On June 10, 2009, the Securities and Exchange Commission (SEC) proposed new
rules (Release No.
33-9046) giving certain shareholders access to a public company’s proxy
materials prepared in connection with a meeting at which directors will be
elected (shareholder meeting) in order to solicit votes for director candidates
nominated by those shareholders. The proposed rules would generally require a
company to include disclosures about eligible director nominees submitted by
eligible shareholders in the company’s proxy materials, so long as the
shareholders are not seeking to change the control of the company or to gain
more than a limited number of seats on the board.
In addition, the proposed rules would allow shareholders to submit proposals
to amend, or request an amendment to, a company’s governing documents regarding
nomination procedures or disclosures related to shareholder nominations. The
proposed rules would apply to all reporting companies, including investment
companies, other than companies that have only publicly held debt.
Proposed Rule 14a-11
New Rule 14a-11 is at the heart of the changes the SEC has proposed. This new
rule would require a company to include director nominees submitted by eligible
shareholders in a company’s proxy materials, unless state law or the company’s
governing documents prohibit shareholders from nominating directors. In order to
comply with the rules, the submitting shareholder and its director nominee must
meet eligibility requirements and satisfy certain disclosure and procedural
Under the proposed rules, a shareholder can nominate directors using the
company’s proxy materials, if they meet the following ownership thresholds:
- at least 1% of the voting stock of large
accelerated filers or registered investment companies with net assets of
$700 million or more,
- at least 3% of the voting stock of accelerated filers or registered
investment companies with net assets of $75 million or more, but less than
$700 million, and
- at least 5% of the voting stock of non-accelerated filers or registered
investment companies with net assets less than $75 million.
Shareholders can aggregate holdings to meet these thresholds. In addition,
shareholders must have held the requisite number of shares for at least one year
as of the date they give notice to the company of their intent to include
nominees in the company’s proxy materials.
For a nominee to be eligible, the candidacy or board membership must not
violate applicable laws, and the nominee must satisfy applicable independence
requirements. Moreover, nominating shareholders must represent that there are no
relationships or agreements between the nominee and the company or its
Number of Nominees
Under the proposed rules, eligible shareholders can nominate the greater of
one nominee or up to the number that represents 25% of the company’s board of
directors, whichever is greater.
Notice and Disclosure Requirements
Proposed Rule 14a-11 would require nominating shareholders to notify the
company of their intention to make a nomination using a new Schedule 14N. The
notice would be filed simultaneously with the SEC. Notice must be given within
the time period specified in a company’s advance notice provision for director
nominations in its governing documents, or if a company does not have such a
provision, no later than 120 calendar days before the date the company mailed
its proxy materials for the prior year’s annual meeting.
The new Schedule 14N would require information such as the following:
- name and address of the nominating shareholder,
- information regarding the amount and percentage of securities owned by
- statement verifying that shareholders continuously held the company’s
voting securities for at least one year as of the date of the notice, and
will continue to hold shares through the date of the shareholder meeting and
after the election,
- a certification that the securities are not held for the purpose of
changing control of the company or gaining more than a limited number of
seats on the board of directors,
- various representations including the shareholder’s eligibility and the
- various disclosures including Schedule 14A disclosures concerning the
nominee and the nominating shareholder, and
- any statement in support of nominees, which may not exceed 500 words.
New Rule 14a-11 will also address a company’s obligations once it receives
notice including, among other things, the process to be followed when a company
seeks to exclude a director nominee submitted by a shareholder from the
company’s proxy materials.
Proposed Amendment to Rule 14a-8
Under the proposed rules, Rule 14a-8, regarding shareholder proposals in
general, would be amended to require a company to include in its proxy materials
proposals that would amend, or that request an amendment to, a company’s
governing documents regarding nomination procedures or disclosures related to
The SEC also proposes the following noteworthy changes:
- Pursuant to new Item 5.07 to Form 8-K, a company would be required to
disclose the date of its annual meeting, if the company did not hold an
annual meeting in the prior year or the date of the meeting has changed by
more than 30 calendar days from the prior year. The Form 8-K must be filed
within four business days after the company determines the anticipated
- Under the proposed rules, a nominating 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 pursuant to Rule 14a-11.
