On September 6, 2011, the Securities and Exchange Commission (“SEC”) announced that it will not seek rehearing of the decision of the U.S. Court of Appeals for the District of Columbia Circuit in Business Roundtable and Chamber of Commerce of the U.S. v. Securities and Exchange Commission, which struck down the SEC’s proposed Rule 14a-11 under the Securities Exchange Act of 1934 (“1934 Act”). The SEC also stated that it will not seek Supreme Court review of the D.C. Circuit’s decision. Rule 14a-11 would have required companies that are subject to the proxy rules under the 1934 Act (including registered investment companies) to include the names of nominees submitted by qualifying shareholders, or groups of shareholders, on the company’s proxy statement and proxy voting card, subject to certain limitations. Generally, under the rule a shareholder (or group of shareholders) would have qualified by holding at least 3% of a company’s voting stock for at least three years. Among other things, the D.C. Circuit’s decision criticized the SEC’s cost-benefit analysis of proposed Rule 14a-11. It remains to be seen what effect the D.C. Circuit’s decision may have on future SEC rule-making.
The SEC also announced on September 6, 2011 its decision to lift its voluntary stay of the effective date of its amendments to Rule 14a-8 under the 1934 Act. Although the amendments to Rule 14a-8 were not challenged in the Chamber of Commerce litigation, the SEC voluntarily stayed the effective date of these related amendments at the time it stayed the effective date of Rule 14a-11. The Rule 14a-8 amendments were originally adopted to permit qualifying shareholders to require companies to include a shareholder proposal regarding proxy access procedures in a company’s proxy materials. Shareholders seeking to invoke the Rule 14a-8 amendments must have held continuously for at least one year the lesser of $2,000 worth or 1% of the company’s voting securities. The SEC has indicated that the amendments to Rule 14a-8 will permit shareholders and companies the opportunity to establish proxy access standards on a company-by-company basis, rather than through a specified standard like that contained in Rule 14a-11. Although it may be possible to challenge the Rule 14a-8 amendments on the same grounds that Rule 14a-11 was vacated, the Chamber of Commerce has indicated that it has no current intention to bring such a challenge. The amendments to Rule 14a-8 took effect on September 20, 2011. The SEC’s adopting release for Rule 14a-8 is available here.
The impact of the Rule 14a-8 amendments remains to be seen. The Rule 14a-8 amendments will likely dissatisfy corporate governance advocates who preferred the form of proxy access that would have been permitted under Rule 14a-11. As amended, Rule 14a-8 has the potential to open proxy access up to a larger group of shareholders because the amendments make it possible to submit a proposal that grants proxy access to shareholders holding fewer shares and for a shorter period of time than would have been required under Rule 14a-11. However, such proposals will also need to satisfy state corporate law requirements, which may be more restrictive. For example, in cases where shareholders do not have the power to amend bylaws, as is typically the case for most funds organized as Massachusetts business trusts, funds should be able to rely on Rule 14a-8(i) of the 1934 Act to force proponents to state their proposals in precatory form. This would leave boards with the ultimate discretion as to whether and how proxy access proposals should be implemented even if approved by shareholders.