(The following post originally appeared on ONSecurities, a top Minnesota legal blog founded by Martin Rosenbaum to address securities, governance and compensation issues facing public companies.)
As I said in my previous post, to paraphrase Bob Dylan, large shareholders are closer than ever to “knock-knock-knockin’ on the boardroom’s door.” And now, we know more about who gets to knock, and when they might be let in.
On August 25, 2010, the SEC adopted Rule 14a-11, the shareholder access rule that was originally proposed on June 10, 2009. The SEC approved a revised version of the rule by a 3-2 vote, with the Republican Commissioners voting against approval. The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act on July 21, 2010 clarified the SEC’s authority to order proxy access and thus removed a major legal concern about enforcement of the rule (Act Section 972).
Rule 14a-11 grants to large shareholders of public companies the right to nominate directors and have the nominees included in management’s proxy statement. The SEC’s press release provides some useful information about the new rule. However, the best capsule summary I have seen so far is contained in today’s post by Broc Romanek on thecorporatecounsel.net Blog, “The SEC Adopts Proxy Access,” including the following practical points:
- What are the thresholds for a Rule 14a-11 access right? - Shareholders (or groups) must have 3% of the voting power (so it doesn't vary by company size as proposed) and have have held their shares for three years (up from one year as proposed) when they give notice of the nomination on Schedule 14N. When calculating the 3%, shareholders will be able to pool assets and include securities loaned to a third party as long as they can be called back - but securities sold, shorted or not held through the company's annual meeting will need to be deducted.
- Who can be nominated as a shareholder candidate? - Shareholder nominees must satisfy the applicable stock exchange's independence standards - and the shareholder exercising the right must not have the intent of changing control of the company. If a company wants to challenge a nominee's qualification, it can use the Staff's no-action process.
- How many nominees can be placed on the ballot by shareholders? - Greater of one director or 25% of the entire board. If the number of shareholder nominees exceeds the number permitted under Rule 14a-11, then preference will be given to the larger holder - not the first to nominate as the SEC had proposed.
- Is there any "opt-out" of the process rules? - Nope, it's mandatory and neither companies nor shareholders are not permitted to opt out or select a more restrictive mechanism. Rule 14a-8 was amended so that companies may not exclude shareholder proposals that seek to establish less restrictive proxy access procedures.
- When do the new rules take effect? - 60 days after their publication in the Federal Register, which is expected to happen next week. However, the deadline for submitting a nominee is 120 days before the anniversary of this year's proxy mailing. So access essentially applies for an annual meeting next year only if the first anniversary of the mailing of this year's proxy materials occurs 120 days or more after effectiveness. The example given during the open meeting: if the rules are effective on November 1st, then shareholders have a proxy access right if the company mailed their proxy materials on or after March 1st during 2010.
- How are smaller companies treated? - They get a three-year delay in effectiveness if the company has a public float of less than $75 million.
- How are foreign private issuers treated? - They aren't subject to the new access rules, just like the other proxy rules.