July 26, 2007

The Race is On: Proposals Compete to Govern Shareholder Access to the Proxy

It was high drama over at SEC headquarters yesterday, as the Commissioners staged a lively debate about how best to address the issue of shareholder access to company proxy materials. Much like the situation with pre-release “spoilers” about “Harry Potter and the Deathly Hallows,” the SEC’s approach on this front was widely anticipated – as it appears that the major newspapers may have had more time than perhaps some of the Commissioners to review the draft releases. Here is Corp Fin’s opening statement.

The SEC took the unusual step of approving alternative proposing releases going in opposite directions. The 3-2 votes on both releases were right along party lines, except for Chairman Cox, who, in a remarkable display of dexterity, voted for both proposing releases. While this two-track approach will certainly buy some more time in what has already been a long and drawn out process since last fall’s AFSCME v. AIG decision, it is not clear at this point how the SEC will ever decide on which approach to adopt or whether it will adopt any approach at all. It is hard to imagine that commenters will sway the Commissioners from their hardened positions, particular since most of the pros and cons of these proposed approaches have already surfaced through the extensive comments on the 2003 access proposal and in the more recent Proxy Roundtable Month.

The actual details of these proposals are of course still a little sketchy – perhaps even for the Commissioners who voted on them. Commissioner Nazareth complained at the open meeting about the fact that she had received a brand new draft proposing release on Tuesday which she termed the “Shareholder Non-Access Proposal.” Given the amount of time that the SEC has been considering these issues, it is certainly notable that the proposals were so fluid in advance of the meeting.

Rep. Barney Frank (D., Mass.) promised back in June that the House Committee on Financial Services will hold hearings on shareholder access once the rules are proposed. Yesterday’s alternative proposals should give the Committee plenty to talk about. We can only hope that the SEC’s indecision on this issue does not result in some sort of rash Congressional action that could ultimately make life more difficult for both companies and shareholders.

Status Quo versus Access by Significant Shareholders

Based on the Staff’s description, one of the proposing releases debated at yesterday’s meeting looks like something that the SEC might have done last fall, when the agency confidently announced that it was calendaring a proposal to address the uncertainty created in the wake of the AIG decision. This proposing release will include a Commission interpretation of Exchange Act Rule 14a-8(i)(8) confirming the long-standing position that companies may exclude from their proxy materials any proposals that would result in an election contest, or that would initiate a process whereby shareholders could conduct a future election contest by requiring that the company’s proxy materials include director candidates nominated by shareholders. The proposing release will also include proposed changes to the text of Rule 14a-8(i)(8) reflecting the Commission’s interpretive position.

The second proposing release will contemplate a fairly straightforward procedure that would enable significant shareholders to include binding access proposals in company proxy materials. Chairman Cox noted at the meeting that lessons were learned from the aborted effort to adopt a new Rule 14a-11 governing shareholder access back in 2003, and the same mistakes were to be avoided with these proposed amendments to Rule 14a-8. Under the proposed amendments, a shareholder would be able to include a shareholder nomination bylaw proposal in the company’s proxy materials only if:

– the proposal relates to a change in the company’s bylaws that is binding on the company if approved;
– the proposal is submitted by a shareholder or shareholder group that has continuously held more than 5% of the company’s securities for at least one year; and
– the shareholder or shareholder group is eligible to, and has, filed a Schedule 13G that would contain expanded disclosure about the shareholder proponent(s) and the proponent(s) and prior interactions with the company (Schedule 14A will also require this comprehensive disclosure).

Not surprisingly, the release is going to include proposed amendments to the proxy rules that would encourage the use of electronic shareholder forums, a much-maligned approach that was floated during the May proxy roundtables. Finally, the proposing release will include questions about the Rule 14a-8 process generally, which could potentially open the door for broader changes to shareholder proposals.

Some further insights on the shareholder access proposals are provided by good ole’ Billy Broc in this week’s Sarbanes-Oxley Report entitled “Shareholder Access: S.E.R.I.O.U.S.” Watch the short vidcast through to the credits (if you can bear it) for a special treat.

SEC Adopts the PCAOB’s Auditing Standard No. 5

One highlight of yesterday’s meeting is that the SEC hopefully closed the book on the most contentious aspect of the Sarbanes-Oxley Act’s implementation, by approving the PCAOB’s Auditing Standard No. 5 governing the audit of internal controls. Everyone is counting on this shorter, more principles-based and less prescriptive auditing standard as providing the basis for more reasonable and appropriately scaled audits of internal controls. The PCAOB has pledged to focus on ensuring that implementation of this standard by auditors is consistent with everyone’s noble vision, and the SEC has said it will keep up the heat on the PCAOB through the SEC’s oversight of the PCAOB inspection process. Here is Corp Fin Director John White’s opening statement.

The SEC also adopted a definition of “significant deficiency” for the purposes of SEC rules. Surprisingly, no 3-2 vote there.

Concept Release on Use of IFRS by US Companies

The SEC also voted to publish a concept release that will solict comments on the topic of permitting US issuers to prepare their financial statements using International Financial Reporting Standards as published by the International Accounting Standards Board. This concept release is going to be out for an unusually long 90-day comment period.

– Dave Lynn