The Society of Corporate Secretaries & Governance Professionals ("Society") responded on August 10 to the Securities and Exchange Commission's request for comment on its shareholder access proposal.
Set forth below is the Society's summary of certain of its arguments and suggested modifications to the proposed rules. The full text of the Society's response as filed with the Commission can be found at: http://www.governanceprofessionals.org/Document.asp?DocID=1593.
I. Private Ordering.
• Proposed Rule 14a-11 should not be adopted because a single mandated procedure for proxy access is not appropriate for all public companies.
• An appropriate proxy access procedure must take into consideration the individual facts and circumstances of each company.
• Rule 14a-8(i)(8) should be amended to allow shareholders to propose proxy access bylaws for their respective companies based on the particular needs and desires of a company's shareholders in what has been called "private ordering"; this is a more appropriate way to balance interests among all shareholders.
• Private ordering has worked in other situations such as majority voting.
• If the Commission elects to adopt proposed Rule 14a-11, then shareholders and the board of directors (subject to shareholder ratification) should be able to "opt-out" of proposed Rule 14a-11 and determine the proxy access procedure that works best for them (if any). In either case, if such proxy access proposal receives the affirmative vote of a majority of the shares of stock present in person or by proxy and entitled to vote on the proposal, the proxy access proposal would apply in place of proposed Rule 14a-11.
• Boards that overreach will be subject to shareholder discipline in the form of refusal to ratify the board's proxy access procedure.
• Companies and their shareholders should be afforded some period of time to adopt their own form of proxy access prior to the application of proposed Rule 14a-11. In this way, private ordering would be encouraged.
II. Proposed Rule 14a-11.
• If the Commission does adopt proposed Rule 14a-11, it should consider the following modifications:
• The Commission should set the minimum threshold at a level that ensures that the nominating shareholder has a substantial economic interest in the company.
• The appropriate threshold should be 5 percent of the company's securities for a single nominating shareholder, and 10 percent for a group.
• Long-term shareholders are more likely to have interests that are aligned with other shareholders.
• The nominating shareholder should be required to have held the securities for at least two years, and to have held such shares in a net long position during the entire holding period and through the date of the annual meeting.
• Additional disclosure should be required regarding any arrangements that affect the nominating shareholder's voting or economic rights (e.g., hedging transactions).
• Proposed Rule 14a-11 should include a "resubmission threshold."
• If the nominee fails to receive 25 percent of the vote at the meeting, the nominating shareholder should be prohibited from submitting another nominee for two years, as such nominating shareholder has not demonstrated sufficient support to justify the expense to the company and its shareholders of the continued use of the company's proxy materials.
• The nominee should not be eligible for re-nomination for two years.
B. Certification that Nominating Shareholder is not seeking to Change Control.
• A shareholder's intent is subjective and control may be obtained without obtaining an actual majority. Therefore, additional safeguards are needed.
• Each nominating shareholder should only be permitted to nominate one director.
• Shareholder-nominated directors constituting 25 percent of the board is too high, and can have a strong influence on control. Shareholder nominations should constitute no more than 15 percent of the board.
• Shareholders should not be permitted to use Rule 14a-11 during a traditional proxy contest (including, a short slate contest). Otherwise, Rule 14a-11 could be used to effect a change of control - particularly in light of the Amylin Pharmaceuticals no-action letter, which would allow Rule 14a-11 nominees to round out short slates.
• The nominee must be independent of the nominating shareholder.
- A shareholder nominee will be more likely to discharge its fiduciary duties to all shareholders and not be unduly obligated to the nominating shareholder.
- It will help ensure the confidentiality of board meetings and that information is not inappropriately shared with the nominating shareholder.
- Independent nominees will less likely be "single issue"directors.
C. The Nominee Must Meet Applicable Regulations and Director Guidelines.
• Non-discriminatory qualifications should apply to shareholder nominees.
• Most state laws permit companies to establish qualifications in addition to those established by securities exchanges. Many companies have adopted such qualifications as part of their bylaws (e.g., U.S. citizenship requirements, specific licensing or national security requirements).
• Many companies have also established non-discriminatory board service guidelines, such as mandatory retirement age, share ownership requirements and the maximum number of other boards on which the nominee may serve.
D. Need for Nominee to Complete a Company's Standard D&O Questionnaire.
• The time constraints of proposed Rule 14a-11 make it impracticable for a nominee to be duly vetted by a nominating committee.
