SEC Proposes Significant Proxy Rule Changes to Provide Shareholder Access to the Director Nomination Process - 22 June 2009

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SEC Proposes Significant Proxy Rule Changes to Provide Shareholder Access to the Director Nomination Process

June 22, 2009

On June 10, 2009, the U.S. Securities and Exchange Commission (the "SEC") issued Release No. 33-9046
(the "Release") proposing significant changes to its proxy rules that
would grant certain shareholders the ability to have their own director
nominees included in a company's proxy materials. The Release embodies
the proposals approved by the SEC in May 2009 as discussed in our May 22, 2009 Alert.

The Release cites the current economic crisis and concerns about
"whether boards are exercising appropriate oversight of management,
whether boards are appropriately focused on shareholder interests, and
whether boards need to be more accountable for their decisions
regarding such issues as compensation structures and risk management"
as catalysts for the SEC's decision to "revisit whether and how the
federal proxy rules may be impeding the ability of shareholders to hold
boards accountable through the exercise of their fundamental right to
nominate and elect members to company boards of directors."

To facilitate shareholders' ability to meaningfully exercise their
rights, the SEC is proposing a new Exchange Act Rule 14a-11 ("Rule
14a-11") and an amendment to Exchange Act Rule 14a-8 ("Rule 14a-8").

Rule 14a-11

If a shareholder or shareholder group satisfies the proposed
eligibility standards and the other requirements of Rule 14a-11, the
rule would require the company to include the shareholder's or
shareholder group's nominee(s) in its proxy materials. As proposed,
Rule 14a-11 generally would apply to any company subject to the SEC's
proxy rules unless applicable state law or the company's governing
documents prohibit shareholders from nominating candidates to the board
of directors. Rule 14a-11 would not be available to shareholders
seeking to rely on the rule to change the control of the company or to
gain more than a permitted number of seats on the board of directors.
The proposed eligibility standards are based on the following minimum
ownership levels and duration of ownership.

Minimum Ownership Levels

In order to avail itself of Rule 14a-11, a shareholder or
shareholder group must satisfy a minimum ownership level, based on the
size of the company, as follows:

• One percent of the voting securities of a "large accelerated
  filer" (a company with a worldwide market value of $700 million or
  more) or of a registered investment company with net assets of $700
  million or more;


• Three percent of the voting securities of an "accelerated filer" (a
  company with a worldwide 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; or


• Five percent of the voting securities of a "non-accelerated filer"
  (a company with a worldwide market value of less than $75 million) or
  of a registered investment company with net assets of less than $75
  million.

Groups of shareholders would be permitted to aggregate their
holdings to meet these minimum ownership thresholds. A five percent or
greater aggregate amount would implicate the reporting requirements
under Exchange Act Section 13(d). However, as proposed, the formation
of a shareholder group solely for the purpose of nominating one or more
directors would not result in a nominating shareholder or shareholder
group from losing its eligibility to file on Schedule 13G.

Duration of Ownership

The shareholder or shareholder group would be required to:

• Have held the securities relied upon to satisfy the minimum
  ownership threshold continuously for a period of at least one year as
  of the date the shareholder or shareholder group provides notice to the
  company;


• State in writing its intent to hold the securities through the date
  of the annual meeting at which the directors are to be elected; and


• Certify that it is not holding the securities for the purpose of
  changing control of the company or to gain more than a minority
  representation on the company's board of directors.

The first shareholder, or shareholder group, that satisfies these
requirements would be permitted to nominate the greater of one nominee
or that number of nominees representing up to 25 percent of the
company's board of directors. The SEC recognized this first-in-time
standard differs from the standard proposed in 2003 that would have
allowed the largest shareholder or shareholder group to have its
nominee included in the company's proxy materials. The SEC believes
this first-in-time standard would provide companies more certainty and
would be fairer to shareholders and shareholder groups that may want to
have nominees included in the company's proxy material.

The Release includes a significant limitation relative to staggered
boards that was not included in the proxy rules proposed earlier. If a
shareholder nominee who was nominated by any shareholder or shareholder
group is then serving on the company's board of directors and the term
of that director would extend past the date of the shareholder meeting,
that nominee will count toward the one shareholder nominee or the
25-percent cap, as applicable. As a consequence, the company would not
have to include on its board at any time more than the total number of
shareholder nominees required to be included under Rule 14a-11.

Shareholder Nominee Qualifications

Under Rule 14a-11, as proposed, shareholder nominees must satisfy
objective director-independence standards of the applicable national
securities exchange or national securities association; the nominee's
candidacy and election must comply with applicable laws and
regulations; and the nominating shareholder or shareholder group must
represent that the nominee is in compliance with these standards. Each
nominating shareholder must also represent that neither the nominee nor
the nominating shareholder nor, where there is a nominating shareholder
group, any member of the nominating shareholder group, has an agreement
with the company regarding the nomination. Negotiations or other
communications limited to whether the company should include the
nominee on the company's proxy would not be considered an agreement for
this purpose. However, any financial transaction or business
relationship since the beginning of the company's last fiscal year, or
any currently proposed transaction, between the company and a
shareholder nominee that exceeds $120,000 would be a required
disclosure on the proposed new Schedule 14N. There would be no
limitation on the relationships between a nominating shareholder or
shareholder group and its director nominees.

