November 2011

Late last week, a shareholder activist filed, what is believed to be, the first proxy access resolution for this proxy season.  The target of the proposal, MEMC Electronic Materials, Inc., is an S&P 500 company that manufactures and sells wafers and related products to the semiconductor and solar industries.  As discussed in a previous blog post, while the U.S. Court of Appeals for the D.C. Circuit vacated the SEC proxy access rules, the Business Round Table and the U.S. Chamber of Commerce did not challenge the amendment to Rule 14a-8, which will allow shareholders to propose a process for the nomination of directors by shareholders. 

Beginning this proxy season, issuers will begin to receive proxy access proposals, which if passed by the shareholders, would allow for a shareholder nominating process beginning in 2013.  Unlike the process access rules proposed by the SEC, which would have limited nominations to shareholders who have held at least 3% of the issuer’s stock for at least three years, Rule 14a-8, as recently revised, allows activist shareholders to determine the requirements and the nominating process to be voted upon.  A nonprofit organization called the U.S. Proxy Exchange has published a model proxy access proposal to make it easier for activist shareholders to propose the required bylaw changes to allow for proxy access.  The MEMC shareholder proposal is based on that model proposal.  The model proposal urges an issuer’s board to adopt a proxy access bylaw that would permit director nominees from: any party of one or more shareholders that has held continuously, for two years, 1% of the issuer’s securities eligible to vote for the election of directors, and/or any party of shareholders of whom 100 or more satisfy SEC Rule 14a-8(b) eligibility requirements (i.e., those who have held at least a $2,000 stake for at least one year). The model proposal would also allow any such party to make one nomination or, if greater, a number of nominations equal to 12% of the current number of board members, rounding down.

While other issuers will likely receive proxy access proposals for this proxy season, we expect the over all number to be relatively low this year.  We would, however, expect the number of proxy access proposals to increase for the 2013 proxy season once the few “test cases” in this proxy season are resolved.

Section 1502 of the Dodd-Frank Act mandates the SEC to adopt rules requiring reporting companies to disclose whether certain minerals used in production chains originate from the Democratic Republic of the Congo or its neighboring countries. Minerals sourced from these areas of central Africa often fund militia and other military groups’ operations which have exacerbated internal conflicts and human rights violations. The goal of the recent legislation is to provide transparency to consumers to allow them to make certain choices with respect to the products that they purchase from public companies. Moreover, the disclosure requirements may encourage public companies to seek alternative sources, materials, or suppliers to project a more socially responsible image to consumers.

The SEC estimated approximately 1,200 companies would be affected by the new disclosure rules and would result in an increase in aggregate compliance costs of approximately $71 million. However, a recent Tulane University study argues that the SEC woefully underestimated this cost and that the actual cost is almost $8 billion. The study indicates that some of the reasons for the SEC’s underestimation include a flawed calculation of the number of affected companies, failure to account for the impact on suppliers or privately-held companies in an issuer’s supply chain, and inadequate estimates of costs for internal due diligence reform. Although final conflict mineral disclosure rules have not yet been promulgated, a bi-partisan congressional group has openly urged the SEC to promptly do so.

To view the SEC’s proposed conflict mineral disclosure rules, click here. To view the study conducted by Tulane University, click here. For more information, view Gustav Schmidt’s contact information by clicking here.