Proxy Access Update
Reaching the Tipping Point
By December 31, 2016, the 251st company of the S&P 500 adopted a proxy access provision allowing shareholder-nominated board candidates to be included in the company’s proxy. A report from the Sidley law firm includes detailed information about which companies have adopted proxy access and the specific requirements for eligibility – most commonly 3% for three years for up to 20% of the board (at least two directors), with a nominating group size limit of 20.1 It also notes that:
The 2015 proxy season saw a significant increase in the number of shareholder proxy access proposals and shareholder support for such proposals, as well as an increased frequency of negotiation and adoption of proxy access via board action – including an accelerating trend towards board adoption without receipt of a shareholder proposal. This trend continued in 2016 and appears to be continuing into 2017.
The report concludes that proxy access proposals are submitted by (and supported by) shareholders as a way of addressing substantive concerns, primarily:
- Climate change (i.e., carbon-intensive coal, oil and gas and utility companies);
- Board diversity (i.e., companies with little or no gender, racial or ethnic diversity on the board); and
- Excessive executive compensation (i.e., companies that received significant opposition to their 2014 say-on-pay votes).
Going from Theoretical to Actual
As noted above, after the SEC rule was successfully challenged in court, investors have been successful at persuading more than 300 companies, including just under 40% of the S&P 500, to accept proxy access provisions voluntarily. Typically they provide that if 3% of the shareholders who have held stock for at least three years submit a candidate for the board, that candidate must be included on the company’s proxy circulated to all shareholders. For the 2017 proxy season, proponents of proxy access have begun to submit so-called “fix-it” proposals, seeking to amend specific features of adopted bylaws that they believe limit the ability of shareholders to use proxy access effectively. Opening the door to these “fix-it” proposals, the SEC staff denied no-action relief to seven of the nine companies that sought exclusion.
GAMCO Investors, Inc. became the first shareholder to take advantage of a proxy access provision by nominating a candidate. On November 10, 2016, GAMCO and its affiliated funds filed a Schedule 14N disclosing their nomination of a proxy access candidate for election to the board of directors of National Fuel Gas Company pursuant to the company’s recently adopted proxy access bylaw. National Fuel has a nine-member classified board and its access bylaw has a 3/3/20/20 formulation, which refers to a group of up to 20 shareholders that own at least 3% of the shares for three years and are able to nominate up to 20% of the board. GAMCO disclosed in its Schedule 14N aggregate beneficial ownership of 7.8% of National Fuel’s common stock and that it has beneficially owned more than 3% for more than three years. In 2015, GAMCO submitted a shareholder proposal, which did not pass, requesting that the company engage an investment bank to effectuate a spin-off of the company’s utility segment.
However, as noted in the Sidley report, this first attempt to make use of a proxy access proposal, by activist Mario Gabelli’s GAMCO funds, was quickly dropped because the company at issue, National Fuel, had a proxy access provision that specifically required any nominee to be put forward by shareholders who had not acquired the stock holdings with activism in mind.