Proxy Access Definition
This year was a break-through year for shareholder proposals seeking to implement proxy access, a mechanism allowing shareholders to nominate directors and have those nominees listed in the company’s proxy statement and on the company’s proxy card. It is estimated that over 100 proxy access proposals were submitted to public companies during the 2015 proxy season, 75 of which were submitted by New York City Comptroller Scott Stringer on behalf of the New York City pension funds he oversees. Stringer’s “2015 Boardroom Accountability Project” affected companies in diverse industries and with a range of market capitalizations, but explicitly targeted companies with purportedly weak track records on board diversity, climate change or say-on-pay. The Comptroller’s proposals, which were precatory and identical regardless of the company’s market capitalization, generally called for the right of shareholders owning three percent of the company’s outstanding shares for at least three years to nominate up to 25% of the board in the company’s proxy materials.
As of July 26, 2015, 81 proxy access shareholder proposals have been submitted to a vote at Russell 3000 companies, compared to 17 proposals in 2014 and 13 proposals in 2013. Of the 81 proposals that have been voted on thus far this year, 48 proposals (or 59.3%) passed, and 33 proposals (or 40.7%) failed. So far this year, shareholder proposals submitted to a vote at Russell 3000 companies received average shareholder support of 54.7%. While this appears to depart from the average support of 30.9% garnered by proxy access shareholder proposals in 2014, it is in line with the 53.4% average support received last year for proposals with 3% / three-year thresholds.
Historical Background and Proxy Access Proposal Trends Through 2014
In 2010, after the Dodd-Frank Act clarified the authority of the Securities and Exchange Commission (“SEC”) to issue a proxy access rule, the SEC adopted Rule 14a-11 under the Securities Exchange Act of 1934, as amended, which required publicly-traded companies to include shareholders’ director nominees in their proxy materials, representing up to 25% of the board. Under Rule 14a-11, a shareholder (or group of shareholders) was eligible to nominate proxy access candidates provided that the shareholder:
- held at least 3% of the voting power of the company’s securities for a minimum of three years; and
- was not prohibited by state or foreign law or a company’s governing documents from proposing a candidate.
Rule 14a-11, however, was challenged in the U.S. Court of Appeals for the D.C. Circuit by the Business Roundtable and the U.S. Chamber of Commerce. The court ultimately agreed with the plaintiffs that the SEC was “arbitrary and capricious” in promulgating the rule, finding that the SEC failed to adequately address the economic effects of the rule. The court thus vacated Rule 14a-11. The decision, however, left intact the SEC’s amendments to Rule 14a-8, which generally permitted shareholders to submit shareholder proposals seeking to amend the company’s governing documents regarding nomination procedures. This effectively allowed for the “private ordering” of proxy access through the shareholder proposal process.
Despite the court’s 2011 decision, a limited number of proxy access shareholder proposals were submitted to public companies prior to the current proxy season. A total of 12, 13 and 17 proxy access shareholder proposals were submitted in 2012, 2013 and 2014, respectively. In 2014, for example, five of the 17 proposals submitted to public companies passed. While last year’s proxy access shareholder proposals garnered an average of 30.9% of the vote, support levels for these proposals varied significantly depending upon the specific proposal being advanced. Proposals mirroring the 3% / three-year thresholds of the SEC’s vacated rule received significantly higher shareholder approval rates than proposals with lower thresholds or those that provided the potential for shareholders to nominate up to 40% of the board or to circumvent the three-year holding requirement.