BusOrg (Fall 2014)

Chapter 16 -- Shareholder Proposal Hypos

Relevant materials:

  • GE Notice of 2014 Annual Meeting and Proxy Statement
  • SEC Shareholder Proposal Rule

Probity Investments is a client. It is the largest mutual fund group in the United States, indeed the world, with more than $3 trillion under management. The group’s “proxy voting committee” is anticipating the upcoming proxy season, in which funds in the group will be called on to vote the equity shares in their portfolios. There are some new members on the committee, who don’t know much about Rule 14a-8 and shareholder proposals. You have been asked some questions about the rule and how it works:

  1. One of the committee members has a copy of the GE proxy statement from last year’s meeting. “Why is that the company included shareholder proposals in the company’s proxy statement, when the board recommended against each one?”
  2. The shareholders who made the proposals had more than 1% of company shares, and thus have a right to have their proposals voted on by other shareholders
  3. The shareholders who made the proposals had owned their shares for more than one year, and thus have a right to have their proposals voted on by other shareholders
  4. The shareholders who made the proposals had more than $2,000 worth of GE stock, and thus have a right to have their proposals voted on by other shareholders
  5. The shareholder-proponents complied with SEC process and substantive rules, and the company was required to include these “proper” proposals in its proxy materials
  1. The inquiring committee member is pleased with your answer. “What are the subjects on which shareholders can make proposals?” You turn to the GE proxy statement and point out, “You’ll notice that the shareholder proposals that went to a vote at GE dealt with …”
  2. Corporate governance matters affecting such things as how shareholders elect directors and shareholder action by written consent
  3. Operational matters that normally would be decided at the board level, such as executive compensation and strategic direction
  4. Social, political and environmental (CSR) matters that affect more than shareholders, such as the company’s energy operations, lobbying efforts or human rights record
  5. Both corporate governance and operational matters, though not CSR matters -- at the most recent annual shareholders’ meeting
  1. The committee member is impressed with how much you know about GE. The next question, “Who can be a proponent under the SEC’s shareholder proposal rule?”
  2. A shareholder who has held continuously 1% of the company’s voting securities for at least 5 years – and then through the time of the meeting
  3. A shareholder who has held continuously $2,000 worth of the company’s voting securities for at least 2 years – and then through the time of the meeting
  4. A shareholder who has held continuously 1% of the company’s voting securities for at least 2 years – and then through the time of the meeting
  5. A shareholder who has held continuously $2,000 worth of the company’s voting securities for at least 1 year – and then through the time of the meeting
  1. “So what kinds of proposals can shareholders propose?” You begin your answer, “Well, in a nutshell …
  2. The proposals are proper if they request board action on matters that are significantly related to the company’s business, beyond ordinary business operations
  3. The proposals are proper if they require the board to take action on significant governance or operational matters not covered by the business judgment rule
  4. The proposals are proper if the shareholder holds at least 1% of the company’s voting shares, or is part of a group holding 1% of the company’s voting shares
  5. The proposals are proper if they seek to amend the corporation’s bylaws, given that this is a power reserved to shareholders under state corporate law
  1. “Hmm,” says the committee member. “So what you’re saying is that qualified shareholders can submit proposals to a public company to be voted on at the company’s annual meeting, provided the proposal is proper. What’s the deadline for submitting such a proposal at the next annual meeting?”
  2. For each company it’s different, depending on when the company has scheduled its annual meeting. For GE the deadline was April 24, 2014
  3. For each company it’s different, depending on when the company has set the record date for its annual meeting. For GE the next record date will be February 24, 2015
  4. For each company it’s different, depending on when the company’s proxy materials were sent out the previous year. For GE the deadline is November 10, 2014
  5. For all public companies, it’s the same: January 15, 2015 – which is three months before such companies must hold their annual meetings under SEC rules
  1. “OK. This is intriguing,” says the committee member. “What happens if a company gets a proposal and decides the shareholder does not meet the ownership criteria or that the proposal is not proper.”
  2. The company cannot exclude the proposal from the proxy materials, provided the shareholder meets the ownership criteria
