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The SEC’s “Proxy Access” Proposals

June 30, 2009

 

On June 10, 2009, the Securities and Exchange Commission released the full text of its proposed revisions to the federal proxy rules that would require public companies to include shareholder director nominees in their proxy materials. The description of the proposed amendments to the federal proxy rules below updates the previous Client Alert we distributed on May 20, 2009 following the Commission’s open meeting announcing the proposed rule changes. The comment period on the proposed amendments will expire on August 17, 2009.

The Proposed Amendments to the Federal Proxy Rules

Proposed New Rule 14a-11 and Rule 14a-18

The Commission proposed new Rule 14a-11, which would require companies, under certain circumstances, to include shareholder nominees for director in the companies’ proxy materials. Rule 14a-11 would apply to any company that is subject to the proxy rules under Section 14(a) of the Securities Exchange Act of 1934 (including investment companies registered under Section 8 of the Investment Company Act of 1940)[1], other than companies that are subject to Section 14(a) solely because they have a class of debt registered under Exchange Act Section 12.

As proposed, if a company subject to Rule 14a-11 receives a valid 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.

Eligibility Requirements Applicable to Nominating Shareholders

A shareholder (or group of shareholders) would be required to satisfy the following requirements as of the date of its notice to the company in order to be eligible to nominate directors for inclusion in a company’s proxy materials:

  • The nominating shareholder (or group of shareholders) must beneficially 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)[2] 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%; or
      • 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%.
  • The nominating shareholder (or group of shareholders) must have beneficially owned 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. This continuous ownership requirement is consistent with the similar requirement currently applicable to shareholders submitting proposals under Rule 14a-8.
  • 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 limited number of seats on the board.

Eligibility Requirements Applicable to Nominees

A shareholder (or group of shareholders) would be permitted to nominate an individual for election to the company’s board of directors only if the following conditions are satisfied:

  • The nominee’s candidacy and board membership (if the nominee is elected) cannot violate any controlling state law, federal law or rule of a national securities exchange or national securities association (other than the rules of a national securities exchange or national securities association regarding director independence, which are subject to the separate requirement described below).
  • The nominee must satisfy any applicable “objective” standards of a national securities exchange or national securities association regarding director independence that apply generally to the board of directors and not to specific members of the board, such as audit committee members (if the company is not subject to the requirements of a national securities exchange or national securities association, there is no such independence requirement).[3]
  • The nominating shareholder (or a group of shareholders) must have no direct or indirect agreement with the company or any affiliate of the company regarding the nomination of the nominee (unsuccessful negotiations with the company’s nominating committee to have the nominee included on the company’s proxy card as a management nominee and negotiations concerning Rule 14a-11 eligibility or compliance would not be considered agreements with the company). If such an agreement exists, persons nominated by the shareholder will not be included in calculating the number of shareholder nominees that a company is required to include in its proxy materials under Rule 14a-11 as further described below.

The proposed rules would not impose any limitation on the relationships between the nominating shareholder (or group of shareholders) and their director nominee or nominees. Accordingly, the nominating shareholder could nominate himself or herself, any member of his or her immediate family member or, if the nominating shareholder is not a natural person, any person holding a position with the nominating shareholder (such as an officer, member, partner or employee).

Limitation on Number of Shareholder Nominees

Proposed Rule 14a-11 would limit the number of shareholder nominees that a company would be required to include in its proxy materials. As proposed, the company would be required to include no more than one nominee or the number of nominees that represents 25% of the company’s board of directors (or the closest number below 25% if 25% of the board size is not a whole number), whichever is greater. If the term of a director serving on the board who was elected as a shareholder nominee pursuant to Rule 14a-11 extends beyond the date of the meeting at which directors are being elected, such director would be counted as a shareholder nominee for purposes of determining the number of shareholder nominees entitled to be included in the company’s proxy materials.

