Summary of SEC Proposed Proxy Access Rules and Shareholder Bill of Rights Act
In the wake of the ongoing economic crisis, politicians and federal regulators have increased their efforts to provide public company shareholders with what they believe will be a greater voice in corporate governance matters. The most notable recent examples include the introduction of the Shareholder Bill of Rights Act of 2009, S. 1074, to Congress on May 19, 2009 (the “Shareholder Bill”) and the Securities Exchange Commission’s (the “SEC”) proposed new proxy access rules released on June 10, 2009 (the “SEC Proposed Proxy Rules”). If passed, the Shareholder Bill would, among other things, provide shareholders of public companies with a “say on pay” through annual advisory votes on executive compensation, establish new corporate governance requirements and require the SEC through rulemaking to adopt rules that would provide for shareholders to include their director nominees in a company’s proxy materials. The SEC Proposed Proxy Rules would also grant proxy access for director nominations to certain public company shareholders. While it is too early to determine whether the Shareholder Bill will become law, comments to the SEC Proposed Proxy Rules must be submitted by August 17, 2009, and we believe the SEC intends to have the final shareholder proxy access rules in place for the 2010 proxy season. Due to the belief that some form of shareholder proxy access is inevitable, the Delaware General Corporation Law (the “DGCL”) recently was amended to expressly authorize companies to adopt bylaws providing for shareholders access to the company’s proxy statement for director nominations.
Proponents of these proposals believe these measures will address problems in our economy purportedly caused by company leaders taking too many risks and claiming excessive compensation without shareholder approval. As a result, these proponents argue that unchecked managerial self-interest drove companies to take unwarranted risks in the hopes of gaining short-term profits. These risks, in turn, led to corporate failures that exacerbated the financial crisis and necessitated the spending of billions of taxpayer dollars in federal bailouts. As stated by Senator Charles Schumer, the Shareholder Bill will prevent this situation from occurring again by “giv[ing] stockholders the ability to apply the emergency brakes the next time the company management appears to be heading off a cliff.” Proponents of the legislation expect that shareholders will use the new law to regulate managements’ propensity for unnecessary risk. Indeed, the SEC’s rationale for the SEC Proposed Proxy Rules expresses these same beliefs:
The nation and the markets are experiencing one of the most serious economic crises of the past century. This crisis has led many to question whether boards of directors are truly being held accountable for the decisions that they make. These concerns include questions about whether boards are exercising appropriate oversight of management, whether boards are appropriately focused on shareholder interests, and whether boards need to be held more responsible for their decisions regarding such issues as compensation structures and risk management. Because of these concerns, the Commission has decided to revisit whether and how the federal proxy rules may be impeding the ability of shareholders to exercise their fundamental right under state law to nominate and elect members to company boards of directors.
This memo summarizes the SEC Proposed Proxy Rules, the Shareholder Bill, certain other recent legislative and regulatory actions and why we believe these actions are an unnecessary intrusion into matters best governed by state law and are more likely to result in the opposite of the proponents stated goals. Additionally, this memo sets forth certain actions companies may want to consider in light of these proposals.
I. SEC Proposed Proxy Rules
A. New Exchange Act Rule 14a-11: Proxy Access for Director Nominations
· Overview: The SEC’s proposed Rule 14a-11 would allow certain shareholders to include director nominees in a company’s proxy materials, unless the shareholders are prohibited from doing so by state law or the company’s governing documents. [1] This rule would apply to Exchange Act reporting companies (other than debt-only companies).
· Shareholder Ownership Requirements: In order to take advantage of the SEC Proposed Proxy Rule, nominating shareholders must:
1. Own a minimum amount of the company’s voting securities (but would be permitted to aggregate shares with other shareholders to meet the minimum ownership requirement). The proposed minimum ownership amounts are:
– at least 1% of the voting securities of a large accelerated filer (public float of $700 million or more);
– at least 3% of the voting securities of an accelerated filer (public float of between $75 million and $700 million);
– at least 5% of the voting securities of a non-accelerated filer (public float of less than $75 million);
2. Have held the shares for at least one year prior to making the nomination;
3. Sign a statement declaring their intent to continue to hold their shares through the date of the annual meeting; and
4. Certify that they are not holding their shares to challenge the control of the company or to gain more than minority representation on the board of directors.
