Proxy Access – Gone, or Just a Phoenix?

September 8, 2011

On September 6, 2011, the Securities and Exchange Commission (SEC) issued a press release confirming that it will not seek a rehearing or Supreme Court review of the decision by the U.S. Court of Appeals for the District of Columbia Circuit relating to the proxy access rules. The decision vacated new Rule 14a-11 relating to director nominations by eligible shareholders and came in response to a petition filed a year earlier by the Business Roundtable and U.S. Chamber of Commerce.

In the press release, Chairman Mary L. Schapiro stated that she remains “committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards.”

The question is whether “private ordering” is the phoenix for proxy access. At the time the petition relating to Rule 14a-11 was filed, the SEC voluntarily stayed amendments to Rule 14a-8 concerning shareholder proposals relating to director elections. The SEC’s stay on the amendments to Rule 14a-8 will expire when the court’s decision is finalized, which is expected to be September 13.

These amendments to Rule 14a-8 permit the type of private ordering for proxy access through the shareholder proposal process that many commenters supported in the course of the proxy access rulemaking. Under the amendments to Rule 14a-8, a company may no longer exclude a proposal that would amend or request that the company consider amending governing documents to facilitate director nominations by shareholders or disclosures related to nominations made by shareholders, as long as such proposal is not otherwise excludable under some other procedural or substantive basis in Rule 14a-8. As a result of the SEC’s amendment of Rule 14a-8(i)(8), shareholders will have the opportunity to establish proxy access standards on an individual company-by-company basis, rather than the “universal” approach that had been contemplated by Rule 14a-11.

In light of these amendments to Rule 14a-8, companies would be wise to prepare for proxy access shareholder proposals in the 2012 proxy season. Shareholders at some companies are likely to use amended Rule 14a-8 to seek to create a form of proxy access at individual companies since Rule 14a-11 will not be available to them.

Companies also may wish to take the initiative and consider amending their bylaws to provide for their own form of proxy access. Several states including Delaware have already adopted enabling legislation for proxy access and the ABA has revised the Model Business Corporation Act to provide for state-level statutory proxy access. Companies taking this approach would be able to establish standards such as the level of ownership a shareholder is required to have, the number of times a nominee may be included in the company’s proxy statement, the number of directors a shareholder could nominate and nominee qualifications.