If more than one shareholder (or group of shareholders) submits a valid notice of its intent to nominate directors and the total number of nominees exceeds the above limitation, the company would be required to include in its proxy materials the nominees of the nominating shareholder that first submitted its notice to the company. If, after inclusion of the first nominating shareholder’s nominees, the maximum number of Rule 14a-11 nominees has not yet been met, the company will also be required to include in its proxy materials the nominee or nominees of the next nominating shareholder or group from which the company received timely notice, up to the maximum number of nominees required to be included by the company.

Schedule 14N Notice Requirements

Proposed Rule 14a-11 would require a nominating shareholder (or group of shareholders) to provide a notice to the company on a new Schedule 14N of its intent to require the company to include the shareholder’s nominee(s) in the company’s proxy material. The notice on Schedule 14N would also be required to be filed with the Commission no later than the date it is provided to the company (under the company’s Exchange Act file number).

If the company does not have an advance notice bylaw provision applicable to director nominations, the Schedule 14N notice would be required to be submitted to the company and filed with the Commission at least 120 days before the first anniversary of the date that the company first mailed its proxy materials to shareholders for the prior year’s annual meeting (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 file it with the Commission in accordance with the timing of that bylaw.[4] The Schedule 14N would be required to include the following disclosures required by proposed Rule 14a-18:

  • The name and address of the nominating shareholder and of each member of the nominating shareholder group.
  • Information confirming the nominating shareholder’s or group’s eligibility to have its nominees included in the company’s proxy materials as described above under “Eligibility Requirements Applicable to Nominating Shareholders.”
  • Information confirming the eligibility of the persons nominated by the nominating shareholder (or group of shareholders) as described above under “Eligibility Requirements Applicable to Nominees.”
  • Information about the nominating shareholder and nominees that is the same as would be required to be provided to shareholders in a proxy contest.

In the event of a material change in the information included in the originally-filed Schedule 14N, the nominating shareholder or group would be required to promptly file an amendment to the Schedule 14N. Material changes would include, among other things, the withdrawal of a nominating shareholder or group or of a director nominee. The nominating shareholder or group would also be required to file a final amendment to the Schedule 14N no later than 10 days after the company has announced the final meeting results to indicate whether the shareholder (or group of shareholders) intends to continue to own the company’s securities following the annual meeting.

Inclusion of Director Nominees in Company Proxy Materials

If the Schedule 14N satisfies all applicable requirements, the company would be required to notify the nominating shareholder or group in writing no later than 30 calendar days before the company files its definitive proxy materials with the Commission that it will include the nominees in such materials. The notification to the nominating shareholder or group must be provided in a manner that would provide evidence of timely receipt by the nominating shareholder or group.

The company would then be required to include disclosure concerning the nominating shareholder or group and the nominee or nominees in the company’s proxy statement based on the information provided by the nominating shareholder or group in the Schedule 14N. This would include, if requested by the nominating shareholder or group, a statement by the nominating shareholder or group in support of its nominee or nominees (not to exceed 500 words).

The company would also be required to include the name of the nominees on the company’s form of proxy. The company would be permitted to identify on the form of proxy that such nominees are shareholder nominees and could include the board’s recommendation for voting for, against or withhold (as applicable) with respect to each shareholder nominee and management nominee. The company would otherwise be required to present the nominees impartially and in a manner so that each nominee is voted on separately (the company would not be permitted to provide an option for shareholders to vote for or withhold authority to vote for the board’s nominees as a group).

Inclusion of the shareholder nominee in the company’s proxy materials would not constitute a “solicitation in opposition” under Rule 14a-6(a) and, therefore, would not require the company to file a preliminary proxy statement with the Commission (absent another requirement to do so).

Exclusion of Shareholder Nominees

Proposed Rule 14a-11 provides a process by which a company could exclude a nominating shareholder’s or group’s nominees from its proxy materials if it makes one of the following determinations:

  • 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;
  • A representation or certification required to be included in the Schedule 14N 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 in its proxy materials and the nominating shareholder or group was not the first to submit shareholder nominees under Rule 14a-11.

