SEC Releases Proxy Access Proposal

On June 10, 2009, the Securities and Exchange Commission (SEC) unveiled the details of its proposal to allow shareholders to have their director nominees included in company proxy materials.[1] The controversial proposal, which passed by a 3-2 vote of the commissioners at the SEC’s May 20, 2009, open meeting, would allow a shareholder (or group of shareholders) who owns at least 1 percent of the stock of a company that is a large accelerated filer (or 3 percent and 5 percent for smaller companies) and who has held the shares for at least one year, to use management’s proxy materials for the nomination of up to 25 percent of the company’s board of directors, provided the shareholder is not seeking a change of control of the company. If adopted, the proposal will dramatically change the landscape for the election of directors of public companies.

The proposal is subject to a 60-day comment period ending on August 17. In this alert, we answer some key questions about the proposal.

COMPANIES AND MEETINGS SUBJECT TO THE PROPOSED RULES

Which companies would be subject to the proposed rules?

The proposed proxy access rules would apply to all companies that have a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 (including investment companies registered under Section 8 of the Investment Company Act of 1940),[2] other than companies that are subject to the proxy rules solely because they have a class of debt registered under Section 12. The new rules do not apply, however, to foreign private issuers. Also, any company whose applicable state law or governing documents prohibit shareholders from nominating candidates for the board of directors will be exempt from the new rules, although the SEC stated in the proposing release that it is not aware of any state whose law prohibits shareholder nominations.

Which shareholder meetings would be subject to the proposed rules?

The proposed rules would require companies to include shareholder nominees in the company’s proxy materials for any annual meeting of shareholders, or special meeting in lieu of the annual meeting, at which directors will be elected. Therefore, special meetings that are not in lieu of an annual meeting such as those that are called, for example, to fill vacancies on a board of directors would not be subject to the proxy access rules.

SHAREHOLDER ELIGIBILITY REQUIREMENTS

Which shareholders would be eligible to have their nominees included in the company’s proxy materials?

Under proposed Rule 14a-11, shareholders would have access to include their director nominees in company proxy materials based on a sliding scale of stock ownership in relation to the size of the company. For all companies, the shareholder must have held the shares that are used for purposes of meeting the ownership threshold continuously for at least one year as of the date the shareholder gives the company notice of its nominees and must intend to continue to own the requisite shares through the date of the shareholder meeting.



Type of Company


Percentage of Stock That Must Be
Owned At Least One Year

Large Accelerated Filer[3]

Accelerated Filer[4]

Non-accelerated Filer

1 percent

3 percent

5 percent

Can shareholders form groups to satisfy the share ownership requirement?

Yes. Shareholders would be able to aggregate their holdings in order to meet the threshold requirements, and in such case, each member of the shareholder group must satisfy the one-year holding requirement.

How would a shareholder determine whether the number of shares it owns meets the ownership threshold?

In determining the number of shares that are entitled to be voted on the election of directors, a nominating shareholder would be permitted to rely on information set forth in the company’s most recent quarterly or annual report, or any subsequent current report, filed with the SEC unless the nominating shareholder knows or has reason to know that such information is inaccurate.

Are there any other eligibility requirements for nominating shareholders?

Although not technically listed as an eligibility requirement, a nominating shareholder would be required to certify that it is not holding the shares for the purpose of, or with the effect of, changing control of the issuer or to gain more than a limited number of seats on the board. Consequently, the proposed rules are not intended to facilitate a change in control of a company. It should be noted, however, that a nominating shareholder could later change its mind. The SEC has solicited comment on how the rules should address the possibility that a nominating shareholder’s or group’s intent may change over time.

NUMBER OF NOMINEES

How many shareholder nominees can be included in the company’s proxy statement?

A company would be required to include no more than one shareholder nominee or the number of nominees that represents 25 percent of the company’s board of directors, whichever is greater. Where a company has a director (or directors) currently serving on its board of directors who was elected as a shareholder nominee pursuant to proposed Rule 14a-11, and the term of that director extends past the date of the meeting of shareholders for which the company is soliciting proxies for the election of directors, the company would not be required to include in its proxy materials more shareholder nominees than could result in the total number of directors serving on the board that were elected as shareholder nominees being greater than one shareholder nominee or 25 percent of the company’s board of directors, whichever is greater. Therefore, for companies with classified boards, the maximum number of directors elected under the new procedures that could be serving on the board at any one time is 25 percent of the company’s board or one shareholder nominee, whichever is greater.

What happens if multiple shareholders or shareholder groups nominate directors?

If the company receives more shareholder director nominees than it is required to include, the nominees to be included would be those put forward by the nominating shareholder or group that first provides timely notice to the company. If the first nominating shareholder or group does not nominate the maximum number of directors allowed under the rule, then the nominee or nominees of the next nominating shareholder or group from which the company receives timely notice will be included, up to the maximum number of shareholder nominees required to be included by the company.

