Annual Meetings

The resignation of Occidental’s chairman at the company’s annual meeting, which has been widely reported, was subject to an unusual majority vote provision. 76% of the votes cast opposed Mr. Irani’s election to the board. As is fairly common with majority voting, the company’s bylaws require any nominee who receives a greater number of votes against his election than in support of such election to tender his resignation. However, rather than having the board consider whether to accept the director’s resignation and publicly announce its decision within 90 days, Occidental’s bylaws provide that the resignation becomes effective upon the earlier of acceptance by the board or October 31 in the year of election. In other words, the bylaws do not allow the board to reject the resignation, for any reason.

The majority vote bylaw was adopted in 2011 following the outcry over the compensation paid to Mr. Irani, who was then CEO of the company. As a result of the most recent controversy, Occidental made additional governance changes. Some of the more unconventional reforms the board adopted include the rotation of the positions of independent chairman and committee chairs every five years, prohibiting former CEOs of the company from sitting on its board and having the mandatory retirement age for CEOs set at 68. Both executive and director compensation, which had been subject to criticism, were also decreased, with the CEO promising to forego any bonus and certain other compensation during his remaining tenure. In addition, the company pledged to have an independent chairman elected from among the independent directors and create a committee focused on management succession.

With over 50 S&P 500 meetings scheduled for this week, the proxy season begins in earnest.  Similar to last year, the Wells Fargo meeting on Tuesday appears to be one of the first targets of protestors. Reports indicate that while many proclaimed their grievances outside, the meeting was disrupted by dozens who had to be removed, in particular one individual who tried to make a citizen’s arrest of the CEO. The demonstrators complained about the bank’s consumer lending and mortgage practices. There was also some grumbling about the location of the meeting site being in Salt Lake City, after 15 years in San Francisco. Goldman Sachs is also holding its meeting in Salt Lake City this year. 

In Pittsburgh, a group of Quakers asked PNC Financial to cease providing financing for projects that use mountaintop removal to produce coal. News reports indicate that they heckled the CEO about a dozen times and tried to interrupt the meeting, which ended after a brief 20 minutes. US Bancorp shareholders gathered in Boise to protest the bank’s foreclosure practices and payday loans. 

This “week of action” for 99% Power is focused on Wells Fargo, Sallie Mae, WalMart and Bank of America with a full schedule of events, so more demonstrations may be planned.

Meanwhile, other high-profile meetings proceeded rather peaceably. The big news for the 850 attendees at Coca-Cola’s annual meeting was the surprise appearance of Warren Buffet, the company’s largest shareholder. At GE, a shareholder proposal seeking an independent chairman only received 25% in support. The proposal also failed at Wells Fargo. 

Recent controversy surrounding Hewlett-Packard’s board elections have put the spotlight on referendums for directors, with the New York Times alone running three stories on the subject over two weeks. The first article complained about the difficulty of removing directors after HP’s board members all received majority support even in the face of several active and well-publicized “vote no” campaigns. The article blamed large shareholders, intimating that they tend to be mutual funds and asset management companies that may have inherent conflicts of interest, and criticized HP’s biggest shareholder for supporting management’s recommendation on directors 100% of the time from January 2009 to June 2012. 

Then, after the announcement that two HP directors are leaving the board and a third is stepping down as chairman, additional articles focused on other boards where directors did not actually receive majority support from shareholders, but continued to govern. Only a small number of directors receive less than majority support, .36% last year (or 61 directors out of over 17,000 up for election). Of those 61 directors, 51 remained on their boards, according to ISS. This time, the plurality voting system came under attack as “an electoral system unworthy of Soviet-era sham democracies.” 78% of S&P 500 companies have majority voting for uncontested board elections, while overall only 45% of the S&P 1500 have joined the movement. Prior efforts by the Council of Institutional Investors to provoke the Delaware legislature to amend its corporation laws were mentioned. Apparently, North Dakota is the only state that bars plurality voting. No major company is incorporated in that state.  

Several companies were highlighted in this article, but the most interesting may be Iris International in confronting the “what-if” scenario that is often considered by companies debating whether to adopt majority voting. After adopting a resignation policy coupled with plurality voting in January 2010, the entire board received more “withhold” than “for” votes at the May 2011 meeting when ISS recommended against board members for deciding earlier in the year to retain a poison pill without subjecting it to shareholder approval. Pursuant to their majority voting policy, all nine directors tendered their resignations. At the same time that they announced the meeting results, the board firmly rejected those resignations, attributing the outcome to ISS influence. Later that year, the company terminated its rights plan. The company has since been acquired. 

Finally, a DealBook article cites to a study that found that director turnover does not depend on company performance, as there was less than a percentage point difference between companies that were deemed to have performed well or poorly. The biggest driver causing new faces on boards is mandatory retirement age.

As companies prepare for annual meetings, they should consider in advance their preferred approach if the proponent or a designated representative does not attend the meeting to properly present the shareholder proposal that it submitted. 

Rule 14a-8(h)(3) permits a company to exclude, for two years, any shareholder proposals from a proponent who fails to appear and put forward the proposal at the annual meeting, unless the proponent can demonstrate good cause. As evident in a recent SEC staff decision disagreeing with Sprint's argument to exclude a proposal on this basis, any ambiguities are likely to be viewed in the proponent's favor.

At the 2012 annual meeting, Sprint's ballot included a shareholder proposal from the AFL-CIO and another from the Office of the New York Comptroller on behalf of several New York City pension funds. Several days prior to the meeting, the New York City pension funds informed the company that the same representative designated to present the AFL-CIO proposal would also be presenting the funds' proposal at the company's meeting. 

