August 26, 2010
Proxy Access Forum: At long last. . .A Proxy Access Rule
Posted by Lisa Fairfax

Yesterday the SEC finally made proxy access a reality.  Indeed, the SEC not only adopted a proxy access rule requiring that under certain circumstances, companies include in their proxy statement information about, and the ability to vote for, shareholder-nominated director candidates, but also amended Rule 14a-8 to require that under certain circumstances, companies include shareholder proposals seeking to establish procedures by which shareholders can include their nominees in company proxy materials. 

For those who have not managed to get a look at the new rules, here are some highlights:

1.  A Mandated Rule.  The proxy access rule, new Rule 14a-11, does not provide for an opt-in or an opt-out.  In other words, it is mandatory, except in that rare (if non-existent) circumstance where state law or a company's governing documents prohibit shareholders from nominating a candidate for election as a director.

2.  New Ownership and Holding Periods.  In order to utilize Rule 14a-11, a nominating shareholder or group must (a) own at least 3% of the voting power of the company's securities entitled to be voted at the meeting, (b) own such amount continuously for at least three years, and (c) continue to own such amount through the meeting date.  Both the ownership threshold and holding period are different from the June 2009 Rule 14a-11 proposal, which only had a one year holding period and contained a threshold that varied depending on a filer's status or the net assets of an investment company.

3.  No Control Intent.  The nominating shareholder or group may not hold the securities with the purpose or effect of changing control of the company, or gaining seats that exceed the maximum number of nominees required to be included under Rule 14a-11.

4. Maximum Number of Nominees.  Rule 14a-11 only requires that a company include one shareholder nominee, or that number of nominees that represents up to 25% of the company's board, whichever is greater.

5. Shareholder Proposals.  Rule 14a-8(i)(8) was also amended to allow for shareholder proposals seeking to establish a procedure in the company's governing documents for including shareholder nominees in the company's proxy statement.  Importantly, any procedure established pursuant to Rule 14a-8(i)(8) would represent an additional avenue for proxy access, and hence would not serve as a substitute for Rule 14a-11 or otherwise serve to restrict or eliminate Rule 14a-11.

6. Solicitation Exemptions. The new proxy rules also carve out exemptions from the solicitation rules for solicitation activities related to forming a nominating group, as well as activities related to supporting shareholder nominees so long as shareholders do not seek proxy authority.  

7. Smaller Reporting Companies Delay.  As a general matter, the new rules apply to companies that are subject to the Exchange Act proxy rules including investment companies.  However, smaller reporting companies will not be subject to Rule 14a-11 until three years after the effective date for other companies.  

The new rules repeatedly emphasize the importance of facilitating shareholders' exercise of their state law right to nominate and elect directors of their choice, while also discussing the importance of ensuring that the proxy access process functions "as nearly as possible, as a replacement for an actual in-person meeting of shareholders."  To be sure, there is also discussion about the impact of the financial crisis, and shareholders' related concern about the "accountability and responsiveness of some companies and boards of directors to shareholder interests."

Interestingly, the SEC considered, but rejected, the notion that recent changes related to shareholder rights (such as increased adoption of majority voting or the recent amendment to Rule 452) obviated the need for a proxy access rule.  Instead, the SEC noted that such changes do not negate the need for proxy access because they "bolster shareholders' ability to elect directors who are already on the company's proxy card, not their ability to affect who appears on that card."

As is clear from the mandated rule, the SEC also rejected the private ordering arguments that arose in several contexts, including as a rationale for only amending Rule 14a-8, or in support of allowing companies to opt-out of 14a-11.  The SEC addressed the argument throughout the final rule, often noting the impropriety of allowing some shareholders--even a majority--to impair other shareholders' ability to exercise their nomination right.  However, the following statement captures the thinking on private ordering. 

"[Corporate governance is not merely a matter a private ordering.  Rights, including shareholder rights, are artifacts of law, and in the realm of corporate governance some rights cannot be bargained away but rather are imposed by statute.  There is nothing novel about mandated limitations on private ordering in corporate governance."

So. . . ready or not, proxy access has come.

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