On August 25, 2010, the SEC adopted final proxy access rules1, giving qualified shareholders or groups of shareholders the right to require most publicly traded U.S. companies to include certain director candidates that those shareholders have nominated in the companies’ annual meeting proxy materials. The right operates in a manner that is similar to the way that shareholders have long been able to force companies to include shareholder proposals in company proxy materials. The proxy access rules make it possible for shareholders to advance their own director nominees without needing to incur the cost of circulating their own proxy materials.
Highlights of the proxy access rules (each of which we discuss more fully below) are as follows:
Steps Companies Should Take Now
In light of the adoption of mandatory proxy access, companies should consider taking the following actions:
When Proxy Access Will Apply
The proxy access rules will be effective 60 days after their publication in the Federal Register, which we expect to occur this week. Under the rules, qualified shareholders who wish to include a director nominee in the company’s proxy materials must notify the company during a 30-day window period that generally runs from 150 calendar days before the anniversary of the date the company mailed its prior year’s proxy materials until 120 calendar days before that date. Accordingly, depending on when the rules are published in the Federal Register and when a company mailed its 2010 proxy materials, the window period for a company’s 2011 annual meeting may close before the rules become effective. For example, if the rules are published on September 2, 2010, they will be effective on November 1, 2010; companies that mailed their 2010 proxy materials before March 1, 2010 (the anniversary of which is 120 days after November 1, 2010) would not be subject to the rules for their 2011 annual meetings because the window period would have closed before the rules became effective. By contrast, under these assumptions, companies that mailed their 2010 proxy materials on March 1, 2010 or later would be subject to the rules for their 2011 annual meetings and would be required to include proxy access nominees in their proxy materials, assuming the nominees are submitted before the window closes and the nominations otherwise meet the requirements of the rules.
Which Companies Are Subject to Proxy Access
The proxy access rules will apply generally to all companies that are subject to the SEC’s proxy rules, except for the following:
Smaller reporting companies — generally those companies with a public float of less than $75 million — will not be subject to the proxy access rules until three years after the date that the rules become effective for other companies. Foreign private issuers, which are generally exempt from the SEC’s proxy rules with respect to solicitations of their shareholders, will not be subject to the proxy access rules. The proxy access rules will apply to registered investment companies, but this alert does not address the application of the rules to such companies.
Proxy Access Will Be Mandatory
For those companies subject to the proxy access rules, proxy access will be mandatory. There is no requirement for a company to “opt in” to the rules and there is, in essence, no way for a company to “opt out” of the rules. The proxy access rules are a non-exclusive way by which a shareholder’s nominee may be put to a shareholder vote and will apply even if a company is engaged in, or anticipates being engaged in, a concurrent proxy contest. Inclusion of a proxy access nominee alone, however, will not constitute a proxy contest for purposes of the SEC’s rules on contested proxy solicitations and will not trigger a requirement to file a preliminary proxy statement. But, for companies with a majority-voting standard in uncontested director elections, inclusion of a proxy access nominee will likely trigger the application of a plurality-voting standard.
A company will be subject to the proxy access rules even if applicable state or foreign law or the company’s governing documents prohibit shareholders from including their nominees in the company’s proxy materials, or allow shareholders to include their nominees in the company’s proxy materials but impose more restrictions than the SEC’s proxy access rules on shareholders’ ability to do so. If applicable state or foreign law or the company’s governing documents are more restrictive with respect to proxy access than the SEC’s rules in some respects, but more permissive in others, then a shareholder will be able to propose nominees under either proxy access regime, but will not be able to use both. The role of state corporate law provisions expressly authorizing bylaws to provide for shareholder access to company proxy materials, such as Section 112 of the Delaware General Corporation Law, may effectively be limited to enabling proxy access regimes more permissive than the SEC’s.
Who Can Use Proxy Access
Shareholders or groups of shareholders who meet the following requirements will be eligible to submit a nominee or nominees for inclusion in the company’s proxy materials:
Nomination Notice Deadline
Under the rules, qualified shareholders who wish to include a director nominee in the company’s proxy materials must notify the company during a 30-day window period that generally runs from 150 calendar days before the anniversary of the date the company mailed its prior year’s proxy materials until 120 calendar days before that date. The deadline for shareholders or groups to provide notice may change from the 30-day window period if a company did not hold an annual meeting during the prior year or moves the date of its meeting more than 30 days from the prior year’s date. In that case, the company will be required to disclose on a Form 8-K the deadline for submitting a proxy access nominee within four business days after determining its anticipated meeting date. The deadline must be a reasonable time before the company mails its proxy materials for the meeting. A company must disclose in its proxy statement the deadline for submitting proxy access nominees for inclusion in the following year’s proxy statement. If a company is electing directors in a special meeting or pursuant to a written consent, the deadline for a shareholder or group to provide notice will be a reasonable time before the company mails its proxy materials.
