Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

In a recently issued no-action letter, the staff of the SEC’s Division of Corporate Finance allowed a company to exclude a shareholder proposal seeking specific changes to the company’s existing proxy access bylaw.  According to the November 4th letter,  Oshkosh Corporation successfully argued that it had substantially implemented a shareholder proposal based on its modifications to an existing proxy access bylaw such that exclusion of the proposal was warranted in reliance on the basis for exclusion of shareholder proposals available under Rule 14a-8(i)(10).

The staff’s determination in this letter marks the first time the staff has concurred with the exclusion under (i)(10) of a proxy access proposal aimed at making specific changes to an existing proxy access framework, also known as a “Fix Proxy Access” proposal (as distinguished from proposals seeking first-time implementation of proxy access or “Adopt Proxy Access” proposals).

In a key distinction from prior (i)(10) letters, Oshkosh was able to highlight specific modifications to its existing proxy access bylaw made after receiving the shareholder proposal in making its successful (i)(10) argument.

By contrast, in several no-action letters issued over the past six months, the staff has consistently expressed an unwillingness to concur with arguments that Fix Proxy Access proposals should be excluded under (i)(10). One such letter released in late September (available here) embodies the staff’s prevailing view that companies may not merely point to an existing proxy access bylaw as evidence that a shareholder proposal seeking specified changes to such bylaw has already been implemented.

The most striking take-away from the November 4th letter, however, may relate to the specific modifications made in response to the shareholder proposal.  In particular, Oshkosh chose to implement only a subset of the total modifications sought by the proponent which included:

  • Reducing the eligibility threshold (from 5% to 3%)
  • Eliminating the 25% vote minimum for renomination, and
  • Eliminating the requirement that nominating shareholder represents it would continue ownership for one year following the meeting.

Oshkosh obtained exclusion despite the fact that they did not implement certain other elements of the shareholder proposal which suggests that the staff might not necessarily view the following elements as essential objectives of the submitted Fix Proxy Access Proposal:

  • Increasing the cap on the percentage of shareholder-nominated candidates to the greater of 25% of directors then serving or two (from the greater of 20% of directors or two),
  • Eliminating the 20-person cap on aggregation or
  • Eliminating the requirement that, to count loaned securities toward eligibility thresholds, there must be a right to recall the shares upon five business days’ notice.

The fact that the proponent in Oshkosh sought and received a specified reduction to the share ownership eligibility threshold for shareholder(s) to nominate a director (from 5% to 3%) may have been an additional motivating factor contributing to the staff’s substantial implementation determination.  As evidenced by its prior (i)(10) decisions in letters involving  Adopt Proxy Access proposals, the staff has consistently indicated that such ownership thresholds represent an essential element of proxy access.  In particular, the staff has repeatedly denied exclusion of proposals under (i)(10) where a company’s proxy access bylaw differs from the shareholder proponent’s proposal on share ownership eligibility threshold (e.g., where the shareholder proponent sought a 3% threshold while the company implements a 5% threshold).  It seems possible that the determination of the staff in Oshkosh was driven at least partially by the company’s willingness to implement this critical aspect of the shareholder’s proposal.

While the staffs’ concurrence in Oshkosh provides some perspective on what may be viewed as essential and non-essential elements of a Fix Proxy Access proposal, the staff’s determination is, as always, issuer and proposal-specific.  For example, it remains unclear how the staff might assess a company’s substantial implementation of a Fix Proxy Access proposal which does not include modification to the share ownership eligibility thresholds.   Likewise, would the staff continue to view changes to the nominee cap, shareholder aggregation limits, or power-to-recall for loaned securities as non-essential if they represented the only elements of a Fix Proxy Access proposal?  With the likely increase in the submission of Fix Proxy Access proposals next proxy season, such questions will continue to plague issuers.

At the very least, the staff’s determination in Oshkosh serves as notice that a company must take specific action to modify its proxy access system by implementing aspects of a Fix Proxy Access proposal in order to “substantially implement” a Fix Proxy Access proposal for purposes of exclusion under (i)(10).