SEC ANNOUNCES EFFECTIVENESS OF RULE 14A-8, ALLOWING “PRIVATE ORDERING” OF PROXY ACCESS
By Bradley A. Robinson
September 23, 2011
On September 16, 2011, the SEC announced that the previously suspended revised Rule 14a-8, giving shareholders the ability to propose proxy access bylaws and other director nomination procedures, would become effective September 20. The amended rule had been temporarily put on hold pending the outcome of a review of its mandatory proxy access rule, Rule 14a-11, by the U.S. Court of Appeals for the D.C. Circuit. As noted in prior newsletters (see rtco.com for more on this decision) the court vacated Rule 14a-11 in July 2011. The SEC has announced that the court’s ruling on Rule 14a-11 will not be appealed at this time. Consequently, the hold on Rule 14a-8 was released. The new rule will affect all publicly-held companies, including investment companies and smaller companies. It should be noted, however, that, until proxy access rules are passed by shareholders, the director nomination process will remain unchanged.
Paving the Way for Change
The amended rule paves the way for “private ordering” for the upcoming proxy season, where different companies may adopt varying rules regarding proxy access for shareholder nominees depending on individual bylaws proposals submitted by shareholders. These proposals will vary by company to company and may set a more or less burdensome bar to entry than was originally proposed under the vacated Rule 14a-11. This Rule required that a shareholder or group of shareholders have a 3% ownership threshold held for a minimum of three consecutive years to qualify for submitting director nominations. It is likely that activist shareholders would prefer a lower bar, depending on a company’s individual circumstances. However, it is possible that this preference may be offset by an attempt to appeal to more conservative investors in an effort to gain majority support at annual meetings.
This proxy season may well see a mix of binding and non-binding proposals. While most activists would prefer the passage of a binding proposal, activist shareholders may submit proxy access proposals that are non-binding and avoid requiring the approval of a supermajority of shareholders. Support levels for non-binding proposals have tended to be greater among mainstream investors, a trend that is likely to continue for the present, particularly in light of the fact that this is the first year of proxy access proposals. However, the specifics of these proposals remain to be determined and, as such, will require diligent monitoring by investor relations and corporate governance professionals.
Proxy Advisor Support
As the proposals themselves are undetermined, so is the support they will receive. Not only do most institutional investors not have individual policies for proxy access proposals, but ISS and Glass Lewis have yet to establish their positions on the subject. We note, however, that ISS announced its support for mandatory proxy access prior to having the rule vacated by the court. While this does not indicate that ISS would offer blanket support to all proxy access proposals, companies should carefully watch the policy discussions by proxy advisors as we approach the 2012 proxy season. This is particularly true for companies with significant institutional holders.
Who is at Risk and Suggested Actions
A poll conducted by TheCorporateCounsel.net blog indicated that the majority of respondents said they expect to see 20 or fewer proxy access resolutions next year. However, this number should be taken with a huge grain of salt as it is an unscientific poll open to the public. More importantly, it is the only attempt to determine the number of proposals expected to be published thus far and serves as an illustration of how little we know about what to expect from the amended rule. One thing that is certain is there are some companies that will see proxy access proposals in the coming year and those companies had better be prepared.
Companies most at risk for receiving proposals will be those with a history of shareholder activism and/or with a history of corporate governance or business performance problems. Corporate governance problems can include, but are not limited to, a perception of underperforming directors or management, lack of experienced board members, or a lack of responsiveness to shareholder concerns or sentiment. As such, companies with higher than average withhold votes in prior elections or majority support for previous shareholder proposals and lower support for management proposals (such as say-on-pay), should be particularly wary of the new proxy access rule.
Whether or not a company is at high risk for shareholder proxy access proposals, there are a number of things that companies should do before proxy season to avoid surprises. As with many potential problems with shareholders, companies should consider engaging in shareholder communication and outreach programs, where investors are actively encouraged to give the board and management feedback. The extent of these programs will vary from company to company depending on risk factors as well as company resources. A good first step in determining the appropriate program for each company will begin with identifying long-term shareholders. Companies should consider working with a proxy solicitor to achieve this.
Through the process of preparing for the 2012 proxy season, issuers should also consider their position on proxy access, ideally taking into account shareholder sentiment at each company. In some cases this may mean proposing to shareholders a version of proxy access (e.g. with higher ownership or holding period requirements) that management can live with. In other cases, it may only mean offering a clear explanation of the current nomination process and why it is best for shareholders and the company. In many situations, issuers will find the optimum solution somewhere in between these two alternatives.
Companies at high risk should also consider addressing past problems. This could include implementing actions proposed by shareholders in the past, making changes to the board or the nominating process, and addressing perceived management shortcomings. Companies can also consider making bylaw changes to reflect more shareholder friendly corporate governance structures, such as majority vote director elections.
Responding to Proxy Access Proposals
Responding to proxy access proposals will be as individual as there are companies. Because it is the first year that such proposals will be allowed, each proposal is likely to differ from the next. This may result in situations where companies may, under current rules, exclude a proposal for vagueness and other technical or language based reasons. This is particularly true as applied to binding proposals. Other responses may include negotiations with proponents (both aimed at determining and addressing the underlying reason for the proposal and at coming to a more management friendly version of a final proposal), proposing their own proxy access rule, and simply opposing the proposal.
Regardless of an individual company’s situation, we recommend that a company always consult its legal counsel as well as a governance professional when determining its options and response.