Back on September 10, 2010, we summarized new Exchange Act Rule 14a-11 relating to shareholder proxy access. Last week, in a panel discussion organized by the Practising Law Institute, several commentators predicted that the new rule will have a limited impact because of low shareholder utilization, for a number of reasons.
The panel featured Ann Yerger, executive director of the Council of Institutional Investors, Michael McAlevey, a vice president with General Electric Co., John Olson, a partner with Gibson Dunn & Crutcher LLP, and John White, a partner with Cravath, Swaine & Moore LLP. You can find a more detailed description of the panel discussion here in BNA’s Securities Litigation & Law Report.
As reported by BNA, the consensus of the panel seemed to be that Rule 14a-11 will be used by only a small number of shareholders forseveral reasons:
1. It will be difficult for shareholders to meet the 3% ownership threshold required by Rule 14a-11, and large shareholders that might more easily meet the threshold, such as money managers and mutual funds, are unlikely to take active roles in management and governance matters.
2. Hedge funds might be a category of shareholders that would be likely to use the new rule, but the rule requires shareholders to have held their stock for at least three years, which is much longer than the typical hedge fund holding period.
3. Rule 14a-11 requires a certification that the shareholder is not using the rule in an attempt to effect a change in control, which will prevent use of the rule in connection with takeover bids.
4. Shareholders that want to use the rule to include director nominees in proxy materials may have trouble finding director candidates that are willing to sit on a hostile board.
5. In the proxy materials, the company’s board can recommend against voting for a shareholder candidate, since nothing in the new rule prevents negative endorsements.
The panelists also noted that although public pension funds are expected to use 14a-11, they will likely only use it as a last resort when there are profound governance problems and other communications with boards have not been effective.
McAlvey also recommended that public companies examine their governance policies and revise them where necessary. For example, many companies may have policies that allow for action to be taken by a minority of the board of directors; these policies may need to be reconsidered in light of shareholder proxy access.
Check back at Dodd-Frank.com frequently for continuing updates on the implementation of Rule 14a-11 and other developments relating to the Dodd-Frank Act.