As expected, the SEC voted today to adopt mandatory proxy access for all U.S. public companies. Under the new rule, any shareholder or group of shareholders holding at least 3% of a company’s voting stock for at least three years will have the right to use the company’s proxy materials to nominate up to a quarter of the board. New Rule 14a-11 will become effective 60 days from publication in the Federal Register (expected shortly), fulfilling Chairman Schapiro’s promise to make proxy access available in the 2011 proxy season for most companies.
Coverage. The rule will apply to all Exchange Act reporting companies (including companies registered under the Investment Company Act). The rule does not apply to foreign private issuers or to companies that are subject to reporting requirements solely because they have registered debt. Application of the rule to smaller reporting companies will be deferred for three years. Companies may not opt out of Rule 14a-11.
Ownership and holding period requirements. In a major change from the SEC’s proposal last year (which had a one year holding period and ownership requirements ranging from 1% to 5% depending on market cap), a single 3% ownership/three-year holding period standard will apply to all companies. The shareholder or group must hold the required ownership level through the election and may not count borrowed shares, although shares loaned to others may be counted so long as the lender may recall those shares.
Certification of no “control” purpose. A shareholder or group using the rule must certify that it does not intend to effect a change of control or gain more than the limited number of board seats permitted by the rule.
Limit on number of nominees. A company would not be required to include in its proxy materials any nominees representing more than 25% of the company’s board of directors. In a change from the proposal, which allocated competing nominations on a first-come, first-served basis, if the company receives competing nominations that exceed the 25% cap, the shareholder or group with the highest percentage of voting securities will be preferred.
Nominee qualifications. The nominee must meet the objective independence standards of the applicable national securities exchange or association in order to be nominated. However, there is no restriction on the relationship between the nominating shareholder and the nominee.
Disclosure and liability for statements. Certain disclosures regarding the shareholder nominee and nominating shareholder must be made in a new Schedule 14N. While nominating shareholders will be liable for any false or misleading disclosures provided to the company, the company will not be responsible for any information provided by the shareholder and reproduced in the company’s proxy materials. This is a change from the proposal which would have made the company liable for any material that the company “knows or has reason to know” is false or misleading.
Effectiveness. Shareholder nominations are required to be noticed to the company at least 120 days before the first anniversary date of the mailing of the company’s proxy statement in the prior year. Rule 14a-11 becomes effective 60 days after the rule is published in the Federal Register, which typically occurs shortly after the final text of the rule is released. Assuming a November 1, 2010 effective date, which we think is a reasonable estimate, Rule 14a-11 would apply to companies that mailed their 2010 proxy statements on or after March 1, 2010.
Alternative procedures. The SEC also voted to amend Rule 14a-8 by requiring companies to include in their proxy materials qualifying shareholder proposals that seek to establish procedures for the inclusion of shareholder nominees in company proxy materials, so long as those procedures do not limit the availability of Rule 14a-11. The current shareholder eligibility requirements of Rule 14a-8 (that a shareholder proponent has held at least $2,000 in market value or 1% of the company’s voting securities, whichever is less, for one year) will apply.
This newsflash provides a summary of the key elements of the new rules, which will present a number of practical issues for the SEC, management and directors alike. We intend to provide further detail, commentary and guidance regarding the application and corporate governance implications of the new rules, including the implications for advance notice bylaws.
For a copy of the SEC release containing a full text of the final rules, click here.