The proxy access movement potentially took a giant leap forward in January when Western Union made the dramatic decision to submit a No-Action Letter to the Securities and Exchange Commission seeking to exclude a proxy access shareholder proposal from Norges Bank Investment Management (NBIM). In its place, Western Union wants to submit its own proxy access plan at its upcoming annual meeting, which would allow shareholders to nominate directors if they own 5 percent of the stock for at least three years. Under the Norges Bank proposal, shareholders would be able to nominate directors if they own at least 1 percent of the shares for one year.
If the SEC approves the request, Western Union would become the first major company to implement a proxy access policy since the regulator gave eligible shareholders permission to require companies to include proxy access resolutions in company proxy materials. Experts also think it could lead other companies that are targets of proxy access proposals to take similar action, preventing shareholders from voting on a softer proposal.
In its No-Action Letter, Western Union asserts that it is submitting a management proposal under Rule 14a-8(i)(9) that conflicts with the shareholder measure seeking to amend its bylaws. Therefore, Western Union argues, a vote on both proposals “could lead to an inconsistent, alternative, ambiguous and conflicting mandate from stockholders.” Western Union would clearly rather its shareholders only consider its more restrictive proposal.
Also in January, KSW, a microcap heating and ventilating company, asked the SEC for permission to omit a shareholder proposal because it plans to implement its own proxy access policy. KSW’s policy would amend its bylaws to allow shareholders to nominate directors if they own 5 percent or more shares for at least one year. The company suggested the amendment after receiving a binding shareholder proposal that would have permitted shareholders who own 2 percent of the stock for one year to nominate directors.
In a report to clients, the law firm Davis Polk & Wardwell explains that KSW is arguing exclusion of the shareholder proposal on the basis of Rule 14a-8(i)(10) — that it has substantially implemented the essential elements of the shareholder proposal.
“The Western Union action is significant,” says Ted Allen, a governance counsel with proxy research firm ISS, noting it is the first major company to counter with its own proxy access proposal since the SEC allowed shareholders to submit these kinds of resolutions. “More companies may follow suit.”
No doubt Western Union felt that rather than risk having an onerous proxy access rule in place, it would preempt it with a policy with which it felt more comfortable. Of course, the SEC could rule that both proposals must be placed on the proxy and voted upon if it does not believe the two resolutions conflict with one another.
Davis Polk, however, does note that there is a major downside for Western Union in making the exclusion argument on the basis of a conflicting proposal. “The proponent may submit the same proposal to the company next year,” the law firm says in a recent note to clients.
In any case, many companies and investors now are eagerly awaiting the SEC’s ruling on the No-Action Letters — especially the one from Western Union, which should come by the end of February or early March. This would give Western Union enough time to place one or both proposals on its proxy before its annual meeting, which generally takes place in May.
If the SEC rules in Western Union’s favor, experts expect a number of other companies that are targets of proxy access proposals to take similar action to prevent a shareholder vote on softer proposals.
Others think that companies and other activist investors will wait to see how this year’s round of resolutions fare.
ISS counts 17 proxy access proposals submitted for this year’s proxy season. This includes six binding proposals filed by NBIM at Western Union, Wells Fargo, Charles Schwab, Staples, Pioneer Natural Resources and CME Group.
The first of the 17 votes is expected to take place at Hewlett Packard in late March. The nonbinding proposal submitted by activist Amalgamated Bank would provide proxy access rights to shareholders who own 3 percent of the stock for three years, but for no more than 25 percent of the board seats.
So far, neither ISS nor institutional investors have yet signaled how they would vote. Allen says ISS figures to issue its recommendation for how to vote for the HP proposal in early March.
“Many institutions are trying to figure it out,” he says.
Several of them, for example, only believe proxy access should take place at firms with a history of governance problems. Others might support more restrictive policies like Western Union’s as opposed to less restrictive proposals filed with MEMC Electronic Materials and Textron, which would permit shareholders to nominate one director if they have continuously held 1 percent of the company’s stock for two years, or if they are part of a group in which at least 100 shareholders each own a minimum $2,000 stake in the company for one year. Still others may want to first see how this year’s shareholder proposals fare.
Meanwhile, Davis Polk points out that several other companies, such as Textron, Bank of America and Goldman Sachs, are seeking to exclude the proxy access proposal altogether on a number of other grounds that do not call for implementing the proposal in any form.
No matter what, how the SEC's ruling on Western Union’s No-Action Letter could have a big impact on how directors are nominated in the future.
