SEC Decides not to Seek Rehearing on Proxy Access, Allows Rule 14a-8 Changes to Become Effective

By Cydney Posner

Last evening, the SEC issued a press release that it does not intend to seek either Supreme Court review or a rehearing of the decision by the U.S. Court of Appeals in Washington, D.C. vacating the proxy access rule, Rule 14a-11, which would have required companies to include in company proxy materials director nominations by shareholders.  (See my articles of 8/25/10, 9/30/10, 10/4/10, 4/8/11, 7/22/11 and 8/25/11 and the CooleyAlerts of 7/19/10 and 9/16/10.)

However, the SEC did lift the stay on changes to Rule 14a-8, which will allow shareholder proposals for proxy access to go forward (by narrowing the election exclusion in that rule), in effect permitting each company and its shareholders to make the decision on proxy access -- and the applicable standards for proxy access -- on an individual basis (so-called "private ordering"). You might recall that, although the amendments to Rule 14a-8 were not challenged in the litigation, the SEC voluntarily stayed the effective date of those amendments so that this issue could be resolved all at once when the court's decision became final. As a result, it is expected that Rule 14a-8 will become effective on September 13.

The debate over proxy access has been a contentious one, with proponents of proxy access emphasizing the need for accountability of boards, the importance of fair representation, implementation of shareholder rights under state law, the potential for improvements in director qualifications and board independence and other corporate governance benefits. On the other side, opponents raised concerns that shareholder-nominated directors could impede the proper functioning of companies and the collegiality of boards, cause inefficiencies, politicize board elections, represent only narrow single interests, make decisions that may not reflect the long-term interests of all shareholders or deter qualified directors who may be less than enthusiastic about facing an election contest.

This action concludes, at least for now, a very long and controversial history of efforts by the SEC to mandate proxy access. The SEC debated whether to institute proxy access in 2003 and 2007, but no rules were adopted. Fueled by concerns stemming from the economic crisis, in 2009, the SEC introduced Rule 14a-11 to make, in the words of SEC Chair Mary Schapiro at that time, "boards more accountable for the risks undertaken by the companies they manage." In connection with the SEC's current action, Chair Schapiro continues to hold to that belief, indicating the potential for a resurrection of proxy access in some form at some later point: "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."

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