Calculation of Voting Power
The voting power held by a nominating shareholder or group for purposes of the three-percent ownership threshold will be calculated as follows:
In determining the total voting power of the company’s securities, nominating shareholders and groups may rely on the most recent quarterly, annual, or current report filed by the company unless they know or have reason to know that the information in the report is inaccurate.
Determination of Continuously Held
Nominating shareholders or group members must have held the minimum amount of securities used to satisfy the three-percent ownership threshold continuously for at least three years. Securities are treated as having been held continuously if a shareholder has held investment and voting power over the amount of securities continuously or, if the securities were loaned to a third party, the shareholder has had the right to recall the loaned securities and will do so upon being notified that any of their nominees will be included in the company’s proxy materials. Securities sold in a short sale during the period or borrowed for purposes other than a short sale will not be treated as continuously held. The amount of securities held must be determined taking into account stock splits, reclassifications or other similar adjustments made by the company during the period.
Implications for Dissident Short Slates
The adopting release appears to contemplate that a dissident shareholder who is seeking election of a short slate by means of the shareholder’s own proxy materials could use proxy access nominees to round out its slate so long as the proxy access nominees and the related nominating shareholder or group do not act in concert with the dissident in the dissident’s nominating or soliciting activities.
Director Nominee Eligibility Under Proxy Access
A nominee will be eligible to be included in a company’s proxy materials only if the nominee’s candidacy or, if elected, board membership will not violate federal law, state law, or applicable national securities exchange or association requirements (except to the extent described below relating to independence standards) or if any such violation may be cured in the time required by the rule.
A nominee also must meet the objective criteria for director independence of the national securities exchange or association that apply to the company. Nominees will not be required to meet independence criteria that require a subjective determination by the board or a board committee, any heightened standards of independence applicable to audit committee members, or any independence requirements imposed by the company in addition to the requirements of the national securities exchange or association. The nominating shareholder or group must indicate on Schedule 14N whether, to the best of its or their knowledge, the nominee meets the applicable objective independence standards of the national securities exchange or association and the qualifications for directors set forth in the company’s governing documents. The company also may choose to disclose in its proxy statement whether it believes a nominee satisfies the company’s director qualifications, as is currently done in proxy contests.
Nominees must not be party to any agreements with the company or its management regarding their nomination. There is no requirement, however, that nominees be independent from the nominating shareholder or group.
Maximum Number of Proxy Access Nominees to Be Included in Company Proxy Materials
The number of proxy access nominees that a company is required to include in its proxy materials will be limited to the greater of one or 25 percent of the total board seats, rounded down to the next whole number. In the case of a classified board, the 25-percent limit is calculated based on the aggregate number of board seats of all classes rather than merely the seats up for election in a given year. If shareholders have the right to elect only a subset of the full board, the maximum number of proxy access nominees will be limited to the lesser of 25 percent of the total board seats (subject to a minimum of one) and the number of board seats the class of shares held by the nominating shareholder is entitled to elect directors.
Directors nominated and elected by shareholders under the proxy access rules will continue to count against the 25-percent limit until the meeting at or after which their terms expire. Accordingly, if a proxy access nominee is elected to a classified board for a three-year term, then that nominee will count against the limit for the next two years. Incumbent directors who were originally elected as proxy access nominees and are re-nominated by the company upon the expiration of their initial term will not count against the 25-percent limit.
In response to a threat by a shareholder or group of shareholders to invoke the proxy access rules for a given nominee, a company might agree to include the nominee as a company nominee for the same meeting rather than requiring the proxy access process to play out. In such a case, the nominee will count against the 25-percent limit only if the shareholder or group had provided notice of the nomination to the company and filed it with the SEC before the company started communicating with the shareholder or group, and if the shareholder or group was otherwise eligible to have its nominees included in the company’s proxy materials.
Priority of Competing Nominations Received by a Company
If more eligible proxy access nominees are submitted than the number of proxy access nominees that a company is required to include in its proxy materials, companies will be required to include the nominee or nominees of the nominating shareholder or group with the highest qualifying voting power percentage. If such nominating shareholder or group does not nominate the maximum number of directors allowed under the proxy access rules, the nominee or nominees of the shareholders or groups with the next highest qualifying voting power percentage will be included. This selection method will continue until the company includes the maximum number of proxy access nominees or exhausts the list of eligible proxy access nominees.
