14 September 2011
On July 22, 2011, the U.S. Court of Appeals for the District of Columbia vacated SEC Rule 14a-11 under the Securities Exchange Act of 1934, which would have required public companies to include shareholders' director nominees in company proxy materials in certain circumstances. On September 6, 2011, the Securities and Exchange Commission announced that it will not seek a rehearing of the decision or attempt to appeal the decision to the Supreme Court.
When the SEC adopted Rule 14a-11, it also amended Rule 14a-8, the shareholder proposal rule. While the SEC’s amendments to Rule 14a-8 were not challenged in the proxy access litigation, the SEC voluntarily stayed the effective date of those amendments at the time it stayed the effective date of Rule 14a-11. With that stay order expiring due to the finalization of the court order, the Rule 14a-8 amendments will apply to the upcoming proxy season.
Before Rule 14a-8(i)(8) was amended, companies were permitted to exclude from their proxy statements shareholder proposals relating to a nomination or an election for membership on the company’s board of directors or analogous governing body, or a procedure for such nomination or election. As amended, Rule 14a-8(i)(8) no longer provides a basis for companies to exclude from their proxy materials shareholder proposals to amend the companies’ governing documents relating to nomination procedures or disclosures related to shareholder nominations.
This rule change does not affect Rule 14a-8(i)(2), which provides a separate basis for exclusion of a shareholder proposal that violates state law. Therefore, the shareholder proposal process under Rule 14a-8 cannot be used to avoid or restrict requirements of state law. Subject to that limitation, amended Rule 14a-8(i)(8) will permit proposals relating to nomination procedures that may not reflect the ownership thresholds, holding periods or other provisions that had been contained in Rule 14a-11.
The amendments to Rule 14a-8(i)(8) also codify certain prior staff positions permitting exclusion of a proposal if it:
- Would disqualify a nominee who is standing for election.
- Would remove a director before the expiration of that director’s term.
- Questions the competence, business judgment or character of any nominee.
- Seeks to include a specific individual in the company’s proxy materials for election to the board of directors.
- Could otherwise affect the outcome of the upcoming election of directors.
- Public companies may receive proxy access shareholder proposals in the coming proxy season and these proposals will not automatically be excludable from their proxy statements.
- Public companies should begin considering possible responses to proxy access shareholder proposals in order to develop a strategy in advance.
- Some public companies might consider it prudent to adopt and incorporate into their bylaws a proxy access mechanism that is more company-friendly than one that shareholders might propose, in order to preserve a possible argument that any subsequent proxy access shareholder proposal has been “substantially implemented” and is thus excludable under Rule 14a-8(i)(10). However, there is no guaranty that the SEC would accept such an argument, especially if the management proposal were narrower in scope.
- Some public companies may want to develop a company-friendly proxy access mechanism that they could propose for adoption by shareholders if they receive a shareholder proxy access proposal, in order to be able to argue that the shareholder proxy access proposal conflicts with a management proposal and is thus excludable under Rule 14a-8(i)(9). This tactic, however, may only delay such a shareholder proposal for a year, because if the management proposal did not go as far as the shareholder proposal, the shareholder potentially could resubmit its proxy proposal the following year.
- As with other shareholder proposals, companies seeking to exclude a proxy access shareholder proposal will need to follow the procedures set forth in Rule 14a-8.
- Investor relations departments should be aware that proxy access may be a potential issue for certain shareholders and may want to prepare general talking points on this topic to use should questions arise when talking to investors.
If you have any questions about proxy access, please contact the author of this Legal Update,
, at +1 312 701 7304, or any other member of our Corporate & Securities practice.
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