The Securities and Exchange Commission has begun a full-scale review of the proxy voting process and intends to issue a proposal allowing some sort of shareholder access to the proxy statement by this summer, according to SEC Chairman Christopher Cox.
Speaking last week at the first of three roundtable discussions the SEC is holding this month on federal proxy rules, Cox said the Commission expects to have new proxy rules in proposed form this summer, with the aim of having final rules in place in time for the 2008 proxy season—and yes, at the top of the agenda is shareholder proxy access, an idea most of Corporate America vigorously opposes.
The SEC’s last attempt to tackle proxy access ended with a failed proposal in 2003. The SEC has long argued that companies can keep proposals for proxy access off the ballot at annual meetings, under Rule 14a-8. Last September, however, a federal appeals court decided that the rules do indeed allow shareholders to put such proposals up for a vote and ordered American International Group to allow a shareholder proposal for proxy access.
The Commission’s inaction since then has bred uncertainty about how companies should handle proxy access. Meanwhile, shareholder activists like the American Federation of State County and Municipal Employees are chomping at the bit to start filing proposals. Only two prominent U.S. companies, Comverse Technologies and Apria Healthcare, offer proxy access voluntarily.
At the May 7 roundtable, Cox noted that the SEC’s review of the proxy rules will go well beyond the issue of shareholder access. He said the agency plans to “take a thorough top-to-bottom look at what is and should be” the SEC’s role in regulating the proxy process.
During the day-long discussion, the SEC sought feedback on its role in upholding shareholders’ rights under state law, as well as input on the purpose and effect of the federal proxy rules, and on the use of nonbinding and binding shareholder proposals.
Coffee
During the opening discussion on the SEC’s role in upholding shareholders' state law rights, John Coffee, a professor at Columbia Law School, said the SEC may give “too much democracy” with regard to its ordinary business exclusion under 14a-8, which he said has been interpreted in an “inconsistent, haphazard, and fairly trendy way.”
RULE EXCERPT
Below is an excerpt of the Securities and Exchange Commission's Rule 14a-8, on proxy submissions, presented in a Q&A format to shareholders.
If I have complied with the procedural requirements, on what other bases may a company rely to exclude my proposal?
(1) Improper under state law: If the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company's organization;
Note: Depending on the subject matter, some proposals are not considered proper under state law if they would be binding on the company if approved by shareholders. In our experience, most proposals that are cast as recommendations or requests that the board of directors take specified action are proper under state law. Accordingly, we will assume that a proposal drafted as a recommendation or suggestion is proper unless the company demonstrates otherwise.
(2) Violation of law: If the proposal would, if implemented, cause the company to violate any state, federal, or foreign law to which it is subject;
Note: We will not apply this basis for exclusion to permit exclusion of a proposal on grounds that it would violate foreign law if compliance with the foreign law could result in a violation of any state or federal law.
(3) Violation of proxy rules: If the proposal or supporting statement is contrary to any of the Commission's proxy rules, including Rule 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials;
(4) Personal grievance; special interest: If the proposal relates to the redress of a personal claim or grievance against the company or any other person, or if it is designed to result in a benefit to you, or to further a personal interest, which is not shared by the other shareholders at large;
(5) Relevance: If the proposal relates to operations which account for less than 5 percent of the company's total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earning sand gross sales for its most recent fiscal year, and is not otherwise significantly related to the company's business;
(6) Absence of power/authority: If the company would lack the power or authority to implement the proposal;
(7) Management functions: If the proposal deals with a matter relating to the company's ordinary business operations;
(8) Relates to election: If the proposal relates to an election for membership on the company's board of directors or analogous governing body;
(9) Conflicts with company's proposal: If the proposal directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting.
Note: A company's submission to the Commission under this section should specify the points of conflict with the company's proposal.
(10) Substantially implemented: If the company has already substantially implemented the proposal;
(11) Duplication: If the proposal substantially duplicates another proposal previously submitted to the company by another proponent that will be included in the company's proxy materials for the same meeting;
(12) Resubmissions: If the proposal deals with substantially the same subject matter as another proposal or proposals that has or have been previously included in the company's proxy materials within the preceding 5 calendar years, a company may exclude it from its proxy materials for any meeting held within 3 calendar years of the last time it was included if the proposal received:
Less than 3 percent of the vote if proposed once within the preceding 5 calendar years;
Less than 6 percent of the vote on its last submission to shareholders if proposed twice previously within the preceding 5 calendar years; or
Less than 10 percent of the vote on its last submission to shareholders if proposed three times or more previously within the preceding 5 calendar years; and
(13) Specific amount of dividends: If the proposal relates to specific amounts of cash or stock dividends.