Disclosure Requirements

Nominating Shareholders

In addition to the shareholder eligibility and nominee requirements,
shareholders nominating a candidate would be required to send to the
company and file with the SEC a new Schedule 14N to disclose, among
other things:

• The amount and percentage of company securities owned by the nominating shareholder;
  


• The length of ownership of the company securities; and


• The nominating shareholder's or shareholders group's intent to
  continue to hold the securities through the date of the meeting and
  further intent with respect to continued ownership after the election.

In addition, a nominating shareholder or shareholder group must
include a certification that the shareholder or shareholder group is
not seeking to change the control of the company or to gain more than a
permitted number of seats on the board of directors. The nominating
shareholder or shareholder group would be liable for any false or
misleading statements in these disclosures.

Proxy Disclosure

A company would be required to include disclosure relating to
nominating shareholders and shareholder nominees similar to that
required by the current disclosure requirements applicable to contested
elections. However, a company would not be liable for any false or
misleading information obtained from the nominating shareholder or
shareholder group unless the company knew, or had reason to know, that
the information was false or misleading.

Rule 14a-8

Paragraph (i)(8) of Rule 14a-8 currently allows a company to exclude
a shareholder proposal from its proxy statement that "relates to a
nomination or an election for membership on the company's board of
directors or analogous governing body or a procedure for such
nomination or election." The proposed amendment would allow a
shareholder, if the shareholder satisfies the eligibility provisions of
proposed Rule 14a-8 (which are materially different from the
eligibility provisions of proposed Rule 14a-11), to submit proposals
that would amend, or that request an amendment to, a company's
governing documents (e.g., the bylaws) regarding nomination procedures
or disclosures related to shareholder nominations. The proposed
amendment to Rule 14a-8 would not restrict the types of amendments that
a shareholder could propose; however, any proposals that would conflict
with Rule 14a-11 or state law could be excluded. Having differing
eligibility thresholds or requiring more disclosure than otherwise
required under Rule 14a-11 would not be deemed to be conflicting;
however, amending procedures that would prevent a shareholder or
shareholder group from meeting the requirements of proposed Rule 14a-11
would be deemed conflicting.

The proposed amendment to Rule 14a-8 would also codify prior SEC
interpretations. Therefore, a company would be permitted to exclude a
proposal under Rule 14a-8 if it would:

• Disqualify a nominee who is standing for election;


• Remove a director from office before his or her term expires;


• Question the competence, business judgment or character of one or more nominees or directors;


• Nominate a specific individual for election to the board of
  directors, other than pursuant to Rule 14a-11, an applicable state law
  provision or a company's governing documents; or


• Otherwise could affect the outcome of an upcoming election of directors.

The SEC cautions that the proposed amendment to Rule 14a-8 should
not be read so broadly that the provision could be used to permit
exclusion of proposals regarding the qualifications of directors,
shareholder voting procedures, board nomination procedures and other
election matters of significance to shareholders that would not
directly result in an election contest between management and
shareholder nominees, and that do not present significant conflicts
with the SEC's other proxy rules.

The eligibility provisions of Rule 14a-8 require a shareholder to
continuously hold at least $2,000 in market value (or one percent,
whichever is less) of a company's securities entitled to be voted for a
period of one year prior to submitting a proposal.

Observations

It is anticipated that the SEC will adopt some version of these
proposed proxy access rules by the end of 2009, thereby allowing
interested shareholders to utilize the rule changes to participate in
the 2010 proxy season.

If adopted as proposed, Rule 14a-11 and the amendment to Rule 14a-8
would create a "significant change" in the corporate proxy process. The
SEC is currently seeking public comments on more than 500 specific
questions relating to the proposed rule changes. The final version of
the proxy access rules may ultimately depend on the comments the SEC
receives to the numerous questions raised in the Release, including:

• What the proper remedy should be if the nominating shareholder
  or shareholder group represents its intent to hold the securities
  through the date of the meeting but fails to do so, and what effect
  such failure should have on the election?


• What should happen if a nominating shareholder qualifies, provides
  notice and submits all of the nominees a company is required to include
  in its proxy and then becomes ineligible under Rule 14a-11?


• Should the first shareholder or shareholder group be able to
  nominate up to the total number of shareholder nominees required to be
  included by the company, or where there is more than one nominating
  shareholder or shareholder group and more than one slot for nominees,
  should the slots be allocated among the proposing shareholders in the
  order in which they provided notice to the company?


• What should be the consequence if a nominating shareholder or
  shareholder group includes materially false information or a materially
  false representation on Schedule 14N, whether before inclusion of a
  nominee in the company's proxy materials, after inclusion of a nominee
  in the company's proxy materials but before the election, or after a
  nominee has been included in the company's proxy materials and elected?


• Should a nominating shareholder or shareholder group be permitted
  to change its composition to correct an identified deficiency, such as
  a failure to satisfy the requisite ownership threshold, or be allowed
  to submit a replacement shareholder nominee in the event it is
  determined the nominee does not satisfy the eligibility criteria?

The significance of the proposed changes to the corporate proxy
process indicates that the SEC should consider the responses it
receives during the comment period before adopting the rule proposals,
rather than rushing the process to make the new provisions applicable
for the 2010 proxy season.

Comments must be received by the SEC no later than August 17, 2009. The SEC will post all comments online at www.sec.gov/rules/final.shtml. We will continue to monitor these and other proxy access developments.

For Further Information

If you have any questions regarding the corporate governance
proposals presented above, including how they may affect your company,
please contact Laurence S. Lese, Howell J. Reeves, David J. Kaufman, Heather N. King, any member of the Securities Law Practice Group or the lawyer in the firm with whom you are regularly in contact.