Schiff Hardin Corporate and Securities Update
SEC Adopts Proxy Access
The Securities and Exchange Commission adopted on August 25, 2010 new "proxy access" rules requiring public companies to permit shareholders or groups of shareholders, under the circumstances discussed below, to include their director nominees in the company's annual meeting proxy statement and form of proxy. These rules represent a significant change from the prior regulatory regime in which shareholders were generally required to fund the cost of preparing and delivering their own proxy materials in order to obtain the necessary votes for shareholder director nominees.
New Rule 14a-11
Eligibility Requirements for Nominating Shareholders. New Rule 14a-11 provides, among other things, that in order to include a director nominee in the company's proxy materials:
- A nominating shareholder or shareholder group must own securities constituting at least 3% of the securities entitled to vote in the election of directors.
- Securities eligible to be counted towards the 3% threshold must have been continuously held for at least three years as of the date the nominating shareholder or shareholder group provides notice of its intent to use Rule 14a-11 on Schedule 14N (discussed below), and such securities must be held by the nominating shareholder or shareholder group through the date of the meeting at which directors will be elected.
- The nominating shareholder or shareholder group must certify that it is not seeking to change control of the company.
The nominating shareholder or shareholder group must have both voting and dispositive power over any securities used to satisfy the ownership test. A nominating shareholder may count shares that have been loaned, so long as the nominating shareholder has the right to recall, and agrees to recall, the securities upon being notified that its nominee will be included in the company's proxy materials. Shares that have been sold short or that have been borrowed for purposes other than a short sale may not be counted.
Eligibility Requirements for Director Nominees. Under Rule 14a-11, an eligible nominating shareholder or shareholder group may nominate, as director nominees, only such persons whose candidacy or, if elected, board membership does not violate applicable law or the rules of any national securities exchange or national securities association (other than rules regarding director independence) to which the company is subject. The nominating shareholder or shareholder group must represent that, to the best of its knowledge, the director nominee meets any objective criteria for independence under the applicable rules of any national securities exchange or national securities association. The nominating shareholder or shareholder group will also be required to represent whether or not, to the best of its knowledge, the director nominee meets the director qualifications set forth in the company's governing documents. The failure of the director nominee to meet company-imposed qualifications, however, cannot serve as a basis for excluding the shareholder nominee from the proxy materials.
Maximum Number of Nominees Required to Be Included. The company will be required to include in its proxy statement and form of proxy only the greater of one shareholder nominee or a number of nominees equal to 25% of its total number of directors. Any director previously elected as a shareholder nominee under Rule 14a-11, whose initial term of office extends beyond the date of the annual meeting for which the Schedule 14N is being filed, will count against the cap. If the company receives director nominations from more than one eligible shareholder or shareholder group under Rule 14a-11, the company is required to include the nominee or nominees of the eligible shareholder or shareholder group holding the highest percentage of the company's voting securities. This represents a substantial change from the SEC's proposed rules under which priority would have been based, instead, on the order of receipt of the related Schedule 14N.
New Schedule 14N
In order for a shareholder or shareholder group to use Rule 14a-11, it must deliver to the company and file with the SEC, through EDGAR, its notice of intent to use 14a-11 on new Schedule 14N no earlier than 150 days before the anniversary of the mailing of the prior year's proxy statement and no later than 120 days before that date. The new Schedule 14N will provide disclosure about the nominating shareholder or shareholder group and its share ownership and each director nominee sufficient to demonstrate eligibility to use Rule 14a-11, as well as disclosures similar to the disclosures currently required in a contested election of directors.
The nominating shareholder or shareholder group may also include, in the Schedule 14N, a statement in support of each nominee. The statement may not exceed 500 words per nominee.
Limited Bases for Excluding Shareholder Nominees
A company receiving a timely notice on Schedule 14N must generally include in its proxy statement information concerning the nominating shareholder or shareholder group and their director nominees and include the director nominees on its proxy card. It may exclude the shareholder nominee only if
- the nominating shareholder or group or the director nominee fails to satisfy the eligibility requirements of Rule 14a-11, or
- including the nominee would result in the company's exceeding the maximum number of shareholder nominees that it is required to include.
In a change from the proposed rules, the company may not exclude from its proxy materials a nominee or a statement in support of a nominee on the grounds that the Schedule 14N (including the supporting statement) contains materially false or misleading statements. Under the rules, the nominating shareholder or shareholder group, and not the company, will be solely liable for any false or misleading statements made in the proxy statement based on information included in the Schedule 14N. According to the SEC, disputes concerning whether information is false or misleading are better handled through disclosure or, if necessary, private litigation.
The final rules include detailed procedures that a company must follow if it proposes to exclude a shareholder nominee from its proxy materials based on a determination that the nominating shareholder or shareholder group or its nominee has failed to satisfy the requirements of Rule 14a-11. Those procedures include notice to the nominating shareholder or shareholder group and the SEC and possible reliance on the staff's no-action procedures.
Rule 14a-8
In addition to adopting new Rule 14a-11, the SEC amended Rule 14a-8(i)(8), which previously permitted a company to exclude from its proxy materials shareholder proposals relating to the nomination or election of directors or procedures for such nominations or elections. The SEC has substantially narrowed the scope of that permitted exclusion so that it is limited to proposals relating to specific nominees or directors or proposals that could affect the outcome of an upcoming election of directors. Rules regarding shareholder eligibility to submit shareholder proposals under Rule 14a-8 have not changed.
As a result of the amendments to Rule 14a-8(i)(8), shareholders may now seek to include, in a company's proxy materials, proposals to amend a company's governing documents to establish procedures, or to amend existing company procedures, relating to shareholder nominations of directors. Such proposals could therefore include, for example, a proposal to establish an alternative means by which shareholders might require the company to include information about director nominees in the company's proxy materials.
The SEC has made clear, however, that no procedure established under a company's governing documents may supersede, or otherwise restrict the rights of shareholders to rely on, Rule 14a-11. As a result, a company may have the right to exclude a shareholder proposal that seeks to limit the availability of Rule 14a-11, not under amended Rule 14a-8(i)(8), but on the grounds that such a proposal is contrary to the proxy rules and may be therefore excluded under Rule 14a-8(i)(3).
Effectiveness
The newly adopted rules will be effective 60 days after they have been published in the Federal Register. The new rules will therefore apply to a company in the next proxy season only if the effective date occurs at least 120 days before the first anniversary of the date of mailing of the company's proxy statement for its annual meeting last year.
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