The SEC's New Proxy Access Rules
On August, 25, 2010, the Securities and Exchange Commission (the “Commission”) adopted a new “proxy access” rule, Rule 14a-11, under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The new rule requires the inclusion of certain shareholder director nominees in a company’s proxy materials. The Commission also amended existing Exchange Act Rule 14a-8 to require that a company’s proxy materials include certain shareholder proposals seeking to establish procedures for incorporating shareholder director nominees into future proxy materials.
Stay of Effectiveness
The new rules would have taken effect for most companies on November 15, 2010; with smaller reporting companies being granted a three year deferral period. The new rules would not have affected foreign private issuers which are generally exempt from the Exchange Act proxy rules (unless they voluntarily comply). However, on September 29, 2010, the U.S. Chamber of Commerce and the Business Roundtable jointly filed a lawsuit challenging the Commission’s adoption of Rule 14a-11 and requesting a stay of its effect until the suit’s resolution. The Commission granted the stay and, on its own accord, also stayed the effect of the amendments to Rule 14a-8. Thereafter, on October 8, 2010, the parties filed a joint motion for expedited review. At this point, even if the parties’ motion is granted, it’s not likely that the Court of Appeals will render a decision before the summer of 2011, meaning that, if the validity of Rule 14a-11 is upheld, the new proxy access rules will not be available before the 2012 proxy season.
New Exchange Act Rule 14a-11
If implemented, the new Exchange Act Rule 14a-11 will require a company to include shareholder director nominees in its proxy materials if the nominating shareholder:
- owns a minimum of 3% of the total voting power of the company’s securities (groups of shareholders can aggregate their shares to meet this minimum threshold);
- has held the minimum number of securities for a period of at least three years;
- certifies that they will continue to hold the minimum number of securities through the date of the shareholder meeting; and
- certifies that they are not holding the securities for purposes of effecting a change in control or to gain a number of board seats in excess of the maximum number permitted under the rule.
A nominating shareholder must provide notice to the Commission and the company of their director nominees between 150 and 120 days prior to the date on which the company’s proxy materials were mailed the year before. To be eligible, a shareholder nominee must meet the requirements of applicable federal, state and foreign laws and of any national securities exchange or association on which the company’s securities are listed.
The new Exchange Act Rule 14a-11 also limits the number of shareholder nominees to the greater of one nominee or up to 25% of the total number of board seats. If more shareholder nominees are put forth than seats are available, only the nominees of the shareholder (or shareholder group) with the largest percentage of qualifying voting power need be included in the company’s proxy materials.
Amended Exchange Act Rule 14a-8
If implemented, the amendments to Exchange Act Rule 14a-8 will require that a company’s proxy materials include shareholder proposals to amend, or that request the amendment of, the company’s governing documents as they pertain to disclosures and procedures for shareholder director nominations; provided, however, the Rule 14a-8 shareholder proposals do not conflict with Rule 14a-11.
Shareholder proposals made under amended Rule 14a-8 would still be required to meet the rule’s existing eligibility requirements, including that the proposing shareholder:
- hold at least $2,000 in market value or 1%, whichever is less, of the company’s securities entitled to vote on the proposal; and
- that the securities have been held for a period of at least one year prior to the proposal submission date.
Companies would also be permitted to exclude shareholder proposals that would:
- disqualify a nominee who is standing for election;
- remove a director from office before the expiration of their term;
- question the competence, business judgment or character of a nominee or director;
- seek to include a specific individual in the proxy materials for election to the board of directors; or
- otherwise affect the outcome of the upcoming election of directors. ■
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Vanessa J. Schoenthaler