United States: SEC Proposes Proxy Access To Company Proxy Statements For Director Elections

Introduction

Currently, shareholders of public companies can nominate their own director nominees, but they may only do so through proxy contests of public companies in which a shareholder must, at its own expense, prepare, file with the SEC and disseminate its own proxy materials. On May 20, 2009, the Securities and Exchange Commission (the "SEC") adopted proposed amendments to its proxy rules to allow shareholders of a public company to nominate candidates for the company's board of directors and have those nominees included in the company's proxy materials.

The proposed rule would create a new Rule 14a-11 under the Securities Exchange Act of 1934 (the "Exchange Act") which would provide that certain shareholders would be able to include nominees for director in the company's proxy materials, unless otherwise prohibited. In addition, the proposed rule would amend Rule 14a-8(i)(8) to permit shareholders to include other shareholder proposals in the company's proxy materials. If adopted, the proposed rule would apply to all companies with equity securities registered under the Exchange Act, would also include investment companies, and would preempt any proxy access provisions set forth in a company's charter or bylaws, which are typically governed by state corporate law. The SEC intends to have final proxy access rules in place for the 2010 proxy season. Comments on the proposed rule will be due 60 days after the proposed rule is published in the Federal Register.

Ownership Requirements

Under the proposed rule, a shareholder that has held shares for at least one year would be eligible to have its director nominee or nominees included in the company's proxy materials if they meet the following share ownership threshold requirements, which vary based on the company's size. A shareholder depending upon the size of the Company must own the following amounts of voting securities:

The proposed rule would permit shareholders to aggregate their holdings to meet the applicable thresholds.

Additional Shareholder Requirements

Under the proposed rule, a nominating shareholder would be required to represent that it intends to hold its shares through the date of the annual meeting and certify it is not holding the shares for the purpose of changing control of the company or to gain more than minority representation on the board of directors.

Shareholder Nominee Requirements

The proposed rule would require that shareholder nominees for director satisfy independence standards of the national securities exchange applicable to the company and comply with applicable laws and regulations. In addition, a nominating shareholder is not permitted to have an agreement, directly or indirectly, with the company regarding the nominee's nomination for director. However, under the proposed rule, there are no restrictions regarding a shareholder's relationship with its nominee for director, including the shareholder's ability to nominate itself for director of the company. Shareholders can nominate the greater of one nominee or the number that equals up to 25% of the board of directors. For example, if a board of directors is comprised of three members, one shareholder nominee could be included in the company's proxy materials, and on the other hand, if a board of directors is comprised of eight members, two shareholder nominees could be included in the company's proxy materials.

Nominating Procedures

Under the proposed rule, a nominating shareholder would be required to file with the SEC and submit to the company a new Schedule 14N containing certain disclosures (including securities owned, length of ownership and intent to continue to hold the securities through the meeting date) and a certification that it is not seeking to change control of the company or gain more than minority representation on the board of directors. The company would include disclosure in its proxy concerning the nominating shareholder and shareholder nominee for director that is similar to the disclosure currently required in a contested election. A nominating shareholder would be liable for any false or misleading statements in the Schedule 14N repeated in the company's proxy statement. The company will generally not be responsible for information provided by the shareholder unless the company knows or has reason to know that the information is false.

The deadline for submitting nominees, under the proposed rule, would be the deadline established by a company's advance notice bylaw or, in the absence of such a bylaw, 120 calendar days before the first anniversary of the date the company's proxy statement was released in connection with the previous year's annual meeting, which also is the deadline for submitting shareholder proposals under Exchange Act Rule 14a-8.

Under the proposed rule, similar to the existing process under Rule 14a-8 of the Exchange Act, companies may submit no-action requests to the SEC's staff to exclude shareholder proposals (presumably due to a procedural defect in the Schedule 14N, a nominating shareholder's failure to satisfy the share ownership requirements or a nominee's failure to satisfy the director independence requirements).

Other Shareholder Proposals

In addition to new Rule 14a-11, the SEC proposed to amend Rule 14a-8(i)(8) to allow shareholders, under certain circumstances, to require companies to include proposals in their proxy materials that would amend, or request an amendment to, the company's governing documents to address the company's nomination procedures or other director nomination disclosure provisions that do not conflict with the SEC's rules.

Currently, Rule 14a-8(i)(8) permits companies to exclude shareholder proposals that "relate to an election." Under the proposed rule, this so-called "election exclusion" would be narrowed to allow for the inclusion of more shareholder proposals regarding elections in company proxy materials. Specifically, shareholder proposals by qualifying shareholders that would propose an amendment to, provisions of a company's governing documents concerning the company's nomination procedures or other director nomination disclosure provisions (so long as those disclosure provisions do not conflict with proposed Rule 14a-11 above) would not be excludable. The current eligibility provisions of Rule 14a-8 would continue to apply and "qualifying shareholders" would include shareholder proponents that have continuously held, for at least one year prior to submitting the proposal, $2,000 or more in market value or 1% percent, whichever is less, of the company's securities entitled to be voted on the proposal at the meeting.

Practical Considerations

Given the fact that the Schedule 14N deadline is tied to the company's advance notice bylaw, companies should have counsel review these provisions and to determine what may be required to be amended in the Company's advance notice bylaw. This preplanning will enable companies to be ready to amend these provisions, as necessary, to ensure that they have sufficient time before the proxy access rule nomination deadline. Further, the bylaws should be reviewed to determine whether they are consistent with the language of the proposed rule. To the extent the bylaw language is viewed as inconsistent with the new requirements, companies should be ready to make the appropriate changes prior to the effective date of the new rules. Companies should also review the current annual meeting timetable to insure that there is sufficient time to address stockholder nominees or proposals which may occur as a result of the adoption of these rules.

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