Shareholder Proposal Rule Amendments: The Rise of Private Ordering

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Contributed by Sanjay Shirodkar, DLA Piper and Arden T. Phillips, WGL Holdings, Inc.

Even though "proxy access" was halted in July by Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011), which overturned the Securities and Exchange Commission (SEC) proxy access rule, and the subsequent decision by the SEC not to proceed with reissuing that rule, the proxy access issue is not over.

The SEC’s amendments to Rule 14a-8, the shareholder proposal rule, and other rules originally adopted by the SEC on August 25, 2010, became effective on September 20, 2011, and shareholders may now decide, on a company-by-company basis, whether to adopt proxy access. The SEC had stayed the effectiveness of the changes to the shareholder proposal rule, along with the mandatory proxy access rule (Rule 14a-11) in October 2010 in response to the Business Roundtable lawsuit. Now that the amendments to Rule 14a-8 are effective, shareholders who otherwise satisfy the procedural requirements of the rule can propose amendments to an issuer’s governing documents that would establish procedures for nominating directors and disclosures related to such nominations. Consequently, "private ordering" options to adopt proxy access provisions pursuant to the shareholder proposal rule are available to shareholders of most calendar year companies. This article will review the background of the amendments to Rule 14a-8 and examine the potential impact the amendments are likely to have on the upcoming 2012 proxy season.



Prior to the amendments, Rule 14a–8(i)(8) allowed companies to exclude from proxy materials a shareholder proposal that relates to a nomination or an election for membership on the company’s board of directors, or a procedure for such nomination or election. This rule was amended by the SEC as part of a package of changes to the federal proxy rules that would have established a mandatory proxy access rule.


Impact of the Amendments to Rule 14a-8

The amendments to Rule 14a-8 give shareholders the ability to propose amendments that would establish proxy access standards on a company-by-company basis, in contrast to the mandatory, "one size fits all" proxy access rules provided in Rule 14a-11 that was vacated by the Business Roundtable decision. Therefore, subject to state law restrictions, shareholders can submit shareholder proposals, including binding bylaw amendments, to amend a company’s governing documents to establish director nomination procedures. This “private ordering” approach, which allows companies to adopt different rules (or to not provide for proxy access), was the preferred proxy access method of many Rule 14a-11 opponents. Foreign private issuers are not impacted by the amendments to the rule.

Amended Rule 14a-8(i)(8) codifies certain prior SEC staff interpretations and makes clear that a company may exclude a shareholder proposal 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 one or more nominees or directors;
  • seeks to include a specific individual in the company’s proxy materials for election to the board of directors; or
  • otherwise could affect the outcome of the upcoming election of directors.

The amendments did not change the deadlines for submission of shareholder proposals set forth in Rule 14a-8. The rule still requires a shareholder to submit the proposal no later than 120 calendar days before the anniversary of when the company released to shareholders its proxy statement for the prior year’s annual meeting. For most calendar-year companies, the deadline for submitting a shareholder proposal falls between November 2011 and January 2012. As a result, eligible shareholders still have time to submit proxy access proposals for the upcoming 2012 proxy season.


Private Ordering Proposals in the 2012 Proxy Season

The Council of Institutional Investors has indicated that its members are "ready and willing" to seek access to the proxy statements of public companies to nominate directors. However, since this is the first year and the deadline for shareholder proposals for many companies is rapidly approaching, it is too early to tell whether there will be a slew of such proposals.

In the longer run, it is possible that private ordering may lead to more shareholder nominations than would have resulted from Rule 14a-11, since the procedural requirements under Rule 14a-8 are significantly lower than the requirements of Rule 14a-11. It is important to note that before the SEC stayed the amendments to Rule 14a-8, shareholders widely supported the proxy access proposals on which they voted. This pattern is likely to repeat in 2012, especially if a company has other governance-related issues or disappointing stock performance.

Public companies have broad flexibility to design a proxy access mechanism that they believe will work best for their circumstances. In fact, there are some benefits to adopting such a mechanism, since a company may then be able to exclude a disfavored proposal under Rule 14a-8. Of course, there may be some uncertainty and risk associated with voluntarily adopting a proxy access system, including costs associated with designing the system, resources associated with gaining consensus from stakeholders as to the design, and the potential abuse of the system by shareholders with special agendas. Companies should discuss their circumstances with counsel.


Key Proxy Access Mechanism Issues to Consider

There are three principal issues that a company adopting a proxy access mechanism should consider:

Threshold shares. How many shares should the shareholder own to be able to submit a nomination? Under the invalidated Rule 14a-11, a shareholder needed to own at least three percent of the outstanding shares of the company in order to submit a proposal.

Duration. How long should the shareholder own the threshold shares before it can submit a nomination? Under the invalidated Rule 14a-11, a shareholder needed to own the threshold shares for a period of three years.

Other. Should there be any other limitations, like specific nominee qualifications or lack of control intent, subject to any state law requirements?


What Steps Should a Company Take Now?

Companies should begin considering the best way to address shareholder proxy access proposals in light of their individual circumstances. The first step in any such analysis is to seek advice from legal counsel and other advisers. The following steps should also be considered:

Annual meeting timeline. Review the preparation timeline for your annual meeting, including the deadline for submitting shareholder proposals pursuant to Rule 14a-8 and the company’s bylaws.

Educate the board. Educate the board of directors and senior management about the possibility of a proxy access proposal. Discuss the potential preemptive adoption of management sponsored proxy access bylaw provisions, the benefits of such an approach and the steps through which this process would be implemented. Determine the company’s strategy if it were to receive an access nomination.

Corporate governance documents. Review the company’s advance-notice bylaws and procedures for shareholder nomination of directors, including the requirements for disclosure of relationships, financial or otherwise, that a proponent or its affiliates may have with its director nominee. Identify any areas that are likely to subject the company to additional scrutiny, including matters related to executive compensation and board-related issues.

Nominating committee process. If adopted by stockholders, proxy access provisions are likely to impact the manner and the process followed by a nominating committee for director nominations. Accordingly, committee members should be particularly sensitive to the key aspects of the changes that might impact a company. Prepare a detailed game plan setting forth the steps the company might take if it receives an access nomination proposal. Review the procedures for vetting shareholder nominees.

Investor relations. Companies should develop general talking points relating to proxy access for their investor relations department.



The amendments to Rule 14a-8(i)(8) give shareholders the ability to propose changes to a company’s governing documents relating to the director nomination process on a company-by-company basis. Supporters of private ordering advocate that these amendments further state law interests and enable companies and their shareholders to tailor a proxy access system to the unique needs of individual companies.

It will take a number of years before any clear best practices emerge from the private ordering system and that preemptively adopting a management-sponsored access bylaw provision may not be the best answer for all companies. However, by taking the steps outlined above, companies may devise dynamic strategies to respond to shareholder proposals in this evolving area.

Sanjay Shirodkar is Of Counsel in DLA Piper’s Public Company and Corporate Governance practice and advises companies on a range of disclosure, corporate governance, fiduciary duty, stockholder, and analyst relations issues. He previously served as Special Counsel with the SEC where he handled a variety of matters related to shareholder proposals, disclosure, and general governance issues. Mr. Shirodkar can be reached at (410) 580-4184 or

Arden T. Phillips is Corporate Secretary and Governance Officer of WGL Holdings, Inc. and its utility subsidiary, Washington Gas Light Company. He plays an integral role in coordinating the actions of directors, and advising management and the board on disclosure rules and corporate governance matters.  


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