On June 10, 2009, the Securities and Exchange Commission proposed changes to the proxy rules to facilitate the rights of shareholders to nominate directors of corporate boards. The proposed rules afford shareholders an expanded role in selecting directors at a time when market conditions have caused many to demand greater director accountability.
A new Exchange Act Rule 14a-11 would permit certain shareholders to include their nominees for director in an issuer's proxy materials, unless otherwise prohibited by state law or an issuer's governing documents. The current proxy rules do not give shareholders this right; rather, shareholders that want to nominate their own directors typically must distribute their own proxies, which is a costly and burdensome undertaking. The proposal generally would permit only the following persons to have their nominees included in an issuer's proxy materials:
- Shareholders owning at least 1 percent of the voting securities of a "large accelerated filer" (a company with a worldwide market value of $700 million or more) or of a registered investment company with net assets of $700 million or more;
- Shareholders owning at least 3 percent of the voting securities of an "accelerated filer" (a company with a worldwide market value of $75 million or more but less than $700 million) or of a registered investment company with net assets of $75 million or more but less than $700 million; or
- Shareholders owning at least 5 percent of the voting securities of a "non-accelerated filer" (a company with a worldwide market value of less than $75 million) or of a registered investment company with net assets of less than $75 million.
The proposal would require both the nominating shareholder and the issuer to make certain disclosures. The nominating shareholder would need to file with the SEC disclosure of the percentage of the nominating shareholder's ownership, the length of such ownership, and the intent to hold the shares through the date of the shareholder meeting. The issuer's proxy materials would need to disclose the details of a shareholder's director nominations (much like the disclosures currently required in a contested election).
To ensure that qualifying shareholders have the right to nominate directors under proposed Rule 14a-11, the SEC has also proposed an amendment to Rule 14a-8(i)(8). This amendment would permit qualifying shareholders to require an issuer to include in its proxy materials an amendment, or proposal for an amendment, to the issuer's governing documents addressing director nomination procedures.
Access the SEC's proposed proxy rules here. The SEC will receive comments on the proposed rules until Aug. 17, 2009.