According to transcripts, after the AFL-CIO representative made a lengthy statement about the union's proposal, the Chairman then called upon him to present the New York City pension funds' proposal. The representative responded, "Well, actually I was only here to present the first one." The Chairman stated, "But you're tagged with this one too, buddy," after which the representative agreed that he was indeed "tagged with this one. I'll just stand here and introduce myself again and say that the AFL-CIO urges you to support this proposal." He did not name the pension funds' proposal, read the resolution or mention the pension funds. He later informed the company that he was surprised and unaware that he was responsible for presenting more than one proposal.

Recently, Sprint submitted a no-action letter to exclude another proposal that the New York City pension funds submitted to the company for the 2013 meeting, on the basis that no representative attended the 2012 meeting to present their 2012 proposal. In its response letter arguing that the 2012 proposal was properly presented, the pension funds used the transcript records to note that the Chairman had specifically called upon the AFL-CIO representative to present the pension funds' proposal, and the Chairman then reminded the representative of this when he indicated no awareness of the proposal. In addition, the pension funds pointed out that the company's Form 8-K announcing the 2012 meeting results reported the votes for the pension funds' proposal, without asserting that the proposal had not been properly introduced.

Companies may want to anticipate in their annual meeting scripts the possibility that the appropriate representative of a shareholder proposal may not be present at the annual meeting, and provide the chair of the meeting with explicit statements that could preserve their ability to make Rule 14a-8(h)(3) arguments in the future.

Hewlett-Packard’s annual meeting yesterday was preceded by a bustle of activity around the agenda items, with a string of news reports announcing that as many as 5 of its 11 board members were the targets of different “vote no” campaigns, primarily due to questions surrounding the company’s acquisition of Autonomy. 

Investor groups differed on who they thought should be held responsible. The New York City Comptroller’s Office and CtW Investment Group filed notices of exempt solicitations to explain why they were voting against two of the company’s longest-serving directors, the chair of the finance committee and the chair of the audit committee. In addition, CtW criticized the proposal to ratify the company’s auditors, not only over their work on the acquisition but also for the amount of non-audit fees reported. CtW claimed that those fees, at 40% of the total, is twice the average for public companies. 

The company responded with a letter from the lead director defending his two fellow board members, as well the executive chairman of the board, an additional subject of opposition for activists like AFSCME. The lead director himself, and the chair of the technology committee, were later added to the list of directors being attacked by shareholders such as the Florida State Board of Administration, which did not lay blame on the chairman. The proxy advisory firms added to the conflicting perspectives, with ISS and Glass Lewis both recommending against the two longest-serving directors, but diverging otherwise. ISS urged that shareholders also vote against the chairman, while Glass Lewis focused instead on the lead independent director and the head of the technology committee, due to their longer tenure.

The controversy was further aggravated by an open letter that the founder of Autonomy posted, widely reported by the press, on the day of the meeting. The letter was addressed to HP shareholders and contained a list of questions that they recommend that shareholders ask the board at the meeting, relating to the impairment charge and the acquisition. 

Ultimately, all of the directors were re-elected to the board. According to news reports, the votes in favor of the chair of the finance committee, the chair of the audit committee and the chairman of the board ranged from 54% to 59% in favor. The chair of the technology committee received 70% support, while 80% of shareholders voted to re-elect the lead director. The auditor was ratified with 85% of the vote, and the company’s say-on-pay vote, which ISS changed its initial recommendation to eventually support, was approved by 75% of the shareholders. Most stories completely overlooked the management’s proxy access proposal that we previously discussed here, which was reportedly approved. 

There has been much in the press about David Einhorn’s lawsuit seeking an injunction against Apple over a proposal in its annual meeting proxy statement, with various reports indicating that Einhorn is focused on Apple’s vast cash position and the possibility of the company distributing preferred stock to its shareholders. The suit also alleges that Apple improperly bundled several matters into one proposal in violation of Rule 14a-4(a)(3).

Apple’s proposal as described in its proxy statement seeks shareholder approval to amend the company’s charter to (a) implement majority voting for the election of directors; (b) eliminate “blank check” preferred stock; (c) establish a par value for the company stock and (c) make conforming changes. Apple discloses that the majority voting amendment is needed to conform to the California Corporation Code that applies to companies that have adopted majority voting.  Unlike Delaware, the California statute provides that the term of an incumbent director in an uncontested election who fails to be elected shall end the earlier of 90 days after voting results are determined or when the vacancy is filled. 

David Einhorn and Greenlight Capital filed a notice of exempt solicitation on February 5th announcing its lawsuit, and included a copy of the letter it sent to Apple shareholders asking them to vote against this proposal because it “would eliminate preferred stock from Apple’s charter and thus restrict the Board’s ability to unlock the value on Apple’s balance sheet.” The notice states that they have had ongoing discussions with Apple about the possibility of distributing perpetual preferred stock to shareholders, which Apple rejected definitively in September 2012. Greenlight then initiated the lawsuit after Apple informed them recently that while it will continue to evaluate Greenlight’s ideas, it will not withdraw the charter amendment and also refused to unbundle the proposal.

In response, Apple filed additional soliciting materials on the same day reiterating its commitment to thoroughly evaluate Einhorn’s proposal and emphasizing that its proposal would not prevent the company from issuing preferred stock, but only requires that shareholders must approve such issuances. Since Apple’s proposal would be in line with what activists of a different stripe would considered “good governance,” it is not surprising that CalPERS also filed a notice of exempt solicitation to support the company. 

Because of the management proposal, Apple filed a preliminary proxy statement first with the SEC. There is no indication whether the SEC staff reviewed it before the final proxy materials were distributed. A majority of the company’s outstanding shares are needed to approve the proposal at the meeting scheduled for February 27th. 

