On May 20, 2009, the U.S. Securities and Exchange Commission proposed a new proxy rule - Rule 14a-11 - that would provide shareholders meeting certain eligibility standards with access to corporate proxy materials for their nominees for election as directors. Other proposed changes to the proxy rules would allow shareholders to include in company proxy materials proposals to amend the company's governing documents concerning director nomination procedures or to impose specific disclosure requirements relating to shareholder nominations. The Commission voted in favor of proposing the rule changes by a 3-2 majority. Chairman Mary L. Schapiro and Commissioners Elisse B. Walter and Luis A. Aguilar voted in favor of issuing the proposal for public comment, while Commissioners Kathleen L. Casey and Troy A. Paredes voted against the proposal.1
This article is intended as an overview of the Commission's proposal, and is based upon statements made and materials provided at the May 20, 2009 open meeting of the Commission. The proposing release2was not available at the time of writing. Note that final rules will be adopted only after a 60-day comment period, commencing June 18, 2009.
Overview Of Proxy Access Proposal
Proposed New Rule 14a-11
As proposed, a new Rule 14a-11 would provide that a shareholder (or group of shareholders) may include in a company's proxy materials nominees for up to 25 percent of the company's board seats (or a minimum of one director) if the following criteria are satisfied:
• Neither state law nor the company's governing documents prohibit shareholders of the company from nominating candidates for election to the board of directors;
• The shareholder or shareholder group owns a certain minimum percentage of the shares entitled to be voted in the election of directors (the "voting securities"); the minimum percentage changes with the size and reporting status of the company.
• "Large accelerated filer" (a company with worldwide market value of $700 million or more) or registered investment company with net assets of $700 million or more - 1 percent of voting securities;
• "Accelerated filer" (a company with worldwide market value of $75 million or more but less than $700 million) or registered investment company with net assets of $75 million or more but less than $700 million - 3 percent of voting securities;
• "Non-accelerated filer" (a company with worldwide market value of less than $75 million) or registered investment company with net assets of less than $75 million - 5 percent of voting securities;
• Shareholders would be able to aggregate holdings to meet applicable thresholds, pursuant to proposed exemptive provisions under the proxy and beneficial ownership reporting rules.
• The shareholder or group has owned the voting securities for at least one year prior to the date notice is provided to the company of the intent to submit nominees for inclusion in the company's proxy materials;
• The shareholder or group discloses to the company, and files with the Commission pursuant to a new Schedule 14N, a statement of its intent to nominate candidates for election to the board and include information about such candidates in the company's proxy materials, and also discloses in this Schedule:
• Representations relating to the shareholder or group's eligibility to nominate candidates for election to the board pursuant to Rule 14a-11, including but not limited to ownership of the requisite amount and percentage of securities by the nominating shareholder or group for the minimum one-year holding period and the intent to continue to hold the voting securities until the date of the meeting at which shareholders will vote on the election of directors;
• A certification that the shareholder or group is not seeking to change the control of the company or gain more than minority representation on the company's board of directors;
• Information about the nominating shareholder or group and the nominees themselves, similar to the disclosure currently required in a contested election, including but not limited to disclosure of any substantial interests of the shareholder or group in the election of directors, the amount of securities owned beneficially and of record by the shareholder or group (including any related indebtedness), any criminal convictions of the shareholder or group, details of stock trades by the shareholder or group in the last past two years, biographical information about the nominee(s) and whether the shareholder or group (or any associate of the shareholder or group) has any arrangement or understanding with any person with respect to future employment by the company or its affiliates or future transactions to which the company or its affiliates may be a party;
• The nominating shareholder or group would be liable under a new provision of Rule 14a-9 for any false or misleading statements contained in information provided to the company that is then included in the company's proxy materials, without concomitant liability exposure for the company absent knowledge of such falsehood;
• The candidate(s) nominated by a shareholder or group must satisfy the director independence standards set forth in the national securities exchange listing standards that apply to the company, and the person's candidacy or board membership must not violate applicable law or regulation; and
• The shareholder or group must have no direct or indirect agreement with the company regarding the nomination.
Incumbent directors who were elected as shareholder nominees pursuant to Rule 14a-11 will count towards the shareholder nominee limit. Additionally, in the event that a company receives more shareholder nominees than it is required to include in its proxy materials, the company is only required to include the nominees of the shareholder or group which first provides timely notice to the company on Schedule 14N. Where the first nominating shareholder or group to submit timely notice does not nominate the maximum number of directors allowed under the rule, the nominees of the next eligible nominating shareholder or group would be included in the company's proxy materials, up to and including the total number of shareholder nominees required to be included by the company.
The proposal clarifies that a shareholder or group will not lose eligibility to file abbreviated beneficial ownership reports as a passive investor pursuant to Schedule 13G, solely as a result of making a nomination, soliciting in favor of a nominee or having a nominee elected to the board under the proposed new rules. In addition, the proposal includes new proxy exemptions allowing solicitation by shareholders seeking to form a shareholder group for the purpose of nominating director candidates, and soliciting in favor of a nominee.
