With the SEC's announcement this week that it won't seek review of a U.S. appeals court decision that blocked Rule 14a-11, companies won't be subject to federal access standards during the 2012 proxy season. However, it appears likely that activist shareholders will be able to file company-specific access proposals.
When adopting a marketwide access rule in 2010, the SEC also approved amendments to Rule 14a-8(i)(8) to permit shareholder proposals that seek more permissive access rules, but those changes were stayed during the litigation by two business groups over Rule 14a-11. That stay is to expire when the SEC formally accepts the court's decision, which is expected by Sept. 13, unless the commission takes action, SEC officials said. Those amendments were not challenged by the business groups, which argued that "private ordering" through company-specific proposals was better than uniform access standards.
The Council of Institutional Investors (CII), which had opposed lifting the stay if an appeal was pending, said the SEC should go ahead and allow investors to file access proposals.
"In light of the SEC's decision, we welcome the lifting of the stay on an amendment to Rule 14a-8 that would allow shareowners to submit proxy proposals seeking access at companies selectively," Ann Yerger, the group's executive director, said in a press release. "Council member funds and the broader investor community are ready and willing to seek access to the proxy to nominate directors judiciously, at companies where boards have been asleep at the switch or chronically unresponsive to shareowner concerns."
On Aug. 24, a lawyers' group, the Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association, urged the SEC to maintain the stay while the agency re-proposes the amendments to Rule 14a-8(i)(8) or reopens the comment period on those provisions, "in order to more fully consider the implications of the amendments in the absence of Rule 14a-11."
If investors decide to submit proxy access resolutions next season, they most likely will seek more permissive standards for nominating board candidates than the 3 percent stake for three years required by Rule 14a-11. Most labor and public funds have supported a one- or two-year holding period and a 1 or 3 percent ownership threshold.
To file an access proposal, investors won't face any additional ownership hurdles beyond the $2,000 stake for at least one year that is required to submit a shareholder resolution on other topics. However, as CII and other investor advocates have noted in the past, it may be difficult for investors to craft binding proposals to address the complex issues associated with access within the 500-word limit mandated by the SEC.
The amended Rule 14a-8(i)(8) does place some limits on access-related proposals. The revised rule would allow companies to exclude shareholder resolutions that seek to nominate a specific candidate, remove a director before his or her term expires, or otherwise impact a particular board election. In addition, some states have additional requirements for investors to file binding proposals; one example is Minnesota, which requires a 3 percent stake, according to the law firm of Leonard, Street, and Deinard.
Even with the revised Rule 14a-8(i)(8) in place, it appears likely that shareholder access resolutions will face no-action challenges from companies on proof-of-ownership or other procedural grounds. Some companies may try to argue that an access proposal conflicts with state law or is impermissibly vague and misleading.
If any binding proposals make it on corporate ballots, proponents also will have to overcome other barriers that many companies have in place. A 2009 analysis commissioned by CII found that about 48.5 percent of Russell 3000 firms had unequal voting rights, supermajority requirements, or other limits on shareholder-initiated bylaws.
At this point, it appears unlikely that investors will submit dozens of access proposals for 2012 meetings, as they have done in past seasons to seek board declassification, majority voting bylaws, or "say on pay" votes. There is concern among some activists that corporate advocates will argue that federal access standards are not needed if investors file a large number of access resolutions next year.
Amy Borrus, CII's deputy director, said she expects to see "probably not more than a handful" of access proposals in 2012. "I expect that shareowners will file proxy access proposals selectively at companies where boards have a history of not being responsive to shareowners or have been asleep at the switch," she said.
Jim McRitchie, a retail shareholder activist who has argued that Rule 14a-11's ownership standards were too onerous, said he is "delighted" that the stay on the Rule 14a-8 amendments is to be lifted. In a blog posting this week, he invited investors to join him in crafting a model access resolution that would set low barriers to access but require all nominators to disclose their election expenditures.
During the 2007 proxy season--the last time that investors were permitted to file access proposals, four resolutions were filed, and three went to a vote. Those proposals earned 43 percent support at Hewlett-Packard, 45 percent approval at UnitedHealth Group, and majority support during a proxy fight at small-cap Cryo-Cell International.
Companies may also propose their own access provisions, but that also appears unlikely unless shareholder proposals start receiving strong support. Comverse Technology and American Railcar Industries are among the handful of U.S. companies that have access provisions. In 2009, Delaware lawmakers approved legislation to permit management to adopt access bylaws, but no well-known Delaware companies have taken advantage of this provision.