SEC Rule 14a-11 allowed a shareholder (or group of shareholders) to include a shareholder nominee, in certain limited circumstances, in a public company’s proxy statement. The Business Roundtable and the US Chamber of Commerce challenged the rule before the Court of Appeals for the District of Columbia. The Court of Appeals for the District of Columbia issued a decision which vacated Rule 14a-11.
The SEC has confirmed that it is not seeking rehearing of the decision vacating Rule 14a-11. Nor will the SEC seek Supreme Court review.
While the proceeding was pending, the SEC stayed application of Rule 14a-11, and an amendment to Rule 14a-8 which was adopted at the same time. Under the amendments to Rule 14a-8, eligible shareholders are permitted to require companies to include shareholder proposals regarding proxy access procedures in company proxy materials. The amendments to Rule 14a-8 were not challenged in the current litigation.
The SEC’s stay order provided that the stay of the effective date of the amendments to Rule 14a-8 and related rules will expire without further SEC action when the court’s decision is finalized, which is expected to be September 13. Accordingly, absent further Commission action, Rule 14a-8 will go into effect and a notice of the effective date of the amendments will be published.
More specifically, the amendments to Rule 14a-8 provide that public companies will no longer be able to rely Rule 14a-8(i)(8) to exclude a proposal seeking to establish a procedure in a company’s governing documents for the inclusion of one or more shareholder nominees for director in a company’s proxy statement.
The revisions to Rule 14a-8 are a potent weapon for activist investors that we have long advised clients could create far more issues than the now vacated proxy access rules. The reason is simple: There are no onerous ownership or length of holding thresholds. Under Rule 14a-8, a shareholder need only own $2,000 worth of stock and have held it for one year. Long time Rule 14a-8 activists like John Chevedden may have a field day. Well funded activists may become disruptive.
That being said, these new rules may be tempered by state law. For instance, for companies incorporated in the State of Minnesota, a shareholder must own 3% of the outstanding common stock in order to make a binding by-law proposal.
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