The Securities and Exchange Commission, the federal agency responsible for protecting the nation’s investors, first proposed proxy access rules in May 2009 in order to give shareholders of publicly traded corporations the right to nominate directors on the company ballot. After the subsequent enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC was granted explicit authority under Section 971 of the act to amend Section 14a of the Securities and Exchange Act of 1934 in order to implement access requirements. The SEC, in a 3–2 vote on August 25, 2010, approved the Exchange Act Rule 14a-11 mandating that shareholders of corporations be eligible to have their nominee listed in proxy materials if they owned a minimum of 3 percent of common shares for at least three prior years.

Following the adoption of the rule, the Business Roundtable and the U.S. Chamber of Commerce filed a petition with the U.S. Court of Appeals for the District of Columbia challenging the rule’s legality. The D.C. Circuit, in a July 22, 2011 decision, vacated the rule, saying that the SEC failed to analyze its costs and benefits as required by Congress. In writing for the Court, Judge Douglas H. Ginsburg held:

[T]he Commission acted arbitrarily and capriciously for having failed once again—as it did most recently in American Equity Life Insurance Company v. SEC…, and before that in Chamber of Commerce…—adequately to assess the economic effects of a new rule. Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commentators.

Despite its continuing commitment to finding a means of facilitating shareholder director nominations, the SEC formally announced on September 6, 2011 that it would not seek immediate review of the Court’s decision, an indication that it took the Court’s harsh criticism as final. Furthermore, when questioned on April 25, 2012 before the House Committee on Financial Services, SEC chair Mary Schapiro answered that proposing a revised mandatory rule on shareholder access to company proxy materials is “not on the Commission’s immediate agenda,” although she did indicate that it was an issue that the SEC will “continue to look at over time.”

Private ordering of proxy access | The Court’s decision to vacate the rule did not affect the SEC’s amendments to Rule 14a‑8(i)8 (adopted in conjunction with Rule 14a-11) facilitating “private ordering” in proxy access, since it was not the subject of the litigation. Many corporate governance reform advocates had supported this private ordering (versus a mandatory rule) to the existing shareholder proposal rule during the course of the original SEC rulemaking process.

Under the amendments to Rule 14a‑8(i)8, a corporation may no longer exclude a proposal that would amend or request that a corporation consider amending governing proxy materials to facilitate director nominations by shareholders, or disclosures related to shareholder nominations, as long as such a proposal is not otherwise excludable under some other procedural or substantive basis. Thus, since September 13, 2011, shareholders have had the opportunity to establish proxy access standards on an individual corporate basis, rather than the “universal” requirement instituted under the vacated Rule 14a-11.

Sullivan and Cromwell, a global law firm headquartered in New York City, recently issued a memorandum that compiled data on proxy access proposals submitted through June 30, 2012 to companies in Standard and Poor’s 500-firm index. The data were compiled by corporate governance research and consulting firms FactSet, SharkRepellant, and Institutional Shareholder Services, as well as Sullivan and Cromwell’s own review of public filings. The results of their study show that 23 proxy access proposals were submitted during the last proxy season, with only nine actually being voted on. Of the 14 proposals not voted on, eight were deemed “excludable” after review by SEC staff—because of “multiple proposals submitted” (when only one is allowed per voting session) or “vague due to 14a‑8 reference” (a procedural or substantive issue)—with the remainder either withdrawn (two), pending for a future meeting (two), not voted on (one), or not presented at the annual meeting (one).

Of the nine proposals voted on, only two nonbinding on the board passed with over 50 percent of shareholders’ support: Chesapeake Energy, with 60 percent shareholder support, and Nabors Industries, with 56 percent shareholder support. Both Chesapeake Energy’s and Nabors Industries’ proposals were for a minimum of 3 percent of common shares for at least three prior years, identical to the vacated “Exchange Act Rule 14a-11.” Those seven proposals not passed with a majority of shareholder support were for a minimum of 1 percent of common shares for at least one year (four firms); a minimum of 1 percent of common shares for at least two years (two firms); or a minimum of 2 percent of common shares for at least one year (one firm).

The 2013 proxy season | With such a small number of proxy access proposals submitted, and an even smaller number voted on, tentative conclusions can be inferred from the first year’s data of the amended Rule 14a‑8(i)8.

First, if there was hesitation on the part of shareholder activists to submit proxy access proposals with S&P 500 firms during the past year—because they were expecting a renewed effort to institute a revised rule that would pass scrutiny with the D.C. Circuit—that expectation was dashed by Schapiro’s statement that a mandatory rule consideration is “not on the Commission’s immediate agenda.” This statement will certainly energize the shareholder activist community’s efforts to increase the number of proxy access proposals in the 2013 proxy season.

Second, studying issues arising from SEC staff review exclusions of proxy access proposals will be a steep, yet attainable, learning curve for shareholder activists. Therefore, this challenge should not be a formidable barrier to shareholders actually voting on such proposals in the upcoming year.

Third, the results of the first-year proxy access proposal votes found that no binding proposal garnered majority shareholder support. If shareholders want to grant specified proxy access to nominate directors, will they want binding or non-binding proxy access?

Last, the issue of acceptable proxy minimum thresholds remains unresolved. While the two nonbinding proxy access proposals that passed with majority shareholder support mirrored the SEC’s percentage of minimum outstanding shares (3 percent) and holding periods (three years), many corporations lobbied for a 5 percent minimum threshold of outstanding shares, while other investors recommended only a 1 percent minimum threshold of outstanding shares during the SEC’s Exchange Act Rule 14a-11 rulemaking process.

Is proxy access a burning issue with U.S. shareholders? This question is still to be resolved. In the short term, however, a renewed effort by knowledgeable shareholder activists to significantly increase the number of proxy access votes is on tap for the upcoming season of annual board meetings. Furthermore, the next proxy season should be a harbinger for what proxy access thresholds will emerge when actively exercised through the private ordering process.