May 22, 2009
The Proxy Access Rule
Posted by J.W. Verret
The Commission has yet to upload its proposed rule on proxy access, but it has issued a press release that offers some useful details.

First, the basics.  Shareholders will be able to include a nominee in the company's proxy materials under the following guidelines: For companies with a market value of $700 million or more, only shareholders with at least 1% of the voting securities will be eligible to nominate.  That percentage threshold requirement increases to 3% for companies with between $75 million and $750 million in market value, and 5% for companies with a market value lower than $75 million.  This rule also applies to mutual fund trustees as well as public company directors.

Shareholders can aggregate holdings to meet the minimum ownership requirements.  Shareholders would have to hold their shares for at least a year and also certify that they are not holding their stock for the purposes of taking control of the company and that they intend to hold their shares through the annual meeting.  Shareholders are permitted to nominate at least one director, but will be limited to nominating at most 25% of the Board's total size.  

The nominees must meet exchange independence standards.  The nominees are also prohibited from entering into any agreement with the company, which may be the Commission's attempt to prohibit the stalking horse maneuver I explore here.  There are some additional disclosure requirements for which the nominating shareholder, rather then the company, will face liability exposure (unless the company has actual knowledge that the shareholder's disclosure is false).  And, of course, the rule will include the subordinated provision permitting election bylaws explored in my last post.

Now, the complications.  The press release notes that "shareholders would be able to include their nominees for director in the company's proxy materials unless the shareholders are otherwise prohibited-either by applicable state law or company's charter/bylaws-from nominating a candidate for election as director."  I would imagine that provision is intended to exclude non-voting preferred shares.  However, as it is worded it would seem that boards could alter their bylaws to specifically exclude certain classes of shareholders from nominating.  Could Boards adopt bylaws prohibiting unions and public pension funds from nominating candidates?  

I also wonder whether a Board could exclude a nominee because including them would require the Board to violate their fiduciary duty, a possibility that motivated Delaware's AFSCME ruling on election bylaws. Perhaps a Board could seek a declaratory judgment from the Court of Chancery if it felt a nominee could endanger shareholder value, then exclude that nominee from the proxy?  That would seem to fit under the heading of a shareholder nomination "prohibited by law." I also wonder about the consequences of the federal government's ownership in TARP participants.  It would seem this rule adds to the government's existing control over the automobile and banking industry, the dangers of which I explore here, and I wonder why a federal government shareholder exclusion wasn't even considered for this rule.

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