The SEC recently released proposed amendments to the proxy rules that would increase shareholder access to issuer proxy materials.1 The proposed rules would require issuers to include board of director candidates nominated by shareholders within their annual meeting proxy materials if certain conditions are met. They also would require issuers to include shareholder proposals amending, or requesting amendment to, the issuer's organizational documents — its articles of incorporation, bylaws, or similar documents — regarding procedures for nomination or related disclosures. The proposed rules would provide as follows:
Shareholder nominee disclosure. Unless state law or a company's organizational documents prohibit shareholders from nominating directors, companies would be required to include shareholder nominees for the board of directors within their proxy materials. This requirement would apply to all companies with a class of equity that is publicly traded and, in contrast to some earlier proposals on proxy access, would be effective without the need for a preceding triggering event.
Eligible shareholders. Only shareholders meeting certain ownership amount and holding period thresholds would be eligible to have disclosures about their nominees included in company proxy materials.
Ownership amount threshold. The nominating shareholder or group would be required to beneficially own, individually or in the aggregate, at least (i) one percent of the company's securities if the company is a large accelerated filer or a registered investment company with net assets of $700 million or more, (ii) three percent of the company's securities if the company is an accelerated filer or a registered investment company with net assets of $75 million or more but less than $700 million or (iii) five percent of the company's securities if the company is a non-accelerated filer or a registered investment company with net assets of less than $75 million. Shareholders would be permitted to aggregate their securities with other shareholders in order to meet the applicable minimum ownership threshold, without losing their eligibility to file on Schedule 13G.
Holding period. For purposes of determining the ownership threshold, the nominating shareholder or group would be required to have beneficially owned their securities continuously for at least one year.
Intent to hold. The nominating shareholder or group would be required to represent that it intends to continue to own its securities through the date of the annual or special meeting of the shareholders.
Notice and Certification. To submit a nominee for inclusion in the company's proxy materials, the nominating shareholder or group would be required to provide notice on Schedule 14N to the company and the SEC of its intent to require that the company include that shareholder's or group's nominee in the company's proxy materials. The notice would need to be sent in accordance with the company's advance notice provision of its bylaws or, if the company has no advance notice provision, 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 to information relating to ownership and eligibility, the Schedule 14N notice would require a certification from the nominating shareholder that it is not holding its securities for the purpose of or with the effect of changing control of the company or to gain more than a limited number of seats on the board.
Maximum number of shareholder nominees. Companies would not be required to include disclosures about shareholder nominees for more than 25 percent of the company's board of directors (rounded down to the nearest whole number, but not less than one). Application of the 25-percent limitation would not be modified for companies with staggered boards: the number of shareholder nominees requiring disclosure would be determined with respect to the company's entire board, despite the fact that only a subset of the board is up for election in any given year. (A shareholder nominee's election to a staggered board would reduce the number of other shareholder nominees for whom disclosure is required in future elections during the director's term. However, inclusion in a given year of a shareholder nominee who is not elected would not reduce the maximum number in future elections.) If nominations exceeding the 25-percent limitation are received from more than one shareholder or group of shareholders, the nominee or nominees of the eligible shareholder or group whose nominations are first received would need to be included.
Consistent with applicable law and regulation. A company would not be required to include a shareholder nominee in its proxy materials if applicable state law or the registrant's organizational documents prohibit the company's shareholders from nominating a candidate or if the nominee's candidacy or board membership would violate controlling state law, federal law, or the rules of a national securities exchange or national securities association. Shareholder nominees also would be required to satisfy the independence requirements of the applicable national securities exchange or national securities association.
Relationships between the nominee, nominating shareholder or group, and the company. The nominating shareholder or group must represent that no relationships or agreements exist between the nominee and the company and its management, and between the nominating shareholder or group and the company and its management.
The election exclusion. The proposed rules would amend Rule 14a-8(i)(8), the so-called "election exclusion," so that companies would no longer be able to exclude from their proxy materials shareholder proposals that attempt to amend their organizational documents regarding nomination procedures or disclosures related to shareholder nominations, so long as such amendments do not conflict with the SEC's proxy rules or other applicable law.
False and misleading information. The nominating shareholder or group relying on Rule 14a-11, an applicable state law or a company's organizational documents to include a nominee in company proxy materials would be liable for any materially false or misleading statement in information provided to the company that is included in the company's proxy materials. The company would not be responsible for information provided by a nominating shareholder or group unless the company knows or has reason to know that the information is false or misleading.
Determinations regarding eligibility. The proposed rules provide for a procedure by which the company must notify a nominating shareholder or group and the SEC if it determines that it may exclude the shareholder or group's nominee, and by which the SEC may provide its views on the validity of the exclusion.
The proposed rules appear to be the latest indication that mandatory proxy access in some form may be inevitable. The SEC has proposed proxy access rules several times in recent years, and legislation that would require the SEC to establish rules on proxy access has been introduced in the current session of Congress.2 Some states have adopted legislation concerning proxy access. Delaware, for example, recently amended the Delaware General Corporation Law to permit (but not require) companies to provide for proxy access. Accordingly, publicly traded companies should consider how best to prepare for a proxy access regime. Potential actions to take now include:
Commenting on the proposed rules. The SEC has requested comment on an array of issues in connection with the proposed rules. Any such comments must be submitted by August 17, 2009.
Examining organizational documents and state corporate codes to determine how they interact with the proposed proxy access rules.
Considering whether to amend advance notice provisions to take full advantage of the proposed procedures for excluding ineligible shareholder nominations.
Revisiting investor relations programs with a view to maintaining and improving communications and relationships with shareholders.
Footnotes
1 See "Facilitating Shareholder Director Nominations," Release Nos. 33-9046 and 34-60089 (June 10, 2009).
2 See Senator Charles Schumer's Shareholder Bill of Rights Act of 2009, introduced on May 19, 2009.
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