· Additional Restrictions on Nominees and Nominating Shareholders: Nominees and nominating shareholders would be subject to additional restrictions including: (i) a nominee’s candidacy or board membership must not violate applicable laws or regulations or the company’s governing documents, (ii) a nominee must satisfy the objective independence standards of the securities exchange on which the company’s securities are listed and (iii) a nominating shareholder cannot have a direct or indirect agreement with the company regarding the nomination of the nominee. Under the SEC Proposed Proxy Rules, a nominee does not need to be independent of the nominating shareholder or group and is permitted to be a member or affiliate of the nominating shareholder or group.
· Shareholder Reporting Requirements: A nominating shareholder would be required to submit nominations to the company and file with the SEC a new Schedule 14N disclosing information about the nominating shareholder’s share ownership and other required disclosures.
· Limitation on Number of Nominees: The SEC Proposed Proxy Rules would restrict the number of nominees to the greater of one director or the number of directors representing up to 25% of the company’s board. In the case of a staggered board, any shareholder nominees previously elected pursuant to Rule 14a-11 and continuing to serve on the board beyond the upcoming election of directors would count against the 25% cap. If more than the maximum allowable number of shareholder nominations is received by a company, then the nominations will be accepted in the order received until the maximum allowable number of nominees is attained. The maximum number of shareholder nominees that a company would be required to include in its proxy statement would be rounded down to the closest whole number below 25%. The SEC Proposed Proxy Rules do not address the situation where a company is contractually obligated to appoint or nominate directors.
· Timing: The deadline for submitting nominees for inclusion in the company’s proxy materials would be the deadline established by a company’s advance notice bylaw or, if no such bylaw exists, 120 calendar days before the first anniversary of the date the company’s proxy statement was released for the previous year’s annual meeting.
· Challenging Nominations: A company that receives a shareholder director nomination would be able to challenge a nomination if it believed that the Rule 14a-11 requirements were not satisfied and the company intended to exclude the nomination on that basis. A company could exclude a shareholder nominee if: (i) proposed Rule 14a-11 does not apply to the company, (ii) the nominating shareholder has not complied with the requirements of Rule 14a-11, (iii) the nominee does not meet the requirements of Rule 14a-11, (iv) any representation required in Schedule 14N is materially false or misleading or (v) the company has received more nominees than it is required to include by Rule 14a-11 and the nominating shareholder is not entitled to have its nominee included. Rule 14a-11 sets forth the specific process a company must follow to exclude such a nominee.
· Including Nominations in Proxy Materials: If a company either does not challenge or does not successfully challenge a shareholder nomination, then the company would be required to notify the nominating shareholder at least 30 days before the company files its proxy that it will include the nominee in its proxy materials. In addition, the company would be required to include disclosure in its proxy statement related to the nominating shareholder(s) and shareholder nominee(s) comparable to the current disclosure requirements for contested elections. The nominating shareholder would be liable for any false or misleading statements provided to the company that are included in the proxy statement. The company would not be liable for information provided by the nominating shareholder(s) unless it knew or had reason to know the information was false.
· Voting: When a shareholder nominee is included in the company’s proxy statement and form of proxy, the SEC Proposed Proxy Rules would not permit a company to provide shareholders the option of voting for or withholding authority to vote for the company nominees as a group, but would instead require that each nominee be voted on separately.
B. Amended Rule 14a-8(i)(8): Shareholder Proposals Relating to Election Procedures
· Overview: Current Rule 14a-8(i)(8) allows companies to exclude shareholder proposals that “relate to an election.” The SEC’s proposed amendment to Rule 14a-8(i)(8) would narrow this exclusion and require a company to include a shareholder proposal to amend the company’s governing documents regarding nomination procedures or election disclosure provisions if submitted by a qualifying shareholder.
· Shareholder Qualifications: The existing shareholder eligibility provisions for Rule 14a-8(i)(8) would remain unchanged. Thus, a shareholder would be eligible to submit a proposal if the shareholder has continuously held, for a period of one year before submitting the proposal, the lesser of at least $2,000 in market value or 1% of the company’s securities entitled to vote at the annual meeting.
· Exclusion of an Election Procedure Proposal: A company could exclude a shareholder proposal relating to election procedures only if it: (i) would disqualify a nominee standing for election, (ii) would remove a director from office before his term expired, (iii) questioned the competence, business judgment or character of one or more nominees or directors, (iv) nominates a specific individual for election to the board of directors, other than as provided for by Rule 14a-11, applicable state law or a company’s governing documents or (v) otherwise could affect the outcome of the upcoming election.
