Thursday, February 23, 2017

Some proxy access proposals meet with success, while others fail

By Jacquelyn Lumb

John Chevedden was successful in gaining inclusion in multiple companies’ proxy materials of his proposal asking the boards to take the necessary steps to allow up to 50 shareholders to aggregate their shares for the purpose of proxy access. Chevedden and others were unsuccessful, however, at Eastman Chemical Company and a number of other companies where the staff concluded that the company’s policies, practices, and procedures compared favorably to the guidelines in the proposal. The most common proxy access model has been the aggregation of shares by up to 20 shareholders to meet a 3 percent threshold of shares held continuously for three years, but as Chevedden noted on behalf of Kenneth Steiner in his proposal to Citigroup, even if the 20 largest public pension funds were to aggregate their holdings, they would not meet the threshold.

Citi’s current proxy access provision. Citigroup pointed out that Chevedden agreed to the current provisions in the bylaw it adopted in 2015, which included a 20 shareholder aggregation limit. The board adopted the proxy access bylaw after shareholders approved a proposal included in its 2015 proxy materials. Citigroup sought to omit the current proposal on the basis that it has substantially implemented the proposal, noting that it has implemented all of the key features—the 3 percent and three year holding thresholds, but with a 20 shareholder aggregation limit. It referred to the proposal as a minor refinement to its bylaw, which it said would be inconsistent with the purpose of Rule 14a-8(i)(10).

Citigroup noted that five of its largest shareholders each own over 3 percent of its common shares and the 20 largest shareholders own approximately 35 percent of its outstanding common shares. The firm also pointed out that there are more than 200 combinations of its shareholders that could aggregate their shares to own more than 3 percent. The 20 shareholder limit is a standard and reasonable provision that is included in the vast majority of companies’ proxy access by-laws, according to Citigroup.

The firm also argued that, in addition to Rule 14a-8(i)(10), the proposal could be omitted under Rule 14a-8(i)(3) because it was materially false and misleading in suggesting that the current bylaw is illusory.

Staff response. The staff said it was unable to concur with Citigroup that the proposal could be omitted under Rule 14a-8(i)(3) because it had not demonstrated objectively that the proposal was false and misleading. The staff was also unable to conclude that Citigroup had met its burden of establishing that the proposal could be excluded under Rule 14a-8(i)(10).

Eastman’s successful argument for omission. Eastman, which received the identical proposal, wrote that it had substantially implemented the proposal when it adopted an amendment on February 18, 2016 to provide for proxy access. Eastman’s bylaw provisions follow the standard guidelines of 3 percent held for three years with an aggregation of up to 20 shareholders. Eastman said the proponent did not explain how or cite any facts to support an argument that increasing the number of shareholders permitted to aggregate their shares would be a meaningful change for the ability of its shareholders to make use of proxy access.

Eastman advised that its 20 largest institutional shareholders own approximately 48.9 percent of its outstanding common shares. The company also pointed out that the proponent had submitted, or was named as the representative for shareholders who submitted, substantially identical proposals to at least 10 other companies without performing an individualized analysis to determine the relevance to each company’s shareholder base. Eastman added that it would also be possible to assemble a group of 20 shareholders that own at least 3 percent of its common shares that does not include any of its largest 90 institutional shareholders. For that reason, as the proposal applies to Eastman, the company said its aggregation limit compares favorably to the guidelines in Chevedden’s proposal.

A number of companies were also successful in omitting the proposal based on arguments similar to that of Eastman.