Following the court decision striking down the SEC’s Proxy Access Rule1, the SEC is implementing amendments to Rule 14a-8 that permit shareholders to make proxy proposals concerning director elections – including proposals for shareholder access to management’s proxy statement. The amendments became effective on September 20, 2011.
The D.C. Circuit Court of Appeals overturned the SEC’s attempt to give shareholders the right under the federal proxy rules to have their director nominees included in management’s proxy materials, citing the SEC’s failure to adequately justify the Proxy Access Rule on a cost-benefit basis. The amendments to Rule 14a-8, on the other hand, do not create a mandatory right of proxy access but permit private ordering on a company by company basis through shareholder proposals. Rule 14a-8 had previously been interpreted to permit companies to exclude shareholder proxy access proposals.
Under amended Rule 14a-8, any shareholder with $2,000 of stock held for at least one year may – starting with the next annual meeting – submit a proposal to the company for a change in the bylaws to require the company to include shareholder nominees for director in the company’s proxy statement and proxy card. Other proposals, such as requiring reimbursement of shareholder expenses in campaigning for a director nominee, are also permitted.
The company must submit such a proposal to its shareholders unless it has a basis for excluding it under Rule 14a-8. The nature of the proposal and the vote required to approve it will depend upon state corporation law and the company’s governing documents. Shareholders of Delaware and Massachusetts corporations may adopt proxy access bylaws, and therefore binding proxy access bylaw proposals can be submitted. The Model Business Corporation Act has a similar provision. In some states, only a nonbinding proposal is permitted.
Unlike the Proxy Access Rule, which had conditions and restrictions on its use, including requirements limiting the ability to submit nominations to long-term holders with a significant economic stake (e.g., 3% of the stock held for at least three years) and capping the number of nominees to a minority of the board of directors (e.g., no more than 25%), shareholder proxy access proposals are subject to no such limitations. Thus, there is broad flexibility for shareholders to fashion a proposal. Because of the complexity of the subject, this may well create issues for companies, including problems of workability.
There has been considerable speculation over the extent to which shareholders will submit proxy access proposals. Some suggest there will be very few such proposals, while others think there could be many because of the low threshold for eligibility to submit a proposal and the high profile of the issue. Some fear that the ability to submit a shareholder proxy access proposal will be used by certain activist shareholders as leverage to achieve other objectives. The Rule 14a-8 amendments might be challenged similarly to the challenge to the Proxy Access Rule, but this is by no means certain and any challenge, if there is one, is more likely to occur when a company seeks to resist a shareholder proxy access proposal. Only time will tell, but we recommend that companies prepare now for this issue by considering how they wish to deal with proxy access.
Based upon experience with such issues as majority voting, elimination of classified boards and the like, there are likely to be some corporate governance leaders that, on their own initiative, will adopt proxy access bylaws tailored to work for their situations. Many companies, especially those who have not been targets for shareholder proposals in the past, are likely to wait to see whether the Rule 14a-8 amendments are challenged, how market practices develop and what positions governance advocates and proxy advisory firms take. Whether or not a company wishes to take action now, we believe that every company should evaluate its position, consider communicating with its significant shareholders and be prepared to act if it receives a proposal. Preparation could include being ready to resist a proposal by challenging the SEC’s action or by having a proxy access bylaw ready for adoption. One benefit of submitting its own proxy access bylaw to shareholders for approval is that a company may be able to exclude a shareholder proposal for proxy access, at least for that annual meeting.
Advance preparation should be the watchword. We can help our clients analyze what actions are right for them and assist them in implementing their chosen course, including developing an appropriate proxy access regime, either for adoption or to have available if needed.