Some companies are writing bylaws that would require a shareholder plaintiff to pay a company’s legal fees if the plaintiff’s action is unsuccessful against a company. There is an effort by institutional investors, Delaware attorneys, academics, and at least one US senator to prevent such provisions from being adopted.
Known as a “fee-shifting bylaw,” more than two dozen Delaware-based companies began working on such a provision after a Delaware Supreme Court decision in May. In the Deutscher Tennis Bund and Qatar Tennis Federation versus ATP Tour Inc. lawsuit, the Delaware court upheld ATP’s fee-shifting bylaw after ATP successfully defended its case. The state of Oklahoma has enacted a law that mandates such a bylaw.
Since the Delaware court decision, there have been several campaigns to stop the adoption of such a bylaw by more companies. The Corporation Law Section of the Delaware State Bar Association drafted proposed legislation to make such bylaws illegal. That legislation is being considered by the Delaware legislature, but can’t be voted on until January 2015 when the legislature is back in session.
Another effort is being spearheaded by US Sen. Richard Blumenthal (D-Conn.), who has asked the SEC to take action. In a letter to the regulator, Blumenthal asks that the SEC can label such provisions as “major risk factors” requiring corporations to “publicly disclose them before any initial public offering” and should clarify that these provisions are “inconsistent with federal law.”
Meanwhile, at its October 9 meeting, the SEC’s Investor Advisory Committee listened to testimony from professors on fee-shifting bylaws. Columbia Professor John Coffee, who pushed for federal action, stated: “If Delaware does act to restrain fee-shifting through bylaws, the potential for a ‘race to the bottom’ arises. Other states of a more conservative bent (consider, for example, Texas) might accept or even endorse fee-shifting bylaws. At this point, some corporate lawyers will predictably advise their clients to reincorporate in Texas, and many IPO issuers might prefer to incorporate in Texas initially.”
The Council of Institutional Investors (CII) recently began a campaign asking investors to lobby Delaware legislators to approve the legislation to stop fee-shifting bylaws. It also plans to ask proxy advisors Institutional Shareholder Services and Glass-Lewis to adopt policies to vote against directors whose boards adopt such bylaws.
For more information on fee-shifting bylaws, read BoardroomDirect June 2014 (Issues in brief).
ISS recently released its 2015 proxy season voting guidelines, which includes changes to its voting policies on independent chair and equity plan shareholder proposals. Meanwhile, Glass Lewis issued its final guidelines that recommend that shareholders vote against the chair of the governance committee and sometimes the whole committee if the board adopts bylaws that reduce or remove important shareholder rights.
Under ISS’ equity compensation plan policy change, there is a new “scorecard” approach to evaluating such shareholder proposals. For independent board chair proposals, the ISS change updates the “generally for” voting policy by adding new governance, board leadership, and performance factors to the existing analytical framework. The scorecard will include three categories: Plan Cost, Plan Features, and Grant Practices. [For more information about the ISS policy changes, read BoardroomDirect October 2014 (Issues in brief).]
Glass Lewis’ major changes include a recommendation to vote against any bylaw or charter amendments that adopt an exclusive forum for shareholder lawsuits, unless the company can give a “compelling argument” that the bylaw benefits shareholders. It also changed its policy regarding a board’s response to a majority-approved shareholder proposal. In 2015 it will recommend a vote vot against all governance committee members if a board didn’t adequately respond to such proposals. In 2014, the proxy advisor generally voted against the governance committee chair, when during the past year the board adopted a forum selection clause (i.e., an exclusive forum provision)29 without shareholder approval, or, if the board is currently seeking shareholder approval of a forum selection clause pursuant to a bundled bylaw amendment rather than as a separate proposal.
The proxy advisor also is increasing its scrutiny of bylaw or charter changes that would adopt a poison pill or classified board prior to a company going public. The final ISS and Glass Lewis guidelines can be found on their websites.
On November 6, New York City Comptroller Scott M. Stringer submitted proxy access shareholder proposals at 75 companies on behalf of the $160 billion New York City Pension Funds.
The resolutions, known collectively as the Boardroom Accountability Project, seek to give shareholders a choice in the election of directors of publicly held companies three years after a federal court struck down a Dodd-Frank rule that would have guaranteed proxy access. The proposals filed by Stringer focus on companies that have been unwilling to change practices in the areas of board diversity, climate change, and executive compensation.
The comptroller proposed the bylaw amendment to give shareholders who meet certain criteria the right to list their director candidates, representing up to 25 percent of the board, on a given company's ballot. The proposed criterion for shareholder access to the proxy is 3% ownership of a company for three or more years. The proposals will be subject to shareholder vote in 2015 at those companies that do not voluntarily adopt the proposal.
The criterion in the comptroller’s proposal is the same as the Dodd-Frank proxy access rule that was struck down by the US District Court in 2011. However, the decision left open the ability for shareholders to file proxy access proposals on a “private ordering” basis. As designed, private ordering is a two-step process, requiring a shareholder vote on proxy access in year 1, and if it passes, a shareholder slate of directors could be proposed in year 2.
In the three years since the onset of private ordering, approval rates have been mixed. Proposals similar to those proposed by Comptroller Stringer have had the most success, receiving a majority of votes cast at ten companies. Similar proposals failed to receive such a majority vote at six companies. In total, proxy access proposals submitted by shareholders with a 3%/3 year threshold received an average vote in favor of approximately 50% over the period from 2012-2014.
In a November 7 memo, law firm Wachtell Lipton notes, "absent procedural defects, the SEC has generally been unsympathetic to proxy access exclusion requests." Given that, many companies will need to consider how to respond to the proposals. Wachtell writes that the following options exist for companies: (1) submit the proposal to a shareholder vote and make a board recommendation for how shareholders should vote, (2) preemptively adopt a proxy access bylaw or submit a competing proxy access proposal with more stringent requirements, or (3) attempt to negotiate a compromise or alternative outcome with the shareholder proponent.