SEC Adopts Rules giving Shareholders Access to Company Proxy Materials

The United States Securities and Exchange Commission (the SEC) has adopted new rules that create a framework for a single shareholder or a group of shareholders to have their director nominees included in a company’s proxy materials and also expand the scope of Rule 14a-8 to further empower shareholders to effect corporate changes resulting in expanded or additional shareholder access to a company’s proxy materials. The SEC’s adoption of these rules and amendments follows the recent enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which delegated authority to the SEC to adopt rules regulating shareholder access to company proxy materials.

Under the new rules, a shareholder seeking to have a director nominee included in a company’s proxy materials must satisfy certain ownership and eligibility criteria. The nominating shareholder must own at least three percent of the total voting power of the company’s securities that are entitled to vote for the election of directors at the meeting. A shareholder may aggregate its securities with other shareholders and form a group for purposes of satisfying the three percent ownership threshold. Securities that have been loaned by a shareholder to a third party may be included in computing the three percent threshold, but only to the extent that the shareholder retains the right to recall such securities and confirms in a Schedule 14N filing with the SEC (discussed below) that upon inclusion of its nominees in the company’s proxy materials it will recall and vote such securities.

In addition to satisfying the ownership threshold, the shareholder or each member of a shareholder group must have held the requisite amount of securities used to satisfy the ownership requirement for a continuous three-year period preceding the date of filing the Shedule 14N required by the rules and must continue to retain such ownership through the date of the meeting at which the directors are to be elected.

In its adopting release for the new rules, the SEC noted that various state and federal statutes and regulations may affect a nominees ability to serve on a company’s board of directors, including the Federal Power Act and related FERC regulations, federal maritime laws and regulations, Department of Defense security clearance requirements, Department of State export licensing requirements, bank holding company laws, FCC licensing requirements, state gaming licensing requirements, Federal Reserve regulations, FDIC regulations, U.S. government procurement regulations, Section 8 of the Clayton Act, Section 1 of the Sherman Act, and Section 5 of the Federal Trade Commission Act. Accordingly, the new rules provide that a company is not required to include a shareholder nominee in its proxy materials if the election of that nominee to the board of directors would violate controlling state law, federal law, or rules of a national securities exchange or national securities association.

While there are no restrictions under the new rules pertaining to relationships between the nominating shareholder and a shareholder nominee, a company is only required to include a shareholder nominee in its proxy materials if the nominee meets all of the objective independence standards of the applicable national securities exchange or national securities association, unless such noncompliance can be cured within fourteen (14) days of the company’s notice to the shareholder or group of shareholders of such noncompliance. Notably, the rules only require compliance with the objective independence criteria of the exchanges and associations, including the existence of certain employment relationships or the provision of consulting services in excess of $120,000 per year. However, a shareholder nominee’s failure to comply with subjective independence criteria, such as a determination that some other relationship exists that would interfere with the nominee’s ability to exercise independent judgment as a director, is not an adequate basis under the new rules to exclude the nominee from the company’s proxy materials.

Under the new rules, a company only is required to include in its proxy materials that number of shareholder nominees equal to the greater of (a) one nominee, or (b) twenty-five percent (25%) of the company’s board of directors, whichever is greater; provided, however, that such number will be reduced by the number of shareholder nominees already serving on the board of directors. In the event that multiple shareholders seek to nominate a number of director candidates that exceed these limits, priority would be given to the shareholder that maintains the highest qualifying voting percentage. If the shareholder with the highest qualifying voting percentage does not nominate the maximum number of director candidates permitted under the rules, then the nominee of the shareholder or group with the next highest qualifying voting percentage would be included in the proxy materials.

The new rules are not available to shareholders seeking to cause a change of control in the company or shareholders wishing to attain more than the maximum number of a company’s board seats than that which is permitted pursuant to the rule.

In order to submit nominees for inclusion in a company’s proxy materials, the nominating shareholder or group of shareholders must file a Schedule 14N with the SEC and provide a copy of the filing to the company. The Schedule 14N must be filed with the SEC no earlier than 150 days and no later than 120 days prior to the anniversary of the mailing date of the company’s proxy statement the previous year. The Schedule 14N must disclose information about the nominating shareholder, including biographical information, the amount and percentage of the company’s voting securities owned by the nominating shareholder, the length of time of ownership of such securities, and a certification by the nominating shareholder that the desired nomination is not intended to result either in a change of control of the company or to gain more than the maximum number of board seats permitted under the new rules. The Schedule 14N must also include all of the information about any shareholder nominee for election to the board that would otherwise be required with respect to any director or director nominee under the proxy rules and applicable provisions of Regulation S-K. With respect to each director nominee, the Schedule 14N also must include a statement that the nominee meets the independence criteria of any applicable national securities exchange or national securities association and a statement that the nominee meets the director qualifications, if any, set forth in the company’s governing documents.

In addition to the shareholder access rules, the SEC has also amended Rule 14a-8 to prohibit a company from excluding from its proxy materials a shareholder proposal solely on the basis that the proposal seeks to establish a procedure in the company’s governing documents for the inclusion of shareholder nominees in the company’s proxy materials. This amendment of Rule 14a-8 will empower shareholders to seek to formally provide for proxy access in the company’s governing documents, which may include proxy access that is less restrictive and more expansive than the proxy access provided by the new rules adopted by the SEC.

The new proxy access rules will be codified in new Rule 14a-11 and will apply to all companies subject to the reporting requirements of the Exchange Act, as well as companies that voluntarily register their securities pursuant to Section 12(g) of the Exchange Act. The rule does not, however, apply to foreign private issuers or companies that are subject to the reporting requirements of the Exchange Act solely because they have registered a class of debt securities. Additionally, companies that meet the definition of smaller reporting companies under Rule 12b-2 of the Exchange Act (i.e., generally companies with a public float of less than $75 million), shall be exempt from complying with Rule 14a-11 during an initial three-year phase-in period.

For more information, please contact the Seyfarth attorney with whom you work or any Corporate attorney on our website.