Market Trends: Responding to Negative Voting Recommendations by Filing Additional Proxy Soliciting Materials

By: Lori Zyskowski GIBSON, DUNN & CRUTCHER LLP

The voting recommendations of proxy advisory firms—including, most notably, Institutional Shareholder Services (ISS) and Glass Lewis & Co. (Glass Lewis)—continue to influence the voting outcomes of company and shareholder proposals. Even when the company’s largest shareholders follow their own voting policies, the voting recommendations of proxy advisory firms can be influential on the voting outcome.

WHEN FACED WITH A NEGATIVE VOTING RECOMMENDATION, to the extent the recommendation is not based on an error that can easily be corrected, most companies elect to file additional proxy soliciting materials along with engaging directly with shareholders to explain their side of the story or to potentially address the underlying issue that led to a negative vote recommendation. This article principally explores the practice (and effectiveness) of responding to negative vote recommendations from proxy advisory firms by filing additional definitive proxy soliciting materials with the Securities and Exchange Commission (SEC). As discussed in greater detail below, a decision whether to file additional proxy soliciting materials is specific to each company’s individual circumstances. In addition, in an era of sharpened focus on shareholder engagement, some companies file additional proxy soliciting materials in connection with their annual shareholder meetings as part of their ongoing shareholder engagement strategy. Given these trends, companies will continue to file additional proxy soliciting materials, both regularly as part of their annual proxy solicitation process, and on special occasions, such as when they seek to respond to a negative voting recommendation from one or more proxy advisory firms.

Legal Requirements

When faced with a negative voting recommendation on a company proposal or one or more director nominees, companies typically want to convince their shareholders that voting in line with the board’s recommendations is appropriate. However, shareholder outreach while a proxy solicitation is being conducted must be carefully managed to avoid violating the SEC’s proxy solicitation rules. Specifically, under Section 14(a) (15 U.S.C. § 78n) of the Securities Exchange Act of 1934, as amended, and Rule 14a-6 (17 C.F.R. § 240.14a-6), public companies are required to file any “soliciting” materials that could be deemed to be “written” communications related to the matters to be voted on at the annual meeting. As such, the primary benefit of filing additional soliciting materials is to facilitate shareholder outreach by allowing companies to communicate directly with shareholders about their proposals while complying with proxy solicitation rules.

To read the full practice note in Lexis Practice Advisor, follow this link.

Lori Zyskowski is a partner in Gibson Dunn’s New York office and a member of the Firm’s Securities Regulation and Corporate Governance Practice Group. Ms. Zyskowski advises public companies and their boards of directors on corporate governance matters, securities disclosure and compliance issues, executive compensation practices, cybersecurity oversight, and shareholder engagement and activism matters. Ms. Zyskowski is a frequent speaker on governance, proxy, and securities disclosure panels and is very active in the corporate governance community. She is a member of the board of directors of the Society for Corporate Governance and served as Secretary to the board from 2011 to 2013.

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