Promptly exercising the authority granted to it under the Dodd-Frank Act, the Securities and Exchange Commission (SEC) has adopted rules that give shareholders the ability to have their nominees for election as director included in the company’s proxy materials – commonly referred to as “proxy access.” Under new Rule 14a-11, companies must include information about shareholder nominees for director in company proxy statements, and the names of the nominee or nominees as choices on company proxy cards, under specified conditions. The proxy access rules will become effective 60 days after publication in the Federal Register, which should make the effective date sometime in early November.

Highlights of the proxy access rules are as follows:   

  • To be eligible to use the new proxy access rules, a shareholder (or group of shareholders) must hold 3% of the voting power and have held their shares for three years when they give notice of their nominations, and the shareholder(s) must not have the intent of changing control of the company.

  • The maximum number of shareholder nominees that can be included in the company’s proxy statement (or serve on the board) at one time is 25% of the entire board (with a minimum of one). If the company receives more nominations than it is required to include in its proxy statement, the preference will be given to the larger shareholder.

  • The shareholder nominee must satisfy the applicable stock exchange’s independence standards.

  • A nominating shareholder must give notice to the company on a new Schedule 14N no earlier than 150 days, and no later than 120 days, prior to the anniversary of the mailing date for the prior year’s proxy materials.

  • Companies cannot opt out of the proxy access process or exclude shareholder proposals that seek to establish a less restrictive process.

  • The new rules will not apply to smaller reporting companies (those with a public float of less than $75 million, measured as of the last business day of its most recently completed second fiscal quarter) for a period of three years.

When is proxy access available?   

Proxy access will be available in connection with an annual meeting of shareholders (or special meeting in lieu of an annual meeting) at which directors are elected. The proxy access rules will not apply to a company that is subject to the proxy rules solely because it has a class of debt securities registered under Section 12 of the Exchange Act.

In addition, the proxy access rules will not apply to a company if applicable state or foreign law, or the company’s governing documents, prohibit the company’s shareholders from nominating a candidate for election as director. The SEC points out in the adopting release that it is not aware of any state law that prohibits a company’s shareholders from nominating directors.   

Who is eligible to use proxy access?

A shareholder nominee or nominees must be included in the company’s proxy statement and form of proxy if the following requirements are satisfied:


  • The nominating shareholder individually, or the nominating shareholder group in the aggregate, must hold at least 3% of the total voting power of the company’s securities that are entitled to vote on the election of directors on the date that the nominating shareholder(s) files the notice of nominations on Schedule 14N.

      • Where a company has multiple classes of stock with unequal voting rights and the classes vote together on the election of directors, then voting power would be calculated based on the collective voting power. If a company has multiple classes of stock that do not vote together in the election of all directors, then voting power would be determined only on the basis of the voting power of the class or classes of stock that would be voting together on the election of the person(s) sought to be nominated by the nominating shareholder(s), rather than the voting power of all classes of stock.

      • To count towards the 3% requirement, the nominating shareholder(s) must have both voting power and investment power over the securities. This means that shares that may be acquired upon the exercise of options or warrants do not count towards the holding requirement. Securities loaned to others may be counted if the shareholder has the right to recall the securities and intends to do so if the shareholder’s nominees are included in the company’s proxy statement. Shares that have been sold short must be subtracted from the shareholder’s holdings.

    • The nominating shareholder(s) has held the shares that were used to meet the minimum ownership requirement for at least three years as of the date of filing the Schedule 14N and must continue to hold that amount of securities through the date of the election of directors.
    • The nominating shareholder(s) provides proof of satisfying the ownership and holding period requirements. A statement from a broker will satisfy this requirement where the securities are held in street name.
    • The nominating shareholder(s) provides a statement on the date that the Schedule 14N is filed that the nominating shareholder(s) intends to continue to hold the amount of securities used to satisfy the minimum ownership requirement through the date of the meeting.
    • The nominating shareholder(s) provides a statement on the date that the Schedule 14N is filed regarding the shareholder’s intent with respect to continued ownership of the company’s securities after the election (for example, whether the shareholder intends to hold the securities if the shareholder’s nominee is not elected).
    • The nominating shareholder(s) is not holding the company’s securities with the purpose, or effect, of changing control of the company or to gain a number of seats on the board of director that exceeds the maximum number of nominees that the company could be required to include in its proxy statement.
    • Neither the nominee nor the nominating shareholder(s) has an agreement with the company regarding the nomination of the nominee.
    • The nominee’s candidacy or board membership would not violate controlling federal, state or foreign law or the rules of a national securities exchange (other than rules regarding director independence).
    • The nominating shareholder(s) provides notice to the company on Schedule 14N of its intent to require the company to include the shareholder’s nominee in the company’s proxy statement and form of proxy.

