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June 15, 2009 |
Schiff Hardin LLP Corporate and Securities Client Alert SEC Proposes Proxy Access Rules On June 10, 2009, the Securities and Exchange Commission (SEC) released proposed changes to the proxy rules intended to facilitate the rights of shareholders to nominate directors to company boards of directors. ("Facilitating Shareholder Director Nominations," Release No. 33-9046). The SEC originally announced the proposed changes at an open meeting held on May 20, 2009. Under proposed new Exchange Act Rule 14a-11, a company would be required to include in its proxy materials a shareholder's or group of shareholders' nominees for director if the shareholder or group has held a specified minimum percentage of the stock of the company for at least a year and neither state law nor the company's governance documents otherwise prohibit shareholders from nominating directors. The SEC acknowledged in the release that it is unaware of any current state law that prohibits shareholder nominations. The specified minimum percentage of stock required to be held is one percent for a large accelerated filer, three percent for an accelerated filer and five percent for a non-accelerated filer. The number of shareholder nominees that a company would be required to include in its proxy materials under this proposed rule would be no more than one or the number of nominees that represents 25 percent of the board, whichever is greater. An incumbent director previously elected as a shareholder nominee under the new rule whose term extends beyond the annual meeting would count against the 25 percent limit. The SEC believes that these limitations reduce the possibility that a nominating shareholder might use the proposed rule to effect a change in control of a company or to gain more than a limited number of seats on the board by repeatedly nominating additional candidates. The 25 percent limit is also intended to alleviate any concerns that a company might increase the size of its board to reduce the effect of a shareholder nominee elected to the board. A shareholder or group would be required to submit its nomination to the company on new Schedule 14N, which requires certain representations, including that (1) the shareholder or group meets the share ownership requirements set forth above, (2) the shareholder or group intends to continue to own such shares through the meeting, (3) the nominees meet the objective criteria for independence of the securities exchange rules applicable to the company, and (4) to the best of the signers' knowledge and belief, the securities are not held for the purpose of changing the control of the company or gaining more than a limited number of seats on the board. Schedule 14N can also include a statement in support of the nominees, not to exceed 500 words, which must be included in the company's proxy statement. In the event that more than one eligible shareholder or group submits a shareholder nomination, priority would be determined by the order of the company's receipt of notice of the nomination. The nominating shareholder or group is required to send Schedule 14N to the company by the date specified in the company's advance notice provision or, where a company does not have an advance notice provision, by the date that is no later than 120 calendar days before the date that the company mailed its proxy materials for the prior year's annual meeting. The Schedule 14N must also be filed with the SEC on its EDGAR filing system on the date that the shareholder or group first sends a copy to the company. The proposed rules also set out the process to be followed if a company determines that it has the right to exclude a proposed shareholder nominee from its proxy materials, including a process for seeking staff no-action relief modeled on the process currently used in connection with shareholder proposals under Rule 14a-8. A proposed amendment to Exchange Act Rule 14a-8(i)(8) would substantially narrow the scope of the so-called "election exclusion" that currently permits companies to exclude from their proxy materials shareholder proposals that "relate to a nomination or an election for membership on the company's board of directors . . . or a procedure for such nomination or election." If the amendment is adopted, companies would no longer be able to rely on Rule 14a-8(i)(8) to exclude shareholder proposals that would amend, or request an amendment to, a company's governing documents regarding nomination procedures or disclosures related to shareholder nominations, provided that the proposal does not conflict with proposed Rule 14a-11 or state law. As a result, shareholders of Delaware corporations would be permitted, for example, to take advantage of recent amendments to the Delaware General Corporation Law to propose by-law amendments relating to the use of the company's proxy materials in connection with shareholder nominations for directors. Any shareholder submitting a proposal relating to the nomination of directors would remain subject to the eligibility requirements of Rule 14a-8, including the requirement that the proposing shareholder must have continuously held at least $2,000 in market value, or one percent, of the company's voting securities for one year. In connection with these proposed changes, the SEC has provided an extensive list of specific questions for comment. Comments are due on or before August 17, 2009. For more information about federal proxy rules, please contact one of the attorneys listed above or another member of our Corporate and Securities Group. ABOUT SCHIFF HARDIN LLP Schiff Hardin's corporate and securities attorneys provide the full range of corporate, securities and financing services for private and public companies throughout the United States and abroad. Our tradition of service to our clients — many of which we have worked with for decades — enables us to anticipate their legal needs and provide solutions tailored to their individual circumstances. For more information, please feel free to contact us.
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