An amendment to SEC Rule 14a-8 that will enable shareholders of U.S. public companies (including investment companies) to submit proposals calling for some form of “proxy access” — that is, a procedure permitting shareholders to include alternative nominees for director in the company’s proxy statement, at the company’s expense — took effect on September 20, 2011. This amendment was adopted in 2010, but suspended pending the outcome of the lawsuit discussed below.
The SEC lifted this suspension by an order in which it also announced its decision not to appeal the July 22, 2011, decision by a panel of the D.C. Circuit Court that vacated the SEC’s mandatory Proxy Access Rule (14a-11). (We discussed this in our Alert of July 22, 2011.1) This means that mandatory proxy access is off the table for the next year at least. Remarks by SEC Chairman Mary Shapiro indicate that the SEC will try again with some form of mandatory proxy access, but that will take time — and it certainly will not result in a revised Rule 14a-11 that is in effect for the 2012 proxy season.
As a result, the new lay of the land — at least for the time being — is one in which voluntary “private ordering,” rather than a mandatory one-size fits all approach, governs proxy access in the United States. Some boards, if they see some merit in the concept of proxy access, may consider adopting, or recommending shareholder approval of, a form of proxy access, under conditions they consider advisable, if that is permitted by state law. Delaware General Corporation Law Section 112, adopted in 2009, authorizes proxy access under conditions that may include, among others:
- Minimum requirements for amount and duration of stock ownership;
- Information concerning both the stockholder and the nominees;
- Limitations on number of nominees;
- A bar on nominations by persons or groups who have acquired, or proposed to acquire, more than a specified percentage of voting power within a specified period; or
- A requirement that the nominating shareholder indemnify the company against any loss resulting from false or misleading information submitted by the shareholder.
Although Section 112 has not yet seen much use, boards faced with the prospect of multiple, conflicting or ill-conceived proposals, as a result of the amendment to Rule 14a-8, may wish to craft their own proxy access by-laws or proposals for consideration by shareholders, with a view to the company’s particular circumstances and profile.
It is difficult to predict how numerous proxy access proposals will be in the upcoming proxy season. The activist institutions who enthusiastically supported the vacated Proxy Access Rule may exhibit restraint, since many of them feel that widespread “private ordering,” through a variety of disparate “proxy access” shareholder proposals, may dissipate some of the momentum toward a mandatory Rule. The executive director of the Council of Institutional Investors, clearly concerned about this possibility, recently remarked that proposals are likely to be limited to “companies where boards have been asleep at the switch or chronically unresponsive to shareowner concerns.”2 On the other hand, individual shareholder proponents — including those who generate large numbers of shareholder proposals — may not feel so constrained.
A decision by a company’s board of directors to adopt, or recommend to shareholders, its own version of a proxy access provision could provide it with a basis to exclude a shareholder proposal for proxy access. Moreover, the Dodd-Frank Act specifically authorized the SEC to adopt a mandatory proxy access rule and, absent a change in the composition of the SEC, it seems only a matter of time before a new mandatory rule is adopted. In that case, there could conceivably be “grandfathering” for companies that have already adopted their own form of proxy access, although almost certainly that would be conditioned on shareholder approval of the company’s version.
Still, in the short term‚ public companies are likely to hold off in order to see how “private ordering” proxy access develops. For one thing‚ limitations under the proxy rules mean that any proposals in the upcoming season are likely to be “precatory,” that is‚ not binding. This means the board of a company whose shareholders approve a shareholder resolution for proxy access will have an opportunity to decide how best to react to it. Moreover‚ it is impossible to predict at this point how widespread support will be for shareholder proposals that do make it into proxies for the coming season. ISS, for instance‚ does not yet have a standard position on such proposals‚ instead deciding them on a case-by-case basis.
For additional information concerning this alert, please contact your regular Bingham corporate contact or the following lawyers:
Michael P. O’Brien
David K. Robbins
Laurie A. Cerveny
Janice A. Liu
Charles A. Sweet