Proxy Access

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FAQs about Proxy Access

Why should activist investors care about proxy access?

It will make it simpler and cheaper for you to compete for spots on the BoD of a portfolio company. Not completely simple and free of cost, and not at every portfolio company, but simpler and cheaper relative to what activist investors deal with today, at some portfolio companies.

In summary, the SEC provides proxy access for long-term, material investors (and groups of investors) that seek a limited presence on a portfolio company’s BoD. The rules take care to exclude investors that would use proxy access to attempt to gain control of a company’s BoD.

The SEC also gives investors the opportunity to structure their own proxy access rules at a company, in the form of proposed bylaws amendments. Those rules must be at least as generous to investors as what the SEC has just finalized. This could be a big deal, as these proposed amendments follow the same (less restrictive) rules as other shareholder proposals.

Since proxy access represents a shift, however modest, in the balance of power between management and investors, it should also make it easier for you to pressure management for constructive change.

What, specifically, is proxy access?

Investors having direct access to the company’s proxy documents, of course. By this we mean shareholders will have the right to include their director nominees on the company’s proxy materials, which the company distributes for the annual meeting. More importantly, it means ballot access, so that your nominees appear alongside the company’s nominees on a single ballot.

What’s the problem today?

Proxy access has meaning only with respect to current regulation and governance practices. Right now, you can certainly nominate your own candidates for election to a BoD (subject to a range of notice and disclosure rules). And, naturally the company nominates their candidates, too. At that point things get complicated fast, in ways that favor heavily the company nominees.

Then, the company will then send all manner of persuasive materials to shareholders extolling the virtues of their nominees. The SEC prescribes some of the contents of these materials, say related to executive compensation. The company can and will include many other interesting facts and compelling arguments about these candidates. Of course, the company (that is, we investors) pays to write, edit, review, print, package, mail, and file with the SEC these materials.

What the company need not do is include anything about your nominees in these materials. It’s there in black and white: SEC rule 14a-8(i)(8) allows the BoD to exclude any shareholder proposal that “relates to a nomination or an election for membership on the company's board of directors.”

So, investors then must do two things:

  1. publicize and make the case for their nominees using entirely separate campaign materials from the company’s materials

  2. solicit and collect proxies separate from the proxies that the company collects.

Separate campaign materials gets costly, especially since investors pay for these materials themselves, while the company (we investors) pays (again) for the company’s own materials. Separate proxies gets very complicated, too – imagine if we ran a civic election such that each candidate distributes his or her own ballot, in a separate color, and voters needed to collect and mail in or bring to the poll individual ballots for each candidate they want to support, and you’ll get the idea.

How did this situation come about?

It dates to the origins of the SEC, in 1934 and 1935. After some trial-and-error with the then-new securities laws, the SEC regulated (among many other things) how companies solicited proxies for votes at annual meetings. In 1942 it required companies to allow shareholders to include their own proposals and resolutions for annual meetings in the proxy solicitation materials. At the same time it exempted from that requirement proposals and resolutions related to BoD elections. The exemption lives on today, in rule 14a-8(i)(8). Various accounts attribute the exemption to pressure on Congress from corporate interests.

The SEC has over the decades attempted to promulgate regulations allowing proxy access, with three tries in the last ten years alone. The most recent effort generated draft regulations in 2009, but the SEC suspended the process in part because it worried that it did not have proper statutory authority.

What did Dodd-Frank do?

The Dodd-Frank Act requires companies to include shareholder nominees on the company proxy materials, subject to rules and regulations from the SEC. So, it also directs the SEC to promulgate regulations to implement this requirement, and provides the needed statutory authority.

The SEC promulgated draft rules in 2009 and finalized them in August 2010, in time for investors to benefit at 2011 annual meetings. Litigation has since limited investors to proposing only bylaw amendments (below).

The new SEC proxy rules

The new rules narrow the current exemption in rule 14a-8(i)(8) to allow investors to propose bylaws amendments that provide for proxy access. These amendments can provide for more expansive proxy access than that which the SEC mandated in its now-abandoned Rule 14a-11.

Shareholder proposals under rule 14a-8(i)(8)

Shareholders can also propose bylaw amendments pertaining to BoD election procedures, including proposals for more liberal proxy access than the SEC requires. This applies to all companies, without the small company exclusion that applies to proxy access nominations. A company’s bylaws can have more liberal proxy access (“private ordering”), but nothing more restrictive than what’s in the new rule. These proposals follow the usual rules for shareholder proposals, including shareholding amounts and time periods, and notice requirements.

Interesting implications for activist investors

These new regulations present a range of opportunities and concerns.

Investors don’t “solicit proxies”, but instead “campaign for votes”. Think about it – with proxy access, the company lists your director nominees alongside the board’s nominees. You don’t send out separate proxy materials in different colors, and rely on shareholders to sort out the paperwork. And, the company sends out biographies of your director nominees, and your supporting statement for these nominees.

Still, investors need to “campaign for votes”. No sane investor will rely solely on what the company includes in the proxy materials to persuade shareholders to vote for your candidates. The company designs the proxy materials, and will highlight their case to the detriment of yours. The SEC allows the company to limit to 500 words your case for your nominees, and you can be sure that the company will present much more information about the company’s candidates. So, a smart investor will also campaign for their candidates, with attendant effort and expense needed to prepare and transmit persuasive materials to investors.

But, monitoring a “campaign for votes” is harder than counting proxies. Proxy access deprives investors of the running vote total that you have when you collect proxy cards from shareholders. Instead, you rely on the promises of support you receive from various shareholders, who can of course change their mind up until the time that they cast their actual votes.

Investors can propose resolutions and bylaws amendments, as well as nominees. Previously, the company could exclude resolutions or bylaws amendments concerning the BoD. So, for example, investors could not propose resolutions on director qualifications, or bylaws amendments on board offices or structure. Investors may now do both