II. Shareholder Bill
If passed, the Shareholder Bill would require the SEC to amend the proxy rules and adopt new rules related to corporate governance. The stated goal of the Shareholder Bill is “to prioritize the long-term health of … firms and their shareholders” by improving the accountability of managers and directors to the shareholders. The Shareholder Bill claims to achieve this goal by making various amendments to the Exchange Act that are intended to enhance the voice of shareholders in public companies while not encroaching on management, including:
· “Say on Pay”: The Shareholder Bill mandates through rules to be adopted by the SEC that shareholders be provided an annual advisory vote on the compensation of executives, as well as requiring an advisory vote on any “golden parachute” compensation. However, these advisory votes will not be binding on or overrule a decision by the board of directors or alter the board of director’s duties. Although an advisory vote on executive compensation is not binding on the company, if the company fails to take action in response to a majority shareholder vote, there still may be negative consequences. For example, RiskMetrics would recommend a “no” vote against all of the nominees of the board of directors if the board fails to act on a proposal that receives a majority vote.
· Shareholder Input on Board Elections: The Shareholder Bill mandates the SEC to establish rules that will enhance shareholder input over director elections by allowing those shareholders owning at least 1% of the voting securities of a company for at least two years prior to an annual meeting to nominate their own candidates through use of the company’s proxy solicitation materials;
· Corporate Governance Standards: The Shareholder Bill proposes a number of new corporate governance standards, including:
1. Requiring the chairperson of the board of directors to be an independent director who has never served as an executive officer of the corporation;
2. Requiring all directors in uncontested elections to receive a majority of the votes cast as to each nominee, and requiring all directors in contested elections to receive the votes of a plurality of the shares that are represented at any meeting and are entitled to vote;
3. Ending staggered boards through obligatory annual elections for each director; and
4. Ordering all companies to establish a risk committee comprised of only independent directors;
· Listing: The Shareholder Bill mandates that the SEC adopt rules to prohibit listing of any security of an issuer that does not comply with these corporate governance requirements.
III. Other Recent Federal and State Legislation and SEC Action
In addition to the Shareholder Bill there have been several other bills recently introduced also seeking to provide shareholders with more influence over corporate governance matters. On May 7, 2009, Senator Richard Durbin introduced two bills targeted towards curbing executive compensation:
· The Excessive Pay Shareholder Approval Act would require additional compensation disclosures in a company’s proxy materials and a supermajority shareholder vote to approve a compensation structure in which any employee is paid more than one hundred times the average employee of that company; and
· The Excessive Pay Capped Deduction Act would limit the tax deduction on compensation to executives paid more than one hundred times the average employee of that company.
The Shareholder Empowerment Act, introduced by Representative Gary Peters on June 12, 2009, is substantially similar to the Shareholder Bill, but includes several additional provisions directed towards curbing excessive executive compensation and severance payouts.
Additionally, as of August 2009, the DGCL will permit a Delaware corporation to adopt a proxy access bylaw that would allow “private-ordering” by companies for adoption and implementation of shareholder proxy access. The DGCL, as amended, authorizes (but does not require) a Delaware corporation to adopt bylaw provisions that give shareholders the right to include shareholders’ nominees for the election of directors in the corporation’s proxy solicitation materials. The bylaw may establish procedures and conditions governing the access right, which may include:
· minimum stock ownership and duration of ownership by the nominating shareholder;
· a definition of beneficial ownership that may include options or other rights;
· a requirement of specified information about the nominating shareholder and the director nominee;
· a limit on the number or proportion of directors that may be nominated;
· preclusion of nominations by persons or of persons who have acquired a specified percentage of the voting power of the company; and
· appropriate indemnification of the company for any false or misleading statement made or provided by the nominating shareholder.
There is speculation that Delaware adopted this amendment to continue to remain at the vanguard of corporation law. Under most state laws, boards and shareholders generally already have the right to approve procedural amendments to their bylaws. It may be the case that the Delaware General Assembly believed by enacting a specific proxy access bylaw statute prior to federal legislative or SEC action, Congress and the SEC would find it, legally and politically, more difficult to supersede the new Delaware statute. At this point, it is impossible to determine whether state private ordering proxy access regimes will be permitted to co-exist with a federal regime and, if so, to what extent.
