Market Trends: Shareholder Proposals

By: Trevor S. Norwitz, Sabastian V. Niles, Avi A. Sutton and Anna S. Greig Wachtell, Lipton, Rosen & Katz

Shareholder proposals are a popular and effective mechanism enabling shareholders to recommend or require that a company and/or its board of directors take a specified action.

TO BE ELIGIBLE TO SUBMIT A PROPOSAL FOR CONSIDERATION at a meeting of the company’s shareholders and have such proposal included in the company’s proxy statement and proxy card under federal law, a shareholder must have held company shares with a market value of at least $2,000 (or at least 1% of the company’s securities entitled to vote on the proposal at the shareholder meeting) for at least one year and comply with additional substantive and procedural rules set forth in Rule 14a-8 (17 C.F.R. § 240.14a-8) under the Securities Exchange Act of 1934, as amended (the Exchange Act). There has been criticism that the dollar threshold in Rule 14a-8, which was adopted decades ago in 1998, is too low. See e.g., Comment Letter of The Business Roundtable, File No. S7-25-97 (Dec. 9, 1997). It is possible that this threshold may be raised in the future and that other reforms may be made to the shareholder proposal process. Alternatively, albeit infrequently used, a shareholder may submit a proposal under state law, without regard to the requirements of Rule 14a-8, but must bear the cost of preparing and mailing its own proxy statement to the company’s shareholders.

After a significant increase in the frequency of shareholder proposals in the 2015 proxy season—due in large part to the prevalence of proxy access proposals described below—the number of shareholder proposals submitted to U.S. public companies has been decreasing somewhat (from 943 in 2015, to 916 in 2016, down to 861 in 2017), though the number of proposals still exceeds the 2013 level (820), according to the Institutional Shareholder Services (ISS) Voting Analytics database and other privately sourced data. (All 2017 data herein is as of July 1, 2017.) As the number of shareholder proposals submitted has increased since 2013, however, the average investor support for shareholder proposals has actually been declining over the past five years, down from 34.4% in 2013 to 29.8% in 2016 and 25% in 2017.

As discussed in detail below, prior trends are expected to continue. In particular, it is expected that:

• The pressure to adopt proxy access bylaws will continue to increase at large-cap companies and begin spreading to mid-cap companies.
• Proponents of proxy access will attempt to refine proxy access bylaws by proposing amendments to existing proxy access bylaws.
• Other governance-related proposals will decline at large-cap companies but increase at mid-cap companies.
• Specific compensation-related proposals will reappear in light of high-profile controversies and legislative uncertainty.
• Shareholder support for environmental and social topics and board diversity—gender diversity in particular—will increase.
• While less common, shareholder proposals may continue to address economic/business issues and be put forward by economic-oriented activists / hedge funds (e.g., Greenlight’s Spring 2017 proposal at General Motors, which ultimately failed).

Common Types of Proposals

Governance

Proxy Access

Proxy access gives shareholders who meet specified conditions the right to include one or more shareholder-nominated candidates for election to the board of directors in the company’s proxy statement and on its proxy card. Since 2015, proxy access has been one of the more dominant shareholder proposals at large-cap companies and the most likely type of shareholder proposal to obtain majority shareholder support. This has resulted in a majority of S&P 500 companies adopting some form of proxy access, either as a result of a successful shareholder proposal or due to voluntary adoption of a proxy access bylaw with terms consistent with market practice.

To read the full practice note in Lexis Practice Advisor, follow this link.

Trevor Norwitz is a partner in the Corporate Department at Wachtell, Lipton, Rosen & Katz where he focuses primarily on mergers and acquisitions and corporate governance matters. He has advised public and private entities across many industries in connection with mergers, acquisitions, divestitures, hostile takeover bids and defenses, proxy contests, joint ventures, financing transactions and corporate governance and crisis management situations. Sabastian V. Niles is a Partner at Wachtell, Lipton, Rosen & Katz where he focuses on rapid response shareholder activism and preparedness; takeover defense and corporate governance; risk oversight, including as to cybersecurity and crisis situations; U.S. and cross-border mergers, acquisitions, buyouts, investments, divestitures, and strategic partnerships; and other corporate and securities law matters and special situations. Avi A. Sutton and Anna S. Greig are associates at Wachtell, Lipton, Rosen & Katz.

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