  3. The company can decide to exclude the proposal, and the matter ends there given that such a choice is protected by the business judgment rule
  4. The company can decided to exclude the proposal, but must first give the shareholder a chance to prove ownership or correct any substantive deficiencies
  5. The company must immediately notify the SEC of the plan to exclude the proposal, subject to the SEC issuing an order requiring its inclusion in the proxy materials
  1. “So at some point the SEC gets involved if the company excludes a proposal,” comments the committee member. “What is this thing -- a ‘no-action letter’?”
  2. The no-action letter is a correspondence from SEC staff stating the view that staff will not recommend SEC action against the company if company proceeds as planned
  3. The no-action letter is a correspondence from the Commission itself that states the company can proceed as planned; it is tantamount to a regulatory decision
  4. The no-action letter is a binding decision by the SEC -- which courts must give deference to -- that the company’s action will not result in any enforcement action
  5. The no-action letter is a filing by the SEC with a court that the SEC is of the view the court should not reach a decision for the plaintiff in the pending action
  1. “The SEC seems to have a lot of influence here,” says the committee member, who is slowly coming to understand Rule 14a-8 and its process. “On what basis can a shareholder proposal be excluded by a company?” You answer, “The proposal can be excluded …
  2. if not a proper subject under state law – for example, a proposal that requested the board reinstate a company CEO would be excludable
  3. if not significantly related to the company’s business – for example, a proposal requesting a report on pate de foi production (a tiny part of revenues) is excludable
  4. if part of ordinary business operations – for example, a proposal that deals with a company’s policy to fire gay employees is excludable
  5. if the proposal seeks to nominate a specific person to the company’s board – for example, a proposal to nominate Evelyn Davis to the GE board could be excluded
  1. “Well, what about executive pay,” asks the Probity committee member. “Would a shareholder proposal seeking to have company executives receive most of their stock-based pay only after leaving the company be excludable?”
  2. Yes, such a proposal would involve the company’s ordinary business; matters of executive pay are excludable
  3. Yes, such a proposal would involve a personnel matter; proposals dealing with company employees are excludable
  4. No, such a proposal would not be ordinary business; but the proposal would have to framed as a recommendation to the board
  5. No, such a proposal would be significantly related to the company’s business; and the proposal could be framed as a requirement, much as a binding “say on pay” vote
  1. “I’ve heard that the shareholder proposal rule is used mostly by social-activist shareholders, is this true?”
  2. Yes, the rule has primarily been used by social-activist shareholders seeking to advance their agendas, given the SEC’s broad interpretation of “significantly related”
  3. Yes, the rule has been a way for social-activist shareholders to “soapbox,” even though a social/political/environmental proposal has never gotten majority shareholder support
  4. No, the rule has been used over time for corporate governance proposals, operational proposals and CSR proposals – the proportions varying at different times
  5. No, the rule has been used mostly by shareholders seeking corporate governance reforms, such as majority director voting and rescission of antitakeover measures
  1. “Well, over time, what kinds of proposals seem to be excluded by management most often?” asks the curious Probity committee member. You answer, “Based on the proposals that management sends to the SEC for the agency’s review …
  2. proposals on corporate governance matters seem to really irk management; most excluded proposals deal with such matters
  3. proposals on operational matters seem to really get management’s dander up; most excluded proposals deal with such matters
  4. proposals on CSR matters seem to rub management the wrong way; most excluded proposals deal with such matters
  5. it’s hard to tell; in some years there are more governance proposals than operational proposals excluded; in other years it’s the other way around
  1. “What attitude does the SEC have toward different kinds of proposals?” asks your Probity friend. You answer, “The SEC views seem to vary. In fact, some academic studies find the SEC staff to be quite inconsistent, sometimes giving no-action letters in an area and then reversing course hardly without explanation. For example, …
  2. In the early1980s, the SEC supported exclusion of corporate-governance proposals and then changed its approach in the early 1990s
  3. In the early 1980s, the SEC somewhat supported inclusion of CSR-related proposals and dramatically stopped supporting their inclusion beginning in the early 2000s
  4. In the early 1990s, the SEC refused to support exclusion of operational-related proposals, especially executive pay, and then continued this approach going forward
