Corporate Secretaries Society Opposes Proposed SEC Shareholder Access Rule 14a-11; Suggests Opt Out Alternative

The Society of Corporate Secretaries and Governance Professionals does not support the adoption of the SEC’s proposed shareholder access rule as currently proposed. In a letter to the SEC, the Society said that, if Rule 14a-11 is adopted, it should be modified to permit companies and their shareholders to opt out of Rule 14a-11 and adopt their own form of proxy access. In addition, the Society believes that proposed Rule 14a-11’s eligibility thresholds should be raised and its disclosure requirements enhanced. The Society does support amending the shareholder proposal rule, Rule 14a-8, to permit shareholders to propose proxy access bylaws for their respective companies.

Under the Society’s suggested approach, a company could propose a proxy access procedure to its shareholders, or shareholders could propose a proxy access procedure pursuant to the proposed amendment to Rule 14a-8. In either case, if such proxy access proposal receives the affirmative vote of a majority of the shares of stock present in person or by proxy and entitled to vote on the proposal, the proxy access proposal would apply in place of proposed Rule 14a-11.

Under the Society’s plan, shareholders could vote affirmatively that they do not want proxy access, or they could vote on procedures that would provide a level of proxy access that is more or less restrictive than Rule 14a-11. The Society believes that requiring shareholder approval of a board’s proposed proxy access procedures should alleviate concerns that boards might attempt to overreach in proposing such procedures, as shareholders would refuse to ratify such board proposed proxy access procedures.

Boards should be given the right to adopt or amend existing proxy access procedures, subject in every case to ratification by shareholders at the next annual meeting. In this way, boards could address issues and problems arising between annual meetings to preserve and enhance effective corporate governance, reasoned the Society, but would always be subject to the requirement of shareholder approval for their actions. The Society feels that this approach appropriately balances the SEC’s concern of ensuring proxy access is available to shareholders of public companies who desire it, while encouraging private ordering and enabling companies and their shareholders to make appropriate choices as to the form of proxy access best suited to their individual company.

The Society also asked that proposed Rule 14a-11 be amended to provide an exception for controlled companies. For this purpose, the Society asked the SEC to consider the definition of controlled company adopted by the NYSE in its Section 303A Corporate Governance Rules, under which a controlled company is a company where more than 50% of the voting power is held by an individual, a group or another company. NASDAQ has a similar rule. The Society said that this will minimize costs to the company for shareholder nominations that have little chance of success.

Proposed Rule 14a-11 provides that shareholders who beneficially own 1% of large accelerated filers or 3% of accelerated filers securities for one year may nominate a director and have their nominee included in the company’s proxy materials. Noting that these thresholds are too low, the Society suggested ownership thresholds of 5% of the company’s securities that are entitled to be voted on the election of directors at a meeting of shareholders for single nominating shareholders and 10% where a group of shareholders are nominating the director. In the Society’s opinion, the 5% and 10% thresholds are not so high as to impose undue impediments to proxy access, while being sensitive to the real costs that such proposals impose on a company and its shareholders. The Society pointed out that in the United Kingdom shareholders must own at least 5% of the company’s securities or be part of a group of at least 100 shareholders in order to submit a nominee for inclusion in the company’s proxy materials.

The Society also believes that it is very important that proposed Rule 14a-11 provide that the director nominee be independent of the nominating shareholder. Specifically, the Society recommends that the rule provide that the director nominee cannot be a nominating shareholder or a member of the immediate family of any nominating shareholder, or a partner, officer, director or employee of a nominating shareholder.

In the Society’s view, ensuring the nominee’s independence makes it less likely that proposed Rule 14a-11 will be used by shareholders seeking to control the company. In addition, independence will make it more likely that the shareholder nominee will discharge his or her fiduciary duties to all shareholders and not be unduly obligated to represent the interests of the
nominating shareholder.

Under proposed Rule 14a-11, the nominating shareholder that first provides notice to the company will be permitted to include its nominee in the proxy materials. However, the rule does not specify the earliest date that a nominating shareholder can file a notice on Schedule 14N. The Society believes that the proposal could have the unintended consequence of resulting in a race by shareholders to be the first to provide their notice to the company. This dynamic could discourage potential nominating shareholders from engaging in constructive dialogue with the board in an effort to achieve its objectives without a proxy access election contest.
The Society urges that the final rule provide for a specific window within which nominating shareholders can make a nomination pursuant to proposed Rule 14a-11, suggesting no earlier than 150 calendar days and no later than 120 calendar days before the date that the company mailed its proxy materials for the prior year’s annual meeting. In addition, the Society believes that, when there is more than one eligible nominating shareholder, the nominating shareholder with the largest holdings should be entitled to include its nominee in the company’s proxy materials.

The Society has asked for enhanced disclosure under proposed Schedule 14N, which is designed to provide information about the nominee and the nominating shareholder. Schedule 14N should require disclosure describing any material transactions between the nominating shareholder and the company within the past 12 months, as well as any discussion on the nomination between the shareholder and a proxy advisory firm. The Society would also like to see the disclosure of contacts with the management or directors of the company that occurred during the 12-month period that had nothing to do with the proposed nomination. Moreover, any holdings of more than 5% of the securities of any competitor of the company should be disclosed.

The Society also urged the SEC to require Schedule 14N disclosure of the items required by Item 4 of Schedule 13D regarding the purpose or plans of the nominating shareholder. This information would include any acquisition, merger or sale plans.Nominating shareholders that beneficially own 5% or more of a subject class of securities should have the option of disclosing this information on their Schedule 13D.

In the Society’s view, the time constraints of proposed Rule 14a-11 mean that the nominating committee will be unable to properly vet a shareholder nominee for inclusion in the company’s proxy materials. Yet, the proposal indicates that the company would have liability if it knows or has reason to know that the information is false or misleading. The company does not have sufficient time to investigate the statements made by the nominating shareholder and the nominee, said the Society, nor will it have the means to determine whether the statements are false or misleading. Thus, the Society urged the SEC to allow a company to explicitly state in the proxy statement that it takes no responsibility for the accuracy or completeness of the information supplied to it by the nominating shareholder or group or the nominee for director.

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