The approval of the Dodd-Frank Wall Street Reform and Consumer Protection Act and subsequent SEC rules and amendments has laid the groundwork for a dynamic 2011 proxy season where directors may have to deal with “real” elections from shareholder-backed candidates.
Under SEC Rule 14a-11, any shareholder or group of shareholders holding at least 3 percent (in aggregate for groups) of a company’s shares for at least three years would be allowed to nominate directors and have those nominees included a company’s proxy materials.
Some of the other requirements that must be met include:
- The shareholder or group seeking to use Rule 14a-11 must notify the company no earlier than 150 days before the anniversary of the annual public meeting and no later than 120 days before that date.
- A company does not have to include a shareholder director nominee slate that would replace more than 25 percent of the current board.
- The shareholder or group must file a Schedule 14N with the company and the SEC electronically on the date it notifies the company of its intent to use Rule 14a-11. The Schedule 14N includes the shareholder or group’s amount of voting power, biographical information about the nominee slate, whether or not the candidates satisfy the company’s director qualifications and a statement supporting the candidates.
Under the amendments to Rule 14a-8, most company exclusions of shareholder proposals from the proxy will not be allowed. Also, smaller reporting companies don’t have to abide by the rules for three years.
Over the past month, much has been written by bloggers, attorneys, corporate governance experts, and columnists about proxy access. Here are some of the articles, blogs, client memos, and white papers that I believe are worth reading…
- Proxy Access: Be Sure Your Board Is Ready, Beverly Behan, Board Advisor founder, Bloomberg Businessweek, Aug. 31, 2010. Summary: Last year's proxy disclosure rules forced companies to outline the reasons why each director was being nominated; specifically what background or expertise each brought that was deemed useful to a board's makeup. For many boards, the focus of this exercise was simply to engage legal experts in wordsmithing a renomination rationale for current directors, rather than addressing gaps in board composition itself. Some obvious composition issues that can attract both shareholder activist and media attention include lack of outside directors with industry experience; lack of chief executive officer or senior executive experience at a public company of similar complexity to your own; no international directors on a board with significant global operations; and/or a situation where it has been several years since a new director graced the board table. She cautions that the time to address such issues is now, not when a 3 percent shareholder comes knocking at your door next spring with a board nominee. She adds that an institutional investor that sees you've recruited capable board members to fill obvious gaps and strengthen the board may even cross you off the target list and focus on another company.
- Analysis – Court Fights May Loom Over U.S. Proxy Access Rules, Jonathan Stempel, Reuters, Sept. 2, 2010. Summary: SEC Commissioner Kathleen Casey, a dissenter in the SEC proxy access rules vote, brought up the possibility of a court fight. Joseph Grundfest, a Stanford Law School professor and former SEC commissioner, is quoted in this article as saying lawsuits are certain and that potential plaintiffs could be trade associations and companies affected by the rules. It quotes Casey, who said during her SEC vote speech, “the rule is so fundamentally and fatally flawed that it will have great difficulty surviving judicial scrutiny.” J.W. Verret, a George Mason University law professor, is quoted in the article citing the possibility of boards using a so-called “whitemail” defense to fight dissident slates. In such a scenario, boards pay the insurgent nominees to go away and not nominate themselves for election.
- SEC Adopts Controversial Proxy Access Rules, Frederic D. Firestone and Michael A. Ungar, McDermott Will & Emery, Sept. 2, 2010. Summary: In this client memo, the authors write that the more than 600 comments received by the SEC on the proposed rules and the strong criticism of the final rules in the public statements made by the two dissenting Republican commissioners reflect the intensity of the debate. While as a practical matter, proxy access may be limited because relatively few shareholders hold 3 percent of a company’s securities for three years, it is likely that the new SEC proxy access rules will be challenged in the courts. Additionally, SEC Chairman Mary Schapiro stated that the commission will closely monitor how the rules are implemented, and will make prompt changes if practice demonstrates the need to do so. Therefore, the debate over proxy access is far from over.
- The 2010 Proxy Season: A Brave New World, David Drake, Rhonda L. Brauer and Steven Pantina, Georgeson Inc., Sept. 7, 2010. Summary: Assuming proxy access is in place for the 2011 proxy season, it will be interesting to see whether it will have an effect on proxy contests going forward. Although utilizing proxy access may be less costly, the final rule will have its drawbacks. Companies will be faced with more challenges than ever. Even with important shifts in the way directors are elected and the types of proposals that shareholders will be required to vote on, companies are often handicapped by an inefficient proxy voting system. Most notably, the current system engenders the over- and under-voting of shares, provides no requirements for proxy vote confirmation, and restricts issuers’ ability to identify and directly communicate with a large percentage of their own shareholders. To help deal with many of the inefficiencies in the current system, the SEC Commissioners voted unanimously to approve the issuance of a concept release seeking public comment on the U.S. proxy system (sometimes referred to as “proxy plumbing” or “proxy mechanics”). While the need for change is clearly necessary, there is a danger that the proposed proxy plumbing initiatives will fall by the wayside if individual companies do not actively press the SEC to take action and encourage other companies to participate in influencing the outcome of the concept release. It is not only what is being voted on, but how the voting gets done that is critically important.
- Defending Against Shareholder Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank, J.W. Verret, George Mason University School of Law, Aug. 8, 2010. Summary: In this paper, the author writes the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has ensured that a shareholder’s ability to place nominees to the board onto the corporate ballot, an objective long advocated by the institutional investor community, will soon be implemented by the SEC. Advocates of proxy access urge that it will help hold boards of directors accountable to their owners. Critics argue that it will give conflicted shareholders, like unions and state pensions, power they will use to facilitate their political objectives at the expense of ordinary shareholders. The shareholder primacy and director primacy theories of corporate law have framed an extensive debate in the literature. Regardless of which theory holds force, we can expect boards to implement defensive strategies in the wake of proxy access to limit shareholder power, in the same way that boards implemented defensive tactics in response to the hostile takeovers of the mid-1980s. Delaware’s review of board proxy access defenses will shape its role in the foreseeable future in much the same way review of board takeover defenses shaped its role over the last 20 years.
Shareholder proxy access is an issue that has been on and off boards’ collective radar for years, depending on whether there was a Democrat or Republican in the White House. But during the current presidency shareholders finally have something tangible to use in their battle for access to the proxy.