The Securities and Exchange Commission is meeting Wednesday to consider proposed proxy access rules that will allow shareholder nominations of board candidates and will require companies to print the names of such candidates directly onto corporate ballots. The rules are expected to pass through the Commission on a 3-2 vote, with the two sitting Republican commissioners voting no. However, based on recently-leaked details (the SEC has not yet officially released any details of the proposed rules), there may be reason to question just how broad the scope of the eventual proxy rules will be.
In order to prevent short-term or small-bore investors from sparking contested board elections, the proxy access rules are expected to require that investors own at least a 3% stake in a company for as long as three years before they can nominate candidates on the company’s ballot. At first blush, that seems reasonable enough. However, for the largest issuers, investors holding a 3% stake will amount to a very small pool indeed. The SEC had initially proposed a “tiered” approach that would have set the minimum stake at 1% for large companies, 3% for midsized companies, and 5% for small companies. That rule, however, has apparently been rejected in favor of a flat requirement.
Couple that with other details leaked today and the application of the rules get even narrower. An anonymous source tells Reuters that the SEC will likely grant a three-year grace period for “small companies” to comply with the proxy access rules. If that turns out to be the case, then, in the near term, the proxy rules will except the very companies most likely to have a significant pool of investors holding the minimum 3% stake to nominate board candidates. In other words, many investors seeking to take advantage of the new proxy rules may find themselves stuck in the middle – owning too little of the big fish to qualify for proxy access but, at the same time, unable to access the proxies of smaller companies for which they do own enough.
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