What if the company is contractually obligated to appoint or nominate a set number of directors?

The proposed rules do not address this situation. For example, if the company is contractually obligated to permit a certain shareholder to appoint two of its 12 directors, nominating shareholders would still be eligible to nominate three of the 12 directors (25 percent of 12), rather than two directors (25 percent of the 10 directors seats that are not subject to contractual obligations). The SEC has solicited comment on situations involving controlled companies and companies that are contractually obligated to appoint directors.

What would happen if 25 percent of the company’s board is not a whole number?

The maximum number of shareholder nominees that the company would be required to include in its proxy materials would be rounded down to the closest whole number below 25 percent. For example, if the company’s board consists of 12, 13, 14 or 15 directors, the company would only be required to include three shareholder nominees in its proxy statement.

SHAREHOLDER NOMINEE REQUIREMENTS

Would a nominating shareholder’s nominee have to satisfy any requirements?

Yes. Nominees would need to satisfy three requirements:

  • Independence . The nominee would need to meet the objective independence standards of the national securities exchange or national securities association to which the company is subject. Those portions of the independence requirements that involve subjective determinations or that apply only to audit committees and not to directors generally would not have to be satisfied.
  • No violation of law or company governing documents . A company would not be required to include in its proxy materials any shareholder nominee whose candidacy or, if elected, board membership would violate applicable state or federal law, any rules of the national securities exchange or national securities association to which the company is subject, or the company’s governing documents. However, in the proposing release, the SEC states that if a company’s governing documents permit the inclusion of shareholder nominees in the company’s proxy materials but impose more restrictive eligibility standards or mandate more extensive disclosures than those required by the proposed rules, the company could not exclude a nominee on the grounds of failure to meet the more restrictive standards included in the company’s governing documents. “In other words, companies may not opt out of Rule 14a-11 by adopting alternate requirements for inclusion of shareholder nominees for director in the company’s proxy materials.”[5]
  • No agreement with company regarding nomination . Finally, neither the nominee nor the nominating shareholder (or any member of the nominating group) would be allowed to have an agreement with the company or an affiliate of the company regarding the nomination. This requirement, which is set forth in the form of a representation that the nominating shareholder or group must make, is designed to reduce the risk of a nominating shareholder acting as a surrogate for the company or its management in order to block usage of the rule by another nominating shareholder or group. Instructions to the proposed rule clarify that negotiations with a company’s nominating committee or board to have a nominee included in management’s slate, where those negotiations are unsuccessful, or negotiations are limited to whether the company is required to include a shareholder nominee in the company’s proxy materials under the proposed rules, would not be deemed an agreement for purposes of the rules.

    Under the proposed rules, there would be no restrictions on the relationships between a nominating shareholder or group and its nominees. Consequently, nominees do not have to be independent of the nominating shareholder or group and, in fact, can be members or affiliates of the nominating shareholder or group.

Would shareholders who nominate directors under proposed Rule 14a-11 be deemed to be affiliates of the company?

No. The instruction to the proposed rule contains a safe harbor making clear that a nominating shareholder will not be deemed an affiliate of the company solely as a result of nominating a director or soliciting for the election of such director nominee or against a company nominee pursuant to the rule. Also, if a shareholder nominee is elected, and the nominating shareholder or group does not have an agreement or relationship with that director, other than relating to the nomination, the nominating shareholder or group would not be deemed an affiliate solely by virtue of such nomination.

SOLICITING ACTIVITIES BY NOMINATING SHAREHOLDERS

Would communications among shareholders in connection with the formation of a nominating shareholder group be subject to the federal proxy rules?

To facilitate the formation of shareholder groups seeking to avail themselves of the new proxy access rule, the SEC is proposing to exempt communications in connection with the formation of these groups from most of the federal proxy rules. Specifically, any written (but not oral)[6] solicitation by or on behalf of a shareholder in connection with the formation of a nominating shareholder group under Rule 14a-11 will be exempt from most of the proxy rules, including those that require the filing of a proxy statement with the SEC,[7] provided that (1) any written soliciting material includes no more than a statement of each soliciting shareholder’s intent to form a nominating shareholder group, identification of and a brief statement regarding the potential nominee or nominees, or if nominees have not been identified, the characteristics of the nominee or nominees that the shareholder intends to nominate, the percentage of shares beneficially owned by the shareholder or shareholder group, and the means by which shareholders may contact the soliciting shareholder; and (2) such written soliciting material is filed under cover of Schedule 14A with the SEC and sent to each national securities exchange on which any class of securities of the company is listed no later than the date the communication is first sent to shareholders. Although these communications would be exempt from most of the proxy rules, they would remain subject to the anti-fraud provisions of Rule 14a-9.

