The Securities and Exchange Commission has adopted new Rule
14a-11 under the Securities Exchange Act of 1934 that will require
public companies to permit any shareholder or group of shareholders
owning at least 3% of a public company's voting stock for at
least three years to include director nominees in company proxy
materials. In addition, the SEC has amended Exchange Act Rule 14a-8
to permit shareholders to submit proposals for inclusion in company
proxy materials relating to adoption of a less restrictive
shareholder access regime under a company's governing
documents, so long as such proposals do not conflict with or limit
the mandatory provisions of Rule 14a-11. See SEC Release No. 33-9136 (August 25,
2010).
The new proxy access rules apply to all public companies and
registered investment companies subject to the proxy rules, unless
applicable state or foreign law or a company's governing
documents prohibit shareholders from nominating board candidates.
The rules do not apply to foreign private issuers or to companies
subject to SEC reporting solely because they have a class of
Exchange Act registered debt securities. The rules will generally
apply to annual meetings beginning in 2011; however, application of
the rules to smaller public companies (those with a public float
less than $75 million) will be deferred for three years.
New Rule 14a-11
Ownership Threshold and Holding Period.The shareholder (or group) must hold voting and investment power
over at least 3% of the voting stock of a company continuously for
a three-year period prior to the date that the shareholder (or
group) notifies the company of its proposed nominees. A group may
aggregate its shares to reach the 3% threshold. Borrowed shares and
shares sold short are excluded from the 3% calculation, and loaned
shares that may be recalled (and will be recalled prior to the
annual meeting) are included. The shareholder (or group) must own
the shares through the annual meeting for which the nominees are
submitted.
Number and Qualifications of Nominees. The
shareholder (or group) may nominate up to 25% of the company's
board of director's (or one director, whichever is greater) at
each election. In the case of a classified (staggered) board, the
25% calculation would be based on the total number of board seats.
If more nominees are submitted than are permitted under the Rule,
the shareholder (or group) with the highest percentage of voting
stock who has made a valid nomination must be given
preference.
The nominees must satisfy the objective (not subjective) standards
for director independence on the national securities exchange on
which the company's securities are listed. The nomination must
not violate applicable state, federal or foreign law. The
shareholder (or group) must not have the intention of changing
control of the company or gaining control of more than the
permissible number of board seats under the Rule. Neither the
nominating shareholder (or group) nor the nominee may have a direct
or indirect agreement with the company regarding the nomination.
There is no restriction on the relationship between the nominating
shareholder (or group) and the nominee.
Notice Filing. A nominating shareholder (or group) must file with the SEC a "Notice of Intent on Schedule 14N" which requires:
- information regarding: the number and percentage of shares owned; the length of time the shares have been held; the shareholder (or group) and the nominees similar to that required in a proxy contest; and whether each nominee satisfies any director qualifications in the company's governing documents (although the nominee is not required to satisfy such qualifications);
- a certification as to: the absence of intention to change control of the company or gain more board seats than are permitted under the Rule; shareholder (or group) and nominee eligibility under the Rule; and
- a statement of intention to continue to hold the shares through the meeting date.
The Notice may also include a statement supporting the nominee. A shareholder (or group) will be liable for any false or misleading information provided to the company. The company will not be liable for information provided by the shareholder (or group) and reproduced in the proxy materials.
The Notice must be filed no earlier than 150 days, and no later
than 120 days, prior to the anniversary of the mailing date for the
prior year's proxy materials.
Company Challenge. A company may seek to exclude a
nomination by a shareholder (or group), after providing the
shareholder (or group) with an opportunity to remedy identified
deficiencies, by giving notice to the SEC of the basis for
exclusion of the nomination and seeking "no-action"
relief, similar to the process for shareholder proposals under Rule
14a-8. The notice to the SEC must be given no later than 80 days
prior to the filing of the company's definitive proxy
statement.
Amendments to Rule 14a-8
Rule 14a-8 was amended to prevent a company from excluding from
its proxy materials shareholder proposals that seek to establish
less restrictive proxy access procedures in the company's
governing documents, provided that these proposals do not conflict
with or limit Rule 14a-11.
Related Rule Amendments
The SEC also adopted rule amendments providing
- for an exemption from the proxy rules for written or oral communications of a shareholder's intent to form a nominating group,
- for an exemption from the proxy rules for communications made in support of a nominee included in a company's proxy materials under Rule 14a-11, and
- that a nominating shareholder (or group) will not lose eligibility to file the shortened Schedule 13G beneficial ownership report as a result of activities relating to a Rule 14a-11 nomination (although forming a nominating group triggers a Schedule 13D or 13G filing requirement if the group holds greater than 5%).
Effectiveness
The amendments will be effective 60 days after publication in the
Federal Register (expected shortly) and will apply to a
company's 2011 annual meeting if the first anniversary of the
mailing of the 2010 proxy materials occurs more than 120 days after
effectiveness of the new rules. For example, assuming the
amendments are effective by November 1, 2010, they would apply to
companies that mailed their 2010 proxy statements on or after March
1, 2010. Application of the rules to smaller reporting companies
(those with a public float less than $75 million) will be deferred
for three years.
Conclusion
The SEC's adoption of mandatory proxy access marks the
beginning of a new era of shareholder empowerment. Active outreach
and attention to shareholder relations will be more important than
ever for public companies. Public companies should review their
governing documents, including advance notice bylaw provisions, to
ensure that they operate properly in the new shareholder proxy
access regime.
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