• Proxy Access Rule Likely Not Effective for 2010 Proxy Season
  • October 23, 2009 | Author: Douglas P. Long
  • Law Firm: Faegre & Benson LLP - Minneapolis Office
  • The Securities and Exchange Commission has indicated that any final action on its proposed proxy access rule will likely be delayed until next year. Since its proposal in May, the SEC has received over 500 comment letters in response to its proposed new Rule 14a-11. In addition to questioning the advisability in general of a mandatory, one-size-fits-all approach to proxy access, most of the comment letters in opposition to the proposed rule also expressed significant concerns regarding many of its details and mechanics. Some commenters went further, challenging the SEC's authority to impose such a mandatory rule and threatening a legal fight if the proposed rule is adopted.

    It appears that the SEC requires additional time to review these comments and to make sure the final rule, as appropriately modified, is both workable and legally supportable.

    Proposed new Rule 14a-11 would require public companies to include shareholder-nominated directors in their proxy materials provided the nominating shareholder or shareholder group is not seeking to effect a change in control of the company, meets certain share ownership thresholds and provides required disclosures. For more background on the proposal, see SEC Proposes Revised Proxy Rules to Facilitate Shareholder Nominations of Directors. Currently, shareholders wishing to nominate their own directors to the board are required to prepare and mail, at their expense, separate proxy and other solicitation materials.

    Future of Proposed Changes to Rule 14a-8 Uncertain

    It is uncertain what the SEC is contemplating with regard to the proposed changes to Rule 14a-8 included in its May proposal. Currently, Rule 14a-8 permits companies to exclude from their proxy materials most shareholder proposals relating to the election of directors. The proposed changes to Rule 14a-8 would end the use of this exclusion in most cases and, if adopted in lieu of mandatory proxy access under proposed Rule 14a-11, would facilitate proxy access by allowing each company and its shareholders to design custom proxy access rules appropriate for that company.

    While there have been no clear statements from the SEC regarding the status and timing of the proposed changes to Rule 14a-8, it seems unlikely that the SEC would move forward with the Rule 14a-8 changes in advance of any final decision with respect to proposed Rule 14a-11.

    Bylaw Proposals Requiring Delaware Corporations to Reimburse Director Election Expenses May Impact 2010 Proxy Season

    Even with no new Rule 14a-11 in effect until, at the earliest, next year and assuming no changes to current Rule 14a-8 this year, the director election and nomination process for the 2010 proxy season could still experience changes. New Section 113 of the Delaware General Corporation Laws, which became effective on August 1, 2009, permits shareholders to adopt bylaws that require a company to reimburse expenses incurred by a shareholder in connection with the solicitation of proxies for the election of directors. Such bylaws may condition reimbursement upon (1) the number or proportion of persons nominated by the shareholder seeking reimbursement, (2) whether the shareholder has previously requested reimbursement, (3) the proportion of votes cast for one or more of such shareholder's nominees, (4) the amount spent by the company in soliciting proxies for the election, (5) limitations related to the election of directors by cumulative voting, or (6) any other lawful condition.

    Given the uncertainty regarding the status and timing of proxy access, shareholders of Delaware corporations (and of corporations of other states with similar reimbursement provisions) may be particularly motivated to propose bylaw amendments to provide for reimbursement as a way to facilitate conventional proxy contests for the election of shareholder-nominated directors.