Proxy Access: SEC Proposed Changes
On June 10, 2009, the Securities and Exchange Commission released proposed amendments to the proxy rules that would require a public company to give its shareholders proxy access (i.e., give shareholders the right to place their nominees for director on the company's proxy card) in certain limited circumstances.
Proposed Changes
Proposed Rule 14a-11
The proposal includes the adoption of a new proxy rule, Exchange Act Rule 14a-11. This rule would, under certain circumstances, require a company to include shareholder nominees for director in the company's proxy materials. This requirement would apply to all companies subject to the Exchange Act proxy rules, except (1) those companies that are subject to such rules solely because they have a class of debt registered under Section 12 of the Exchange Act, and (2) where shareholder director nominations are prohibited by state law or a company's governing documents.
Eligibility Requirements. Proposed Rule 14a-11 would be available only to those shareholders of a company that have a significant, long-term interest in the company. As such, a company will be required to include shareholder nominees in its proxy materials if the nominating shareholder or group:
First, the company must determine whether the nominee must be included in the proxy statement and, if so, must notify the nominating shareholder or group no later than 30 calendar days before the company files its definitive proxy statement and form of proxy with the SEC. On the company's form of proxy, the company will be permitted to identify any shareholder nominees as such and recommend how shareholders should vote (for, against or withhold) for those nominees; however, the company must otherwise represent the shareholder nominees in an impartial manner. The proposed rules would require that each nominee be voted for separately, rather than as a group (as is currently permitted).
Second, the company must include, if provided on proposed Schedule 14N, the nominating shareholder's or group's statement in support of the nominee or nominees.
The proposed rules set forth a process by which a company may determine that a nominee may be excluded from its proxy statement. If the company determines that it is permitted to exclude a nominee, it must inform the nominating shareholder or group of such exclusion and undergo a no-action process similar to the current Rule 14-8 process.
Proposed Rule 14a-19
The proposal includes the adoption of another new proxy rule, Rule 14a-19, which would apply to a shareholder nomination for director for inclusion in a company's proxy materials made pursuant to state law procedures (i.e., a by-law adopted under new Delaware GCL Section 112) or a company's governing documents. Similar to proposed Rule 14a-11, proposed Rule 14a-19 would require a nominating shareholder or group to file a notice on proposed Schedule 14N and to include certain disclosures regarding the nominating shareholder or group and the nominee or nominees thereon.
Amendment to Rule 14a-8(i)(8)
In addition to the rules regarding director nominees, the proposal also includes an amendment to Exchange Act Rule 14a-8(i)(8) to require a company to include in its proxy materials shareholder proposals that would amend, or that request an amendment to, a company's governing documents regarding nomination procedures or disclosures related to shareholder nominations (provided such proposals do not conflict with proposed Rule 14a-11). Currently, a company is permitted to exclude such proposals from their proxy materials.
Under the proposed amendment, a company would only be permitted to exclude a proposal under Rule 14a-8(i)(8) if it would:
Currently, if a shareholder is dissatisfied with a company's board of directors, the shareholder has the following options to effect a change:
If the proposed rules become final, shareholders will no longer be required to go through the expensive and time-consuming process of a proxy contest, which will likely result in more nominations and more challenges to a company's slate of directors in any given election. In addition, the cost of determining whether to include the shareholder's nominee(s) and of including the information in the proxy materials will fall to the company. Depending upon the number of nominations, this could prove to be a very expensive process.
The proposed amendment to Rule 14a-8(i)(8) could also prove costly to a company as it may require the company to make changes to its governing documents and its practices regarding the nomination of director candidates. Not only would a company incur the cost of including a proposal for such changes in its proxy materials, but if such proposals are approved by the shareholders, it will incur the cost of changing the documents themselves.
The proposed rules will also have an impact on a company's incumbent board members as the rules give shareholders greater freedom to nominate opponents to such incumbents.
How Can I get More Information or Comment on the Proposal?
For more information on the proposed rule or if you are interested in commenting on the proposed rule you may contact any member of the Buchanan Ingersoll & Rooney Securities Practice Group.
Proposed Changes
Proposed Rule 14a-11
The proposal includes the adoption of a new proxy rule, Exchange Act Rule 14a-11. This rule would, under certain circumstances, require a company to include shareholder nominees for director in the company's proxy materials. This requirement would apply to all companies subject to the Exchange Act proxy rules, except (1) those companies that are subject to such rules solely because they have a class of debt registered under Section 12 of the Exchange Act, and (2) where shareholder director nominations are prohibited by state law or a company's governing documents.
Eligibility Requirements. Proposed Rule 14a-11 would be available only to those shareholders of a company that have a significant, long-term interest in the company. As such, a company will be required to include shareholder nominees in its proxy materials if the nominating shareholder or group:
- Beneficially owns, as of the date of the shareholder notice, a percentage of the company's securities that are entitled to be voted on the election of directors at the annual meeting of shareholders ranging from 1 percent to 5 percent depending upon the size of the issuer.
- Has beneficially owned such securities continuously for at least one (1) year as of the date of the shareholder notice.
- Represents that it intends to continue to own those securities through the date of the annual or special meeting.
