Chaos Reigns on Proxy Access Proposals

More than a year after the court decision that thrust the issue of shareholder access to the proxy statement back into the spotlight, consensus on a resolution appears elusive.

The comment period for two Securities and Exchange Commission proposals—one allowing shareholders to place director nominations in the proxy statement, the other denying it—closed last week, after thousands of letters flooded into SEC offices. A large number were form letters on both sides of the issue, but the volume and passion of debate underscores just how difficult it will be for the SEC to settle the issue.

Cox

SEC Chairman Christopher Cox has repeatedly said his Commission will approve a final rule on proxy access this winter, in time for next year’s proxy season. But with one Democratic commissioner recently resigned and the other saying she wants to leave as quickly as possible, plus little enthusiasm from commenters for either proxy access proposal, meeting that deadline will be a major challenge.

Also unclear is what will happen if the SEC fails to do anything. Last year an appeals court overturned a long-standing SEC interpretation of Rule 14a-8(i)(8) that proxy access did not extend to director nominations. Opinions sharply differ on whether that decision can apply broadly to other nomination battles or whether the SEC can still reject such proposals on a case-by-case basis.

Shareholder activists are especially concerned about the departure of the two Democratic commissioners, Roel Campos and Annette Nazareth, who supported proxy access. The California Public Employees’ Retirement System and the American Federation of State, County and Municipal Employees both urged the SEC to postpone a decision until all of the Commission seats are filled: “Only a full Commission should pass judgment on the topic,” CalPERS wrote in its comment.

Republican commissioners Paul Atkins and Kathleen Casey both support a rule proposal to codify the SEC’s original position that companies can exclude shareholders’ director nominations from the proxy. Business groups, such as the U.S. Chamber of Commerce, the Business Roundtable, and law firm Wachtell, Lipton, Rosen & Katz, also favor that proposal.

Hirschmann

In testimony before the House Financial Services Committee Sept. 27, David Hirschmann, a senior vice president at the Chamber of Commerce, said the Republican proposal reaffirms SEC guidance that has been “consistently applied and reaffirmed by the staff and has endured numerous proposed and adopted changes to proxy rules.”

“This interpretation does not, as some have suggested, prevent shareholders from exerting significant influence on the corporate governance of reporting companies, but has appropriately prevented the company’s proxy from being the battleground for public policy issues advanced by unions and other specials interests,” Hirschmann said.

Nazareth and Campos have dubbed the Republican proposal the “non-access” plan. Both vehemently oppose it, as do CalPERS, the unions, and many other shareholder activism groups.

Cox, a Republican, voted to put forward both proxy access proposals. He said at the time that his preference is for the so-called “access proposal,” which would amend Rule 14a-8 to permit the inclusion of shareholder nomination bylaw proposals in the company proxy materials if the shareholder or group of shareholders has held more than 5 percent of the company’s securities for at least a year.

But that plan has drawn sharp criticism too, not only from business groups that oppose access, but also from those who favor shareholder access, who claim the 5 percent threshold is too high.

Opponents of access, including the law firm Wachtell Lipton Rosen & Katz, contend that allowing shareholders to use a company’s proxy statement for director nominations “would be a serious mistake with far-reaching consequences.”

“Election contests are tremendously disruptive and divert the time and attention of a company’s board and management from running the business,” WLRK’s comment letter states. “When successful, they also can create a dysfunctional and balkanized board.”

DUELING PROPOSALS

An excerpt from SEC Release No. 34-56160, to allow shareholder nominations to the board to be included in the proxy:

To achieve the mutually reinforcing objectives of vindicating shareholders’ state law rights to nominate directors, on the one hand, and ensuring full disclosure in election contests, on the other hand, we are proposing revisions to Rule 14a-8(i)(8) that would permit a shareholder who makes full disclosure in connection with a bylaw proposal for director nomination procedures, including a proposal such as that in the AFSCME case, to have that proposal included in the company’s proxy materials. The basis for the disclosure that we are proposing is the familiar Schedule 13G regime, under which certain passive investors that beneficially own more than 5 percent of a company’s securities, report their ownership of a company’s securities. We believe that using this well-understood system of disclosure should reduce compliance costs for companies and shareholders. In addition, because shareholders eligible to file under Schedule 13G must not have acquired or held their securities for the purpose of or with the effect of changing or influencing the control of the company, the opportunity to use Rule 14a-8 to inappropriately circumvent the disclosure and procedural regulations that are intended to apply in contested elections should be minimized.

