Yesterday, in this 2-page order, the SEC granted a stay of its proxy access rules pending resolution of the Business Roundtable and Chamber of Commerce petition for review with the DC Circuit Court of Appeals (I blogged about the lawsuit last week) so that the SEC could join the groups in seeking an expedited review by the court. As expected, the SEC’s order does not address the merits of the plaintiff’s claims.
In its order, the SEC also delayed the amendment to Rule 14a-8, which would have allowed shareholders to file bylaw proposals that seek more permissive access procedures. That rule change was not challenged by the plaintiffs – but he SEC said it decided to delay the implementation of this rule change, “because the amendment to Rule 14a-8 was designed to complement Rule 14a-11 and is intertwined, and there is a potential for confusion if the amendment to Rule 14a-8 were to become effective while Rule 14a-11 is stayed.”
Proxy Access: What is the Timing for the Court’s “Expedited Review”?
Prior to this stay, the new rules were scheduled to become effective November 15, 2010 – and apply to companies that mailed proxy materials mailed for its last annual meeting after March 13, 2010. As the SEC’s order was silent about how to determine the manner in which the stay will ultimately impact the effective date of the rules, I have been bombarded with questions about what the possible timing of the expedited review.
Here is what Cooley is saying – excerpted from this memo – about timing: “Even in highly expedited cases, in most of the courts of appeals, each party will have about three weeks for their principal briefs and a week or more for the reply. We think that, in a case like this, there is likely to be argument heard. As a result, we estimate that it may take a few months to resolve, which means that the potential application of proxy access for this proxy season will likely be in limbo for many issuers until more is known about the schedule. The court has not yet set a briefing schedule, nor is there anything on the Court’s docket showing that it has received a motion to expedite the briefing schedule.”
This seems right as this BusinessWeek article notes a SEC spokesperson as saying this will be resolved in “late Spring”…
Interestingly, dozens of law firms already have sent out emails regarding this development – but these firms had remained silent when the lawsuit was filed last week. Notably, very few of the emails dealt with this timing issue, which I imagine is the one item that folks want to know about most.
Proxy Access: Corp Fin’s Position on the Application of Advance Notice Bylaws
Below is a Corp Fin position as repeated from this memo from Cooley (a position which was also articulated by Corp Fin Director Meredith Cross at a New York Chapter meeting of the Society of Corporate Secretaries on Friday):
An SEC staff member has just responded to a question I had posed to the staff about a month ago with regard to the viability of advance notice bylaws in connection with Rule 14a-11 (proxy access) nominations. While it’s clear that advance notice bylaws apply with regard to nominations made outside of the proxy access rules, it was not clear whether the company could, in the SEC’s view at least, preclude a proxy access candidate’s nomination at the meeting if the nominating shareholder did not comply with the company’s advance notice bylaws. Most firms took the position that proxy access “trumped” the advance notice bylaws and that the company could not preclude the nomination and election of the candidate at the meeting, even if the nominating shareholder did not comply with the advance notice provisions. The staff member told me that, to the contrary, the staff’s position is that the advance notice bylaws cannot be ignored.
Moreover, a predicate to Rule 14a-11 is that there is a state law right to nominate, and failure to comply with the advance notice bylaw means, in effect, that there is no state law right to nominate. As a result, not only could the nomination of the candidate be precluded at the meeting, but, surprisingly, the company could use the fact of noncompliance to exclude the nominee from the proxy, subject to the company’s following the process outlined by the SEC for exclusion of nominees, including notice to the SEC.
The question of director qualifications is, from the staff’s perspective, a slightly different animal. It’s clear from the release that if the bylaws include reasonable director qualifications that relate to the nominee’s ability to serve as a director, then a Rule 14a-11 nominee must be included in the proxy statement even if the nominee does not satisfy the qualifications. The company could, however, refuse to seat the director, even if elected, in compliance with Delaware (or other state) law. But what if the bylaws were phrased to prevent not only service as a director, but the nomination of a director that did not meet the reasonable qualifications in the bylaws? Again, if the bylaws cut off the right to nominate the director, then the 14a-11 nominee could be excluded, not just from nomination, but also from the proxy statement.
However, in advising the SEC that the company intended to exclude the nominee, the company would need to show that the qualification was generally applicable across the board, not one that could be satisfied prior to nomination (such as a qualification that the nominee be a shareholder) and that the qualification would be a valid limitation on the right to nominate under Delaware (or other state) law. (I assume that the difference with regard to advance notice provisions is that it’s widely accepted that reasonable advance notice provisions are permitted under Delaware law to preclude nominations, whereas qualification requirements for the nomination of directors was less clear (at least to the staff if not to Delaware counsel), so the threshold to convince the staff regarding qualifications would be higher.)
The staff member said that the staff would, however, look askance at a bylaw provision that suggested that the company was really just trying to “opt out” of Rule 14a-11. His example of that type of circumvention was a director qualifications bylaw that provided that an individual could not be nominated if the nomination occurred during the open window period for proxy access nominations, thus creating an unavoidable conflict with Rule 14a-11.
This interpretation seems to open up the field for bylaw limitations on the right to nominate, provided that they would could be supported as valid under Delaware law. Of course, the summary above is just the staff’s take on the matter. A nominating shareholder that wants to contest a company’s attempt to exclude a nominee could well end up seeking a judicial determination, which could easily have a different result.
Proxy Access: The Debate Over What to Do If the Rules Stick
While we wait to see what happens with the SEC’s new proxy access rules, I thought it might be useful to point out the heated debate over what types of actions that companies might take if access “sticks.” Professor JW Verret has been publishing his ideas about what type of defenses companies might consider adopting in the wake of access – and here is some commentary in response.
– Broc Romanek