By a 3-2 vote on Aug. 25, 2010, the Securities and Exchange Commission (SEC)
new rules (Release Nos. 33-9136; 34-62764; IC-29384; File No. S7-10-09)
adopting proxy access. The rules will significantly change
the director nomination process for public companies, and give certain
shareholders access to public company proxy materials in order to solicit votes
for director candidates nominated by those shareholders.
The application date of the new rules will depend on when a company last
mailed its annual meeting proxy statement; but in general, the new rules will
not apply to upcoming annual meetings unless the company mailed its last annual
meeting proxy statement after late February 2010. Smaller reporting companies
will have three years before proxy access rules will apply.
While proxy access has been proposed in various forms for more than 30 years,
the adopted rules (new Exchange Act Rule 14a-11 and amended Rule 14a-8) are
largely the result of the enactment of the Dodd-Frank Wall Street Reform and
Consumer Protection Act which addressed the SEC’s rulemaking authority.
The adopted rules include numerous changes from those most recently proposed by
the SEC on June 10, 2009, and discussed in
alert from last summer.
Some Essential Elements of the Adopted Rules
- Eligibility: Access will be available to a
shareholder (or group of shareholders) who own, and have owned continually
for at least the prior three years, at least 3% of the company’s
voting stock. The rules include detailed provisions on how to calculate this
amount. Shareholders can aggregate holdings but may not borrow stock to meet
the threshold. Stock owned but lent to others may be counted, if the
nominating shareholder has the right to recall the stock and promises to do
so if the company includes the nominee in its proxy statement.
- Limit on number of shareholder nominees: The total number of
nominees available to qualifying shareholders under this new process will be
the greater of one or 25 % of the board.
- Multiple qualifying nominations: A company will be required to
include in its proxy materials the nominee or nominees of the nominating
shareholder or group with the highest qualifying voting power percentage.
- No change of control intent: Shareholders will not be able to use
the new rules if they hold their stock with the intent of changing control
of the company or gaining more seats on the board than is permitted under
- No private ordering: While a company’s shareholders may opt to
adopt, through either a management recommendation or Rule 14a-8 shareholder
proposal, access rules that provide for greater access, shareholders
cannot limit the availability of the new rules.
The rules have been applauded and criticized by various interest groups, and
we expect that legal challenges and judicial scrutiny may be forthcoming.
McGuireWoods LLP assists clients in complying with their corporate governance
and public reporting obligations. We are ready to assist you in implementing the
new proxy access rules and other upcoming changes in the areas of corporate
governance and shareholder communications.