Editor: Todd, tell our readers about your background.
Lang: I received both my bachelor and law degrees at Yale. I've been with Weil, Gotshal & Manges since graduating from law school, and for many years co-managed the firm and headed its corporate, securities and M&A practice. I participate actively in many organizations, including committees of the American Bar Association and chair the Advisory Board for the Study of Corporate Law at Yale Law School. I co-chair the ABA Task Force on Shareholder Proposals which is a unit of the Federal Regulation of Securities Committee, Business Law Section of the ABA.
I do want to point out that the views expressed in this interview are strictly my own and not necessarily those of my firm, my partners or the clients of the firm, nor of any organization in whose activities I participate.
Editor: Describe the DC Circuit's recent decision (the Decision) to vacate SEC Rule 14a-11 (the Rule).
Lang: The Decision vacated the Rule as arbitrary and capricious under the standards of the Administrative Procedure Act. It found the economic analysis used to justify the Rule was faulty and not persuasive and that the information supplied about the effects on capital formation and efficiency failed to meet the required standards. The Decision observed inconsistencies in the SEC's rationale for various provisions and the fact that the SEC ignored important input from commenters.
The Decision also pointed out that the Rule should not apply to investment companies because they are separately regulated under the Investment Company Act and the need for proxy access with respect to investment companies has not been established. The court said that just as the Rule is arbitrary and capricious, it is even more so as applied to investment companies.
Editor: Do you have any indication as to what the SEC's reaction to the Decision might be?
Lang: A staff member of the SEC has expressed its disappointment in the Decision and observed that the amendment to Rule 14a-8, the shareholder proposal rule, adopted in connection with the proxy access Rule, is unaffected by the Decision. The SEC is evaluating the Decision and its impact on rulemaking in relation to proxy access and perhaps other rules including those mandated by the Dodd-Frank Act.
The SEC undoubtedly is evaluating the litigation aspects of the Decision, including its litigation alternatives. These include an appeal to the United States Supreme Court, rearguement before the panel and an application to be heard by the Circuit Court en banc. It also will consider the application of the stay that it granted in connection with the petition to the Circuit Court and whether that stay should continue in whole or in part in relation to further action or inaction by the Commission.
The Commission could reopen the rulemaking and seek to remedy the deficiencies found by the court. It could also propose new proxy access rules or choose to take no rulemaking action.
As part of the package of access rules, there was an amendment to the shareholder proposal rule, Rule 14a-8. The SEC could seek to permit that amended rule to become effective so that shareholders could use the corporation's proxy materials to propose bylaw or charter amendments providing access. There is a meaningful issue as to whether that is feasible because the SEC had stated that using the shareholder proposal rule alone would not achieve its goal in adopting the proxy access rule and that Rule 14a-8 is not a substitute or a means to having the proxy access rule be more restrictive. Rule 14a-8 as amended is deemed to be intertwined with the proxy access Rule. The petitioners in the case did not address the amendment to Rule 14a-8. Further, when it adopted the proxy access Rule, the SEC expressed its disagreement with many commenters who suggested that an amendment to Rule 14a-8 would be the best means to provide shareholder access. The SEC found this to be insufficient. Therefore, it is legally uncertain as to whether that amended rule would be effective assuming that the proxy access Rule remains vacated particularly since the amendment to Rule 14a-8 was not adopted on a standalone basis.
The SEC is undoubtedly concerned with the upcoming proxy season, the potential use of a shareholder proposal rule to establish a right of access and the uncertainty and confusion that may exist with respect to access. Some current rulemaking redefining the use of Rule 14a-8 in terms of proxy access may be practical but that will take some time for public comment and ultimate decisionmaking. The Commission's actions will be watched carefully in relation to the calendar.
From a substantive point of view, the Commission could consider more use of private ordering in establishing a right of proxy access as distinguished from prescriptive rulemaking. This would enable corporations to adapt proxy access to their individual capital structures and other arrangements. It also may expand the right of shareholders to use the corporation's proxy materials to establish a right of access through bylaw and charter amendments. At this juncture, prediction is not meaningful.
