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Feb 15, 2018

CII criticizes exclusion of AES shareholder proposal

SEC staff say shareholder proposal conflicts with management proposal

The Council of Institutional Investors (CII) has criticized the SEC’s decision to allow AES to block an attempt to make it easier for shareholders to call a special meeting – arguing that the agency opens the door to ‘game playing’ by companies.

The proposal, from shareholder John Chevedden, urges the AES board to amend the company’s bylaws to give holders of an aggregate 10 percent of company shares the power to call a special shareowner meeting.

‘This proposal does not impact our board’s current power to call a special meeting,’ the proposal’s text reads. ‘Scores of Fortune 500 companies allow 10 percent of shares to call a special meeting. Special meetings allow shareowners to vote on important matters, such as electing new directors, that can arise between annual meetings.

‘This proposal may be particularly timely because we may have a need for board refreshment after the 2018 annual meeting since Charles Rossotti is still [chair] at age 76. Rossotti [has] had 14 years’ tenure, which can challenge the independence of any director, no matter how qualified.’

The company requested that the SEC allow it to exclude the proposal from its proxy materials on the basis that:

  • It ‘directly conflicts’ with a proposal the company plans to submit at the AGM
  • It questions the competence and business judgment of one or more directors and could affect the outcome of the election of directors at the 2018 annual meeting.

The company’s proposal seeks ratification of the existing requirement that one or more shareholders must between them own 25 percent of AES’ stock, and that the right to call a special meeting is subject to ‘substantive and procedural requirements and limitations.’

The SEC agreed. ‘In our view, the proposal directly conflicts with management’s proposal because a reasonable shareholder could not logically vote in favor of both proposals,’ the staff of the division of corporation finance write in a December 19, 2017 no-action letter granting AES’ request.


‘Legitimate proposal’

In a recent letter to the SEC, CII general counsel Jeffrey Mahoney writes: ‘It appears AES is gaming the system to exclude a vote on a legitimate proposal that receives substantial shareholder support when it is voted on at other companies: to reduce the threshold for calling a special meeting.’

The threshold for calling a special meeting at public companies is ‘highly material to the utility of a special meeting bylaw, as both investors and corporate boards are well aware,’ Mahoney writes. He says that in 2016-2017, 34 shareholder proposals to US companies asked boards to lower such thresholds, receiving average support of 41.6 percent, with two of the proposals being approved by shareholders.

‘Particularly for large and mid-size companies, many observers believe a 25 percent threshold to be unrealistically high,’ Mahoney writes. ‘Indeed, in the [UK], by law the threshold for shareholders to call a special meeting is 5 percent of voting shares. So the AES proposal, to reduce the threshold to 10 percent, raises a real issue.

‘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 percent. The shareholder proposal likely would have received substantial support and may have been approved. AES put its current special meeting bylaw into effect in November 2015, and did not seek shareholder ratification at its 2016 or 2017 annual meetings, but now found it important to do so.’

Mahoney calls this approach ‘exactly the kind of game playing’ that led to the SEC’s Staff Legal Bulletin No 14H (CF) as guidance for determining the scope of Rule 14a8(i)(9). CII argues that there are problems with that guidance leading to the AES no-action letter. For example, the group believes AES’ shareowners could logically vote for the shareholder proposal and the management proposal. A shareowner vote for both proposals would signal that shareowners favor AES’ existing special meeting bylaw generally, but prefer that the 25 percent threshold be replaced by a 10 percent threshold, Mahoney writes.

‘We believe a company seeking no-action relief on 14a-8(i)(9) should be required to provide evidence that it contemplated proposing the relevant management proposal on a date earlier than receipt of the shareholder proposal,’ he says. ‘To do otherwise is to invite game playing by corporate issuers.’

The SEC staff’s approach to the AES matter ‘curtails shareowners’ ability to suggest different terms for an item currently addressed in a company’s bylaws or charter, thereby frustrating private ordering that has often proven to be beneficial to all parties,’ Mahoney adds.

Spokespeople for the SEC and AES declined to comment.

‘I hope the correct interpretation of Staff Legal Bulletin 14H is upheld,’ Chevedden says in a statement.

Ben Maiden

Ben Maiden is the editor-at-large of Corporate Secretary , an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter , covering regulatory and compliance...
Editor-at-large, Corporate Secretary