Search Penny Hill Press

Thursday, October 13, 2011

Proxy Access Reform: The SEC Makes It Potentially Easier for Shareholders to Nominate Directors

Gary Shorter
Specialist in Financial Economics

In response to the financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protections Act (P.L. 111-203) overhauled the nation’s financial sector regulation. The 112th Congress is actively involved in overseeing the act’s implementation, including provisions involving corporate governance such as expanding the role played by shareholders in the selection of public company corporate boards. While some regarded this as a change that would help make boards more sensitive to market developments and thus shareholder interests, others see it as a change that would place too much potentially abusable power in the hands of large shareholders.

Members of public company boards are supposed to play key fiduciary and management watchdog roles for the shareholders. At annual public company shareholder meetings, incumbent boards submit slates of board nominees for shareholder consideration as part of the official corporate proxy materials and statement sent to shareholders in advance of the meeting. Whereas states like Delaware (the state of incorporation for a large proportion of sizeable public firms) have largely governed substantive corporate matters for firms that they incorporate, the Securities and Exchange Commission (SEC) oversees matters related to the content of proxy materials.

Historically, the SEC has interpreted applicable federal securities laws as allowing companies to exclude from their proxy materials shareholder proposals involving the nomination of persons to their boards. Shareholders interested in pushing an alternative slate of nominees for fellow shareholder consideration must bear the printing and distribution costs themselves, which many believe poses a significant obstacle. Proxy access would reduce these cost barriers by allowing shareholder nominations to be included in the corporate proxy materials.

A provision in the Dodd-Frank Act (P.L. 111-203) enacted on July 21, 2010, explicitly authorizes the SEC to adopt proxy access rules. In August 2010, with the Republican commissioners dissenting, the SEC did so. The central and most controversial change, the adoption of Rule 14a- 11 under Regulation 14, which the agency adopted in 1935 pursuant to Section 14(a) of the Securities Exchange Act of 1934, would permit individual investors or investor groups with at least 3% of the total voting power of a company’s securities to put forward no more than one nominee, or several that will constitute up to one-fourth of a company’s board, whichever is greater, via the company’s proxy material at the annual meeting. Shareholders would also be required to have held their shares for at least three years and will not be eligible to use the proxy access rule if their securities are held for the purpose of changing corporate control. Some longtime advocates of proxy access, including various labor unions such as the AFL-CIO and pension fund groups such as the Council of Institutional Investors, claim that the rules should help improve management as well as enhance investor returns. Some opponents of proxy access as formulated, including various business interests such as the Business Roundtable and the United States Chamber of Commerce, criticized the access rulemaking. A major criticism was that the SEC’s rules would empower large investors, such as unions, at the expense of the small investors, giving them unfair leverage over corporate activities.

On September 29, 2010, the Chamber and the Roundtable jointly filed a petition with the United States Court of Appeals for the District of Columbia Circuit alleging that Rule 14a-11 violated several federal statutes. On October 4, 2010, pending a judicial decision, the SEC agreed to stay implementation of the rule. On July 22, 2011, calling the rule arbitrary and capricious, the appeals court voted to vacate Rule 14a-11, a ruling that the SEC decided not to appeal. This report will be updated as events dictate.

Date of Report: September 30, 2011
Number of Pages: 27
Order Number: R41864
Price: $29.95

Follow us on TWITTER at or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.