Financial Regulatory Reform Series: Shareholder Proxy Access
As part of a series of posts over the next two months, I will focus on the five main corporate governance and executive compensation sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This installment focuses on shareholder proxy access.
Probably one of the most controversial of the measures included in the Dodd-Frank Act, shareholder proxy access for director nominations is a reality most large public companies will have to deal with in the 2011 proxy season now that the SEC has approved a new rule and amended another.
Considering that the effective date of the new and amended SEC rules would most likely be March 1, 2011 (the effective date is based on 120 days after the date the rules are printed in the Federal Register), some corporate governance experts don’t expect an onslaught of such proxy campaigns. The reasons given are that shareholder groups need to come up with game plans to meet the necessary thresholds and companies need to change their by-laws (which are based on state laws) to accommodate the new rules.
“The short-term advice is for companies to wait for the SEC action,” William M. Kelly, a corporate partner with Davis Polk & Wardwell, said during a Webcast prior to the Aug. 25 SEC vote. “Many companies are going to have to review their advance notice by-law provisions and make sure they line up with the [SEC] timetables.”
Ning Chiu, a counsel in Davis Polk’s Capital Markets Group, said in the same Webcast that she expects SEC staff to issue interpretative guidance regarding effective dates for all the Dodd-Frank Act rules. [Read Davis Polk’s latest update on the Dodd-Frank Act.]
Former SEC Commissioner Annette L. Nazareth, who is now a partner at Davis Polk, told a National Association of Corporate Directors (NACD) Webcast audience yesterday, “I don’t see this as a rule that will be widely used in all circumstances. It will be used for exceptional cases.”
Her fellow Davis Polk colleague David L. Caplan, also a partner, says he foresees shareholder groups using Exchange Act Rule 14a-11 for “targeted campaigns at companies that shareholders see as vulnerable.”
Under 14a-11, any shareholder or group of shareholders holding at least three percent (in aggregate for groups) of a company’s shares for at least three years would be allowed to nominate directors and have those nominees included a company’s proxy materials.
Some of the other requirements that must be met include:
- The shareholder or group seeking to use Rule 14a-11 must notify the company no earlier than 150 days before the anniversary of the annual public meeting and no later than 120 days before that date.
- A company does not have to include a shareholder director nominee slate that would replace more than 25 percent of the current board.
- The shareholder or group must file a Schedule 14N with the company and the SEC electronically on the date it notifies the company of its intent to use Rule 14a-11. The Schedule 14N includes the shareholder or group’s amount of voting power, biographical information about the nominee slate, whether or not the candidates satisfy the company’s director qualifications and a statement supporting the candidates.
“Once a [Form] 14N is filed, if a 14a-11 nominee is added to the company slate [of directors as a gesture by the company] that nominee is still considered as a 14a-11 and he counts against the 25 percent limit,” John J. Gorman, partner at Luse Gorman and former special counsel of the SEC Division of Corporation Finance, said during the NACD Webcast. He added that the SEC isn’t going to allow companies to allow shareholders to check one box to vote for management’s slate, which has been standard.
Under the amendments to Rule 14a-8, most company exclusions of shareholder proposals from the proxy will not be allowed. The so-called exemption rule that has been in place was the biggest roadblock for shareholder groups trying to gain access to the proxy.
Under both rules, smaller reporting companies do not have to abide by the new and amended rules for three years. The reasoning is that since the impact could be greater on those companies, they would need more time to comply.