SEC Adopts Proxy Access RulesSeptember 10, 2010
On August 25, 2010, the Securities and Exchange Commission adopted new rules to facilitate the rights of shareholders to nominate directors to a company's board. The new rules will require, under certain circumstances, that a company's proxy materials provide shareholders with information about, and the ability to vote for, a shareholder's, or group of shareholders', nominees for directors. The new rules will also require that companies include in their proxy materials, under certain circumstances, shareholder proposals that seek to establish a procedure in the company's governing documents for the inclusion of one or more shareholder director nominees in the company's proxy materials.
This alert only provides a summary of the new proxy rules and procedures. There may be additional provisions and procedures that apply to your company. The adopting release is available online.
The effective date of the new rules is 60 days after their expected date of publication in the Federal Register in early September. However, as described in more detail below, the deadline for shareholders or groups to submit a director nominee or nominees is 120 days prior to the anniversary of the date on which proxy materials were mailed in 2010. Accordingly, the new proxy access rules will apply for a company's 2011 annual meeting if the first anniversary of the mailing of its 2010 proxy materials occurs within 120 days of effectiveness. For example, if the effective date for the new proxy rules is November 1, 2010, then shareholders will have a proxy access right in 2011 if the company mailed its proxy materials for the last annual meeting on or after March 1, 2010.
New Exchange Act Rule 14a-11
Companies Subject to Rule 14a-11
New Rule 14a-11 will apply to all reporting companies under the Securities Exchange Act, including registered investment companies and controlled companies, but not companies whose only public securities are debt securities. Rule 14a-11 will also apply to smaller reporting companies, but the SEC has decided to delay the new rule's application to these companies for three years following the effectiveness of the new rule for other companies.
Shareholders Eligible to Use Rule 14a-11
Shareholders will be eligible to have their nominee or nominees included in the proxy materials if:
- They own, as of the date of the shareholder notice on new Schedule 14N (discussed in more detail below), either individually or in the aggregate with other members of their group, at least 3% of the total voting power of the company's securities that are entitled to be voted in the election of directors at the annual meeting (or, in lieu of an annual meeting, a special meeting of shareholders);
- They have held those securities continuously for at least three years as of the date of the Schedule 14N, and continue to hold the required amount of securities through the date of the shareholder meeting;
- They are not holding any of the company's securities with the purpose, or with the effect, of changing control of the company or to gain a number of seats on the board of directors that exceeds the maximum number of nominees that the company is required to include under Rule 14a-11, as described below; and
- They provide to the company and file with the SEC a notice on Schedule 14N of intent to require the inclusion of the nominating shareholder's or group's nominee or nominees in the company's proxy materials.
Proxy Solicitation Exemptions
Because Rule 14a-11 permits shareholders to aggregate their securities with other shareholders in order to meet the applicable minimum ownership threshold, the SEC anticipates that shareholders would most likely engage in communications with other shareholders in an effort to form a nominating shareholder group. Under the current proxy rules, such communications between shareholders would be deemed solicitations. Accordingly, the SEC adopted an exemption from the proxy solicitation rules for written and oral communications among shareholders about a shareholder's intent to form a nominating group. The SEC has also exempted communications made in support of a nominee included in a company's proxy materials under Rule 14a-11. These new exemptions are subject to certain consent requirements and limitations as well as filing requirements as set forth in the new rules.
Nominee Eligibility under Rule 14a-11
Under Rule 14a-11, a company will not be required to include in its proxy materials any nominee whose candidacy or board membership would violate controlling state or federal law or the applicable standards of a national securities exchange where such violation could not be cured during the time period provided in Rule 14a-11, as described below. The shareholder nominee must also satisfy the objective independence standards of the applicable national securities exchange or, in the case of an investment company, the nominee must not be an "interested person" of the registrant, as defined in Section 2(a)(19) of the Investment Company Act of 1940.
Furthermore, neither the nominating shareholder or group nor the nominee may have a direct or indirect agreement with the company regarding the nomination. However, there are no restrictions on the types of relationships between the nominating shareholder and nominee.
Maximum Number of Shareholder Nominees
Under Rule 14a-11, a company would be required to include no more than the greater of one shareholder nominee or the number of nominees that represents 25% of the company's board of directors. In instances where this calculation does not result in a whole number, the number of shareholder nominees is rounded down to the closest whole number under 25%. In the context of a company with a staggered board, where the shareholders are only entitled to elect a subset of the total number of directors, the 25% calculation would still be based on the total number of board seats. However, the company may exclude a shareholder nominee if including that nominee would result in the company exceeding the maximum number of nominees it is required to include in its proxy statement and form of proxy.
Priority of Nominations Received by a Company
Under Rule 14a-11, a company will be required to include in its proxy materials the nominee or nominees of the nominating shareholder or group with the highest voting power percentage as of the date of filing of the Schedule 14N, up to and including the total number of shareholder nominees required to be included by the company. If such nominating shareholder or group does not nominate the maximum number of directors allowed under the Rule, the company will be required to include the nominee or nominees of the shareholder or group with the next highest qualifying voting power percentage up to the maximum number of shareholder nominees. If a director nominee or nominating shareholder or group is withdrawn or is disqualified before the company prints its proxy materials, the company must include substitute nominees if there are other qualified nominations. However, once a company has commenced printing its proxy materials, it will not be required to include substitute nominees.