In the event a company makes any of the above determinations, the company would be permitted to exclude the nominating shareholder’s or group’s nominees from its proxy materials, but only after following a prescribed process set forth in Rule 14a-11 (which is similar in concept to the process applicable to the exclusion of shareholder proposals from a company’s proxy materials under Rule 14a-8). The process is summarized in the following table:

 

Due Date

 

Action Required

 

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 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 correct any eligibility or procedural deficiencies identified in the notice (other than deficiencies relating to the composition of the nominating shareholder group or the identity of shareholder nominees, which cannot be cured)

 

No later than 80 calendar days before the company files its definitive proxy statement and form of proxy with the Commission

 

If the company determines eligibility or procedural deficiencies still exist, the company must provide notice to the Commission and the nominating shareholder or group of its intent to exclude the nominating shareholder’s or group’s nominee or nominees and the basis for its determination.  A separate opinion of counsel would be required if the basis for excluding the nominee or nominees relies on a matter of state law.

 

Within 14 calendar days of the nominating shareholder’s or group’s receipt of the company’s notice to the Commission

 

Nominating shareholder or group could submit a response to the company’s notice to the Commission staff

 

As soon as practicable

 

Commission staff would, at its discretion, provide an informal statement of its views to the company and 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 Commission

 

Company must provide the nominating shareholder or group with notice of whether it will include or exclude the shareholder’s or group’s nominee or nominees

 

If requested by the company or the nominating shareholder or group

 

Commission staff would seek the Commission’s views with respect to the staff’s determination if it involves a matter of substantial import or where the issues are novel or complex

 

 

Exemption from the Proxy Solicitation Rules

The Commission proposed amendments to the federal proxy rules that would provide an exemption from those rules for solicitations by a shareholder that is seeking to form a nominating group and solicitations in support of a shareholder nominee for director. Generally, these exemptions would exempt the shareholder making such solicitation from the requirement to file with the Commission and furnish to the solicited shareholders a proxy statement and annual report (if it relates to an annual meeting), as well as the related requirements governing the content of such materials and the process for providing them to shareholders.[5]

Solicitations in Connection with the Formation of a Shareholder Group

The Commission proposed an exemption from the proxy rules for any written communication made by or on behalf of a shareholder in connection with the formation of a nominating shareholder group for purposes of satisfying the minimum ownership requirements of Rule 14a-11.[6] This exemption would apply as long as the communication is filed with the Commission no later than the date it is first published, sent or given to shareholders and includes no more than:

  • A statement of the shareholder’s intent to form a shareholder group in order to nominate a director under Rule 14a-11;
  • Identification of, and a brief statement regarding, the shareholder’s potential nominee or nominees (or the characteristics of the potential nominee(s), if none have been identified);
  • The percentage of securities that the shareholder beneficially owns or the aggregate percentage owned by any shareholder group to which the shareholder belongs; and
  • The means by which shareholders may contact the shareholder making the communication.

The existing exemptions from the proxy rules, including the exemption for solicitations of no more than 10 shareholders and the exemption for certain communications that take place in an electronic forum, could also be used to solicit shareholders for the purposes of forming a shareholder group.

Solicitations in Favor of Shareholder Nominees.

The Commission also proposed an exemption from the proxy rules for written communications made by or on behalf of a nominating shareholder (or group of shareholders) in support of a nominee included in the company’s proxy statement and form of proxy in accordance with proposed Rule 14a-11. This exemption would apply as long as the communication is filed with the Commission no later than the date it is first published, sent or given to shareholders and only if:

  • The shareholder making the communication does not seek directly or indirectly, either on its own or on another’s behalf, the power to act as a proxy for a shareholder and does not furnish, or otherwise request (or act on behalf of a person who furnishes or requests), a form of revocation, abstention, consent or authorization; and
  • The written communication includes the identity of the nominating shareholder (or group of shareholders), provides a description of his or her direct or indirect interests and contains a prominent legend advising shareholders (i) that a shareholder nominee is (or will be) included in the company’s proxy statement, (ii) to read the proxy materials when they become available, and (iii) that all proxy materials are available on the company’s website.

