Important Disclaimer 2009 Proxy Season Update April 16, 2009 Public companies in the United States are currently in the middle of "proxy season," the period during which many companies hold their annual meeting of shareholders. With the growth of shareholder activism (including the federal government's role as "shareholder activist" in forcing change at such companies as General Motors, Citigroup, and others), as well as changes in personnel and policy at the Securities and Exchange Commission (SEC) and evolving notions of "best practices" of corporate governance, there are a number of interesting topics coming to the fore during this year's proxy season. This WSGR Alert highlights some of those areas with respect to the SEC's and the New York Stock Exchange's (NYSE's) new policies and procedures; we will follow this alert shortly with another alert summarizing some recent significant changes in Delaware corporate law. SEC No-Action Letters On March 30, 2009, RiskMetrics Group published an update, available here, regarding recent trends in SEC no-action letters relating to shareholder proposals.1 Corporate Governance Proposals Through March 25 of this year, companies have filed no-action letters seeking to exclude nearly 37 percent (212 of 574) of corporate governance proposals submitted by shareholders, compared to 33 percent in 2008 and 20 percent in 2007. Despite this increase, companies have been successful in excluding only 48 percent (75 of 157) of such proposals through the no-action process, compared to 69 percent in the same period of 2008. In addition, 22 shareholder proposals were withdrawn this year prior to an SEC decision. While it is difficult to overly generalize from these numbers, it appears that it is becoming increasingly difficult to exclude shareholder proposals, even as the number of shareholder proposals increase as shareholders continue to seek greater control and/or direct oversight over corporate affairs. Proposals Concerning the Right to Call Special Shareholder Meetings A notable trend this year is the success of corporate governance proposals brought by retail investors affiliated with shareholder activist John Chevedden. Such proposals seek to provide certain shareholders, typically groups of investors holding at least 10 percent ownership of a company, the right to call special shareholder meetings. As of March 25, 29 such proposals have survived no-action challenges, while nine proposals were permitted to be excluded from proxy statements, compared to the exclusion of 23 similar proposals in 2008. Unsuccessful arguments advanced by companies this year include substantial implementation through a 25 percent ownership threshold and arguments that the proposals are impermissibly vague and indefinite. Cumulative Voting Proposals Through March 25 of this year, cumulative voting proposals put forth by Chevedden and other shareholder activists have survived 11 no-action challenges, with only four such proposals being excluded from proxy statements, compared to 13 of 30 such proposals excluded in 2008, most due to conflicts with state law. Unsuccessful arguments advanced by companies this year include arguments that such proposals are vague and misleading, as they failed to explain how cumulative voting would function along with existing majority voting provisions. Social/Environmental Proposals As of March 25, companies have filed no-action letters to oppose 95 of the 371 (26 percent) social and environmental proposals filed by shareholders and have succeeded in excluding 37 of the 55 cases decided by the SEC staff (67 percent). NYSE Rule 452 Next year's proxy season may be affected by the outcome of the proposed amendment to NYSE Rule 452. NYSE and SEC rules require that brokers deliver proxy materials to the beneficial owners of shares held by them and request instructions from each beneficial owner as to how to vote such shares at each shareholder meeting. Current NYSE Rule 452 permits brokers to exercise discretionary voting authority on "routine" matters when voting instructions are not received from a beneficial owner 10 days prior to the shareholder meeting. Uncontested director elections are considered routine matters under current NYSE Rule 452. The proposed amendment to NYSE Rule 452 would provide that uncontested director elections are not routine matters, potentially decreasing the number of votes cast in uncontested director elections. In 2005, the NYSE created the Proxy Working Group to review the NYSE rules regulating the proxy voting process.2 The Working Group issued its original report in June 2006, and issued an addendum to its original report in August 2007.3 The reports recommended a number of changes and proposals with respect to the proxy system, one of which was that the NYSE should "amend Rule 452 to make the election of directors a 'Non-Routine' matter," meaning that brokers would no longer be permitted to vote the shares of beneficial owners who do not give specific voting instructions with respect to the uncontested election of directors. The SEC has postponed consideration of the proposed amendment to NYSE Rule 452 for several years but is currently reviewing the comments provided by interested parties, which are available here. The SEC has not yet, however, scheduled a meeting