On February 20, (ISS) published long-awaited FAQs clarifying its voting policies on proxy access proposals that would allow investors to include director nominees in the company’s proxy materials. 

Proxy Access

Moving away from its historical case-by-case approach, ISS generally will now recommend in favor of management and shareholder proposals with the following parameters:

• a maximum ownership threshold of not more than 3 percent;
• a maximum holding period of not more than three years of continuous ownership for each member of the nominating group
• “minimal or no limits” on the number of shareholders that can form a nominating group
• a cap on the number of nominees to “generally” 25 percent of the board.

ISS will review “for reasonableness” any other restrictions on the right of proxy access and generally will recommend a vote against proposals that are more restrictive than the guidelines described above.

Competing Management-Sponsored and Shareholder-Sponsored Proposals

If a company submits a management-sponsored proxy access proposal along with a shareholder-sponsored proxy access proposal, ISS will review each proposal under its new policy.

Exclusion of Shareholder Proposals

ISS views the ability of qualifying shareholders to submit properly presented shareholder proposals for inclusion in the company’s proxy materials as a fundamental right of share ownership. Accordingly, ISS will view attempts to circumvent the normal avenues of dispute resolution and appeal relating to shareholder proposals “with a high degree of skepticism.”

To this end, under its governance failures policy, ISS generally will recommend a vote against one or more directors (individual directors, certain committee members, or the entire board based on case-specific facts and circumstances), if a company omits from its proxy materials a properly submitted shareholder proposal when it has not obtained:

• voluntary withdrawal of the proposal by the proponent
• no-action relief from the Securities and Exchange Commission (SEC);
• a U.S. District Court ruling that it can exclude the proposal from its ballot.

The negative voting recommendation will be made regardless of whether there is a management-sponsored proposal on the same topic on the ballot. If the company has taken unilateral steps to implement the proposal, however, the degree to which the proposal is implemented, and any material restrictions added to it, will factor into the ISS assessment.

Several Companies Voluntarily Adopt Proxy Access

Recently, four prominent public companies, each of which faced proxy access shareholder proposals, voluntarily amended or announced that they would amend their bylaws to adopt proxy access:

• General Electric Co.’s (GE) bylaw amendments permit an individual shareholder, or a group of up to 20 shareholders, owning at least 3 percent of outstanding common stock continuously for a minimum of three years, to nominate and include in the company’s proxy materials director nominees constituting up to 20 percent of the board. 
• CF Industries’ bylaw amendments allow an individual shareholder, or a group of up to 20 shareholders, owning at least 5 percent of outstanding common stock continuously for a minimum of three years, to nominate and include in the company’s proxy materials director nominees constituting up to 20 percent of the board. 
• HCP, Inc.’s bylaw amendments allow an individual shareholder, or a group of up to 10 shareholders, owning at least 5 percent of outstanding common stock continuously for a minimum of three years, to nominate and include in the company’s proxy materials director nominees constituting up to 20 percent of the board.
• Citigroup Inc. announced bylaw amendments that would permit an individual shareholder, or a group of up to 20 shareholders, owning at least 3 percent of outstanding common stock continuously for a minimum of three years, to nominate and include in the company’s proxy materials director nominees constituting up to 20 percent of the board. 

These companies join a very small handful of other public companies that have adopted process access bylaws, including, most prominently, Hewlett-Packard and Verizon.

Currently, 96 shareholder proposals calling for proxy access are pending. Companies that had hoped to exclude a shareholder proposal on the basis of a competing management proposal now have to proceed without the benefit of the Rule 14a-8 process following the announcement from the SEC staff that it would refuse to grant no-action relief during the 2015 proxy season to companies seeking to exclude any shareholder proposal on the basis that the shareholder proposal conflicts with a management proposal on the same topic. 

As a consequence of the SEC staff’s action, companies facing a proxy access shareholder proposal had been considering a number of different options, such as:

• including the shareholder proposal in the proxy materials and opposing it through written arguments and shareholder engagement
• including both the shareholder proposal and the management proposal in the same proxy and advocating for the management proposal
• including the shareholder proposal and recommending in favor of it
• excluding the competing shareholder proposal after seeking a declaratory judgment in court.

After GE, CF Industries and HCP, commenters speculated whether other companies currently facing proxy access shareholder proposals would follow suit and proactively amend their bylaws to adopt proxy access on their own terms. Under this scenario, companies would include the shareholder proposal (unless withdrawn) in their proxy materials, but oppose it by highlighting the recently adopted (and more management friendly) proxy access bylaw. 

ISS’ revised voting guidelines reveal the potential limitations of this approach where the company adopts a more management-friendly proxy access bylaw, since the updated guidelines clearly are aimed at steering all companies toward a universal proxy access standard (3 percent/three years/25 percent) rooted in the now-vacated SEC proxy access rule and currently reflected in the proxy access proposals submitted by the New York City comptroller’s office under its multiyear Boardroom Accountability Project. We note, however, that Citi, which announced that it would adopt a proxy access bylaw after ISS posted its revised voting guidelines, determined to adopt a 3 percent/three years/20 percent framework similar to GE instead of the 3 percent/three years/25 percent framework favored by ISS. In this case, Citi appears to be taking advantage of the fact that ISS (i) “generally” favors a 25 percent cap on nominees as compared to insisting on a 25 percent cap, and (ii) chose a principle-based approach on aggregation as compared to a black-and-white standard.  

While the ISS revised voting guidelines will be one of many factors that boards will take into account in deciding how to respond to proxy access shareholder proposals, it is unclear whether they will result in a “tipping point” of investor support that pushes a substantial majority of companies facing proxy access shareholder proposals to a 3 percent/three years/25 percent framework. We continue to believe that a company’s analyses of the myriad of issues presented by proxy access should be based on its particular facts and circumstances as compared to a one-size-fits-all approach.