- Not acquire or hold the securities for the purpose of or with the effect of changing control of the company or to gain more than a limited number of seats on the board (the greater of one nominee and the number of nominees that represent 25 percent of the company's board of directors);
- Provide and file with the SEC a notice to the company on proposed Schedule 14N of the nominating shareholder's or group's intent to require that the company include that nominating shareholder's or group's nominee(s) in the company's proxy materials 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.
- The nomination must be consistent with applicable state and federal law and the rules of a national securities exchange or national securities association (other than rules of a national securities exchange or national securities association that set forth requirements regarding the independence of directors) and the nominating shareholder or group must make a representation on proposed Schedule 14N to that effect.
- If the company is subject to the requirements of a national securities exchange or a national securities association, the nominating shareholder or group must make a representation on proposed Schedule 14N that the shareholder nominee is in compliance with the generally applicable objective director independence standards of a national securities exchange or national securities association (the subjective standards need not be considered).
- If the company is a registered investment company or a business development company, the nominating shareholder or group must represent on proposed Schedule 14N that its nominee is not an "interested person" of the company as defined in Section 2(a)(19) of the Investment Company Act, rather than making the representation regarding independence.
- The nominating shareholder or group must represent on proposed Schedule 14N that neither the nominee nor the nominating shareholder (or any member of the nominating shareholder group) has an agreement with the company regarding the nomination of the nominee.
First, the company must determine whether the nominee must be included in the proxy statement and, if so, must notify the nominating shareholder or group no later than 30 calendar days before the company files its definitive proxy statement and form of proxy with the SEC. On the company's form of proxy, the company will be permitted to identify any shareholder nominees as such and recommend how shareholders should vote (for, against or withhold) for those nominees; however, the company must otherwise represent the shareholder nominees in an impartial manner. The proposed rules would require that each nominee be voted for separately, rather than as a group (as is currently permitted).
Second, the company must include, if provided on proposed Schedule 14N, the nominating shareholder's or group's statement in support of the nominee or nominees.
The proposed rules set forth a process by which a company may determine that a nominee may be excluded from its proxy statement. If the company determines that it is permitted to exclude a nominee, it must inform the nominating shareholder or group of such exclusion and undergo a no-action process similar to the current Rule 14-8 process.
Proposed Rule 14a-19
The proposal includes the adoption of another new proxy rule, Rule 14a-19, which would apply to a shareholder nomination for director for inclusion in a company's proxy materials made pursuant to state law procedures (i.e., a by-law adopted under new Delaware GCL Section 112) or a company's governing documents. Similar to proposed Rule 14a-11, proposed Rule 14a-19 would require a nominating shareholder or group to file a notice on proposed Schedule 14N and to include certain disclosures regarding the nominating shareholder or group and the nominee or nominees thereon.
Amendment to Rule 14a-8(i)(8)
In addition to the rules regarding director nominees, the proposal also includes an amendment to Exchange Act Rule 14a-8(i)(8) to require a company to include in its proxy materials shareholder proposals that would amend, or that request an amendment to, a company's governing documents regarding nomination procedures or disclosures related to shareholder nominations (provided such proposals do not conflict with proposed Rule 14a-11). Currently, a company is permitted to exclude such proposals from their proxy materials.
Under the proposed amendment, a company would only be permitted to exclude a proposal under Rule 14a-8(i)(8) if it would:
- Disqualify a nominee standing for election.
- Remove a director from office before the expiration of his or her term.
- Question the competence, business judgment, or character of one or more nominees or directors.
- Nominate a specific individual for election to the board of directors (other than pursuant to 14a-11, state law or the company's governing documents).
- Otherwise affect the outcome of the upcoming election of directors.
Currently, if a shareholder is dissatisfied with a company's board of directors, the shareholder has the following options to effect a change:
- Launch a proxy contest in accordance with SEC proxy rules.
- Use the shareholder proposal procedure in Rule 14a-8 to submit proposals and have a vote on certain topics (other than director elections).
- Conduct a "withhold vote" or "vote no" campaign against one or more directors.
- Propose a board nominee at a shareholder meeting.
- Engage in a dialogue with management (including recommending a candidate to a nominating committee).
If the proposed rules become final, shareholders will no longer be required to go through the expensive and time-consuming process of a proxy contest, which will likely result in more nominations and more challenges to a company's slate of directors in any given election. In addition, the cost of determining whether to include the shareholder's nominee(s) and of including the information in the proxy materials will fall to the company. Depending upon the number of nominations, this could prove to be a very expensive process.
The proposed amendment to Rule 14a-8(i)(8) could also prove costly to a company as it may require the company to make changes to its governing documents and its practices regarding the nomination of director candidates. Not only would a company incur the cost of including a proposal for such changes in its proxy materials, but if such proposals are approved by the shareholders, it will incur the cost of changing the documents themselves.
The proposed rules will also have an impact on a company's incumbent board members as the rules give shareholders greater freedom to nominate opponents to such incumbents.
How Can I get More Information or Comment on the Proposal?
For more information on the proposed rule or if you are interested in commenting on the proposed rule you may contact any member of the Buchanan Ingersoll & Rooney Securities Practice Group.
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