Revisions to rule 14a-8 to come into effect allowing private ordering for proxy access proposals – but will investors use them?
The revisions to SEC Rule 14a-8 are expected to come into effect this week. Many investor advocates were disappointed when the SEC decided against appealing a court decision that struck down the more potent Rule 14a-11, which would have forced proxy access on all companies. But the surviving rule enables private ordering of proxy access proposals, regardless of the state in which companies are registered.
Now IROs will have to watch to see exactly how activist institutional and retail investors make use of 14a-8. The Business Roundtable and US Chamber of Commerce took the SEC to court over 14a-11 because they opposed a one-size-fits-all approach. ‘Federal law is proscriptive,’ says Claudia Allen, chair of Neal, Gerber & Eisenberg's corporate governance practice group.
‘State law is fundamentally enabling – that means in the context of private ordering we see different companies adopt different approaches.’ ‘When the proposal originally came out, we kept saying we ought to go the route of private ordering,’ says Peter Gleason, managing director of the National Association of Corporate Directors. ‘Let's push the dialog as opposed to pushing a rule around the dialog.’ In most states, it won't take much to start that dialog process.
A shareholder needs only to have held $2,000 worth of stock for a year. That opens the process to many activist retail shareholders, not just institutions. However, the conversation may not go on for long. Companies ‘have lots of defenses’ against proxy access proposals, says James McRitchie, governance activist and publisher of CorpGov.net.
These aren't special tools, but the tactics a company can take to virtually any type of shareholder-forwarded proposal, he explains. A super-majority provision for bylaw change is one tool. Another is for a board to put forward its own proposal, generally pushing the shareholder one to the side, with the SEC's permission.
‘We've seen that with holding special meetings,’ says McRitchie. A change in one term, like requiring 10 percent support to place a proposal on the proxy, rather than the 1 percent an investor might have wanted, can erect an efficient roadblock.
There was even the case last year when energy company Apache sued one of its own activist investors, John Chevedden, over a proposal to eliminate a super-majority voting requirement. Proxy access has been a contentious issue in the US for decades, often pushed by institutional investors. The question is what will they do now.
McRitchie has heard that some will continue to push the SEC for a new federal rule. ‘Since they are not satisfied with private ordering, their best strategy would be to only use that private ordering rule on rare occasions,’ he says. ‘If they use it a lot and are successful, that would take away their case.’ Activists like Carl Icahn might choose to ignore 14a-8 and run their own proxy campaigns.
According to Neal, Gerber & Eisenberg’s Allen, they might prefer to control their proxy process themselves with their own solicitation team and tabulator, rather than turn the campaign over to the board. In any case, Allen says that governance changes tend to come at large-cap companies first, so those with investor discontent could be the first targets. The threat of a proxy access motion could become a weapon itself, giving some investors leverage in negotiating with a board.
‘A lot of what goes on between corporations and shareholders in discussion on governance is behind the scenes,’ Allen says. ‘The 2012 season will be interesting.’
How can a board avoid a showdown? ‘If you get the best board possible and you're focused on the right issues like strategy and risk, and you communicate with your shareholders, you don't need to worry about it,’ Gleason says.