What about soliciting activities in support of shareholder nominees or against the company’s nominees?

Written solicitations (but not oral solicitations) by or on behalf of a nominating shareholder or nominating shareholder group in support of a nominee included in the company’s proxy materials pursuant to proposed Rule 14a-11 or against the company’s nominee or nominees will be exempt from most of the proxy rules provided that (1) the soliciting party does not at any time during the solicitation seek, either on its own behalf or another’s behalf, the power to act as proxy for a shareholder and does not furnish or otherwise request a form of proxy or revocation; (2) each written communication identifies the nominating shareholder and his direct or indirect interests, by security holdings or otherwise, and includes a legend advising shareholders about the company’s proxy statement; and (3) such material is filed under cover of Schedule 14A with the SEC and sent to each national securities exchange on which any class of securities of the company is traded no later than the date the material is first sent to shareholders.

NOTICE AND DISCLOSURE REQUIREMENTS

How would shareholders nominate candidates under the proposed rules?

A nominating shareholder or group would be required to provide a notice on Schedule 14N to the company and file the Schedule 14N with the SEC.

When would the notice have to be provided?

The notice would have to be provided to the company and filed with the SEC by the date specified by the company’s advance notice provision or, where no such provision is in place, no later than 120 calendar days before the date that the company mailed its proxy materials for the prior year’s annual meeting. If the company did not hold an annual meeting during the prior year, or if the date of the meeting has changed by more than 30 calendar days from the prior year, however, then the nominating shareholder must provide notice a reasonable time before the company mails its proxy materials. In these situations, the company would be required to disclose the date by which the shareholder must submit the required notice on a Form 8-K within four business days after the company determines the anticipated meeting date.

The proposed rule does not set an outside date for the submission of nominees, unlike most advance notice bylaws, which typically require that nomination notices be given within a specified range of time, usually a 30-day window that ends well in advance of the meeting date. The SEC has solicited comment on whether a time range should be imposed. Because shareholder nominees are included in the company’s proxy materials on a “first come, first served” basis, the absence of an outside date for shareholder submissions may result in a rush by shareholders to make submissions immediately after (or conceivably even before) an annual meeting for the next annual meeting. But, setting an outside date for submissions when nominees are accepted on a “first in time” basis may also be problematic in determining which submission was received first, if the company receives multiple submissions on the first day of the submission period.

What information would be required in the notice on Schedule 14N?

The notice on Schedule 14N would require the following information—

  • the name and address of the nominating shareholder or each member of the nominating shareholder group
  • the amount and percentage of securities beneficially owned by the nominating shareholder or group members
  • a statement from the “record” holder of the shares beneficially owned by the nominating shareholder or each member of the nominating shareholder group verifying that, as of the date of the shareholder notice on Schedule 14N, the shareholder continuously held the securities being used to satisfy the ownership threshold for at least one year (this requirement would apply only where the nominating shareholder is not the registered holder of the shares and where the shareholder has not filed a Schedule 13D, Schedule 13G, or Form 3, 4 or 5)
  • a statement that the nominating shareholder or each group member intends to continue to own the requisite shares through the shareholder meeting, and disclosure of their intent with respect to continued ownership after the election
  • a certification that to the best of their knowledge and belief, the shares are not held for the purpose of, or with the effect of, changing the control of the issuer or gaining more than a limited number of seats on the board of directors
  • a representation that the nominating shareholder or group is eligible to submit a nominee under Rule 14a-11
  • a representation that, to the knowledge of the nominating shareholder or group, the candidate’s nomination or initial service on the board, if elected, would not violate controlling state law, federal law, or applicable listing standards (other than a standard relating to independence)
  • a representation that, to the knowledge of the nominating shareholder or group, the nominee meets the objective criteria for independence from the company in the rules of any national securities exchange or national securities association to which the company is subject
  • a representation that neither the nominee nor the nominating shareholder (nor any member of the nominating shareholder group, if applicable) has an agreement with the company regarding the nomination of the nominee.

The following information must be included not only in the Schedule 14N but also in the company’s proxy statement—

