Split Commission Votes to Propose New Access Rule

At long last, the third time may be the charm for proxy access.

The SEC voted May 20 to propose a rule allowing shareholders to place nominations for board director in the proxy statement, an idea bitterly opposed by Corporate America. But with a Democratic majority for the first time in eight years, the SEC voted 3-2 along party lines to propose the rule, after two failed attempts to resolve the issue during the Bush Administration.

A full text of the proposing release has not yet been published. But based on comments from last week’s meeting, the proposal 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 currently are off-limits unless the board decides to allow them.

Schapiro

Chairman Mary Schapiro and Commissioners Elisse Walter and Luis Aguilar, all Democratic appointees, voted in favor. Republican appointees Kathleen Casey and Troy Paredes dissented.

Critics have long argued that proxy access will only inject more politics into corporate boardrooms and further distract directors from doing their real jobs of managing company business. Today’s decidedly anti-corporation political climate, however, gives proxy access—the Holy Grail of shareholder activists—its strongest chance yet of success.

Swanson

“A lot of threads are coming together that make it more likely that the SEC will act on proxy access this time,” says Richard Swanson, a partner at the law firm Arnold & Porter.

Aside from more receptive leadership at the SEC, the state of Delaware also recently changed its corporation law to allow proxy access and limited reimbursement for shareholders soliciting proxies for director elections. Sen. Charles Schumer, D-NY, also unveiled a “Shareholder Bill of Rights” in the Senate last week that includes proxy access. An American Bar Association committee with jurisdiction over the Model Business Corporation Act has begun studying the issue of proxy access.

The question of changes in state law, however, might be a chief line of attack for proxy access opponents. At the SEC meeting, Paredes argued that a uniform federal rule granting access encroaches too much on internal corporate affairs, which are traditionally the domain of state corporate law.

The SEC’s proposal, he said, “reaches too far past the point of being about disclosure or even about the voting process,” and would “realign corporate control at the federal level.”

Others also say conflicts over federal and state jurisdiction will be a central issue in the debate. “Everyone will need to look carefully at the proposal to see how it dovetails with state law requirements and company bylaw provisions,” says Matthew Brown, a partner in the law firm Katten Muchin Rosenman.

Allen

Still, the political reality is that union pension funds and other activist investors have wanted proxy access for years and are now politically in step with Schapiro and the rest of the Obama Administration; the combined forces want to push this through. Claudia Allen, head of corporate governance at the law firm Neal Gerber & Eisenberg, notes that Schapiro has indicated that, “this is a high priority on her agenda. And she doesn’t need a unanimous vote to get a final rule in place.”

'THE TIME HAS COME'

The following excerpt is from SEC Chairman Mary Schapiro’s Speech on Proxy Access:

No less than three times in recent memory has the Commission considered the question of amending our proxy rules to address so-called “proxy access.” The time has come to resolve this debate.

The nation and the markets have recently experienced, and remain in the midst of, one of the most serious economic crises of the past century. This crisis has led many to raise serious questions and concerns about the accountability and responsiveness of some companies and boards of directors, to the interests of shareholders. These concerns have included questions about whether Boards are exercising appropriate oversight of management, whether Boards are appropriately focused on shareholder interests and whether Boards need to be more accountable for their decisions regarding such issues as compensation structures and risk management.

In light of these concerns, the Commission has determined to revisit whether and how the federal proxy rules may be impeding the ability of shareholders to hold Boards accountable through the exercise of their fundamental right to nominate and elect members to company Boards of Directors.

I believe that the most effective means of providing accountability—in a way that is both cost effective and timely—is to ensure that shareholders have a meaningful opportunity to effectuate the rights that they already have under state law to nominate directors.

Under the proposal before us today, shareholders who otherwise have the right to nominate directors at a shareholder meeting will be able to have their nominees included in the company proxy ballot that is sent to all voters. 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.

As a means of further ensuring that shareholders determine the rules that affect their own rights, shareholders will also be able to use shareholder proposals to affect nomination procedures in any way that does not conflict with the Commission’s rules.

The staff of the Division of Corporation Finance has taken great care to ensure that the proposed rules strike the appropriate balance between facilitating shareholder rights and understanding the logistical mechanics of putting together proxy materials and holding annual shareholder meetings. Whether we have reached the right balance will be among the many questions that the Release will ask. I urge all commenters to review and respond to the questions thoroughly. As I hope all appreciate, the Commission takes all comments very seriously, and I am quite confident that our final rulemaking will be better because of the comments that we receive.

Source

Securities and Exchange Commission (May 20, 2009).

Schapiro and the other supporters contend that the current federal proxy rules impede shareholders’ ability to exercise their right to nominate directors. “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’s real and has a real chance of holding boards of directors accountable to company owners,” Schapiro said during the meeting.

Even if passed, however, experts say proxy access could be derailed by a challenge to the SEC’s authority to put a rule in place. Casey, in her remarks, noted that the SEC’s authority to enact these rules “is subject to significant doubt.”

The U.S. Chamber of Commerce, which issued a statement opposing the plan, is likely to lead that charge. If Congress moves forward with Schumer’s legislation to allow proxy access, however, that will make challenging the SEC’s proposal much harder.

“There could be a multi-prong attack in Congress, the court of public opinion and in the U.S. federal district courts,” says Swanson.

Thresholds for Access

The SEC proposal would create a new rule, Rule 14a-11 of the Exchange Act, that allows proxy access. It would apply to all companies that have equity securities subject to Exchange Act proxy rules, including registered investment companies, but wouldn’t apply if shareholders don’t have the right to nominate directors under state law or pursuant to provisions of a company’s governing documents.

The ownership threshold would be 1 percent for large accelerated filers and registered investment companies with net assets of $700 million or more; 3 percent for accelerated filers and registered investment companies with net assets between $75 million and $700 million; and 5 percent for non-accelerated filers and registered investment companies with net assets of less than $75 million.

“The fundamental notion is that anybody that seeks to use proxy access should have skin in game,” says Allen.

While the new 14a11 would not apply if shareholders don’t have nomination rights, it would still apply even if a company also has a provision in its governing documents that provides shareholders with an alternative mechanism to include shareholder director nominees in the proxy.

The proposal would also amend Exchange Act Rule 14a-8, the so-called election exclusion, to let shareholders include proposals in proxy materials that would amend (or request amendments to) a company’s governing documents to address nomination rights or disclosures, or other procedural matters related to those nomination rights, if they don’t conflict with Rule 14a-11.

Breheny

Brian Breheny, deputy director of the SEC’s Division of Corporation Finance, stressed that the changes would not let a shareholder include a proposal that would affect the disclosure provisions provided by Rule 14a-11.

Comments on the proposal will be due 60 days after its publication in the Federal Register. The rule would need to be finalized by late fall to take effect for the 2010 proxy season, and that could be difficult considering the extensive feedback the SEC is likely to get—leading some to speculate that a final rule might come by the end of the year, but with a later effective date to avoid a crunch early next year.