ON Securities : Securities Lawyer & Attorney for Corporate Governance & Executive Compensation Matters

Last week, the SEC disclosed that it would not appeal the opinion of the D.C. Circuit Court that struck down Rule 14a-11, the proxy access rule that would have allowed shareholders to nominate members of the board of directors and required the company to include these nominees in its proxy statement. Therefore, Rule 14a-11 will not go into effect unless the SEC readopts the rule using procedures that will satisfy the courts.

At the same time, the SEC announced that it will allow a companion change to Rule 14a-8 (PDF) to go into effect. The amended Rule 14a-8 allows shareholders to submit proxy access proposals at individual companies and would prevent the companies from excluding those proposals. This process is known as "private ordering." The SEC issued a stay of effectiveness of Rule 14a-8 at the same time it stayed the effectiveness of Rule 14a-11. In its release last week, the SEC confirmed that the stay will expire without further SEC action on the date when the court’s decision will be finalized, expected to be September 13, 2011. The ON Securities Cheat Sheet, always available on this site, has been updated to provide more detail on amended Rule 14a-8.

In a recent post on the Conference Board Blog, “2012 Proxy Access Shareholder Proposal Wave Can Commence Next Week,” Gary Larkin reports that many commentators are recommending that proxy access proposals should be on the radar screens of boards of directors for the 2012 proxy season. This is true – of course, boards should be familiar with the operation of the amended rule.

But should companies expect a flood of shareholder proposals demanding or requesting proxy access? Probably not, at least not right away. Ted Allen in the ISS Governance Blog provides a very useful perspective on the advent of private ordering. In “Will Proxy Access Appear on Corporate Ballots in 2012?”, Allen reports:

At this point, it appears unlikely that investors will submit dozens of access proposals for 2012 meetings, as they have done in past seasons to seek board declassification, majority voting bylaws, or "say on pay" votes. There is concern among some activists that corporate advocates will argue that federal access standards are not needed if investors file a large number of access resolutions next year.

Amy Borrus, CII's [the Council of Institutional Investors’] deputy director, said she expects to see "probably not more than a handful" of access proposals in 2012. "I expect that shareowners will file proxy access proposals selectively at companies where boards have a history of not being responsive to shareowners or have been asleep at the switch," she said.

Allen also points out a variety of factors that will discourage proxy access proposals, especially binding votes on bylaws amendments, or make it more difficult for shareholders to get support for the proposals. See this previous post for further discussion of binding vs. non-binding votes.

In other words, once again to paraphrase Bob Dylan (a/k/a Bobby Zimmerman from Minnesota), it may be a while before shareholders are “knock-knock-knockin’ on the boardroom’s door.” But this delay doesn’t change the fact that, in terms of shareholder relations, “the times they are a-changin’.”
 

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 In “Will Investors File Proxy Access Proposals in 2012?”, in the RiskMetrics Blog, Ted Allen analyzes the possible impact of the D.C. Circuit Court’s ruling (discussed in this prior post) that struck down the SEC’s proxy access rule, Rule 14a-11. Rule 14a-11 grants to large shareholders of public companies the right to nominate directors and have the nominees included in management’s proxy statement.

Allen points out that the SEC may lift its stay on the related amendment to Rule 14a-8, which would allow shareholders to introduce proxy access proposals in 2012. He reports that there may not be a flood of proxy access proposals next year, due to institutional investors’ mixed feelings on these proposals and some complex dynamics:

Several investors said this week they are looking into submitting access proposals next season . . . . So far, it appears that the activist investor community is undecided about whether to file access proposals in 2012 and how many companies to target. There is a concern that the filing of dozens of access resolutions next season might bolster corporate arguments that the SEC should refrain from adopting a new marketwide access rule and just allow private ordering to work. There also is a concern that low support levels for poorly targeted proposals would be cited by corporate critics as evidence that most shareholders don't want access. Conversely, some activists argue that strong shareholder votes for access in 2012 could help prod the resource-stretched SEC to prepare a revised access rule. If activists do file access proposals next season, it appears that they may focus on a few high-profile companies with well-known governance issues.

