Major Law Firms Oppose SEC Proposed Shareholder Access Rule

A consortium of major law firms has asked the SEC not to adopt proposed Rule 14a-11, the shareholder access rule, and instead to amend the shareholder proposal rule to permit shareholders to use Rule 14a-8 for proxy access proposals. Further, any prescriptive proxy access regime the SEC may adopt should permit private ordering under state law to allow shareholders to modify the SEC’s proxy access regime as they see fit, including by opting out of the regime in its entirety. The law firms that signed the comment letter are Skadden Arps, Wachtell Lipton, Cravath Swaine & Moore, Davis Polk & Wardwell, Latham & Watkins, Sullivan & Cromwell, and Simpson, Thacher & Bartlett.

In order to ensure workability and avoid the need for a special meeting of shareholders, the firms said that boards should be explicitly permitted to adopt or amend proxy access by-laws in the period between annual meetings, subject to shareholder ratification at the next annual meeting. The firms also urged the SEC to adjust upwards the ownership thresholds to determine eligibility to use Rule 14a-11 to 5% for individual shareholders and higher thresholds for groups of shareholders.

The law firms believe the SEC can achieve its goal of removing impediments in the proxy rules to proxy access by amending Rule 14a-8 to permit shareholder proposals relating to the election of directors with far less complexity and disruption than a prescriptive one-size-fits-all rule. SEC reliance on Rule 14a-8 would also show far greater deference to the value of private ordering under state law which has been the hallmark of the federal system of corporate regulation for decades.

Proposed Rule 14a-11 would have the practical effect of foreclosing much of the potential scope and utility of private ordering in an area of great complexity and factual variation. The proposal would preclude companies and their shareholders from adopting any form of proxy access that is more restrictive, thereby eliminating the flexibility and experimentation necessary to deal with the complex issues that inevitably will arise.

The workability issues do not have one obvious solution, according to the firms, but can rationally be resolved in a number of different ways, illustrating that a one-size-fits-all approach is inherently flawed as a regulatory model for proxy access. There are over 7,000 public companies that would be subject to proposed Rule 14a-11, the firms noted, and the appropriate form of proxy access will depend upon a number of factors, including a company’s state of incorporation, capital structure, board composition, shareholder base and governance practices.

The firms said a single, national prescriptive rule is neither adequate to address all of the issues and ambiguities that will arise nor readily adaptable to unique circumstances. Private ordering, on the other hand, not only allows flexibility of design but also provides an inherent capability of dealing with error, ambiguity and change of circumstance as companies and their shareholders gain experience with proxy access, without requiring the SEC to continually interpret and amend its access rules.

Private ordering under enabling state corporate statutes has proven responsive to changing shareholder views concerning other governance matters with meaningful changes such as the widespread adoption of majority voting and the elimination of classified boards. Delaware amended its corporate statute explicitly to enable the adoption of a by-law establishing a proxy access regime by board or shareholder action.

The firms also recommended that the SEC exempt controlled companies that are majority-owned by one or more shareholders from proposed Rule 14a-11. Since voting at these companies is predetermined through the sizeable voting block held by the controlling shareholders, subjecting those companies and their stockholders to the proxy access process would impose costs without any possibility of the shareholder nominee’s election.