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Proxy Access in 2015

January 16, 2015

New York City Comptroller Scott M. Stringer, on behalf of the $160 billion New York City Pension Funds, has submitted proposals to 75 companies to request access to their proxies to nominate candidates to the boards in 2015.1

Proxy access is the ability for shareowners to nominate directors to run against a company’s chosen slate of director candidates on a corporate ballot.  This past fall, Stringer filed 75 proposals requesting that companies amend their bylaws to provide for proxy access.

The Dodd-Frank Act of 2010 affirmed the Securities and Exchange Commission’s (“SEC”) authority to issue its proxy access rule; however, a lawsuit filed in 2010 in the Federal District Court for the District of Columbia successfully vacated the rule on procedural grounds.2  Despite the loss of universal proxy access, the SEC separately allowed “private ordering,” the ability to file individual shareholder proposals requesting proxy access, to remain. The standards for private ordering were initially proposed under former SEC Chairman William Donaldson in 2003.3

Stringer’s proposals would give shareholders who own at least 3% of a company’s shares outstanding for three or more years the right to list their director candidates, representing up to 25% of the board, on a given company’s ballot. 

The 75 proposals were filed based on three priority issues according to Stringer: climate change, board diversity and excessive CEO pay. Based on these screening criteria, resolutions were filed at 33 carbon-intensive coal, oil and gas, and utility companies; 24 companies with few or no women directors, and little or no apparent racial or ethnic diversity; and 25 companies that received significant opposition to their 2014 advisory vote on executive compensation.

Since then, at least seven companies have submitted no-action letters to the SEC to exclude the proposals because they will “directly conflict” with the company’s own proxy access proposal, which has higher ownership and holding thresholds.

The practice began when Whole Foods Market Inc. was recently successful in obtaining SEC relief from a proposal submitted by investor James McRitchie.4  Whole Foods said that McRitchie’s shareholder proposal conflicts with its own proposal to provide proxy access for any shareholder owning 9% of company shares for five years.

Whole Foods has since lowered the ownership threshold to 5% after criticism from shareholders.5

Cabot Oil & Gas Corp. has submitted a no-action letter to the SEC seeking to exclude Stringer’s proposal on similar grounds.6  Cabot Oil’s board said it is submitting its own proxy access proposal to permit any shareholder owning 5% or more of Cabot’s stock for three years to nominate candidates to the board.

Other companies seeking to exclude Stringer’s proposal by submitting their own proposal are Exelon Corp., with thresholds of 5% for five years;7  Apache Corp., with thresholds of 5% for three years; Chipotle Mexican Grill Inc., with thresholds of 8% for five years;8  Noble Energy, Inc., with thresholds of 5% for five years;9  SBA Communications Inc., with thresholds of 5% for five years;10  and Peabody Energy Corp., with thresholds of 7% for five years.11

At least one group has spoken out against this trend. The Council of Institutional Investors sent a letter to the SEC asking it to alter its interpretation of “counterproposals” as a basis for exclusion of shareholder proposals.12

The SEC has not yet decided whether to grant the companies no-action relief to exclude the proposals. McRitchie has since requested an appeal to the full Commission of the decision to grant Whole Foods a no-action letter permitting the omission of his proposal. 13

In a dramatic turn of events, the SEC then reversed course.  The SEC’s Division of Corporation Finance wrote to McRitchie, “The Division has reconsidered its position. On January 16, 2015, Chair [Mary Jo] White directed the Division to review the Rule 14a-8(i)(9) basis for exclusion. The Division subsequently announced, on January 16, 2015, that in light of this direction, the Division would not express any views under 14a-8(i)(9) for the current proxy season.”

Comptroller Stringer responded with alacrity.  In a statement Stringer said, “The playing field for shareowners just got a lot more level. The SEC’s review means that the nearly 100 companies that received proxy access proposals this year can no longer exploit an overly-broad interpretation of the competing proposal rule to disenfranchise shareowners. Boards that decide to exclude these proposals anyway not only face opposition to their director nominees from institutional investors, including the city’s pension funds, they now also do so without the cover of SEC no-action letters.”

However, the SEC’s action on the proxy access counter-proposals will affect all other counter-proposals in 2015 as well.  “There are a bunch of other (i)(9) letters beyond proxy access (e.g. special meeting and pro rata vesting proposals) and it looks like those are collateral damage for this proxy season,” wrote TheCorporateCounsel.net’s Broc Romanek.

1  http://comptroller.nyc.gov/newsroom/comptroller-stringer-nyc-pension-funds-launch-national-campaign-to-give-
3  http://www.sec.gov/rules/proposed/34-48626.htm
4  http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2014/jamesmcritchie120114.pdf
5  http://www.sec.gov/Archives/edgar/data/865436/000120677414003689/wholefoods_pre14a.htm#propo32
6  http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2014/nyccomptroller121814-14a8-incoming.pdf
7  http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2014/nyccomptroller122914-14a8-incoming.pdf
8  http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2015/comptrollernewyork010215-14a8-incoming.pdf
9  http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2015/comptrollercityofnewyork-010615-14a8-incoming.pdf
10 http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2015/newyorkcityretirement010615-14a8-incoming.pdf
11 http://www.sec.gov/divisions/corpfin/cf-noaction/14a-8/2014/comptrollercityofnewyorstate123014-14a8-incoming.pdf
12 http://www.cii.org/files/issues_and_advocacy/correspondence/2015/01_09_15_CII_to_SEC_re_Whole_foods.pdf
13 http://corpgov.net/wp-content/uploads/2014/12/McRitchieAppealNo-action12-23-2014.pdf

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