Under the proposed amendments, if the proponents of a bylaw to establish a procedure for shareholder nominations of directors do not meet both the threshold for required filing on Schedule 13G, and the eligibility requirements to file on Schedule 13G, the proposal could then be excluded from the company’s proxy materials under Rule 14a- 8(i)(8). In this way, shareholders will be guaranteed the disclosure necessary to evaluate such proposals.

An excerpt from SEC Release No. 34-56161, clarifying that shareholder nominations to the board can be excluded from the proxy:

The text of Rule 14a-8(i)(8) currently specifies only that a proposal may be excluded “[i]f the proposal relates to an election for membership on the company’s board of directors or analogous governing body.” To clarify the meaning of the exclusion, consistent with the Commission’s interpretation of that exclusion, we are proposing to revise the exclusion to read:

If the proposal relates 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.

We believe that the added references to “nomination” and “procedure” in the rule text will reflect more appropriately the purpose of the election exclusion. Further, if adopted, we would indicate clearly that the term “procedures” referenced in the election exclusion relates to procedures that would result in a contested election, either in the year in which the proposal is submitted or in subsequent years, consistent with the Commission’s interpretation of the exclusion.

Source

SEC (July 25, 2007)

Testifying before the House Financial Services Committee, Business Roundtable president John Castellani called proxy access “a bad idea whose time has passed,” which would result in polarized boards dominated by special-interest candidates.

And Yet More Complaints …

Frank

Even those who favor shareholder access blasted the SEC’s proposal as unworkable. Massachusetts Democrat Barney Frank, head of the House Financial Services Committee, reportedly suggested that the SEC “start over” following his committee’s hearing on the proposals.

Reservations about the Democratic proposal have been echoed by groups, including the Council for Institutional Investors, AFSCME, CalPERS, and Connecticut Treasurer Denise Nappier, principal fiduciary of the $26 billion Connecticut Retirement Plans and Trust Funds. Those groups, who dislike both plans, have blasted the 5 percent threshold as too high and criticized required new disclosures about shareholder proponents as being too burdensome.

A letter by CalPERS said the proposed threshold “would effectively stifle the ability of shareowners to enact director election procedures” and called the proposed disclosure requirements “too onerous and one-sided to be workable.”

Pooling together 5 percent of shares in any large company would be an enormous undertaking, requiring hundreds of millions of shares and billions of dollars. Even if CalPERS and nine of the other largest public pension funds aggregated their holdings of a single public company’s securities, “they would likely be unable to clear the more than 5 percent hurdle,” CII general counsel Jeff Mahoney wrote.

McEntee

AFSCME—the plaintiff in last year’s decision allowing proxy access—argued that shareholder director nominations should not need any higher level of ownership than any other proposals shareholders might submit for the proxy statement, pursuant to SEC rules. “Comparing a proxy access proposal with a proposal to require that directors be elected by holders of a majority of shares, it is difficult to understand why the former should be limited to holders of 5 percent of outstanding shares while the latter may be submitted by a shareholder owning $2,000 of stock,” AFSCME international president Gerald McEntee wrote.

A number of commenters also blasted one part of the access proposal seeking comment on whether the SEC should adopt rules that would permit companies and shareowners to adopt their own procedures for treating non-binding shareowner proposals, or a rule that would enable companies to follow an “electronic petition model” for non-binding proposals in lieu of Rule 14a-8.

Nappier said the limitation of shareholders’ ability to file non-binding advisory resolutions mentioned in the proposal “is of great concern” and could “pose a major setback in the more than 65-year history of communications between shareholders and management.”