The U.S. Securities and Exchange Commission (SEC) announced last week that it will not seek a court rehearing on the validity of its proposed “proxy access” rules, which were rejected by the U.S. Court of Appeals in July. Under the rules, a company would have been required to include on its proxy a board candidate nominated by a shareholder who held more than 3% of a company’s voting equity for a period of at least three years. The intent was to give long-term shareholders a greater voice in corporate governance. Critics feared it went too far and that the increase in proxy battles would create needless costs for companies. In striking down the proposed rules, the U.S. Court of Appeals held that, among other things, the SEC had failed to assess the economic effects of the rules.
The Canadian experience with proxy access suggests that concerns over the proposed US rules were potentially overblown. Corporate statutes in Canada have long enabled shareholders to access the company’s proxy for the purpose of nominating directors. Typically, the shareholder must hold at least 5% of the company’s stock and meet certain other conditions. However, it would appear, at least anecdotally, that these proxy access rules are not typically used by dissident shareholders. A dissident that is serious about change at the board often determines that the value of controlling its communications with shareholders through its own dissident proxy circular is worth the extra cost. It would have been interesting to see whether the US experience was much different.
Although the SEC has made clear that it will not challenge the court’s decision, it could potentially decide to re-start the rule-making process again. The SEC has indicated that it is continuing to review the court’s decision, as well as comments previously received, in order to determine its next steps. In the meantime, a separate rule will come into effect shortly in the US that will allow shareholders to propose changes to a company’s by-laws so as to provide for proxy access for that company’s shareholders. Shareholder proposals may request that the company’s board implement proxy access, or alternatively may directly amend the company’s by-laws to provide for proxy access. So, although proxy access will not be mandated for all companies, shareholders will have the ability to institute proxy access at any given company. A good overview of the new rule is found at the Harvard Law School’s Forum on Corporate Governance and Financial Regulation.