SEC Approves "Proxy Access" Rules
On August 25, 2010, the Securities and Exchange Commission (SEC) voted 3 to 2 to adopt significant changes to the federal proxy and other rules to facilitate director nominations by shareholders (known as "proxy access" rules). Relying on the SEC's authority under the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act, the new rules will require companies to include the names of shareholder board nominees on their proxy ballots if certain conditions are met. Below is a summary of the proxy access rules.
Rule 14a-11: Rule 14a-11 applies to all companies subject to the proxy rules, including investment companies and controlled companies, but will not apply to "debt-only" companies. Rule 14a-11 will apply only when applicable state or foreign law or a company's governing documents do not prohibit shareholders from nominating a candidate for election as a director. The new rules will be effective 60 days following publication in the Federal Register; however, the effective date will be deferred for three years for all Smaller Reporting Companies (companies with a public float of less than $75 million).
Shareholder Eligibility: A shareholder or group of shareholders will be eligible for access to the company's proxy materials if they satisfy an ownership threshold of at least 3 percent of the voting power of the company's securities entitled to be voted at the meeting. Shareholders will be able to aggregate their shares to meet the threshold. Under Rule 14a-11, the nominating shareholder or nominating shareholder group (referenced herein as Nominating Shareholder) must hold both investment and voting power of the securities, either directly or through any person acting on their behalf, and short sold securities not closed out and borrowed securities must be deducted from the amount of securities that may be counted towards the required ownership threshold.
In addition, the Nominating Shareholder must have continuously owned the securities that satisfy the ownership requirement for at least three years as of the date the Nominating Shareholder submits notice of its intent to use Rule 14a-11 on SEC filed Schedule 14N. Further, the Nominating Shareholder must continue to hold those securities through the date of the shareholder meeting at which directors are to be elected and provide disclosure concerning their intent with regard to continued ownership of the securities after the election of directors. The Nominating Shareholder must provide proof of ownership of the amount of securities that are used for purposes of satisfying the ownership and holding period requirements. Such shareholders may not be holding 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 could be required to include under Rule 14a-11, and may not have a direct or indirect agreement with the company regarding the nomination of the nominee or nominees prior to filing the Schedule 14N.
Nominating Shareholder Eligibility — Disclosure Requirements: To be eligible for access to a company's proxy materials, the Nominating Shareholder must comply with disclosure and other requirements. The disclosures must be set forth in a notice to the company on Schedule 14N. The Nominating Shareholder must disclose:
- The amount and percentage of voting power of the company's securities entitled to be voted by the Nominating Shareholder and the length of ownership of those securities.
- Biographical and other information about the Nominating Shareholder and the shareholder nominee(s), similar to the disclosure currently required in a contested election.
- Whether or not the nominee(s) satisfy the company's director qualification, if any (as provided in applicable federal and state law, and applicable listing standards of securities exchanges).
- Certifications that, after reasonable inquiry and based on the Nominating Shareholder's knowledge, the:
- Nominating Shareholder (or each member of the nominating group) is 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 nominees that the company could be required to include under Rule 14a-11.
- Nominating Shareholder otherwise satisfies the requirements of Rule 14a-11, as applicable.
- Nominee(s) satisfy the requirements of Rule 14a-11, as applicable.
- A statement that the Nominating Shareholder (or each member of the nominating group) will continue to hold the qualifying amount of securities through the date of the meeting and a statement with regard to the Nominating Shareholder's intended ownership of the securities following the election of directors (which may be contingent on the results of the election of directors).
- An optional statement in support of each shareholder director nominee, not to exceed 500 words per nominee. If the statement of support submitted by a Nominating Shareholder exceeds 500 words, per nominee, the company will be required to include the nominee(s), provided that the eligibility requirements and other conditions are satisfied (but the company may exclude the statement).
The Nominating Shareholder must provide notice to the company of its intent to use Rule 14a-11 no earlier than 150 days prior to the anniversary of the mailing of the prior year's proxy statement and no later than 120 days prior to this date. The notice must be transmitted to the company on the date it is filed with the SEC.
Nominee Disqualifications: The company will not be required to include any nominee in the proxy materials whose candidacy or, if elected, board membership would violate controlling state or federal law, or the applicable standards of a national securities exchange or national securities association (except with regard to director independence requirements that rely on a subjective determination by the board) or, if a nominee's candidacy or, if elected, board membership could violate such laws or rules, such violation could not be cured within a specified time period. Rule 14a-11 also provides that a company will not be required to include any nominee whose candidacy or, if elected, board membership would violate controlling foreign law. The rule does not include any restrictions on the relationships between the nominee and the Nominating Shareholder.
Nominee Limitations: Under Rule 14a-11, a company will not be required to include more than one shareholder nominee, or a number of nominees that represents up to 25 percent of the company's board of directors, whichever is greater. If the maximum number of shareholder director nominees is not a whole number, companies will determine the maximum number of shareholder nominees by the closest number to the whole number below 25 percent. When a company has a classified (staggered) board, the 25 percent calculation will still be based on the total number of board seats. Where there are multiple eligible Nominating Shareholders which exceed the maximum number, the Nominating Shareholder(s) with the highest percentage of the company's voting power will have its nominees included in the company's proxy materials.