- The proposed rules also address liability relating to statements made by
nominating shareholders. Nominating shareholders would be liable for any
false or misleading statements provided to the company that are then
included in the proxy materials. A company would not be responsible for the
information provided by the shareholder, unless the company knows or has
reason to know the information is false.
Requests for Comment
The SEC has requested comments on every aspect of the proposed rules,
- the proposals are appropriate,
- the proposed requirements should be stricter or looser,
- proposed time periods should be shorter or longer, and
- there are any requirements that should be eliminated or added.
Specific requests for comment include, among other requests:
- What specific issues would arise in an election that is conducted by
- For companies that have more than one class of securities entitled to
vote on the election of directors, does the rule provide adequate guidance
on how to determine whether a shareholder meets the requisite ownership
- Should the proposed rule address situations where the governing
documents provide a range for the number of directors on the board rather
than a fixed number of board seats?
- Should the procedure address situations in which, due to a staggered
board, fewer director positions are up for election than the maximum
permitted number of shareholder nominees? If so, how?
- Should the inclusion of a shareholder nominee be viewed as a
solicitation in opposition that would require a company to file its proxy
statement in preliminary form?
Comments must be received by the SEC on or before August 17, 2009.
Issues for Consideration Regarding the Proposal
The SEC has previously looked at the issue of proxy access on many occasions
with the most recent in depth consideration beginning in 2003. Numerous comments
were received by the SEC on these occasions. In the current proposed rules, the
SEC has tried to respond to previous concerns that were raised. Shareholder
eligibility requirements have been modified. The number of candidates that can
be nominated by eligible shareholders has been revised. However, several
concerns still exist.
The most significant issue is whether the SEC has the authority to regulate in this arena. Corporate governance has generally been governed by state law. Absent the adoption of federal legislation that clarifies the issue, such as that recently introduced by Senator Schumer, it is expected that litigation will ensue if the SEC adopts the proxy access rules in the form proposed.
Many believe that shareholder-nominated directors could impede the proper
functioning of boards and their companies and cause inefficiencies. For example,
a shareholder-nominated director may focus his or her concerns on the issues
that are important to the nominating shareholder rather than shareholders
overall. Another concern is that the possibility of contested elections could
deter qualified candidates from seeking to serve on the board of directors.
If the new rules are adopted, coordinating state law provisions will likely
be necessary. States have already begun to look at this issue and adopt their
own statutes. In 2007, North Dakota amended its corporate code to permit holders
of more than 5% of a company’s stock to nominate directors and require the
company to include each such shareholder nominee in its proxy statement and form
of proxy. In April 2009, Delaware adopted amendments to the Delaware General
Corporation Law that clarify that companies can adopt bylaws allowing
individuals nominated by shareholders to be included in the company’s proxy
solicitation materials. The Delaware amendments will become effective August 1,
2009. In addition, the ABA is currently considering changes to the Model
Business Corporation Act (MBCA) to allow for proxy access bylaws. States whose
corporate laws are based on the MBCA are also looking at their own statutes to
determine whether changes should be made.
Proxy access proposals are being made contemporaneously with a number of
other changes or proposed changes relating to the director nomination process,
including mandatory majority vote (replacing traditional plurality voting for
director elections) and broker discretionary voting in uncontested elections.
Companies and shareholders will need to consider carefully how all of the new
rules will work together. For example, shareholders may find that they wield
greater control over director elections by engaging in a “vote no” campaign
rather than nominating candidates under proxy access rules thus creating a
situation where plurality voting will govern.
McGuireWoods LLP assists clients in complying with their corporate governance
and public reporting obligations and we are actively monitoring developments
relating to proxy access. We are ready to assist you to comment on the proposed
rules and to assist you in preparing to respond to any changes in the area of