Research Update: Proxy Access (June 28, 2010)
U.S. House and Senate negotiators agreed last week to use language in the financial reform bill that will grant the SEC the authority to issue rules on proxy access, but without eligibility or other specific criteria defined by the U.S. Congress. House negotiators rejected efforts led by Senators Christopher Dodd and Charles Schumer to constrain the SEC's rule-making on proxy access by defining certain eligibility criteria. Sen. Dodd, in a provision detailed in the Senate's "Counter-Offer" of June 16, had initially pressed for amending: "Section 972 Proxy Access of the base text so that only shareholders that have owned not less than 5% of outstanding shares for not less than 2 years have access to the proxy." http://banking.senate.gov/public/_files/TitleIXcounter.pdf When House negotiators resisted (the 5% level in particular), Sen. Schumer floated an alternative proposal of 3% of O/S held for 3 years + a requirement that a shareholder nominating a director under proxy access provisions would have to maintain an ownership stake for 2 years following the meeting at which their nominee was elected to the board. The latter proposal marked a turning point in the process. House negotiators ended up rejecting all efforts to define eligibility criteria. House Financial Services Chairman Rep. Barney Frank reportedly remarked that "sentencing people to own shares is an odd concept" (Dow Jones, June 24).
The final language of the bill coming out of the conference committee reportedly includes a provision authorizing the SEC, if it chooses to do so, to exempt smaller companies from proxy access rules.
The SEC's proposing release on proxy access indicated that the Commission has been looking at a tiered approach to ownership requirements. Ownership thresholds could range from 1% to 5% of O/S – where the SEC asked for comments on whether to define the tiers based on SEC categorizations ["large accelerated filer, accelerated filer, and non-accelerated filer"] or by market capitalization or public float, "e.g., 5% for companies with less than $75,000,000 in public float." http://www.sec.gov/rules/proposed/2009/33-9046.pdf. However, there have been reports (rumors at this point) suggesting that SEC Commissioners are now at least considering a single ownership threshold (3% has been mentioned) instead of a tiered approach.
Looking Ahead:
Various reports indicate that the financial reform bill will be voted on by both the U.S. Senate and House in time for the President to sign the bill into law by July 4. Some have speculated that the SEC might follow up rather quickly by issuing a final rule on "facilitating shareholder director nominations" sometime next month.
Action Item:
While the exact mechanics of proxy access will remain uncertain until the SEC issues its final rule, the Rubicon has been crossed. It is time for companies to start thinking about conducting over coming months detailed Governance Risk Assessments examining the challenges that are likely to be presented by shareholders taking advantage of a proxy access rule in the 2011 proxy season. Indeed, the Wall Street Journal (WSJ.com) reported on June 18, 2010, that CalPERS, CalSTRS, and CII have already started building a database of potential shareholder director nominees (that is, to take advantage of expected rules on proxy access).
For more details on The Altman Group's Governance Risk Assessments, please contact one of our senior corporate governance experts:
Paul Schulman (TEL: 201.806.2206). E–MAIL: pschulman@altmangroup.com
Francis Byrd (TEL: 201.806.2220). E–MAIL:fbyrd@altmangroup.com
Reid Pearson (TEL: 678.919.7189). E–MAIL: rpearson@altmangroup.com