U.S. Chamber of Commerce/Business Roundtable vs. SEC
after the agency decided not to challenge the July 22 decision.
The way that new rule is written, you can see why some shareholder activists and law firms are preparing for a busy shareholder proposal proxy season in 2012 starting this week. The new rule states that any shareholder having held $2,000 in company stock for at least a year would be allowed to propose amending a company’s bylaws to allow shareholder proxy access for director nominations. If approved, the company would have to allow proxy access in the subsequent proxy season. This would limit proxy access to a company-by-company basis, which is known as private ordering.
Although SEC Chair Mary Schapiro left open the possibility of revisiting full shareholder proxy access, some shareholder activists have already decided to work within the new regime and propose their own model proposals. One such person is James McRitchie of CorpGov.net, a longtime shareholder. He proposes the following guiding principles
for proxy access shareholder proposals:
- “A universal proxy will increase the likelihood that no special interest, such as unions or entrenched managers, will ‘control’ the board, since many shareowners will choose directors ala carte, rather than along ‘party’ lines.
- To address concerns of the Business Roundtable and Chamber of Commerce and reduce the likelihood of excess spending, all candidates, including the board’s own nominees, should be required to file full disclosure of costs, both pre- and post-election. There should be an accounting of all campaign expenditures, including in-kind contributions and those expended by corporations or other interested entities on behalf of candidates they support.”
- Low barriers are also advisable. Narrow eligibility requirements, such as those contained in Rule 14a-11, which bar most individual and institutional investors, must go. Artificial barriers requiring a 3 percent holding for three years in order to place a nominee on the ballot can be seen as “arbitrary and capricious,” especially given the SEC’s longstanding requirement of $2,000 worth of shares held for one year to submit shareowner proposals under Rule 14a-8.
- Full access is needed to ensure changes in control can occur in a timely manner — before the value of the corporation erodes — and without the unnecessary expense of a solicited proxy contest.
Of the law firms issuing client memos regarding proxy access, many are warning public companies to expect quite a few shareholder proposals especially if they tend to have active shareholders and to make sure they prepare responses to the proposals. All of the client memos I have read picked up on the “private ordering” language related to Rule 14a-8. And at least one accounting firm has issued an alert that gives advice to companies for the 2012 proxy season.
Here are some of the client memos and publications I think are worth reading …
- Proxy access: Not gone yet, John Barry, Catherine Bromilow, Don Keller, pwc, Fall 2011. Excerpt: In early September, the SEC said it would not appeal the court ruling. As a result, the stay on the Rule 14a-8 amendment expires when the court’s ruling is finalized, which is expected on September 13. This opens the door for proxy access through private ordering. Directors can prepare for this possibility by:
- Anticipating an increase in the number of proxy access proposals.
- Reviewing company bylaws and amending them to include more robust advance notice mechanisms and conditions for shareholder nominations.
- Identifying any internal issues relating to director nomination or board composition, including reviewing the company’s nominating committee charter, bylaws relating to director qualifications, rules for the conduct of shareholder meetings, and the policy on director age and term limits.
- Ensuring that there is regular shareholder engagement to identify and address concerns related to director nominations.
- Proxy Access – End Game for Now, Colin J. Diamond, David M. Johansen, Gary Kashar, Kevin Keogh, White & Case, September 2011. Excerpt: Under Rule 14a-8, a shareholder proposal must be submitted to a company no later than 120 days in advance of the anniversary of the release date for the prior year’s proxy materials, which for calendar year companies typically falls in November or December. Therefore, eligible shareholders intending to submit shareholder access proposals will need to do so relatively soon if they wish to include such proposals under Rule 14a-8 for the upcoming proxy season. This timing also means that companies should begin preparing for the possible submission of such proposals. Proactive steps that could be considered by public companies to prepare for the private ordering regime include engaging with shareholders to identify and address, among other things, any concerns related to director nominations and performance, identifying any large and active shareholders and determining what issues they are concerned about, and educating nominating committees and other board members about the possibility of such proposals. … It is not unreasonable to expect that shareholders will pursue private ordering alternatives more aggressively than might otherwise have been the case.