to consider the proposed amendment, but it is expected that it may provide that the amendment to NYSE Rule 452 be permitted in the near future. If approved by the SEC prior to August 31, 2009, the proposed amendment to NYSE Rule 452 would apply to the solicitation of proxies for shareholder meetings held on or after January 1, 2010. When combined with majority voting provisions, which many companies have already adopted, the proposed amendment to NYSE Rule 452 may dramatically affect director elections of public companies. The proposed amendment, which elicited pointed comment from both sides, would affect director elections of both NYSE- and Nasdaq-listed companies, since the NYSE rules affect how brokers licensed by the NYSE that hold stock of a Nasdaq-listed company on behalf of a client could vote in a director election of that Nasdaq-listed company. A number of comment letters sent to the SEC (including the Proxy Working Group's comment letter4) have suggested that the SEC consider the amendment to NYSE Rule 452 as part of the holistic review of the proxy system, as suggested by the Working Group's report. There has also been concern expressed that the proposed amendment may disenfranchise retail investors, who already cast fewer votes with the increased use of the SEC's new "notice and access" electronic delivery rules. Some of the comment letters received by the SEC have also argued that the proposed amendment could create an additional hurdle for smaller companies to meet their quorum requirements and/or prohibit proportional voting provisions adopted by 11 brokers representing more than 45 percent of the market.5 Institutional investors have urged the SEC to adopt the proposed amendment, citing the increase of broker discretionary voting concomitant with the decrease in retail voting. Such advocates have also expressed concern about the rise of proportional voting as violative of the "one share, one vote" principal. Investor advocates have cited the CVS Caremark 2007 director election and Washington Mutual 2008 director election as examples in which broker discretionary voting was the deciding factor in electing management nominees to the board of directors. It is estimated that as much as 70 to 80 percent of the shares of U.S. public companies are held in "street name" and managed by brokers. Brokers exercising discretionary voting authority vote overwhelmingly for management nominees. In 2008, 16.5 percent of shares were voted by brokers exercising discretionary voting under current NYSE Rule 452, according to Broadridge Financial Solutions. Application of Advance Notice Bylaws In response to several court rulings last year,6 many public companies have updated their advance notice bylaws,7 for example, to clarify the wording of notice requirements and require disclosure of derivative and hedging transactions of shareholder proponents. In the past, Delaware court cases have upheld the validity of advance notice bylaws generally, so long as such a bylaw "operates as a reasonable limitation" upon the shareholders' right to nominate candidates to the board of directors or otherwise propose business to be conducted at the shareholders' meeting.8 There is no reason to believe that a Delaware court would strike down a recently amended advance notice bylaw that met such a standard, although no Delaware case has yet examined a recently amended advance notice bylaw. This year a company may be faced with a situation in which it can use an advance notice bylaw to exclude a shareholder proposal from consideration at a shareholder meeting. For example, for some time many advance notice bylaws have contained provisions that authorize the chairman of a shareholder meeting to declare at the meeting, if the facts warrant, that a shareholder proposal was not properly brought in accordance with the advance notice bylaw, with the result that the shareholder proposal shall not be acted upon at the meeting. Companies should note that, where the application of an advance notice bylaw would impinge upon shareholders' right to vote or be unfair to shareholders, Delaware courts have sometimes required companies to waive their advance notice bylaws.9 Companies may be required to demonstrate a "compelling justification" under the Blasius standard of review if it is determined that the application of an advance notice bylaw is designed principally to interfere with a shareholder vote, even if the act is taken advisedly and in good faith.10 Prior to using an advance notice bylaw to exclude a shareholder proposal, companies should review their situation with counsel to better ensure that they are using the advance notice bylaw properly.
This WSGR Alert was prepared by David J. Berger and Richard Cameron Blake, both of Wilson Sonsini Goodrich & Rosati's Palo Alto office. Wilson Sonsini Goodrich & Rosati will provide further information regarding the matters above as more information is made available. Please contact the authors listed above, your regular Wilson Sonsini Goodrich & Rosati contact, or any member of our corporate and securities practice or securities litigation department with any questions you may have about these matters and the potential implications they could have for your company.
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