In August 2010, the Securities and Exchange Commission (the "Commission"), by a 3-2 vote, voted to adopt a new Rule 14a-11 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). As adopted, Rule 14a-11 would have allowed stockholders who owned at least 3% of the voting capital stock of a company and who had held such shares for at least three years to nominate board candidates for inclusion in the company's proxy statement at the company's expense. The Commission also adopted amendments to Rule 14a-8 to allow proxy access shareholder proposals. The Commission postponed the effective date of the new rules pending the outcome of a lawsuit filed in October 2010 by the U.S. Chamber of Commerce (the "Chamber") that challenged the new rules.
On July 22, 2011, The U.S. Court of Appeals for the D.C. Circuit struck down Rule 14a-11 on the basis of the following determinations:
- The Commission acted "arbitrarily and capriciously" in approving Rule 14a-11;
- The Commission's adopting release for Rule 14a-11 contained contradictory statements regarding estimates of the frequency of potential board election contests under the new rules; and
- The Commission failed to address corporate concerns that new Rule 14a-11 would be used by certain activist stockholder groups to advance "self-interested objectives" that may be inconsistent with maximizing shareholder value.
It should be noted that the Court ruled exclusively on procedural grounds not reaching the constitutional questions of federal versus state regulation raised by the Chamber in its pleadings.
The Commission has 45 days to request the panel to reconsider its ruling or seek a rehearing en banc by the full D.C. Circuit. Alternatively, the Commission may seek to propose and adopt Rule 14a-11 with a revised economic analysis that addresses the deficiencies noted by the D.C. Circuit Court. However, in light of the significant Commission rulemaking required in the next six months under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, it is unlikely that Rule 14a-11 will be effective for the 2012 proxy season.
However, because the Commission's amendments to Rule 14a-8 were not challenged nor subject to the D.C. Circuit Court's ruling, it is expected that the Commission stay postponing the effectiveness of the Rule 14a-8 amendments will be lifted in time for the Rule 14a-8 filing deadlines for the 2012 proxy season. The unavailability of shareholder proxy access in 2012 coupled with the Rule 14a-8 amendments may result in an increased number of traditional director challenges via proxy fights, "no vote" campaigns, proxy access bylaw proposals, or a combination of more than one of these tactics. We believe proxy access bylaw proposals are the most likely for of challenges that will develop for the 2012 proxy season.