On December 13, the SEC declined to permit Disney to exclude a proxy access shareholder proposal submitted by Legal and General Assurance (Pensions Management), in conjunction with its client, Hermes Equity Ownership.

The proposal requested that Disney’s board adopt a bylaw that would allow a holder of 3% of its stock for at least three years to nominate up to 20% of the directors. The ownership requirements of the proposal closely resembled those of the SEC’s vacated proxy access rule and was substantially similar to two other proposals that were approved by a majority of shareholders at Chesapeake Energy and Nabors Corp. at their 2012 annual meetings.  

Disney sought to exclude the proposal as vague and indefinite under Rule 14a-8(i)(3), arguing that the proposal’s requirement that the nominating party provide Disney with information required by SEC “rules” about the nominating party and the board nominee was vague and misleading because it did not describe the substantive provisions of such rules. Disney also argued that the proposal was subject to multiple interpretations and its references to both SEC rules and to “any federal regulations” was vague and misleading.

In response, counsel to the shareholder proponent argued that the proposal “is a garden-variety ‘proxy access’ proposal” whose “central aspect” is the request of proxy access for owners of 3% of the stock for three years for up to 20% of the board. As such, the proponent argued that the language cited by Disney as vague and misleading was a secondary element of the proposal. The shareholder also disputed the claim that the wording was vague and subject to multiple interpretations. Disney then submitted a second letter to the SEC refuting the claims in the proponent’s response.

The SEC did not agree with Disney’s views, including its argument that the proposal’s reference to the SEC’s “rules” made it vague and indefinite and therefore subject to exclusion subject to Rule 14a-8(i)(3). In contrast, in the 2012 proxy season, the SEC had found that proxy access proposals which referenced “SEC Rule 14a-8(b) eligibility requirements,” without specifically describing such requirements, were subject to exclusion as vague and indefinite. In those letters, the SEC reasoned that the specific eligibility requirements were a central provision of the proxy access proposal in question.

A copy of the correspondence can be found here.

This is the fourth in a series of posts to discuss shareholder proposals during the 2012 proxy season.

While the number of shareholder proposals on independent board chairs increased significantly this year, shareholder support for these proposals did not show a corresponding surge. As of June 30th, there was a total of 48 proposals voted on at Russell 3000 companies, as compared to 21 at the same time last year.

This increase in number of proposals is due in part to a concerted effort this year by activist investors, including AFSCME, to target companies with combined chair and CEO positions. Not all shareholders, however, followed the lead of these activist investors. Of the 48 shareholder proposals, only 3 proposals passed. The average level of shareholder support for all independent chair proposals was 36% of votes cast, which is lower than the support received this year by other governance proposals such as declassification and majority voting.

It seems that the appointment of a lead director is not enough to prevent a company from receiving a shareholder proposal for an independent chair, as a majority of the companies receiving shareholder proposals this year had a lead director in place. All but four of the remaining companies had a presiding director. In addition, there were independent lead directors at all three companies at which the proposals passed. 

According to a Spencer Stuart 2011 Board Index, only 21% of S&P 500 companies have an independent board chair.

This is the third in a series of posts to discuss shareholder proposals during the 2012 proxy season.

The number of shareholder proposals relating to shareholder ability to call special meetings continued to decline: to 17 this year, down from 30 last year and 45 in 2010. 

This decline is due, in part, to the number of management proposals on the same topic. Management proposals relating to special meetings typically require a higher percentage (20%-25%) of share ownership to call a special meeting than do those proposed by shareholders, which generally require 10% ownership. Companies often submit management proposals to provide a basis for excluding a shareholder proposal with a lower ownership requirement under Rule 14a-8(i)(9). There have been 18 management proposals to date this year.

Close to one-third of the shareholder proposals on special meetings passed; the average level of shareholder support of votes cast was 44%. The common factor at all the companies where the shareholder proposal passed was that the shareholders of the companies in question did not have any right to call a special meeting. (At some, although not all, of the companies where the shareholder proposals failed, the shareholders of the company already had a right to call special meetings, although at a higher percentage than that sought in the shareholder proposal.) 

The SEC also permitted a number of these shareholder proposals to be excluded based on Rule 14a-8(i)(3), which allows exclusion of shareholder proposals that are “vague and indefinite.” Those proposals called for an ownership threshold of 10% “or the lowest percentage of outstanding common stock permitted by state law,” which language was found to be vague and indefinite. Interestingly, this was the same language in the proposals at most companies that chose the alternate route of seeking no-action relief  based on introducing a management proposal.

This is the second in a series of posts to discuss shareholder proposals during the 2012 proxy season.

Not surprisingly, shareholder proposals on majority voting for uncontested director elections continued to garner support this year, averaging 62.5% of votes cast at 33 companies as of early July, up slightly from 59.2% in 2011.

Of this total, 18 of the proposals voted on were at S&P 500 companies. Half of those  passed with average support of 57.5% of shares cast. Two companies – PACCAR and CF Industries – had notably high shareholder support: 97.1% and 91.7%, respectively. Management had supported the proposal at PACCAR but opposed it at CF Industries. 

At its annual shareholder meeting this year, Apple announced its intention to adopt a majority voting standard, as proposed in a shareholder proposal in its proxy statement. This followed a year of Apple’s refusal to adopt a majority vote standard, despite 73% of its shareholders having supported such a proposal in a non-binding vote in 2011. CalPERS had submitted the majority vote proposals at Apple in both 2011 and 2012.

