By Cydney Posner

At an open meeting this morning, the SEC voted (by 3 to 2) to propose changes to the federal proxy rules to facilitate director nominations by shareholders, so-called "proxy access." In essence, the Democratic appointees believe the measure is a way to hold directors more accountable and a necessary component to restoring investor confidence. The Republican appointees, both of whom expressed fairly heated dissents, were generally concerned about the creation of a federal corporate governance regime that would intrude on the rights reserved to the states.

The proposal would create a new Rule 14a-11 that would permit shareholders to nominate directors using the company's proxy statement as a disclosure platform. The rules would establish procedures and thresholds for participation; however, in contrast to earlier versions of this proposal, no triggering events would be required before the proxy access regime would kick in. The right to proxy access would vary based upon tiered thresholds of stock ownership, depending upon the company's market cap. For companies with market caps over $700 million, the ownership threshold would be 1% of outstanding, for companies with market caps between $75 million and $700 million, the threshold would be 3% and for companies with market caps below $75 million, the threshold would be 5%. In each case, the shareholders seeking proxy access must have held the shares for at least one year. The rule would apply to all Exchange Act-registered companies unless shareholder nominations were not permitted under state law or the company's governing documents. The proponents would need to certify as to certain matters, including that they were not seeking to gain control of the company or to nominate in excess of the maximum number of nominees (the greater of 25% of the board or one nominee). Nominees would need to meet SRO independence standards. The proposal includes requirements for disclosure regarding the proponent and nominee basically equivalent to that required for an election contest. If the disclosure provided by the proponent included material misstatements, the company would be permitted to exclude the nominee; there is a also a process for the company to discuss these matters with the staff. Proponents would have liability under Rule 14a-9 for their own disclosure.

The proposal would also amend Rule 14a-8 to narrow the election exclusion. Under the proposed amendment, shareholder proposals would be permitted if they seek to amend governing documents to address nominating procedures or rights, so long as they do not conflict with proposed Rule 14a-11. This proposal would essentially overturn the SEC's 2007 amendment (see my posting on 11/28/07) that permitted the exclusion of shareholder proposals that related to a nomination or an election to the company's board or a procedure for nomination or election. The term "procedures" relates to procedures that would result in a contested election, either in the year in which the proposal is submitted or in subsequent years.

However, both Commissioners Casey and Paredes expressed strong doubts about the proposal. Casey questioned whether the current economic crisis was a fair rationale for the SEC's action and characterized the proposal as "paternalistic." Paredes implicitly questioned the need, given that, even in the absence of state law mandates, many larger companies (apparently, more than half of the S&P 500) had already adopted some form of majority voting. Paredes also expressed concern that the reach of the proposal exceeded the disclosure mandate of the Exchange Act. But the arguments that both Casey and Paredes pressed most urgently related to the encroachment of federal law on the traditional role of the states in corporate governance matters and the potential conflict with state law on this issue. When asked what the result would be in the event of a state law conflict, the staff responded that both "rights" would co-exist, but that state law could not trump the SEC's mandate. But, Paredes pointed out, if under Delaware law, a company adopted a threshold of 2% and a two-year ownership requirement, that state law right would be essentially abrogated by the lower federal law thresholds. Moreover, he worried that the privilege proposed for some shareholders was really at the expense of others, perhaps others that represented special interests. Casey worried about the potential uncertainty that might result if these rules were later overturned in court. Both seemed to be open to the possibility of a narrower rule that facilitated the implementation of state law, as Paredes expressed it, an enabling approach that would allow efficient private ordering, as opposed to a mandatory approach that would impose one-size-fits-all.

The related press release has also been posted.

Stay tuned for more, as Senator Schumer yesterday introduced S 1074, his proposed shareholder bill of rights.

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as "Cooley"). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction, and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. When advising companies, our attorney-client relationship is with the company, not with any individual. This content may have been generated with the assistance of artificial intelligence (Al) in accordance with our Al Principles, may be considered Attorney Advertising and is subject to our legal notices.