Additional Major Proxy Reforms Are Possible Next Year

This post comes to us from James F. Burke, Managing Director of Special Studies at The Altman Group. This post refers to the SEC’s “Final Rule on Facilitating Shareholder Director Nominations,” available here, as well as the SEC’s “Concept Release on the U.S. Proxy System,” available here. Additional posts on proxy plumbing are available here.

While recent developments have focused attention on the new rule enabling proxy access (Rule 14a-11; available here) and its impact on the 2011 proxy season, the Securities and Exchange Commission (SEC) will also be busy over coming months exploring a major overhaul of the proxy system based on reform concepts presented in their Concept Release on the U.S. Proxy System (“Proxy Mechanics;” available here). Comments on the latter, if you haven’t already submitted them to the Commission, are due on or before October 20, 2010 (SEC File Number S7-14-10).

It was an indication of the Commission’s priorities that it moved to issue new rules on proxy access, which will become effective on November 15, 2010, before completing its review of long-standing, and arguably far more pressing, issues addressed in the concept release. Commissioner Kathleen L. Casey noted in her remarks on the new proxy access rule (Aug. 25, 2010): “a primary, if unstated, objective of this rule is to put the issue of proxy access behind the Commission once and for all…paradoxically, the rule that the Commission” adopted “virtually guarantees that the Commission will be forced to deal with this issue for years to come.” Indeed, there is some uncertainty about whether the eligibility and disclosure requirements under Rule 14a-11 could change as a result of decisions arising out of the Commission’s review of proxy mechanics. Some of the reform concepts and issues raised in the concept release on the U.S. proxy system go directly to questions of eligibility and disclosure requirements under Rule 14a-11. For example, the concept release not only raised the issue of a procedural definition of “empty voting” (e.g., should “voting and investment power” calculations include equity and/or credit derivative-based hedging or short positions), but also the possible prohibition of “empty voting” in situations where a shareholder has a “negative economic interest.”

The public policy debate over such critical concepts as “empty voting” and “voting power” has yet to see a wide range of market participants engaged. Or should we conclude from the Commission’s final rule on proxy access that the die is already cast when it comes to the definition of “voting and investment power?” We hope not. Indeed, the Commission’s adopting release on facilitating shareholder director nominations included this notable comment (at footnote 277, page 100): “We recognize that selling a company’s securities short is only one of a number of ways that a shareholder can hedge the economic risk of its investment. Indeed, a number of commenters suggested that we adopt a beneficial ownership definition for purposes of Rule 14a-11 that netted all hedging arrangements (derivatives, swaps, etc.). We believe, however, that it is appropriate at this time to adopt the ownership threshold for Rule 14a-11 with the provision only relating to short sales….” The phrase “at this time” was a curious choice of words, and hinted at further examination of what should be the appropriate definition of “voting and investment power.”

The issues raised in both the Commission’s 151-page concept release on the U.S. proxy system and its 451-page adopting release on facilitating shareholder director nominations (“proxy access”) are far too numerous to review in detail in this special edition of our newsletter. That is why The Altman Group has prepared for you both an Executive Summary of the concept release on proxy mechanics, which is available here, and a Client Alert on the “Implications for Corporate Issuers of the SEC’s Concept Release on the U.S. Proxy System.” The latter, which is available on our website here, offers comments and insights from The Altman Group on the issues raised by the SEC’s concept release that we see as the most significant. In addition, we have previously published a Client Alert examining in detail the SEC’s adopting release on proxy access. This report can be found on our website here.

Public Policy Debate Over Additional Reforms of the U.S. Proxy System

On a final note, we would like to express our hope that readers will take this opportunity to examine the many reform concepts outlined in the SEC’s concept release on the U.S. proxy system, and consider submitting comments to the Commission. The Altman Group plans to submit comments to the Commission on a number of topics covered in the concept release — with a particular focus on what the SEC has termed an “annual NOBO” concept. The annual NOBO (ANOBO) approach detailed in the concept release is based, in part (according to footnote 163, pg. 71 of the release), on a proposal submitted to the SEC in October 2009 by The Altman Group. In that proposal we urged the Commission to consider adopting a system called an event-based All Beneficial Owners (ABO) model. That Oct. 2009 proposal from The Altman Group, titled “Practical Solutions to Improve the Proxy Voting System,” is available here. In the annual NOBO system under consideration (quoting from the SEC’s concept release): “an issuer would be entitled to a list of all beneficial owners, but only as of the record date for a particular meeting…At any other time during the year, objecting beneficial owner information would not be available to the issuer or any other party. An annual NOBO system would enable issuers to communicate directly with all of their shareholders, both registered and beneficial owners, for purposes of a shareholder meeting, while minimizing the possibility that the investor information will be used for purposes other than proxy solicitation, such as determining an investor’s trading strategies.”

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