In looking at these results, it seems that while majority voting is often referred to in the same breath as other governance stalwarts such as board declassification (which we recently discussed), shareholder support for such proposals is not nearly as high. Indeed, this season management proposals for majority voting passed at 9 companies, but failed at two companies. Nevertheless, the trend of adoption of majority voting standards, especially at large cap companies, continues apace; according to ISS, 79% of S&P 500 companies had adopted majority voting by 2011, up from 59% in 2009.

The importance of shareholder engagement is increasingly clear, as annual meetings become more than simply routine events.  For a discussion on how to execute that mandate, and do it well, we turn to GE’s Christoph Pereira, Chief Corporate, Securities & Finance Counsel, and Lori Zykowski, Executive Counsel, Corporate, Securities & Finance for their insights. 

Davis Polk: What does shareholder engagement mean at GE, and how do you carry it out?

GE:  Over the last few years, we have stepped up our shareholder outreach, and we now have a dedicated team that includes those of us in the corporate and securities legal group as well as our investor relations team. The effort has evolved into a nearly year-round process, which starts in the fall, when we reach out to our top 50 shareholders and, in many cases, make personal visits. During these visits, we discuss GE’s governance practices, our Board of Directors, our executive compensation program and current trends. We share the investor feedback with senior management and the GE Board, and these discussions often lead to recommendations for governance enhancements. We conduct follow-up solicitations in March, and review and analyze key insights from the proxy season over the summer.

Davis Polk:  What are the reactions of shareholders when you reach out to them? How do you think these efforts, which can be quite time-consuming, benefit companies?

GE:  Our shareholders are generally receptive, and, in many cases, stress the importance of this dialogue. The quality of our discussions has improved over the last few years as we have made a concerted effort to understand each individual investor.  To this end, we have created detailed investor profiles, which allow us to focus on specific concerns and positions, thereby minimizing generic and repetitive governance discussions. While this is quite time-consuming, we derive a lot of value from our outreach, as it helps us synthesize real-world investor concerns with the academic governance discussion, which tends to be driven by well-intentioned ideas, rather than hard evidence. Most importantly, it helps us avoid any surprises. There’s also the added benefit that once we’ve met an investor in person (or by telephone), it’s easier to reach out to them during the height of the proxy season when we may have a hard issue and a short timeframe to resolve it.

Davis Polk: Why do you think shareholder engagement has become so instrumental to companies, even at those companies without any significant governance issues of contention?

GE:  Governance failures dominate headlines these days and have significant reputational ramifications. The say-on-pay vote has raised the stakes in this respect because it can also be interpreted as a vote on performance. Interestingly, say-on-pay votes tend to exhibit binary voting patterns and don’t necessarily follow a smooth predictable trend. For example, it is not uncommon to see 90% plus approval levels at a company on say-on-pay in one year and then a sharp drop in support the following year.  This phenomenon underscores the danger of being too complacent: it’s easy to get caught off guard if you are not in tune with your shareholders. Finally, we have experienced an emergence of ESG-focused investor inquiries, and the governance outreach helps round out our IR strategy.

This is the first in a series of posts to discuss shareholder proposals during the 2012 proxy season.

The march towards board declassification showed no signs of slowing down in the 2012 proxy season. Of the 45 precatory shareholder declassification proposals that had gone to a vote as of mid-June, 40 of such proposals passed with an average support of 89% of the votes cast. This shows an increase in support of shareholder declassification proposals over the previous proxy season, in which  declassification proposals passed with average support of 77% of votes cast. For the proposals that failed, the average support was 43.7% (excluding a failed proposal at Hospitality Properties Trust, which garnered the support of 90% of votes cast but failed to get the requisite 75% of outstanding shares.) 

The number of shareholder declassification proposals might have been even higher had an additional 44 companies receiving such shareholder proposals not negotiated agreements to offer management proposals to declassify their boards, according to a report by the Harvard Law School Shareholder Rights Project (SRP). All the management proposals regarding declassification received resounding support of votes cast, but some nevertheless failed at companies, such as Alcoa and Charles Schwab, which require votes of more than 80% of the outstanding shares.

According to the ISS, only one-third of all S&P 500 companies have staggered boards, as compared with over half of the mid-cap and small-cap companies. Notwithstanding this gap, the activist focus continues to be on the large-cap companies. Approximately three-quarters of the shareholder declassification proposals this season were filed at large-cap companies, many of them proposed by institutional investors who were advised by the SRP. 

While proxy season has ended for most companies, there are a number of governance matters worth keeping an eye on during the summer months:

SEC Rulemaking.  The SEC website noting upcoming Dodd-Frank activity still indicates a number of actions slated before the end of June, including proposing rules regarding disclosure of pay-for-performance, pay ratios, hedging by employees and directors and recovery of executive compensation. It was recently updated to reflect the adoption of final rules on compensation committees and advisers, which we discussed here. As we are in the last week of June, it is likely that the Commission will again delay the actions into the next time period – July to December 2012. Watch for the SEC Sunshine Act meeting notices that usually come out on Wednesdays regarding Commission discussions of proposed or final rules, as summer is traditionally an active month for SEC rulemaking. 

NYSE and Nasdaq Listing Standards.  The SEC final rules on compensation committees and compensation advisers gave the listing exchanges wide latitude in proposing standards of implementation, including the possibility of imposing additional prohibitions or other restrictions. The exchanges have 90 days from the time the rules are published in the Federal Register, and the proposed standards are subject to public comment. 

ISS Policy Survey.  Last year, ISS released its policy survey to its client institutions and corporate issuers in early July. The survey forms the basis for possible changes to ISS policies with respect to voting recommendations on such matters as director elections, say-on-pay and shareholder proposals. 

