The SEC has adopted proxy access rules, principally set forth in Rule 14a-11. The rules, which were permitted by the Dodd-Frank Act, permit shareholders to include shareholder director nominees in a company’s proxy statement. However, the proxy access rules are currently stayed because of litigation challenging the validity of the rules. Nevertheless, several companies have recently amended their bylaws in anticipation of Rule 14a-11 becoming effective.
The interface between bylaw provisions and the proxy access rules embedded in Rule 14a-11 is not entirely clear from the SEC rule making process. However, it is now generally believed, based on statements by SEC staff, and a speech by Commissioner Walter, that proxy access under Rule 14a-11 is only available when the shareholder has a right under state law to nominate directors. Accordingly, it appears shareholders must comply with advance notice bylaws to gain access to a proxy statement, or at least to nominate directors at a meeting. Many believe however, that advance notice bylaws cannot be so severe so as to serve as an opt-out from Rule 14a-11.
With the foregoing in mind, we took a look at recent efforts to amend bylaws to address Rule 14a-11. As you can imagine, where something as complex as this is in flux, there is a divergence in models, with some being more preferable to others.
Bristow Group Inc., a Delaware corporation, adopted a bylaw which provides that at least two thirds of the members of the board of directors must be citizens of the United Sates within the meaning of the Federal Aviation Act. It further provides that non-citizens are not eligible for nomination or election if together with the election of incumbents that are not US citizens would cause less than two-thirds of the directors to be U.S. citizens.
Felcor Lodging Trust Incorporated, a Maryland REIT, generally imposes an age limit of 70 years on directors nominated for election.
These models say that compliance with the advance notice provision is the exclusive way to nominate a director, and include some savings language in the event it is not possible to comply with both the advance notice provision and Rule 14a-11. The most comprehensive example of bylaw amendments addressing Rule 14a-11 we reviewed was MGM Resorts International, a Delaware corporation. Some of the things we liked are as follows:
- Only those nominated in accordance in accordance with the bylaw shall be eligible to serve as a director. (12(c))
- The person presiding at the meeting has the power to determine eligibility. (12(c))
- If the nominating shareholder does not appear at the meeting the nomination shall be disregarded. (12(c))
- Only stockholders of record may nominate directors. (12(a)(1))
- Disclosure of derivatives positions. (12(a)(3))
- Company can require proposed nominee to furnish other information on eligibility and independence. The information must be updated at the record date. (12(a)(3))
- A savings clause which says the advance notice provisions need not be complied with to the extent it is not feasible to comply with both Rule 14a-11 and the bylaws. (12(a)(5))
- A requirement for the nominee to deliver a questionnaire. The questionnaire requires representations as to certain voting commitments and, if elected, the nominee will comply with corporate governance, conflict of interest, confidentiality and trading policies.
Care Investment Trust is another comprehensive example tailored to a Maryland REIT. For those companies whose directors do not want multiple page advance notice bylaws, Analysts International Corporation, a Minnesota corporation, does a good job covering the basics. Analysts International also has some nice language regarding broker non-votes. (Article III, Section 8)
These models tend to have less rigorous provisions regarding the bylaw being the exclusive method to nominate directors and/or the models have broader carve outs stating nothing in the advance notice bylaw affects the rights of stockholders to request inclusion of nominees in the company’s proxy statements pursuant to Rule 14a-11. Examples include Bristow Group Inc., a Delaware corporation, and Felcor Lodging Trust Incorporated, a Maryland REIT.
Rule 14a-11 Controls Model
Other models broadly defer to Rule 14a-11, providing compliance with Rule 14a-11 is adequate without regard to the advance notice bylaw. Examples include Vectren Corporation, Flexsteel Industries, Inc. and Ampco-Pittsburgh Corporation.
We prefer the exclusive model as it puts all nominees on equal footing and does not permit a company to opt out of proxy access and Rule 14a-11. The non-exclusive model is often acceptable, and sometimes may be difficult to discern from the exclusive model, but may suffer from some ambiguity as to when Rule 14a-11 overrides an advance notice bylaw. At this time, we do not see any advantages to the Rule 14a-11 controls model.
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