  • a statement from the nominee that the nominee consents to be named in the company’s proxy materials and to serve on the board if elected
  • a statement that the nominating shareholder or group intends to continue to own the requisite amount of securities through the date of the meeting, as well as a statement regarding their intent with respect to continued ownership after the election
  • disclosure about the nominee complying with the requirements of Items 4(b) (information about persons making solicitation); 5(b) (interests of persons making solicitation); 7(a) (disclosure of certain legal proceedings); 7(b) (disclosure relating to director nominee biographical information, transactions with related persons, Section 16 compliance, audit committee eligibility and financial expert status); and 7(c) (director independence) of Schedule 14A
  • disclosure about the nominating shareholder or members of a nominating shareholder group consistent with the disclosure currently required pursuant to Items 4(b) and 5(b) of Schedule 14A in a contested election
  • disclosure about whether the nominating shareholder or member of a nominating shareholder group has been involved in certain legal proceedings during the past five years
  • the following information regarding the nature and extent of the relationships between the nominating shareholder or group and nominee and the company or any affiliate of the company:
    • any direct or indirect material interest in any contract or agreement between the nominating shareholder or group or the nominee and the company or any affiliate of the company (including any employment agreement, collective bargaining agreement, or consulting agreement)
    • any material pending or threatened litigation in which the nominating shareholder or group or nominee is a party or a material participant and that involves the company, any of its officers or directors, or any affiliate of the company
    • any other material relationship between the nominating shareholder or group or the nominee and the company or any affiliate of the company not otherwise disclosed

  • any Web site address on which the nominating shareholder or group may publish soliciting materials
  • if desired to be included in the company’s proxy statement, any statement in support of the shareholder nominee or nominees, which may not exceed 500 words.

When would a nominating shareholder or group be required to amend a Schedule 14N?

Schedule 14N would need to be amended if any material change occurs in the facts set forth in the schedule. Also, an amended Schedule 14N would have to be filed within 10 calendar days of the announcement of the final results of the election stating the nominating shareholder’s or group’s intention concerning continued ownership of their shares.

What information on shareholder nominees would the company be required to include in its proxy statement?

The company would be required to include in its proxy materials disclosure concerning the nominating shareholder and the shareholder nominee or nominees that is similar to the disclosure currently required in a contested election. For a list of the required information, see the second part of the answer above to the question “What information would be required in the notice on Schedule 14N?”

What would the company be required to include in the form of proxy?

The company would be required to identify the shareholder nominees as such in the company’s form of proxy. However, the company would be permitted to recommend whether shareholders should vote for, against or withhold votes on those nominees and could continue to recommend that shareholders vote for management nominees. If a shareholder nominee is included in the proxy, the company could not use the current practice of providing shareholders the option of voting for or withholding authority to vote for management nominees as a group. Instead, each nominee would have to be voted on separately. Companies could continue to solicit discretionary authority to vote a shareholder’s shares for the company’s nominees, as well as cumulate votes for company nominees in situations where there is cumulative voting.

Would the company be responsible for the information included in its proxy statement that is furnished by a nominating shareholder?

No. The company will not be responsible for any such information unless the company knows or has reason to know that the information is false and misleading.

Would the company have to file its proxy statement in preliminary form if a shareholder nominee is included?

No. The rules would provide that inclusion of a shareholder nominee in the company’s proxy statement will not require a filing in preliminary form provided the company is otherwise eligible to file the proxy statement in definitive form. The SEC also clarified that inclusion of a shareholder nominee will not be deemed to be a “solicitation in opposition” for purposes of the proxy rules.

Under what circumstances could a company exclude a shareholder nominee?

A company could determine that it is not required under proposed Rule 14a-11 to include a nominee from a nominating shareholder or group in its proxy materials if the company determines any of the following—

  • Proposed Rule 14a-11 is not applicable to the company.
  • The nominating shareholder or group has not complied with the requirements of Rule 14a-11.
  • The nominee does not meet the requirements of Rule 14a-11.
  • Any representation required to be included in the notice to the company is false or misleading in any material respect; or
  • The company has received more nominees than it is required to include under proposed Rule 14a-11.

What procedures would the company need to follow to exclude a nominee from the company’s proxy materials?

To exclude a nominee, a company would be required to follow procedures that are similar to the procedures companies currently must follow when seeking to exclude shareholder proposals under Rule 14a-8. Specifically, the company would send a notice to the SEC when it determines not to include a shareholder nominee in its proxy materials and the company could seek staff advice through a no-action request regarding that determination. The following table sets forth the timeline for the procedures that must be followed:

Due Date Action Required

Date set by company’s advance notice provision or, in the absence of such a provision, 120 days before the anniversary of the date that the company mailed the prior year’s proxy materials

Nominating shareholder or group must provide to company and file with SEC notice on Schedule 14N

Within 14 calendar days after the company’s receipt of the nominating shareholder’s or group’s notice on Schedule 14N

Company must notify the nominating shareholder or group of any determination not to include the nominee or nominees and explain the basis for its determination

Within 14 calendar days after the nominating shareholder’s or group’s receipt of the company’s deficiency notice

Nominating shareholder must respond to the company’s deficiency notice and may correct any eligibility or procedural deficiencies[8]

No later than 80 calendar days before the company files its definitive proxy statement and form of proxy with the SEC[9]

Company must provide notice to the SEC and the nominating shareholder or group if it still intends to exclude the nominating shareholder’s or group’s nominee or nominees and the basis for its determination