Say-on-Pay.  The current count is 49 companies with failed votes. June has been a particularly active month, with eventful annual meetings at Nabors and Chesapeake but also with Safety Insurance Group being the first company to fail its vote even after receiving support from ISS. ISS likely recommended in favor of the company because it scored "low concern" on the three quantitative pay-for-performance tests, but shareholders rejected that formulaic approach. Consulting firm Semler Brossy indicates that shareholders may have been concerned about the company's performance and possibly the absence of changes or description of shareholder outreach that might have been expected as a result of the prior year's 67% favorable vote. Interesting events continue to unfold, such as Abercrombie & Fitch announcing changes to CEO compensation immediately after its vote received only 25% in favor. The company indicated that the CEO will forego two semi-annual equity grants that he is entitled to under his employment agreement. As the season winds down, we will begin to see whether there are any lessons to be learned from this second year of experience. 

Shareholder Proposals.  As the overall results of shareholder proposals are tallied, it may be useful to analyze not only the average votes, but also where companies received either much higher or lower support for the proposals that your company may have already received, or may be at risk of seeing for the 2013 meeting. Proposals often also reflect the current governance environment in terms of which practices are becoming more widely adopted by companies and expected by investors as a result of high support, such as board declassification. 

Shareholder and Proxy Advisory Firm Engagement.  The summer months may be an ideal time to reach out to shareholders, and proxy advisory firms if needed, either on specific issues or as a way to make introductions or otherwise keep in contact with those no longer harried by the proxy season. 

The movement toward exclusive forum provisions, which as we recently discussed had been gathering steam over the past couple of years, is under attack and is for the moment, we believe, in retreat.   Although some 200 companies have adopted exclusive forum provisions since 2010, mostly in the form of board-adopted bylaws, recent litigation in Delaware has caused some companies to dismantle these bylaws and numerous others to defer consideration of the issue.

This recent shift illustrates what happens when a small group with strong preferences encounters a large group with less strong ones.  The large group in this case is the companies.  An exclusive forum provision mandating that shareholder litigation take place in Delaware does not eliminate shareholder litigation, but it channels it in a way that can avoid forum shopping and duplicative litigation and enhance predictability, since the Delaware courts handle these sorts of cases for a living.  It is easy to conclude, as many companies have, that this is in the interests of shareholders, but most companies we’ve talked to view these provisions as “nice to have” rather than as a matter of critical importance.

The small group, of course, is the plaintiffs bar, for whom duplicative litigation and forum shopping are a feature rather than a bug, since they magnify uncertainty (and thus settlement value) and may facilitate finding a congenial place to make a fee application.  Faced with a threat to their franchise, the plaintiffs bar determined to act preemptively, and sued about a dozen companies in the Delaware Court of Chancery for adopting exclusive forum bylaws.  Plaintiffs also challenged charter amendment proposals by three companies.  Suing in Delaware was an interesting tactical decision, since Chancery, with its natural interest in upholding the primacy of the Delaware courts, might have been thought to be the court most likely to uphold these provisions.

Faced with this unexpected development, the defendants faced the dilemma of whether to invest time and money defending litigation over a provision that had been promoted as a device to reduce litigation.  Not surprisingly, the great bulk of the companies chose to reverse course, repealing the exclusive forum bylaws provisions and mooting the pending litigation. Two of the three companies whose charter amendment proposals were challenged also withdrew the proposals in response.

Leaving the field of battle may not be for free, however.  The plaintiffs filed fee applications seeking approximately $400,000 in each bylaw case and $500,000 in each charter proposal case.  Ten of the thirteen mooted cases reached settlement agreements earlier this week for undisclosed amounts.  The other three fee petitions remain pending.

This leaves two companies, Chevron and FedEx, continuing to litigate the validity of their bylaws.  Chevron has also been sued in a copycat action in federal court in California, and has moved to stay or dismiss the California action.

How do shareholders feel about these provisions?  The evidence is inconclusive.  Of the five exclusive forum provisions that were to have been on the ballot in 2012, two were approved, two were withdrawn and one voted down.  In addition, shareholder proposals seeking to remove exclusive forum provisions at two companies (including Chevron) failed to pass.  While labor unions and other shareholder groups traditionally aligned with the plaintiffs bar will invariably oppose exclusive forum provisions, the voice of the majority of institutional shareholders has not yet been heard clearly.

Now that adopting an exclusive forum bylaw has turned out not to be costless, we expect most companies to wait for guidance from the Court of Chancery before taking further action in this area.

Being an election year, it’s no surprise that the most prolific type of shareholder proposal this season asked for disclosure and oversight of political contributions and lobbying expenses.  ISS reports that over 100 such proposals were filed. The proposal generally averages far less than overwhelming support, not even 30% as of the end of May.  However, WellCare recently became the first company in 2012 to receive 53% in favor of the proposal (without counting abstentions), an increase from 43% in the prior year.  Similar proposals also received more than 40% support at five other companies, including Coventry Health Care Inc. (49%) and Anadarko Petroleum Corp. (47%).

According to a profile on WellCare published by the Center for Political Accountability, 90 companies in the S&P 500, including more than half of the S&P 100, have committed to disclose their political spending and oversight of such activities.  The disclosure sought by proponents of these proposals are complex.  Many activists say it is insufficient to include only direct contributions to candidates, parties and committees.  They also want companies to report the dues and other payments made to trade associations and other tax-exempt groups that are used for political purposes, which is broadly defined.  The need to highlight those particular expenses is often difficult for companies, but as one example, AFSCME praises Coca Cola for its disclosure on the amounts and percentages of the portion of dues it pays to national trade associations that are used for lobbying expenditures. 

