Alert May 26, 2009

SEC Votes to Propose Proxy Rule Amendments relating to Shareholder Nomination of Directors and Shareholder Proposals

At an open meeting on May 20, 2009, the SEC voted to propose amendments to the proxy rules under the Securities Exchange Act of 1934 (the “1934 Act”) that would facilitate director nominations by shareholders.  These amendments would apply to all companies that report under the 1934 Act, including investment companies, but would not apply to debt-only companies.  The proposed amendments would also modify Rule 14a-8 under the 1934 Act so that a company could not exclude from its proxy materials a shareholder proposal affecting the issuer’s nomination procedures or disclosure requirements.  (Rule 14a-8 provides shareholders with an opportunity to place a proposal in a company’s proxy materials for consideration at an annual or special meeting of shareholders.  A shareholder proposal that meets certain procedural requirements and does not fall within one of the categories of proposals that the Rule allows a company to exclude, must appear alongside management’s proposals in the issuer’s proxy materials.)  The information in this article on the substance of the SEC’s proposals is based on the SEC press release announcing the action taken at the open meeting (http://www.sec.gov/news/press/2009/2009-116.htm), which represents the only official information available thus far.

Shareholders Nominating Directors – Eligibility and Obligations.  Under proposed Rule 14a-11 under the 1934 Act, an eligible shareholder would be able to include nominees for director in a company’s proxy materials unless otherwise prohibited from doing so, either by applicable state law or the company’s charter/bylaws.  In order to be eligible, a shareholder would have to:

  • own at least 1 percent of the voting securities of a “large accelerated filer” (a company with a worldwide market value of $700 million or more) or of a registered investment company with net assets of $700 million or more.
  • own at least 3 percent of the voting securities of an “accelerated filer” (a company with a worldwide market value of $75 million or more but less than $700 million), or of a registered investment company with net assets of $75 million or more but less than $700 million.
  • own at least 5 percent of the voting securities of a non-accelerated filer (a company with a worldwide market value of less than $75 million) or of a registered investment company with net assets of less than $75 million.

A shareholder could aggregate holdings to meet one of these thresholds, but would have to have held the securities for at least one year.  The nominating shareholder would have to file with the SEC and submit to the company proposed Schedule 14N.  Schedule 14N would require (a) disclosure of the amount and percentage of securities owned by the nominating shareholder and the length of ownership and (b) a statement of the shareholder’s intent to continue to hold the securities through the date of the shareholder meeting at which the director election is to take place. The Schedule 14N would require a certification that the nominating shareholder is not seeking to change the control of the company or to gain more than minority representation on the board of directors.   A nominating shareholder could not have any direct or indirect agreement with the company regarding the nomination of the nominee.

Shareholder Nominees.  A shareholder nominee’s candidacy or, if elected, board membership could not violate applicable law.  For publicly traded companies, a shareholder nominee would have to satisfy objective independence standards of the applicable national securities exchange or national securities association.  

Company Proxy Materials.  A company would be required to include in its proxy materials no more than the greater of (a) one shareholder nominee or (b) the number of nominees that represents up to 25 percent of the company’s board of directors.  A company would include in its proxy materials disclosure concerning a nominating shareholder and a shareholder nominee or nominees similar to the disclosure currently required by the proxy rules in a contested election.  As when directors nominate candidates, a nominating shareholder or group would be liable for any false or misleading statements in information provided to the company that was subsequently included in the company’s proxy materials.  Under the proposed rule, a company would not be responsible for information provided by a nominating shareholder, unless the company knew or had reason to know the information was false.

Shareholder Proposals.  Currently, Rule 14a-8(i)(8) permits a company to exclude shareholder proposals that “relate to an election.”  (In 2007, in response to a decision of the US Court of Appeals for the Second Circuit, the SEC codified what it regarded as its long-standing interpretation of this exclusion by revising Rule 14a‑8(i)(8) to specify that, in addition to being able to exclude a shareholder proposal from its proxy materials when that proposal relates to an election for membership on the issuer’s board of directors or analogous governing body, an issuer may also exclude a proposal that relates to a procedure for such nomination or election, as discussed in the December 11, 2007 Alert.)  The proposed amendment would narrow this exclusion so that a company could not exclude a proposal by a qualifying shareholder that would amend, or that requested an amendment to, provisions of a company’s governing documents concerning the company’s nomination procedures or other director nomination disclosure provisions (provided the proposal does not conflict with proposed Rule 14a-11).

Public Comment.  The deadline for comments on the SEC proposals is 60 days after their publication in the Federal Register.