The U.S. Court of Appeals for the District of Columbia Circuit vacated Rule 14a-11 of the Securities and Exchange Act of 1934 (the Exchange Act) on July 22, 2011. Rule 14a-11 would have required companies subject to the proxy rules in the Exchange Act to include in their proxy materials the names of shareholder-nominated director candidates. Under Rule 14a-11, these candidates generally could have been nominated by a shareholder or group of shareholders that continuously held, for at least three years, at least three percent of a company's voting securities.
In its ruling, the court held that the SEC acted arbitrarily and capriciously for having failed to adequately assess the economic effects of the new rule. The court found that the SEC "inconsistently and opportunistically framed the costs and benefits of the rule; failed to adequately quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters." The SEC had until Sept. 6, 2011, to appeal, but declined to do so.
Pending judicial resolution, the SEC had stayed the effectiveness of Rule 14a-11 and the amendments to Rule 14a-8(i)(8). While Rule 14a-11 is now vacated, the SEC has opted to allow the amendments to Rule 14a-8(i)(8) to become effective without modification. The stay on the amendments to Rule 14a-8(i)(8) was lifted upon finalization of the court's decision, and the amendments became effective on Sept. 20, 2011, in time for the 2012 proxy season. As a result, certain shareholders will be able to submit proposals to amend the provisions of a company's governing documents regarding the procedures for shareholders to nominate director candidates. A "private ordering" of proxy access procedures on an issuer-by-issuer basis likely will follow through the upcoming proxy season and beyond.
As we have recommended before, and in light of the effectiveness of Rule 14a-8(i) (8), we recommend that companies continue to monitor their shareholder base. Companies should consider who their significant shareholders are and should engage in a continuous dialog with these shareholders to mitigate the likelihood of a surprise shareholder proposal. Additionally, companies should develop a plan for responding to shareholder access proposals that seek to amend procedures for shareholders to nominate directors. Companies also may wish to develop their own shareholder-nominated director procedures, so that any similar shareholder proposals may be excluded under Rule 14a-8(i)(10), because they have already been "substantially implemented," or under Rule 14a-8(i)(8), because they conflict with a management proposal. Finally, companies with problematic governance may be more likely to attract shareholder proposals to facilitate the nomination of shareholder-director candidates. Thus, companies should evaluate their past corporate governance record in advance of the 2012 proxy season.
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