Shareholder Proxy Access - Still Relevant For 2010 Annual Meetings?

Author:Mr Robert Morris, Aron S. Izower, Herbert F. Kozlov, David T. Mittelman and J. Todd Arkebauer
Profession:Reed Smith

On Friday, Oct. 2, 2009, SEC Chair Mary Schapiro issued a statement indicating that the Commission will not take up the matter of new shareholder proxy access rules until 2010. She indicated it was her hope to finalize rules "early in the new year."

New rules were proposed by the SEC June 10, 2009. In its release "Facilitating Shareholder Director Nominations," the SEC proposed to require public companies to include in proxy materials distributed to shareholders, information relating to, and the capability to vote on, persons nominated by shareholders for election as directors. Also, such companies would be required to similarly include shareholder proposals related to the conduct of the election of directors.

If the SEC does not take action on the proposal until 2010, new rules will not be implemented for the 2010 proxy season. Public corporations on the calendar year will be holding annual meetings beginning in late March and April. The proposed SEC rules contemplate a deadline for shareholder nominees for director of 120 days prior to mailing of the proxy materials.1 For an April 2010 annual meeting, this deadline would be well in advance of SEC action on the rules.2 Although the final rules could impose shorter deadlines for nominations, we believe this is unlikely given the need to afford time for dispute resolution.

The comment deadline for the proposal was Aug, 17, 2009, with the proposal attracting significant comment. Many commenters argued that the proposal to mandate proxy access for shareholder nominees was flawed in that it would preclude "private ordering," that is, the federal requirement as proposed would override inconsistent provisions that a corporation's shareholders might adopt pursuant to their authority to amend the corporation's bylaws under applicable state corporation law, and would preclude a corporation's shareholders from voting to "opt out" of the federal regime. Commenters suggested that if rules were adopted by the SEC in the proposed form, they would be vulnerable to attack as beyond the SEC's regulatory powers. It has been speculated that the SEC is taking additional time on the proposal in order to adequately consider these arguments.

At this juncture, it is not known what form the final rules will take, or when such rules may be adopted. The SEC could adopt rules substantially as proposed, in which case shareholder proxy access for director nominees will be mandated under specified terms and conditions. This would leave no room for private ordering.

However, we believe that, given the compelling arguments in favor of private ordering made during the comment process, there is a reasonable likelihood that the final version of these rules will in some fashion permit variations from the federal regime. The delay in SEC action in our view suggests that these arguments are receiving serious consideration, which indicates that there very likely will be room for some form of private ordering in the rules as ultimately adopted. For example, it is possible that the final rules will mandate a default requirement, which may be varied by corporations in light of their particular circumstances. If such variance is permitted, it is likely that shareholder approval of the variance from the federal mandate will be required.

In light of the heightened possibility that private ordering will be permitted under the final rules, we suggest that, while awaiting the issuance of final rules by the SEC, it would be prudent for public corporations to begin to consider now what type of shareholder access mechanism may make sense for them, in their particular circumstances. Depending upon a particular company's annual meeting schedule, and the timing of SEC rulemaking, this could...

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