- In its short statement from Meredith Cross, director of Division of Corporation Finance, SEC, following the court’s decision, said: “We are considering our options going forward. We note that our rule allowing shareholders to submit proposals for proxy access at their companies, which we adopted at the same time, is unaffected by the court’s decision.”
- In its statement following the decision, the Council of Institutional Investors (CII) said: “We think the court got it wrong. We will continue to advocate for proxy access and will encourage the SEC to promptly address the court’s concerns. Proxy access is a core shareowner right that is standard in many countries. It would invigorate board elections and make boards more responsive to shareowners and more vigilant in their oversight of companies.”
- In a client memo issued the day of the decision, the law firm of Wachtell, Lipton, Rosen & Katz, which applauded the court, said: “Shareholders have many avenues to influence boards of directors, who are in general more independent, more engaged and more vigilant than ever before, and we do not expect this ruling to decrease the frequency of proxy contests.”
In the 21-page court opinion
, Circuit Judge Douglas H. Ginsburg heavily criticized the SEC for writing the regulation and arguing that it would decrease the cost of proxy contests.
“…the Commission observed that ‘any increased costs and decreased efficiency of an investment company’s board as a result of the fund complex no longer having a unitary or cluster board would occur, if at all, only in the event that investment company shareholders elect the shareholder nominee.’ … The Commission’s point was that shareholders might benefit from getting proxy materials ‘making [them] aware of the company’s views on the perceived benefits of a unitary or cluster board and the potential for increased costs and decreased efficiency if the shareholder nominees are elected.’ And so they might, but this rationale is tantamount to saying the saving grace of the rule is that it will not entail costs if it is not used, or at least not used successfully to elect a director. That is an unutterably mindless reason for applying the rule to investment companies.”
Further, Ginsburg wrote that the SEC was “arbitrary and capricious” in writing Rule 14a-11.
PwC, in an alert it sent out yesterday by John Barry, leader of PwC’s Center for Board Governance, summed up the SEC’s options quite succinctly: “While we do not yet know what the SEC will do in response to the ruling – whether they will appeal the decision, develop a new proposal, or take other action – we do know proxy access rules will not be effective for the 2012 proxy season. However, shareholders are able to submit proxy access bylaw proposals at companies this coming proxy season as this provision of the rule was not challenged in court. Shareholders can also continue to use conventional methods to nominate directors.”
The plaintiffs in the original complaint, the U.S. Chamber of Commerce and Business Roundtable, called the decision a victory against special interest groups while focusing on the effect the decision will have on the long-term interests of shareholders. [Read the press release
“By vacating the rule, the court has effectively placed great importance on the long-term interests of shareholders and businesses alike,” said Sandy Cutler, Chairman & CEO of Eaton Corporation and Chairman of Business Roundtable’s Corporate Leadership initiative. “The judges agreed with Business Roundtable and the Chamber of Commerce that the Commission failed to do what was required and that’s to consider the rule’s impact on efficiency, competition and capital formation. This ruling will help company management and boards pay attention to the creation of long-term shareholder value under strong and transparent rules of corporate governance.”
So while the SEC mulls over what it will do in reaction to the D.C. Circuit Court decision, boards and shareholders are left with one rule under the Dodd-Frank Act that is still intact. That is the amendment to Rule 14a-8.
Amendment to Rule 14a-8
The original rule gave public companies the right to exclude shareholder director nominees from the proxy, which included an opt-in provision. Under the amended rule, a company must include such a shareholder proposal under the final rules as long as the procedural requirements of Rule 14a-8 are met and the proposal is not subject to exclusion under one of the other substantive bases. The only way such a shareholder proposal could be excluded would be if it:
- Would disqualify a nominee who is standing for election;
- Would remove a director from office before his or her term expired;
- Questions the competence, business judgment, or character of one or more nominees or directors;
- Seeks to include a specific individual in the company’s proxy materials for election to the board of directors; or
- Otherwise could affect the outcome of the upcoming election of directors.
Two things are almost certain following Friday’s decision by the U.S. Court of Appeals for the D.C. Circuit in the case challenging the SEC’s new proxy access rules: there definitely will be no proxy access for proxy season 2012 and the number of proxy contests will increase next year.
While I know I’m not going out on a limb to make the first prediction since the court unanimously vacated Rule 14a-11 (which would allow shareholders direct access to the proxy), I believe shareholder groups will take advantage of Rule 14a-8 as a backdoor way toward proxy access. Additionally, there is bound to be some kind of blowback for those directors sitting on companies that had negative Say on Pay votes. Granted, that might take the form of withhold campaigns but many shareholder groups may just opt for the good old-fashioned proxy contest.
Here’s why I believe there will be an uptick in proxy contests and/or shareholder proposals calling for proxy access: