On October 4, 2010, the SEC ordered a stay of the effect of proxy rules adopted on August 25, 2010 that enhance the rights of shareholders to nominate directors for corporate boards, including boards of investment companies. The stay was granted in response to a petition by the Business Roundtable and the U.S. Chamber of Commerce pending resolution of court challenges to the rules that they filed on September 29, 2010 with the Court of Appeals for the District of Columbia Circuit.
The amendments create Rule 14a-11 under the Exchange Act, which allows eligible shareholders to have their nominees included in a company’s proxy materials. Shareholders must meet all the requirements of Rule 14a-11 to have their nominee included in a company’s proxy materials and Rule 14a-11 is not available if applicable state law or the company’s governing documents prohibit shareholders from nominating candidates to the board. In addition, the amendments modify Rule 14a-8 under the Exchange Act to allow shareholders, subject to the other requirements of the Rule, to include proposals in a company’s proxy materials that would amend provisions of a company’s governing documents concerning the company’s director nomination procedures or other director nomination disclosure provisions.
Pursuant to new Rule 14a-11, a shareholder is eligible to have a nominee included in a fund’s proxy materials if the shareholder provides proper notice to the fund and, as of the date of such notice: (1) owns at least 3% of the outstanding fund voting securities entitled to vote on the election of directors at the meeting, (2) continuously held securities equaling the 3% threshold for at least three years prior to the notice date and (3) continues to hold the securities through the date of the shareholders meeting. Rule 14a-11 allows multiple shareholders to aggregate their individual holdings to meet the minimum ownership threshold, but each shareholder in the group must have held their qualifying shares for the required three-year period and must continues to hold their shares through the meeting date. For purposes of Rule 14a-11, unless a fund is a series company, a shareholder may determine the total amount of voting power of a fund’s securities entitled to vote on the election of directors by reference to information included in the fund’s most recent annual or semi-annual report on Form N-CSR. For a fund that is a series company, the fund must file a Form 8-K within four business days of setting a meeting date disclosing the total number of shares outstanding and entitled to vote on the election of directors as of the end of the most recent calendar quarter.
In addition to the ownership requirements, under Rule 14a-11, shareholders must certify that they are not holding their shares for the purpose of gaining control of the company or to gain more than a minority representation on the board of directors. An eligible shareholder is allowed to have one nominee or a number of nominees that would represent 25% of a company’s board of directors, whichever is greater, included in the company’s proxy materials. A nominating shareholder is required to file Schedule 14N with the SEC, which includes the information and certifications required by Rule 14a-11. A company that includes shareholder nominees in its proxy materials is not liable for any false or misleading statements in information provided by the nominating shareholder unless the company knows or has reason to know the information is false or misleading.
Pending resolution of the request for expedited review of the rules by the D.C. Court of Appeals, the amendments become effective on November 15, 2010.