New proxy access rules adopted by the SEC establish a federal proxy access right for shareholders of public companies to include their nominees for election to a company’s board of directors in the company’s proxy materials.
On August 25, 2010, the Securities and Exchange Commission adopted amendments to the federal proxy rules, including new Rule 14a-11, to permit a shareholder or group of shareholders meeting certain eligibility requirements to require public companies to include in the company’s proxy materials a limited number of director nominees selected by shareholders. These rules become effective November 15, 2010, and will apply to the 2011 annual meeting proxy statements for companies that mailed their 2010 annual meeting proxy statements on or after March 15, 2010. Smaller reporting companies will not be subject to Rule 14a-11 until November 15, 2013.
Rule 14a-11 requires companies to include in their proxy materials director nominees proposed by any shareholder or group of shareholders that:
- owns at least 3% of the total voting power of the company’s securities entitled to vote for the election of company’s directors; and
- has held the securities for at least 3 years.
The nominating shareholder or group must also continue to hold the required amount of securities through the date of the relevant shareholder meeting.
Shareholders may aggregate holdings to establish the required ownership, but must hold both investment and voting power over the securities in order to satisfy the 3% ownership threshold. Shareholders may not use the rule if they are holding the company’s securities for the purpose of changing control of the company, or to gain a number of seats on the board of directors that exceeds the number of shareholder nominees a company may be required to include under Rule 14a-11. A shareholder or group may not use the rule if there is an agreement with the company regarding the nomination.
Filing and Disclosure Requirements
In order to include nominees in a company's proxy materials, a nominating shareholder or group must file with the SEC, and provide to the company, new Schedule 14N. The Schedule 14N must be filed no earlier than 150 days and no later than 120 days before the anniversary of the date a company mailed its proxy statement for the prior year's annual meeting. If a company did not conduct an annual meeting of shareholders in the prior year or if the date of the annual meeting changes by more than 30 days from the prior year, then the Schedule 14N must be filed a reasonable time before the company mails its definitive proxy statement, as specified by the company in a Form 8-K filed within four business days after the company determines the annual meeting date.
Schedule 14N includes:
- certain information about the nominating shareholder or group;
- biographical, qualification and independence information about the director nominee;
- an optional supporting statement of up to 500 words for each nominee; and
- securities ownership, eligibility information and other representations by the nominating shareholder.
If a company determines to include a nominating shareholder's or group’s nominees in its proxy materials, then, at least 30 days before filing its definitive proxy statement, it must notify the nominating shareholder or group and must include any supporting statement from the Schedule 14N in its proxy materials sent to shareholders. The company will not be liable for any information provided by the nominating shareholder or group.
Permitted Shareholder Nominees and Qualifications
Shareholders may nominate up to the greater of one nominee or 25% of the number of directors on the company’s board. If there are multiple nominating shareholders, the company must include the nominees of the shareholders holding the highest percentage of the company's voting power until the 25% limitation is met. If a company negotiates with the nominating shareholder or group that has filed a Schedule 14N and the company ultimately agrees to include such shareholder’s or group’s nominee in the company’s proxy statement as a company nominee, that nominee will still count toward the 25% limitation.
Any person may be nominated under the new rules so long as such nominee’s candidacy or board membership would not violate controlling federal law, state law, foreign law or stock exchange regulations. If the company is subject to stock exchange rules regarding independence, a shareholder nominee must be independent in accordance with the objective standards set forth by the applicable stock exchange. The nominee need not meet any additional qualification standards imposed by the company’s board of directors.
Exclusion of Shareholder Nominees
If the company concludes that there is no basis for excluding a nominating shareholder’s nominees, the company must notify the nominating shareholder or group at least 30 days before the company files its proxy materials with the SEC that it will include the nominations. If there is a basis for exclusion of a nominee, the company must notify the nominating shareholder in writing of the determination within 14 days after the Schedule 14N deadline. The nominating shareholder would have 14 days after receipt of the company’s notice to cure any deficiencies, although neither the composition of a nominating group nor the nominees may be changed to cure a deficiency. A company intending to exclude a shareholder nominee after providing the required notice and opportunity to cure must provide notice of the basis for the exclusion to the SEC no later than 80 days before filing its definitive proxy statement. The SEC may permit a later notice upon demonstration of good cause for missing the deadline. If requested by the company, the SEC would, at its discretion, provide its informal views in a no-action letter.
Amendment of Rule 14a-8
At the same time as it adopted the new proxy access rules, the SEC also amended Rule 14a-8 to permit shareholder proposals that seek to establish a procedure in the company's governing documents for the inclusion of shareholder director nominees in company proxy materials. The amendment of Rule 14a-8 narrows the categories of shareholder proposals concerning elections that a company may exclude from its proxy materials, and permits the submission of proposals by shareholders that seek to amend the company’s governing documents concerning nomination procedures or disclosures concerning shareholder nominations, as long as such proposals do not conflict with or limit Rule 14a-11 or state law.
These new rules will apply to all companies subject to the SEC’s proxy rules under the Securities Exchange Act of 1934 (including investment companies). A company is required to provide access under the new rules despite any contrary state law or charter or bylaw provision that seeks to regulate or limit shareholder access to company proxy materials, and companies may not opt out of the new rules. There is no exception for controlled companies, and the new requirements will also apply to companies that voluntarily register a class of securities under Section 12(g) of the Exchange Act. The rules will not apply to companies that are subject to the proxy rules solely because they have a class of debt registered under Section 12 of the Exchange Act and will not apply to foreign private issuers because they are exempt from the SEC’s proxy rules.