Establishing and maintaining proper corporate governance structures and compliance programs has always been fundamental to business strategy; however, continued regulatory changes and state law developments have greatly amplified their importance. Corporate directors should be aware of the following developments from the first quarter of 2012:
Proxy Access – SEC No-Action Letters
In the first quarter of 2012, at least 22 companies received “proxy access” proposals from shareholders proposing bylaw amendments that would require companies to include shareholder board nominations in company proxy materials, provided certain eligibility and procedural requirements were satisfied. Approximately half of these companies have filed no-action requests with the SEC to allow the companies to exclude the proposals from their proxy statements. In response, on March 7, 2012, the SEC staff issued a series of no-action letters addressing shareholder proxy access issues, granting relief in some cases and denying relief in others.
- No-action relief was granted in those cases where the proposal contained something “separate and distinct” from shareholder nominations, on the grounds that under Rule 14a-8(c) shareholders may not submit more than one proposal.
- The SEC also granted relief where the proposals failed to specify eligibility requirements, on the basis that they were “vague and indefinite” under Rule 14a-8(i)(3).
- The SEC denied no-action relief to companies arguing that a proposal was vague and indefinite under Rule 14a-8(i)(3) because it referred to a website that was not yet active (on the basis that the proponent had provided the company with the content that would be posted on the website).
- The SEC also denied no-action relief to a company asserting that a proposal had already been substantially implemented under Rule 14a-8(i)(10) in circumstances where the company had already adopted a proxy access bylaw but it had a higher ownership threshold than the shareholder’s proposal.
Although the current proxy season is nearly over, we can expect that proxy access will continue to be a key issue in 2013, and that future shareholder proposals will be tailored to address the defects identified by the SEC in its recent letters. Public companies without a plan for addressing shareholder proxy access proposals should consider how they intend to approach this new era of company-shareholder relations.
NYSE Limits Broker Votes on Governance Proposals
On January 25, 2012, the New York Stock Exchange announced that brokers may no longer vote on corporate governance proposals supported by company management without instructions from their clients. This is a significant departure from the historical practice of brokers using their discretion to cast votes on behalf of “street name” shareholders who fail to provide voting instructions with respect to what were previously viewed as “routine” matters. The NYSE’s new position will affect the voting dynamic on such matters as proposals to de-stagger a board, eliminating supermajority voting requirements, providing for the use of shareholder consents and rights to call a special meeting, among others.
SEC to Review Beneficial Ownership Reporting Rules
The SEC has announced that it is undertaking a broad review of its beneficial ownership rules to determine whether they should be updated in light of modern investment strategies and innovative financial products. Among other things, it will consider whether the 10-day initial filing deadline under Section 13D should be shortened, and whether beneficial ownership reporting should be expanded to include various types of derivative instruments. This is a long-term project for 2012, and the first step will likely be a concept release.
Abigail P. Bomba is a partner and Robert M. Blum is an associate in the Corporate Department at Fried, Frank, Harris, Shriver & Jacobson LLP.