For many companies, the period between Independence Day and Labor Day is a good time to absorb the lessons of the spring proxy season and to catch a corporate breath before the stretch run to the end of the year. With that in mind, I have three thoughts for consideration.
Thought One: Consider proxy access.
Now that the hoopla regarding proxy access has died down momentarily (see this Doug’s Note), companies should step back and assess their vulnerability to a proxy access proposal next year and whether it makes sense to act affirmatively in that regard. Affirmative action could take the form of meaningful shareholder engagement (more on that later) to assess your own shareholders’ sensitivity to that issue and, perhaps, the likelihood of your company receiving such a proposal.
Affirmative action could also take the form of “voluntarily” adopting a proxy access bylaw. Because proxy access best practices are still evolving, this is an opportune time for companies to implement proxy access bylaws specifically suited to their own circumstances. None of the key provisions of a proxy access bylaw are yet written in stone, including such things as percentage ownership, years of ownership, number of members in a shareholder group, “creeping control” limits, and the circumstances under which proxy access may be suspended, to name a few. A good case can be made, therefore, that early voluntary adopters of proxy access will be better able to control their own destinies, rather than wait for perhaps more onerous best practices to develop.
Nevertheless, the vast majority of companies will wait to see how this governance issue develops over the next few years under the theory that it is preferable for best practices to firm up before taking action or that proxy access could increase a company’s vulnerability to an election contest. Such companies might reasonably decide to oppose any proxy access proposals until there is more clarity.
The point is that such issues should at least be discussed, even if not finally decided, over the next few months and before next proxy season, when the next wave of proposals will hit.
Thought Two: Don’t miss the Third Circuit’s recent decision regarding the “ordinary business” exclusion for shareholder proposals.
Earlier this month, the Third Circuit U.S. Court of Appeals issued its opinion in Trinity v. Wal-Mart, which rejected the concept that a proposal for board-level action, rather than management-level action, automatically renders unavailable the Rule 14a-8 “ordinary business” shareholder proposal exclusion. In this case, Trinity sought to prohibit sales by Wal-Mart of certain products, such as assault weapons.
Essentially, the court held that so long as the subject of the proposal “relates” to ordinary business operations, it is excludable, despite the proponent’s efforts to characterize it as a governance matter. It is not enough, the court ruled, that the proposal addresses social policy issues; it must, in addition, “transcend” ordinary business operations. Interestingly, the court provides a relatively specific, multi-step methodology for analyzing applicability of the exclusion, while noting with apparent frustration the SEC’s long-standing failure to have done so.
Be sure to consult Trinity if you receive an “ordinary business” proposal next proxy season.
Thought Three: It’s prime time for shareholder engagement.
Finally, as I have said before (see this Doug’s Note), the fall is prime time for shareholder engagement: summer vacations are over and year-end deadlines have not yet monopolized everyone’s schedules. Don’t wait for the crunch of next year’s proxy season, when companies and shareholders are swamped with deadlines and distractions.
The next few months are the best time for developing or updating your shareholder engagement strategy, prioritizing strategic goals, identifying targeted shareholders, setting governance road show schedules, reviewing your peers’ latest governance activities, identifying and training company participants, and developing an engagement agenda.
Believe it or not, proxy season will be here again before we know it.