The Securities and Exchange Commission on August 25 adopted final proxy access rules on a three-two vote. The SEC believes the new rules “will benefit shareholders by improving corporate suffrage, the disclosure provided in connection with corporate proxy solicitations, and communication between shareholders in the proxy process.” The adopted release runs 451 pages, and includes 41 pages of Paperwork Reduction Act information and 60 pages of cost benefit analysis. The new rules become effective 60 days after publication in the Federal Register. Consequently, the rules will impact public companies with shareholder meetings scheduled for April 2011 or later.
Thresholds for Nomination
- A shareholder (or group of shareholders working together) must meet certain minimum ownership thresholds and minimum duration of ownership thresholds.
- The shareholders must hold investment and voting power of at least 3% of the outstanding voting stock.
- The shareholders must have held such securities for at least 3 years, and agree to hold the securities through the shareholder meeting date.
- If the thresholds are met, the nominating shareholders can require their nominee to be included in the company’s proxy statement along with a description of up to 500 words per nominee.
Limits on Nominations
- Shareholders can nominate up to a maximum of 25% of the entire board.
- If a company has a classified board (with groups of directors up for election every three years), the 25% rule applies to the number of directors on the entire board and not the number of directors up for election at a particular shareholder meeting.
- In the classified board situation, prior shareholder nominees continuing to serve a 3-year term count against the 25% cap.
- If various shareholders propose nominees exceeding the 25% cap, the nominee proposed by the largest shareholder (or shareholder group) is included in the company’s proxy statement.
- Nominees must satisfy any federal and state law eligibility requirements (of which there are few). Nominees would also be required to meet objective independent standards of the stock exchanges.
- An objective independent standard, for example, would be a limitation on prior CEOs serving on the board. A subjective standard (which the nominee would not be required to meet), for example, would be one based on a materiality standard (such as one applicable to related party transactions).
- If a company seeks to exclude a shareholder nominee, on the basis of failure to meet qualifications or for other reasons, the company must go through the SEC no-action process.
Timetables and Disclosures
- Shareholders seeking to place a nominee in the company’s proxy statement must file a Schedule 14N no later than 120 days prior to the anniversary of the mailing date of the company’s prior year proxy materials.
- The nominating shareholders must disclose that they are not intending to change control of the company and whether the nominee meets the company’s director qualification standards. However, a failure to meet company qualification standards does not preclude the nomination of the shareholder nominee.
- All companies will eventually be covered by the new rules. Larger public companies and investment companies are immediately covered.
- Smaller companies, i.e., with a public float of $75 million or less, are exempt from the new rules for three years.