An amendment to the SEC's proxy rules permitting public company shareholders to submit "proxy access" proposals recently became effective. The amendment to Rule 14a-8(i)(8) under the Exchange Act requires companies, under certain circumstances, to include in their proxy materials shareholder proposals to establish procedures in the company's governing documents for the inclusion of shareholder director nominees in the company's proxy materials. The SEC had stayed the amendment pending review of its related mandatory proxy access rule by the U.S. Court of Appeals for the District of Columbia Circuit. The SEC's stay expired after the court invalidated the mandatory rule earlier this year.
The Rule 14a-8(i)(8) amendment is described in Release No. 34-9136 (August 25, 2010).
As discussed in our SEC Update of August 31, 2010, the SEC adopted a mandatory proxy access rule (Rule 14a-11) on August 25, 2010 that would have enabled public company shareholders to include in their company's proxy materials their own nominees for election for the company's board of directors. The proxy access changes adopted at that time also included amendments to certain of the SEC's other proxy rules, including an amendment to Rule 14a-8(i)(8) to allow shareholders to submit proposals to alter their company's procedures for nominating directors if the procedures do not permit shareholders to make director nominations. Rule 14a-8(i)(8) previously had allowed companies to exclude from their proxy materials any proposals relating to the nomination or election of directors. Recognizing the inconsistency of this exclusion with its proxy access initiative, the SEC in 2010 narrowed the exclusion to apply only to matters relating to the election of individuals to the board of directors or to the outcome of an upcoming election of directors and added the provision permitting director nomination proposals.
The SEC ordered a stay of Rule 14a-11 and the related amendments to its rules, including the amendment to Rule 14a-8(i)(8), until the D.C. Circuit ruled on a challenge to the new proxy access regime. On July 22, 2011, as described in our SEC Update of August 1, the court vacated Rule 14a-11. The petitioners, however, did not challenge the SEC's amendment to Rule 14a-8(i)(8), which became effective on September 20 following expiration of the SEC's stay and upon publication of Release No. 34-9259 in the Federal Register.
Amendment to Rule 14a-8(i)(8)
Before it was amended, Rule 14a-8(i)(8) permitted the exclusion of a shareholder proposal that would have resulted in an immediate election contest or that would have established a process for shareholders to conduct an election contest in the future by requiring a company to include a shareholder's director nominee in the company's proxy materials for subsequent meetings. Companies had used the rule to exclude shareholder proposals that sought a process for shareholders to nominate their own director nominees for inclusion in a company's proxy statement.
Under the amended rule, shareholders, under certain circumstances, now will be able to submit proposals 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. For example, the amended rule permits shareholders to seek an amendment to the company's bylaws that would require the company to include shareholder nominees in the company's future proxy materials.
The amended rule affords companies a number of previously recognized grounds to exclude proxy access shareholder proposals. Among these grounds, the rule continues to permit companies to exclude a shareholder proposal that nominates a specific individual to the board of directors. The changes to Rule 14a-8(i)(8) also codify prior SEC staff interpretations of the rule allowing exclusion of a proxy access shareholder proposal that:
- Would disqualify a current nominee standing for election;
- Would remove a director from office before the expiration of the incumbent's term;
- Questions the competence, business judgment, or character of one or more nominees or directors; or
- Otherwise could affect the outcome of the upcoming election of directors.
In addition, companies still may exclude proxy access proposals on any of the enumerated procedural grounds under Rule 14a-8 (such as the rule's ownership threshold) and on the substantive bases provided by the other provisions of Rule 14a-8(i), including where implementation of the proposal would cause the company to violate state, federal or foreign law to which it is subject.
Related proxy rule amendments
In addition to the amendment to Rule 14a-8(i)(8), the lifting of the SEC's stay allowed related amendments to its proxy rules to become effective. Many of the amendments are technical in nature and reflect the possibility that shareholder nominees may appear in a company's proxy statement.
A few of the amendments, however, are noteworthy. New Regulation 14N, Schedule 14N and Rule 14a-18 together require any shareholder making a nomination for director to provide to the company and file with the SEC a notice on Schedule 14N. Schedule 14N, which also would have been required for nominations under Rule 14a-11, requires disclosure of specified information concerning the nominating shareholder and the nominee. A Schedule 14N must be provided and filed by the date required under the company's advance notice provisions or, if the company has none, no later than 120 calendar days before the anniversary of the date on which the company mailed its proxy materials for the prior year's annual meeting.
A related amendment to Form 8-K adds a new Item 5.08 providing that, if a company did not hold an annual meeting in the prior year, or if the date of the next annual meeting has changed by more than 30 calendar days from the date of the prior year's meeting, the company must report under Item 5.08 the date by which a Schedule 14N is due. In those circumstances, the Schedule 14N deadline is a "reasonable time" before the company mails its proxy materials.
The amendments also revise Rule 14a-6 to provide that the company is not required to file preliminary proxy materials solely because it will include a shareholder nominee for director under applicable state or foreign law or under the company's governing documents.
It is uncertain whether proxy access proponents will submit a significant number of proposals seeking to amend the governing documents of companies to provide enhanced access by shareholders to director nominations. Companies that are frequently targeted by shareholders with governance proposals, or whose boards have been criticized for a lack of responsiveness to shareholders, may be the most likely candidates to receive a proxy access proposal.
Notably, before the invalidation of Rule 14a-11, the Rule 14a-8(i)(8) amendment would have permitted the exclusion of shareholder proposals that conflicted with Rule 14a-11. Among other requirements, Rule 14a-11 would have imposed a condition that a shareholder proposing a nominee must have held at least 3 per cent of the total voting power of a company's securities eligible to be voted on the election of directors for at least three years. As a result of the invalidation of Rule 14a-11, this basis for excluding shareholder proposals no longer will exist. Accordingly, one of the consequences of the D.C. Circuit's decision vacating mandatory proxy access is that many shareholder proposals seeking proxy access under Rule 14a-8(i)(8) that otherwise might have been excluded from the company's proxy materials may now have to be put to a shareholder vote.