September 15, 2011
Practice Group(s):
Corporate
Corporate
Governance
Mergers &
Acquisitions
Securities
Enforcement
Companies Should be Prepared for
Shareholder Proxy Access Proposals for
the 2012 Proxy Season
The Securities and Exchange Commission announced last week that it will not seek a rehearing or
Supreme Court review of the recent federal circuit court decision striking down its mandatory proxy
access rule, Rule 14a-11 under the Securities Exchange Act of 1934. As described in our alert of
August 1, 2011, Rule 14a-11 would have required public companies to include in their proxy materials
certain shareholder nominations for directors. SEC Chairman Mary L. Schapiro stated in the
announcement that she continues to believe that “providing a meaningful opportunity for shareholders
to exercise their right to nominate directors . . . is in the best interest of investors.” Chairman Schapiro
also noted that she is “committed to finding a way to make it easier for shareholders to nominate
candidates for corporate boards.”
Although Chairman Shapiro’s comments leave open the possibility of the SEC revisiting mandatory
proxy access, the SEC’s decision not to appeal the circuit court’s ruling confirms that mandatory
proxy access will not be effective for the 2012 proxy season. The immediate issue, however, is that
the SEC also decided to lift the stay on its amendments to Rule 14a-8, which will allow shareholders
of public companies to submit proposals regarding proxy access on a company-by-company basis.
Accordingly, public companies should be prepared to receive shareholder proxy access proposals for
their 2012 annual meetings.
Rule 14a-8 and Private Ordering
When the SEC adopted Rule 14a-11, it also adopted amendments to Rule 14a-8 that would permit
shareholders to submit proxy access proposals for inclusion in company proxy materials. Among
other things, the Rule 14a-8 amendments will permit eligible shareholders to submit proposals seeking
to amend a company’s governing documents to establish director nomination procedures, including
standards for shareholders to include their director nominees in a company’s proxy statement. Many
commentators noted that this approach should allow for the “private ordering” of proxy access without
mandating a one-size-fits-all approach.
While the Rule 14a-8 amendments were not challenged in the federal litigation, the SEC nevertheless
voluntarily stayed the effectiveness of those amendments pending the outcome of the Rule 14a-11
challenge because the rules were meant to complement one another. In its announcement, however,
the SEC said that its stay on the effectiveness of the Rule 14a-8 amendments would expire without
further action by the SEC when the circuit court’s decision was finalized, which occurred on
September 14, 2011. Consequently, the SEC is expected to publish a notice confirming the effective
date of the amendments shortly.
Companies Should be Prepared for Shareholder Proxy
Access Proposals for the 2012 Proxy Season
What Should Companies Do Now?
As a result of the Rule 14a-8 amendments, companies should begin considering the best way to
address shareholder proxy access proposals in light of their individual circumstances. For example, a
board could consider under what circumstances it would be willing to implement its own proxy access
process, the benefits and the parameters of that process, and the means by which the process would be
implemented. Although it may be premature for many companies, it is possible that some companies
will want to establish their own proxy access standards, either by unilateral board adoption of proxy
access bylaw amendments or submitting proxy access bylaw amendments to their shareholders for
approval. The preemptive adoption of management sponsored proxy access bylaw provisions may not
prevent future shareholder proposals under Rule 14a-8; however, the adoption of reasonable proxy
access standards tailored to the specific circumstances of a company may discourage activist
shareholders from pursuing more expansive proxy access proposals.
Regardless of how a company moves forward, it will need to address any shareholder proxy access
proposals that it receives. Upon receipt of a proxy access proposal, a company’s board will need to
consider whether the company should:
• unilaterally implement its own proxy access process (and then seek to exclude any shareholder
proposal from the proxy statement by arguing that the proposal has been “substantially
implemented”);
• put the shareholder proposal to a shareholder vote and either support or oppose it; or
• put its own version of a proxy access process to a vote of the shareholders (and then seek to
exclude the shareholder proposal by arguing that the proposal conflicts with a management
proposal).
Of course, the company can also negotiate with a shareholder proponent to persuade it that a proposal
is not appropriate given the company’s circumstances (or seek to exclude the shareholder proposal on
other grounds permitted under Rule 14a-8, including procedural grounds).
While the number of companies that will receive shareholder proxy access proposals for the 2012
proxy season remains to be seen, we expect the season to be eventful. In particular, we would expect
the largest companies, and companies with perceived governance issues, to be the most likely
candidates for shareholder proxy access proposals. We are available to assist you in thinking through
the best course of action for your company, or to answer any questions you have regarding proxy
access, Rule 14a-8, and any related matters.
Authors
Michael J. Denny
mike.denny@klgates.com
+1.704.331.7488
Robert K. Smith
robert.smith@klgates.com
+1.202.778.9376
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Companies Should be Prepared for Shareholder Proxy
Access Proposals for the 2012 Proxy Season
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