Editor: Will the SEC have the resources to do the things you mentioned to move proxy access along?
Lang: Some question whether the Commission has the budget and other resources to pursue proxy access because it has a very full plate of things to do, including adopting other regulations under Dodd-Frank. There is legislation filed by Sen. Baucus and others that would restructure the whole SEC.
I believe that the SEC does have the resources to take current action on proxy access, notwithstanding its other current commitments. Undoubtedly, its decisionmaking will be based upon what it perceives to be in the public interest, although increased revenue and personnel would facilitate this and many other tasks.
It is useful to bear in mind that the SEC received authority under the Dodd-Frank legislation to adopt a proxy access rule provided that it is either in the interest of shareholders or for the protection of investors. However, it is not mandated. Therefore, the decisionmaking on the best action to take is with the SEC.
Editor: What about the Delaware statute?
Lang: The Delaware statute authorizes proxy access; it doesn't set its terms. It simply provides that you can do it. What is needed is a proxy access bylaw or charter amendment. The ABA Task Force in 2009 proposed illustrative bylaws to establish proxy access. Its purpose was to inform as to the considerations involved in various elements of a proxy access bylaw with commentary as to the decisions to be made by the corporations adopting the bylaw in relation to its own structure and to avoid misuse. To the extent that private ordering is enabled by further SEC rulemaking, it is likely that illustrative model bylaws from various sources will be used to assist corporate and other advisors in establishing the terms of access.
Editor: Given the significant voting power of institutions, do you see the possibility that some corporations might even without SEC action go ahead and provide for proxy access by adopting a bylaw or charter amendment along the lines of that proposed by ABA Task Force.
Lang: On an overall bases, I am doubtful that such corporate action might occur at least until there is further indication as to the action to be taken by the SEC. While the SEC has been largely prescriptive in its proxy access rulemaking, subject to SEC rules, corporations on their own initiative need only conform to their governing documents and state laws to adopt access bylaws by director or shareholder action. Thus without SEC prescription, the SEC's further rulemaking may primarily affect or define the right of shareholders under Rule 14a-8 to establish proxy access through procedures set forth in a bylaw or charter amendment.
Editor: What impact will the principles laid down in the Decision have on rules adopted by the SEC and other agencies implementing Dodd-Frank?
Lang: There is no question that the Decision is significant in terms of establishing standards applicable to agency rulemaking. The extent to which other courts follow these standards or differ from them remains to be seen. It is reasonable to assume that some SEC Dodd-Frank rulemaking, past and future, may be challenged on the basis of the Decision. It also will be instructive to the agencies in terms of future rulemaking and therefore already has had an impact on such process.
Editor: Would all the efforts to vacate those rules go to the DC Circuit?
Lang: The DC Circuit is clearly an appropriate court given the fact that a good deal of rulemaking takes place in the District of Columbia. There is a meaningful body of decisions that deal with petitions to review regulatory orders of administrative agencies including the SEC.
Editor: I was fascinated by the DC Circuit's expression of concern about whether directors nominated by single issue groups like labor unions and state pension plans could truly represent the shareholders interests.
Lang: In the SEC's proxy access proposal in 2003, it required that nominees through the exercise of the right of proxy access be independent of the corporation as well as the sponsor. The obvious reason is the potential for control implications. The Rule does not require independence from the sponsor so that the nominee can be an official of a labor union or of a public pension fund or other similar sponsor. The Rule has the effect of treating all directors alike whether elected through the right of access or otherwise. It is, therefore, a judgment call as to the extent to which certain nominees may be more concerned with their own interests as distinguished from those of the shareholders.
Editor: Do you that think that the Decision will stimulate those who object to other Dodd-Frank regulations to appeal to the DC Circuit?
Lang: Each regulation has to be considered on its merits. Ordinarily one would presume deference to what an agency finds. On the other hand if a court, as the DC Circuit did in the Decision, finds flaws in the basis for an agency's actions, it can vacate the regulation. The Decision establishes high standards for regulatory rule adoption. Therefore, this will be a major consideration for those who seek to review or are affected by regulatory rulemaking.
Published September 1, 2011.