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 proposed revisions to Rule 14a-8(i)(8) would substantially limit the November 2007 codification of the “election exclusion.” As proposed, revised Rule 14a-8(i)(8) would not restrict the types of amendments that a shareholder could propose to a company’s governing documents to address the company’s provisions regarding nomination procedures or disclosures related to shareholder nominations, unless they fall within narrow types of proposals that would continue to be excludable under Rule 14a-8(i)(8) or conflict with the Commission’s other proxy rules, including Rule 14a-11 and Rule 14a-(8)(i)(2) (which permits exclusion of a proposal that would cause the company to violate state, federal or foreign law).

The narrow types of proposals that would continue to be excludable under Rule 14a-8(i)(8) reflect the codification of certain staff interpretations that permit the exclusion of proposals related to particular elections and nominations for directors from proxy materials where those proposals could result in an election contest between a company and shareholder nominees without the protections of the disclosure and liability provisions of the proxy rules. Specifically, as proposed, a company would be permitted to omit a proposal only if the proposal:

  • Would disqualify a nominee who is standing for election;
  • Would remove a director from office before his or her term expired;
  • Questions the competence, business judgment, or character of one or more nominees or directors;
  • Nominates a specific individual for election to the board of directors, other than pursuant to proposed Rule §240.14a-11, an applicable state law provision, or the company’s governing documents; or
  • Otherwise could affect the outcome of the upcoming election of directors.

Accordingly, other shareholder proposals relating to the qualifications of directors, shareholder voting procedures, board nomination procedures and other election matters that would not directly result in an election contest between management and the shareholder’s nominees will be permitted as long as they do not conflict with the Commission’s other proxy rules.

The proposed revision to Rule 14a-8(i)(8) would not make a distinction between binding and non-binding proposals and 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).

Proposed Rule 14a-19

The proposed revision to Rule 14a-8(i)(8) could result in a company being required to include shareholder proposals proposing amendments that would establish more lenient procedures for nominating directors and disclosures related to shareholder nominations that require a lesser ownership threshold, holding period, or other qualifications or representations than those proposed in Rule 14a-11, which could potentially result in shareholder nomination procedures that require little or no disclosure on the nominee or nominating shareholders. A company’s amendment of its governing documents or changes to state law could also result in more lenient procedures for director nominations without a corresponding disclosure requirement. Therefore, the Commission has also proposed additional disclosure requirements intended to provide shareholders with full and fair disclosure of information that is material to choosing among director nominees to be elected. The proposed rule would apply to shareholder nominees included in a company’s proxy materials made pursuant to procedures established pursuant to state law or by a company’s governing documents, including more lenient procedures that may be implemented through the Rule 14a-8 process.

Proposed Rule 14a-19 would require a nominating shareholder (or group of shareholders) to provide to the company and file with the Commission a Schedule 14N that would include the name and address of the nominating shareholder or each member of the nominating shareholder group, information regarding the number and percentage of company securities beneficially owned by the nominating shareholder or shareholder group, and information about the nominating shareholder (or group of shareholders) and their nominee(s) that are similar to what would be required in an election contest. The same deadlines applicable to the submission of a Schedule 14N under proposed Rule 14a-11 apply to the submission of a Schedule 14N under proposed Rule 14a-19. The disclosures included in the Schedule 14N would be included in a company’s proxy materials pursuant to proposed new Item 7(f) of Schedule 14A (or proposed Item 22(b)(19) of Schedule 14A for investment companies).

