Proxy Access Update and SEC Rule Changes

Update on Proxy Access Proposals

In our M&A Quarterly for the Second Quarter of 2012, we reported on proxy access proposals that had been submitted during the main proxy season. We described two such proposals that were adopted by shareholders of Nabors Industries and Chesapeake Energy, both of which requested that the company’s board adopt a bylaw allowing shareholders who have owned at least 3% of the company’s stock continuously for at least three years to have their candidate nominations included in the company’s proxy materials (not to exceed one quarter of the number of directors). This ownership threshold and holding period are identical to those which had been included in the proposed, and now invalidated, SEC Rule 14a-11.

Since that time, precatory proxy-access proposals have been presented to shareholders at Forest Laboratories, Medtronic and H&R Block. Each of these proposals required the nominating shareholder hold just a 1% ownership interest for a two-year period (or a group of 50 or more shareholders each holding $2,000 worth of stock for one year), which are significantly lower eligibility requirements than those approved by the shareholders of Nabors Industries and Chesapeake Energy. The stated aim of these new proposals was to ensure that long-term shareholders have a reasonable, but not necessarily easy, means for including board nominations in the companies’ proxy materials. Based on the outcome of the votes, it appears that the hurdles were set too low: none of these proposals obtained the support of even 10% of the shares voted. It is notable that both Institutional Shareholder Services (ISS) and Glass Lewis declined to support the proposals.

SEC Rule Changes

Over the summer, the Securities and Exchange Commission (“SEC”) adopted a series of new rules implementing key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

  • Listing Standards for Compensation Committees: Under new Rule 10C-1 of the Securities Exchange Act of 1934 (the “Exchange Act”), each national securities exchange must establish listing standards that, among other things, require each member of a listed company’s compensation committee to be a member of the board of directors and to be “independent” (as defined in the listing standards of the applicable stock exchange). Compensation committees must also have authority to retain independent advisors and they will be required to consider independence factors in selecting these advisors. Each national securities exchange and national securities association must have final rules in place that comply with Rule 10C-1 and have been approved by the SEC no later than June 27, 2013. Once an exchange’s new listing standards are in effect, a listed company must meet the standards in order for its shares to continue trading on that exchange.
  • Compensation Consultant Conflicts of Interest Disclosure: The SEC adopted amendments to its proxy disclosure rules to require new disclosures from companies about their use of compensation consultants and conflicts of interest. Specifically, with respect to any compensation consultant that has played a role in determining or recommending the amount or form of executive and director compensation and whose work has raised any conflict of interest, companies will be required to disclose the nature of the conflict and how the conflict is being addressed. Companies must comply with these disclosure rules in any proxy or information statement for an annual or special meeting of shareholders at which directors will be elected occurring on or after January 1, 2013.
  • Conflict Minerals Rules: Under new Rule 13p-1 of the Exchange Act, companies must publicly disclose their use of conflict minerals (including tantalum, tin, gold and tungsten) that originated in the Democratic Republic of Congo or adjoining countries. Companies will be required to provide this disclosure by filing a specialized report on new Form SD beginning on May 31, 2014 (for the 2013 calendar year) and annually on May 31 every year thereafter.
  • Payment Disclosure Rules for Resource Extraction: Under new Rule 13q-1 of the Exchange Act, resource extraction issuers (companies engaged in the development of oil, natural gas or minerals) must file annual reports disclosing certain payments made to the US government or foreign governments for the purpose of commercial development of oil, natural gas or minerals. Companies must comply with the new rule for fiscal years ending after September 30, 2013 by filing a Form SD no later than 150 days after the end of their fiscal year.

Affected companies should consider whether new internal policies or procedures should be adopted in order to implement and comply with these new rules.