ISS began to recognize companies' efforts and revised its policy for this season by making voting recommendations on a case-by-case basis, depending in part on a company's existing disclosure of policies and oversight mechanisms related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes and any recent significant controversies, fines, or litigation pertaining to the company's political contributions or political activities.  In practice, ISS did not automatically recommend in favor these proposals, and therefore may have contributed to the generally low level of votes in support.

Some are urging the SEC to get involved.  In 2011, a group of law professors petitioned the SEC for rulemaking mandating political contributions disclosure data, indicating that public investors have become increasingly interested in receiving information about corporate political spending and citing companies' voluntary reports as evidence of responses to such interest.  The petition states that the disclosure is "important for the operation of corporate accountability mechanisms."  A few months later, SEC Commissioner Luis Aguilar, referring to the rulemaking petition, voiced his support for SEC rulemaking since “investors are not receiving adequate disclosure, and as the investor’s advocate, the commission should act swiftly to rectify the situation.”

A lot has already been written about the controversy surrounding Chesapeake's governance and its annual meeting taking place today, but since it is unusual for shareholders to litigate in order to delay an annual meeting with routine ballot items, the court order on the preliminary injunction request gives some insight on the standard.

Chesapeake originally filed a preliminary proxy on April 20th that included information regarding the CEO's now well-known interest in certain company transactions and related loans. The SEC conducted a review of the proxy after media inquiry highlighted those transactions. The company issued a final version to shareholders on May 11th. Plaintiffs later asserted that defendants failed to disclose material information necessary to allow shareholders to cast a fully informed vote and asked the Court to enjoin the meeting until the disclosure is revised. The plaintiffs alleged that the voting items impacted by the lack of disclosure include the re-election of two directors, an amendment to the equity plan and the approval of the performance goals for a new cash-based plan. The plaintiffs did not reference the advisory vote on executive compensation.

The Court determined that the plaintiffs did not met their burden of showing irreparable injury, because the plaintiffs have an adequate remedy if the injunction is denied. Namely, if the plaintiffs ultimately prove proxy violations, the Court can void the shareholders’ vote on the voting items related to that material information and order that those voting items be resubmitted to the shareholders, especially as the voting items at issue "do not involve complex business transactions."  The Court also noted that the director elections were not contested, and that some weight should be given to the SEC's review and clearance of the proxy when deciding on the matter. 

There may never be a need to consider whether to void at least some of the votes, since reports today indicate that the two directors received less than majority support (about 26-27% in support) and have tendered their resignations under a newly adopted majority voting policy. The say-on-pay vote fared even worse, and received only 20% in support. 

In the first win of its kind, a majority of shareholders at Nabors Industries voted in favor of a proposal for the right of shareholders owning 3% or more for at least three years to nominate directors on a company's ballot, for up to 25% of the board. The thresholds are the same as those previously adopted by the SEC, which was later struck down by the courts. The shareholder proposal was submitted by a group of New York City Pension Funds led by the City Comptroller of New York, and co-sponsored by similar funds in five other states. The company confirmed news reports that the proposal has passed, but has made no public announcement about the specific vote results.

Nabors had been criticized for their executive compensation practices last year, which entitled the then-CEO to a cash bonus of 10% of any amount of the company’s cash flow that exceeded 10% of average shareholder equity. In addition, a $100 million award was triggered when the CEO relinquished his title but did not leave the company. The outcry resulted in a failed say-on-pay vote. The company also announced an SEC investigation into its disclosure of aircraft perks after the Wall Street Journal reported that flight logs showed many flights to the CEO's homes that did not appear to be reported in the proxy statement. 

While claiming that proxy access is a basic shareholder right in an exempt filing, the proponents also cited several issues that they argued made proxy access particularly compelling at Nabors, including the $100 million award (which the CEO later waived), related party transactions with board members and the absence of majority voting. A later filing quoted from ISS and Glass Lewis reports in support of the proposal. 

While much of the attention on proxy access proposals this season has been on the versions proposed by U.S. Proxy Exchange and Norges Bank since they put forth the bulk of the proposals, it was always questionable whether they would succeed, given that their low thresholds likely caused institutional investors to question their reasonableness. In addition, the SEC staff permitted the exclusion of several proposals.

Instead of peppering the landscape with proposals, seasoned shareholder proponents like the City Comptroller targeted only a few companies that have been criticized for perceived governance issues. It now appears that their strategy has succeeded, as Hewlett-Packard previously negotiated to include proxy access and the proposal won at Nabors. The next proposal of this kind to be voted on is at Chesapeake Energy's annual meeting this Friday, but given that their recent governance changes included the ability of two shareholders to name directors to the board, the concept of proxy access seemed to have already taken effect. 

It is an unusual annual meeting where Justin Timberlake acts as the Master of Ceremonies and Taylor Swift, Celine Dion, Lionel Ritchie and others perform for over 14,000, mostly employees, in attendance. But the focus at Wal-Mart’s meeting was clouded by recent allegations of FCPA violations, as evidenced in the annual meeting results announced today. 

Since slightly more than half of the shares are held by insiders, the opposition by more than 15% to the re-election of former CEO H. Lee Scott is not insignificant. ISS also recommended against current CEO Michael Duke, chairman Robson Walton and audit committee chair Christopher Williams, with those three directors receiving about 13% negative votes. Perhaps as a testament to ISS influence, the remaining directors emerged unscathed with at least 93% in support, even though CalPERS campaigned against the re-election of nine directors, the City Comptroller of New York targeted five directors and Glass Lewis also recommended against additional directors. 

