The Securities and Exchange Commission has suffered a number of recent setbacks in areas ranging from enforcement policy to rulemaking. One of the most serious was the DC Circuit’s 2011 decision in Business Roundtable v. SEC, in which the court invalidated the SEC’s proxy access rule, Rule 14a-11, on the basis that the SEC had failed to conduct an adequate cost-benefit analysis. By imposing an onerous, and possibly insurmountable procedural burden, the decision threatens to paralyze rulemaking by the SEC and other administrative agencies. The effect is particularly troubling in light of the heavy rulemaking obligations imposed by Dodd-Frank and the JOBS Act.

In my article, The Long Road Back: Business Roundtable and the Future of SEC Rulemaking (forthcoming in Seattle University Law Review), I critically evaluate the Business Roundtable decision. Specifically, I argue that, although Rule 14a-11 suffered from a number of flaws, flaws I have noted in other work (see Fisch, The Destructive Ambiguity of Federal Proxy Access, 61 Emory L. J. 435 (2012)), the deficiencies in SEC’s rule-making that led to the adoption of Rule 14a-11 cannot accurately be ascribed to inadequate economic analysis. Nor is the demanding standard imposed by DC Circuit’s decision a product of the statutory constraints on SEC rulemaking. Rather it stems from the court’s skepticism about proxy access and the SEC’s policymaking generally.

The SEC’s inability to defend its proxy access rule against attack was, in part, a product of two important constraints on its policy formation – the notice and comment requirements of the Administrative Procedure Act and the Government in the Sunshine Act. Although commentators have defended both these requirements in terms of transparency and democratic values, they sacrifice consensus building as well as decision-making efficiency, and they allow for the increased influence of political forces and interest groups. These sacrifices are of particular concern in the context of SEC rulemaking and, I argue, were at the heart of a problematic Rule 14a-11.

…continue reading: Business Roundtable and the Future of SEC Rulemaking

As participants in the Forum know, SEC rule changes that took effect in September 2011 once again allow shareowners the right to submit and vote on “proxy access proposals” as we had done prior to an underground reinterpretation of SEC rules in 1990 and during a brief window of opportunity after AFSCME v AIG (2006). These proposals give shareowners the right to include director nominees in the company’s proxy materials. Arguably, the most innovative recent models of such proposals have now withstood the SEC “no-action” process and will soon come to a vote at Forest Labs (FRX) on August 15th, Medtronic (MDT) on August 23rd and H&R Block (HRB) on September 13th.

Download a PowerPoint presentation and/or read the paper (pdf) on these important proposals. All three proposals were introduced by long-time activist Kenneth Steiner, with the help of John Chevedden. Design of the proposal came from a team of United States Proxy Exchange (USPX) members, including James McRitchie, Glyn Holton, Brett Davidson, Steve Neiman, Daniel Rudewicz, Steven Towns and others, with helpful input from a variety of their contacts.

…continue reading: Proxy Access: Upcoming Votes at FRX, MDT and HRB

Pursuant to SEC rule changes that took effect in September 2011, shareholders are now permitted to submit and vote on “proxy access proposals” – that is, proposals to give shareholders the right to include director nominees in the company’s proxy materials. Over 20 such shareholder proposals (half of which were binding) were submitted during the 2012 proxy season, of which only eight have come to a vote. Many of the proposals that did not come to a vote were deemed excludable from proxy statements by the staff of the SEC for a variety of technical reasons. We have included on the following page a chart of the terms and outcomes of proxy access proposals submitted to date.

The vote results from this limited pool suggest that shareholders are hesitant to approve proposals that would give a proxy access right to holders of a small number of shares, but are more supportive of proposals that have ownership requirements that are similar to the 3%/3-year threshold that would have applied under the SEC’s now-vacated mandatory proxy access rule.

…continue reading: Proxy Access Proposals: Review of 2012 Results and Outlook for 2013

Testifying recently before a House Financial Services subcommittee, SEC Chairman Mary Schapiro stated that, because of capacity constraints, proposing a revised mandatory rule on shareholder access to company proxy materials is “not on the Commission’s immediate agenda.” She noted, however, that the issue is one that the SEC will “continue to look at over time.”

Last summer, the D.C. Circuit Court of Appeals vacated the SEC’s Rule 14a-11, finding that the SEC had “acted arbitrarily and capriciously” in adopting the rule without adequately assessing its economic effects. At the time, the SEC said that it was considering its options but noted that its changes facilitating private ordering in proxy access were not impacted by the Court’s decision.

In the current 2012 proxy season, less than two dozen companies have received proxy access proposals. This modest level of activity is in part explained by activist shareholders waiting to learn whether or not the SEC would be re-promulgating a mandatory rule. Because it is now clear that this will not happen, at least not for the 2013 proxy season, we can expect the focus on private ordering through shareholder proposals to continue and increase.

…continue reading: SEC Not Pursuing Mandatory Proxy Access at this Time

The Securities and Exchange Commission has announced that its revisions to the proxy rules to allow shareholders to propose proxy access bylaws and other election or nomination procedures will become effective shortly. The SEC had stayed the effectiveness of these changes to Rule 14a-8 pending the outcome of a judicial review of its mandatory proxy access rule, Rule 14a-11. On July 22, 2011, the U.S. Court of Appeals for the D.C. Circuit vacated Rule 14a-11, but the Rule 14a-8 changes were not litigated. The SEC’s stay order will automatically expire when the court decision is finalized, which is expected to occur on September 13, and the Rule 14a-8 changes will therefore become effective at that time absent further SEC action. The SEC stated that a notice of effective date will be published.

