Proxy Access Under Private Ordering: Advice of Counsel

myCorporateResource.com is a new database of law firm alerts, as well as providing many other resources. A great site worth exploring, which I have added to our blogroll. I encourage readers to go to the original documents linked below, since there you will get the clips in full context. My intent here is to simply provide a sampling of current advice to corporate management.

Alston + Bird: With respect to the Rule 14a-8 amendments, given the stated reasons for implementing the stay (including statements about how “intertwined” amendments were with Rule 14a-11 and the “potential for confusion”), it would not be surprising to see legal challenges to the lifting of the stay. Absent action on the part of the SEC, however, companies and shareholders should prepare for “private ordering”, which may well be part of this upcoming proxy season.

Morrison & Foerster: Shareholders who have expressed disappointment in the Court’s decision to vacate Rule 14a-11 may use the mechanism provided by Rule 14a-8(i)(8) to seek to establish a proxy access regime at individual companies. Companies gearing up for the proxy season should plan accordingly.

O’Melveny & Myers: options include presenting the proposal in the company’s proxy materials for a vote of the shareholders or taking actions that allow for the exclusion of the proposal from the company’s proxy materials — for example, through the adoption of a proxy access process or submission of a management-proposed proxy access proposal for a vote of the shareholders.

Proskauer: Depending on the mailing date of last year’s proxy materials, shareholders at some companies may still have time to submit proxy access proposals under amended Rule 14a-8… Some companies may still take the position that such proposals are not permitted under state law. Delaware, however, has amended its laws to permit proxy access mechanisms. The Delaware legislature adopted Section 112 of the Delaware General Corporation Law, which explicitly authorizes, but does not require, bylaws granting shareholders access to the corporation’s proxy materials to nominate directors. Section 113, which also is enabling, permits a bylaw providing for the corporate reimbursement of shareholders soliciting proxies for the election of directors.

Schulte Roth & Zabel: there is broad consensus that, at a minimum, companies with widely perceived governance issues are likely recipients. As has been the case with other governance initiatives, it is likely that a fairly small number of mostly larger companies will receive access proposals in 2012, with these types of proposals continuing to be refined and momentum picking up in 2013 and beyond. Access proposals are likely to provide for more liberal access than Rule 14a-11. For example, many labor funds have expressed a preference for a two-year holding period, while some governance activists believe that an ownership threshold substantially lower than three percent is appropriate at larger companies. There is some effort underway to develop an access proposal template, but these efforts are in the early stages. Both ISS and Glass Lewis will evaluate proxy access proposals on a case-by-case basis. In its evaluation, ISS will take into account the proposed ownership threshold and the proponent’s rationale for the proposal at the targeted company in terms of board and director conduct.

Squire Sanders: Companies should expect that the SEC will publish some guidance with respect to the applicability to the 2012 proxy season of the Rule 14a-8 amendment facilitating a shareholder vote on the inclusion in corporate bylaws of shareholder nomination procedures. Companies and their counsel will want to quickly consider how the company’s bylaws and other corporate governance documents, including the charter of the nominating committee, are adequate to deal with the receipt of one or more such shareholder proposals.

Sullivan & Cromwell: 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. [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)] A management-proposed standard need not parallel Rule 14a-11… 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… 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.

White & Case: the Private Ordering Rule may have a greater impact on director elections than the Mandatory Proxy Access Rule because the eligibility thresholds in the Mandatory Proxy Access Rule would have limited significantly the ability of shareholders to use its provisions, whereas the eligibility requirements for shareholders to use Rule 14a-8 generally, ownership of shares with a value of at least US$2,000 for at least one year—are more easily met…

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. Public companies should also review their bylaws to ensure that they provide an effective advance notice mechanism for shareholder proposals outside of Rule 14a-8 as well as procedures for shareholder nominations of directors, including requiring disclosure of relationships, financial or otherwise, a proponent and its affiliates might have with its director nominees…

absent the opportunity to submit director nominations pursuant to the Mandatory Proxy Rule, it is not unreasonable to expect that shareholders will pursue private ordering alternatives more aggressively than might otherwise have been the case.

Wilson Sonsini: 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.

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… it is possible that the SEC will take the position that the proposal must be submitted to a shareholder vote unless the company’s procedures are very similar (e.g., identical ownership threshold and tenure) to those proposed by the shareholder…

we suggest that companies take a more comprehensive, year-round view of shareholder engagement and director elections. For example, every company should have a firm understanding of what board actions are likely to cause a proxy advisory firm such as ISS to recommend voting against a director nominee at an annual meeting… continuous shareholder engagement is vital, and companies that only interact with their shareholders on a substantive level in connection with each year’s annual meeting do so at their peril.

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