On August 25, the Securities and Exchange Commission (“SEC”) passeda new proxy access rule that will provide certain shareholders with the right to nominate corporate directors and have those nominations appear in corporate proxy statements.Shareholder advocates have advocated for a federal proxy access rule for nearly thirty years. A draft rule was published in June 2009, and the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act (.pdf) confirmed the SEC's authority to issue the new rule.
Specific provisions of new Exchange Act Rule 14a-11 include:
- A shareholder or shareholder group must have held at least 3 percent of a company’s shares continuously for at least three years in order to nominate a director, or directors.
- Shareholders may nominate up to 25 percent of a company’s directors. If the board includes less than eight directors, only one director may be nominated.
- Companies with less than $75 million in market capitalization are exempted from the rule for at least three years.
- The rule impacts all Exchange Act reporting companies, including investment companies. Companies whose only public securities are debt securities and foreign private issuers are not subject to the new rule.
For certain companies, depending upon the mailing date of their last proxy statement, the new proxy access rule will impact the 2011 proxy season. The new rule will go into effect 60 days after publication in the Federal Register (expected soon). Shareholders must submit nominees no later than 120 days before the anniversary date of the mailing of a company’s proxy statement from the previous year.
Significantly, in addition to the new Rule 14a-11, the SEC also amended Rule 14a-8(i)(8) to limit corporate capacity to exclude shareholder proposals seeking revisions to a company’s procedural requirements for shareholder director nominations.
Without a doubt, the 3 percent ownership threshold represents a significant hurdle to shareholders and is a strong counter-argument to the assertion that the new rules will allow director nominations to be “hijacked” by special interests. That said, the new rules provide shareholders with significant new tools for use in engaging companies and pushing for changes in corporate management and operations. Groups seeking to take advantage of the new proxy access rule will likely represent broad coalitions of shareholders concerned with issues ranging from corporate governance to the management of social and environmental concerns. Even if these shareholders are unsuccessful in achieving the necessary ownership threshold, they will likely be able to use the new proxy access rule as an additional basis for the initiation of dialogue with corporate management regarding issues of concern.