During late August, the SEC adopted Rule 14a-11 under the Exchange Act, its long anticipated proxy access rule. Under Rule 14a-11, shareholders that meet the specified criteria discussed below are now able to require public companies to include in their proxy materials director candidates that are nominated by the shareholders. Proxy access makes it significantly easier for eligible shareholders to propose director nominees, since the shareholders are not required to pay for the preparation, printing and mailing of separate proxy materials. As part of the same Adopting Release, the SEC also narrowed the exceptions under Rule 14a-8(i)(8) under the Exchange Act to facilitate shareholder proposals relating to proxy access. This Q&A answers many of the questions that public companies and their boards are likely to have about proxy access in connection with preparing for the upcoming annual meeting season.

Is my company subject to Rule 14a-11?

Most Exchange Act registrants are required to comply with Rule 14a-11, including voluntary filers, controlled companies, registered investment companies and business development companies, although some of the requirements of the rule are different for investment companies. Foreign private issuers and debt-only registrants are not subject to Rule 14a-11. Smaller reporting companies are subject to Rule 14a-11, but not until the third anniversary of the rule’s effective date in 2013.

When does proxy access take effect?

Proxy access takes effect 60 days after the final rules are published in the Federal Register. For the 2011 proxy season, shareholders will be able to use Rule 14a-11 if a particular company’s window period for submitting nominees (which is discussed below) is open after the effective date of the rule. If the window period has closed before the effective date of the rule, a shareholder will not be able to submit nominees under Rule 14a-11 for inclusion in the company’s 2011 proxy materials. If the window period opens before the effective date of the rule but closes after the effective date, eligible shareholders will be able to submit director nominees between the effective date of the rule and the close of the window period.

Does Rule 14a-11 require nominating shareholders to satisfy any threshold quantitative criteria in order to nominate directors?

The nominating shareholders must satisfy both a minimum share ownership requirement and a minimum holding period. They must hold at least 3% of the total voting power of the company’s securities that are entitled to vote for the election of directors at the meeting for at least three years. They must also satisfy certain other requirements, as discussed below in this Q&A.

Can shareholders aggregate their holdings to meet the 3% requirement?

Shareholders can aggregate their holdings for purposes of Rule 14a-11; a shareholder is not required to individually satisfy the 3% voting power requirement. However, all of the shareholdings that are being counted for purposes of meeting the 3% threshold also must satisfy the three-year holding period requirement and all of the nominating group members must satisfy all of the other requirements of Rule 14a-11. References in this Q&A to a nominating shareholder also apply to nominating shareholder groups.

Solicitations by shareholders seeking to form a group for purposes of nominating directors pursuant to Rule 14a-11 are exempt solicitations under the proxy rules, subject to certain limitations on the content of written communications. The shareholder must file a Schedule 14N cover page when the solicitation to form the group commences and any written soliciting material must be filed with the SEC under cover of Schedule 14N when the material is first used. Alternatively, a solicitation to form a nominating group may be structured to comply with another exemption from the proxy rules, such as the existing Rule 14a-2(b)(2) exemption, which exempts solicitations of no more than 10 persons.

How is the 3% total voting power requirement calculated?

For shares to count toward the 3%, the nominating shareholder must hold both voting and investment power, either directly or through a person acting on its behalf. Examples of persons acting on behalf of a shareholder include financial intermediaries such as banks and brokers. Total voting power held by a shareholder for purposes of Rule 14a-11 is calculated somewhat differently than “beneficial ownership” under Rule 13d-3 under the Exchange Act. For purposes of Rule 14a-11, a person does not have voting and investment power over securities that it has the right to acquire, such as securities underlying exercisable options. Under certain circumstances, shares that have been loaned out by the shareholder may be included in its ownership calculation. Borrowed shares and shares that have been sold short are excluded.

For purposes of calculating its voting power percentage, the nominating shareholder is entitled to rely on the most recent current, quarterly or annual report filed by the company.

How is total voting power calculated if we have multiple classes of stock?

If the company has multiple classes of stock that vote together for the election of directors, then, for purposes of the denominator, the total voting power of the company’s securities is calculated based on the collective voting power of the classes, even if the classes have unequal voting rights or a class is not registered under the Exchange Act. If the company has multiple classes of stock that do not vote together for the election of directors, for example, where each class elects a subset of the board, for purposes of both the numerator and the denominator, total voting power is determined by taking into account only the voting power of the relevant class or classes that vote together.

