The July 22 federal appeals court ruling that struck down the SEC's marketwide proxy access rule, Rule 14a-11, did not affect the SEC's amendments to Rule 14a-8 that would permit shareholders to resume filing proxy access bylaw proposals. Those amendments were placed on hold by the SEC last October after two business groups brought a legal challenge to Rule 14a-11. At that time, the SEC said the 14a-8 changes were "intertwined" with the marketwide access rule.
If the SEC lifts its stay on its Rule 14a-8 amendments, shareholders will be able to submit access bylaw proposals in 2012. Investors would not face any additional ownership hurdles other than the requirements that already apply to proponents--i.e., owning at least $2,000 in company stock for more than a year.
Several investors said this week they are looking into submitting access proposals next season. Investors could file binding or non-binding resolutions, but some states require higher ownership thresholds for binding bylaw proposals. It appears likely that proponents would seek holding periods and ownership thresholds that are more permissive than Rule 14a-11's requirements of a 3 percent stake for at least three years. Labor funds generally prefer a two-year period, and some activists have argued for a lower threshold (such as 1 percent) at large-cap firms.
So far, it appears that the activist investor community is undecided about whether to file access proposals in 2012 and how many companies to target. There is a concern that the filing of dozens of access resolutions next season might bolster corporate arguments that the SEC should refrain from adopting a new marketwide access rule and just allow private ordering to work. There also is a concern that low support levels for poorly targeted proposals would be cited by corporate critics as evidence that most shareholders don't want access. Conversely, some activists argue that strong shareholder votes for access in 2012 could help prod the resource-stretched SEC to prepare a revised access rule. If activists do file access proposals next season, it appears that they may focus on a few high-profile companies with well-known governance issues.
Back in 2007, two well-targeted shareholder access proposals did attract broad investor support, winning at least 43 percent approval at UnitedHealth Group and Hewlett-Packard. There also was majority approval for access at Cryo-Cell International, a small-cap firm. However, the SEC, which then had a Republican majority, approved a rule in late 2007 to stop investors from filing access resolutions.
If shareholders bring access resolutions in 2012, no-action challenges by companies would be inevitable. Some companies may seek to exclude investor access proposals (as firms have done in response to special meeting requests) by offering their own management resolutions with greater hurdles to access--such as a 10 percent (or higher) ownership threshold.