Proxy Access: What Now, With Ban to be Lifted?

The SEC will not challenge the decision of the U.S. Court of Appeals for the District of Columbia Circuit, No. 10-1305, which struck down the agency’s rule to make it easier for shareowners to nominate directors to corporate boards. (see SEC Fails to Appeal on Proxy Access, 9/6/2011 and Statement by SEC Chairman Mary L. Schapiro on Proxy Access Litigation) That leaves Rule 14a-8(i)(8), which wasn’t challenged. I have a few recommendations for the path forward. According to the statement by Schapiro:

The Commission’s stay order provides that the stay of the effective date of the amendments to Rule 14a-8 and related rules will expire without further Commission action when the court’s decision is finalized, which is expected to be September 13. Accordingly, absent further Commission action, Rule 14a-8 will go into effect and a notice of the effective date of the amendments will be published.

In Proxy Access: Next Steps for Shareowners I noted that Rule 14a-8(i)(8) amendments adopted by the SEC were stayed by the Commission because they were “intertwined” with Rule 14a-11, which has now been thrown out by the DC Circuit Court. At the end of that post I asked how proxy access proposals in 2012 (assuming the SEC lifts the stay while it appeals or takes other action on Rule 14a-11) would differ from proposals on proxy access in the 1980s.

Let’s look at the amendment to Rule 14a-8(i)(8) itself. Under the amended rule, shareowner proposals could be excluded from the proxy if the proposal:

(i) Would disqualify a nominee who  is standing for election;

(ii) Would remove a director from office before his or her term expired;

(iii) Questions the competence, business judgment, or character of one or more nominees or directors;

(iv) Seeks to include a specific individual in the company’s proxy materials for election to the board of directors; or

(v) Otherwise could affect the outcome of the upcoming election of directors.

This seems much like the way the SEC was interpreting the rule back in the 1980s. Basically, proposals must be aimed at how future elections will be conducted; they cannot be used in an attempt to influence the next election of directors.

I find (iii) somewhat problematic but understand why the SEC included it. On the one hand, it would be great to be able to include information on conflicts of interest or poor business judgement in access proposals to help sell them. On the other hand, I understand why the SEC wouldn’t want to vett all those acquisitions and no-action requests.

With regard to disclosure requirements for a shareowner who submits a proposal that would amend or request an amendment to a company’s bylaws to address proxy access, the SEC didn’t propose any. Instead, they required additional disclosures at the time a nominee is submitted. That was a good decision, since many shareowners like myself might introduce proxy access resolutions as “good governance” proposals without an intention to nominate specific individuals.

Amendments to Rule 14a-19 apply to a shareowner nomination to be included in a company’s proxy materials made pursuant to State law or by company bylaws, including bylaws adopted after amendment through the Rule 14a-8(i)(8) process. Nominating shareowners or groups would include in their notice on Schedule 14N disclosures that are similar to those required in an election contest.

But wait; the petition filed with the Court addressed Rule 14a-11 “and associated amendments to the Commission’s rules,” which “include new Schedule 14N, new Rule 14a-18, and amendments to Rule 14a-2, among others.” Additionally, the Council of Institutional Investors urged the SEC retain the stay of Rule 14a-8 “while the Commission considers the procedural issues raised by the Court.” The Federal Securities Regulation Committee of the American Bar Association also urged the SEC to retain the stay and “either repropose the amendments to Rule 14a-8 or reopen the comment period relating to those amendments, in order to more fully consider the implications of the amendments in the absence of Rule 14a-11.”

There are many who seem to be hoping the stay on 14a-8 amendments is not lifted until we have a federal rule. I think their fear is that if 14a-8 gets used a lot there will be no push for 14a-11 or a similar federal rule. That will mean shareowners will need to battle company by company and there are dozens of defenses boards can utilize to block proxy access.   Many of these are laughable but several would be a very tough go… it could take many many years to make progress on proxy access anywhere near equivalent to what has been made on majority vote.

Since the 3% for 3 yrs of 14a-11 wouldn’t do most retail shareowners any good, I’m delighted the SEC’s stay will be lifted. We didn’t have the recently proposed disclosure requirements back in 1977 when the SEC proposed amendments to Rule 14a-8 that would allow shareowner bylaw proposals to provide proxy access. At that time, the Business Roundtable (BRT) said the amendments

… would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.

In 1980 Unicare Services included a proposal to allow any three shareowners to nominate and place candidates on the proxy. There were several private ordering proposal back in those days without the recently proposed disclosure requirements.

Of course, the world has changed substantially and the BRT and Chamber now appear to rule the roost… and the courts. In moving forward 14a-8, I would take a close look at Jill E. Fisch’s paper, The Destructive Ambiguity of Federal Proxy Access, the August 17, 2009 comments from USPX on SEC file No. S7-10-09, and recent examples of proxy access proposals (CalPERS at United Health in 207 and AFSCME at HP, both in 2007). I would also consider the following as potential guiding principles:

• A universal proxy will increase the likelihood that no special interest, such as unions or entrenched managers, will “control” the board, since many shareowners will choose directors ala carte, rather than along “party” lines.
• Full access is needed to ensure changes in control can occur in a timely manner — before the value of the corporation erodes — and without the unnecessary expense of a solicited proxy contest.
• Low barriers are also advisable. Narrow eligibility requirements, such as those contained in Rule 14a-11, which bar most individual and institutional investors, must go. Artificial barriers requiring a 3% holding for 3 years in order to place a nominee on the ballot can be seen as “arbitrary and capricious,” especially given the SEC’s longstanding requirement of $2,000 worth of shares held for one year to submit shareowner proposals under Rule 14a-8.
• To address concerns of the Business Roundtable and Chamber of Commerce and reduce the likelihood of excess spending, all candidates, including the board’s own nominees, should be required to file full disclosure of costs, both pre- and post-election. There should be an accounting of all campaign expenditures, including in-kind contributions and those expended by corporations or other interested entities on behalf of candidates they support.

I would love to work with any parties considering a proxy access proposal under 14a-8. Let’s create a new model template. Contact me.