      The company may omit a shareholder’s nominee from the proxy statement if the nominating shareholder is participating in more than one nominating group with respect to the company or is separately conducting a proxy solicitation in connection with the election of directors of the company.

      When must notice of the intent to nominate a director be given to the company?

      In order to submit a nominee for inclusion in the company’s proxy statement and form of proxy, the nominating shareholder or nominating shareholder group must give notice to the company on new Schedule 14N. The Schedule 14N must be filed with the SEC 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 statement for the prior year’s annual meeting. The Schedule 14N must be transmitted to the company on the same date that it is filed with the SEC.   

      For example, if the company mailed its proxy materials on April 1, 2010, notice of a shareholder nomination to be included in the 2011 proxy statement must be received no earlier than November 2, 2010, and no later than December 2, 2010.

      If the company did not hold an annual meeting during the prior year, or if the date of the meeting has changed by more than 30 calendar days from the prior year, then the nominating shareholder(s) must transmit notice to the company and file its notice with the SEC a reasonable time before the company mails its proxy materials. In either such case, the company must file a Form 8-K to disclose the date by which a shareholder must submit the required notice within four business days after the company determines the meeting date.   

      How many shareholder nominations can be made and how are nominations prioritized?

      A company will be required to include in its proxy statement and form of proxy one shareholder nominee or the number of nominees that represents 25% of the total number of directors, whichever is greater. Any number of nominees in excess of this limitation may be excluded. If 25% of the board is not a whole number, the company will round down to the closest whole number below 25% to determine the number of shareholder nominees. For example, if the company has nine directors, the company would be required to include in its proxy materials no more than two shareholder nominees.   

      If a company has multiple classes of securities and each class is entitled to elect a specified number of directors, the company will be required to include the lesser of the number of nominees that the nominating shareholder’s class is entitled to elect or 25% of the board of directors, but in no case less than one nominee.

      If a company has one or more directors currently serving on its board of directors who were elected as a shareholder nominee pursuant to the proxy access rules and the term of that director or directors extends past the election of directors for which the company is currently soliciting proxies, the company will not be required to include in its proxy materials more shareholder nominees than could result in the total number of directors who were elected as shareholder nominees being more than one or 25% of the total number of directors, whichever is greater. For example, if a company with an eight member board had one shareholder nominee elected in the prior year to a three-year term, it would be required to include no more than one shareholder nominee in the current year’s proxy statement.

      If more than one shareholder or group of shareholders submits a nominee for inclusion in the company’s proxy statement, the nominating shareholder(s) with the highest qualifying voting power percentage will have its nominee(s) included in the company’s proxy statement. If the nominating shareholder(s) with the highest qualifying voting power percentage does not nominate the maximum number of individuals required to be included in the company’s proxy materials, the nominating shareholder with the next highest percentage will have its nominees included in the proxy statement. This process would continue until the company reaches the maximum number of nominees it is required to include in its proxy materials or exhausts the list of eligible nominees. If the nominating shareholder that is last in priority has nominated a number of candidates that would result in exceeding the maximum number of shareholder nominees, the nominating shareholder may specify which of its nominees are to be included in the proxy statement.   

      If, prior to printing the proxy statement, a nominating shareholder withdraws or is disqualified, then the company must include in its proxy statement the nominee(s) of the nominating shareholder with the next highest qualifying voting power percentage, if any. If a nominee withdraws or is disqualified after the nominating shareholder files its Schedule 14N, the company must include the nominee of the nominating shareholder with the next highest qualifying voting percentage, if any.