In addition, we expect the SEC to approve amendments to NYSE Rule 452 (“Rule 452”)at a meeting being held on July 1, 2009, which will provide that the election of directors is not a “routine” matter. Rule 452 governs voting by brokers and impacts both NYSE and NASDAQ listed issuers. The current version of Rule 452 allows brokers to exercise discretionary voting authority for matters the NYSE considers “routine” with respect to “uninstructed shares,” or shares for which voting instructions have not been received by the tenth day preceding the shareholder meeting. Assuming the SEC approves this amendment at the July 1 st meeting, amended Rule 452 will be applicable to proxy voting for shareholder meetings beginning in 2010.
We believe amended Rule 452 will increase the influence of institutional shareholders and activist shareholders. If retail shareholders do not instruct their brokers on how to vote for matters decided by a majority of the shares actually voting, then votes cannot be cast for the uninstructed shares. Thus, since most institutional shareholders vote their shares with respect to these matters (as often recommended by RiskMetrics or another proxy advisory firm), the amended rule effectively makes their votes “count” more because retail shareholders frequently do not instruct brokers how to vote their shares. Additionally, companies that have adopted bylaws providing for a majority voting standard in director elections may find it more difficult to meet the majority threshold when brokers are unable to vote uninstructed shares. Companies with such majority voting provisions also may find that activist shareholders start to launch more “vote no” campaigns for director elections. In the case of a “vote no” campaign, uninstructed shares would be treated as a “no” vote, and may make it more difficult for a director to obtain the required majority.
IV. Why the Shareholder Bill and Proposed Proxy Access Rules are misguided
We believe that the Shareholder Bill and the SEC Proposed Proxy Rules represent dramatic and unwarranted federal interference with state corporation law. State legislatures and judiciaries have traditionally developed corporate governance standards, and we believe neither Congress nor the SEC has provided evidence that a departure from this state-run model is necessary or beneficial. Indeed, many states have already proven responsive to reasonable demands for reform. For example, Delaware and New York, among others, have recently passed laws to facilitate the adoption of majority voting requirements in director elections. In addition, many public companies have been quick to respond to calls for reform without state or federal intervention. Approximately 66% of the S&P 500 has adopted some form of majority voting for directors in uncontested elections. In fact, we believe that a potential side-effect of adopting these measures may be to actually inhibit majority voting in the election of directors, even if federal legislation makes majority voting mandatory. In most instances, if there are shareholder nominees, a majority voting provision will default back to a plurality standard required for contested elections because the definition of an election contest generally means having more candidates than board seats.
We also believe the proposed measures represent a “one size fits all” federal fiat that does not account for the varying needs of different firms and industries, and that an increased shareholder voice will augment the exact short-term, high-risk decision-making that these measures claim to avoid. We believe, as the U.S. Chamber of Commerce and Business Roundtable have repeatedly argued, that providing shareholders such easy access to proxy statements will ultimately distract management and boards from focusing on companies’ daily business and long-term goals. The result will be to weaken the goals of long-term investors for the benefit of both those investors that pursue short-term strategies often based on complex financial derivatives and those special interest activist shareholders pursuing social policies. We believe that the aims of these shareholders are antithetical to the pursuit by companies of long-term goals and strategies and will breed the same short-term myopic behavior these measures were intended to quell. As many commentators have already argued, we believe a state private-ordering approach to proxy access is more consistent with shareholder democracy by permitting all shareholders of each corporation to determine through shareholder action – rather than government fiat – shareholder access bylaws that suit the particular circumstances of each individual company and its shareholders.
V. Points to Address in Comment Letters to the SEC
Although we do not purport to address how companies should respond to the proposed federal legislation, we do believe companies should consider submitting a comment letter to the SEC related to the SEC Proposed Proxy Rules. The SEC appears determined to adopt some form of proxy access rules in time for the 2010 proxy season. Certain commentators believe that given the controversial nature of these issues, the breadth of the SEC Proposed Proxy Rules and the complexity of implementing such fundamental changes to director elections, change will not occur in the near-term. However, we urge companies to avoid being lulled into a false sense of complacency. Proxy access issues have been debated for many years, including being the subject of two SEC proposals in 2003 and 2007. As a result of the current economic recession and a perception among legislators of weaknesses at the SEC, we believe that if the SEC fails to address shareholder proxy access this year, Congress likely will seize control of the process and pass legislation to address the issue. Indeed, as discussed in this memo, Congress already has multiple bills circulating which propose to do just that.
