SEC Votes to Issue New Proxy Access Proposals

The SEC yesterday voted 3-to-2 to issue a set of proposals to change the federal proxy rules to facilitate the rights of shareholders to nominate directors to a company's board. It is the fourth time in recent years that the Commission has tried to address the proxy access issue.

SEC Chair Mary Schapiro said the proposals' time has come given the concerns raised by the economic crisis about the accountability and responsiveness of some companies and boards of directors. In particular, shareholders have questioned whether boards need to be more accountable for decisions regarding compensation structures and risk management. Through the proposals, the SEC is revisiting whether the proxy rules are impeding the ability of shareholders to hold boards accountable through the exercise of their right to nominate and elect board members, Schapiro said.

Proposed Rule 14a-11 would allow shareholders to include their nominees for director in the company's proxy materials if they have been shareholders of the company for at least one year and satisfy a minimum holdings test based on the company's market value. The proposed rule would apply to all 1934 Act reporting companies, including investment companies, other than debt-only companies.

Shareholders would be eligible to have their nominee included in the proxy materials if they own at least one percent of the voting securities of a company with a market value of $700 million or more, or of a registered investment company with net assets of $700 million or more. They also would be eligible if they own at least three percent of the voting securities of a company with a market value of $75 million or more but less than $700 million, or of a registered investment company with net assets of $75 million or more but less than $700 million. Finally, shareholders would be eligible if they own at least five percent of the voting securities of a company with a market value of less than $75 million or of a registered investment company with net assets of less than $75 million.

Shareholders would be required to sign a statement declaring their intent to own the shares through the annual meeting, and would be required to certify that they are not holding their stock for the purpose of changing control of the company, or to gain more than minority representation on the board of directors. Shareholders may nominate no more than one shareholder nominee, or a number of nominees that represents up to 25 percent of the company's board of directors, whichever is greater.

The nominating shareholder would be liable for any false or misleading statements in information provided to the company that is then included in the company's proxy materials. The proposed rule would provide that the company will not be responsible for information provided by the shareholder, unless the company knows or has reason to know the information is false.

The Commission also proposes to narrow the election exclusion provided by Rule 14a-8(i)(8). Specifically, shareholder proposals by qualifying shareholders that would amend, or that request an amendment to, provisions of a company's governing documents concerning the company's nomination procedures or other director nomination disclosure provisions would not be excludable, provided that the provisions do not conflict with proposed Rule 14a-11.

The proposals were opposed by Commissioners Kathleen Casey and Troy Paredes. Casey said that the rationale that the rules are needed in response to the current crisis is ill-founded for two reasons. First, the Commission has been working on the proxy access issue for years, long before the crisis started. Second, the proposals would impose new rules on all companies, many of which had nothing to do with the risk-taking and compensation structures that have raised concerns.

Casey said that the proposals put the Commission in the position of creating a federal corporate governance regime. She believes that states are best situated to handle the proxy access issue, and noted that several states including Delaware are being actively innovative in this area.

Paredes believes that proposed Rule 14a-11 encroaches far too much on internal corporate actions, which traditionally have been the domain of the states. He and Casey expressed concern that the proposed rules would prevail over state laws. They cited North Dakota's adoption in 2007 of a law that provides proxy access to shareholders that own 5% of a company's shares. Proposed Rule 14a-11 would provide access at a 1% ownership level, thereby effectively overriding North Dakota's law, they said.

Commissioner Elisse Walter noted that the release asks for feedback on whether Rule 14a-11 should overrule state laws, or whether the Commission should defer to state-approved provisions. She encouraged interested parties to comment on this critical issue.