• SEC Decides Not To Appeal Rule 14a-11 Proxy Access Decision, Rule 14a-8 Stay Expires Next Week
  • September 14, 2011 | Authors: Peter K. Blume; Rachel L. Smydo
  • Law Firms: Thorp Reed & Armstrong, LLP - Philadelphia Office ; Thorp Reed & Armstrong, LLP - Pittsburgh Office
  • As we previously reported, on July 22, 2011, the United States Court of Appeals for the District of Columbia Circuit ("Court of Appeals") vacated Rule 14a-11 adopted by the Securities and Exchange Commission ("Commission") on August 25, 2010. Rule 14a-11 would have permitted shareholders or shareholder groups who owned not less than 3 percent in voting power of a U.S. public company (including investment companies) for at least three years to include their nominees (up to 25 percent of the board) in the company's proxy materials. The Commission entered a stay on October 4, 2010 of the proxy access rules (Rule 14a-11, together with amended Rule 14a-8 and other related amendments) that were scheduled to become effective November 15, 2010.

    The Court of Appeals held that the Commission acted arbitrarily and capriciously for failing to adequately assess the economic effects of Rule 14a-11 and promulgated Rule 14a-11 in violation of the Administrative Procedures Act and the Commission's obligation to consider the rule's effect upon efficiency, competition and capital formation. The Court of Appeals also strongly criticized the Commission's application of the rule to investment companies.

    Earlier this week, the Commission confirmed that it will not seek rehearing of the Court of Appeals' decision nor will it seek review by the Supreme Court. Chairman Mary L. Schapiro issued the following statement:

    "I firmly believe that providing a meaningful opportunity for shareholders to exercise their right to nominate directors at their companies is in the best interest of investors and our markets. It is a process that helps make boards more accountable for the risks undertaken by the companies they manage. I remain committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards.

    "At the same time, I want to be sure that we carefully consider and learn from the Court's objections as we determine the best path forward. I have asked the staff to continue reviewing the decision as well as the comments that we previously received from interested parties."

    Amended Rule 14a-8 provides that companies must include in their proxy materials, under certain circumstances, shareholder proposals that seek to establish a procedure in the company's governing documents for the inclusion of one or more shareholder director nominees in a company's proxy materials. The Commission's stay order on amended Rule 14a-8 and other related amendments is expected to expire on September 13, 2011.