The SEC undoubtedly will receive hundreds of comment letters on the SEC Proposed Proxy Rules from companies, shareholders, special interest groups and other organizations. We expect litigation to commence challenging the SEC’s authority to adopt the SEC Proposed Proxy Rules, particularly if federal legislation does not pass specifically authorizing the SEC to do so.
Given the fact that we believe some form of greater shareholder proxy access is likely this year, we do not believe it is a prudent use of resources to submit a proxy access comment letter that merely argues for no change in the current regulations. We believe the critical path should be to focus on the details of how the SEC ultimately determines to implement the SEC Proposed Proxy Rules. The end result will be either the use of the SEC Proposed Proxy Rules as a device to create greater accountability of directors to shareholders or, as we and many other commentators believe, as the facilitator of annual election contests and broken boards. We recommend that companies provide comments to the SEC on those aspects of the proxy access proposal that we believe will have the most deleterious affect on companies’ managing their affairs with the oversight of their board of directors.
In addition to the specific topics described below, companies who are submitting comments on the SEC Proposed Proxy Rules may want to consider addressing what we believe are the overarching fundamental flaws in the SEC Proposed Proxy Rules: (i) providing shareholders with proxy access through the SEC Proposed Proxy Rules is not likely to achieve the SEC’s stated objectives of increasing board accountability, shareholder participation and investor confidence and may ultimately have a negative impact on the management and oversight of a company; (ii) it is not necessary to adopt the SEC Proposed Proxy Rules in light of recent changes in the corporate governance landscape (e.g., widespread adoption by companies of majority voting and changes in state law); (iii) state law has historically governed director elections and recent changes to state laws related to corporate governance should be given a chance to succeed before they are dismissed and preempted by the SEC; and (iv) the SEC Proposed Proxy Rules should not preempt state law or a company’s governing documents, such that companies should be permitted to opt out of the SEC Proposed Proxy Rules.
Below is a non-exhaustive list of specific topics we suggest companies may want to consider when framing their comment letters to the SEC.
· Application of Proposed Rules: Companies may want to consider whether there should be triggering events that subject a company to Rule 14a-11, such as at least 35% “withhold” votes for a director in a prior election or a shareholder vote subjecting the company to the SEC Proposed Proxy Rules.
· Ownership Requirements: Companies may want to consider whether the percentage ownership thresholds for nominating shareholders under Rule 14a-11 should be revised. The one-year holding period for shares held by the nominating shareholder should apply to all of a shareholder’s ownership in the company, not just the amount of shares required to meet the ownership threshold. The nominating shareholder should be required under Rule 14a-11 to have a net long position in shares of the company at the time of the annual meeting, which should not be obtained through the use of derivative instruments. The nominating shareholder should be required under Rule 14a-11 to hold a minimum ownership percentage in the company for a substantial specified period following the annual meeting.
· Nominating Shareholder Representations/Requirements: Rule 14a-11 should address the possibility that a nominating shareholder’s intent may change as it relates to seeking to change the control of the company or gain more than 25% of the board. Currently, the SEC Proposed Proxy Rules do not address the impact that will result if a nominating shareholder’s intent changes. There should be a strong stand-still imposed on a nominating shareholder from trying to seek a change of control of the company. Otherwise, a nominating shareholder should be forced to use the current procedures in place to conduct a contested election.
· Independence: The shareholder nominee should satisfy any “subjective” independence standards of the company’s listing exchange and, to the extent they exist, any stricter independence criteria the company has established. If a shareholder makes a nomination under Rule 14a-11, that fact should be considered when determining if such shareholder is an affiliate of the company.
· Nominee Independence from Nominating Shareholder: Shareholder nominees should be required under Rule 14a-11 to be independent from nominating shareholders.
