Corporate and Securities / The Guardian: Company-Side Shareholder Activism Alert

Executive Summary

On June 10, 2009, the Securities and Exchange Commission (the "SEC") proposed rule changes that would expand the rights of shareholders with respect to the nomination and election of directors to serve on the boards of directors of public companies. Proposed Rule 14a-11 of the Securities Exchange Act of 1934 (the "Exchange Act"), if adopted, would require, in certain circumstances, that a company include in its proxy materials sent to shareholders in connection with an annual meeting (or special meeting, as applicable) a shareholder's or group of shareholders' nominees for director. In addition, the SEC has proposed an amendment to Rule 14a-8(i)(8) which, if adopted, would restrict, in certain circumstances, a company's ability to exclude from its proxy materials shareholder proposals to amend, or request an amendment to, the company's governing documents relating to its nomination procedures or nomination disclosure provisions.

The basis for these proposed rule changes is the SEC's view that the current economic crisis has led to concerns about the accountability and responsiveness of companies and their boards to the interests of shareholders. The proposed amendments are designed to remove impediments to the exercise of shareholders' rights to nominate and elect directors to the boards of directors of public companies.

Comments on the SEC's proposals are due to the SEC on or before August 17, 2009.

Shareholder Access to Proxy Materials for the Nomination of Directors

Proposed Rule 14a-11 would permit a shareholder to include its nominee or nominees for director in a company's proxy materials, provided that such action is not prohibited by state law or the company's governing documents. All companies that have a class of equity securities subject to the proxy rules, including investment companies, would be subject to the proposed rule.

Eligibility Requirements

The availability of the proposed rule to a shareholder would be conditioned on the shareholder meeting certain eligibility requirements, including that such shareholder beneficially own a specified minimum amount of the company's securities entitled to vote at an election of directors and held such shares for a specified amount of time. Under the proposed rule, the minimum ownership percentage required depends on the size of the company:

Size of Company

Amount of
Voting Securities

Large Accelerated Filers1

1%

Accelerated Filers2

2%

Non-Accelerated Filers3

3%

In addition, under the proposed rule, if adopted, a shareholder would be required to have held such minimum amount of voting securities for at least one year prior to its notice to the company of its intent to submit a nominee or nominees for inclusion in the company's proxy materials.

Shareholder Statements and Representations

In addition to imposing certain eligibility requirements on nominating shareholders, the proposed rule, if adopted, would also require such shareholders to make certain statements and representations on a new Schedule 14N, including:

  • that the shareholder's intent is to continue to hold its voting securities through the date of the meeting for the election of directors;
  • that the shareholder is not seeking to change the control of the company or to gain more than a limited number of seats on the board; and
  • neither the nominating shareholder nor its nominee or nominees has an agreement or relationship with the company or management of the company.

Limit on Number of Nominees

In order to prevent shareholders from using the proposed rule as a means to effect a change of control of the company, the SEC has determined to limit the number of shareholder nominees a company is required to include in the proxy materials to the greater of one, or the number that represents 25% of the board of directors. Incumbent directors who were previously elected as shareholder nominees under the proposed rule would count towards this 25% limit. To address situations where more than one eligible shareholder or group of shareholders submits a nomination, the SEC has proposed a "first-in standard" whereby priority will be given to the shareholder from whom the company first receives timely notice of intent to nominate a director pursuant to the proposed rule. If the first nominating shareholder does not nominate the maximum number of directors allowed under the proposed rule, the nominee or nominees of the next nominating shareholder from whom the company receives timely notice of intent to nominate a director ­pursuant to the proposed rule would be included in the proxy materials.

Timing of Nominations and Shareholder Nominee Requirements

A nominating shareholder must inform the company of its intent to require the company to include its nominee or nominees in the company's proxy materials by providing a Schedule 14N to the company by the date specified by the company's advance notice provision or, if no such advance notice provision exists, no later than 120 calendar days prior to the date the company mailed its proxy materials to shareholders for the previous year's annual meeting.