Source
Securities Lawyer's Deskbook (University Of Cincinnati)
He suggested the SEC require a “substantial showing of shareholder interest,” or some sort of materiality test to ensure that only matters “economically significant” to shareholders made it on to proxy ballots—an idea that was supported by other panelists.
Delaware Chancery Judge Leo Strine, however, said the SEC should allow more shareholder proposals on the ballot and let the states determine what’s permissible, a view that was echoed by others throughout the day, including Fordham University business law professor Jill Fisch.
Fisch agreed that the SEC should allow the markets, courts, and state legislatures to sort out which shareholder proposals are allowed on proxy ballots. Just as shareholders shouldn’t be allowed to micromanage corporations, “You don’t want the Commission to micromanage the voting process,” she said.
Other Proxy Woes
Delaware Chancery Judge Stephen Lamb noted a difficulty created by an SEC rule that prevents companies delinquent in their periodic filings from holding annual meetings and soliciting proxies, an issue which Cox said is “a real problem” that the SEC should address.
Meanwhile, other panelists cautioned the SEC against giving states too much power to make determinations on shareholder proposals. Ted White, an adviser to Knight Vinke Asset Management and a consultant to the Council of Institutional Investors, said his concern about relying too much on state law to make such determinations is that it would “create an uneven playing field for investors.”
Noting that the federal rules have facilitated the use of more nonbinding proposals, White said nonbinding proposals are viewed as less intrusive than binding ones and have acted like an “incubation tank” for what have in many cases turned out to be best practices.
John Wilcox, head of corporate governance at pension fund TIAA-CREF, agreed that nonbinding resolutions are preferable, since, he said, “It’s important to not micromanage internal decision-making by the company.” Wilcox also called for more transparency in the proxy process, including more information by the record date about ownership positions.
“Transparency is one of the fundamental principles of federal securities laws, and I think it holds the key to making the process one we can all have greater trust in,” he said.
Keller
During a third panel, speakers told Commission members that Rule 14a-8 has pushed the market toward using nonbinding proposals, even for subjects where proposals could be put forth as binding. Stanley Keller, a partner at the law firm Edwards, Angell, Palmer & Dodge, who called nonbinding proposals “a creature of 14a-8,” said the question the SEC must consider is whether it can take nonbinding proposals out of the annual meeting framework and create an alternative method of shareholder communication.
University of Iowa law professor Paul Neuhauser, who likened a proxy fight to an elephant gun, a binding proposal to a spear, and a nonbinding proposal to fly swatter, quipped, “The availability of a fly swatter rather than elephant gun is good for the system … The idea that small shareholders should be able to participate is important.”
The SEC even floated the idea of providing a secure online discussion forum restricted to company shareholders to discuss their concerns, an idea it asked BroadRidge Financial Solutions to examine. BroadRidge chief executive Rich Daly said the existing system can be expanded to “create an environment that would add an alternative to the proxy,” although he quickly cautioned that, “The devil is in the details.”
Ribstein
During the final discussion of the day on binding proposals, Larry Ribstein, a law professor at the University of Illinois, advised the SEC to “take as modest an approach as possible,” which he defined as “shying away from any merit regulations and making judgments about the kinds of proposals that ought to be brought.”
Former SEC commissioner Joseph Grundfest, now a law professor at Stanford University, urged the SEC to give more authority not only to states, but also to individual corporations.
CII executive director Ann Yerger said even if the laws were changes to make the environment for binding proposals more permissive, “I don’t think you would get many of them.” Yerger said proponents prefer to use nonbinding proposals as a way of communicating with companies. “The present community is relieved the SEC has the uncomfortable position of being judge and jury,” she said. “It ensures some consistency.”
Cox said the May 24 roundtable will deal with proxy mechanics issues, while a third roundtable on May 25 will seek input from stakeholders on “what works and what can be made to work better.” Agendas and participant lists for those events aren’t yet available.
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