May 20, 2009
Today, the Securities and Exchange Commission ("SEC") approved the publication of proposed amendments to the SEC’s proxy rules to permit shareholders to nominate directors in a company’s proxy materials (also known as "proxy access"). The proposals include: (1) a federal proxy access right that would preempt state law and a company’s charter and bylaws; and (2) an amendment to Rule 14a-8 to permit proxy access shareholder proposals.
The proposals were supported by three commissioners, Chairman Schapiro, Commissioner Elisse Walter, and Commissioner Luis Aguilar, with Commissioner Kathleen Casey and Commissioner Troy Paredes indicating they could not support the proposals. Chairman Schapiro stated that the SEC needed to address this issue once again in light of the current economic crisis. "This crisis has led many to raise serious questions and concerns about the accountability and responsiveness of some companies and boards of directors, to the interests of shareholders." Commissioner Casey countered that the proxy access proposals would be imposed not only on the country’s largest banks and Wall Street firms, but also on thousands of other large and small public companies that had little to do with the financial crisis. While Commissioners Walter and Aguilar were in favor of creating a federal proxy access right, Commissioners Casey and Paredes expressed concern that the proposals overly encroached on decisions of state legislatures that establish state corporate law and private ordering by companies and their shareholders.
This summary is based on information provided at the SEC’s open meeting and therefore may not reflect nuances that appear in the official text of the proposals. We will prepare an additional memorandum to clients once the proposing release is issued. The proposed rules will have a 60-day comment period following publication in the Federal Register. It appears that the SEC wishes to be in a position to adopt final rules that would be in place in time for the 2010 proxy season. Nevertheless, at the open meeting today, the Chairman and Commissioners stressed that the proposing release would contain extensive requests for comment, and they urged interested parties to review and respond to the questions thoroughly.
The SEC previously proposed amendments to the federal proxy rules regarding proxy access in 2003 and 2007.
The 2003 proposals would have required companies to include in their proxy materials director candidates nominated by shareholders where one of the following two triggers was present: (1) if at least one of the company’s nominees for the board of directors for whom the company solicited proxies received "withhold" votes from more than 35% of the votes cast at the company’s annual meeting of shareholders; or (2) if a shareholder proposal requesting that the company become subject to the proxy access rule received more than 50% of votes cast. Upon the occurrence of either trigger, holders of more than 5% of a company’s shares would have been able to include up to three director nominees in the company’s proxy materials. The 2003 proposals were widely criticized and were never adopted by the SEC.
In 2007, the SEC again proposed rules regarding proxy access. The SEC has historically permitted companies to exclude proxy access shareholder proposals from their proxy materials under Rule 14a-8(i)(8) because the shareholder proposals would result in contested elections. However, in September 2006, the United States Court of Appeals for the Second Circuit held in AFSCME v. AIG that the SEC’s interpretation of Rule 14a-8(i)(8) reflected an unexplained change in interpretation. In response to this decision, the SEC proposed two amendments to Rule 14a-8(i)(8). The first proposal was to amend Rule 14a-8(i)(8) to clearly state that proxy access shareholder proposals were excludable from company proxy materials. The second proposal would have permitted shareholders holding at least 5% of a company’s shares for one year to propose a binding proxy access bylaw. The SEC adopted the first proposal, which affirmed that proxy access proposals could be excluded under Rule 14a-8(i)(8), but took no action on the second proposal.
Overview of the Proposed Rules
There are two components to the proxy access proposals approved by the SEC today: (1) creating a federal right, in proposed Rule 14a-11, for shareholders to nominate directors in company proxy statements, with related amendments to other rules; and (2) amending existing Rule 14a-8(i)(8) to permit proxy access shareholder proposals.
Proposed Rule 14a-11 to Permit Director Nominations by Shareholders in Company Proxy Materials
Proposed Amendments to Rule 14a-8(i)(8) to Permit Proxy Access Shareholder Proposals
The SEC also is proposing to amend Rule 14a-8(i)(8) to require companies to include proxy access shareholder proposals in company proxy materials except in limited circumstances. Specifically, proxy access shareholder proposals that would amend or request the amendment of provisions of a company’s governing documents to address the company’s nomination rights or the disclosures or procedures related to shareholder nominations would not be excludable unless they conflicted with proposed Rule 14a-11 or state law. Thus, the proposed rules seek to reverse in part the SEC’s 2007 rulemaking that explicitly affirmed that all such shareholder proposals could be excluded. Proxy access shareholder proposals would be subject to the same eligibility requirements as other shareholder proposals under Rule 14a-8 (i.e., a shareholder must hold at least $2,000 in market value, or 1%, of the company’s shares for at least one year to be eligible to submit a proposal).
 In addition, yesterday U.S. Senator Charles Schumer introduced the "Shareholder Bill of Rights Act of 2009," which, among other things, would give the SEC authority to adopt proxy access rules and require it to establish rules permitting shareholders who own at least 1% of a company’s voting shares for at least two years to nominate members of the board of directors in company proxy materials. See S. 1074, 111th Cong. (1st Sess. 2009).
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following in the firm’s Washington, D.C. office:
John F. Olson (202-955-8522, email@example.com)
Brian J. Lane (202-887-3646, firstname.lastname@example.org)
Ronald O. Mueller (202-955-8671, email@example.com)
Amy L. Goodman (202-955-8653, firstname.lastname@example.org)
Gillian McPhee (202-955-8230, email@example.com)
Elizabeth Ising (202-955-8287, firstname.lastname@example.org)
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