On September 20, 2011, the Securities and Exchange Commission (the “SEC”) published a notice in the Federal Register announcing that its previouslyadopted amendments to the shareholder proposal rule (Rule 14a-8 under the Securities Exchange Act of 1934) are now effective. The Rule 14a-8 amendments require public companies, under certain circumstances, to include in their proxy statements shareholder proposals seeking to establish procedures in the company’s governing documents for including a shareholder’s director nominees in the company’s proxy materials. Accordingly, shareholders may submit proxy access proposals for inclusion in 2012 proxy statements.

During the upcoming proxy season companies will not, however, be subject to Rule 14a-11, which would have permitted qualifying long-term shareholders to use a company’s proxy materials for nominating directors to a company’s board. This rule, adopted on August 25, 2010, has been vacated by the United States Court of Appeals for the District of Columbia Circuit (the “Court”). The SEC has announced that it will not seek a rehearing or appeal the Court’s decision.

For more information on Rule 14a-11 and related amendments, please see our September 2010 Securities Law Update entitled, “SEC Adopts Proxy Access Rules for Shareholder Director Nominations.”

SHAREHOLDER PROPOSAL RULE

In connection with adopting Rule 14a- 11, the SEC also amended Rule 14a-8, which previously allowed companies to exclude shareholder proposals relating to a nomination or procedure for nominating directors. The revised Rule 14a-8 gives a company the ability to exclude a director election proposal only if it:

• would disqualify a nominee who is standing for election;
• would remove a director from office before his or her term expired;
• questions the competence, business judgment or character of any nominee;
• seeks to include a specific individual in the company’s proxy materials for election to the board of directors; or
• could otherwise affect the outcome of the upcoming election of directors.

LITIGATION CHALLENGING THE PROXY ACCESS RULES

On September 29, 2010, the Business Roundtable and the United States Chamber of Commerce filed a petition with the Court seeking judicial review of Rule 14a-11 and filed a request with the SEC to stay Rule 14a-11 and its related amendments. On October 4, 2010, the SEC granted this request, staying the effectiveness of Rule 14a-11 as well as amended Rule 14a-8 pending the Court’s resolution of the challenge to Rule 14a-11.

VACATING PROXY ACCESS RULE

On July 22, 2011, the Court vacated Rule 14a-11, the proxy access rule, holding that the SEC “acted arbitrarily and capriciously… for having failed to adequately assess the economic effects of the new rule.” The Court agreed with petitioners’ argument that the SEC neglected both to quantify costs companies would incur in opposing shareholder nominees, as well as to substantiate the rules predicted benefits.

On September 6, 2011, SEC Chairman Schapiro announced that the agency would not appeal or seek a rehearing of the Court’s decision. At the same time, Chairman Schapiro reaffirmed her support for mandatory proxy access and suggested that the SEC may rewrite the regulation after staff consideration:

Chairman Schapiro cautioned, however, “I want to be sure that we carefully consider and learn from the Court’s objections as we determine the best path forward.”

IMPACT OF RULE 14A-8 ON PUBLIC COMPANIES

It remains to be seen whether shareholder activists will submit a significant number of proxy access proposals in advance of the upcoming proxy season. It may be that shareholder groups take advantage of the opportunity to implement proxy access through private ordering. In the alternative, shareholder groups may exhibit restraint under the theory that submitting proposals under Rule 14a-8 could dissipate some of the momentum towards a mandatory proxy access rule. Either way, large companies with a history of corporate-governance related issues can expect to receive the greatest number of proposals.

Proxy access proposals may be drafted as advisory (or “precatory”) resolutions or, if permitted under state law (as in Delaware), as binding bylaw amendments. Although shareholders might normally prefer a binding vote, Rule 14a-8’s 500-word limit may create a difficult drafting hurdle for proponents seeking to implement a well crafted bylaw. As a result, proxy access proposals may be largely precatory.

Shareholders will have to propose eligibility requirements for shareholders seeking to nominate directors. Rule 14a- 11 would have required nominating shareholders to have continuous ownership of a minimum of 3% of a company’s stock for at least three years. Shareholder proxy access proposals submitted for the 2012 proxy season are likely to contemplate more permissive eligibility requirements than under Rule 14a-11.

PREPARING FOR THE 2012 PROXY SEASON

Public companies should prepare for the 2012 proxy season by reviewing their particular board composition, governance policies and procedures, shareholder base and past concerns expressed by shareholders, including prior shareholder proposals and voting results, to determine the probability of receiving a proxy access proposal, its possible substance and the likelihood of shareholder support. A company may then devise a response strategy if it receives a proxy access proposal, but should keep in mind that any model strategy will likely require modification based on the specific proposal.

Companies may adopt their own versions of proxy access provisions to provide a basis to exclude shareholder proxy access proposals. This conduct could be premature, however, given that the SEC may adopt mandatory proxy access rules and because it is unclear how private ordering proxy access will develop, particularly with respect to shareholder support.