The SEC stepped back into the proxy access arena on February 12, 2016, with a volley of 18 no-action letters on a single day that sharply reduced uncertainty about an important tactical point.

At issue was the circumstances under which a company with an existing proxy access bylaw can exclude a shareholder proxy access proposal based on “substantial implementation” under Rule 14a-8(i)(10).  Of the 18 companies, 14 adopted a bylaw after receiving a shareholder proxy access proposal for the 2016 proxy statement, and then sought to exclude the shareholder proposal.  That tactic was tried only once in 2015, by General Electric; there, the sole distinction between the adopted bylaw and the proposal was that the adopted bylaw imposed a limit (20) on the number of shareholders who may form a group, while the shareholder proposal simply referred to “a group of shareholders,” and the SEC granted no-action relief.

Many commentators thought the GE approach might no longer be available after the SEC in October 2015 took a narrow view of what companies can exclude based on a “conflicting proposal” from management under Rule 14a-8(i)(9).  And even if it were, there was doubt about whether it could be expanded– i.e., whether it would be available where there were more differences between the adopted bylaw and the proposal.

The February 2016 no-action letters do go beyond the GE precedent and sketch the boundaries of substantial implementation with several different fact patterns, summarized in the table below.  The companies’ adopted bylaws differed from the shareholder proposals in multiple ways, and the SEC refused no-action relief only where a bylaw provided proxy access for shareholders owning 5% of the shares, and the shareholder proposal sought a 3% ownership threshold.


This guidance obviously clarifies the considerations for a company that receives a shareholder proxy access proposal and prefers to avoid a shareholder vote.  Adopting a bylaw and then excluding the proposal is viable as long as the differences are within the range summarized in the table above.  Adopting a bylaw and then negotiating withdrawal is also viable, and it is significant that all of the successful February 2016 letters involve individual shareholder proponents (mostly John Chevedden); this is probably because the institutional proponents are more prepared to negotiate withdrawal.

A company that does not have a bylaw and has not received a proposal still has two choices, if it prefers not to see the issue come to a shareholder vote in the future.  It can unilaterally implement a proxy access bylaw on standard terms before the next shareholder proposal window, on the theory that shareholder activists probably will not target a company with an existing standard bylaw (at least not in the near term) and, even if they do, the company can probably exclude the proposal on the basis of substantial implementation.  Alternatively, it can wait to see if it receives a proposal and, at that time, enact a standard bylaw and either try to negotiate withdrawal or obtain no-action relief to exclude the proposal.  Unilaterally adopting in advance of receiving a proposal has the advantage of minimizing the potential distraction at proxy time of either negotiating withdrawal or seeking no-action relief.  In any event, a company should consider the proxy access terms it would be willing to adopt so it is ready if it does receive a proposal.

A large number of companies have enacted proxy access bylaws during the last three months, and it is likely that many were adopted as part of a withdrawal agreement with shareholder proponents.  For the companies that do include a shareholder proposal in the proxy statement, we will be watching closely to compare the voting to last year, when support for proxy access proposals was solid but not overwhelming.  One important change over the last week came from Vanguard, which formerly supported proxy access rights for 5% holders but not for 3% holders: Vanguard has announced that it will now support proxy access proposals with the standard 3% ownership threshold.  Proxy access may seem at this point like an inevitability for most companies, particularly with this shift by Vanguard, but we have yet to see whether retail shareholders, by and large, share this view.