• A shareholder nominee should be required, at the request of the company, to complete the company's standard D&O questionnaire prior to the printing of the proxy statement.
• This would help the company determine if the nominee is independent, which is the same purpose for which companies collect information from current directors.
• If the nominee did not meet the applicable standards or guidelines, the company could notify shareholders in the proxy statement, as it is relevant to shareholders.
E. Nominees that Count Against the Shareholder "Cap."
• If the board decides to endorse the shareholder's nominee, the nominee should continue to be counted against the maximum number of nominees that could be nominated pursuant to Rule 14a-11.
• This will help facilitate discussions between boards and nominating shareholders. Otherwise, Rule 14a-11 is likely to have a chilling effect on negotiations between shareholders and boards.
• After election, Rule 14a-11 may encourage the board to not re-nominate the shareholder director in order to avoid that person from becoming a "management" director.
• Any company nominee that was initially elected as a shareholder nominee should be counted against the cap for three years.
F. Largest Shareholders Should Get to Nominate; Window period.
• Rule 14a-11 does not specify the earliest date that a shareholder can file a Schedule 14N, which could result in a race by shareholders to be the first to file.
• The race to file could discourage potential communications between shareholders and boards, and companies could potentially have to address nominations throughout the year.
• There should be a specific window period within which shareholders can make a nomination (e.g., no earlier than 150 calendar days and no later than 120 calendar days before the date that the company mailed its proxy materials for the prior year's annual meeting).
• The nominating shareholder with the largest holdings should be entitled to include its nominee in the company's proxy materials.
• The largest shareholder has the greatest economic interest in the company, and is more likely to be aligned with the interests of the other shareholders.
• With a window period this approach would be easier to administer.
G. Excluding a Shareholder Director Nominee.
• The deadline for submitting a nominee pursuant to proposed Rule 14a-11 should be no later than 120 calendar days before the date that the company mailed its proxy materials for the prior year's annual meeting (i.e., the same as the deadline for submitting a 14a-8 proposal).
• The deadline in proposed Rule 14a-11 currently is calculated based on a company's advance notice bylaw provisions, which provides for much shorter notice periods, and as a result, a company would not be able to comply with the timeline in proposed Rule 14a-11 for excluding a nominee.
• If a nominee is excluded pursuant to proposed Rule 14a-11, the company should not be required to include a substitute nominee, as the company would not have sufficient time to go through the process again.
H. Additional Required Disclosures.
• Additional disclosures should be required on Schedule 14N such as material transactions between the nominating shareholder and the company, holdings of stock in a competitor company, meetings or contacts between the nominating shareholder and company managers or directors, et al.
I. Universal Proxy Card.
• Including a shareholder nominee in the company's proxy may confuse shareholders - shareholders may execute a blank proxy card without checking the boxes for any nominees, which could result in an invalid proxy card; shareholders may mistakenly check boxes for both the company's nominees and the shareholder's nominees, with uncertain results; and shareholders may not check boxes for a full slate of nominees, which could disenfranchise a shareholder.
• Shareholders should be permitted to vote for the company's nominees as a group.
• Any proxy that is voted in blank should continue to be deemed to be a vote for the entire board-nominated slate.
J. Liability of the Company.
• The company should not be liable for any information provided by the nominating shareholder or nominee.
• The imposition of liability if a company "knows or has reason to know information is false or misleading" suggests that companies have a duty to investigate, and represents an inappropriate shifting of liability to companies.
• Under existing Rule 14a-8(l), a company is not responsible for shareholder proposals or supporting statements and the 2003 proxy access proposal followed this approach.
• The company should be entitled to explicitly state that it has done no investigation and takes no responsibility for the accuracy of information supplied by the nominating shareholder.
III. Proposed Amendment to Rule 14a-8(i)(8).
A. Substantially Implemented.
• If a company has a proxy access procedure, it would be inappropriately disruptive to allow proposals that seek only incremental changes to that procedure.
• The Commission should provide clear guidance regarding the application of the "substantially implemented" standard in Rule 14a-8(i)(10). The standard should be exclusion, except for "material" amendments.
B. Change of Control.
• Companies should be permitted to exclude any proposal that would create a proxy access procedure that could result in the election of more than a majority of a company's board of directors.
C. Ownership Requirements.
• The ownership standard for a proxy access proposal should be at least 1 percent (which would be higher than for other proposals under Rule 14a-8, but lower than the proposed modification to the ownership threshold under proposed Rule 14a-11).