Proxy Access Debate Rages On

The deadline has passed for public comment on the Securities and Exchange Commission’s proposal to allow shareholder access to the proxy statement. Now comes the waiting, to see what the SEC will do next with the controversial idea.

The comment period closed Aug. 17. The SEC received hundreds of letters—far more than it usually receives, and a telling sign of how passionately voices in corporate governance feel about the issue. The right to place shareholder proposals in the proxy statement has been a Holy Grail for shareholder activists for years; Corporate America has repeatedly defeated the idea. Given the current economic and political climates, however, many now say proxy access is bound to be approved in some form.

That being said, the SEC’s 250-page proposing release demonstrates just how difficult it will be to craft a final, specific rule. As currently proposed, the SEC would grant proxy-access rights to shareholders at large companies who hold at least 1 percent of outstanding shares for one year or more; shareholders at smaller filers would need to meet higher ownership thresholds. Those shareholders would also have the right to submit other proposals about nomination, procedural, or disclosure matters that are currently off-limits unless the board decides to allow them.

The heart of the debate is whether or not allowing shareholders to place nominations for board director in the proxy statement is a good idea. Beyond that (as the flood of comment letters show), questions also abound about how a federal proxy access rule would operate, the Commission’s authority to adopt it, the interaction of state and federal law, and the potential for unintended consequences.

Critics, including most companies, generally oppose a federal access rule. They say it is fraught with unintended consequences and will lead to battles over boardroom seats that will distract directors and managers from carrying out their duties. Supporters—including pension funds and others activists—contend that current SEC rules impede shareholders’ ability to exercise their right to nominate directors.

Schapiro

The SEC has always been deeply split on the issue, but as evidenced by the 3-2 vote last May in favor of publishing the proposal for comment, that divide now seems to favor proxy access. Chairman Mary Schapiro, in her remarks at the May 20 meeting, commented: “Given the reality of how the proxy process works, this would turn what would otherwise be a somewhat illusory right to nominate into something that is real, and has a real chance of holding boards of directors accountable to company owners.”

“The election of shareholder nominees could turn into an ugly debate for some issuers, and if the nominating shareholder takes off its gloves the issuer should be able to as well.”

—Stephen Quinlivan,

Securities Lawyer,

Leonard, Street & Deinard

The Commission’s Republican appointees, Kathleen Casey and Troy Paredes, objected largely on the grounds that a uniform federal rule would encroach too much on state corporate law. Instead, they and other opponents of a federal rule argue that shareholders should determine whether proxy access is appropriate on a company-by-company basis.

Holzman

That view was echoed in a number of the comment letters submitted to the SEC, including one from James Holzman, chair of the Delaware State Bar Association’s Council of the Corporation Law Section. Delaware recently amended its corporate law to allow proxy access and limited reimbursement for shareholders soliciting proxies for director elections. Other states are expected to follow its lead.

Holzman wrote that a single rule would deprive Delaware corporations “of the flexibility state law confers to deal effectively with myriad different circumstances that legislators and rulemakers cannot anticipate, and would thereby undermine a key element of the state system of corporate governance that has been largely successful for decades.” He went on to say that many Delaware companies would adopt a proxy access policy better suited to their own needs anyway, if a universal rule is not forced upon them.

Likewise, Michael McAlevey, chief corporate, securities, and finance counsel for General Electric, says a federal rule “would constrain rather than empower shareholder choice.” McAlevey supports the SEC proposal to amend Rule 14a-8(i)(8), which would “enable shareholders to choose the system, if any, they find most appropriate for their individual company, and would avoid numerous workability and other issues raised by the proposed mandatory uniform federal Rule 14a-11.”

Other Ideas …

Others, such as the always-voluble American Federation of State, County, and Municipal Employees, argued that a company-by-company approach would not work.

PROXY COMMENTS

Below are excerpts from some of the comments submitted to the SEC about its proxy access proposal:

Proposed Rule 14a-ll, however, would substantially limit the ability of

stockholders and boards of directors to set the terms of a proxy access system, or to

choose a system of proxy expense reimbursement in lieu of a proxy access regime. In

addition, the costs and uncertainties that would accompany this impairment of

stockholder choice are considerable:

If it adopts Rule 14a-ll, the Commission would be establishing a new and

complex administrative system to resolve disputes over the interpretation

of an undeniably complex set of proxy access rules. Moreover, even with

that administrative system in place, such disputes could proceed in federal

courts, with attendant potential for conflicting interpretations of the Rule

and for further burdens on the federal court system.

If it adopts Rule 14a-ll, the Commission would be establishing a complex

set of rules that would inevitably require further refinement. Such

refinement, however, will be more readily accomplished through an

incremental process guided by broad stockholder consensus rather than

through continual rulemaking intervention by the Commission.

If it adopts Rule 14a-ll, the Commission would effectively cut short an

evolutionary process of refining proxy access systems that would facilitate

stockholder choice and be most likely to lead to the adoption of systems

suited to the diverse conditions and needs of individual corporations.

