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The
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What’s
to Fear in Proxy Access?
Article published on August 30, 2010
By
Kristin Gribben
Reactions were mixed to the
SEC’s approval last week of a proxy access
rule,
capping years of contentious debate over the issue.
Although on principle corporate directors and executives might not be
thrilled with the new SEC mandate, they also might not have much cause for
concern, at least not those at larger companies.
By a vote of 3 to 2, the SEC approved final rules that allow shareholders
with at least 3% holdings for three years to nominate their own director
candidates on the company ballot to replace up to 25% of the board.
For larger companies, the final rule is more corporate-friendly than the
proposal, which had called for 1% holdings for one year at companies with a
market capitalization over $700 million. For smaller companies with a market
cap under $75 million, the holding requirement under the proposal was 5%.
While the final rule is tougher on smaller companies, it provides for a
three-year exemption period to weigh the impact of the proxy access rules on
larger companies.
“Three years is definitely good for a public company — not as good as not
adopting the rule at all, but the longer the better,” says Patrick
Quick, a partner at Foley & Lardner.
Shareholder advocates had mixed reactions to the rule. While they were
largely disappointed with the 3%-for-three-years restriction, they were
happy to even be granted proxy access at all.
It will be challenging for activist investors such as public pension funds
to meet the threshold requirement, explains Amy Borrus,
deputy director at the Council of Institutional Investors.
However, she says she doesn’t think it will be impossible.
Ricardo Duran, a spokesman at Calstrs,
says that while it will be difficult to meet the 3% holding for three years
in the large-cap segment of its portfolio, “Calstrs officials feel that it
can be achieved.”
In an Aug. 12 letter to the SEC, several state pension funds illustrate the
difficulties of meeting the 3% threshold, particularly with large-cap
companies. The funds claim it would take 20 of the largest public pension
funds that have stock in Goldman Sachs Group to hold in
aggregate 2.88% of the company’s securities. What’s more, Calpers
has released prior data showing the 10 largest public pension funds
together hold less than a 2.5% stake at Bank of America,
Microsoft, IBM and Exxon Mobil.
Lawyers say that because public pension funds are less likely to have the
requisite holdings at large-cap companies, smaller and midsize companies are
more likely to be targets of proxy access. Companies with a market cap under
$75 million have a three-year reprieve from the new rules. SEC Chairman
Mary Schapiro said changes to proxy access could be made in
that time period depending on how the new rules play out at larger
companies.
While hedge funds aren’t likely to meet the long-term holding requirements
the proxy access rule requires, another type of investor that might be
likely to use proxy access could be a disgruntled former executive who still
holds a large amount of company stock, says Sanjay Shirodkar,
of counsel at DLA Piper and former special counsel with the
SEC. That scenario is also more likely to occur at smaller companies, he
says.
Another possible, though perhaps unlikely, scenario is if a shareholder
files a proxy access proposal that calls for an even less restrictive form
of proxy access at a company. Last week, the SEC also voted to allow these
types of proposals. However, a majority of shareholders would have to
approve such a proposal and it would most likely be non-binding on the
company.
Shareholders of companies that mailed their proxy statements for their last
annual meeting no earlier than Feb. 20, 2010, will be eligible to submit
director nominees for 2011 meetings. Shareholders that intend to submit a
director nominee must provide the company with a 120-day advance notice from
the anniversary of the company’s prior-year mailing of the proxy statement.
Legal Challenges Coming?
The SEC held off on determining a final proxy access rule until the
Dodd-Frank financial reform bill passed, which gave the commission authority
to draft federal rules governing director elections. Some legal scholars
view this as a states’ right. Commissioner Kathleen Casey,
who voted against the proxy access rule, said today that even though
Congress gave the SEC authority, she thinks a legal battle is likely.
“I believe the rule is so fundamentally and fatally flawed that it will have
difficulty facing judicial scrutiny,” Casey said.
Commissioner Elisse Walter countered by saying in her
remarks, “I for one never doubted our authority… but I am quite pleased
Congress clarified [it].”
The U.S. Chamber of Commerce is considering taking legal
action against the new proxy access rule, says Tom Quaadman,
vice president for the business group’s capital markets center. While
Chamber officials believe Dodd-Frank protects the SEC on the
state-versus-federal issue, the business group is considering challenging
the new regulation on the grounds that the agency acted in an arbitrary and
capricious manner when drafting the rules. The SEC doesn’t appear to have
taken into account the opinion of the business community or other outside
voices that were against a proxy access rule, says Quaadman.
The chamber has sued the SEC before and won. Shirodkar, the attorney at DLA
Piper, says the case would probably go to the D.C. circuit court, which is
known for sometimes deciding against the SEC. For instance, earlier this
month, the D.C. circuit sent the SEC’s order approving the NYSE Arca
ArcaBook fees rule back to the agency for further consideration because the
SEC did not sufficiently explain the basis of its approval and did not
support its conclusion with adequate evidence.
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