Wait, how could that be? Everything we’ve heard points to a huge win for corporations, right?

Not so fast. How about investors designing their own proxy access rules? Yes, it’s true. Despite all the uproar, rules allowing proxy access bylaw amendments survived the fight between the SEC and the Business Roundtable and the US Chamber of Commerce. Here’s what happened, why it’s probably better than the now-vacated proxy access rules, and how smart investors can take advantage.

So, how did this happen?

Let’s start from the beginning. Since the 1940s, Section 14a-8 of SEC proxy regulations permit investors to include their own matters in the proxy materials for corporate annual meetings. So, corporations must feature shareholder resolutions and bylaw amendments in their proxy materials.

With one notable exception: corporations can exclude a proposal that “relates to” BoD elections. This came to encompass proposals for shareholder nominees to the BoD, and proposals for bylaw amendments that pertain to BoD elections. So, corporations could exclude bylaw amendments that address director qualifications, election procedures, and of course whether the corporation must include shareholder nominees on proxy materials.

Dodd-Frank to the Rescue

DFA requires corporations to allow shareholder nominees on proxy materials. The SEC wrote two sets of rules setting forth how this would work:

1. 1.Requirements that corporations put certain shareholder nominations in the proxy materials (usually thought of as “proxy access”)
   

2. 2.Requirement to allow shareholders to propose bylaw amendments that will allow proxy access (call it a “proxy access bylaw amendment”, PABA for short, maybe it will catch on).
   

The recent DC Appellate Court decision vacated 1. It didn’t really touch 2.

Just Like Other Shareholder Proposals

Proxy access bylaw amendment proposals follow the same rules; the shareholder must own $2,000 worth of stock for the year preceding the date he or she submits the proposal. That’s really it.

We have a bit of history on this, too. Shareholders at Hewlett-Packard and United HealthCare submitted PABA proposals in 2007. Then, a court decision interpreting SEC rules created an oh-so-brief window for filing these proposals. The SEC closed the window quickly, though.

Corporations make life difficult, though, for investor proposals. PABA proposals will suffer similarly. Investors will confront advance notice requirements, limits on supporting statements, and elaborately worded objections from the BoD. No one said it would be easy, just easier than before.

Advantages of PABA Proposals

Now it gets interesting. Investors can propose whatever proxy access rules they want:

1. ❖No minimum shareholding amount (the SEC proposed 3%)
   

2. ❖No minimum shareholding period (SEC proposed one year)
   

3. ❖No limit on the number of “proxy access directors”, or shareholder-nominated directors (the SEC limited these to 25% of the total board).
   

The PABA concept does delay change in a BoD, though. A bylaw amendment that wins approval in 2012 could take effect immediately. Investors could then include their nominees in the proxy materials starting the following year, say in 2013.

Winning Won’t be Easy

Corporations have all manner of ways to head off a PABA. First, it’s one thing to include a PABA in the annual proxy materials. It’s another to win the votes needed to approve it. Corporations have different standards for the vote needed to approve any shareholder-sponsored bylaw amendment, with 39% of the Russell 3000 companies calling for a supermajority vote. Also, corporations typically count votes relative to shares outstanding, rather than shares voting, making it even harder to win.

An even more insidious tactic has emerged, too. Some corporate lackeys recommend that corporations adopt their own PABA in advance of shareholders proposing one. A corporation can adopt a very restrictive structure (say, requiring an investor to own 10% of the shares for a five-year period) as a proposal for the proxy materials. The SEC then allows the corporation to exclude shareholder proposals that address the same subject.

And, we need the SEC actually to implement the PABA rules. The SEC stayed enforcement of the rules pending the outcome of the lawsuit with the Business Roundtable and the US Chamber of Commerce. The SEC has yet to lift the stay.

How to Do It

Shareholders that want to propose a PABA should keep these items in mind:

1. ❖Understand the corporate bylaws, and identify the section(s) that a PABA would amend
   

2. ❖Determine the advance notice requirements for submitting shareholder proposals. For companies with annual meetings in Spring 2012, most will require notice of the PABA proposal by around December 1.
   

3. ❖Draft the actual amendment, say with the Hewlett-Packard and United HealthCare proposals as good examples.