On July 22, 2011, the U.S. Court of Appeals for the D.C. Circuit vacated Rule 14a-11 in the case of Business Roundtable and Chamber of Commerce v. Securities and Exchange Commission. However, the court’s decision does not end the proxy access debate. On September 6, 2011, the Securities and Exchange Commission (the “SEC”) announced that it would not appeal the D.C. Circuit’s ruling, but instead would reinstate its amendments to rule 14a-8. Effective on September 14, 2011, the SEC adopted an amendment to Rule 14a-8 to prohibit companies from excluding proxy materials shareholder proposals seeking to establish procedures for director nomination or election.
As amended, Rule 14a-8 allows eligible shareholders to establish proxy access standards on a company-by-company basis, rather than the universal, mandatory approach under Rule 14a-11. While companies can still exclude shareholder proposals to remove directors or include specific nominees in the company’s proxy statement, shareholders now can submit for inclusion in a company’s proxy materials a proposal to amend the company’s governance documents to provide for proxy access or that requests the board of directors of the company to implement proxy access. Rule 14a-8 established a channel to enable proxy access, whereby shareholders with 1% of a public company’s shares or $2000 ownership for 1 year are eligible to submit a proposal relating to director elections. Since its amendment, there has been heated debates on the viability of Rule 14a-8 to facilitate private ordering in proxy access.
Would Rule 14a-8 Facilitate Proxy Access?
The major concern is that the SEC staff’s interpretation of Rule 14a-8 in practice would not give shareholders meaningful access to private ordering. One scholar, Gabriella Wertman, has argued that Rule 14a-8 does not facilitate proxy access because the SEC staff application of Rule 14a-8 precedents results in an easy-to-manipulate, systematic advantage for management that effectually strips shareholders of any meaningful opportunity. Drawing on the shareholder proposals in 2012 proxy seasons, Wertman supported her argument that a majority of proposals were challenged by management and then rejected by the SEC no-actions letters. Similarly, another scholar, Robert Jackson, worried that the SEC staff’s adherence to long-standing Rule 14a-8 precedents could give corporate management opportunities to exclude shareholders’ proxy access proposals by providing conflicting proposals.
Recently, the no-action letter issued to Whole Foods Market Inc. seems to have confirmed these concerns. The SEC seems to have allowed corporate management to exclude conflicting proxy access proposals under Rule 14a-8(i)(9) “if the proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting”. It is the first time that the SEC staff decided that corporate management could exclude shareholders’ proxy access proposals under Rule 14a-8(i)(9) due to an alternative proposal by the company. Further, it has been suggested that corporate management could also exclude shareholder’s proxy access proposal when the company has already substantially implemented the proposals under Rule 14a-8(i)(10).
No-Action Letters Issued by the SEC in 2012, 2013 and 2014
To verify Rule 14a-8’s viability to facilitate shareholders’ participation in director nomination, the no-action letters issued by the SEC are the sole sources of data. We obtained data from Division of Corporation Finance 2012, 2013 and 2014 No-Action Letters issued under Rule 14a-8 and searched for  companies that received proxy access proposals. A study of the no-action letters relating to proxy access proposals during the proxy seasons of 2013, 2013, and 2014 shows the following:
Table 1. No-Action Letters in 2012, 2013 and 2014
|2012||2013||2014 (till August 31)|
|Proxy Access Proposals||24||23||28|
|The SEC Staff Decisions||11 rejections
|Proposals Voted On||8||15||26|
In the 2012 proxy seasons, 15 out of 24 proxy access proposals submitted by shareholders were deemed excludable by the SEC staff based on drafting errors under Rule 14a-8 precedents. Among 11 rejections, five proposals were vague and indefinite regarding specific eligibility requirements, three proposals were conflicting, two were repetitive and one supplied incorrect information. Shareholders corrected these problems in the proposals submitted for the 2013 proxy seasons, and rejections from the SEC staff were reduced to only four proposals. The proxy access proposals made to the ballot double that of the 2012 proxy season. Among four rejections, three were vague proposals and 1one conflicting proposals. Among four majority votes, two out of four were from management proposals in 2013. In 2014, the trend continues. Only two no-action requests were made against 28 proxy access proposals, among which one was failure to satisfy stipulated ownership requirement. The number of proxy access proposals excluded by no-action requests plummeted in the 2014 proxy season, and the number of proxy access proposals from shareholders with Rule 14a-11 Formula received majority votes also doubled compared with 2013 proxy season. Importantly, three out of seven proxy access proposals were replaced by management proposals.
After 2012, the no-actions letters data supports that Rule 14a-8 no longer imposes technical barrier for shareholders’ proxy access proposals to make it to the ballot. In 2014, 26 out of 28 shareholder proposals were voted on at the ballot. Even though corporate management might have a systematic advantage to exclude shareholders proposals, Rule 14a-8 gives shareholders a chance to submit proxy access proposals and at least force corporate management to provide conflicting proposals at the ballot or substantially implement such proposals if corporate management wants to exclude shareholders’ proposals.
After shareholders adapted in 2012 to the drafting requirements under Rule 14a-8 precedents, Rule 14a-8 seems no longer pose a technical hindrance for proxy access proposals to make to the ballot. Public companies can still submit conflicting proposals or substantially implement similar proposals to reject shareholders’