The Activist Investor Blog
The Activist Investor Blog
Troubling Proxy Access Trends
Now that shareholders can attempt to “order privately” proxy access at portfolio companies, what have we seen so far as “proxy season” gets underway?
[Am I the only one who dislikes “proxy season”? Activist investing demands year-round attention...]
We’ve seen trouble, we think. If investors aren’t careful, they may lose more than they gain, in terms of the basic right to nominate BoD candidates, let alone feature those candidates in company proxy materials.
Two kinds of proposals
Shareholders can propose specific proxy access in two ways, as a non-binding resolution demanding that the BoD implement it, or as a binding bylaws amendment. Right now ISS has identified 17 total proposals: eight bylaw amendments, and nine resolutions.
Of the bylaw amendments, interestingly six come from a single investor: Norges Bank Investment Management (NBIM), which runs the Norway state pension fund. The other two have come from Furlong Funds, a smaller activist investor.
Almost all of the resolutions follow the standard format that USPX has prescribed, which in turn roughly follows the SEC’s original mandatory proxy access rules. John Chevedden, Kenneth Stein, and Jim McRitchie, all experienced individual activist investors, proposed all but two of these nine. Amalgamated Bank, a labor union-affiliated investor, proposed a resolution at Hewlett-Packard, and a group of nine state pension funds, led by CalSTRS, proposed a resolution at Nabors.
Companies fighting hard
Not surprisingly, companies have opposed these shareholder efforts, and seek to exclude them from the annual meeting proxy materials on a variety of bases. They have gone after six of the nine resolutions on very similar bases, claiming that the resolutions are vague, beyond the company’s power to implement, violate state law or existing contracts (say, debt covenants), or deal with ordinary business. The SEC has allowed companies to exclude other proposals on these bases in the past. The SEC needs to agree that only one of these bases applies in order for the company to exclude the proposal.
Companies take different approaches to excluding the bylaw amendments. Wells Fargo has asked to exclude their NBIM proposal as vague because it includes a link to an inactive website URL. NBIM included the URL as a way to keeps its proposal below the 500 word limit that the SEC regulations allow companies to impose on shareholder proposals. It seems likely that the SEC will allow NBIM to rectify this one.
How to defeat proxy access
Two others take more troubling approaches. The SEC allows companies to exclude a shareholder proposal if the company will offer a similar proposal, or if the company has already implemented the proposal.
Western Union opposes their NBIM proposal because the company plans to submit their own proxy access bylaw amendment for shareholders to consider. Of course, their amendment is worse for investors than the one from NBIM. The NBIM proposal would provide proxy access to an investor or group owning 1% of the company’s shares for one year. Western Union’s proposal would do so for investors having 5% of the shares for three years. The SEC has allowed companies to exclude proposals in similar situations, such as when an investor proposes a voting threshold to approve a special meeting, and the company proposes a higher voting threshold.
KSW opposes their Furlong proposal because they already implemented what they claim is a similar proposal. They amended their bylaws ostensibly to provide for proxy access. But, whether inadvertently or intentionally, instead did something much worse: their bylaw amendment actually limits how shareholders can nominate directors, but not how the company must feature those nominees in the proxy materials.
Before this started at KSW, its bylaws allowed a shareholder to submit any number of nominees, as long as the shareholder met requirements for timely and proper notice to the company. It imposed no share ownership limits, as to size or duration of holding. Of course, KSW did not need to include such nominations in the proxy materials.
Furlong submitted its proposed bylaw amendment to KSW in November 2011. This amendment provided proxy access to an investor (or group) having 2% of the shares for a year. On January 4, 2012 the company adopted its own bylaw amendment.
But what a bylaw amendment it is. It actually doesn’t address proxy access per se at all. Instead, it limits any shareholder nominations to investors having 5% of the shares for at least a year. The company now prevents all but the largest shareholders from even nominating directors.
It’s not clear what will happen next. The SEC could exclude Furlong’s proposed bylaw amendment. Yet, it seems different enough from what the company just implemented that the SEC might not (and definitely should not) do that.
If the company cannot exclude the proposal, and shareholders approve it, a sort of corporate governance chaos ensues. The now-current bylaws limits nominations to 5% shareholders. The to-be-amended bylaws allow 2% shareholders proxy access, even though they cannot nominate director candidates.
Nominating directors remains a basic right of shareholders, along with voting their shares. We hope that KSW either screwed this up or that the SEC, with Furlong’s help, will see through this clear effort to disenfranchise investors, and deal with it appropriately.
Tuesday, January 31, 2012