How is the three-year holding period measured?

The amount of securities that are used for purposes of satisfying the 3% voting power requirement must be held continuously for at least three years as of the date of the shareholder notice on Schedule 14N and through the date of the shareholder meeting.

How do we know that a shareholder has satisfied the ownership and other requirements needed to use Rule 14a-11?

The nominating shareholder is required to file a Schedule 14N. The Schedule 14N is required to include, among other things, information concerning the shareholder’s ownership and the nominating shareholder must certify and make other statements as to compliance with the requirements of Rule 14a-11. If the nominating shareholder is not the registered holder of the shares, unless its share ownership information has already been included in an ownership statement filed with the SEC (a Form 3, 4 or 5 or a Schedule 13D or 13G), the nominating shareholder is required to provide as an attachment to its Schedule 14N a statement from the registered holder verifying that the nominating shareholder has continuously held the amount of securities being used to satisfy the 3% ownership threshold for at least three years.

How many shareholder nominees are we required to include in our proxy statement?

Under Rule 14a-11, a company is not required to include in its proxy materials more than the greater of one nominee and the number of nominees that represents up to 25% of the board. If 25% of the board is not a whole number, the maximum number of shareholder nominees that are required to be included in the company’s proxy materials is rounded down to the closest whole number below 25%.

If the company has a staggered board, the maximum number of nominees is still based on the total number of board seats, rather than the number of directors being elected at the meeting. However, when the term of a director who was nominated pursuant to Rule 14a-11 continues past the next shareholder meeting, that director will continue to count toward the maximum number of shareholder nominees under Rule 14a-11.

If the company has multiple classes of stock, the maximum number of nominees is still based on total board size, but the number of directors that a nominating shareholder of a particular class is entitled to include in the company’s proxy materials is capped at the number of directors that can be elected by that class.

If an eligible shareholder files a Schedule 14N before reaching an agreement with the company and the company subsequently agrees to include a director nominee of that shareholder in its proxy materials as a company nominee, that nominee will count toward calculating the director cap.

What if multiple shareholders want to include director nominees in our proxy materials?

If there are multiple nominating shareholders, such that the maximum number of shareholder nominations required to be included in the company’s proxy materials under Rule 14a-11 would be exceeded, the nominating shareholder with the highest qualifying percentage of the company’s voting power as of the date of the Schedule 14N filing is entitled to have its nominees included in the company’s proxy materials.

If the nominating shareholder with the highest qualifying voting power percentage does not nominate the maximum number of directors allowed under Rule 14a-11, then nominees of the nominating shareholder with the next highest qualifying voting power percentage also would be included in the company’s proxy materials.

This process would continue until the company has included the maximum number of nominees it is required to include in its proxy materials or until it exhausts the list of eligible nominees. If the number of eligible nominees exceeds the maximum number required to be included in the company’s proxy materials under Rule 14a-11, the shareholder whose slate of nominees is to be cut back may specify which of its nominees are to be included.

Can a shareholder use Rule 14a-11 if it wants to control the board?

The nominating shareholder may not use Rule 14a-11 if it has the purpose of changing control of the company or obtaining a number of board seats that exceeds the maximum number of nominees that the company is required to include in its proxy materials under Rule 14a-11.

Are a shareholder’s nominees required to be independent of the shareholder?

A nominee is not required to be independent of or unaffiliated with the nominating shareholder. Rule 14a-11 does not preclude the nominating shareholder from having any particular types of relationships with its nominees.

Can a shareholder use Rule 14a-11 if it has an agreement with us regarding director nominations?

Prior to filing the Schedule 14N, the shareholder may not have a direct or indirect agreement with the company concerning director nominations. Negotiations that do not result in an agreement do not disqualify a shareholder from using Rule 14a-11. If, after the Schedule 14N is filed, the nominating shareholder reaches an agreement with the company for a Rule 14a-11 nominee to be included in the company’s proxy materials as a company nominee, that nominee would count toward the 25% cap.

Is there a window for making nominations under Rule 14a-11?

Nominations must be made during the 30-day window period that is between 150 and 120 days prior to the anniversary of the mailing of the prior year’s proxy materials.

