On July 22, 2011, a three person panel of the Court of Appeals for the District of Columbia vacated the SEC recently enacted proxy access rule (Rule 14a-11), which required public companies to include in its proxy materials persons nominated by qualifying shareholders for election to the Board of Directors. The Business Roundtable and the U.S. Chambers of Commerce petitioned for review of the proxy access rule, arguing that the SEC promulgated the rule in violation of the Administrative Procedure Act because, among other things, the SEC failed to adequately consider the rule's effect upon efficiency, competition and capital formation, as required by the Securities Exchange Act of 1934 and the Investment Company Act of 1940. The panel agreed, finding that the SEC did not adequately assess the rule's economic impact.
Although some proponents of proxy access asked the SEC to request the full U.S. Court of Appeals for a rehearing, the SEC determined not to do so or to appeal the ruling to the U.S. Supreme Court. The SEC is continuing to review the decision as well as the comments the SEC previously received from interested parties, to find a way to make it easier for shareholders to nominate candidates to corporate boards. Accordingly, proxy access may not be dead, but just delayed further. It is worth noting that, according to a letter by SEC Chairman Mary Schapiro on August 5, 2011, the SEC spent approximately $2.2 million in labor costs over 2 years to write the proxy access rule, and approximately $315,000 to defend it in court. This translates to approximately 21,000 staff hours on rulemaking and 2,700 staff hours on litigation. These figures should be considered basic estimates since the SEC does not track or record times spent by staff on specific projects. This information was in response to an earlier letter by Representative Scott Garrett and other members of the House of Representatives, charging that the proxy access rule was a serious mismanagement of the SEC's priorities.
Even though the proxy access rule was vacated, the "private ordering" amendments to Rule 14a-8, adopted at the same time as the proxy access rule but stayed pending the court case, are now in effect. Shareholders may now require companies to include shareholder proposals relating to proxy access procedures in the company's proxy materials. The stay was lifted over the objections of the American Bar Association's Federal Securities Regulation Committee, who requested the SEC to more fully consider how the decision to vacate proxy access now affects private ordering.
Pursuant to private ordering, a company may no longer exclude an otherwise proper proposal that would amend or require its Board of Directors to consider amending the company's charter or by-laws to facilitate director nominations by shareholders or disclosures related to nominations made by shareholders.The SEC also codified some of the Staff's historical interpretations of Rule 14a-8, which permitted exclusion of certain shareholder proposals. As a result of private ordering, shareholders will still have the opportunity to establish proxy access standards notwithstanding the proxy access rules being vacated, although such procedures will be done on a company-by-company basis.
In fact, in some respects private ordering may be more beneficial for shareholder rights advocates, as under the rule, investors will not need to meet any special ownership requirements other than the minimum $2,000 stake held for at least one year, which is the current requirement to file a shareholder proposal on other topics. Under the vacated proxy access rule, shareholders would have had to hold a minimum of 3% of a company's shares for three years, a much higher standard that many shareholder rights advocates felt was too high to meaningfully affect universal proxy access. Accordingly, shareholders utilizing the private ordering may propose standards that are substantially less restrictive than those provided in the proxy access rule and, if there is success in doing so, the proxy access rule may not be missed that much. On the flip side, as with any shareholder proposal, companies will still be permitted to submit a request for no-action to exclude the proposal if the other requirements for including the shareholder proposal are not met.
Furthermore, unlike the proxy access rule, which had a phase-in period for smaller companies, private ordering would take effect for all issuers, including smaller reporting companies, at the same time, although it is likely that shareholder rights advocates would initially only target larger reporting companies.