In the wake of Business Roundtable v. SEC, public company shareholders and boards have, for the first time, been using Rule 14a-8 to propose, and defend against, proxy access proposals. Earlier this month, the SEC staff released a series of no-action letters addressing management requests to exclude shareholders’ proxy access proposals from the ballot. The staff has based these early rulings on their longstanding 14a-8 precedents, which were originally crafted to address proposals outside the proxy access context. The staff’s approach leaves open the possibility that management will be able to use these rules to exclude proxy access proposals in the future, endangering the viability of Rule 14a-8 as a means of facilitating private ordering in proxy access. Before next proxy season, the SEC should make clear that it will apply Rule 14a-8 in a way that will give investors a meaningful opportunity to adopt the proxy access rules that shareholders prefer.
Although the staff’s initial rulings addressed important preliminary questions raised by the use of Rule 14a-8 for facilitating proxy access, they were much more notable for their adherence to the staff’s existing precedents for evaluating shareholder proposals outside the proxy access context. This approach has convinced corporate counsel and their clients that the SEC will allow management to use these precedents to exclude proxy access proposals from the ballot. Unless the SEC reverses course, this approach will give management a systematic advantage that will prevent shareholders from adopting their preferred approach to proxy access.
Suppose, for example, that a company receives a shareholder proposal that would amend the company’s bylaws to permit a shareholder who has held 3% of the company’s stock for 3 years to nominate directors on the company’s proxy. Having received this proposal, management could then propose an amendment providing that only a shareholder owning 5% of the company’s stock for 5 years will have access to the ballot. Under existing SEC precedents, management could then exclude the shareholder’s proposal as “conflicting” with management’s own proposal. Indeed, corporate counsel have suggested that management will be able to use this approach to exclude proposals from the ballot next year.
If Rule 14a-8 is to give shareholders a meaningful opportunity to express their preferences on the rules governing shareholder access to the ballot, the SEC must recognize that its traditional approach in this area is unsuitable for proxy access proposals. In many contexts, such as proposals addressing questions of corporate social responsibility, it may well make sense for the SEC to permit the company to exclude shareholder proposals that “conflict” with management’s. But because access proposals, by definition, threaten incumbent directors’ seats on the board, allowing them to offer a “conflicting” proposal, and thereby prevent a vote on shareholders’ preferred access regime, would give management a systematic advantage in an area where their interests often conflict with shareholders’.
Giving management advantages of this kind would threaten the viability of Rule 14a-8 as a mechanism for facilitating proxy access. Before next proxy season, the SEC should make clear that its approach to shareholder access proposals under Rule 14a-8 will reflect the unique nature of those proposals, and that insiders will not be able to use traditional bases for exclusion to deny shareholders the right to choose the access regime they prefer. If, as many have suggested, the Commission instead gives management the power to set the agenda on proxy access, Rule 14a-8 is unlikely to succeed in facilitating private ordering in this important area.