On September 6, 2011, the SEC issued a press release indicating its decision not to further challenge the July 22, 2011, decision of the D.C. Circuit in Business Roundtable, et al. v. SEC, No. 10-1305. The Business Roundtable decision vacated the SEC’s recently adopted “proxy access” rules, allowing a shareholder of a public company who satisfies certain conditions to force the company to include the shareholder’s nominee(s) in the company’s proxy statement. The SEC’s chairman, Mary Schapiro, indicated in the release that before determining the SEC’s next step, the staff would be reviewing the decision as well as the comments on the rules previously received from interested parties.
The news was not all good for public companies, however. Chairman Schapiro stated that she remains committed to finding a way to make it easier for shareholders to nominate candidates for membership on public company boards. Of more immediate concern, the SEC announced that an amendment to the shareholder proposal rule (Rule 14a-8) adopted with the proxy access rules and temporarily stayed by the SEC in October 2010 pending resolution of the Business Roundtable case was not affected by the Business Roundtable decision and that the stay would be lifted as soon as the court decision was finalized. The amendment to Rule 14a-8 would permit a shareholder to include in the company’s proxy statement, subject to compliance with the procedural, timing and other requirements of that rule, a proposal to amend the company’s bylaws to establish procedures allowing shareholders in future years to place one or more nominees in the company’s proxy statement to be voted upon by shareholders. The following are some observations we have on these developments.
What is the expected timing of any further proxy access rulemaking by the SEC?
The SEC is significantly behind schedule on a number of complex congressionally mandated rulemaking initiatives arising out of the Dodd-Frank Act. It seems unlikely to us that the SEC staff would allocate scarce resources to reevaluate and repropose proxy access rules for which there is no deadline until it has fulfilled these mandates over the course of the next 12 months. However, in view of the substantial investment of time and resources already made by the staff1 and Chairman Schapiro’s stated commitment to making it easier for shareholders to nominate candidates for membership on public company boards, it also seems unlikely that the Business Roundtable decision has put the proxy access issue permanently to rest.
Why is the companion amendment to Rule 14a-8 becoming effective by itself without the addition of the proxy access rule?
This action is somewhat surprising in light of the SEC’s statements in the proxy access adopting release that adopting only the Rule 14a-8 amendment would not achieve the SEC’s stated objectives and that the changes to Rule 14a-8 would permit shareholder actions in ways that “supplement” the now-vacated proxy access rules.2 Moreover, in its order staying the proxy access rules and the amendment to Rule 14a-8, the SEC stated that it was staying both rules because the Rule 14a- 8 amendment was “designed to complement [the proxy access rules] and is intertwined, and there is a potential for confusion if the amendment to Rule 14a-8 were to become effective while [the proxy access rules are] stayed.”3 There was no explanation in the September 6, 2011 release as to why the SEC now believes the potential for confusion has been abated despite the now-permanent court-imposed stay on the proxy access rules, nor has there been any indication of how companies and practitioners should view the interpretive language in the adopting release regarding the interplay between the Rule 14a-8 amendment and the now-vacated proxy access rules.
What is the anticipated effect of the amendment to Rule 14a-8?
Rule 14a-8(i)(8) previously allowed a company to exclude from its proxy statement a shareholder proposal that related to a nomination or election to the company’s board or a procedure for such nomination or election. As a result, proposals that would result in an immediate election contest or would establish a process for shareholders to conduct an election contest in the future by requiring the company to include shareholders’ nominees in the company’s proxy materials for subsequent meetings had to be set forth separately in a proponent’s proxy materials at the proponent’s expense. As amended, Rule 14a- 8(i)(8) would no longer allow a company to exclude a shareholder proposal that would amend, or request an amendment to, a company’s bylaws or other governing documents regarding nomination procedures or disclosures related to shareholder nominations as long as the proponent satisfies the other procedural requirements of Rule 14a-8, none of the other substantive exclusionary provisions applies and the proposal itself does not conflict with state law.4
As revised, Rule 14a-8 will permit a company to exclude a proposal relating to director elections only if it:
- Would disqualify a nominee standing for election;
- Would remove a director from office before expiration of the director’s term;
- Questions the competence, business judgment or character of one or more nominees;
- Seeks to include a specific individual in the company’s proxy materials for election to the board; or
- Otherwise could affect the outcome of the upcoming election of directors.
As a result of the revision, a shareholder could now submit a proposal for inclusion in the company’s proxy for the 2012 annual meeting to amend the company’s bylaws to require the company to permit proxy access for any shareholder’s nominee(s) and, if the proposal is approved by the requisite shareholder vote, submit nominee(s) for inclusion in the company’s proxy statement for the 2013 annual meeting in accordance with the new provision.
Given the reduced costs of making such proposals if proponents do not have to bear the cost of a separate proxy solicitation,5 there would seem, at first blush, to be a greater likelihood that such proposals will be made. Commentators’ views, however, are mixed as to how frequently proxy access proposals will be made during the 2012 proxy season. While some believe such proposals will be a common theme, others such as ISS believe they will not be. Our view is that there will be some companies with performance, compensation or other shareholder relations issues that will have to contend with a proxy access proposal, but a proxy access proposal is not likely to be an issue for most companies.
What action should my company be taking now to deal with the threat of such a proposal?
- Companies should consider communicating with their most significant shareholders to determine whether there is any sentiment in favor of instituting proxy access procedures or replacing one or more board members. Much like the communications with shareholders regarding executive compensation and Say on Pay proposals, these conversations can help shareholders understand the board’s position and direction and perhaps reduce the chance that a proxy access proposal that is not supported by the board would gain substantial support.
- Companies should consider at the board level the various pros and cons of implementing a proxy access procedure and determine whether implementing such a procedure would be in the best interests of the company and its shareholders. If the board were to implement its own reasonable proxy access procedures, efforts by dissident shareholders to propose their own procedures may be preempted and it may become more difficult for these shareholders to convince others to vote in favor of their dissident proposal.6 If the board determines that proxy access procedures would not be in the best interests of shareholders, the reasoning will form the basis of the company’s statement in opposition in the event a shareholder makes a proxy access proposal that is included in the company’s proxy statement in the future.
- Companies should consider reviewing their bylaws and applicable state law for relevant limitations and provisions that may apply should a shareholder proposal for proxy access be made or should the board determine to implement its own proxy access procedures for shareholders.