On June 10, 2009, the Securities and Exchange Commission (SEC) proposed new rules (Release No. 33-9046) giving certain shareholders access to a public company’s proxy materials prepared in connection with a meeting at which directors will be elected (shareholder meeting) in order to solicit votes for director candidates nominated by those shareholders. The proposed rules would generally require a company to include disclosures about eligible director nominees submitted by eligible shareholders in the company’s proxy materials, so long as the shareholders are not seeking to change the control of the company or to gain more than a limited number of seats on the board.
In addition, the proposed rules would allow shareholders to submit proposals to amend, or request an amendment to, a company’s governing documents regarding nomination procedures or disclosures related to shareholder nominations. The proposed rules would apply to all reporting companies, including investment companies, other than companies that have only publicly held debt.
Proposed Rule 14a-11
New Rule 14a-11 is at the heart of the changes the SEC has proposed. This new rule would require a company to include director nominees submitted by eligible shareholders in a company’s proxy materials, unless state law or the company’s governing documents prohibit shareholders from nominating directors. In order to comply with the rules, the submitting shareholder and its director nominee must meet eligibility requirements and satisfy certain disclosure and procedural requirements.
Shareholder Eligibility
Under the proposed rules, a shareholder can nominate directors using the company’s proxy materials, if they meet the following ownership thresholds:
- at least 1% of the voting stock of large accelerated filers or registered investment companies with net assets of $700 million or more,
- at least 3% of the voting stock of accelerated filers or registered investment companies with net assets of $75 million or more, but less than $700 million, and
- at least 5% of the voting stock of non-accelerated filers or registered investment companies with net assets less than $75 million.
Shareholders can aggregate holdings to meet these thresholds. In addition, shareholders must have held the requisite number of shares for at least one year as of the date they give notice to the company of their intent to include nominees in the company’s proxy materials.
Nominee Eligibility
For a nominee to be eligible, the candidacy or board membership must not violate applicable laws, and the nominee must satisfy applicable independence requirements. Moreover, nominating shareholders must represent that there are no relationships or agreements between the nominee and the company or its affiliates.
Number of Nominees
Under the proposed rules, eligible shareholders can nominate the greater of one nominee or up to the number that represents 25% of the company’s board of directors, whichever is greater.
Notice and Disclosure Requirements
Proposed Rule 14a-11 would require nominating shareholders to notify the company of their intention to make a nomination using a new Schedule 14N. The notice would be filed simultaneously with the SEC. Notice must be given within the time period specified in a company’s advance notice provision for director nominations in its governing documents, or if a company does not have such a provision, no later than 120 calendar days before the date the company mailed its proxy materials for the prior year’s annual meeting.
The new Schedule 14N would require information such as the following:
- name and address of the nominating shareholder,
- information regarding the amount and percentage of securities owned by the shareholder,
- statement verifying that shareholders continuously held the company’s voting securities for at least one year as of the date of the notice, and will continue to hold shares through the date of the shareholder meeting and after the election,
- a certification that the securities are not held for the purpose of changing control of the company or gaining more than a limited number of seats on the board of directors,
- various representations including the shareholder’s eligibility and the nominee’s independence,
- various disclosures including Schedule 14A disclosures concerning the nominee and the nominating shareholder, and
- any statement in support of nominees, which may not exceed 500 words.
Company Requirements
New Rule 14a-11 will also address a company’s obligations once it receives notice including, among other things, the process to be followed when a company seeks to exclude a director nominee submitted by a shareholder from the company’s proxy materials.
Proposed Amendment to Rule 14a-8
Under the proposed rules, Rule 14a-8, regarding shareholder proposals in general, would be amended to require a company to include in its proxy materials proposals that would amend, or that request an amendment to, a company’s governing documents regarding nomination procedures or disclosures related to shareholder nominations.
Additional Amendments
The SEC also proposes the following noteworthy changes:
- Pursuant to new Item 5.07 to Form 8-K, a company would be required to disclose the date of its annual meeting, if the company did not hold an annual meeting in the prior year or the date of the meeting has changed by more than 30 calendar days from the prior year. The Form 8-K must be filed within four business days after the company determines the anticipated meeting date.
