Proxy Access: Not So Fast

It's beginning to look like the SEC will trot out its final rules regarding proxy access a little later than experts had anticipated.

For awhile, there was talk that it would come sometime in May, after being delayed once earlier in the year.

However, this timetable does not appear to be materializing.

According to an SEC spokesman, there is no open meeting scheduled at which the issue would be discussed. And keep in mind that the SEC is required to schedule open meetings at least one week in advance.

So, this brings us past the middle of the month as the earliest date that the issue could be discussed. "I haven't heard a thing," the spokesman confirms.

Changing Triggers?

When the SEC does issue its final rules, however, chances are they will be different than the version it unveiled back in the fall.

The original proposal called for a two-step, two-year timetable for possibly allowing some outsiders to nominate a director.

Under the plan unveiled back in October, before certain shareholders could put up their slate of nominees, one of the two initial triggers must be tripped.

One requires that a shareholder, or a group of shareholders, owning at least 1 percent of voting shares outstanding for at least a year submit a proposal for a nomination procedure and it receives more than 50 percent of the votes cast at the meeting.

The other trigger would occur if at least one of the company's nominees for the board of directors for whom the company solicited proxies received "withhold" votes from more than 35 percent of the votes cast at the annual meeting.

If one of these triggers occurs, then the following year a shareholder owning more than 5 percent of the shares for two years can nominate a director.

An SEC source acknowledges there is some talk about changing several of these proposed triggers.

For example, it is very possible the 35 percent threshold could move up to 50 percent when the final rules are issued.

There is also a possibility that in order to submit a proposal for nomination you will need to own at least 3 percent of the shares instead of 1 percent.

MBNA And This Year's Meetings

At this point, however, there is no indication that the SEC is backing off from the initial proposal that the rule be effective with this year's annual meetings.

"I think the SEC commissioners will have a lot of explaining to do if they give these companies [that received withhold votes exceeding 35 percent] a pass," says Richard Ferlauto, director of pensions and benefits policy for the American Federation of State, County and Municipal Employees.

This would be good news for the unhappy shareholders of MBNA, which could become one of the first companies to qualify for the SEC's new proxy access rule if it is approved by the SEC.

Last week, more than 40 percent of shareholders voted to withhold their votes for two independent directors: James Berick and Benjamin Civiletti.

"Considerable pressure was ramped up on them," says Ferlauto.

Calpers points out that Berick, the chair of the compensation committee, was until 2002 a partner in Squire, Sanders & Dempsey LLP, a law firm that provides legal services to the company.

"In addition, Berick has extensive ties to the co-founder of MBNA, the late Alfred Lerner," according to the Institutional Shareholder Services. "He was Lerner's college roommate and at one point served as the Lerner family lawyer."

Civiletti, lead director and a member of three key committees, is the chairman of Venable LLP, a law firm that provides legal services to the company, Calpers claims.

In addition, Civiletti's son works in the legal department at MBNA, according to ISS.

Raytheon And Sears

Ferlauto and other activists were also banking on a high number of withhold votes for at least one of the four directors up for election to Raytheon's board last week.

However, as it turns out, none of the withhold votes amounted to more than 10 percent of the total votes, according to the company's tally.

Meanwhile, this week, keep a close eye on the Sear's Roebuck's annual meeting, scheduled for Thursday.

Calpers has recommended to withhold votes for four directors: William Bax, Donald Carty, Hugh Price, and CEO and president Alan Lacy, who's also chairman of the board.

Ferlauto thinks at least one of the individuals could be vulnerable because he believes the company has a lousy governance track record. "It has very poor disclosure on executive compensation issues," he argues.

In addition, he notes the board has not complied with previous majority votes to de-classify the board. Shareholders will once again be asked to vote on this non-binding resolution this year.

The Importance Of Wording: Qwest And Verizon

One potential target of shareholder ire, however, seemingly received a fateful break last week.

We had reported a couple of months ago that the SEC permitted two members of the Association of US West Retirees to put up for vote at the telecom company's May 25 annual meeting a resolution that requests Qwest's Board of Directors to include in the proxy the name of any Board nominee who has been nominated by a Qualified Shareholder. The group defined a Qualified Shareholder as an individual or group holding "at least 5 percent" of the company's outstanding common stock for at least two years.

Now, keep in the mind this resolution would not have qualified under the SEC's proposed proxy access rules because the Retirees' proposal is being sponsored by shareholders who own less than 1 percent of the company's shares.

Even so, Qwest had tried to keep the proposal out of the proxy, but the SEC had rejected Qwest's request. Qwest's lawyers subsequently sent a letter to the SEC asking the Commission to reconsider its position.

And as it turned out, the SEC ruled in Qwest's favor and the company was permitted to leave the proposal out of its proxy. Why?

Because the resolution defined qualified shareholders as owning "at least 5 percent" of the shares and not "greater than 5 percent" of the shares, which would have duplicated the SEC's language.

"The wording of each proposal is extremely important," said Martin Dunn, deputy director of the SEC's division of corporation finance, who ruled on the Qwest matter, in a Dow Jones report. Dunn added that "absolute consistency" between a shareholder proposal and the SEC's rule proposal is necessary because, if adopted, "the rules would establish a uniform proxy standard across all public companies."

A disappointed Con Hitchcock, the lawyer representing the Qwest shareholders, said late last week, "At the time the proposal was sent in, it was not clear the SEC would allow any of the proposals on the ballot."

In any case, Qwest's shareholders certainly should have known better. Earlier this year, the SEC kept a similar proposal out of Verizon's proxy. That resolution called for investors holding five percent of shares for one year to be allowed to nominate directors. Their mistake was not duplicating the SEC's initial proposal, which states if one of the two initial triggers is met, then investors holding five percent of the shares for two years can then nominate directors.