SEC Alert: Facilitating Shareholder Director Nominations

With an eye towards facilitating “the effective exercise of shareholders’ traditional state law rights to nominate and elect directors to company boards of directors,” the SEC has recently adopted changes to the federal proxy rules to facilitate the nomination by shareholders of candidates for election as a director and to require, under certain circumstances, that a company include such shareholders’ nominees in its proxy materials in order to provide shareholders with the ability to vote for such shareholders’ nominees.  The new rules will be effective for the 2011 proxy season for most calendar year-end companies.  However, the SEC has delayed the new rules’ application to smaller reporting companies for three years.     


Regulation of the proxy process was one of the original responsibilities that Congress assigned to the SEC as part of its core functions in 1934.  The SEC has actively monitored the proxy process to ensure that it functions in a manner that adequately protects the interests of investors.  Since the proxy process represents a shareholder’s principal means of participating effectively at an annual or special meeting of shareholders, the SEC has focused on whether the proxy process functions, as near as possible, as a replacement for an actual in-person meeting of shareholders.  Without the ability to effectively utilize the proxy process, shareholder director nominees, who in most cases are nominated at the shareholder meeting itself, do not have a realistic prospect of being elected because most, if not all, shareholders return their proxy cards in advance of the shareholder meeting, and thus, cast their votes before the meeting at which such shareholder director nominees are actually nominated.  To address this failure of the proxy process to facilitate shareholder nomination rights, the SEC has adopted new rules to enable the proxy process to more closely approximate the conditions of a shareholder meeting.

Summary of New Rule 14a-11

The SEC has adopted new proxy rules, codified as new Rule 14a-11, which, under certain circumstances, requires companies to provide shareholders with information about, and the ability to vote for, a shareholder’s, or group of shareholders’, nominees for director in the companies’ proxy materials.

Under the SEC’s new proxy rules, companies are required to include shareholder nominees for director in their proxy materials in accordance with the following rules and procedures:    

•           Ownership Threshold

A nominating shareholder or group will be required to satisfy an ownership threshold of at least 3% of the voting power of the company’s securities entitled to be voted at the meeting.  Shareholders are permitted to aggregate their shares to meet the threshold.

The nominating shareholder, or each member of the group, will be required to have held the 3% continuously for at least three years as of the date the nominating shareholder or group submits notice of its intent.

The nominating shareholder or members of the group must continue to own the 3% through the date of the shareholder meeting, and provide disclosure concerning their intent with regard to continued ownership of the securities after the election of directors.

•           No Change of Control Intent

The nominating shareholder (or any member of the nominating shareholder group), may not be holding the company’s securities for the purpose, or with the effect, of changing the control of the company, or gaining control of more than 25% of the seats on the company’s board of directors.

•           Maximum Number of Shareholder Nominees

A company will not be required to include in its proxy materials more shareholder nominees than could result in the total number of directors serving on the board that were elected as shareholder nominees being greater than one shareholder nominee or 25% of the company’s board of directors (even if the company has a staggered board), whichever is greater.

•           Priority of Nominations

Where there are multiple eligible nominating shareholders, the nominating shareholder or group with the highest percentage of the company’s voting power would be entitled to have its nominees included in the company’s proxy materials.

•           Advanced Notice

The nominating shareholder or group must provide notice to the company of its intent to nominate a candidate by transmitting new Schedule 14N to the company 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 materials for the prior year’s annual meeting.  The notice on Schedule 14N must be transmitted to the company and filed with the SEC on the same day.

If a company will include a shareholder nominee in its proxy materials, the company will be required to notify the nominating shareholder or group (or their authorized representative) no later than 30 calendar days before it files its definitive proxy materials with the SEC.

If a company determines that it may legally exclude a shareholder nominee, the company will be required to notify the SEC and the nominating shareholder or group (or their authorized representative) no later than 14 calendar days after the close of the window period for submission of nominations pursuant to Rule 14a-11.

Under new Rule 14a-11(g), a company may exclude a shareholder nominee because:

◦           Rule 14a-11 is not applicable to the company;

◦           The nominating shareholder or group or nominee failed to satisfy the eligibility requirements of Rule 14a-11(b);

◦           Including the nominee or nominees would result in the company exceeding the maximum number of nominees it is required to include in its proxy statement and form of proxy.

•           No Action Process to Challenge Nominees

A company may submit a no-action request for the SEC’s informal view with respect to the company’s determination that it may exclude a shareholder nominee.

Summary of Amendment to Rule 14a-8(i)(8)

•           Shareholder Proposals for Nominating Procedures

Rule 14a-8(i)(8) allowed a company to exclude from its proxy statement shareholder proposals that relate to a procedure for the nomination or election of a member to the company’s board of directors.  The SEC has adopted an amendment to Rule 14a-8(i)(8), the election exclusion, to enable shareholders, under certain circumstances, to require companies to include in their proxy materials shareholder proposals that would amend a company’s governing documents regarding nomination procedures or disclosures related to shareholder nominations, provided that the proposal does not conflict with Rule 14a-11 and that the procedural requirements of Rule 14a-8 are met.

The complete text of the new rules may be accessed at:  Final Rule: Facilitating Shareholder Director Nominations.

By:  Steve Kronengold and David C. Zuckerbrot. © September 2010. All rights reserved.
This article is provided for educational, informational and non-commercial purposes only. The content of this article is not intended to provide legal advice on any subject matter and should not be relied on as such.

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