Circuit Court Strikes Down Proxy Access Rule; What Will the SEC Do?

It’s going to be quite a while longer before, to paraphrase Bob Dylan, large shareholders are “knock-knock-knockin’ on the boardroom’s door.” As has been widely reported, last Friday the D.C. Circuit Court of Appeals struck down the SEC’s Rule 14a-11, adopted in August 2010, which grants to large shareholders of public companies the right to nominate directors and have the nominees included in management’s proxy statement. The Court’s opinion, using very harsh language, found that the SEC’s process was deficient in adopting the rule and held that the adoption of the rule was arbitrary and capricious.

The SEC’s statement about the decision expresses disappointment and states that the agency is “considering our options going forward.” What might this mean for proxy access?

• Reconsideration/Rehearing or Appeal. As reported by Ted Allen in “U.S. Appeals Court Strikes Down Proxy Access” in the RiskMetrics Blog, “The SEC now has 45 days to decide whether to ask the three-judge panel to reconsider its ruling or seek a rehearing by the full nine-judge D.C. Circuit.” Presumably, depending on further action of the D.C. Circuit, the agency could further appeal to the U.S. Supreme Court.
• Re-Adoption of the Rule. Allen also reports, “If the commission doesn’t seek additional judicial review, it would then have to decide whether to redo its economic analysis and try to revive Rule 14a-11. Given the SEC’s heavy workload of Dodd-Frank Act rulemakings, it appears unlikely that the commission would move quickly to resurrect the rule.” I agree that it is unlikely in the short term that the SEC will go through the process of reconsidering the rule and re-adopting it with a more deliberate process. However, the agency has put a huge amount of time and effort into the rule already, and the Dodd-Frank Act specifically authorized the adoption of the rule. Therefore, in the long run, I wouldn’t rule out another attempt by the SEC.
• Removal of Stay on Rule 14a-8. The more immediate question in the short term is what the SEC will do about a companion amendment to Rule 14a-8 that was adopted in the same release as Rule 14a-11. This amendment allows shareholders to submit proxy access proposals at individual companies and would prevent the companies from excluding those proposals. The SEC issued a stay of effectiveness of Rule 14a-8 at the same time it stayed the effectiveness of Rule 14a-11. The SEC’s statement regarding the Court of Appeals’ decision specifically points out that the Rule 14a-8 amendment “is unaffected by the court’s decision . . . . ” The SEC could quickly lift the stay relating to Rule 14a-8, regardless of what it does with Rule 14a-11. Allen predicts, “ . . . [the stay on the Rule 14a-8 amendment] likely will be lifted before the filing deadlines for most 2012 meetings.”

The bottom line: there is a consensus that it is highly unlikely that proxy access will be in effect for the 2012 proxy season. However, if the stay on Rule 14a-8 is lifted, then a large number of companies may be dealing with shareholder proposals in 2012 to provide proxy access to large shareholders in future years.

What should companies do now? For those companies with advance notice bylaws, there is probably no rush to amend those bylaws to conform to the requirements of Rule 14a-11. However, companies without advance notice bylaws should consider adopting them, to provide adequate notice of shareholder proposals and to provide the board with additional information about the shareholders making the proposal, their shareholdings, and their relationships with each other and with the company.