SEC Proposes Shareholder Access Rule Based on Minimum Time and Ownership Requirements

Against the backdrop of impending changes to the Delaware corporation code making it easier for shareholders to nominate directors to corporate boards, the SEC has proposed rules facilitating the rights of shareholders to nominate directors. Proposed rule 14a-11 would allow shareholders to include their nominees for director in the company's proxy materials if they have been shareholders of the company for at least one year and satisfy a minimum holdings test based on the company’s market value. The proposed rule would apply to all Exchange Act reporting companies, including investment companies.

Shareholders would be eligible to have their nominee included in the proxy materials if they own at least 1 percent of the voting securities of a large accelerated filer, which is a company with a worldwide market value of $700 million or more or of a registered investment company with net assets of $700 million or more. Shareholders of an accelerated filer with market value of $75 million to $700 million would need to own at least 3 percent of the voting securities in order to be eligible. For a non-accelerated filer with less than $75 million, the ownership requirement is 5 percent. Shareholders would be able to aggregate holdings to meet the thresholds.

Under the proposal, shareholders would be required to sign a statement declaring their intent to continue to own their shares through the annual meeting at which directors are elected. They would also have to certify that they are not holding their stock for the purpose of changing control of the company, or to gain more than minority representation on the board of directors.

The nominating shareholder would be required to file with the Commission and submit to the company a new Schedule 14N disclosing the amount and percentage of securities owned, the length of ownership, and intent to continue to hold the securities through the date of the meeting. The Schedule 14N would require a certification that the nominating shareholder is not seeking to change the control of the company or to gain more than minority representation on the board of directors. For its part, 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

The nominating shareholder would be liable for any false or misleading statements in information provided to the company that is then included in the company's proxy materials. The proposed rule would provide that the company will not be responsible for information provided by the shareholder, unless the company knows or has reason to know the information is false.

Under the proposal, shareholders could nominate no more than one shareholder 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 must satisfy objective independence standards of the applicable national securities exchange. Further, the nominating shareholder may have no direct or indirect agreement with the company regarding the nomination of the nominee.

Changes to the Delaware corporation code that take effect August 1, 2009 will make it easier for shareholders to nominate directors to corporate boards. A new Section 112 of the Delaware General Corporation Law clarifies that company bylaws may require, that if the company solicits proxies on an election of directors, the company may be required to include in its proxy materials one or more nominees submitted by shareholders in addition to individuals nominated by the board. Section 112 also identifies a non-exclusive list of conditions that the bylaws may impose on shareholder access to the proxy materials, including a minimum level of stock ownership and the duration of shareholder ownership