Wednesday, August 25, 2010

SEC Adopts Proxy Access for Significant Long-Term Shareholders

Armed with specific congressional authorization, the SEC has adopted shareholder proxy access, which is shorthand for a framework of rules under which a shareholder may require the company to include in its proxy statement and proxy card a person nominated by the shareholder, and not by the board, for election to the board. This effort finds itself resting on an historical bedrock principle of federal securities regulation, which is that the proxy rules seek to improve the corporate proxy process so that it functions, as nearly as possible, as a replacement for an actual in-person meeting of shareholders. The Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the SEC to implement shareholder access to management’s proxy card to nominate directors for election to the board.

In the SEC’s view, to refine the proxy process so that it replicates, as nearly as possible, the annual meeting is particularly important given that the proxy process has become the primary way for shareholders to learn about the matters to be decided by the shareholders and to make their views known to company management. The proxy access rules are intended to remove impediments so shareholders may more effectively exercise their rights under state law to nominate and elect directors at meetings of shareholders. As far back as 1943, then SEC Chairman Ganson Purcell testified before Congress that the rights that the SEC is endeavoring to assure to the stockholders are those rights that they have traditionally had under state law.

Under new Exchange Act Rule 14a-11, companies would be required to include a shareholder nominee or nominees for director in company proxy materials if the shareholder meets certain conditions, and if the shareholders are not otherwise prohibited by applicable state or foreign law or a company’s governing documents from nominating a candidate for election as a director.

Shareholders would be eligible to have their nominee included on management’s proxy card if they own at least 3 percent of the total voting power of the company’s securities that are entitled to be voted on the election of directors at the annual meeting, shareholders would be able to aggregate holdings to meet this threshold, and have held their shares for at least three years. The shareholders would be required to continue to own at least the required amount of securities through the date of the meeting at which directors are elected. However, shareholders would not be eligible to use the rule if they are holding the securities for the purpose of changing control of the company, or to gain a number of seats on the board of directors that exceeds the number of nominees a company could be required to include under Rule 14a-11.

The proxy access rule would apply to all Exchange Act reporting companies, including investment companies, other than companies whose only public securities are debt securities. Smaller reporting companies would be subject to the rule, but it would not apply to them until after a three-year phase in period. Foreign companies that come within the definition of “foreign private issuer” are not subject to the SEC’s proxy rules and would not be subject to these new rules. Foreign companies that do not qualify as foreign private issuers would be subject to the rules.

A shareholder would be able to include no more than one nominee, or a number of nominees that represents up to 25 percent of the company’s board of directors, whichever is greater. For example, if the board is comprised of three members, one shareholder nominee could be included in the proxy materials. If the board is comprised of eight members, up to two shareholder nominees could be included in the proxy materials.

The nominee’s candidacy or, if elected, board membership must not violate applicable laws and regulations. The shareholder’s nominee for director must also satisfy objective independence standards of the applicable national securities exchange or national securities association. Neither the nominating shareholder nor the director nominee may have a direct or indirect agreement with the company regarding the nomination of the nominee. But there would be no restrictions on the relationship between the nominating shareholder and the nominee.

The nominating shareholder would be required to file with the SEC and submit to the company a new Schedule 14N, which would be publicly available on EDGAR. The Schedule 14N would require, among other things, disclosure of the amount and percentage of the voting power of the securities owned by the nominating shareholder, the length of ownership, and a statement that the nominating shareholder intends to continue to hold the securities through the date of the meeting. The disclosure provided in Schedule 14N would identify the nominee or nominees, would include biographical information about the nominees, and would include a description of the nature and extent of the relationships between the nominating shareholder and nominees and the company. In addition, Schedule 14N would require several certifications relating to eligibility and the accuracy of the information provided. A nominating shareholder could also include a statement of support for its nominee in the Schedule 14N.

The company would include in its proxy materials disclosure concerning the nominating shareholder, as well as the shareholder nominee or nominees, that is similar to the disclosure currently required in a contested election. As is the case when directors nominate candidates, the nominating shareholder or group would be liable for any false or misleading statements it makes about the nomination, regardless of whether the statements are included in the company’s proxy materials. A company will not be responsible for information provided by the shareholder and then reproduced in the company’s proxy materials.


For Rule 14a-11, shareholders must submit nominees no later than 120 days before the anniversary date of the mailing of the company’s proxy statement in the prior year. Shareholders will be able to submit nominees for inclusion in the next year’s proxy statement if the 120 day deadline falls on or after the effective date of the rules. For example, if the rules become effective on Nov. 1, 2010, Rule 14a-11 generally would be available at companies that mailed their proxy statement for their last annual meeting no earlier than March 1, 2010.

The SEC also amended Exchange Act Rule 14a-8(i)(8) requiring companies to include in their proxy materials shareholder proposals seeking to establish a procedure in the company’s governing documents for the inclusion of shareholder director nominees in company proxy materials. Currently, Rule 14a-8(i)(8) permits companies to exclude shareholder proposals that relate to elections. Under the amendment, this so-called election exclusion would be narrowed, thereby allowing in the proxy materials more shareholder proposals regarding elections.

Specifically, shareholder proposals by qualifying shareholders that seek to establish a procedure in the company’s governing documents for the inclusion of shareholder director nominees in company proxy materials would not be excludable under amended Rule 14a-8(i)(8). A company would not be required to include in its proxy materials a shareholder proposal that seeks to limit the availability of Rule 14a-11.



The Council of Institutional Investors and others maintain that the current federal proxy rules for the election of directors are flawed because they prohibit shareholders from placing the names of their own director candidates on proxy cards. Rather, in the United States, unlike most of Europe, the only way that shareowners can run their own candidates is by waging a full-blown election contest and printing and mailing their own proxy cards to shareowners. For most investors, that is onerous and prohibitively expensive.Shareholder proxy access is viewed as a sound corporate governance imperative. In the Council’s view, a measured right of access will invigorate board elections and make boards more responsive to shareowners, more thoughtful about whom they nominate to serve as directors and more vigilant in their oversight of companies. The

Consistent with good governance, the SEC is focused on removing burdens that the federal proxy process currently places on the ability of shareholders to exercise their basic rights to nominate and elect directors. The Commission believes that shareholder proxy access will facilitate shareholders’ ability to participate more fully in the debates surrounding the issues. To the extent shareholders have the right to nominate directors at meetings of shareholders, the federal proxy rules should not impose unnecessary barriers to the exercise of this right. Proxy access is consistent with investor protection, noted the SEC, since investors are best protected when they can exercise the rights they have as shareholders without unnecessary obstacles imposed by the federal proxy rules.

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