Proxy access: moving to center stage? A real shift may be underway in how board elections are conducted for public companies.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

Although the directors of a public company are elected by, and consequently theoretically an swerable to, their shareholders, many have argued that these shareholder elections are not conducted on a level playing field, but instead significantly favor the incumbents. When the incumbent directors run for re-election, the company runs their campaign, paying to prepare and distribute the proxy statement to its shareholders and then soliciting proxies to vote in favor of the incumbents. By comparison, in the past challengers had to prepare and manage their own election campaign, often at significant cost. Perhaps more importantly, the incumbent's campaign has the imprimatur of corporate approval, relegating challengers to the status of a "dissident" or "insurgent."

Recognizing this disparity, many voices, including the SEC, have called for leveling the playing field by giving certain long-term, significant stockholders equivalent ability to nominate director candidates using the company's proxy statement. The SEC addressed this matter of proxy access in 2010 when it adopted proxy access on a "3-3-25" basis, i.e., holders of 3% of a company's shares for at least three years could use company proxy materials to seek election for up to 25% of the board members (a "3-3-25" standard).

Although this initiative was later invalidated as having exceeded the SEC's authority, the issue has not gone away. Last year, the New York City Comptroller submitted 3-3-25 shareholder proxy access proposals to 75 different publicly traded companies. During the last proxy season, over 100 proxy access proposals, most following the 3-3-25 pattern, were submitted as shareholder proposals and about 60% of those voted on were approved by shareholders.

This level of support for these proposals suggests that proxy access proposals will not quickly fade away. This maybe the beginning of a real shift in how board elections are conducted for public companies.

The landscape of the proxy access movement has been complicated by the SEC's pullback from its previous position that a company may in certain circumstances exclude a shareholder proposal, such as one dealing with proxy access, from its proxy statement. The usual basis for excluding such proposals was that the company had itself proposed or even adopted a similar proposal, even if it had done so after having received the shareholder proposal. Before the SEC backed away from this policy, which it says is currently under...