TheCorporateCounsel.net

The long-awaited proposal to rescind Rule 14a-8 was announced yesterday. Here’s the 228-page proposing release and the 1.5-page fact sheet. Statements were issued by Chairman Atkins, Commissioner Peirce and Commissioner Uyeda. The fact sheet explains:

The proposing release discusses the scope of the Commission’s authority under Section 14(a) of the Exchange Act and explains that Rule 14a-8 should be rescinded because it exceeds the Commission’s statutory authority. The Commission also has independent policy reasons for proposing to rescind the rule. First, many of the justifications that were originally provided to support adoption of Rule 14a-8 either have not been substantiated in practice or are less compelling today.

In addition, Rule 14a-8 also has had, and will continue to have, certain unintended consequences that further undermine any justification for retaining the rule:

• Rule 14a-8 has become a mechanism for influencing the interactions between companies and their shareholders in ways that are inconsistent with the rule’s original purpose.
• The existence of Rule 14a-8 places the Commission in the position of making judgments about the application of state law that are best left to other actors.
• The presence of a federal rule has inhibited the development of state law and private ordering.

The proposal would also amend Rule 14a-4(c) to address the issues companies face related to discretionary authority when a shareholder proposal isn’t included in a company’s proxy statement, which may be more common after the repeal of Rule 14a-8. The proposing release says:

[I]f current Rule 14a-4(c)(2) were to remain in effect, more companies may feel compelled to include a proponent’s proposals in the company’s own proxy materials to obtain proxy voting authority from shareholders on the proposals [. . .] Under the proposed amendments, a proponent’s proxy card could include the company’s nominees, management proposals, and the proponent’s proposals, while the company’s card could solely include the company’s nominees and management proposals. The company could then exercise discretionary voting authority to vote proxies it receives against the proponent’s proposals, other than for proxy cards the company receives on which shareholders have checked the proposed [. . .] check box [. . .] that would provide shareholders an option to prohibit the company from exercising discretionary voting authority on proposals omitted from the company’s proxy card.

This Goodwin Public Company Advisory Blog sums up the practical effect of the proposed changes to Rule 14a-4(c) as follows:

A proponent’s independent solicitation would no longer prevent the company from exercising discretionary voting authority over all proxies it receives. Instead, each shareholder would decide whether to allow the company to vote that shareholder’s shares on the omitted proposal.

Without Rule 14a-8, determining when companies must include shareholder proposals in their proxy materials would be left to state law and potentially companies’ governing documents, and “the transition period may be bumpy,” as Commissioner Peirce acknowledges in her statement. That’s because, as the fact sheet notes, “the presence of a federal rule has inhibited the development of state law and private ordering.” Gibson Dunn has discussed this in detail, saying “many state corporate law aspects of shareholder proposals remain unclear or unsettled,” including in Delaware, and different states may take different approaches.

As Goodwin notes, frameworks will eventually be developed governing “who may submit proposals, which matters are permissible for a shareholder vote in those proposals, and when inclusion in a company’s proxy statement is required” through private ordering and state law. Meanwhile, hearing words like “bumpy” and “unclear or unsettled law” makes me think of the Wild West. It may get worse before it gets better. Saddle-up!

The comment period will be open for 60 days following publication in the Federal Register.

Side note: We were pleased to see one of our blogs and remarks from the 2024 Proxy Disclosure & Executive Compensation Conferences cited in the discussion of Rule 14a-4(c). Special thanks to our former editorial colleague, Emily Sacks-Wilner, for pointing this out while I was still digesting yesterday’s fact sheets! She is so on top of things!

– Meredith Ervine