We Want Your Vote! Preparing Now For the Inevitable Proxy Access Regime
Except in connection with proxy contests, we doubt that there are many proxy statements distributed each year by companies that sincerely are concerned about obtaining the requisite votes for their nominees. As a result, virtually
all proxy statements are consistent -- the traditional serial presentation of director biographies, compensation information and beneficial ownership, preceded by a courteous letter from the president
-- with relatively little, if any, hard-nosed advocacy. It is an easy and proven approach, unlikely to generate liability under Section 14(a), and uncontroversial. But will it generate enough votes if a company has to
name an activist’s nominee in its proxy statement and on its proxy card?
We believe the proxy regime as it exists in its present state likely is nearing an end. Section 971 of the Dodd-Frank Act provides the SEC with the authority to adopt “proxy access” rules that would require “that a solicitation of proxy . . . include a nominee submitted by a shareholder. . . .” While it is not clear that the SEC did not already have this authority, Section 971 certainly emboldens the three-to-two majority at the SEC to push forward with proxy access. At this juncture, the only thing that we can envision slowing it down is the SEC's overflowing agenda as a result of the Dodd-Frank Act’s requirement that the SEC promulgate at least 95 new rules.
For most companies, proxy access is of little concern. They are well managed and low profile, and simply are not on the radar screen of the activist investors. For a few that are poorly managed and unwilling to entertain investor recommendations, proxy access may be well-deserved. But for others – well managed companies that simply elicit the ire of special interest groups – it may be a nightmare. Every bank, utility, energy firm or other entity that regularly is subject to shareholder proposals from special interest groups may be vulnerable to getting an unwanted nominee. Worse, if the company had the recent misfortune of aggravating RiskMetrics, say over the severance benefits contained in their CEO’s contract or as a result of the extension of a shareholder rights plan, the chances of victory by the special interest group is going to be real. With agenda-driven activist groups such as Change to Win Investment Group (which claims to work with union-sponsored pension funds), companies currently receiving shareholder proposals from special interest groups should expect these activists to not only continue their efforts but also to combine their efforts and to get the support of some large institutional holders, such as CalPERS, in order to get their nominees included in company proxy statements.
Against this backdrop, we think that it is important for companies to be proactive and increase their focus on the care and feeding of shareholders. While this starts with an organized campaign of talking or meeting with the largest shareholders on a regular basis (and not just when their votes are needed), it also is going to include rethinking proxy statements and converting them into documents that assertively ask for, rather than just formalistically solicit, shareholder votes. And companies are going to want to do this every year, and not just following an activist nomination. Companies need to ask themselves why their shareholders should vote in favor of each of their nominees (in preference to a potential activist nominated candidate) and how they convey that to shareholders, before and not just after a proxy contest has commenced.
We encourage you to begin to consider how you might refocus your proxy statement so that shareholders want to vote in favor of management's slate rather than just toss the proxy card away. We are actively developing ideas in this area and would be happy to share them with you.