Shifting Leverage in Shareholder Votes: Cross currents with shareholder access to company proxies.

• Author: Raymond, Doug

An incumbent director has powerful advantages in any election contest with a challenger. One of the most significant is that the incumbents' nominations are included in the company's proxy statement, and the proxy card that goes to all shareholders makes it very easy to vote for their re-election.

By contrast, challengers must mount their own campaign, and at their own expense prepare and distribute competing proxy statements and cards and try to persuade shareholders not to default to the usual choice. The "proxy access" movement seeks to shift that balance of power away from the incumbents and to level the playing field for challengers.

Proxy access rights allow shareholders who have nominated directors who are challenging management's nominees, to press their nominees' election using the company's proxy statement and more importantly, its proxy card mailed to shareholders. Typically, this allows shareholders (including a group of shareholders) that have held a minimum amount of shares (e.g., three percent of the outstanding) for a stated period of time (often three years) to nominate candidates for up to 20% of the board (or at least two directors).

Being included in the company's proxy statement can greatly increase the chances of a dissident being elected to the board, it strengthens the leverage of institutional and activist shareholders when dealing with boards over a range of issues. Even without a pending election contest, the incumbent directors know that a credible election contest may emerge if the investors believe that the incumbents are not fully engaged in that dialogue.

The Securities and Exchange Commission originally adopted a version of Proxy Access in 2010 in Exchange Act Rule 14a11 that applied to all public companies; however, a year later the rule was invalidated by a Federal Appeals Court on the basis that the SEC had adopted it in an arbitrary and capricious manner, without having conducted a sufficient assessment of its economic impact. But the concept survived, and like the "majority voting" movement for director elections, has been championed by public pension funds and other institutional investors.

While the number of proposals submitted by shareholders seeking adoption of proxy access may have peaked, corporations continue to be pressured to adopt proxy access and many have preemptively adopted management-supported bylaws to avoid having to deal with a shareholder proposal that would need to be included in...