- Get Ready - Shareholder Proxy Access Is Here
- September 6, 2010 | Authors: Stephanie Brauner Chandler; Richard F. Dahlson; Byron F. Egan; C. Alex Frutos; Elise F. Green; Steven R. Jacobs; Mark L. Jones; Michael F. Meskill; Richard S. Roth; Jeffrey M. Sone
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On August 25, 2010, the Securities and Exchange Commission (“SEC”), in a close vote, adopted final “proxy access” rules requiring certain public companies to include in their proxy materials (1) a shareholder’s director nominees and (2) shareholder proposals to amend the company’s governing documents to establish different criteria for proxy access nominations.1 The SEC’s adoption of the proxy access rules follows many years of SEC proxy access proposals and the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which gave the SEC authority to adopt proxy access rules. The final proxy access rules approved by the SEC establish a federal proxy access right pursuant to new Rule 14a-11 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and amend Rule 14a-8 of the Exchange Act to permit shareholder proposals that would change a company’s proxy access procedures. As described below, the final rules take effect sixty days after publication in the Federal Register, except for smaller reporting companies which have three years to comply with the new rules. Shareholder proxy access will be in effect in time for the 2011 proxy season.
New Rule 14a-11
New Rule 14a-11 creates a process under which any public company to which the rule applies that receives a notice from an eligible shareholder or group of shareholders to nominate one or more directors will be required to include those nominees in its proxy materials so long as certain requirements are met. The following is a summary of the key provisions of the rule:
- Companies Subject to Proxy Access: Rule 14a-11 will apply to companies subject to the proxy rules (including registered investment companies, controlled companies and companies that voluntarily register a class of securities under Section 12(g) of the Exchange Act). Rule 14a-11 will not apply to foreign private issuers or companies subject to the proxy rules solely because they have a class of registered debt. The requirements apply to these public companies unless state or foreign law or the company’s governing documents (e.g., charter, bylaws, certificate of designations, etc.) completely prohibit the company’s shareholders from nominating directors. However, the SEC states in the adopting release that Rule 14a-11 applies regardless of whether state law or a company’s governing documents prohibit inclusion of shareholder director nominees in company proxy materials or set share ownership or other terms that are more restrictive than Rule 14a-11 under which shareholder director nominees will be included in company proxy materials.
- Ownership Requirements: Shareholders must own at least three percent of the total voting power (determined as of the filing date of the newly adopted Schedule 14N) of the company’s securities entitled to be voted on the election of directors. Shareholders must hold both investment power and voting power. Shareholders may aggregate their securities with other shareholders in order to meet the three percent threshold. Shareholders must have held their shares continually for at least three years, must provide a statement that they intend to continue to own at least the required amount of securities through the date of the meeting at which directors are elected and must disclose their intent regarding continued ownership of the securities after the election (which may be contingent on the outcome of the election). Nominating shareholders cannot hold the securities with the purpose, or with the effect, of changing control of the company or to gain a number of seats on the board of directors that exceeds the number permitted under the new rules. The calculation of percentage of voting power must be in accordance with the new rule. Shares that are sold short or borrowed are not included in the share ownership calculation. Shares that are loaned to a third party by or on behalf of a nominating shareholder are included only if the shareholder has the right to call them back and must recall them upon being notified that its nominee is included in the proxy.
- Nominee Eligibility Requirements: A shareholder nominee’s candidacy and, if elected, board membership must not violate federal, state or foreign law, or the rules of the applicable national securities exchange. The nominee must satisfy the objective independence standards of the applicable national securities exchange. Nominees do not, however, have to be independent of the stockholders who nominate them. Neither the nominee nor the nominating shareholder (including any member of the nominating shareholder group) may have any agreement with the company regarding the nomination.
- Maximum Number of Nominees: A company must include a number of shareholder-nominated director nominees that represents no more than 25 percent of the company’s board of directors (rounded down), but no less than one director. If the number of nominees submitted exceeds the authorized number of permissible nominees, then priority is given to the nominees from the nominating shareholder or shareholder group holding the greatest percentage of securities eligible to vote in the election of directors. For companies with classified boards, this limit is calculated based on the total number of board seats even though not all of the directors may be up for election at the meeting.
- Notice Requirements: A nominating shareholder or group must file a new Schedule 14N with the SEC and provide a copy to the company no earlier than 150 calendar days and no later than 120 calendar days before the anniversary of the mailing date for the company’s proxy statement for the previous year’s annual meeting. Schedule 14N requires nominating shareholders to make certain disclosures, including: the amount of securities held by the nominating shareholder and the length of time those securities have been held; a statement of the shareholder’s intent to hold those securities; a certification that the shareholder is not holding the company’s securities with the purpose, or effect, of changing control of the company or to gain control of the board; information about the nominating shareholder; and a statement of support for each nominee that is no longer than 500 words per nominee. The nominating shareholder or group will be responsible for any statement in the Schedule 14N or any other related communication and companies will not be liable for any information provided by the nominating shareholder or group under Rule 14a-11 that the company includes in its proxy statement except to the extent that the company subsequently specifically incorporates the information by reference or otherwise adopts the information as its own.
