November 11, 2016

Proxy Access: First Use of Access Bylaw to Nominate Director!

The first Schedule 14N! Back in July, Broc ran a poll asking when we’d see the first proxy access nominee – only 11% of responders thought it would happen this year. The other 89% were wrong – including the 24% who said ‘never’! Here’s the intro from this Gibson Dunn blog:

In what appears to be the first use of a company’s proxy access bylaw, GAMCO Asset Management filed today a Schedule 13D/A and a Schedule 14N announcing that it has used the proxy access bylaw at National Fuel Gas (NFG) to nominate a director candidate for election at NFG’s 2017 Annual Meeting.  According to the 13D/A, GAMCO and its affiliates beneficially own in the aggregate approximately 7.81% of NFG’s Common Stock and yesterday delivered a letter to NFG nominating Lance A. Bakrow to the Board of Directors.

NFG amended its bylaws in March 2016 to include a proxy access bylaw & its terms are pretty typical:

The Bylaws provide that a shareholder, or a group of up to 20 shareholders, owning 3% or more of the Company’s outstanding Common Stock continuously for at least three years may nominate and include in the company’s proxy materials directors constituting up to 20% of the board, provided that the shareholders(s) and the nominee(s) satisfy the bylaw requirements.   Here is NFG’s proxy access bylaw.

In this blog, Davis Polk’s Ning Chiu also lays out the circumstances…

Delaware Says “No” to Director’s Books & Records Request

Every now & again there’s a case that isn’t likely to have a big practical impact, but is worth noting just because it exists – and the Delaware Chancery Court’s recent decision in Bizarri v. Suburban Waste Services is that kind of case. Most corporate lawyers believe that directors have a virtually unlimited right to access books & records. As this blog from Francis Pileggi notes, it turns out that there are some limits after all:

This opinion provides a rare instance in which the court denies a director unfettered access to the books and records of a corporation on whose board he serves, but this case also involves somewhat extreme facts which are not often replicated.

The court found during trial that the director and stockholder, who was also a member and manager of an affiliated LLC, engaged in efforts to compete with and inflict reputational harm on the entities. The plaintiff’s actions in that regard were “driven by his intense hatred of the entities’ other two owners and principals.” Together with the familial relationship of the plaintiff with one of the entities’ main competitors, it makes the “prospect of the plaintiff misusing the books and records both real and troubling.”

There’s a strong presumption in Delaware that a director is entitled to “unfettered access” to books & records – and it’s up to the company to demonstrate an improper purpose. This is one of the rare cases where the company was able to meet that burden.

CEO Succession: Boards Pass Over Corporate “Fredos”

This Stanford study concludes that boards are pretty good about identifying which potential CEO candidates should be “passed over” – like Fredo in The Godfather:

Our data modestly suggests that corporate boards do a reasonable job of identifying CEO talent. Fewer than 30% of the executives passed over among large corporations are recruited by other firms as CEO. Most (over 70%) are not.

If an executive who is passed over has valuable skills that make him or her a viable CEO candidate, it is likely that another corporation would identify and hire that individual. Furthermore, candidates who are recruited to new firms after being passed over appear to perform worse (relative to benchmarks) than those who were selected at the original company.

I guess Fredo also is a good example of the potential dangers of a disgruntled senior executive.

John Jenkins