Proxy Access: Next Steps for Shareowners

As I indicated in What Would Proxy Access Look Like if Done Right? the ruling that struck down the SEC’s main proxy access Rule 14a-11 didn’t strike down amendments to Rule 14a-8(i)(8), allowing shareowners to resume filing proxy access precatory and bylaw proposals. Those amendments were placed on hold by the SEC last October after the legal challenge to Rule 14a-11 because the 14a-8(i)(8) changes were “intertwined” with the marketwide access rule.

Before 1990, Rule 14a-8(i)(8) applied only to proposals ”used to oppose solicitations dealing with an identified board seat in an upcoming election” (also known as contested elections).

In 1980 Unicare Services included a proposal to allow any three shareowners to nominate and place candidates on the proxy. Shareowners at Mobil proposed a “reasonable number,” while those at Union Oil proposed a threshold of “500 or more shareholders” to place nominees on corporate proxies.

Many private ordering proposals were presented over the years but opponents had nothing to worry about, since in decades of experience no shareowner proposal ever won a majority vote. That changed in 1987 when Lewis Gilbert’s proposal to allow shareowners to ratify the choice of auditors got the first majority vote at Chock Full of O’Nuts. That win was followed by an even greater victory in 1988 when Richard Foley’s proposal to redeem the poison pill passed with a majority vote at the much larger Santa Fe Southern Pacific Corporation.

After many years of access, just as shareowners actually began getting a few majority, the SEC changed their interpretation of the phrase “related to an election” to include future elections, not just current year elections — and they did so without public discussion or even disclosure in 1990. That was the rationale of problem decided by AFSCME v AIG. In 2007, the SEC closed the door legally with an amendment.

If the SEC now lifts its stay on Rule 14a-8(i)(8) amendments, shareowners owning at least $2,000 in company stock for more than a year will once again be able to submit access proposals in 2012.

Several investors told Ted Allen of ISS they are looking into submitting access proposals next season. “It appears likely that proponents would seek holding periods and ownership thresholds that are more permissive than Rule 14a-11’s requirements of a 3 percent stake for at least three years. Labor funds generally prefer a two-year period, and some activists have argued for a lower threshold (such as 1 percent) at large-cap firms.” Allen reports on discussion amongst activists:

So far, it appears that the activist investor community is undecided about whether to file access proposals in 2012 and how many companies to target. There is a concern that the filing of dozens of access resolutions next season might bolster corporate arguments that the SEC should refrain from adopting a new marketwide access rule and just allow private ordering to work. There also is a concern that low support levels for poorly targeted proposals would be cited by corporate critics as evidence that most shareholders don’t want access. Conversely, some activists argue that strong shareholder votes for access in 2012 could help prod the resource-stretched SEC to prepare a revised access rule. If activists do file access proposals next season, it appears that they may focus on a few high-profile companies with well-known governance issues…

If shareholders bring access resolutions in 2012, no-action challenges by companies would be inevitable. Some companies may seek to exclude investor access proposals (as firms have done in response to special meeting requests) by offering their own management resolutions with greater hurdles to access–such as a 10 percent (or higher) ownership threshold. (Will Investors File Proxy Access Proposals in 2012?, ISS, 2011)

Several have written on next steps for the SEC with regard to Rule 14a-11. For example, Jay Brown writes:

When the SEC returns with a new proposal, as it certainly will, the rule will likely go into effect after the elections.  The SEC will therefore have greater flexibility in determining the standards for access.  Thus some of the more onerous restrictions (the three year holding period for example) can more easily be jettisoned.  And, while the DC Circuit will get another crack at the rule, membership on the court is likely to shift in a more moderate direction.

Access is an inevitability.  It is not because of ideology.  It arises out of the interests of shareholders.  As problems such as executive compensation remain intractable, shareholders will rely less on the “imperial CEO” model of governance and insist on greater participation.  While this can occur through incremental increases in authority (say on pay for example), the real solution is the right to nominate directors.  In fact, as the example of Britain has shown, it will be the threat of access that will cause boards to focus more often on the interests of shareholders rather than the actual use of the authority which, no matter what the DC Circuit thinks, is not likely to occur often…

Each time access has been shelved, the results have favored shareholders.  The initial efforts were for an access bylaw.  When that didn’t happen, the SEC proposed a direct access right.  When that was delayed, Congress was prevailed upon to clarify the SEC’s rulemaking authority in the area.  The same will likely occur here.  The ultimate rule will likely favor shareholders more than the current version. (The DC Circuit and Delaying the Inevitable)

What I haven’t seen is anyone addressing just how “intertwined” Rule 14a-8(i)(8) is with Rule 14a-11 and how proxy access proposals in 2012 (assuming the SEC lifts the ban) would differ from those of the 1980s. This will take a little work that I would like to avoid, if anyone else has already done it. If you’ve written such analysis or have seen such analysis, please contact me at jm@corpgov.net.