- Including/Excluding a Shareholder Nominee: If a company determines to include a shareholder nominee in its proxy statement, it must notify the nominating shareholder or group no later than thirty days before the company files its definitive proxy statement with the SEC. If the company seeks to exclude a shareholder nominee from its proxy statement, the company must provide notice to the shareholder no later than fourteen days after the applicable deadline for submission of nominations to the company for such annual meeting. The nominating shareholder will then have fourteen days after receipt of the notice by the company to respond and correct any eligibility or procedural deficiencies identified in the notice. If the company continues to believe that it has a basis for not including a nominee in its proxy statement, the company must provide notice of the basis for its exclusion to the SEC no less than eighty days before it files its definitive proxy statement with the SEC. The company also may request that the SEC staff issue a no-action letter concurring that the company may exclude the director nominee or the statement in support of such nominee.
Amendment to Rule 14a-8 Shareholder Proposals
Rule 14a-8(i)(8) currently allows a company to exclude from its proxy statement a shareholder proposal that relates to a nomination or an election for membership on the company’s board of directors or a procedure for such nomination or election. Amended Rule 14a-8(i)(8) enables shareholders, under certain circumstances, to require companies to include in their proxy materials shareholder proposals that would amend, or that request an amendment to, a company’s governing documents regarding nomination procedures and disclosures related to shareholder nominations, provided that the proposal does not conflict with state law or Rule 14a-11. A shareholder proposal could expand proxy access to a broader group of shareholders or create alternative proxy access rights, but could not have the effect of preventing a shareholder or group that satisfies the requirements of Rule 14a-11 from having its nominee included in a company’s proxy materials. The SEC codified certain prior staff interpretations that outline certain circumstances where companies have the right to exclude proposals related to elections and nominations for directors.
Amendments to Related SEC Rules
The SEC also adopted related changes to SEC rules governing beneficial ownership reporting and solicitation disclosures. Nominating shareholders or groups will not lose their eligibility to report on Schedule 13G and will not be required to report on Schedule 13D, solely due to nominating director(s) pursuant to Rule 14a-11 or soliciting activities in connection with such a nomination (including soliciting in opposition to a company’s nominee). Written and oral communications made pursuant to Rule 14a-11, which would be deemed solicitations under the SEC proxy rules, will be exempt from certain disclosure, filing, and other requirements of those rules, so long as the shareholder is not holding the company’s securities with the purpose or effect of changing control of the company or to gain a number of seats on the board of directors in excess of the maximum number permitted under the new rules. Rule 14a-2(b)(7) generally will exempt shareholder solicitations in connection with efforts to form a nominating group and Rule 14a-2(b)(8) generally will exempt shareholder solicitations made in support of the group’s nominee(s) and/or against the company’s nominees. Solicitations made pursuant to either rule will need to be reported on Schedule 14N no later than the date of first use. Solicitations made pursuant to Rule 14a-2(b)(8) may commence once the nominating shareholder or group receives notice from the company that the shareholder nominee will be included in the company’s proxy materials.
Proxy Statement and Form of Proxy
Inclusion of a shareholder nominee in a company’s proxy statement pursuant to Rule 14a-11 would not be considered a solicitation in opposition and would not require the company to file a preliminary proxy statement provided that the company was otherwise qualified to file directly in definitive form. A company that is required to include a shareholder nominee or nominees on its form of proxy: (i) can identify the shareholder nominees as such and recommend whether shareholders should vote for, against, or withhold votes on those nominees and management nominees on the form of proxy; and (ii) can determine the order in which its nominees and any shareholder nominees are listed in the form of proxy. When a shareholder nominee is included (either pursuant to Rule 14a-11, an applicable state law provision or the company’s governing documents), the company may not give shareholders the option of voting for or withholding authority to vote for the company nominees as a group, but instead must require that shareholders vote on each nominee separately.
These proxy access rules become effective sixty days after publication in the Federal Register. Under the new rules, however, shareholders must submit nominees no later than 120 calendar days before the anniversary of the mailing of the company’s proxy statement for the prior year’s annual meeting. Therefore, a company will be subject to the new rules during the 2011 proxy season if this 120-day deadline falls on or after the effective date of the new rules. The effective date of Rule 14a-11 for smaller reporting companies (generally companies with a public float of less than $75 million) is three years from the rule’s effective date. However, this deferral does not apply to the Rule 14a-8 amendment. Thus, during that deferral period a smaller reporting company still could be subject to proxy access through shareholder approval of a binding proxy access bylaw amendment submitted under Rule 14a- 8(i)(8).
What to Do Now
Get ready -- shareholder proxy access is here. In light of the new proxy access rules and the new “say on pay” and broker voting requirements of the Dodd-Frank Act, there has been a dramatic change in shareholder-company relations. Prior to the arrival of proposals and nominations for the 2011 proxy season, companies subject to the new rules should evaluate the impact of the rules and consider the following in doing so:
- Determining which of the company’s three percent or greater shareholders might be interested in nominating a director, and which shareholders below three percent might be expected to solicit the formation of a group to nominate directors
- Improving shareholder engagement to exchange views on such matters
- Reviewing corporate governance, management and executive compensation issues to determine whether there are problem areas that could be addressed
- Reviewing corporate governance and nominating committee charters, as well as bylaws, to determine if changes need to be made to deal appropriately with proxy access mandated timeframes and vetting shareholder nominees
Considering available strategies for contending with directors nominated as a result of proxy access, including how to work with proxy advisory firms in such cases
1 Facilitating Shareholder Director Nominations, Exchange Act Release No. 34-62764, available at http://www.sec.gov/rules/final/2010/33-9136.pdf