Notice on New Schedule 14N
To submit a nominee for inclusion in the company's proxy materials, a nominating shareholder or group must provide a notice to the company on Schedule 14N of its intent to require that the company include that shareholder's or group's nominee or nominees in the company's proxy materials. The notice on Schedule 14N must also be filed with the SEC on the date it is first sent to the company. The notice on Schedule 14N must be transmitted to the company and filed with the SEC no earlier than 150 calendar days, and no later than 120 calendar days, before the anniversary of 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, then the company (including registered investment companies) must file a Form 8-K within four business days of determining the anticipated date of the meeting, disclosing the date by which a nominating shareholder or group must submit notice to include a nominee pursuant to Rule 14a-11. The date must be a reasonable time before the company mails its proxy materials for the meeting. A registered investment company that is a series company is also required to disclose on the Form 8-K the total number of the company's shares that are entitled to vote for the election of directors at the meeting as of the end of the most recent calendar quarter.
Schedule 14N will require a nominating shareholder or group to provide detailed disclosure regarding the nominating shareholder or group and the nominee. In addition to certain information required by Schedule 14A, such information includes: (1) identifying and contact information regarding the nominating shareholder or each member of the group; (2) ownership amounts of company securities held by the nominating shareholder and each member of the group; (3) a certification that the nominating shareholder and each member of the group has continuously held the qualifying amount of securities for at least three years; (4) a certification that the nominating shareholder and each member of the group intends to hold the qualifying amount of securities through the shareholder meeting; and (5) an optional statement in support of the shareholder nominee or nominees, which may not exceed 500 words per nominee.
Requirements for a Company Receiving a Notice
Unless a company determines that it may exclude the shareholder nominee or nominees in its proxy materials (as described below), the company must notify the nominating shareholder or group in writing no later than 30 calendar days before the company files its definitive proxy statement with the SEC that it will include the nominee.
Under new Rule 14a-11, a company may exclude a shareholder nominee or nominees because: (1) Rule 14a-11 is not applicable to the company; (2) the nominating shareholder or group failed to satisfy the eligibility requirements of Rule 14a-11; or (3) including the nominee or nominees would result in the company exceeding the maximum number of nominees it is required to include in its proxy statement and form of proxy. If a company determines that it will exclude the shareholder nominee from its proxy materials based on the criteria above, the company must notify the nominating shareholder or group of its determination not to include the nominee or nominees no later than 14 calendar days after the close of the window period for submission of nominees. The nominating shareholder or group must then respond to the company's deficiency notice and, where applicable, cure any defects in the nomination no later than 14 calendar days after receipt of the company's notice.
If the company still determines that it will exclude the shareholder nominee, it must provide notice of its intent to do so and the basis for its determination to the SEC and, if desired, seek a no-action letter from the SEC staff no later than 80 calendar days before the company files its definitive proxy statement with the SEC. The nominating shareholder or group may submit a response to the company's notice to the SEC, but must do so no later than 14 calendar days after the shareholder's or group's receipt of the company's notice to the SEC. If requested by the company, the SEC staff may, at its discretion, provide an informal statement of its view to the company and the shareholder or group as soon as practicable. Promptly following receipt of the staff's informal statement of its views, the company must provide notice to the nominating shareholder or group stating whether it will include or exclude the nominee.
Amendments to Shareholder Proposal Rules
Currently, Rule 14a-8(i)(8) allows a company to exclude from its proxy materials a shareholder proposal that relates to a nomination or an election for membership on the company's board of directors or a procedure for such nomination or election. The SEC approved an amendment to Rule 14a-8(i)(8), also known as the "election exclusion," to require companies to include in company proxy materials shareholder proposals that seek to establish a procedure in the company's governing documents for the inclusion of shareholder director nominees in the company's proxy materials. The shareholder proposal would have to meet the procedural requirements of Rule 14a 8 and not be subject to one of the rule's substantive exclusions, other than the election exclusion. Shareholder proposals under Rule 14a-8(i)(8) that conflict with proposed Rule 14a-11 (e.g., proposals that would preclude nominations by shareholders who would otherwise qualify under proposed Rule 14a-11 to have their nominee for director included in the company's proxy materials) or applicable state law would be excluded. Accordingly, the amendments to Rule 14a-8(i)(8) could result in shareholders proposing amendments to a company's governing documents that would establish procedures for nominating directors and disclosures related to such nominations that require a different ownership threshold, holding period, or other qualifications or representations than those proposed in Rule 14a-11. However, any procedure established under Rule 14a-8(i)(8) would be in addition to, not in lieu of, Rule 14a-11.
The new proxy rules could potentially have a significant impact on public companies in the 2011 proxy season. However, business groups such as the U.S. Chamber of Commerce have vowed to challenge the new proxy rules. We will continue to monitor the ongoing developments.
Please do not hesitate to contact a member of Godfrey & Kahn's Securities Practice Group if you have any questions regarding the new proxy rules.