) As I write, the no-action request from West Pharmaceutical Services is still pending.

All three companies argued the proposals could be omitted because each company’s existing policies and procedures substantially implement the essential purpose of the Proposal. I countered that investors had been given no insight into how boards would exercise their discretion to treat shareholder nominees equitably. It is worth noting a few concerns contained in my rebuttals.

No Discretion

One common company argument is that a shareholder must meet procedural requirements, leaving little discretion to the board. However, company corporate governance guidelines sometimes applied to board and shareholder nominees, contained subjective considerations. At their discretion, boards could determine that shareholder nominees would have a negative “impact on Board dynamics” or lack “relevant knowledge.”

Additionally, some bylaws gave boards “sole discretion” to determine “eligibility” in very short timeframes. It is hard to see how SEC Staff could agree that boards have no discretion when their bylaws give boards “sole discretion” over subjective decisions. Shareholders would have to go to court if they disagreed.


Bylaws included provisions such as requiring delivery of “information as may reasonably be required” to determine the “eligibility or suitability” of proposed nominees. Proposed nominees must meet “any publicly disclosed standards used by the Board in selecting nominees.” (my emphasis) Many company guidelines are public and contain broad, subjective suitability criteria.

Other bylaws required proposed nominees to “submit to interviews with the Board or any committee thereof.” Why would this be reasonably necessary unless the nominee seeks the board’s endorsement?

While assessing discretionary factors may be entirely reasonable by nominating committees before extending an invitation to serve, such judgments must be left to shareholders regarding their nominees. In Delaware and many other states of incorporation, qualification or eligibility standards must be prescribed in the charter or bylaws. More subjective suitability standards are typically found in policy documents, not bylaws.

Fair Treatment of Shareholder Nominees: Learning

When I filed my shareholder proposals, I mainly reacted to Bloomberg’s Matt Levine, who speculates bylaws might eventually require disclosure submissions “on paper woven from unicorns’ manes.” I wanted a proposal that could reasonably be filed at any company without researching existing bylaws.

Since I had little experience in advance notice bylaws, I thought the main issue was “treating shareholder and Board nominees equitably.” That is not true; I learned that the main underlying problem is conflating suitability with eligibility, although some companies have adopted more obviously problematic bylaws, such as “acting in concert” provisions that cannot be complied with since they encompass people that cannot be known to the proposing person.

Fortunately, I also asked that companies not “encumber the nomination process” with “excessive or inappropriate” candidate disclosure requirements. That should also be a fundamental tenet going forward.

Fair Treatment of Shareholder Nominees: Agreements

As indicated at the top of this post, I reached agreements with most companies where I filed Fair Treatment of Shareholder Nominees proposals.

Withdrawal agreements have evolved into something like the following:

For the purposes of SEC Rule 14a-19 (Universal Proxy), the Board’s role in terms of including a shareholder nominee on the proxy card is to ensure the shareholder nominee is qualified, based on requirements specified in the charter or bylaws. It is not to ensure their suitability to serve on the Board.

Companies have agreed to add such language to their corporate governance policy and reference that addition in an SEC-filed document, such as a 10-K or proxy.

Fair Treatment of Shareholder Nominees: Opposition

The bottom line opposition we have seen so far is tepid from companies that didn’t file no-actions. Here’s one example:

Thank you for your email regarding the shareholder proposal submitted to XYZ requesting a new policy for evaluating shareholder nominees.  While XYZ  does not disagree with the language that you and some companies have agreed to as a basis for withdrawing your proposal, we do not view it necessary to amend the Company’s corporate governance guidelines to discuss how the advance notice bylaws operate or to try to paraphrase the Board’s responsibilities under Delaware law.

I read that as we are not asking for anything new. Company bylaws in the context of Delaware law already say that. Maybe so, and I recognize that a board policy cannot override bylaws, but I find companies willing to add the above language more reassuring. Not many people will read through company bylaws or have a full understanding of Delaware law. Adding the language to governance policies and referencing it in an SEC-filed document reassures shareholders their universal proxy candidates have a better chance of getting on the proxy card than at companies that don’t make such a statement of intent.

XYZ company will spend far more writing and publishing its opposition statement in the proxy than it would have cost to simply include the clarifying statement on the Board’s role in applying the Universal Proxy rules. See an analysis of costs in this comment letter to the SEC by Sanford Lewis of The Shareholder Rights Group.

Fair Treatment of Shareholder Nominees: Going Forward

In the future, I will file a much simpler form of the Fair Treatment of Shareholder Nominees proposal, focused on the issue of eligibility vs suitability. This will keep this critical issue in front of boards, investors, and advisors while allowing me to file with a minimum of research at companies that have not clarified that distinction.

However, I have also engaged Abbott Cooper PLLC to investigate possible board misconduct concerning bylaw provisions at our portfolio companies. When necessary, Mr. Cooper will investigate anti-democratic provisions and take legal action to ensure bylaws that “unduly restrict the stockholder franchise” are removed or struck down. Yes, we will be improving accountability through more democratic corporate governance using shareholder proposals AND possible litigation. Stay tuned.

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One Response to Fair Treatment of Shareholder Nominees: Progress & Holdouts

  1. James McRitchie 02/26/2024 at 11:07 am #

    Mr. Larrieu and the Oregon State Treasury (OST) serve the market, boards, and all shareholders well by trying to establish guardrails in this area. I am attempting to follow their leadership after filing 13 proposals on this topic.

    We are all learning as we go and are trying to find the least burdensome path for companies. Yes, a board policy cannot trump an advance notice bylaw.

    However, if a company enacts a policy that says the board’s role is to determine the eligibility of shareholder nominees, according to rules established in their charter and bylaws, NOT the suitability of nominees, hopefully, boards will then reexamine their bylaws to ensure they follow that dictum.

    If this route doesn’t work, perhaps shareholder proposals to amend bylaws will do the trick. I know litigation and even the threat of litigation also works, but most shareholders would rather work on guardrails in a more amicable manner.

    I have been able to work out agreements at most companies where I have filed these proposals. I assume that has also been the experience of the OST. https://corpgov.law.harvard.edu/2024/02/26/oregon-state-treasury-nomination-neutrality

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