On July 10, 2009, the SEC proposed amendments to the proxy solicitation rules, including amendments that could make it easier for shareholders to conduct proxy solicitations against management. The SEC also proposed amendments to Form 8-K to require that shareholder meeting voting results be reported on a Form 8-K within four business days of the meeting. The SEC release proposing these amendments also proposed other amendments to enhance compensation and corporate governance disclosures (which are described in a separate Fried Frank memorandum titled " SEC Proposes Rules Concerning Proxy Disclosure of Executive Compensation and Corporate Governance and Shareholder Approval of Executive Compensation of TARP Recipients.") The release, captioned "Proxy Disclosure and Solicitation Enhancements," is available at http://www.sec.gov/rules/proposed/2009/33-9052.pdf . Comments on the proposed new rules must be submitted to the SEC on or before September 15, 2009. The SEC has proposed that these amendments would be applicable for the 2010 proxy season.
A. Exempt Solicitations - Exchange Act Rule 14a-2(b)
Exchange Act Rule 14a-2(b)(1) currently exempts from most of the proxy solicitation rules persons who: (I) are not seeking proxy authority, (ii) do not request a "form of revocation" and (ii) do not have a "substantial interest" in the subject matter of the solicitation. In particular, this exemption has been utilized by persons conducting "just vote no" campaigns. While the Staff of the SEC took the position that providing shareholders with an unmarked copy of a company's proxy card with a request to return the card to company management would not be deemed to be a request for a "form of revocation," the US Court of Appeals for the Second Circuit has taken a contrary position. See Mony Group, Inc. v. Highfields Capital Mgmt. L.P., 368 F.3d 138 (May 13, 2004). The SEC proposes to amend Rule 14a-2(b)(1) to expressly provide that an unmarked copy of management's proxy card would not constitute a "form of revocation" if the person providing the card requests that it be returned to management. As discussed in our July 7, 2009, memorandum regarding the SEC's proposed proxy access rules, the SEC has separately issued proposed shareholder proxy access rules that would require companies to include shareholder nominees in companies' annual proxy statements and proxy cards. The SEC's proposed amendment to Rule 14a-2(b)(1) would provide shareholders that take advantage of the proxy access rules to include nominees on a company's proxy card with the ability to furnish that card to potential voters. This additional solicitation tool could very well enhance the solicitation efforts in favor of shareholder nominees.
Questions have also arisen as to whether only security holders of a registrant can be disqualified from relying upon this exemption from the proxy solicitation rules because of a "substantial interest" in the subject matter of the solicitation. The SEC has proposed to amend Rule 14a-2(b)(1) to clarify that a non-security holder can have a disqualifying "substantial interest." For example, a potential acquirer that wants to solicit approval of a merger from the target's shareholders would have a "substantial interest" under the amended rule.
B. Requirements as to Proxy - Exchange Act Rule 14a-4(d)(4)
Exchange Act Rule 14a-4(d)(1) provides that a proxy may confer authority to vote only for director nominees who have consented to serve as a director and to be named in the soliciting person's proxy statement. These persons are referred to as "bona fide nominees." Rule 14a-4(d)(4) currently provides an exception to the "bona fide nominee" requirement that permits a non-management person soliciting support for a minority slate of nominees to "round out" its short slate with nominees named in the company's proxy statement. However, Rule 14a-4(d)(4) does not currently permit a non-management person to round out its short slate with nominees named in other non-management proxy statements. The SEC has proposed to amend Rule 14a-4(d)(4) to expand this exception to permit a non-management person to round out its short slate with other non-management nominees so long as the non-management persons are not acting together. As written it would appear that shareholder nominees included in a company's proxy statement, for example pursuant to the proposed shareholder proxy access rules, could also be named to round out the short slate. In order to substantiate the fact it is not acting together with the other non-management person, the person rounding out the short slate must represent in its proxy statement that it has not agreed, and will not agree, to act, directly or indirectly, as a group or otherwise engage in any activities that would be deemed to cause the formation of a Section 13(d) group with such other non-management person and that it is not a participant in the other person's solicitation.
As discussed in our July 7, 2009, memorandum regarding the SEC's proposed proxy access rules, the SEC's proposed proxy access rules do not require a company to include in its "universal proxy card" shareholder nominees who are not named in the company's proxy statement (i.e., shareholders soliciting with their own proxy statement). As a result, while the SEC's proposed amendment to Rule 14a-4(d)(4) provides a shareholder with greater flexibility in rounding out its short slate, it does not address the fact that a shareholder who wants to grant a proxy to vote for some or all of the nominees proposed by a shareholder but not included in the company's proxy statement and other nominees included in the Company's (or a non-management person's) proxy statement cannot grant a proxy to vote for its chosen slate of directors and must either vote on a non-management proxy card or forgo voting for any nominees not included in the company's proxy statement.
C. Requirements as to Proxy - Exchange Act Rule 14a-4(e)
Exchange Act Rule 14a-4(e) requires that a proxy holder vote the shares as to which a proxy is granted subject to "reasonable specified conditions" which will cause the shares not to be voted. In order to make certain that the proxy is not conferring impermissible discretionary authority, the SEC has proposed to amend Rule 14a-4(e) to provide that these conditions must be "objectively determinable." The "objectively determinable" standard will not be met, for example, if the proxy holder reserves the right not to vote the shares covered by the proxy if it concludes, in its sole discretion, that it would not be advisable to do so.
D. Solicitation Before Furnishing a Proxy Statement - Exchange Act Rule 14a-12(a)(1)(i)
Exchange Act Rule 14a-12 permits a person to use written communications that constitute a solicitation before furnishing security holders with a proxy statement if specified participant information is included in the communications. Rule 14a-12(a)(1)(i) currently requires that the participant information include either (i) the identity of the participants and a description of their direct or indirect interests in the solicitation or (ii) a legend advising security holders where they can obtain this information. Questions have arisen regarding when the information referenced in the legend must be filed with the SEC. The SEC has proposed to amend Rule 14a-12(a)(1)(i) to explicitly provide that the referenced information must be filed with the SEC no later than the time the legend is first used. If this amendment is adopted, in a merger context, a company may need to determine and disclose information about the interests of director and executive officers in the transaction in connection with its first public announcement of the merger, rather than waiting until the filing of the preliminary proxy statement with the SEC, as is currently the practice.
E. Accelerated Disclosure of Annual Meeting Election Results
Currently, public companies are required to disclose the results of any matter that was submitted to a vote of its shareholders at an annual or special meeting in the Form 10-Q for the fiscal quarter in which the shareholder meeting occurred or, if the meeting occurred during the fourth fiscal quarter, in the Form 10-K. The SEC has proposed to accelerate this disclosure by requiring that the results of a shareholder vote be disclosed on a Form 8-K to be filed within four business days of the meeting.
The proposed rules provide that if the results of a contested election for directors have not been finally determined at the end of the meeting, the company will not be required to disclose the preliminary voting results until four business days after the preliminary results are determined. An amended Form 8-K will be required to be filed within four business days after the voting results are certified.
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