Rule 14a-11 and amendments to Rule 14a-8
) might not withstand federal court scrutiny unscathed. At least, that is the early read from news reports following the line of questioning of the three U.S. Court of Appeals for the District of Columbia Circuit judges hearing oral arguments in the U.S. Chamber/Business Roundtable lawsuit vs. the SEC.
At the court hearing, two of the three judges questioned the premise of the SEC’s argument regarding the effect the rules would have on costs. Judges David Sentelle and Douglas Ginsburg poked holes in the SEC’s logic that through proxy access there would be fewer contests for director seats.
A Dow Jones Newswires article
quoted Sentelle: “How do you come up with a lower number when you are expanding the universe of contests that can be brought?” Chief Judge Sentelle asked. He told the SEC attorney that he thought the number of contests would be closer to 108, not the 51 the SEC was arguing would be the case.
Judge Ginsburg, who was surprised the SEC argued the number of contests would decrease, also brought up the point that the new rules may make certain special interest groups more powerful. “Are you concerned that the new rules will empower labor and pension funds, and those shareholders have different interests than the shareholders at large?” he asked. [Read Market Watch
Although the court isn’t expected to rule on the lawsuit until July or August, it is believed it will do one of three things: tell the SEC to strike down the rule, rework the rule with some changes, or uphold the rule. Based on recent SEC rulemaking decisions, where the body has revisited other rules and recast them with changes, it’s probably a safe bet the SEC will do the same here.
The area most likely to be changed is the amendment to Rule 14a-8, which allows for exceptions to the rule through no-action letters that are approved by the SEC on a case-by-case basis. The thinking here is that companies could ask for the exception based on the costs to the company. The irony here is that the Chamber and Business Roundtable are not asking that part of the rule be struck down.
No matter what happens, I would like to reiterate that public companies should seriously consider a game plan for the 2012 proxy season. It could probably be more in line with the strategy for dealing with Say on Pay proposals this proxy season. With such advisory votes now law thanks to the Dodd-Frank Act, many companies and boards focused on their CD&A as well as the language in the executive compensation plans that shareholders voted on. While the rule only calls for an advisory vote, some companies who have lost such votes are seriously considering changes to their compensation plans.
If you remember a Director Notes report we issued in December 2010 (Private Ordering and Proxy Access Rules: The Case for Prompt Attention
), there are certain areas boards and companies should focus on. They include:
- Advance-notice bylaws, particularly the windows for notice of nominations for proxy access and for conventional election contests and the informational requirements for both types of nominees
- Traditional director qualifications, such as age, term limits, citizenship, and ownership of minimum amount of stock
- Additional director qualifications, such as written adherence to board governance and informational policies
- Conduct of shareholder meetings
- Board size
- Nominating committee processes and procedures
The report, written by Latham & Watkins Partner Charles M. Nathan and Associate Paul F. Kukish, warns boards not to postpone review and action beyond the summer of 2012. “Acting now in an orderly and thoughtful fashion is far better than waiting for a court or subsequent SEC decision establishing proxy access for the 2012 annual meeting season,” they wrote.
Wouldn’t it be the ultimate irony if the shareholder proxy access rules approved by the SEC under the Dodd-Frank Act were thrown out by a federal court because they could cost companies too much money? One of the major thrusts behind proxy access over the past couple of decades was that the traditional proxy fights to replace directors has been cost prohibitive to minority shareholders who had to pay for their own ballots.
Most likely the court won’t strike down the rules entirely, but instead will ask the commission to tweak the rules to take into account its concerns about costs of implementing the rules, a major argument made by the federal court hearing the case earlier this month.
The proxy access rules approved by the SEC (