- SEC Elects Not to Appeal Proxy Access Decision, Wilson Sonsini Goodrich & Rosati, Sept. 8, 2011. Excerpt: In permitting “private ordering” proxy access through Rule 14a-8 to become effective, the SEC can be expected to impose a high bar on companies seeking to exclude such proposals through the Rule 14a-8 no-action process. It should be anticipated that the SEC will permit few, if any, of these proposals to be excluded unless they are clearly deficient on other Rule 14a-8 grounds (e.g., share ownership for an insufficient period of time). The SEC may view the amendments to Rule 14a-8 as a low-cost way to study the implementation and operation of some form of proxy access in what is likely, at least initially, to be a relatively limited subset of companies. Companies — particularly those with shareholders who have been successful in bringing and adopting Rule 14a-8 proposals or those with a history of public shareholder activism—may wish to begin the process of considering potential responses to the receipt of a Rule 14a-8 proxy access proposal. Shareholders submitting proxy access proposals through the Rule 14a-8 process are likely to seek procedures that are more permissive (and perhaps significantly so) than those proposed in the SEC's proxy access rule. As a result, it may make sense for some companies and their boards of directors, following the receipt of a proxy access shareholder proposal, to consider whether there are proxy access procedures for their company that are more appropriate than those that have been proposed by the shareholder, which proposal may be the product of the shareholder's particular agenda. However, preemptive board action in these circumstances should be the product of careful consideration because it remains to be seen how the SEC will treat a company's unilateral adoption of proxy access after receipt of a shareholder proposal for the purposes of Rule 14a-8's substantial implementation standard.
- Mandatory Proxy Access is Dead – For Now – as SEC Drops its Legal Appeal; Private Ordering of the Proxy Access Issue Will Be the Likely Short-Term Result, Abby E. Brown, Daniel G. Berick, Frank M. Placenti, Joseph P. Richardson, David A. Zagore, Squire Sanders, September 2011. Excerpt: Unless the SEC acts within the next few days to suspend or cancel the effectiveness of the amendments to Rule 14a-8(i)(8), it is unclear when the amendments would become effective – whether on September 13, 2011, the date on which the court of appeals mandate (i.e., final decision) is expected to issue, or some later date. In any event, the amendments are likely to be effective for the 2012 proxy season. Shareholders seeking to propose amendments to company governance documents will be required to submit the proposals at least 120 days prior to the anniversary of the mailing date of the previous year’s proxy materials. This would mean, for example, that the private ordering amendments of Rule 14a-8 would be available at companies that mailed their proxy statements for their last annual meeting on or after January 21, 2011. However, for companies that mailed on January 21, 2011, the new rule would be available only for one day, September 13, 2011, the 120th day preceding the anniversary of the prior year’s proxy mailing date.
- SEC Walks Away from Part of New Proxy Access, Faces Imminent Deadline on Remainder, Julie M. Allen, Philippa M. Bond, Stuart Bressman, et al, Proskauer, Sept. 9, 2011. Excerpt: The amendments to Rule 14a-8(i)(8) narrowed a company's ability to exclude shareholder proposals relating to election of directors. The revised Rule14a-8(i)(8) would provide shareholders with a mechanism for including in company proxy materials proposals that would address the inclusion of shareholder director nominees in the company’s proxy materials. The old Rule 14a-8(i)(8) allowed exclusion of a shareholder proposal to set up a proxy access mechanism or to nominate a particular person for a board seat. The revised rule, if implemented, would permit proposals to set up a proxy access mechanism, subject to the requirements of state law, pursuant to which shareholders could force a company to include their nominees on the company's proxy card. … Much depends on the SEC's own decisions with respect to proxy access. Companies, however, should consider the possibility that stockholder proposals relating to proxy access may become a factor as early as the 2012 proxy season.
Now that Rule 14a-11 (mandatory shareholder proxy access under the Dodd-Frank Act) is dead for at least the next proxy season, it has become apparent that the focus will be on the amended Rule 14a-8 (private ordering for proxy access shareholder proposals). Today is supposed to be the day the amended rule goes into effect, pending the final decision in the