· Cap on Number of Shareholder Nominees: The 25% cap on the number of seats available for a nomination pursuant to Rule 14a-11 should be lower. It should be acknowledged that it is appropriate for incumbent directors elected pursuant to Rule 14a-11 that are up for re-election to be taken into account for purposes of the 25% cap. There should be a provision in Rule 14a-11 specifically addressing staggered boards, and perhaps applying a different cap standard for those boards. Shareholders with shareholder-designated representatives on the board of directors should not be permitted to utilize the SEC Proposed Proxy Rules to make additional shareholder nominations. If a nominating shareholder becomes ineligible after submitting the necessary notice to the company under Rule 14a-11 (such as losing the independence requirements), then that shareholder’s nominees should no longer be eligible to be elected to the board of directors whether or not included in a company’s proxy. In addition, to the extent that there were more nominees than seats available before the shareholder became ineligible, the “excess nominees” should not replace the nominees of the now ineligible shareholder.
· Timing of Nomination: The first-come, first-serve preference under Rule 14a-11 will likely result in a race to file. The race to file mentality may result in far less qualified nominees being considered for board membership over other more qualified individuals and may provide an advantage to shareholder activists. Instead, in determining priority, consideration should be given to shareholders with the highest percentage of ownership and long-term holdings. A company’s advance notice bylaws should govern the deadline for submitting notice under Rule 14a-11 to the company regarding shareholder nominations. Because many companies will need to amend their advance notice bylaws in order to take advantage of the arbitrary timeline set forth in the SEC Proposed Proxy Rules, for the first year the SEC Proposed Proxy Rules are in effect, the SEC should set a deadline that will give all companies, regardless of their advance notice bylaw, sufficient time to be able to take advantage of the arbitrary timeline if it wants to exclude a nominee.
· Nominating Shareholder Disclosure: A company should have no due diligence obligation with respect to information required to be provided under Rule 14a-11 by the nominating shareholder for inclusion in the company’s proxy statement. There should be a distinction between the disclosure required under Rule 14a-11 and the disclosure required for shareholders nominating pursuant to state law or a company’s governing documents. Nominating shareholders should have to provide disclosure under Rule 14a-11 similar to that required in a proxy contest.
· Slate Voting and Voting Standards: If Rule 14a-11 is adopted, companies should still retain the ability to provide shareholders with the option to vote for a slate of directors. Rule 14a-11 should not apply to companies with majority vote provisions.
· Interplay between 14a-11 and 14a-8(i)(8): The changes to Rule 14a-8 alone (along with recent state law changes) provide a better means to meet the SEC’s stated objectives for adopting the SEC Proposed Proxy Rules than the adoption of the SEC Proposed Proxy Rules in their entirety.
· Interplay with Traditional Proxy Contests: The interplay between Rule 14a-11 shareholder nominees and traditional proxy contests is unclear and should be clarified.
VI. Possible Actions to Take Before the SEC’s Proposed Rules Become Effective
In light of the SEC’s proxy access proposal and the recent proposed legislation, we believe some form of greater shareholder proxy access is likely. Given this outcome, we recommend companies review certain of their practices and governing documents to ensure they are properly prepared for what the SEC and/or Congress ultimately adopt.
· Size of Board: Companies may want to consider adjusting the size of their boards of directors. The SEC’s proxy access proposal permits a nominating shareholder or nominating shareholder group to nominate the greater of one director or 25% of a company’s board of directors. When the 25% cap does not result in a whole number, the number of allowed nominees is rounded down. Thus, the size of a company’s board of directors could have an effect on the number of nominees a shareholder or nominating shareholder group can nominate under the SEC’s proxy access proposal. For example, under the SEC Proposed Proxy Rules whether a company’s board of directors is composed of eight or eleven directors, a shareholder is permitted to only nominate two directors. In addition, a company may consider reviewing its governing documents and recent board of directors actions related to the size of the board of directors to determine whether the company has any inadvertent director vacancies that potentially could be filled through the Rule 14a-11 shareholder nomination process proposed by the SEC.
· Committees: There is no requirement in the SEC Proposed Proxy Rules that shareholder nominees elected to the board of directors must serve on board committees. Companies may want to consider whether their boards of directors consist of a sufficient size such that at least 75% of the board of directors can fulfill committee requirements. So doing would ensure that even if the maximum number of shareholder nominees are elected to the board of directors, the committee structure would not need to be adjusted.
· Clarification of Director Criteria: Companies may consider clarifying the criteria for director selection contained in their governing documents and committee charters. Companies may consider whether to specify that such provisions will apply to a Rule 14a-11 or bylaw shareholder nominee. The SEC Proposed Proxy Rules do not indicate whether restrictions on serving on the board of directors set forth in a company’s governing documents, such as age, will be permitted to be used as a basis to reject a Rule 14a-11 shareholder nominee.