Other Rule Changes

Application of the Liability Provisions of the Federal Securities Laws

The Commission has proposed revisions to Rule 14a-9 that would expressly provide that a nominating shareholder or group relying on Rule 14a-11, an applicable state law provision or a company’s governing documents to include a nominee in the company’s proxy materials would be liable for any materially false or misleading statements or omissions in the Schedule 14N information provided to the company by the nominating shareholder or group that is then included in the company’s proxy materials. Pursuant to proposed provisions in new Rule 14a-11 and Rule 14a-19, this information included in the company’s proxy materials will not be deemed to be incorporated by reference into any filing by the company under the Securities Act or the Exchange Act unless the company determined to incorporate the information by reference specifically into that filing. Accordingly, as long as the company does not incorporate the information by reference into another filing or otherwise adopt the information as its own, the company will not be responsible for the information provided by the shareholder (or group of shareholders) in its Schedule 14N and included in the company’s proxy materials unless the company knows or has reason to know that the information is false and misleading.

Beneficial Ownership Reporting Requirements

A group of shareholders formed to satisfy the minimum ownership requirements of Rule 14a-11 in order to be eligible to nominate directors for inclusion in the company’s proxy materials may, as a result, exceed the 5% ownership threshold that would require beneficial ownership reporting under Exchange Act Section 13(d)(3) and Rule 13d-5(b)(1) on a Schedule 13D. A shorter Schedule 13G filing is permitted in certain circumstances as long as the company’s securities beneficially owned by the shareholder (or group of shareholders) were acquired with neither the purpose nor the effect of changing or influencing control of the company. The Commission has proposed revisions to Rule 13d-1 that would make clear that a shareholder (or group of shareholders) would not lose eligibility to file beneficial ownership reports on the shorter Schedule 13G with respect to any activities solely in connection with nominating one or more directors pursuant to Rule 14a-11. This would include the formation of a shareholder group solely for the purpose of nominating one or more directors pursuant to Rule 14a-11, the nomination of one or more directors pursuant to proposed Rule 14a-11, soliciting activities in connection with such a nomination (including soliciting in opposition to a company’s nominees) and the election of the shareholder’s (or shareholder group’s) nominees as a director.

The proposed exception to the Schedule 13D reporting requirement would be available only for purposes of the nomination -- a nominating shareholder (or group of shareholders) would need to reassess its eligibility to continue to report on Schedule 13G as a passive or institutional investor after the election. In addition, the proposed exception would apply only to nominations made under Rule 14a-11 and, accordingly, a shareholder group formed for the purpose of nominating directors pursuant to an applicable state law provision or a company’s governing document would not be eligible to rely on the exception.

Questions about the Commission’s Proxy Proposals

The rules proposed 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.


[1] Foreign private issuers are exempt from the proxy rules pursuant to Exchange Act Rule 3a12-3 and, accordingly, would not be subject to Rule 14a-11.

[2] Status as a large accelerated filer, accelerated filer or non-accelerated filer will be determined as currently provided in Exchange Act Rule 12b-2 (i.e., company size will be determined at the end of the company’s fiscal year based on its public float as of the last day of its most recently completed second fiscal quarter).

[3] For investment companies, the proposals would require that the nominee is not an “interested person” of the company as defined in Section 2(a)(19) of the Investment Company Act of 1940.

[4] If the company did not hold an annual meeting during the prior year, or if the date of the meeting changed by more than 30 days from the date of the prior year’s meeting, the nominating shareholder would be required to provide notice a reasonable time before the company mails its proxy materials as determined by the company and disclosed in a Form 8-K filed by the company under a new Item 5.07 within four business days after the company determines the anticipated meeting date.

[5] The specific proxy rules that would not apply to any solicitation by or on behalf of a shareholder in connection with the formation of a nominating shareholder group are Exchange Act Rules 14a-3 to 14a-6 (other than paragraphs 14a-6(g) and 14a-6(p)), 14a-8, 14a-10, and 14a-12 to 14a-15.

[6] The exemption would not apply to oral communications or to communications to form a shareholder group where the nominations will be made pursuant to a procedure specified in the company’s governing documents or pursuant to applicable provisions of state law (rather than pursuant Rule 14a-11).