Thwarting Shareholder Activism Through Engagement

As the 2017 proxy season draws to a close for most companies, it is obvious that shareholder activism remains alive and well, though the actual number of public activist campaigns appears to have tapered off slightly as compared to recent years. Activism takes many forms, ranging from takeover proxy battles to proxy access proposals to single-issue social welfare proposals. Particularly noteworthy is an apparent trend among institutional investors to target small and mid-size companies, perhaps believing (perhaps correctly) that these companies are ill-prepared to resist their forays. Companies have a wide array of defensive techniques at their disposal, depending on the nature of the activist’s approach, one of which is effective shareholder engagement. The good news is that more and more institutions are welcoming, and even encouraging, engagement with their portfolio companies. And while small and mid-size companies still sometimes struggle to get the attention of major institutions, this has become less problematic now that shareholder engagement is standard practice in corporate America. Although many of the governance benefits of shareholder engagement are widely known, often overlooked is its ability to thwart shareholder activism. Better communication between the company and its major shareholders reduces misunderstandings about management’s strategy or the reasons behind its latest moves. Misunderstandings, in turn, may lead to activism, or a willingness to side with activists. Strong relationships with traditionally non-activist institutional shareholders (by far the larger percentage) have the ability to actually deter activist behavior before it even happens, or to nip it before it gains too much momentum. For example, many activist shareholders own a relatively small percentage of the target company, particularly as compared...

Don’t Forget the Say-on-Frequency Form 8-K

The proxy rules require that public companies submit a nonbinding proposal to their shareholders every six years regarding how often they should hold say-on-pay votes, known as “say-on-frequency.” Most companies held their first say-on-frequency vote in 2011 and will be including another vote in their 2017 proxy statements. (“Smaller reporting companies” were not required to hold their first say-on-frequency vote until 2013, meaning that they won’t have to do it again until 2019, and there are special rules for “emerging growth companies.”) Shareholders may choose to vote on executive compensation every year, every two years or every three years, or they may choose to abstain. Though the vote is nonbinding, the charter of most compensation committees requires them to consider the outcome of the shareholder vote when deciding how best to proceed. Indeed, companies must amend their initial post-meeting Item 5.07 Form 8-K (which reports voting results) no later than 150 calendar days after the end of the shareholder meeting at which the vote was taken in order to “disclose the company’s decision in light of such vote as to how frequently the company will include a shareholder vote on the compensation of executives in its proxy materials….” Back in 2011 when these rules were still new, more than a few companies failed to make the necessary Form 8-K disclosures. While this may not sound like a big deal, in fact it is. A missed Form 8-K filing can render a company ineligible to use Form S-3 during the 12 months following the date that the Form 8-K should have been filed. For companies planning to raise capital in...

It’s Time to Consider Virtual Annual Meetings

More and more companies are moving to virtual-only or hybrid (both virtual and physical) annual shareholder meetings, though they remain in a substantial minority. Other companies sometimes pause to consider virtual meetings as they begin the annual proxy season sprint, then abandon the notion due to the press of time. Many (most?) companies haven’t yet considered them at all. In truth, there is much to be thought through, and much to be put in place, before taking the virtual meeting plunge—so much so that companies with spring proxy seasons have likely missed their chance for this year. Now is the perfect time, however, to tee up the issue for next year while management and the board of directors is focused on the annual meeting process. What is a virtual annual shareholders’ meeting? Virtual meetings can take many forms. Some are solely audio, much like most quarterly earnings calls. Others include video, much like a typical webcast. And as mentioned above, some companies (often those transitioning from physical to virtual-only meetings) hold hybrid meetings. Essentially, shareholders are issued a verifiable control number that allows them to access a secure meeting page, where they may listen to the meeting presentation and vote (if they have not already done so by proxy or if they wish to change their prior vote). Often they can ask questions, whether in real time by audio or electronically, or by submitting questions ahead of time. The meeting details and logistics of a virtual meeting can be tailored to the needs of each company, based on its analysis of its shareholder base and the message it wants...