If the company did not hold an annual meeting during the prior year, or if the date of the meeting has changed by more than 30 days from the prior year, the nominating shareholder must make nominations under Rule 14a-11 a reasonable time before the company mails its proxy materials, as specified by the company under new Item 5.08 of Form 8-K.

If a shareholder wishes to nominate directors under Rule 14a-11, how does it inform us?

The nominating shareholder must provide notice to the company on Schedule 14N. The Schedule 14N is required to be filed on EDGAR and transmitted to the company.

The Schedule 14N is required to include, among other things, information concerning the nominating shareholder, its share ownership, its director nominees and the nature and extent of any relationships between the nominating shareholder, its nominees and/or the company. The Schedule 14N also is required to include various representations and certifications by the nominating shareholder relating to its eligibility to use Rule 14a-11. In addition, the Schedule 14N may include an optional statement in support of each shareholder nominee not to exceed 500 words per nominee. The Schedule 14N is required to be amended promptly in the event of any material changes to the disclosure and certifications contained therein.

What information about the nominating shareholder and its nominees are we required to include in our proxy materials?

The company is required to include a substantial portion of the information contained in the Schedule 14N in its proxy statement.

The company also must include the shareholder’s director nominees on its proxy card. In connection with the adoption of proxy access, Rule 14a-4 under the Exchange Act also was amended to provide that, when a shareholder nominee under Rule 14a-11 is included on the company’s proxy card, the company may not give shareholders the option of voting for or withholding authority to vote for the company’s or the shareholder’s nominees as a group, but must instead require a separate vote on each nominee. This change does not affect the company’s ability to continue to solicit discretionary authority to vote a shareholder’s shares for the company’s nominees.

Are we liable for statements in the Schedule 14N that are included in our proxy materials?

The company is not responsible for information from the Schedule 14N that it reproduces in its proxy materials. The company also is not required to recirculate or correct proxy materials if it learns that the materials provided to shareholders include false or misleading information from the nominating shareholder.

Information provided by the nominating shareholder that is included in the company’s proxy materials will not be deemed to be incorporated by reference into any of the company’s filings under the Securities Act or the Exchange Act unless the company specifically incorporates that information by reference. To the extent that the information is incorporated by reference, it will be treated as the company’s own information for purposes of the anti-fraud and civil liability provisions of the federal securities laws.

If a shareholder nominee is to be included in our proxy materials, when are we required to inform the nominating shareholder?

If a shareholder nominee is to be included in the company’s proxy materials under Rule 14a-11, the company must notify the nominating shareholder no later than 30 days before it files its definitive proxy materials with the SEC.

Can we exclude a shareholder nominee from our proxy materials?

A shareholder nominee may be excluded if the shareholder does not satisfy the eligibility requirements of Rule 14a-11, the rule is not applicable to the company, or the company has received more nominations than it is required to include under Rule 14a-11.

The company is not required to include in its proxy materials any nominee whose candidacy or board election would violate state or federal law or stock exchange rules. The nominee must satisfy any objective independence standards of the relevant stock exchange that apply to directors generally. However, a nominee cannot be excluded for failing to satisfy subjective independence criteria, such as whether the nominee has a “material relationship” with the listed company, or for failing to satisfy a heightened definition of independence applicable to audit committee members. That said, the inclusion of a nominee in the company’s proxy materials under Rule 14a-11 does not preclude that nominee, if elected, from ultimately being subject to a subjective independence test for purposes of committee membership or treatment as an independent director generally.

What is the process for excluding a shareholder nominee from our proxy materials?

If the company determines that it may exclude a shareholder nominee from its proxy materials and plans to do so, it must notify the nominating shareholder no later than 14 days after the close of the window period for the submission of nominations pursuant to Rule 14a-11. The notice must include the basis for the exclusion. If the nominating shareholder wishes to continue to seek to include a nominee in the company’s proxy materials under Rule 14a-11, it must respond within 14 days after receipt of the company’s deficiency notice and, to the extent applicable, the deficiency must be cured within that time period.

If, after receiving the nominating shareholder’s response, the company still determines to exclude the nominee, it must provide notice to the SEC of its intent to exclude the nominee and its basis for doing so. At the time the company files its notice with the SEC, it also may seek an informal statement of the SEC staff’s views with respect to the company’s determination. The company also may submit a no-action request. The notice must occur no later than 80 days before the company files its definitive proxy materials with the SEC. The notice also must be sent to the nominating shareholder, who may submit a response within 14 days after its receipt of the notice.