If, after submitting a proxy access nominee, a shareholder or group withdraws or is disqualified, the company will be required to substitute the proxy access nominee of the shareholder or group with the next highest voting power percentage. If a proxy access nominee of a shareholder or group (rather than the nominating shareholder or group itself) withdraws or is disqualified after the company indicates it will include the nominee in its proxy materials, the nominating shareholder or group may substitute any other eligible nominee submitted by that nominating shareholder or group on its Schedule 14N. If that nominating shareholder or group did not submit any other nominees in its notice, then the company will be required to include the nominee or nominees of the shareholder or group with the next highest voting power percentage that is otherwise eligible. Companies that believe they have a basis for excluding nominees of shareholders or groups with lesser voting power percentages should not wait to commence exclusion procedures (discussed below) with respect to such nominees in case the shareholders or groups with priority withdraw or are disqualified. Similarly, if a shareholder or group with priority submits more proxy access nominees than may be included, a company should commence exclusion procedures with respect to all nominees that it believes may be excluded to anticipate the possibility that some of the nominees withdraw or are disqualified. However, once a company has started to print its proxy materials, it will not be required to include substitute nominees.
Notice on Schedule 14N
The proxy access rules require a nominating shareholder or group to notify the company of its intent to submit a proxy access nominee by sending a Schedule 14N to the company and filing it with the SEC. Schedule 14N will require the following information that also will be included in the company’s proxy materials:
Schedule 14N also will require information that will not be included in the proxy materials, including the address of the nominating shareholder or group, the amount and percentage of securities held and entitled to vote and the related voting power, verification that the shareholder or group satisfied the continuous holding requirement as of seven calendar days before the filing, and a written statement of the shareholder’s or group’s intent to continue to hold the qualifying amount of securities through the meeting date and with respect to continued ownership after the election.
A nominating shareholder or group must amend its Schedule 14N promptly for any material change to the disclosure and certifications provided in its Schedule 14N. The shareholder or group also will be required to file a final amendment to the Schedule 14N within 10 days of the company’s announcement of final results from the annual meeting disclosing the shareholder’s or group’s intention with regard to continued ownership of its shares.
Requirements for a Company Receiving a Notice From a Nominating Shareholder
Upon receiving notice from a shareholder or group of an intent to submit a proxy access nominee, a company must determine whether it may exclude the nominee on one of the following bases:
If the statement in support of a nominee or nominees exceeds 500 words for each nominee, the company may exclude the statement but must include the nominee or nominees if the eligibility requirements have been satisfied. Companies may not exclude a nominee or a statement in support on the basis that, in the company’s view, the Schedule 14N contains materially false or misleading statements.
If the company determines that it will include a proxy access nominee, it must notify the nominating shareholder or group no later than 30 calendar days before it files its definitive proxy materials with the SEC. The company will need to include in its proxy statement the disclosures described above under “Notice on Schedule 14N.” The proxy card will need to present the proxy access nominee in an impartial manner, but may identify the nominee as a proxy access nominee and include a recommendation as to whether shareholders should vote for or against or withhold their vote with respect to the nominee. The proxy card also will not be permitted to provide an option for voting or withholding authority to vote with respect to the company’s nominees as a group. Even if a company does not include a proxy access nominee, its proxy statement will need to indicate the deadline for submission of proxy access nominees with respect to the next year’s annual meeting.
If the company determines it may exclude a proxy access nominee or statement in support, it must send a notice of its determination to the nominating shareholder or group by no later than 14 calendar days after the close of the 30-day window period for proxy access nominations. The shareholder or group will then have 14 calendar days to respond and correct any deficiencies identified in the notice, although neither the composition of the shareholder group nor the nominee may be changed as a means to correct a deficiency. If, after the shareholder group has responded and taken any remedial measures, the company still intends to exclude the nominee or statement of support, it must notify the SEC by at least 80 calendar days before it files its definitive proxy statement. The notice to the SEC must identify the shareholder or each member of the group and the nominee or nominees and include an explanation of the basis for exclusion and, if the exclusion is based on state or foreign law, a supporting legal opinion. A copy of the notice must be provided to the nominating shareholder or each member of the nominating group, which may respond within 14 calendar days. After notifying the SEC of its intent to exclude the nominee, the company may (but could elect not to) seek an SEC no-action letter with regard to the company’s determination to exclude.
In general, the burden will be on the company to demonstrate that it may exclude a nominee or nominees. All materials submitted to the SEC under this process will be publicly available upon submission.
Application of Other Proxy Rules to Solicitations by Nominating Shareholders or Groups
Under current SEC rules, shareholder communications to solicit proxies, or to form a group to solicit proxies, may be subject to certain disclosure, filing, and other requirements. In connection with its adoption of proxy access rules, however, the SEC created two new exemptions from these requirements for proxy access-related solicitations.
