Late Tuesday, September 6, 2011, the Securities and Exchange Commission (SEC) Chairman Mary L. Shapiro issued a statement that the SEC would not seek a rehearing of the decision by the United States Court of Appeals for the District of Columbia Circuit (the “Court”) vacating the SEC’s recently adopted Rule 14a-11 and related amendments (also known as the “proxy access rule”) and would not seek Supreme Court review.1 The statement clarified that, absent additional SEC action, the amendments to Rule 14a-8 included in the same release that adopted Rule 14a-112 would go into effect when the Court’s decision is finalized, which is expected on September 13, 2011, and that notice of the effective date of the amendments will be published.
On August 25, 2010, the SEC adopted proxy access and related rules in a 3-2 vote divided along party lines. By September 29, 2010, the Business Roundtable and the U.S. Chamber of Commerce filed a lawsuit challenging the SEC’s final rules and requested that the SEC stay the effectiveness of those rules. Although the lawsuit did not implicate all of the rules adopted in connection with proxy access, on October 4, the SEC granted a stay covering both the proxy access rule and the amendments to Rule 14a-8, st ating:
“The Commission further finds that, under all of the circumstances of this matter, it is consistent with what justice requires to stay the effectiveness of the amendment to Rule 14a-8 adopted contemporaneously with Rule 14a-11 because the amendment to Rule 14a-8 was designed to complement Rule 14a-11 and is intertwined, and there is a potential for confusion if the amendment to Rule 14a-8 were to become effective while Rule 14a-11 is stayed.”3
On July 22, 2011, the Court vacated Rule 14a-11 holding that the SEC acted in an arbitrary and capricious manner in adopting the rule and failed to adequately address the economic effects of the Rule.4 The SEC had until September 6, 2011, to seek a rehearing.
Not only did the Court’s decision vacate the proxy access rule, something the SEC has tried to adopt for many years, but—perhaps more worrisome—the Court’s opinion may have an impact that extends beyond proxy access. In striking down the Rule, the Court held that:
“… the Commission acted arbitrarily and capriciously for having failed once again … adequately to assess the economic effects of a new rule. Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.5”
Many are concerned that the SEC’s basic authority to promulgate regulations may have been fundamentally impaired.
Changes to the Election Exclusion in Rule 14a-8
Once the stay is lifted and the amendments to Rule 14a-8 are effective, companies, including investment companies, will no longer be able to rely on Rule 14a-8(i)(8) to exclude shareholder proposals relating to shareholder nomination bylaw amendments under the election exclusion. As a result of these changes, shareholders will have the ability to influence proxy access standards under what is commonly referred to as “private ordering.” That is, they will be able to influence standards on a company-by-company basis through the shareholder proposal process.
The SEC also codified certain prior interpretations of Rule 14a-8(i)(8) that permit certain types of proposals to continue to be excluded from an issuer’s proxy material. Under the amendment to the election exclusion, companies would be able to continue to exclude proposals that would:
- seek to disqualify a nominee standing for election;
- remove a director from office before the expiration of his/her term;
- question the competence, business judgment or character of a nominee or director;
- nominate a specific individual for election to the board of directors, other than through the Rule 14a-11 process, applicable state law provision, or the company’s governing documents; or
- otherwise affect the outcome of the upcoming election of directors.
Chairman Shapiro’s statement indicated that she has asked the staff to continue reviewing comment letters relating to the proxy access as well as the Court’s decision. That statement leaves open the possibility that the SEC could re-propose some version of proxy access, but that seems unlikely in the short term.
With respect to the Rule 14a-8 amendments, given the stated reasons for implementing the stay (including statements about how “intertwined” these amendments were with Rule 14a-11 and the “potential for confusion”), it would not be surprising to see legal challenges to the lifting of the stay. Absent action on the part of the SEC, however, companies and shareholders should prepare for “private ordering”, which may well be part of this upcoming proxy season.