PROXY ACCESS: WILL THE NEXT SHOE DROP?

POTENTIAL RAMIFICATIONS OF THE COURT'S DECISION

On July 22, 2011, the Circuit Court of Appeals of the District of Columbia soundly rebuked the SEC, vacating the 1934 Act Rule 14a-11, which provided proxy access. The court’s ruling stated that the SEC “inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support judgments; contradicted itself; and failed to respond to substantial problems raised by commenters.” In September of 2010, the SEC had issued a stay on the proxy access regulations shortly after the Business Roundtable and U.S. Chamber of Commerce filed for a judicial review of the regulatory changes. The stay put off the implementation of Rule 14a-11, as well as Rule 14a-8(i)(8). The latter regulation was part of an integrated “two-pronged” approach to permit qualified shareholders to ask companies via a proxy proposal to adopt “proxy access” in a form specific to the issuer. Many comments had been submitted suggesting that the SEC just adopt the second approach, to permit proxy access to commence through the shareholder proposal process with the expectation that companies may preemptively adopt some form of access similar to the tactics adopted when majority voting blossomed. With this ruling, mandated proxy access is unlikely to be resurrected for 2012, leaving open the question of whether the SEC will remove the stay on Rule 14a-8(i)(8), shareholder proposals for access.

Implications of the Ruling on Future Regulations

The court’s ruling may have several ramifications that will affect issuers and security industry participants. The severity of the court’s ruling regarding the SEC’s failure to respond to specific comments on the regulation may result in the SEC having to make a greater effort to review and respond to specific comments and the potential costs of proposed regulations. In the past, we have observed what appeared to be offhanded dismissal of some comments that, we believed, had merit. In some instances, the SEC discussion reflected that the SEC didn’t believe the comment warranted consideration, yet didn’t provide substance to support their conclusion. This approach may change radically how the SEC evaluates comments, increasing the cost and time involved in this process. Indeed, after the Court’s ruling, the SEC took the unusual action of extending the comment period on the proposed regulation 17Ad-17 in an apparent effort to get better cost data.

Proxy Access Implications

Proxy access in some form may still be active in the coming proxy season. While Rule 14a-11 has been sidelined, at least for the foreseeable future, the Commission may lift the stay on Rule 1414a-8(i)(8). The SEC Director of Corporation Finance noted after the ruling that Rule 1414a-8(i)(8) was unaffected by the court’s decision. If the stay on the amendment to Rule 1414a-8(i)(8) is lifted, then issuers may be required to include proposals received from eligible shareholders to create a proxy access specific to the issuer. Larger issuers may be looking at proxy access proposals as early as November or December of this year. IN light of these possibilities, issuers may want to develop strategies that contemplate receiving such proposals, what actions they might take and the potential design of a proxy access process that the issuer may want to unilaterally undertake as a preemptive tactic. Having plans and strategies on the drawing board may help a company prepare for a confrontation.

Proxy access has been debated and discussed in one form or another for almost 70 years. The latest drama was certainly a set-back for proponents of proxy access. However, despite the court’s ruling, as the saying goes, "rumors of its demise are greatly exaggerated". One might expect that the next proxy access shoe will fall sooner than later, unless the shock of such a stern ruling reverberates longer and louder in Washington, D.C. than did the recent earthquake.