So, what just happened?

1. ❖The Dodd-Frank Act (DFA) mandated proxy access, and required the SEC to write the rules
   

2. ❖The SEC wrote the rules
   

3. ❖Two business groups sued the SEC to oppose the rules
   

4. ❖The business groups just won the first round of the lawsuit.
   

Plenty of jubilation (from business groups and corporate lackeys) and disappointment (from investor groups) followed. The SEC has some options, though, and there’s even a silver lining, pertaining to bylaw amendments that would basically allow the same thing.

An Interesting Decision

Soon after the SEC approved them, the Business Roundtable (trade group for big company CEOs) and the US Chamber of Commerce (everyone else) asserted in a lawsuit that the SEC’s rules did not consider all the costs to companies of proxy access. Novel grounds, as they could not question the right of the SEC to write the rules (DFA clearly required it).

To the surprise of very few, the DC Appellate Court agreed with the business groups. Various observers predicted this outcome once the court assigned judges to the case. Others, in hindsight, attribute the decision to politics as much as to legal reasoning.

Bylaw Amendments?

The ruling covers only one part of the DFA rulemaking, namely rules that implemented mandatory proxy access by statute. It did not cover rules that allow shareholders to propose company bylaw amendments that would provide for proxy access. This could be huge for investors.

Rather than follow the SEC’s (now vacated) rules, investors still can propose their own proxy access structure and process, as a bylaw amendment. This adds steps, of course, since investors will need to propose and approve the amendment, and then a year later nominate directors pursuant to the approved structure. The advantage is, it allows investors to pursue a more inclusive proxy access structure than the SEC would have allowed. And, most any investor (that is, one that has owned $2,000 in shares for a year) can propose it.

But, investors need to watch out. Companies have already started to develop ways to undercut a bylaw amendment, in part by proposing their own structure, more restrictive than what the SEC would provide. A company-proposed bylaw amendment would likely preclude consideration of an investor-sponsored one.

A Few Different Paths

The SEC has some choices:

1. ❖Abandon the regulations - unlikely given the DFA requirement
   

2. ❖Rewrite regulations - more likely, but it will take time given the considerable workload at the SEC
   

3. ❖Seek full review - most likely; the SEC can ask the full nine-judge court to review the decision of the three-judge panel that rendered the current opinion.
   

One observer encourages the SEC to act quickly to appeal the decision to the full court.

What Should Investors Do?

Clearly, bylaws amendments represents an enormous opportunity to influence corporate director elections, perhaps the most significant one in years. Some suggested steps:

1. ❖research company bylaws
   

2. ❖draft a suitable proxy access bylaw amendment
   

3. ❖understand the process for submitting bylaw amendment, including advance notice requirements
   

4. ❖understand the voting mechanics of winning a bylaw amendment vote.
   

Otherwise, it will take awhile for the SEC to issue a new version of the regulations, with better research that satisfies the objections of the CEO community and their supporting judges.