Proposed Amendments To Rule 14a-8(i)(8)
Currently, Rule 14a-8(i)(8) permits companies to exclude shareholder proposals that "relate to an election." The Commission also proposed amendments to this rule that would permit shareholders to include in a company's proxy materials proposals to amend or request amendment of the company's governing documents concerning nomination procedures or other disclosure provisions relating to shareholder nominations, provided that such provisions do not conflict with proposed Rule 14a-11 and are otherwise not excludable under Rule 14a-8 (e.g., because violative of state law). A shareholder bringing a proposal under amended Rule 14a-8(i)(8) would be required to meet the eligibility requirements set forth in Rule 14a-8.
The proxy access proposals approved by the Commission are part of the ambitious near-term agenda of proxy access and disclosure reforms, coupled with increased market supervision to be exercised through both the rulemaking and enforcement processes, discussed by Chairman Schapiro in a speech delivered on April 6, 2009.3While efforts to grant shareholders access to corporate proxy materials have been made by the Commission several times in the past,4this proposal dovetails in some respects with recent legislative developments and may be more likely to be adopted than previous proposals, given the current political environment and renewed emphasis on corporate governance reforms in the wake of the financial crisis.
Related Legislative Developments
Proxy access has also been the focus of legislative efforts this year at the state and federal level. On May 19, 2009, Senator Charles Schumer introduced a bill that proposes to, among other things, amend the Securities Exchange Act of 1934 to add a new Section 14A that, among other things, explicitly confirms the authority of the Commission to establish rules "relating to the use by shareholders of proxy solicitation materials supplied by the issuer for the purpose of nominating individuals to membership on the board of directors of an issuer," provided that such shareholder or group has beneficially owned an aggregate of not less than 1 percent of the voting securities of the company for at least the two-year period preceding the date of the next scheduled annual meeting of the company.5
Moreover, on April 10, 2009, the governor of Delaware signed into law new legislation permitting, but not requiring, Delaware companies to adopt bylaws that would provide for shareholder access to company proxy materials for the purpose of proposing director nominees pursuant to the procedures and conditions set forth in such bylaws (Section 112), and for the reimbursement of expenses incurred by the nominating shareholder in soliciting proxies (Section 113). Such bylaws can be adopted either by the company's board of directors or nominating shareholders. Bylaws adopted under new Section 112 of the Delaware General Corporation Law (which becomes effective August 1, 2009) may include procedures and conditions under which a company soliciting proxies for the election of director nominees would also be required to include in its proxy materials nominees submitted by shareholders.6
The Proxy Access Debate
Whether and under what circumstances shareholders should be able to use company proxy materials to solicit votes for shareholder nominees has been a matter of significant debate since 2003, when the Commission first proposed a limited right of access. While the Commission did not act on this proposal, access has remained a subject of intense interest, with repeated calls by supporters that companies on their own provide, or be required by the SEC to provide, access.
Access advocates are of the view that proxy access will improve corporate governance by promoting greater director accountability to shareholders.7They express dissatisfaction with the effectiveness of the alternatives currently available to shareholders who wish to effect a change in the composition of a board of directors. Currently, shareholders can, as a general matter, recommend director candidates for nomination by a company's board of directors, can nominate candidates and can solicit votes in support of their nominees. However, in order to solicit other shareholders on a widespread basis for support of its nominee a shareholder must prepare and disseminate to shareholders at its own expense a proxy statement and proxy card, which can require substantial expenditures. Advocates argue that access procedures, by requiring companies to include shareholder nominees in the proxy card and proxy statement distributed by the company, will make it practicable for shareholders to participate in the nomination and election process to a much greater degree.
Chairman Schapiro, together with Commissioners Walter and Aguilar, expressed support for this view at their May 22 meeting. According to the Chairman:
I believe that the most effective means of providing accountability - in a way that is both cost effective and timely - is to ensure that shareholders have a meaningful opportunity to effectuate the rights that they already have under state law to nominate directors. Under the proposal before us today, shareholders who otherwise have the right to nominate directors at a shareholder meeting will be able to have their nominees included in the company proxy ballot that is sent to all voters. Given the reality of how the proxy process works, this would turn what would otherwise be a somewhat illusory right to nominate into something that is real - and has a real chance of holding boards of directors accountable to company owners.8
Those opposing shareholder access9to company proxy materials, on the other hand, argue that such access would be "terribly disruptive to the corporate governance process,"10and would facilitate special interest directors, polarize the boardroom, hamper a company's ability to attract and retain quality directors and spawn numerous costly election contests, imposing costs on companies that all shareholders would be required to bear even where the proponent of a nominee is not prepared itself to pay the costs of soliciting for its nominees. Opponents of shareholder access have also expressed concern that, by bypassing a company's nominating committee, access would diminish the board's fiduciary role and its ability to protect the interests of all shareholders and may result in board composition that will frustrate satisfaction of corporate governance listing standards. Commissioners Casey and Paredes raised similar concerns during yesterday's meeting, and also expressed reservations regarding the Commission's authority to regulate corporate governance by imposing access.
Cathy Dixon is a Partner in Weil Gotshal's Public Company Advisory Group in the Washington, DC office. Holly J. Gregory is a Partner in Weil Gotshal's Corporate Governance practice in the New York office. Rebecca Grapsas is an Associate in Weil Gotshal's Corporate Governance practice in the New York office and Ad é K. Heyliger is an Associate in the Corporate department in Weil Gotshal's Washington office. Please visit our website at www.metrocorpcounsel.com for the footnotes to this article.