SEC to Allow Shareholders to Submit Proxy Access Proposals for 2012 Season

James Morphy is a partner at Sullivan & Cromwell LLP specializing in mergers & acquisitions and corporate governance. This post is based on a Sullivan & Cromwell client memorandum. More posts about proxy access, including several from the Program on Corporate Governance, are available here.

The Securities and Exchange Commission has announced that its revisions to the proxy rules to allow shareholders to propose proxy access bylaws and other election or nomination procedures will become effective shortly. The SEC had stayed the effectiveness of these changes to Rule 14a-8 pending the outcome of a judicial review of its mandatory proxy access rule, Rule 14a-11. On July 22, 2011, the U.S. Court of Appeals for the D.C. Circuit vacated Rule 14a-11, but the Rule 14a-8 changes were not litigated. The SEC’s stay order will automatically expire when the court decision is finalized, which is expected to occur on September 13, and the Rule 14a-8 changes will therefore become effective at that time absent further SEC action. The SEC stated that a notice of effective date will be published.

The SEC also confirmed that it will not seek a rehearing of or appeal the decision vacating Rule 14a-11. A statement by the SEC Chairman indicated that she remains committed to facilitating shareholder nominations of directors and that the SEC will continue to review the court decision and the comments received on their proposed rules in order to “determine the best path forward” on mandatory proxy access.

These developments mean that “private ordering” of proxy access will begin in the upcoming proxy season. In other words, U.S. public companies will not be subject to a mandatory proxy access standard but must permit shareholder proposals that either request that the board implement proxy access or that bypass the board and directly amend the company’s bylaws to implement proxy access. We anticipate a significant number of shareholder proposals in this area, as was the case over the past decade with respect to majority voting, staggered boards, separation of CEO and chair, shareholder rights to call special meetings and act by written consent and other governance matters.

Some companies may want to consider proactively adopting their own proxy access standard rather than waiting for an activist shareholder to propose one. Companies doing so may want to condition adoption on a shareholder vote. [1] A management-proposed standard need not parallel Rule 14a-11 and may include thresholds and restrictions that are more appropriate to the company’s particular circumstances. We would anticipate that shareholders would generally support a reasonable company proposal for proxy access, even if it is more restrictive than shareholder groups might recommend on their own. Of course, under revised Rule 14a-8, any company may be subject to proposals in future years seeking to expand proxy access rights.

Other companies may decide to observe the development of market practices and trends before taking action. We expect that in a system of private ordering it will take a number of years for market practices to develop, and it is not clear that proxy access will become common among public companies in the way that, say, majority voting has. Many companies and shareholders may determine that a proxy access regime would undermine the role of the nominating committee and that a combination of a strong, independent nominating committee, effective shareholder communication channels and majority voting provisions makes proxy access unnecessary and undesirable.

The SEC’s stay of effectiveness related not only to Rule 14a-11 and Rule 14a-8, but also to other related rules, including additional exemptions from proxy solicitation rules and the introduction of Schedule 14N for shareholder nominations under either Rule 14a-11 or a company proxy access bylaw. Since many of these provisions mention Rule 14a-11 in some respect, it seems likely that the SEC will need to make technical amendments to these rules.

Endnotes

[1] As a general matter, if a company is seeking shareholder approval of its own proxy access bylaw change, then the company should be able to exclude any conflicting shareholder proposals from the proxy statement under Rule 14a-8(i)(9), which allows exclusion of a shareholder proposal that conflicts with a management proposal.
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2 Comments

  1. Posted Friday, September 9, 2011 at 2:41 pm | Permalink

    Mr. James Morphy,
    I appreciate your perspective regarding proxy access. Your comments regarding corporate governance and nominating committees resonates with me. These committees can have a significant impact on proxy access if they take appropriate action to substantially improve current processes which are used to recruit and develop excellent directors. I believe directors are well positioned to continue leading this process if we take a more effective leadership approach to identifying and developing board members who are committed to increasing shareowner value.

    Curtis J. Crawford, Ph.D.

  2. Posted Thursday, September 15, 2011 at 7:27 pm | Permalink

    Of course, the ability of stockholders to bypass the board of directors and directly adopt bylaw amendments will be a function of state law. Nevada, for example, permits the articles of incorporation to include a provision that grants the authority to adopt, amend or repeal bylaws exclusively to the directors. NRS 78.120(2).

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