The nominating shareholder must also make a representation in its Schedule 14N that (i) neither its nominee's candidacy nor, if elected, such nominee's service on the board will violate state or federal law or the applicable listing standards (excluding standards relating to independence); and (ii) its nominee meets the objective criteria for independence of the applicable rules of a national securities exchange or national securities association, or, in the case of a registered investment company, such nominee is not an "interested person" of the company as defined in the Investment Company Act. The proposed rule, if adopted, would also require that the nominating shareholder make or include other statements and disclosures in its Schedule 14N, including (i) a statement from the nominee that he or she consents to be named in the proxy statement and, if elected, to serve on the board; (ii) a disclosure regarding the nature and extent of the relationships between the nominating shareholder(s) and the nominee and the company or any affiliate of the company, including involvement in pending or threatened litigation, transactions with the company, and any other material relationship between the nominating shareholder(s) or the nominee and the company or any of its affiliates; and (iii) a disclosure of any website on which the nominating shareholder may publish soliciting materials. In addition, under the proposed rule, the nominating shareholder is permitted to include a statement in support of its nominee(s), not to exceed 500 words, for inclusion in the company's proxy statement.

Company's Obligation to Provide Notice of Inclusion or Exclusion of Nominee

Under the proposed rule, a company that determines to include a nominee in its proxy materials would be required to notify the nominating shareholder or shareholders of such determination within 30 calendar days of the filing of its definitive proxy statement with the SEC. In the event a company determines that it is not required to include a shareholder nominee in its proxy materials, notice of such fact must be postmarked or transmitted electronically to the nominating shareholder or shareholders within 14 calendar days of the receipt of such shareholder or shareholders' notice of intent and include an explanation of the company's basis for such exclusion. The nominating shareholder has 14 calendar days to respond to the company's notice and correct any eligibility or procedural deficiencies identified in such notice. Under the proposed rule, upon receipt of the nominating shareholder's response, if the company determines that it may still exclude such shareholder's nominee or nominees, the company would be required to provide notice of the basis of its determination to the SEC and the nominating shareholder no later than 80 calendar days before the company files its definitive proxy statement. The nominating shareholder may submit a response to the company's notice to the SEC within 14 calendar days of receipt of the same. The SEC, at its discretion, may provide a no-action letter to the company and the nominating shareholder reflecting the SEC's informal views of the company's determination. The SEC, however, will not adjudicate the merits of a company's position with respect to such determination to exclude a shareholder nominee. The company's ultimate determination of whether it will include in or exclude a shareholder nominee from its proxy materials must be provided to the nominating shareholder no later than 30 calendar days prior to the filing of the company's definitive proxy statement.

Narrowing of "Election Exclusion" under Proposed Rule 14a-8(i)(8)

Under current Exchange Act Rule 14a-8(i)(8), or the so-called "election exclusion", a company is permitted to exclude from its proxy statement a shareholder proposal that relates either to a nomination or an election for membership on the board of directors or a procedure for such nomination or election. The proposed rule, would substantially narrow the scope of the election exclusion by prohibiting a company from excluding from its proxy materials shareholder proposals that would amend, or that request an amendment to, the company's governing documents concerning nomination procedures or disclosures related to nominations by shareholders. The proposed rule, would make certain requirements of and place certain restrictions on any such shareholder proposal, including that such proposal not ­conflict with either state law or proposed rule 14a-11. Furthermore, the shareholder proposal would be required to meet the procedural requirements of Rule 14a-8 and not be subject to one of the other substantive exclusions under Rule 14a-8.

In addition, to maintain a company's right, under certain circumstances, to exclude from its proxy materials shareholder proposals relating to particular elections and nominations for director where such proposals could result in an election contest between the company and shareholder nominees without the protections provided by the disclosure and liability provisions in the proxy rules, the proposed rule, would not prohibit a company from excluding a proposal under Rule 14a-8(i)(8) if such proposal (i) would ­disqualify a nominee who is standing for election; (ii) would remove a director from office before the expiration of such director's term; (iii) questions the ability, judgment or character of a nominee or director; (iv) nominates a specific individual for election to the board, other than pursuant to Rule 14a-11, an applicable provision of state law or the company's governing documents; or (v) otherwise could affect the outcome of the upcoming election of directors. The SEC is not proposing any new disclosures from a shareholder who submits a proposal to amend, or request an amendment to, the company's governing documents. In addition, under the proposed rule, a shareholder who submits a proposal that would amend, or that requests an amendment to, the company's governing documents concerning nomination procedures or disclosures related to nominations by shareholders would remain subject to the eligibility requirements of Rule 14a-8, including the requirement that such shareholder have continuously held for at least one year at least $2,000 in market value, or 1%, of the company's voting securities entitled to vote on such proposal.

Questions

Any person who has a question regarding the issues raised in this Corporate and Securities Update may obtain additional guidance from a member of our Public Companies Group (www.blankrome.com).

Footnotes

1. Generally companies with public float of $700 million or more

2. Generally companies with public float greater than $75 million but less than $700 million.

3. Generally companies with public float below $75 million

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.