A Counterintuitive Reform: The Inherent Hindrance to Proxy Access in Rule 14a-8’s Pipeline

Abstract

Proxy access, a mechanism through which shareholders can place director nominees on the company’s proxy materials at the company’s expense, is an invaluable tool of corporate governance intended to keep boards accountable to their shareholders.  Recognizing the necessity of granting shareholders this power in the aftermath of the financial crisis, the United States Securities and Exchange Commission promulgated Rule 14a-11, which granted certain shareholders the right to place director nominees on the corporate ballot.  However, in the wake of the Business Roundtable challenge and the subsequent D.C. Circuit court of Appeals decision to vacate Rule 14a-11, proxy access for shareholders is now only available through the private ordering system of Rule 14a-8.  This Note systematically analyzes whether shareholder-sponsored proxy access proposals can operate efficiently within Rule 14a-8’s framework and its existing common law.  Although Rule 14a-8 is meant to equip shareholders with a vehicle to implement proxy access, this Note argues that shareholders will be unable to reap the benefits of proxy access unless the SEC takes concerted action to clarify how the rule will apply to proxy access proposals.  The current application of Rule 14a-8 common law to proxy access proposals results in an easy-to-manipulate, systematic advantage for management that will effectually strip shareholders of any meaningful opportunity to express their preferences on the rules governing shareholder access to the ballot.  Additionally, the lack of SEC clarification with respect to this issue is not only counterproductive to the intended reform, but also compromises the system as a whole and places its functionality for this purpose in serious question.  This Note identifies inherent issues that came to light after the 2012 proxy season regarding the application of the private ordering system to proxy access.  In this manner, it attempts to provide the framework for certain critical decisions the SEC will face before the next proxy season and encourages action by the SEC Commissioner to clarify for the staff, shareholders, and corporations that proxy access is unique and will operate differently within Rule 14a-8 than other shareholder proposals.