Alert August 31, 2010

SEC Adopts Proxy Rule Amendments Relating to Shareholder Nomination of Directors

At its open meeting on August 25, 2010, the SEC voted to adopt amendments (the “Amendments”) to the proxy rules under the Securities Exchange Act of 1934 (the “1934 Act”) that facilitate shareholder nomination of directors by requiring a company to include shareholder nominees in its proxy statement and card (collectively “proxy materials”) relating to the election of directors, provided certain conditions in new Rule 14a-11 under the 1934 Act are met.  The Amendments also revise Rule 14a-8 under the 1934 Act, principally to codify prior SEC staff positions regarding an issuer’s ability to exclude certain shareholder proposals relating to director elections and to eliminate an issuer’s ability to exclude a shareholder proposal that relates to a procedure for the nomination or election of directors in reliance on Rule 14a-8(i)(8).  The release adopting the Amendments is available here.

Issuers Affected and Compliance Dates.  The Amendments apply to all 1934 Act reporting companies, including investment companies, other than companies whose only public securities are debt securities.  The compliance date is 60 days after publication of the Amendments in the Federal Register except for “smaller reporting companies,” which may delay complying with Rule 14a-11 until three years after the compliance date.

Eligible Shareholders.  A shareholder or group of shareholders (reference to a “nominating shareholder” meaning either) will be eligible to have a nominee included in a company’s proxy materials by (a) owning at least 3 percent of the total voting power of the company’s securities that are entitled to be voted on the election of directors at the meeting in question, as to which the nominating shareholder has both investment and voting power and (b) holding the required amount of qualifying securities for at least three years and continuing to own them through the meeting date.  A nominating shareholder holding the requisite securities with the intent of changing control of the company, or gaining a number of seats on the board of directors that exceeds the number of nominees the company would be required to include under Rule 14a-11 may not rely on Rule 14a-11.

Shareholder Nominees.  Rule 14a-11 does not permit a shareholder nominee whose candidacy or board membership would violate applicable state law, federal law or the applicable rules of a national securities exchange or national securities association (other than those relating to director independence).  For an issuer other than a registered investment company, a shareholder nominee must also meet the objective independence standards of the relevant national securities exchange or securities association that apply to directors generally.  For a registered investment company, a shareholder nominee meets Rule 14a-11’s independence standard if the nominee is not an “interested person” of the issuer within the meaning of the Investment Company Act of 1940.

As a general matter, the number of shareholder nominees under Rule 14a-11 is limited to no more than one nominee, or the number of nominees that represents up to 25 percent of the company’s board of directors (rounding down), whichever is greater. 

Disclosure and Notice Filings.  A nominating shareholder will be required to file Schedule 14N with the SEC and submit it to the company.  Schedule 14N filings, which will be publicly available, will include disclosure about voting securities held by the nominating shareholder, information about the nominating shareholder and shareholder nominee(s) similar to the disclosure currently required in a contested election, and descriptions of the nature and extent of the relationships between the nominating shareholder and nominee(s) and the company, among other things.

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A more in-depth look at the Amendments in a future edition of the Alert will provide more detail on the features of the Amendments described above and address other features of the Amendments such as procedures relating to the exclusion of shareholder nominees and additional exemptions from the proxy solicitation rules designed to accommodate nominating shareholder activities related to Rule 14a-11.