Fixing the Shareholder Proposal Process

Battles over proxy access have taken center stage over the past few years in the form of activist shareholder proposals and proposed SEC rulemaking. (See this Doug’s Note.) Now Business Roundtable is suggesting that the entire Rule 14a-8 shareholder proposal process is flawed and has offered solutions to fix it. Business Roundtable, an association of CEOs of leading U.S. companies established to promote sound public policy, recently issued a white paper entitled “Responsible Shareholder Engagement & Long-Term Value Creation: Modernizing the Shareholder Proposal Process.” Its premise is that the shareholder proposal process has “fallen out of step” with today’s corporate decision making and capital markets. As a result, a small number of individuals with a small stake in companies are able to file many common proposals that distract business leaders from doing their jobs. The paper identifies the key problems as follows: The threshold for submitting a proposal is too low. For example, to be eligible, a proposing shareholder need own only $2,000 in market value of the company. The paper notes also that only three shareholders and their families were responsible for almost 22% of all nonmanagement shareholder proposals submitted to Fortune 250 companies in 2016. Excluding proposals relating to general social issues is difficult for companies. Business Roundtable believes that “most social, environmental and political proposals…have only an attenuated connection to shareholder value and are generally not issues material to a company’s business.”   By way of solutions, Business Roundtable proposes, among other things (which I quote verbatim): Updating the eligibility requirements for submitting a proposal based on a sliding scale related to company size; Increasing the...

Tips for Seeking Shareholder Approval of Equity Benefit Plans

Most public companies regularly submit equity benefit plans to their shareholders for approval. As a general rule, both NYSE and Nasdaq require that every new benefit plan, and any material amendment to an existing plan, be approved by the shareholders if it offers equity to the company’s officers, directors, employees or consultants (subject to certain exceptions for retirement plans, plans acquired via acquisitions and “inducement awards” to newly hired employees). In addition, IRS Code Section 162(m) generally requires that an equity plan be approved by shareholders not less than once every five years in order to avoid that section’s limit on deductibility of executive compensation. The SEC’s say-on-pay rules and the heightened scrutiny by institutional investors of executive compensation now make shareholder approval more of an adventure than it used to be. Therefore, if your company is considering whether to, or is required by rule to, request shareholder approval of an equity plan this proxy season, here are some tips for navigating that process: Plan ahead. It is surprising how often the decision to seek shareholder approval of a plan or a plan amendment is made at the eleventh hour of the proxy preparation process. Give yourself plenty of time to analyze the issues, map out and implement a strategy, and prepare and vet the necessary disclosures. If you haven’t already, it is not too soon to begin that process. Pay attention, but don’t over-react, to proxy advisor standards. The fact is that, though they continue to be important players in this arena, ISS and Glass Lewis now have noticeably less influence on the vote of institutional investors (particularly...

A Say-on-Frequency Reminder

The proxy rules require that public companies submit a proposal to their shareholders every six years regarding how often they should have say-on-pay votes, known as “say-on-frequency”. Most companies held their first say-on-frequency vote in 2011, which means that it will be time for another vote in 2017. (“Smaller reporting companies” were not required to hold their first say-on-frequency vote until 2013, which means that they won’t have to do it again until 2019. Also, there are special rules for “emerging growth companies.”) Note that: Say-on-frequency must be a separate ballot item due to the SEC’s proxy unbundling rule (see this Doug’s Note); Shareholders may choose to vote on executive compensation every year, every two years, every three years or choose to abstain; and The proxy statement must briefly explain the general effect of this vote, such as whether it is non-binding, the company’s current say-on-pay vote frequency, the timing of the next scheduled say-on-pay vote and any other relevant information. Note also that Item 5.07 of Form 8-K requires companies to amend their initial post-meeting Item 5.07 Form 8-K (which reports voting results) no later than 150 calendar days after the end of the shareholder meeting at which the vote was taken in order to “disclose the company’s decision in light of such vote as to how frequently the company will include a shareholder vote on the compensation of executives in its proxy materials….” Rather than later amending the initial post-meeting Item 5.07 Form 8-K, many companies choose to include the required disclosure in the initial Form 8-K. In that case, no subsequent amendment is required. Whether a...