Capital Markets Alert: SEC Adopts Rule Changes Related to Shareholder Nominations
8/26/2010
Under new and revised Federal proxy and other rules approved by a three-to-two vote on August 25, 2010 by the members of the Securities and Exchange Commission (SEC), substantially all Exchange Act reporting companies, including investment companies, will be required “to include the nominees of significant, long-term shareholders in their proxy materials, alongside the nominees of management” (see http://www.sec.gov/news/press/2010/2010-155.htm).
Such "proxy access" is intended “to facilitate the ability of shareholders to exercise their traditional rights under state law to nominate and elect members to company boards of directors.” Until now, other than members of the board of directors, any shareholders that wanted to make changes to the composition of a company’s board had to incur the entire cost for mailing separate ballots. The new and revised rules are also intended to make it easier for shareholders to make changes to a company's governing documents that restrict or prohibit their ability to nominate and elect members to company boards of directors.
The SEC was given the authority to make these rule changes, which have been controversial and under discussion for decades via the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
According to the SEC:
“Under new Exchange Act Rule 14a-11, shareholders who otherwise are provided the opportunity to nominate directors at a shareholder meeting under applicable state or foreign law would be able to have their nominees included in the company proxy materials sent to all shareholders.
Under amended Exchange Act Rule 14a-8(i)(8), shareholders also have the ability to use the shareholder proposal process to establish procedures for the inclusion of shareholder director nominations in company proxy materials.”
Shareholders will be eligible to have their nominee included in the proxy materials only under certain conditions:
- They must own at least three percent of the total voting power of the company's securities that are entitled to be voted on the election of directors at the annual meeting; in this case shareholders will be able to aggregate holdings to meet this threshold.
- Shareholders are required to have held their shares for at least three years and must continue to own at least the required amount of securities through the date of the meeting at which directors are elected.
- Shareholders will not be eligible to use the rule if they are holding the securities for the purpose of changing control of the company, or to gain a number of seats on the board of directors that exceeds the number of nominees a company is required to include under new Rule 14a-11.
- However, a shareholder will not be allowed to include more than one nominee, or a number of nominees that represents up to 25 percent of the company's board of directors, whichever is greater, in the company’s proxy materials.
The nominating shareholders will be required to make certain disclosures about their holdings and backgrounds in filings with the SEC and in the proxy materials.
The effective date for the new rules will, generally, be 60 days after their publication in the Federal Register and, accordingly, the exact date cannot be determined at this time. However, "smaller reporting companies" get an initial three year deferral despite the objections of certain proponents of the new rules who are concerned about the possibility of the deferral becoming permanent. This concern follows an initial exemption period for smaller reporting companies after the implementation of the internal control audit requirements under Section 404(b) of the Sarbanes-Oxley Act; that exemption later became permanent with the passage of the Dodd-Frank Act.
In its press release, the SEC explains the mechanics of the initial implementation of Proxy Access Rule 14a-11 for larger companies as follows:
“Shareholders must submit nominees no later than 120 days before the anniversary date of the mailing of the company's proxy statement in the prior year. Shareholders will be able to submit nominees for inclusion in the next year's proxy statement if the 120 day deadline falls on or after the effective date of the rules. For example, if the rules become effective on Nov. 1, 2010, Rule 14a-11 generally would be available at companies that mailed their proxy statement for their last annual meeting no earlier than March 1, 2010.”
The bottom line is that it is likely that eligible shareholders of larger companies with December 31 year ends will be able to begin submitting board candidates in proxy statements for the 2011 annual meeting season.
To access the 451-page SEC Release -- Nos. 33-9136; 34-62764; IC-29384; File No. S7-10-09—click here.
For more information, contact Kenneth Nielsen Goldmann, CPA, partner and member of
J.H. Cohn's Capital Markets and SEC Practice, at kgoldmann@jhcohn.com or 877-704-3500.