What if a shareholder nominee withdraws or is disqualified before proxy materials are printed?

Until it commences printing proxy materials, the company will be required to include a substitute nominee if there are other eligible nominees.

Does a Rule 14a-11 nomination require the filing of preliminary proxy materials?

Inclusion of a shareholder nominee in the company’s proxy materials does not require the filing of a preliminary proxy statement so long as the company is otherwise eligible to file directly in definitive form. Can a shareholder that nominates directors under Rule 14a-11 engage in solicitations outside of the company’s proxy materials?

Subject to the satisfaction of certain conditions, a nominating shareholder may solicit in favor of its nominees, including orally, by U.S. mail, electronic mail and web site postings. Any written soliciting materials must be filed with the SEC on Schedule 14N on the date first used. Solicitations may begin after the nominating shareholder has received notice from the company that it will include the nominating shareholder’s nominees in its proxy materials. As discussed above, solicitations also may be made in connection with the formation of a group.

If a shareholder’s Rule 14a-11 nominees are not elected to the board, are there any restrictions on its future use of Rule 14a-11?

The nominating shareholder’s ability to use Rule 14a-11 is not impacted by its prior unsuccessful use of the rule. In a subsequent nomination, it may propose the same or new nominees.

If a shareholder nominee is elected to the board, is the shareholder required to continue to hold its stock?

The shareholder is not subject to any continuing minimum share ownership requirement, although sales of shares may affect its eligibility to use Rule 14a-11 in subsequent years. The shareholder’s Schedule 14N is required to disclose its intention concerning future ownership of the company’s shares after the director election.

Do Rule 14a-11 nominations preclude other shareholders from launching a proxy contest?

A shareholder may wage a non-Rule 14a-11 proxy contest concurrently with a nomination proposal under Rule 14a-11 by another shareholder, and vice versa. Nominees on a non-Rule 14a-11 slate do not reduce the number of directors that may be nominated under Rule 14a-11.

Can our governing documents restrict proxy access?

Shareholders will have proxy access rights under Rule 14a-11 even if a company’s governing documents (i.e., charter and bylaws) prohibit proxy access or set share ownership levels or other terms for proxy access that are more restrictive than those contained in Rule 14a-11. For example, if a company’s governing documents require a 10% share ownership threshold for proxy access, the lower ownership threshold of Rule 14a-11 would instead apply.

However, Rule 14a-11 does not trump state law or a company’s governing documents with respect to whether shareholders have the right to nominate director candidates or what voting rights shareholders have in director elections.

Can we adopt more expansive proxy access procedures?

A company’s governing documents can establish lower proxy access thresholds than those that are provided for in Rule 14a-11. A company also can have in place other nomination procedures that are in some respects more permissive and in others more restrictive than Rule 14a-11. For example, a company could have a 10% ownership threshold for proxy access coupled with the right to nominate a greater number of directors than is provided for under Rule 14a-11. A shareholder could choose to nominate directors under either Rule 14a-11 or another applicable nomination procedure, although not on an a la carte basis; the shareholder would not be able to pick and choose different aspects from each procedural regime.

Can shareholders seek to have us adopt proxy access procedures that are more expansive than Rule 14a-11?

In connection with the adoption of Rule 14a-11, the SEC also amended Rule 14a-8(i)(8) under the Exchange Act to enable shareholders, under certain circumstances, to require companies to include in their proxy materials shareholder proposals that seek to provide for proxy access in the company’s governing documents. For example, these proposals could seek to adopt different, but not conflicting, ownership periods or thresholds, or to require other qualifications or representations than are provided for under Rule 14a-11. The shareholder making the proposal must meet the ownership threshold requirements of Rule 14a-8 and the proposal must not be subject to one of the limited substantive bases for exclusion under Rule 14a-8. Unlike in the case of Rule 14a-11, the amendments to Rule 14a-8(i)(8) take effect for smaller reporting companies at the same time as for other issuers.

Can we “opt out” of proxy access?

Companies that are subject to Rule 14a-11 are not permitted to opt out of or alter the application of the rule, either in favor of a different proxy access framework or no framework. However, as discussed above, companies may have in place more expansive access rights or may adopt procedures and standards that supplement Rule 14a-11.