SEC release proposing proxy access

By Cydney Posner

The SEC has posted its 250-page release proposing shareholder access to company proxy materials. The proposal is designed to revise the federal proxy rules " to remove impediments to the exercise of shareholders' rights to nominate and elect directors to company boards of directors." The new rules would require a company to include in its proxy materials shareholders' nominees for director, as well as shareholder proposals to amend a company's governing documents regarding nomination procedures or disclosures related to shareholder nominations, in each case, if certain conditions are satisfied. The proposal would require that use of the new procedures be in accordance with state law, mandate specified disclosures concerning nominating shareholders and their nominees and amend other rules that may be affected by the proposed new rules. While the proposal has a veneer of simplicity, the various requests for comment are quite detailed, suggesting the possibility that the final rules may be substantially more complex. The deadline for comments is August 17, 2009.

The proposal stems from concerns, fueled by the economic crisis, 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." At issue is whether the federal proxy rules impede the ability of shareholders under state corporate law "to hold boards accountable through the exercise of their fundamental right to nominate and elect members to company boards of directors." In regulating the proxy process, the SEC has sought to improve the corporate proxy process so that it functions, as nearly as possible, as a replacement for an actual in-person meeting of shareholders. The SEC has recently recognized that the director nomination and shareholder proposal processes are "two areas in which our current proxy rules pose impediments to the exercise of shareholders' rights." The SEC acknowledges the competing policy arguments about the effect that shareholder-nominated directors or shareholder-proposed nomination procedures might have on a company and its governance. On one side of the debate, commentators emphasize accountability, representation, director qualifications and independence and other corporate governance benefits while, on the other side, commentators raise concerns that shareholder-nominated directors could impede the proper functioning of companies, cause inefficiencies, represent only narrow single issues or result in contests the prospect of which may deter qualified directors. Nevertheless, the SEC believes that investors are best protected when they can exercise the rights they have as shareholders, without unnecessary obstacles to the essential state law right to nominate and vote for directors.

There have long been complaints that procedures currently available for director nominations, such as waging a costly proxy contest, do not afford a practical mechanism for shareholders to participate effectively in the nomination process. The prevalence of plurality voting has also limited the effectiveness of "vote no" campaigns. Failing these efforts, shareholders dissatisfied with board performance may be left with selling their shares as the only option. Recent changes in corporate governance practices, such as new board independence standards, and other reforms, such as increasing migration toward some form of majority vote standards, have mitigated some of these concerns, but the SEC does not believe they have sufficiently addressed the central problem. The SEC has considered proposals to provide proxy access, either directly or indirectly through revision of the "election exclusion" in Rule 14a-8 (shareholder proposals), on several occasions in the past. Although none of those proposals has been adopted, they have left a juicy record of commentary and advocacy that the SEC has attempted to take into account in this proposing release.

PROPOSED PROXY ACCESS AMENDMENTS

The proposed amendments to the proxy rules would require that, under certain circumstances, companies must include disclosures about shareholder nominees for director in companies' proxy materials so long as the shareholders are not seeking to change the control of the issuer or to gain more than a limited number of seats on the board. There are two components to the proposal:

• New Rule 14a-11, which would impose the requirement to include shareholder nominees for director in the companies' proxy materials unless state law or a company's governing documents (charter, bylaws) prohibit shareholders from nominating directors ); and
• an amendment to Rule 14a-8(i)(8) precluding companies from relying on the election exclusion in that rule to exclude shareholder proposals that would amend, or that request an amendment to, a company's governing documents regarding nomination procedures or disclosures related to shareholder nominations, provided the proposal does not conflict with proposed Rule 14a-11.

With regard to the first component, the release provides that state law or the governing documents may provide for additional or enhanced rights, implicitly leading to the curious result that shareholder nominations may be prohibited altogether but not otherwise restricted. (Later in the release, the SEC requests comment on whether Rule 14a-11 should be inapplicable if shareholder-approved provisions in governing documents are more or less restrictive than Rule 14a-11.) The SEC believes the proposed rule changes will "provide shareholders with a greater voice and an avenue to exercise the rights they have to effect change on the boards of the companies in which they invest that they no longer can exercise effectively through attending a shareholder meeting in person."

Proposed Rule 14a-11 would apply to all companies subject to the Exchange Act proxy rules (except for companies subject to the proxy rules solely because they have a registered class of debt) unless applicable state law or a company's governing documents prohibit shareholders from nominating board candidates. The release notes that currently there are no state laws that prohibit shareholder nominees for director. And, of course, if a company's governing documents did prohibit nomination rights, shareholders could simply submit a shareholder proposal to amend the provision. See proposed amendment to Rule 14a-8(i)(8), discussed below.) (The release requests comment on whether companies should be able to take specified steps or actions, such as adopting a majority vote standard or bylaw specifying procedures for the inclusion of shareholder nominees in company proxy materials, to prevent application of proposed Rule 14a-11 where it otherwise would apply.) In contrast to previous proposals related to proxy access, this proposal does not require a triggering event to be operative; however, the release does ask a series of questions about whether some type of triggering event should be required.