—James Holzman,

Chair,

Delaware State Bar Association

First, from the perspective of a diversified shareholder, any flexibility benefits

from a company-specific approach would be significantly outweighed by the complexity

of having to navigate a different proxy access regime for each company. Many of the

funds in which AFSCME’s members are participants are heavily indexed, which

translates into owning shares in hundreds or even thousands of U.S. companies. The

variation touted by proponents of a more tailored approach—such as the ability to impose

different ownership thresholds and holding periods, or the imposition of triggering

requirements—would result in an unworkable administrative burden for broadly invested

shareholders that need to track deadlines and requirements at many different companies.

Second, the very companies that would benefit most from a shareholder access

regime are likely to put up the stiffest resistance to adopting access. In the Plan’s

experience attempting to engage the boards of Countrywide, Citigroup and Washington

Mutual, the resistance of boards to fundamental change can lead to drastic results for

shareowners. Some companies may have or adopt super majority voting requirements to

amend the bylaws or, in states that permit it, eliminate shareholders’ right to amend the

bylaws altogether. A 2002 review of corporate takeover defenses showed that nearly a

quarter of companies limit shareowners right to amend bylaws and nearly a third have

some form of supermajority voting requirements.

—Gerald McEntee,

International President,

AFSCME

We recognize the fundamental shareholder right under state law to nominate and elect

directors to oversee the management of the corporation, and we appreciate the

Commission’s thorough consideration of the role of the federal proxy rules in connection

with this right. We also appreciate the Commission’s thoughtful proposals contained in the Release for further changes in this area. Having considered these proposals, we remain unconvinced that a federal rule mandating a process for shareholders to nominate and solicit for directors using company proxy materials is necessary or advisable, as it would constrain rather than empower shareholder choice. We do, however, support the proposal to amend Rule 14a-8lil(8) to remove the restrictions on allowing shareholders to propose matters that relate to the director election process. This approach would allow shareholders and issuers, through an iterative process, to reach accommodation on the optimal approach to proxy access, would enable shareholders to choose the system, if any, they find most appropriate for their individual company, and would avoid numerous workability and other issues raised by the proposed mandatory uniform federal Rule 14a-11.

—Michael McAlevey,

Vice President,

General Electric Company

Source

Comments to Proxy Proposal on SEC Website.

“From the perspective of a diversified shareholder, any flexibility benefits from a company-specific approach would be significantly outweighed by the complexity of having to navigate a different proxy access regime for each company,” AFSCME president Gerald McEntee wrote. “The variation touted by proponents of a more tailored approach … would result in an unworkable administrative burden for broadly invested shareholders that need to track deadlines and requirements at many different companies.”

Further, McEntee noted, “the very companies that would benefit most from a shareholder access regime are likely to put up the stiffest resistance to adopting access.”

Lawyers from the law firm Davis Polk & Wardwell called for the SEC to postpone action on the direct proxy-access proposal, and instead monitor the effect of allowing shareholders to submit access by-laws on an issuer-by-issuer basis.

In an Aug. 11 letter, Davis Polk lawyers William Kelly, Francis Currie, Joseph Hall, Michael Kaplan, and Ning Chiu suggested the SEC amend Rule 14a-8 “to permit shareholders to use the rule for proxy access proposals, shelve proposed rule 14a-11 for now, closely monitor the broad trial-and-error process that will inevitably develop as companies and shareholders work though a variety of approaches to shareholder nomination of directors, and revisit the issue from time to time to determine whether further adjustments to the proxy rules are appropriate.”

Quinlivan

Stephen Quinlivan, a securities lawyer at Leonard, Street & Deinard, says that alternative “is far less disruptive and lets the shareholders decide whether or not they want shareholder access.”

If the SEC does push ahead with proposed Rule 14a-11, the Davis Polk letter suggests that it be revised to allow companies to opt out through a shareholder vote, and for the rule to be inapplicable where shareholders approve an alternative form of proxy access, whether by a shareholder or a management proposal.

Other commenters raised issues about how the details of the proposed rule would work.

While a letter from the Council of Institutional Investors called the proposed shareowner eligibility criteria for Rule 14a-11 “appropriate and workable,” the CII asked the Commission to clarify how the percentage of stock ownership would be calculated, considering the “routine and common fluctuations in ownership.”

Meanwhile, Quinlivan says it’s unclear what steps a registrant can take to oppose a nominee once included in the registrant’s proxy.

“The election of shareholder nominees could turn into an ugly debate for some issuers—and if the nominating shareholder takes off its gloves, the issuer should be able to as well,” he tells Compliance Week. “This is likely to lead to lawsuits.”

The rules also don’t permit a registrant to exclude a nominee if it’s subsequently determined the nominating shareholder or nominee has taken steps to make the nomination ineligible, which Quinlivan says isn’t “a level playing field.”

“The lack of clarity in the rules is likely to lead to a nightmare scenario for at least a few issuers the first year the rules become effective,” he says.