A letter to the SEC from the Council of Institutional Investors (CII) accuses power company AES Corporation of playing games with its no-action letter to the SEC. John Chevedden submitted a shareholder proposal last October calling on AES to lower its existing threshold required to call a special meeting from 25% to 10%. But the SEC allowed AES to exclude Chevedden’s proposal because the company claimed it was already going to submit a management proposal to ratify its existing special meeting provisions. The CII letter says: “We believe it is highly likely that AES developed its ratification proposal after receiving the shareholder proposal, with the purpose of blocking a shareholder vote to reduce the threshold to 10%.” So, it is the Whole Foods proxy access ‘we thought of it first’ thing all over again.
“For large and mid-size companies, many observers believe a 25% threshold to be unrealistically high” – Council of Institutional Investors
Oddly, the SEC uses the same rules it developed in the wake of the Whole Foods fiasco to allow AES to exclude.
The CII notes that from 2016 to 2017, 34 shareholder proposals requesting boards to reduce the threshold for calling special meetings received average support of 41.6% of shares and two were approved by a majority. “Particularly for large and mid-size companies,” continues the letter, “many observers believe a 25% threshold to be unrealistically high.” And points to the UK law that the threshold for shareholders to call a special meeting is 5% of voting shares.
AES introduced its special meeting bylaw in November 2015, but did not seek shareholder ratification at either its 2016 or 2017 annual meetings. Now, all of a sudden, the CII insinuates, ratification is necessary. “This is exactly the kind of game-playing that prompted the SEC review that led to Staff Legal Bulletin No. 14H”, the bulletin that resolved the Whole Foods issue.One of the reasons that the SEC allowed AES to exclude the proposal is that shareholders could not vote on both proposals or would be confused by having to do so. The CII says this is nonsense. Shareholders at five companies in 2016-17 did exactly this. The results were that the management proposals were supported by an average of 83% of shares. The CII also says that companies seeking to exclude proposals on this basis should be required to prove that they were going to introduce a management proposal before they received the shareholder one. It also says that game-playing is most likely when shareholder proposals are likely to win majority or substantial support and are therefore the proposals on which shareholders should be able to vote.
Of course, having seen one company get away with this kind of shenanigan, another company is going to try the same trick. Capital One recently tried to exclude a similar special meeting resolution by claiming it wished to ratify its existing 25% threshold. But this time it was less successful as the SEC had apparently changed its stance again. This time the commission requested the company to include a set of information in its proxy in order to get permission to exclude the proposal. The company had to state that it had omitted the proposal, that it believed a vote for ratification was a vote ‘against’ lowering the threshold, what would happen to the threshold and what it would then do if ratification was not received. Ken Bertsch, CII’s Executive Director, said, despite this change in attitude: “There is no official change in the AES guidance (at least appearing on its web site), and I think the SEC staff will leave AES as it is, given that it is close to publishing its proxy statement. I do not think there is a process for the proponent at this point to seek review on that. We are more concerned about the precedent and this issue in the future; the revised SEC guidance is not ideal, but is a substantial improvement, in our view.”