One interesting issue is whether the shareholder access proposals would likely be votes on binding amendments to the bylaws or non-binding precatory votes that are merely recommendations to the board. Allen states: “Investors could file binding or non-binding resolutions, but some states require higher ownership thresholds for binding bylaw proposals.” Individual companies also may have bylaws that would require a supermajority vote by shareholders. Allen points to three examples of proxy access proposals in 2007, before the SEC stopped allowing such proposals under Rule 14a-8:

• A binding access proposal involving Hewlett-Packard Corporation that won a high percentage of approval but did not pass. This proposal would have required a two-thirds positive vote under H-P’s bylaws.
• Non-binding access proposals involving UnitedHealth Group, Inc. and Cryo-Cell International, Inc. The UnitedHealth proposal won a high percentage of approval but did not pass; the Cryo-Cell proposal passed.

Therefore, if the SEC lifts its stay on the amendment to Rule 14a-8, the resulting proposals are likely to include a mix of binding and non-binding proposals.

Cheat Sheet Updated for Changes in Dodd-Frank Rulemaking Timetable

As Broc Romanek pointed out in TheCorporateCounsel.net Blog, the SEC has modified its timetable for rulemaking under the Dodd-Frank Act. The ON Securities Cheat Sheet has been updated to include the additional dates. Most of the changes consist of adding a proposed time frame for final rules that have not yet been adopted, in many cases giving a range of January to June 2012. This makes it very unlikely that some of these rules, including the disclosure of pay relative to performance and the ratio of CEO pay to median non-CEO employee pay, will apply to the 2012 proxy season.

Stock Market Woes? Blame the Blue Guys!

We’re all still reeling from the stock market plunge this week so far. In his CNN show this evening, Piers Morgan showed footage of the New York Stock Exchange’s opening bell being rung on July 29 by . . . the Smurfs! He points out that, since that time, the Dow Jones Industrial Average has plunged by almost 1,000 points. Obviously, there must be a connection.

See the video below, if you want to know who’s to blame for the crummy stock market. You’ll be singing the blues!

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 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 (127-page PDF), 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 (127-page PDF) 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.

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ABA Releases Exposure Draft of Model Bylaw for Shareholder Access

TheCorporateCounsel.net Blog reports that the ABA's Task Force on Shareholder Proposals has released an exposure draft of a model bylaw for Delaware corporations to grant shareholder access - giving significant shareholders the ability to nominate one or more director candidates and have the candidates included in management's proxy statement. The model bylaw provides a company with flexibility in its provisions, including the percentage of the company's outstanding stock the stockholder must hold, and the length of time the stockholder must have owned the shares. The Task Force has asked for comments on the model bylaw.

It's not clear how many companies will voluntarily adopt the Task Force's model bylaw without being required to do so. The Delaware General Corporation Law was amended in April 2009 to add a new Section 112 to facilitate bylaws such as the model bylaw. Before 2007, numerous companies faced shareholder proposals supporting shareholder access. The SEC in 2007 determined that management could refuse to include these shareholder proposals in their annual meeting proxy statements. However, there may still be pressure on public company boards to allow shareholder access.

The SEC's proposed rules on shareholder access, if adopted, will make shareholder access mandatory and will eliminate much of the flexibility incorporated into the model bylaw. The Task Force clarified that the model bylaw does not take the SEC's proposed rules into account. However, assuming the SEC's rules become effective, public companies will move to adopt bylaws to clarify the procedures and standards for shareholder access, and the Task Force's draft will be a useful starting point.

The King of Pop - and IP

Working with companies and entrepreneurs gives you an appreciation for innovative business leaders. And whatever you think about Michael Jackson, the guy was a genius within the entertainment business. Some of his business ventures are well known - like his purchase of most of the Beatles' music catalog in the mid-1980s. But until I read his Wikipedia profile, I didn't realize that he was the named inventor on an issued patent. Michael developed an illusion for dancers performing "Smooth Criminal" to lean far forward, as if defying gravity. The trick was originally done with wires, but the Gloved One helped develop special shoes for the trick, and in 1992 he and two co-inventors were granted U.S. Patent 5,255,452: "Method and Means For Creating Anti-Gravity Illusion". Unbelievable - see the video in this article.

If only he had survived long enough to develop "Method and Means for Creating an Economic Comeback."

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