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This week the U.S. Securities and Exchange Commission ("SEC") announced it would not seek a rehearing or Supreme Court review of the recent decision by the U.S. Court of Appeals for the District of Columbia Circuit in Business Roundtable v. SEC vacating the new federal proxy Rule 14a-11, which would have required companies to include shareholders' director nominees in company proxy materials in certain circumstances. The SEC indicated that it will allow the proxy access amendments to Rule 14a-8(i)(8) to become effective.
Background
On August 25, 2010, the SEC adopted amendments to the federal proxy rules under the Securities Exchange Act of 1934, including adopting a new Rule 14a-11 that would have permitted eligible shareholders to have their nominees for director included in a company's proxy materials, except as prohibited by applicable law or the company's governing documents. The SEC also adopted amendments to Rule 14a-8(i)(8), which, prior to the amendment, permitted companies to exclude from their proxy materials shareholder proposals that "relate to an election" for membership on the company's board of directors. The amendments to 14a-8(i)(8) narrowed this so-called "election exclusion" so that a company may not exclude shareholder proposals that would amend, or that request an amendment to, nominating procedures or director nomination disclosure requirements set forth in a company's governing documents.
In September 2010, certain petitioners sought review of Rule 14a-11 from the U.S. Court of Appeals for the District of Columbia Circuit and the SEC stayed the effective date of Rule 14a-11 pending the outcome of the review. Although the amendments to Rule 14a-8 were not challenged, the SEC voluntarily stayed the effective date of those amendments at the time it stayed the effective date of Rule 14a-11. On July 22, 2011, the Court vacated Rule 14a-11, holding that the SEC "acted arbitrarily and capriciously for having failed once again to adequately assess the economic effects of a new rule."
Recent Developments
On September 6, 2011, while confirming that the SEC would not contest the Court's decision, Chairman Mary L. Schapiro emphasized her commitment to making it easier for shareholders to nominate candidates for election to the board of directors and stated that the SEC staff would carefully consider the Court's objections and other comments received in "determining the best path forward."
Absent further action by the SEC, the stay on the amendments to Rule 14a-8 will be automatically lifted when the Court's decision becomes final, which is expected to occur on September 13, 2011. The SEC will publish a notice of the effective date of the amendments. While there will be no mandatory proxy access, with the implementation of the Rule 14a-8 amendments, eligible shareholders may require companies to include shareholder proposals regarding proxy access procedures in company proxy materials, giving shareholders and companies the opportunity to establish proxy access standards on a company-by-company basis in the upcoming proxy season.
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