Wednesday, November 25, 2009

SEC Shareholder Director Nomination Proposal: Rule 14a-11

I’ve actually had this post in outline form on my desktop for weeks now …Thank god for Thanksgiving and down-time!

The Securities and Exchange Commission (“SEC”) deferred its decision to expand shareholder (“s/h”) board nomination rights until 2010. Chairwoman Shapiro wanted to review the hundreds of comments that were submitted regarding the proposal. Recall the comment period elicited joint letters from both sides of the aisle, BigLaw defense and plaintiff securities firms.

The proposal is available here, and I wanted to share some of what I read (not ironically, what has generated the most discussion). Broadly speaking, the proposal would allow shareholders greater access to a company’s board. Specifically, the SEC proposes a new rule, Exchange Act Rule 14a-11, that would require a company to include in its proxy materials shareholder nominees for director. Any state law, articles of incorporation, or corporate by-laws that disallow shareholders to nominate directors would supersede the proposed rule. The rule is not intended to apply to shareholders seeking either control of the company or possession of “more than a limited number” of director seats. Refer infra. discussion for clarification of what “more than a limited number ” means.

The SEC theme is fortifying existing shareholder rights. Proposed rule 14a-11, for example, is to remedy what the SEC identifies as an obstacle to a s/h’s right to nominate and elect the board of directors. That being, shareholder nominees float the expense to present their nomination to the shareholders at large for purposes of voting. Board nominees, on the other hand, are simply listed in the company’s proxy materials, and therefore do not have to finance the expense.

Ownership Floors

In an effort to address contra arguments (cost and disruption to the company), the SEC has proposed an eligibility requirement to leverage 14a-11. There is a minimum ownership threshold that must be met by the nominating shareholder or the shareholder group (“shareholder(s)"). The breakdown:

∙ 1% - For large accelerated filers, and registered investment companies with net assets of $700 million or more (company type and size, as defined in Exchange Act Rule 12b2).
∙ 3% - For accelerated filers, and registered investment companies with assets between $75 million and $700 million.
∙ 5% - For non-accelerated filers, and registered investment companies with assets less than $75 million.

These percentages are beneficial ownership as of the time of s/h notice of the vote, and as a percentage of the company’s securities entitled to be voted on at the time of the vote. Further, shareholder(s) must have owned the shares for a minimum of one year preceding the notice, and intend to continue to do so up until the vote in fact occurs.

Disclosures to SEC

Shareholder(s) must also provide notice to the SEC of their intention to include a nominee in the company’s proxy materials; Schedule 14N. This same disclosure would also be made to the company, and is manifold. It contains information such as the percentage of securities held by the nominating shareholder(s), the length of the ownership and the intent to continue to hold the securities until the vote, as well as “certification” that the shareholder(s) do not intend to change control of the company or obtain “more than a limited number” of seats.

Nominating shareholder(s) would also attest that the nominee satisfies standards of director independence as required by a national securities exchange or association, or for a registered investment company, that the nominee was not an “interested person” per § 2(a)(19) of the Investment Company Act.

Further, nominating shareholder(s) would attest that there is no agreement between the nominating group and the company as regards the nominee (Ie., once elected, the director would block certain issues from moving forward). Unsuccessful negotiations with the nominating committee of the company to have the candidate included on the company's proxy card as a management nominee, or negotiations regarding disclosure of the shareholder nominee, do not count.

“More than a limited number”

This limited number is either one nominee, or a quarter of the total possible director positions on a board; whichever is greater. If shareholder(s) successfully nominate and elect 25% of a board’s directors, and those directors' terms overlap with the next nomination and election process, the company is not required to include any further shareholder nominees in the impending proxy materials (so as to avoid greater than 25% of the board being composed of shareholder nominees). Further – as regards which shareholders’ nominees will get priority – first in line is first in time. 14a-11(d)(3).


As a threshold matter, inclusion of shareholder(s) nominee in the company’s proxy materials would not prohibit other solicitation materials that currently exist and are proper (SEC Ie., a website).

Since an SEC decision on the matter has been deferred until 2010, if approved, Rule 14a-11 would not be applicable during the 2010 proxy season.

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