      What information must the nominating shareholder provide to the company?    

      A shareholder or group of shareholders that submits a director nominee for inclusion in the company’s proxy statement must file a statement containing the information provided on Schedule 14N and simultaneously provide the notice to the company.

      Schedule 14N will require a nominating shareholder or group to provide the following information about the nominating shareholder or group and the nominee:

      • The name and address of the nominating shareholder or each member of the nominating shareholder group.
      • Information regarding the amount and percentage of securities held and entitled to vote on the election of directors.
      • A written statement from the registered holder of the shares, or the broker or other custodian through which the shares are held, verifying that the shareholder continuously held the qualifying amount of securities for at least three years.
      • A written statement of the nominating shareholder’s intent to continue to hold the qualifying amount of securities through the shareholder meeting at which directors are elected and regarding the shareholder’s intent with respect to continued ownership after the election.
      • A statement that the nominee consents to be named in the company’s proxy statement and, if elected, to serve on the board of directors.
      • Disclosure about the nominee that would be required under the proxy rules for management nominees, such as present occupation and recent background, certain legal proceedings and related party transactions.
      • Disclosure about the nominating shareholder(s) that would be required in the event of a proxy contest, as well as disclosure of certain legal proceedings.
      • Disclosure about whether, to the best of the nominating shareholder’s knowledge, the nominee meets the director qualifications set forth in the company’s governing documents.
      • A statement that, to the best of the nominating shareholder’s knowledge, the nominee meets the objective criteria for independence of the securities exchange rules applicable to the company, if any.
      • Disclosure about the nature and extent of the relationships between the nominating shareholder(s), the nominee, and/or the company or any affiliate of the company.
      • Disclosure of any website address on which the nominating shareholder(s) may publish soliciting materials.

      Only one Schedule 14N need be filed for each shareholder group. The Schedule 14N must identify all of the members of the group, contain the required information with respect to each shareholder that is a member of the nominating group and include an agreement, filed as an appendix, that the statement is filed on behalf of each of them.

      Within 10 calendar days after the results of the election have been announced, the nominating shareholder(s) must file an amendment to its Schedule 14N stating the nominating shareholder’s intention with regard to continued ownership of its shares.   

      What information must the company provide to shareholders about the shareholder nominee(s)?

      The company must include in its proxy statement the disclosure about the shareholder’s nominee or nominees and the nominating shareholder or members of the nominating shareholder group that is provided in the Schedule 14N filed by the nominating shareholder or shareholder group. In addition, the company must include a statement of support submitted by the nominating shareholder(s), provided that the statement does not exceed 500 words per nominee. If the supporting statement exceeds 500 words, the statement may be omitted, but the company still will be required to include the shareholder’s nominees, provided the eligibility requirements and other conditions of the rule are satisfied.

      The company is not responsible for any information included in the company’s proxy statement that is provided by the nominating shareholder(s).   

      What response must the company give to the nominating shareholder? 

      If the company determines that it may exclude a shareholder nominee or exclude a statement of support, the company must notify the nominating shareholder(s) in writing no later than 14 calendar days after the close of window period for submitting shareholder nominations. The company’s notice must include an explanation of the basis for determining that it may exclude the nominee or statement of support. A company may exclude a shareholder nominee because Rule 14a-11 is not applicable to the company, because the nominating shareholder(s) or the nominee fail to satisfy the eligibility requirements, or because including the nominee would result in the company exceeding the number of nominees it is required to include in its proxy materials.

      The nominating shareholder(s) will have 14 calendar days after receipt of the company’s notice to respond to the company and correct any eligibility or procedural deficiencies. Neither the nominating shareholder group nor the identity of the shareholder nominee may be changed as a means of correcting the deficiency identified in the company’s notice to the nominating shareholder(s).  

      If the company determines that it will include a shareholder nominee in its proxy materials, it must notify the nominating shareholder(s) no later than 30 calendar days before the company files its definitive proxy statement with the SEC.