· Voting Standard for Director Elections: In recent years, many companies have adopted majority voting (rather than plurality voting) in uncontested director elections. Most majority voting bylaws are written such that majority election of directors does not apply where there are more nominees than director seats available. Indeed, RiskMetrics’ Proxy Voting Guidelines provide that binding shareholder resolutions for majority election of directors “need to allow for a carve-out for a plurality vote standard when there are more nominees than board seats.” Therefore, companies with a majority vote standard applicable to the election of directors should review such standard to ensure that including a Rule 14a-11 or bylaw shareholder nominee in the company’s proxy materials would make the election “contested” such that the plurality voting standard would apply. Because the plurality vote standard may not be triggered based on the language of Rule 14a-11, companies may consider modifying their majority vote standard to clarify that where the number of nominees exceeds the number of board seats up for election, the plurality vote standard will apply.
· Amending Advance Notice Bylaws: Under Rule 14a-11, the proposed deadline for submitting shareholder nominees is the deadline established by a company’s advance notice bylaws
or, in the absence of such bylaws, 120 days before the anniversary of the mailing date for the prior year’s proxy materials. As noted above, the SEC proposes a detailed no-action process through which a company could exclude
a shareholder’s nominees from the company’s proxy materials because of the shareholder’s failure to meet or comply with the requirements of Rule 14a-11. While each company’s advance notice bylaws may differ,
such provisions typically require a 90- to120-day notice period prior to the annual meeting. Because of this, many currently existing advance notice bylaws may not provide ample time to take advantage of the Rule 14a-11 no-action
process.
Therefore, companies may want to consider making certain amendments to their advance notice bylaws to take advantage of the Rule 14a-11 exclusion procedures. Companies also may want to consider amending their advance notice bylaw
provisions to specifically provide for at least a 120-day period. In this manner, companies may be able to exclude shareholder nominees for the 2010 annual meeting where the 120-day notification requirement has already expired. If
companies wait to amend advance notice bylaws until the SEC adopts final rules, the changes may not be early enough to provide companies with the opportunity to utilize the no-action process for shareholder nominees for the 2010
proxy.
· Amending Bylaws to Provide for Proxy Access: Assuming, at a minimum, that the SEC amends Rule 14a-8 to permit shareholder proposals regarding proxy access, we believe shareholders quickly will begin submitting for inclusion in a company’s proxy statement binding shareholder proposals to amend a company’s bylaws to provide for proxy access. Companies should expect that such shareholder proposals will be very shareholder-friendly. Alternatively, if a board of directors preemptively elects to adopt its own form of proxy access, it may be able to avoid or defeat a more shareholder-centric shareholder proposal. A board of directors could adopt a bylaw that puts more conditions on its shareholders’ right to proxy access than corporate governance activists desire (which, depending on whether a new federal law or rule allowed for unrestricted private ordering, also could be more restrictive than the new federal regime), such as higher share ownership and holding period thresholds for the nominating shareholder. In addition, in so doing, a board of directors may position itself to be able to more effectively negotiate with shareholder activists on the terms of the proxy access, so that it is less permissive then either a federal regime or that such shareholder activists’ desire.
· Review Investor Relations Programs and Strategic Board Composition: Companies may consider reviewing their investor relations programs with a view toward improving their relationships with institutional investors. As a part of this effort, companies may want to work towards building institutional investors’ confidence in their boards of directors and management or collaborate with large institutional investors as sounding boards for the strategic make-up of the current board of directors and management. Additionally, companies may want to consider determining the appropriate strategic composition of their boards of directors and proactively publishing the qualifications and accomplishments of their directors in their proxy materials or through other means. As part of this process, companies may want to examine how the board of director’s performance has been rated based on corporate governance assessments (such as RiskMetrics’ corporate governance quotient) and whether changes to improve such assessments should be implemented.
· Anticipating Shareholder Nominees: Corporate governance committees may want to proactively assess (1) activist shareholders and whether those shareholders may be likely to try to act together as a group to nominate directors, (2) shareholder groups that have the requisite level of ownership in the company to enable them to make nominations under Rule 14a-11.
[1] The SEC has proposed amendments to Rule 14a-8(i)(8) (discussed below) which would allow shareholders to submit proposals to amend a company’s governing documents if the governing documents prohibit the shareholders from having nomination rights.