The Activist Investor Blog
The Activist Investor Blog
Proxy Access for Activist Investors
With some drama and controversy, this month the SEC granted activist investors one long-held wish, for proxy access. Congress also had a role, clearing up any doubt whether the SEC has the authority to grant that wish, with the passage last month of the Dodd-Frank Act.
The 451 pages of the release document that the SEC approved on a 3-2 party line vote last week feature impressive and intimidating detail. The new rules themselves occupy only about 60 pages of the release, with the remainder explaining the SEC’s reasoning behind the specific rules, identifying changes between the final and preliminary releases, and discussion of the over 600 comment letters it received. We’ve read it for you and put together a guide with detailed background, explanation, and comments on the specifics, along with a checklist for activist investors that want to take advantage of the new rules. Below are some observations about what it all means.
Proxy access, which allows investors to promote their board nominees on the company’s proxy materials, will likely apply to relatively few activist situations. The SEC positioned it for long-term investors, defined as having 3% of the company’s shares for at least three years (although groups of investors can aggregate their holdings to meet these thresholds). And, of course it pertains only to nominees – investors still need to win elections, or at least settle them favorably.
The settlement possibilities, though, represent a useful pressure point. The threat of a proxy access contest helps shift power from management to investors, so smart activists will use that threat wisely. The threat of bylaws amendments allowing more liberal proxy access than the SEC requires also will serve as a pressure point. Most of all, the new rules represent an important symbol of how Congress and the SEC, along with activist investors of all types, seek a better balance between management and shareholders.
The debate took awhile, decades, in fact. Proxy access proposals first surfaced in the 1940s, not long after the SEC was born. Investors and the SEC tried three times just in the past ten years to gain proxy access. It took the recent financial crisis to focus attention enough to move the debate to a conclusion.
While sometimes contentious, the debate generated an intelligent, thoughtful set of rules, all the more surprising given the current complicated proxy processes, arcane rules, and numerous warring interest groups. The SEC has managed to limit proxy access to long-term investors with a substantial (yet somewhat arbitrary at 3%) stake. And, the SEC allows investors to propose different limits through bylaws amendments. Finally, the SEC has designed a new mechanism for organizing proxy access efforts, in Schedule 14N. Whether or not activists agree with the limits, or like the idea of proposing bylaw amendments instead of gaining direct proxy access, the SEC has shown considerable creativity and ingenuity in getting there.
The new rules represent a significant win for investors relative to what the SEC could have done to placate corporate interests, based on what these interests had sought to include in earlier versions of these rules:
•Companies cannot opt-out or adopt stricter limits than what the SEC now requires (“private ordering”).
•Proxy access is available immediately, rather than after company misconduct or some other triggering event.
•It applies to every SEC filer, with the only exemption a three-year implementation delay for smaller companies (under $75 million in public float), and even smaller companies must allow bylaw amendments on proxy access.
Bylaw amendments seem to provide the most fruitful avenue for activist investors. Shareholders can propose any form of proxy access that is less restrictive than the SEC rules:
•less than 3% ownership;
•fewer than three years’ ownership;
•more than 25% of available BoD positions;
or anything else that suits investors. Like any other shareholder proposal, approval will require only a majority of shares, or (depending on how the company approves bylaw amendments) a majority, two-thirds, or some other hurdle in the case of a specific bylaw proxy access amendment.
Not surprisingly, corporate interests have promised to oppose proxy access at every step. One of the two minority SEC commissioners speculates that these interests will challenge the legality of the new rules. The U.S. Chamber of Commerce has as much promised such as challenge, although the basis is not clear since Congress mandated the rules. I’ve heard of challenges based on an unfair process that failed to consider corporate views (difficult to reconcile with the 600 comment letters) or on an unfair preemption of state corporate law (although proxy matters have long remained the subject of Federal rather than state law). Others have started to propose numerous ways for companies to circumvent the new rules, sneaky but probably legal.
These objections don’t make sense. Proxy access in substance applies to only a few companies, and even then it only makes nominations a little easier. Investors still need to win elections. It’s proxy access, not boardroom access. But, management might see investors on the threshold (literally?) of the boardroom, which isn’t a bad thing, either.
Monday, August 30, 2010