      What process is available if the company believes it may exclude a shareholder nominee?

      If, after providing to the nominating shareholder(s) the required notice and opportunity to remedy deficiencies, the company intends to exclude a shareholder nominee from its proxy materials, the company must provide notice of the basis for its determination to the SEC and deliver a copy to the nominating shareholder(s) no later than 80 calendar days before it files its definitive proxy materials. The nominating shareholder may submit a response to the company’s notice to the SEC. This response must be submitted to the SEC no later than 14 calendar days after the nominating shareholder’s receipt of the company’s notice to the SEC.

      The company may also seek a no-action letter from the SEC. Receipt of a no-action letter from the SEC would give the company the comfort that the SEC shares its view that the shareholder nominee may be excluded. If the company seeks a no-action letter from the SEC, the company must promptly notify the nominating shareholder after it receives a response from the SEC of whether it will include or exclude the shareholder nominee.

      The timing of the proxy access process would generally be as follows:

      Key Date

      Event/Action

      150 days prior to the anniversary of the date the company mailed its proxy materials for the prior year’s meeting.

      Window period for notice of shareholder nominees opens.

      120 days prior to the anniversary of the date the company mailed its proxy materials for the prior year’s meeting.

      Window period for notice of shareholder nominees closes.

      14 days after close of window period (approx. 106 days before proxy mail date).

      Company must notify the nominating shareholder(s) of any determination not to include the shareholder’s nominee(s).

      14 days after receipt of the company’s deficiency notice (approx. 92 days before proxy mail date).

      Nominating shareholder must respond to the company’s deficiency notice.

      80 calendar days before filing definitive proxy statement with SEC.

      Company must notify the SEC of its intent to exclude the shareholder nominee(s) and the basis for its decision and, if desired, seek a no-action letter.

      14 days after receipt of the company’s notice to the SEC (approx. 66 days before proxy mailing).

      Nominating shareholder(s) may submit a response to the company’s notice to the SEC.

      Promptly following receipt of SEC staff’s response to a no-action request.

      Company must provide notice to the nominating shareholder(s) stating whether it will include or exclude the nominee(s).

       

      Can a company opt out of the proxy access rules or prevent shareholders from proposing bylaw provisions that would create a less restrictive proxy access process?

      No, a company cannot opt out of the proxy access rules.

      In addition, companies can no longer exclude a shareholder proposal seeking to establish a procedure in the company’s governing documents for inclusion of one or more shareholder nominees in the company’s proxy statement. This means that a shareholder could, for example, propose a bylaw amendment that provides an additional – and less restrictive – means for including shareholder nominees in the company’s proxy statement. Such a proposal could require a different ownership threshold, holding period or other qualifications than those contained in new Rule 14a-11, or permit a greater number of shareholder nominees to be included in the company’s proxy statement.  

      If shareholders are successful in adopting amendments to the company’s governing documents to establish proxy access procedures, such provisions would be an additional avenue for shareholders to obtain proxy access and not a substitute for, or restriction on, Rule 14a-11.

      How will shareholder nominees be presented on the company’s proxy card?

      A company that is required to include a shareholder nominee or nominees on its form of proxy may identify shareholder nominees as such and recommend whether shareholders should vote for, against, or withhold votes on any or all of those nominees on the form of proxy. A company may not give shareholders the option of voting for or withholding authority to vote for the company nominees as a group, but instead must require that shareholders vote on each nominee separately. To avoid confusion, clear instructions on the number of votes that can be cast need to be provided.

      When does proxy access become effective?

      The new proxy access rules will become effective 60 days after publication in the Federal Register, which should make the effective date sometime in early November. Shareholders seeking to use new Rule 14a-11 would be able to do so if the window period for submitting nominees is open in whole or in part after the effective date of the rules.

      Smaller reporting companies (those with a public float of less than $75 million, measured as of the last business day of its most recently completed second fiscal quarter) have been given a temporary reprieve from the new proxy access rules. Rule 14a-11 will not be effective for such smaller reporting companies for a period of three years.

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