In other director news today, Chesapeake Energy announced in advance of its annual meeting on Friday that it will change the composition of its board after reaching agreement with Southeastern Asset Management and Carl Icahn to add four new independent directors to replace four existing directors who plan to resign, and appoint a new independent chairman upon the retirement of a fifth existing director. It is unclear whether this development affects the hearing scheduled to take place in Oklahoma federal court on a preliminary injunction to delay the meeting until more information is made available about the related party transactions and perks involving the company's CEO. The plaintiffs argued that they needed more details to make informed voting decisions about director elections and the vote on executive compensation. 

Even with director elections in the news, ISS reports that the average vote for directors were 95.5% as of late May. Only 7 out of 5,7000 directors have failed to win majority support, and for all the same reasons as in prior years – attendance issues, adoption of poison pills without shareholder approval and failure to implement shareholder proposals that received majority of votes from shareholders. Most of those directors remain on their boards due to plurality voting structures.

We're at that stage during proxy season when observers analyze and come to preliminary views of the results so far, as we did ourselves in this memo. With more annual meetings having taken place, many focus on the voting tallies for shareholder proposals. The Conference Board's May Proxy Season Fact Sheet uses data for Russell 3000 companies as of the end of April and includes a detailed chart of each company's reported say-on-pay vote. The Manhattan Institute's Center for Legal Policy's Proxy Monitor's Mid-Term Report is based on its scorecard tracking every ballot proposal at Fortune 200 companies. Some of the notable details in these reports include:

• While governance proposals make up the bulk of proposals when examining Russell 3000 companies, political spending and executive compensation proposals dominate at the Fortune 200 companies that already have many of the governance practices (annual elections and majority voting) that are often the subject of those proposals.



• 30% of Fortune 200 companies faced political spending proposals, but support has actually decreased on average to less than 20%, in large part due to different levels of voluntary disclosures by many companies. Proposals seeking an advisory vote or direct prohibition on political spending have even received less than 5% support. The averages hide the disparate results at specific companies, with the same proposal garnering 19% at Sprint Nextel and 39% at AT&T, the highest level for a political contributions proposal.



• With mandatory say-on-pay already on proxy cards, executive compensation proposals now focus on limiting practices such as gross-ups, golden parachutes and death benefits, or requiring a certain period of equity award retention. The proposals average 26% support, though proposals calling for pro-rata vesting or prohibiting accelerated vesting upon a change-in-control are reaching upwards of 40%.



• Other than declassification, majority voting and elimination of supermajority provisions, other governance topics do not receive majority of shareholder support. For that reason, exceptions are always noted, as written consent proposals succeeded at Eastman Chemical and a handful of other companies and came very close with over 49% at Pfizer. A special meeting proposal passed at Allergen, and Sempra Energy is the first company to see majority support for an independent chair proposal this season.

This proxy season there has been a lot of focus on companies filing additional soliciting materials to supplement proxy disclosure, with a particular focus on executive compensation in light of the say-on-pay vote. Exxon Mobil has taken a particularly interesting approach turning a two-dimensional paper communication into something more dynamic by inviting interested persons to a company-sponsored webcast on executive compensation.

The webcast represents an additional proactive step Exxon has taken. On the same day it filed its proxy statement, Exxon took the unusual step of also filing a colorful presentation filled with data, graphs and photos to explain how its pay-for-performance approach focuses on the long-term nature of its capital-intensive business. In supplemental information filed more recently, Exxon took issue with specific aspects of the ISS analysis, including the peer group selected, which Exxon asserted failed to adjust for its size and complexity, since the company's revenue is more than 4X larger by revenue and 3.5X larger by market capitalization than the median of the peer group. 

On the webcast, which included a presentation, Exxon representatives discussed the company's business environment, the scale and scope of the company and its focus on the long-term nature of its business strategy. The company explained that together, these form the basis for customized compensation decisions, including a lengthy "hold-to-retirement" policy and a unique approach on the deferral of 50% of annual bonuses, a measure rarely seen outside of financial institutions. The company's focus on executive training, retention and succession was emphasized, including the fact that the company achieves its retention goals without change in control or severance agreements with senior executives. The company also discussed the shareholder engagement it undertook as a result of last year's say-on-pay vote. In response to questions during the webcast, the company noted how its programs focus on performance assessments that take a more holistic approach rather than concentrating on formulas that inspire executives to reach for only certain specific goals. The company received several questions about specific aspects of its pay decisions, the reasons for the webcast and the proxy advisory firms' recommendations.

The NYSE announced today that the Proxy Fee Advisory Committee (PFAC), formed in September 2010 and comprised of representative investors, brokers and companies, has published its recommendations to change the proxy fees. Brokers and banks are required under SEC rules to distribute company proxy materials to beneficial owners of securities, or shareholders holding in "street name." In turn, companies must reimburse them for their expenses. The NYSE regulates the amount of fees, subject to SEC review and approval.

The full Report by PFAC explains in summary form the complexities of the proxy distribution process, by reference to the SEC "proxy plumbing" concept release.  Over 80% of public securities are estimated to be held in street name. Broadridge, the primary intermediary for proxy distribution, reported that in 2011 it handled distributions to 90 million beneficial owners with accounts at over 900 banks and brokers, covering over 628 billion shares, at a cost of about $200 million to companies in the aggregate.

The Report painstakingly describes the careful work by PFAC in considering each of the four different type of proxy fee designed to compensate brokers for different services, an examination of the existing rationale based on the work involved and an evaluation of whether a change in fee is warranted based on recent developments, such as a move toward less paper distributions. According to the Report, it is expected that overall fees paid by companies will decrease by about 4% under the revised structure.

PFAC's recommendations include several changes to the existing fees and also streamlining the proxy fee categories to increase transparency. In addition, PFAC supported allowing companies to ask brokers for a list of the identity of non-objecting beneficial owners (NOBO) based on number of shares held or of those that have not yet voted proxies, without needing to pay for an entire list of all NOBOs. In order to encourage further retail investor voting, PFAC also recommended that the NYSE broach with the SEC the idea of a fee to pay for an "investor mailbox," through which investors can access proxy materials and voting forms through their brokers' website. 

