Seven Law Firms Comment on “Opt-Out” Under SEC’s Proposed Proxy Access Rules

Seven major law firms — Cravath, Swaine & Moore LLP, Davis Polk & Wardwell LLP, Latham & Watkins, LLP, Simpson Thacher & Bartlett LLP, Skadden, Arps, Slate, Meagher & Flom LLP, Sullivan & Cromwell LLP and Wachtell, Lipton, Rosen & Katz — collaborated on a 17-page comment letter  in response to a request by the SEC last December for additional comments on its proposed proxy access rules.  These seven firms previously submitted a comment letter  last August on the proxy access proposal, which was described on the Forum here.  In light of the additional data and analyses cited in the SEC’s request for additional comment, as well as the recent comments by some of the Commissioners regarding the possibility of permitting shareholders to approve a more restrictive proxy access standard, the comment letter elaborated on the seven firm’s earlier recommendation that shareholders should have the opportunity to modify or opt-out entirely from the SEC’s proxy access regime if Rule 14a-11 were adopted.  As currently proposed, Rule 14a-11 only permits shareholders to adopt less restrictive provisions (a one-way opt-out) to facilitate proxy access.  The most recent seven firm letter recommended that shareholders should be permitted to adopt either more or less restrictive provisions (a two-way opt-out), including a complete exemption or an alternative regime, for the following reasons:

• A two-way opt-out (compared to the Proposal’s one-way opt-out) is fundamentally more consistent with the SEC’s goal of enfranchising shareholders.
• Given the diverse nature and needs of the over 12,000 companies that would be subject to a proxy access rule, uniform proxy access would not be effective or workable without the safety valve of a two-way opt-out.
• A two-way opt-out is widely endorsed by the SEC’s constituencies, with only narrow opposition.

The most recent seven firm letter also notes serious issues with the criticism of a two-way opt-out:

• Proxy access is not fundamentally a “disclosure” regime and concerns regarding its modification by shareholder cannot be properly analogized to weakening disclosure requirements or to permitting shareholders to opt-out of a disclosure regime.
• In contrast to the potential impact on proxy access that impediments to shareholder by-law amendments may pose under an opt-in regime, concerns regarding such impediments, to the extent applicable, under a two-way opt-out regime are misplaced because any such impediments will only make the achievement of a two-way opt-out more difficult and therefore lead to greater prevalence of the default rule.

The letter includes detailed discussion and recommendations regarding the best way to implement two-way opt-out as part of an SEC proxy access rule.

The complete comment letter can be downloaded here.