August 26, 2010
Proxy Access Forum: The New Proxy Access -- Some Initial Thoughts
Posted by Lisa Fairfax

On my first read through the new proxy access rules, at least five things occurred to me.

As an initial matter, although one can (and many likely will) object to the manner in which the SEC ultimately resolved the complex web of issues involved with forming a proxy access rule, reading the final rule not only left me with the impression that the SEC had seriously considered the multitude of comments it received (apparently totaling about 600 comment letters), but also left me with the impression that the SEC had made the effort to either incorporate those comments or respond to those comments as it deemed appropriate, which, from a rulemaking standpoint, is a favorable impression.  

Second, given the emphasis by many on private ordering and the SEC's acknowledgement that support for changes to Rule 14a-8(i)(8) was relatively widespread, it seems noteworthy that the SEC did not take the relatively easier, and certainly less controversial, approach of only amending Rule 14a-8(i)(8) and either abandoning Rule 14a-11 or leaving that rule for another day.  Though perhaps, in light of the specific authority to adopt a proxy access rule granted under the Dodd-Frank Act, which the SEC noted made any challenges to its statutory authority "now moot," the SEC felt it needed to strike while the iron was hot.

Third, it also seems noteworthy that while the SEC recognized and took note of state law changes aimed at facilitating proxy access, such as the Delaware and ABA amendments,  those changes did not dissuade it from fashioning a federally mandated rule.  Under the SEC's view, even if proxy access bylaw amendments were permissible in every state, the fact that shareholder proposals could face significant obstacles that could undermine shareholder efforts to obtain proxy access warranted a federal rule.

Fourth, the 3%/3 year requirement of course raises the question about whether such a requirement will prove too difficult to meet, rendering the proxy access rule inaccessible for most shareholders.  On the one hand, there was a lot of push back when a 5% rule was proposed (and then abandoned) in connection with the Dodd-Frank Act, with opponents contending that such a rule would prevent all but the largest investors from taking advantage of proxy access.  The SEC's final rule reflected its concern that a 5% threshold would be too high.  On the other hand, there seemed to be a lot of agreement that 1% was too low--though there were those who advocate no ownership threshold.  In the end, the SEC contends that the 3%/3 year requirement facilitates the ability of shareholders with "significant, long-term" stakes, to take advantage of the rule.  In support of this contention, the SEC pinpointed data indicating that 33% of public companies "have at least one institutional investor owning at least 3% of their securities for at least three years," and that "31% of public companies have three or more holders with at least 1% share ownership each; and 29% have two or more holders with at least 2% share ownership each."  In this regard, the data suggest that there are many companies at which a relatively small number of shareholders could form a nominating group.  Of course the SEC recognized the limitations of its data, and hence the SEC recognized that there is no real way to know whether and to what extent the holding requirements will serve to hinder use of the proxy access rule.  At the very least, the requirements make it likely that shareholders will need to form groups in order to take advantage of the proxy access rule, which the SEC suggested was a good outcome.

Fifth, my research suggests that the solicitation exemptions are critical for ensuring the viability of the proxy access rule.  Indeed, in Canada, where there is a proxy access rule that goes virtually unused, corporate governance experts note that one of the reasons for the non-use is shareholders' inability to solicit on behalf of their nominees outside of the limited information printed in the corporation's proxy statement.  In this regard, the fact that solicitation basically requires the filing of a separate proxy statement apparently makes the Canadian proxy access rule unattractive.  By comparison, the fact that the new US rules enable shareholders to solicit without such a filing should make the US rules more attractive, and hence more likely to be utilized by shareholders.  

To be sure, it is unclear how any of these issues will shake out.  However, given that the new rules are scheduled to take effect 60 days after publication in the federal register, we won't have that long to wait.

Forum: Proxy Access, Securities | Bookmark

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