Alert September 09, 2011

SEC Concedes Battle over Mandatory Proxy Access but Amendment Allowing Shareholder Proposals for Proxy Access to Become Effective

Earlier this week, the SEC announced that it would neither seek a rehearing of the D.C. Circuit decision vacating Rule 14a-11 (commonly referred to as the proxy access rule) nor appeal the decision to the U.S. Supreme Court. Rule 14a-11 would have established a mandatory procedure applicable to all public companies (including registered investment companies) under which eligible shareholders could nominate director candidates in the company’s proxy statement. By not appealing, the SEC has effectively conceded that Rule 14a-11 will not become effective. In the SEC press release, Chairman Mary L. Schapiro emphasized that she remains committed to finding a way to make it easier for shareholders to nominate directors.

The court decision did not apply to the amendment of Rule 14a-8 (also known as the shareholder proposal rule) which the SEC had adopted concurrently with Rule 14a-11 and which had not been challenged in the litigation.  The Rule 14a-8 amendment will allow eligible shareholders to propose resolutions requiring a company to amend its bylaws to adopt specific procedures for shareholders to propose director nominees and use the company’s proxy statement for such nominations.  Essentially, shareholders can propose proxy access procedures on a company-by-company basis.  The requisite vote required to adopt such an amendment will be determined by the company’s charter and bylaws.

Shortly after the litigation over Rule 14a-11 was originally filed, the SEC issued a stay order deferring the effectiveness of both Rule 14a-11 and the Rule 14a-8 amendment until the challenge was resolved.  In its recent announcement, the SEC noted that, absent further action by it, the stay order will automatically expire when the court’s decision is finalized, which is expected to be on September 13, 2011. As a result, the Rule 14a-8 amendment will be in effect for the next proxy season and companies could see shareholder proposals seeking to amend company bylaws to establish shareholder proxy access procedures.