On May 20, the Securities and Exchange Commission, by a 3 to 2 vote, proposed changes to the federal proxy rules to permit certain shareholders broader access to company proxy materials for the purpose of nominating independent directors.  

Proposed changes include the addition of a new Rule 14a-11 to the SEC’s proxy rules, which would establish a tiered structure by which shareholders holding a minimum percentage of a company’s outstanding voting securities would be entitled to submit nominations for either one director or up to 25 percent of the company’s directors, whichever is greater, for inclusion in proxy materials. The proposed minimum holding requirements would be as follows: for large accelerated filers, one percent of outstanding voting securities; for other accelerated filers, three percent of outstanding voting securities; and for non-accelerated filers, five percent of outstanding voting securities. Shareholders would be permitted to aggregate holdings to meet these thresholds, and the proposals will include a new exemption for solicitations by shareholders seeking to form a nominating shareholder group. If a company receives more shareholder nominees than it is required to include in its proxy materials it would include “those put forward by the nominating shareholder or group that first provides timely notice to the company”.  

To be eligible for proxy access, shareholders must have held such minimum number of securities for at least one year. Additionally, nominees must be “independent” directors according to standards of the applicable national securities exchange or securities association. Nominating shareholders would be required to submit to the company and file with the SEC a new Schedule 14N, which would include disclosures regarding the shareholder’s security holdings and certifications that (i) the shareholder would hold such securities through the date of the annual meeting and (ii) the shareholder is not seeking to gain more than a minority representation on the registrant’s board of directors. The company’s proxy materials would be required to include disclosure concerning the nominating shareholder as well as the director nominee. The nominating shareholder would also be liable for any false or misleading statements provided by such shareholder and included in the company’s proxy materials.  

In addition, the SEC proposed to amend Rule 14a-8(i)(8) to remove as grounds for a registrant’s exclusion of shareholder proposals amendments to a company’s by-laws regarding the company’s director nomination procedures or other director nomination disclosure provisions, provided that these proposals do not violate or conflict with the SEC rules (including proposed Rule 14a-11). Rule 14-8(i)(8) currently permits registrants to exclude such proposals from its proxy statement. In contrast to the tiered holding requirements applicable under Rule 14a-11, a shareholder proposing such by-law changes would be required to comply only with the current Rule 14a-8 eligibility provisions—that the proponent have continuously held at least $2,000 in market value (or one percent, whichever is less) of the company’s securities for at least one year prior to submitting the proposal.  

The proposed rules would apply to all Exchange Act reporting companies, including investment companies, other than debt-only companies. However, the Division of Corporation Finance emphasized that proposed Rule 14a-11 would not apply to shareholders who are otherwise prohibited from nominating a director under either state law or the company’s organizational documents.  

Public comments on the proposed rule amendments must be received by the SEC within 60 days after their publication in the Federal Register. Following such publication, Katten will issue a Client Advisory summarizing in greater detail the proposed proxy access rules.  

Click here to read the SEC press release.  

Click here to read remarks from Lillian Brown, Senior Special Counsel, SEC Division of Corporation Finance.