The first exemption is for solicitations in connection with the formation of a nominating shareholder group, presumably for the purpose of reaching the three-percent ownership threshold. The exemption will apply only if the shareholder relying on the exemption does not hold securities for the purpose, or with the effect, of changing control of the company or to gain a number of seats on the board of directors that exceeds the maximum number of nominees that the registrant could be required to include under the proxy access rules. In addition, to be eligible for the exemption, written communications must be limited to:
The soliciting shareholder must file any written soliciting material published, sent, or given to shareholders in accordance with the exemption with the SEC on Schedule 14N on or before the date the material is first published, sent, or given to shareholders. Oral communications are included within the exemption and will not be subject to the content limitations on written communications. However, a shareholder seeking to form a nominating shareholder group in reliance on the exemption must file a Schedule 14N notice upon commencement of the oral solicitation.
The second exemption makes it easier for a nominating shareholder or group to pursue solicitation activities in support of their proxy access nominee or nominees (or in opposition to the company’s nominee or nominees) without filing and circulating more complete proxy materials. It applies only if:
Neither of the two new exemptions will apply to solicitations made when seeking to have a nominee included in a company’s proxy materials pursuant to a procedure specified in the company’s governing documents (rather than pursuant to the proxy access rules). In addition, the exemptions will be lost for any person who subsequently engages in soliciting or other nominating activities outside of the scope of the proxy access rules or becomes a member of any other group with persons engaged in soliciting or other nominating activities in connection with the election.
Liability for Statements Made by Nominating Shareholders or Groups
Nominating shareholders and groups, as well as proxy access nominees, will be subject to liability under the federal securities laws for materially misleading statements or omissions made in filings relating to proxy access nominations. Companies will not be responsible for the accuracy of information that is provided by the nominating shareholder or group under the proxy access rules and repeated by the company in its proxy statement. In addition, such information will not be incorporated by reference into companies’ other securities filings unless the company determines to incorporate the information by reference specifically into that filing.
Expansion of Potential Shareholder Proposals Relating to Elections of Directors
The SEC’s proxy access rules provide one set of rules and procedures that give shareholders of all relevant companies access to the companies’ proxy materials. In addition, a related rule change opens the door for shareholders to pursue different sets of rules and procedures at individual companies by expressly empowering shareholders to pursue their own shareholder proposals on the subject.
Rule 14a-8(i)(8) under the Securities Exchange Act of 1934 currently allows companies to exclude from their proxy statements shareholder proposals relating to “an election for membership on the company’s board of directors … or a procedure for such nomination or election.” Under this rule, companies currently may exclude proposals that would result in immediate election contests or establish processes for future contests by requiring the company to include shareholder nominees in the company’s proxy materials for subsequent meetings.
The SEC’s new rules modify Rule 14a-8(i)(8) to no longer permit exclusion of shareholder proposals seeking to make proxy access more available to shareholders by, for example, lowering the required ownership thresholds, shortening holding periods, or eliminating other required qualifications and representations. The modified rule also codifies prior SEC staff interpretations on Rule 14a-8(i)(8), clarifying that companies may exclude shareholder proposals if they do any of the following, which is now an exclusive list relating to the subject of director elections:
Exception to Schedule 13D Reporting Requirements for Nominating Groups
The rules include an exception from the requirement to file a Schedule 13D for activities solely in connection with a nomination pursuant to the proxy access rules to allow a nominating shareholder or group to report on Schedule 13G. Any activities other than those provided for under the proxy access rules would make this exception inapplicable.
Timing of Process for Submission and Inclusion or Exclusion of Proxy Access Nominations
No earlier than 150 calendar days, and no later than 120 calendar days, before the anniversary of the date that the company mailed its proxy materials for the prior year’s annual meeting
Nominating shareholder or group must provide notice on Schedule 14N to the company and file the Schedule 14N with the SEC
No later than 14 calendar days after the close of the window period for submission of nominations
Company must notify the nominating shareholder or group (or its authorized representative) of any determination not to include the nominee or nominees
No later than 14 calendar days after the nominating shareholder’s or group’s receipt of the company’s deficiency notice
Nominating shareholder or group must respond to the company’s deficiency notice and, where applicable, cure any defects in the nomination
No later than 80 calendar days before the company files its definitive proxy statement and form of proxy with the SEC
Company must provide notice of its intent to exclude the nominating shareholder’s or group’s nominee or nominees and the basis for its determination to the SEC and, if desired, seek a no-action letter from the staff with regard to its determination
No later than 14 calendar days after the nominating shareholder’s or group’s receipt of the company’s notice to the SEC
Nominating shareholder or group may submit a response to the company’s notice to the SEC staff
As soon as practicable
If requested by the company, SEC staff would, at its discretion, provide an informal statement of its views to the company and the nominating shareholder or group
Promptly following receipt of the staff’s informal
Company must provide notice to the nominating shareholder or group stating whether it will include or exclude the nominee
1. See SEC Release No. 33-9136 (available at http://www.sec.gov/rules/final/2010/33-9136.pdf).
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If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following individuals:
Joshua A. Agen
Patrick G. Quick
Peter C. Underwood
John K. Wilson