For those interested in learning more, an archive version of a webcast sponsored by the NYSE is here.

PFAC's work is only the beginning. The NYSE indicated that it will initiate discussions regarding the PFAC’s recommendations with the SEC, after which the NYSE would expect to submit a rule change proposal to the SEC reflecting the outcome of these discussions. Any rule filing proposal would be published for public comment prior to SEC approval.

An increasing number of shareholders are filing solicitation materials advocating for a particular position on a voting matter at annual meetings, the flip-side to our recent discussion of companies filing additional soliciting materials to support management proposals. Some companies that are not accustomed to the practice may be surprised that the shareholder materials are filed under the company's EDGAR record, as a Notice of Exempt Solicitation. As permissible under Rule 14a-6(g)(1) and Rule 14a-2(b)(1), the solicitation is exempt from requiring the proponents to file accompanying proxy statements.

Since March 1st, shareholders have made over 30 such filings. More than half were filed by the proponents that submitted shareholder proposals being voted on at the meeting. The others generally focus on voting against director nominees. Recently, a coalition of state pension funds, including CalPERS and CALSTRS, urged shareholders to vote against the two directors up for re-election at Hospitality Properties Trust. Their letter states that they are taking this "extraordinary action" for several reasons, including the adoption of a poison pill by the company without shareholder approval and the absence of efforts to declassify its board after receiving more than majority support for shareholder proposals seeking annual elections for three consecutive years. Yesterday, the company announced that one of the directors received only 42% in support and resigned as a result. However, as the board determined that the low vote was not due to the director's "personal failings" but rather the board's disagreement with CalPERS, the board re-appointed the same director to the vacancy that his resignation created, and the director accepted. The composition of the board remained the same.

At Wellpoint, CtW Investment Group filed three separate letters to shareholders asking them to withhold support for two director nominees because of perceived lack of oversight for political spending. The most recent criticizes not only the company but also takes issue with ISS' support for the election of those directors and the advisory firm's recommendation to vote against a shareholder proposal on political contributions disclosure. CtW also asked Sotheby's shareholders to vote against its nominating and governance committee for their "failure to take decisive action and break with James Murdoch," a former board member. In another action directed at board members, the Comptroller of the City of New York encourages shareholders to vote against several director nominees at Wal-Mart for independence and compliance issues related to recent allegations of bribery at the company. 

Proponents who submitted shareholder proposals are using these materials as another way to hype their proposals, without being restricted by the 500-word limit imposed on supporting statements. They also use them to rebut the company's opposition statement in the proxy statement. The most prolific shareholders include Trillium Asset Management, urging support for their proposals asking that boards of directors adopt policies prohibiting the use of corporate funds for political purposes at 3M and Bank of America as well as proposals at Verizon and AT&T to commit to operate its network consistent with principles of network neutrality, which at 10 pages (with footnotes) was one of the longest. Most soliciting materials are from advocates of environmental and social issues, with a few covering executive compensation proposals. In addition, Amalgamated Bank filed a letter urging shareholders of Chevron to vote for its proposal to repeal an exclusive forum bylaw.

In early April, Norges Bank Investment Management filed a presentation on the proxy access proposals that it had submitted to six companies, including Wells Fargo. Norges had taken part in a Glass Lewis-sponsored proxy talk. Besides explaining the terms of the proposal, the presentation provides the reasons why it focused on these particular companies, citing issues ranging from stock price performance to governance matters such as combined CEO and chair positions, the absence of the right to call special meetings or the adoption of the right to call special meetings at higher thresholds than the 10% supported by a majority of shareholders, the existence of classified boards or the boards' rights to amend bylaws without shareholder approval. The claims are sufficiently wide-ranging as to make it difficult to predict what companies would not be targets.

The results at Hospitality Properties Trust is likely due to its fairly unusual fact pattern, and the ability of these shareholder soliciting materials to affect vote results is probably not meaningful for the most part. However, as a relatively simple and inexpensive means of shareholder communication, the use of these exempt filings could continue to appeal to these types of shareholder activists.

The Occupy Wall Street Movement has turned its focus on annual meetings, which one media outlet is calling "a rare public forum in U.S. business." News reports indicate that a coalition of unions and other organizations calling itself the "99% Power" intends to target more than 200 meetings, although only a few dozen companies were listed on its website. Some of these organizations sponsored trainings for those interested shareholder protests. Reportedly, over 1,000 demonstrators descended upon the Wells Fargo meeting site, where activists bought single shares of stock to gain entrance and over a dozen were ejected for disrupting the meeting. The press today reported that GE's annual meeting was delayed in order to remove two dozen people chanting at the beginning. GE confronted about 100 protestors in Detroit. Videos of the demonstrations outside the meetings, as well as the protestors' efforts during the meetings, have been posted online.

The focus of these particular agitators are not the items on the proxy ballots. At Wells Fargo, demonstrators targeted the bank's foreclosure and lending practices and mortgage operations.  The anger directed at GE stems from reports about its tax rate. The protests also did not seem to affect the voting results. Wells Fargo saw over 96% support for its advisory vote on executive compensation and GE received over 92% in favor. It appears that the first proxy access shareholder proposal to be voted on this season at Wells Fargo did not pass. According to various articles, the shareholder proposal that received the highest support at that meeting, at 38%, was one to split the chairman and CEO roles. The same proposal won 22% of the vote at GE. As Ted Allen discussed recently in his blog, shareholders of 44 companies will vote on independent chair proposals this season.