alerts & publications
SEC Proposes "Proxy Access" RulesJanuary 1, 0001
The Securities and Exchange Commission, by a 3-2 vote, proposed for public comment significant revisions to the federal proxy rules that would require public companies to include shareholder director nominees in their proxy materials. The comment period on these proposed amendments to the proxy rules will be open for 60 days from the date the Commission’s proposing release is published.
The description of the proposals below is based on statements at the public meeting at which the Commission voted on the proposals. Upon formal release of the rule proposals, we will update this Client Alert to provide additional detail.
The Proposed Amendments to the Federal Proxy Rules
Proposed New Rule 14a-11
The Commission proposed new Rule 14a-11, which would require any company that is subject to the proxy rules under Section 14(a) of the Securities Exchange Act of 1934 (including any such investment company) to include shareholder nominees for director in its proxy materials. As proposed, if a company subject to Rule 14a-11 receives a notice from an eligible shareholder (or group of shareholders) regarding its intent to nominate directors for election at a company’s meeting, the company would be required to include those nominees in the company’s proxy materials as long as the company's shareholders are not otherwise prohibited by the company’s governing documents or applicable state law from nominating candidates for director. The number of such shareholder-submitted nominees that a company would be required to include in its proxy materials would be limited to the greater of one director or 25% of the number of directors on the company’s board.
Eligibility Requirements. To be eligible to nominate directors for inclusion in a company’s proxy materials, a shareholder (or group of shareholders) would be required to satisfy the following requirements:
1. The nominating shareholder (or group of shareholders) must own a specified percentage of the company’s securities that are entitled to vote on the election of directors at the company’s meeting of shareholders, based on the size of the company, as follows:
- if the company is a large accelerated filer ($700 million or more in public float) or a registered investment company that has net assets of $700 million or more, the ownership requirement would be 1%;
- if the company is an accelerated filer ($75 million or more in public float, but less than $700 million in public float) or a registered investment company that has net assets of $75 million or more but less than $700 million, the ownership requirement would be 3%;
- if the company is a non-accelerated filer (less than $75 million in public float) or a registered investment company that has net assets of less than $75 million, the ownership requirement would be 5%.
2. The nominating shareholder (or group of shareholders) must have held the requisite percentage of securities for at least one year at the time of providing notice to the company of its intent to nominate directors and must certify its intent to hold those securities continuously through the meeting at which directors would be elected.
3. The nominating shareholder (or group of shareholders) must certify that it has no intent to seek a change in control of the company or to gain more than a minority representation on the board.
Notice Requirements. The nominating shareholder (or group of shareholders) would be required to provide notice to the company indicating that it satisfies the above eligibility and certification requirements. The nominating shareholder also must file a copy of the notice on new Schedule 14N with the Commission. Specifically, the notice would be required to include the following information:
- disclosure of the amount of securities held by the nominating shareholder (or group of shareholders) and the length of time those securities have been held;
- a statement of the shareholder’s intent to hold those securities through the meeting at which directors will be elected;
- certification that the shareholder does not have an intent to seek to change control of the company or gain more than a minority representation on the board; and
- information about the nominating shareholder and nominees that is the same as would be required to be provided to shareholders in a proxy contest.
If the company does not have an advance notice bylaw provision applicable to director nominations, the notice would be required to be submitted to the company and the Commission at least 120 days before the first anniversary of the date that the prior year’s proxy materials were first released to shareholders (which is consistent with the timing for the submission of shareholder proposals in Rule 14a-8). If the company has an advance notice bylaw provision applicable to director nominations, the shareholder would be required to provide the notice to the company and the Commission in accordance with the timing of that bylaw.
If separate shareholders (or separate groups of shareholders) submit director nominees, and the total number nominees covered by the notices exceeds the greater of one director or 25% of the number of directors on the company’s board, the company would be required to include only those nominees for which it first received timely notice.
Conditions Applicable to Nominees. A shareholder (or group of shareholders) is not permitted to nominate an individual for election to the company’s board of directors unless the following conditions are satisfied:
- the nominee’s candidacy and board membership (if the nominee is elected) must be consistent with applicable law and regulation;
- the nominee must satisfy any applicable exchange listing standards regarding director independence (if the company is not listed on an exchange, there is no such independence requirement); and
- the nominating shareholder (or a group of shareholders) must have no direct or indirect agreement with the company regarding the nomination of the nominee.
There is no limitation on the extent of relationships between the nominating shareholder and the nominee (as a result, the shareholder could nominate herself or himself for director).
Exemption from the Proxy Solicitation Rules. To facilitate the operation of proposed Rule 14a-11, the Commission proposed amendments to the federal proxy rules that would provide an exception from those rules for both solicitations in support of a shareholder nominee for director and solicitations by a shareholder that is seeking to form a nominating group. Further, the proposals would make clear that a shareholder (or group of shareholders) would not lose eligibility to file beneficial ownership reports on Schedule 13G as a result of such shareholder’s (or shareholder group’s) nomination of director nominees for election to the company’s board, such shareholder’s (or shareholder group’s) solicitation in favor of such a nominee, or the election of such a nominee to the company’s board.
Proposed Amendments to Rule 14a-8
The Commission also proposed amendments to Rule 14a-8(i)(8), which is often referred to as the “election exclusion” provision of the shareholder proposal rule. Rule 14a-8(i)(8) was previously amended by the Commission on November 28, 2007 to make clear that the election exclusion permits a company to exclude a shareholder proposal if it “relates to a nomination or an election for membership on the company’s board of directors or analogous governing body or a procedure for such nomination or election.” This November 2007 amendment made clear that companies were not required to include in their proxy materials any “shareholder access” proposals to establish procedures that would result in a contested election, either in the year in which the proposal is submitted or in subsequent years.
The Commission today proposed to revise Rule 14a-8 to allow significantly more shareholder proposals relating to the processes for the nomination and election of directors. The proposed amendment to Rule 14a-8(i)(8) would require the inclusion of shareholder proposals that would amend or request an amendment to a company’s governing documents concerning the company's nomination procedures or other director nomination disclosure provisions, so long as those disclosure provisions do not conflict with applicable law (including proposed Rule 14a‑11). As a result, the shareholder proposals that would be required to be included in a company’s proxy materials may go beyond proposed Rule 14a-11, but would not be permitted to limit the operation of that rule. There would be no heightened eligibility standard for these shareholder proposals; the existing requirements of Rule 14a-8 would apply to these proposals, including the eligibility requirements of Rule 14a-8(b).
If You Have Any Questions about the Commission’s Proxy Proposals
The rules proposed today by the Commission would fundamentally alter the nature of the proxy process for the election of directors for U.S. public companies. The public comment process regarding these rule proposals will provide the only opportunity for those companies to provide the Commission with their views regarding the broad principles in the proposals and the logistics that would be necessary to comply with the proposals. If you have any questions regarding these proxy proposals or the submission of comments to the Commission, please contact the authors of this Client Alert or any of O'Melveny's Corporate Finance partners.
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