BoardroomDirect: Issues in brief

Update on the current board issues: March 2015

Issues in brief


NYC comptroller reaches proxy access settlements with some companies

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As of March 17, five companies have reached agreements with the New York City comptroller to allow shareholders to nominate directors for election to the board.

Comptroller Scott M. Stringer, who represents the $163 billion New York City Pension Funds, announced that Whiting Petroleum, Big Lots, McKesson Corp., Staples, and Abercrombie & Fitch will allow shareholders who have owned at least 3% of stock of a company for three or more years to nominate directors. [For more information on the agreements, read City Comptroller Reaches Deals with Five Companies on Giving Shareholders Say on Directors, New York Times, March 11, 2015.]

In October 2014 Stringer started proxy access campaigns at 75 companies in which the New York City Pension Funds owned shares of stock. He was joined in his campaign by the Illinois State Board of Investment and The Philadelphia Public Employees Retirement System.

The agreements come after SEC Chair Mary Jo White asked the SEC staff to review a shareholder proposal exclusion rule that was cited by Whole Foods Markets management when it was granted no-action relief from the commission. The agency granted the relief regarding a proxy access proposal on the basis that the proposal was in conflict with a similar management proposal. Subsequently, the commission’s Division of Corporation Finance announced it will “express no views on the application of Rule 14a-8(i)(9) during the current proxy season.” [For more information on the exclusion rule, read BoardroomDirect February 2015 (Proxy access proposals in 2015).]

“Proxy access is a fundamental shareowner right,” Stringer said. “A 3% ownership threshold over three years to exercise that right is reasonable and meaningful. The momentum for proxy access is evident and we expect more companies to follow.”

In one of the proxy access agreements, the company announced it would submit a management-supported proxy access bylaw amendment to be voted upon by shareholders at the company’s 2016 meeting. The bylaw amendment will become effective if approved by shareholders at that meeting.

While each of the agreements is unique, some of the common terms include:

  • Shareholders (not to exceed a group of 25) holding at least 3% of the shares for three years are permitted to nominate up to 20 percent of the directors if the board has 10 or more directors, or 25 percent of the directors if the board has 9 or fewer directors;
  • Various provisions consistent with, or mirroring, the original SEC-adopted proxy access rule, including how the loaned shares are treated for purposes of satisfying the continuous ownership requirement.


CII, US Chamber weigh-in on universal proxy ballots

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Both the Council of Institutional Investors (CII) and the US Chamber of Commerce have expressed concerns with the current proxy voting system. But they take different sides regarding possible resolutions. At issue is the universal proxy ballot card, a concept that has been gaining momentum among shareholder advocates in recent years.

Following the SEC's February 19 roundtable on universal proxy ballot cards, CII sent a letter urging the Commission to propose rules to implement such cards in contested director elections. CII has stated that comprehensive reform is needed so that in a proxy fight, investors can vote for any combination of board candidates. In January 2014, CII filed a detailed rulemaking petition with the SEC to amend rules that would allow the use of universal proxy cards.

CII comments

The recent CII correspondence makes several arguments for implementing universal proxy ballot cards:

  • The inability for investors to choose from among all candidates nominated by all parties limits shareowner choice and diminishes director accountability by precluding shareowners from choosing the best candidates amongst all of those who have been duly nominated.
  • Universal proxy cards would lessen investor confusion. The current proxy rules are a source of complexity.
  • Universal proxy cards would lower the substantial costs that investors currently face.

US Chamber comments

In a February 18 letter to the SEC, the US Chamber’s Center for Capital Markets Competitiveness (CCMC) said it does not believe the universal proxy ballot will work: “… the universal ballot will divorce corporate governance from the fiduciary duties integral to the long-term performance of a public company and its ability to provide a return to investors.” It continued, “Director elections will turn into annual political-style campaigns and create dynamics that are not conducive to the effective management of a public company.” [Bloomberg BNA has the complete letter.]

Instead of adopting universal proxy ballot cards, the CCMC suggests the SEC do the following:

  • Think about possible interpretive guidance to give retail shareholders access to client- directed voting, where a shareholder would be invited to provide his or her broker or bank custodian with advance standing instructions to vote on certain types of proxy proposals
  • Encourage greater use of web-based communications and technology
  • Streamline proxy disclosures through the SEC’s Disclosure Effectiveness Project


Delaware attorneys again propose anti-fee-shifting bylaw legislation

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The Delaware State Bar Association’s Corporation Law Council again proposed legislation to restrict the ability of companies to adopt bylaws requiring a shareholder plaintiff to pay a company’s legal fees if the plaintiff is unsuccessful in a legal action against the company.

Known as a “fee-shifting bylaw,” more than two dozen Delaware-based companies began working on the provision after the Deutscher Tennis Bund and Qatar Tennis Federation versus ATP Tour Inc. Delaware Supreme Court decision in May. The Delaware court upheld ATP’s fee-shifting bylaw after ATP successfully defended its case.

Following the decision, the Corporation Law Section of the Delaware State Bar Association proposed legislation to make such bylaws illegal. The bill was withdrawn in June 2014.

A recent article in the National Law Review explained the details of the Delaware bar association council’s new proposed legislation: “After further consideration, the Corporation Law Council recently recommended amendments to the Delaware General Corporation Law that, if adopted, would:

  • Prohibit fee-shifting provisions in the charters and bylaws of stock corporations
  • Limit the right to seek appraisal rights (the rights of a corporation's minority shareholders to have a fair stock price be determined by a judicial proceeding or independent valuator) to stockholders who own at least $1 million of stock or 1 percent of the disputed company.
  • Sanction exclusive forum provisions, as long as the exclusive forum is the State of Delaware

[An FAQ on the proposed fee-shifting bylaw legislation is available here.]