Last month, a U.S. federal appeals court struck down the Securities and Exchange Commission's Rule 14a-11, more commonly known as the Proxy Access Rule, citing the regulator's failure to provide a fair and consistent cost and benefit analysis on the rule implementation. The rule would have required companies to include shareholders' director nominees in companies' proxy materials. However, without Rule 14a-11, the issues ahead are in the implementation of Rule 14a-8 by the SEC, says Stanley Keller, partner at law firm Edwards Angell Palmer & Dodge.

According to Keller, the snubbed Rule 14a-11 would have put in place some limitation on eligibility of shareholders who can nominate their choice candidates in the proxy materials. Under the eligibility guidelines of 14a-11, qualified shareholders must meet some stringent requirements which include:

Holding of at least 3 percent of companies' shares

Have held qualifying companies' shares for a minimum of 3 years

Continue to hold the shares through shareholder meeting's date

Are not holding the shares for the purpose of changing a company's control

No pre-arranged agreement with a company regarding the nomination

Keller said the SEC has several alternatives that are undoubtedly being considered now. The regulator can ask for a re-hearing, appeal the decision at the U.S. Supreme Court, amplify its cost and benefits study of Rule 14a-11 and re-adopt the rule, modify the rule, or let the rule disappear.

“If Rule 14a-8 is to take effect without Rule 14a-11, it really opens the floodgate of all shareholders' proposals,  especially in corporate control,” says Keller. Any shareholders can put forward their nominations on proxy materials without the eligibility limitation, he adds. Rule 14a-8 allows shareholders owning a relatively small amount of company securities to submit proposals alongside management proposals in company proxy materials for voting at shareholder meetings. Rule 14a-8 has been stopped, pending resolution of Rule 14a-11.

Keller believes the regulator will more likely take a slow approach on the issue as it has a full agenda for the rules and has learned the lesson from the last court ruling. “My guess is the SEC is not going to rush for anything in the 2012 proxy season with these rules,” he says. Having said that, he cautions everyone to be on the alert of what the SEC will do next. It is possible for the SEC to lift the stay it has imposed on Rule 14a-8 earlier, he says.