The SEC also confirmed that it will not seek a rehearing of or appeal the decision vacating Rule 14a-11. A statement by the SEC Chairman indicated that she remains committed to facilitating shareholder nominations of directors and that the SEC will continue to review the court decision and the comments received on their proposed rules in order to “determine the best path forward” on mandatory proxy access.

…continue reading: SEC to Allow Shareholders to Submit Proxy Access Proposals for 2012 Season

On July 22, 2011, the U.S. Court of Appeals for the D.C. Circuit issued a long-awaited decision in the case of Business Roundtable and Chamber of Commerce v. Securities and Exchange Commission, No. 10-1305 slip op. (D.C. Cir. Jul. 22, 2011), which vacated Rule 14a-11, the SEC’s shareholder access rule. By vacating the rule, the D.C. Circuit has dealt a significant blow to the SEC’s longstanding efforts to adopt a rule that would require, under certain circumstances, that public companies include in their proxy materials shareholder-proposed nominees to the board of directors. The decision also has import that goes significantly beyond shareholder access, as it will challenge the SEC (and, likely, other agencies) in assessing the economic consequences of future rulemakings. Nevertheless, the court’s decision does not end the shareholder access debate. Under an amendment to the shareholder proposal rule (Rule 14a-8) that was adopted last year at the same time as the shareholder access rule and voluntarily stayed by the SEC pending the outcome of the shareholder access rule litigation, shareholders may yet be able to submit shareholder proposals that seek to establish shareholder access regimes in 2012. The SEC has not yet indicated whether it will lift this stay, but there is no legal reason why it could not do so.

…continue reading: Implications of the Proxy Access Case

With the United States Court of Appeals for the District of Columbia Circuit having struck down Rule 14a-11 in Business Roundtable et al v. Securities and Exchange Commission (No. 10-1305, July 22, 2011), the question is where does proxy access now stand and what can now be expected?

The Court overturned the SEC’s attempt to give shareholders the right under the federal proxy rules to have their director nominees included in management’s proxy materials because of the SEC’s failure to adequately justify Rule 14a-11 on a cost-benefit basis. The SEC has several alternatives which undoubtedly are being considered. It could seek rehearing either by the panel or en banc or appeal the decision to the U.S. Supreme Court, it could amplify its analysis of the economic justification for Rule 14a-11 and readopt the rule, it could modify Rule 14a-11 and seek to justify the modification in a way that it believes will pass judicial scrutiny, or it could do nothing on Rule 14a-11 and let it disappear. Under any of these alternatives, the question is what will the SEC do about the amendment of Rule 14a-8, which offers another route to proxy access through shareholder proposals. The amendment has been stayed pending resolution of the court action challenging Rule 14a-11 and further notice from the SEC. Again, the SEC has several alternatives – it could lift the stay and let the amendment take effect as adopted or it could revisit the Rule 14a-8 amendment. I will not presume to predict what the SEC will do, or worse, tell it what it should do regarding Rule 14a-11. However, I have some observations regarding a path forward.

…continue reading: What Now For Proxy Access?

The paper, The Destructive Ambiguity of Federal Proxy Access, forthcoming in the Emory Law Journal, demonstrates the tension between the federal requirements for the exercise of shareholder nominating rights and the state law principles upon which the SEC purports to ground those rights. The paper unpacks the ambiguities in the SEC’s conception of which shareholders should nominate director candidates. And it highlights the ambiguity resulting from the SEC’s failure to confront, in adopting its rule, the appropriate allocation of power between shareholders and management and the effects of proxy access on that balance.

Under U.S. corporate law, the shareholders elect the board of directors. In most cases, however, those shareholders do not nominate director candidates. Instead, the nominating committee of the board chooses a slate of candidates, and those candidates are submitted to the shareholders for approval. Absent the infrequent phenomenon of an election contest, shareholders do not participate in the nomination process.

…continue reading: The Destructive Ambiguity of Federal Proxy Access

For seven years, the SEC deliberated whether to give shareholders direct access to the proxy statements mandated by federal law. After the Business Roundtable and others raised doubts about the SEC’s authority to adopt proxy access, Congress considered for nearly a year whether to intervene and mandate it by statute. In the end, Congress simply elected in the Dodd-Frank law to remove any doubt as to the SEC’s authority in the area. At long last, the SEC in September adopted Rule 14a-11, which requires public companies to distribute information about candidates nominated by shareholders that have held 3+% of the voting stock for 3+ years.

…continue reading: Law Professors Submit Amicus Brief in Proxy Access Case

This has been an eventful year in corporate governance. As companies prepare for the 2011 proxy season, it is important to review some of the legislative and regulatory events and key trends of 2010 that are expected to have an impact over the next year. Data from the last proxy season and the revised proxy policies of Institutional Shareholder Services (ISS) for 2011 both indicate that executive compensation will continue to be the main focus for shareholders in the New Year.

…continue reading: Focus in 2011 Will Remain on Executive Compensation