  5. Over time, the SEC has generally refused to give “no action” letters supporting the exclusion of shareholder proposals by management
  1. “I’m curious how shareholders have voted on shareholder proposals over time?” your inquiring Probity official asks. You answer, “Over 15 years or so, shareholders proposals have fared quite well in annual meetings, particularly those dealing with corporate governance matters. For example, in the 2005 proxy seasons …
  2. The most frequent corporate governance proposal, requiring companies to eliminate classified boards, received 44% overall support
  3. The corporate governance proposals calling on boards to let shareholders vote to approve poison pill plans received 58% overall support
  4. The corporate governance proposals for cumulative voting, which shareholders accomplished by amending corporate articles, received 50% overall support
  5. Few corporate governance proposals received majority support, but many received 20% support or more and were implemented by management
  1. “Well, what role has the mutual fund industry played regarding shareholder proposals?”
  2. Mutual funds have been among the most active in making shareholder proposals, particularly on corporate governance matters
  3. Mutual funds have been regular proponents, particularly on issues of executive pay, and have taken the lead in lobbying for legislation requiring “say on pay” votes
  4. Mutual funds have rarely submitted proposals, a role played more by activist pension plans, but typically support proposals as much as shareholders generally
  5. Mutual funds have rarely submitted proposals, a role played by activist shareholders, but generally have supported corporate governance proposals more than other shareholders
  1. “You mentioned ‘say on pay.’ As I understand things, these are non-binding votes by shareholders indicating their approval or disapproval of the company’s executive pay practices. Such votes are now required under the Dodd-Frank law for all public companies, but before 2010, many shareholder proposals were submitted under Rule 14a-8 calling on companies to conduct ‘say on pay’ votes.” You answer, “That’s right. Shareholder ‘say on pay’ proposals submitted in the pre-Dodd-Frank period from 2006-2008 …
  2. were among the most popular types of proposals, generally received majority shareholder support
  3. generally were included in company proxy materials, but did not receive strong shareholder support
  4. generally were excluded by company management, with the SEC staff issuing no-action letters in nearly all instances
  5. generally resulted in management engaging with the proponent, who then would withdraw the proposal after the company agreed to institute a ‘say on pay’ vote
  1. “So my understanding is that one of the most contentious shareholder-proposal issues is proxy access. I’m not sure I understand what that is?” You answer, “Proxy access is the term …
  2. describing the ability of larger shareholders (or groups) to nominate a short-slate of directors in the company’s proxy materials
  3. describing the ability of shareholders to use Rule 14a-8 to propose nominations of an individual director in the company’s proxy materials (one proposal per proponent)
  4. describing the process and disclosures of how larger shareholders (or groups) can nominate a short-slate of directors in their own proxy solicitation
  5. describing a corporate bylaw that specifies how larger shareholders (or groups) can nominate a short-slate of directors in the company’s proxy materials
  1. “My understanding is that virtually every law-making body involved in corporate law has had a say on proxy access.” You answer, “That’s true …
  2. Congress in the Dodd-Frank Act required that public companies submit a vote shareholders allowing them to approve ‘proxy access’ bylaws
  3. Delaware’s legislature passed a new law that allows shareholders to nominate 1 or more directors, subject to conditions specified in the DGCL
  4. The Second Circuit held that a ‘proxy access’ bylaw proposal could not be excluded under the then-existing version of Rule 14a-8, because it did not “relate to an election”
  5. The D.C. Circuit upheld an SEC rule creating ‘proxy access’ in public companies subject to its proxy rules (the agency conducted an adequate cost-benefit analysis)
  1. “Oh, my. It’s amazing how convoluted and contentious has been the history of proxy access. So today if Probity wanted to put a person on the GE board, could we do it?”
  2. Yes. Probity could submit a ‘proxy access’ bylaw to GE, hope for shareholder approval, and next year submit a nominee (or nominees) under the bylaw procedures
  3. Yes. Probity could submit a proposal under Rule 14a-8 nominating one or more directors, with the nominees seated if among the top GE nominees vote-getters
  4. No. Probity would have to wait for the SEC to re-promulgate its ‘proxy access’ rule; although valid under Delaware law, proxy access is not available in public companies
  5. No. Probity’s mutual funds would be subject to insider trading rules if their delegatees were to sit on portfolio company boards