- Under the proposed rules, a nominating shareholder or group will not lose eligibility to file abbreviated beneficial ownership reports as a passive investor pursuant to Schedule 13G solely as a result of making a nomination pursuant to Rule 14a-11.
- The proposed rules also address liability relating to statements made by nominating shareholders. Nominating shareholders would be liable for any false or misleading statements provided to the company that are then included in the proxy materials. A company would not be responsible for the information provided by the shareholder, unless the company knows or has reason to know the information is false.
Requests for Comment
The SEC has requested comments on every aspect of the proposed rules, including whether:
- the proposals are appropriate,
- the proposed requirements should be stricter or looser,
- proposed time periods should be shorter or longer, and
- there are any requirements that should be eliminated or added.
Specific requests for comment include, among other requests:
- What specific issues would arise in an election that is conducted by cumulative voting?
- For companies that have more than one class of securities entitled to vote on the election of directors, does the rule provide adequate guidance on how to determine whether a shareholder meets the requisite ownership thresholds?
- Should the proposed rule address situations where the governing documents provide a range for the number of directors on the board rather than a fixed number of board seats?
- Should the procedure address situations in which, due to a staggered board, fewer director positions are up for election than the maximum permitted number of shareholder nominees? If so, how?
- Should the inclusion of a shareholder nominee be viewed as a solicitation in opposition that would require a company to file its proxy statement in preliminary form?
Comments must be received by the SEC on or before August 17, 2009.
Issues for Consideration Regarding the Proposal
The SEC has previously looked at the issue of proxy access on many occasions with the most recent in depth consideration beginning in 2003. Numerous comments were received by the SEC on these occasions. In the current proposed rules, the SEC has tried to respond to previous concerns that were raised. Shareholder eligibility requirements have been modified. The number of candidates that can be nominated by eligible shareholders has been revised. However, several concerns still exist.
The most significant issue is whether the SEC has the authority to regulate in this arena. Corporate governance has generally been governed by state law. Absent the adoption of federal legislation that clarifies the issue, such as that recently introduced by Senator Schumer, it is expected that litigation will ensue if the SEC adopts the proxy access rules in the form proposed.
Many believe that shareholder-nominated directors could impede the proper functioning of boards and their companies and cause inefficiencies. For example, a shareholder-nominated director may focus his or her concerns on the issues that are important to the nominating shareholder rather than shareholders overall. Another concern is that the possibility of contested elections could deter qualified candidates from seeking to serve on the board of directors.
If the new rules are adopted, coordinating state law provisions will likely be necessary. States have already begun to look at this issue and adopt their own statutes. In 2007, North Dakota amended its corporate code to permit holders of more than 5% of a company’s stock to nominate directors and require the company to include each such shareholder nominee in its proxy statement and form of proxy. In April 2009, Delaware adopted amendments to the Delaware General Corporation Law that clarify that companies can adopt bylaws allowing individuals nominated by shareholders to be included in the company’s proxy solicitation materials. The Delaware amendments will become effective August 1, 2009. In addition, the ABA is currently considering changes to the Model Business Corporation Act (MBCA) to allow for proxy access bylaws. States whose corporate laws are based on the MBCA are also looking at their own statutes to determine whether changes should be made.
Proxy access proposals are being made contemporaneously with a number of other changes or proposed changes relating to the director nomination process, including mandatory majority vote (replacing traditional plurality voting for director elections) and broker discretionary voting in uncontested elections. Companies and shareholders will need to consider carefully how all of the new rules will work together. For example, shareholders may find that they wield greater control over director elections by engaging in a “vote no” campaign rather than nominating candidates under proxy access rules thus creating a situation where plurality voting will govern.
McGuireWoods LLP assists clients in complying with their corporate governance and public reporting obligations and we are actively monitoring developments relating to proxy access. We are ready to assist you to comment on the proposed rules and to assist you in preparing to respond to any changes in the area of corporate governance.