A company will not be required to include shareholder director nominee(s) submitted by a Nominating Shareholder if the Nominating Shareholder or any member of a group also submits any other nominee to the company or is participating in more than one group for that company. Additionally, a company will not be required to include a shareholder director nominee if a Nominating Shareholder or member of a group: (i) is or becomes a member of any other group with persons engaged in soliciting or other nominating activities in connection with the subject director election, (ii) is separately conducting a solicitation subject to Rule 14a-2(b)(8), or (iii) is acting as a participant in another person's solicitation in connection with the subject director election.
Company Requirements Upon Receipt of Shareholder Director Nominee Notice: In addition to the reasons stated earlier, a company may exclude a nominee from its proxy materials if it determines:
- Rule 14a-11 is not applicable to the company.
- The nominee(s) or the Nominating Shareholder(s) fail to satisfy the eligibility requirements of Rule 14a-11.
If a company determines that the nominee(s) is not eligible for inclusion in its proxy materials, the company must notify the Nominating Shareholder no later than 14 calendar days after the close of the period for submission specified in Rule 14a-11(b)(10). Such notification must include the company's explanation for its determination to exclude the nominee(s) or statement of support. The Nominating Shareholder will have 14 calendar days after receipt of the company's notice to respond and correct any eligibility or procedural deficiencies identified in such notice. If the company intends to exclude a shareholder nominee or statement of support, after providing the requisite notice of and time for the Nominating Shareholder to remedy any eligibility or procedural deficiencies in the nomination or statement, the company must provide notice of the basis for its determination to the SEC no later than 80 calendar days before it files its definitive proxy statement and form of proxy with the SEC. At the time the company files such notice, it may also submit a request for the SEC staff's informal view with respect to the company's determination to exclude the nominee(s) from it proxy materials (i.e. a "no-action" requests). Please see Appendix A below to this advisory, which contains a chart summarizing the timing of this process.
If a company determines that it will include a shareholder nominee in the proxy materials, it must notify the Nominating Shareholder which notification should be post-marked or transmitted electronically no later than 30 calendar days before the company files its definitive proxy statement and form of proxy with the SEC.
Rule 14a-8: The SEC also amended Rule 14a-8(i)(8) by narrowing the scope of the exclusion relating to the election of directors. The revised rule provides that companies must 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 company proxy materials except if the proposal (i) would disqualify a nominee who is standing for election, (ii) would remove a director from office before the term has expired, (iii) questions the competence, business judgment or character of one or more nominees or directors, (iv) seeks to include a specific individual in the proxy materials for election, or (v) otherwise could affect the outcome of the upcoming director election.
Other Rule Changes: The SEC also revised the proxy rules so that shareholders may communicate by written and oral solicitations with each other in an effort to form a nominating group satisfying the relevant ownership requirement of Rule 14a-11 without complying with the filing and certain other requirements of the proxy rules provided that:
- The shareholder cannot hold 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 could be required to include under Rule 14a-11.
- The content of written communications is limited to certain information specified in the rule.
- All written solicitation materials sent to shareholders are filed with the SEC in reliance on the exemption with the SEC under cover of Schedule 14N with the appropriate box checked no later than when material is first sent or given to shareholders and with three copies of the materials filed with, or mailed for filing to, each national securities exchange upon when the securities are listed.
- In the case of oral solicitations, the Nominating Shareholder must file with the SEC a cover page on Schedule 14N with the appropriate box checked no later than the date of first communication.
- No solicitations in connection with the subject director election other than pursuant to the provisions of Rule 14a-11 and the exemption described below.
Further, the SEC amended the proxy rules to permit a Nominating Shareholder to solicit votes in favor of the Nominating Shareholder's nominee(s) or for or against company nominees, so long as the following requirements are met:
- The Nominating Shareholder does not seek the power to act as a proxy for another shareholder and does not furnish or otherwise request a form of revocation, abstention, consent or authorization.
- Disclosure of certain information (including the identity of the Nominating Shareholder, and a prominent legend about availability of the proxy materials) in all written communications.
- Filing all written soliciting materials sent to shareholders in reliance on the exemption with the SEC under cover of Schedule 14N with the appropriate box checked.
- No solicitations in connection with the subject director election other than pursuant to the provisions of Rule 14a-11 and this exemption.
A form of proxy may not grant authority to vote for any nominees as a group or to withhold authority for any nominees as a group if the form of proxy includes one or more shareholder director nominees.
Lastly, beneficial ownership reporting rules were also amended so that shareholders relying on Rule 14a-11 would become eligible to file a Schedule 13G (a form available to certain investors who own 5 percent or more of a class of securities subject to the Securities Exchange Act of 1934), in lieu of filing a Schedule 13D, solely as a result of activities in connection with inclusion of a nominee under Rule 14a-11.
What To Do Now: The following are some practical steps that companies can take now to be prepared for the 2011 proxy season in light of the new proxy access rules:
- Review your charter documents (especially any advance notice provisions delineated in bylaws) to determine if changes are needed to comply with the new provisions.
- Inform your governance and nominating committees of the new rules and the timing and mechanics of the proxy access process.
- Incorporate the timing of the proxy access procedure into your overall proxy process, to ensure you have the ability to respond in the event you receive nominee notices.
- Consult with your proxy solicitor and counsel regarding the timing and mechanics of the new rules.
For questions or more information, contact one of the members of the firm's Securities/SEC Practice Group including:
Lewis U. Davis, Jr. — 412 562 8953; email@example.com
Jeremiah G. Garvey — 412 562 8811; firstname.lastname@example.org
Jennifer R. Minter — 412 562 8444; email@example.com
Brian S. North — 215 665 3828; firstname.lastname@example.org
Brian S. Novosel — 412 562 5266; email@example.com