As a balance against the potential cost and disruption to companies of compliance with the proposed new rule, the proposal provides that only holders of a significant, long-term interest in a company would be able to rely on Rule 14a-11. To take advantage of the rule, shareholders must meet a minimum ownership threshold (which would be tiered according to company size) as well as duration-of-ownership requirements. The tiered beneficial ownership thresholds represent an effort to balance the desire not to discriminate against small holders with the desire to limit the use of company funds for nominations to those with substantial, long-term stakes.

Rule 14a-11 would require a company to include a shareholder nominee in its proxy material and form of proxy if the nominating shareholder or group:

• Beneficially owns, as of the date of the shareholder notice on new Schedule 14N, either individually or in the aggregate:
  • For large accelerated filers (approximately 26% of firms), at least 1% of the company's securities that are entitled to be voted on the election of directors at the annual meeting of shareholders;
  • For accelerated filers (approximately 33% to 35% of firms), at least 3%; and
  • For non-accelerated filers (approximately 38% to 40% of firms), at least 5%;
• Has beneficially owned the securities that are used for purposes of determining the ownership threshold continuously for at least one year as of the date of the shareholder notice on Schedule 14N (in the case of a shareholder group, each member of the group must have held the securities that are used for purposes of determining the ownership threshold for at least one year as of the date of the shareholder notice on Schedule 14N); and
• Represents that it intends to continue to own those securities through the date of the annual or special meeting.

Under proposed Rule 14a-18(b), the nominating shareholder or group would be required to include in its Schedule 14N Notice a representation that the nominating shareholder or group satisfies the conditions in Rule 14a-11(b). In one of the statistical samples it consulted, the SEC found that nearly all (above 99%) of large accelerated filers have at least one shareholder that could meet the 1% threshold individually, while a somewhat greater number of large accelerated filers have two or more shareholders that each have held at least 0.5% of the shares outstanding for the appropriate period and, thus, could more easily aggregate their securities in order to meet the 1% ownership requirement. However, raising the threshold to 3% for large accelerated filers reduced the percentage of filers that have a single shareholder that could make a nomination to 77% of large accelerated filers and reduced the number of large accelerated filers that have two or more shareholders that have held at least 1.5% of the shares for the appropriate period to 89%. The percentages for accelerated filers and non-accelerated filers at the 3% and 5% levels, respectively, followed a similar general pattern, although the percentages were substantially lower.

With respect to eligibility criteria related to duration of ownership, the SEC believes that long-term shareholders are more likely to have interests that are better aligned with other shareholders and are less likely to use the rule solely for short-term gain. The one-year requirement is consistent with the existing eligibility requirement for shareholders to submit proposals under Rule 14a-8. Some of the commenters on previous proposals that included a two-year hold suggested that the two-year holding period was too onerous.

The intent-to-hold requirement was based on the belief that it is important that any shareholder or group that intends to submit a nominee to a company for inclusion in the company's proxy materials continue to have a significant economic interest in the company. The intent requirement also demonstrates the nominating shareholder's commitment to the director nominee and the election process; however, the proposal also would require that a nominating shareholder or group state its intent with respect to continued ownership of their shares after the election.

Finally, to rely on proposed Rule 14a-11, a nominating shareholder or group must:

• Not acquire or hold the securities for the purpose of or with the effect of changing control of the company or to gain more than a limited number of seats on the board;
• Provide to the company and file with the SEC the notice on proposed new Schedule 14N on a timely; and
• Include in the notice on Schedule 14N disclosure indicating satisfaction of the requirements of Rule 14a-11 and a certification that the nominating shareholder or group is not seeking to change the control of the company or to gain more than a limited number of seats on the board of directors, and disclosure meeting the requirements of Rule 14a-18.

Shareholder Nominee Requirements

• The nomination must be consistent with applicable law and regulation. A company would not be required to include a shareholder nominee in its proxy materials if the nominee's candidacy or, if elected, board membership would violate controlling state law, federal law (e.g., Clayton Act prohibition on directors who are employed by competitor), or rules of a national securities exchange or association (other than those setting independence requirements, which depend upon the overall make-up of a board and are addressed separately), and the violation could not be cured.. However, companies may not "opt out" of Rule 14a-11 by adopting alternate requirements for inclusion of shareholder nominees for director in the company's proxy materials and excluding a nominee on the grounds that the shareholder or the nominee fails to meet the more restrictive standards included in the company's governing documents. Where a company is subject to the requirements of a national securities exchange or association, the nominating shareholder or group would be required to make a representation that the nominee is in compliance with the objective standards of generally applicable independence requirements of the exchange or association (i.e., not the audit committee standard of independence). To the extent a subjective determination is required (e.g., a determination that the nominee has no material relationship with the listed company), this element of an independence standard would not have to be satisfied. The proposal addresses only the requirements to be included in a company's proxy materials; a company could still apply the subjective tests of independence for board committee positions and include disclosure in its proxy materials advising that the nominee would not meet the company's subjective independence criteria, as appropriate. (No consideration appears to have been given to the possibility that, under some scenarios, the company could be left without a viable audit committee.)
• Relationships between the nominee, the nominating shareholder or group and the company. To address concerns that nominating shareholders or groups may be acting merely as a surrogate for the company or its management to block usage of the rule by another nominating shareholder or group, the rule would require that the nominating shareholder or group represent that no relationships or agreements exist between the nominee and the company and its management, and between the nominating shareholder or group and the company and its management regarding the nomination of the nominee. Negotiations with the nominating committee to have the nominee included on the company's proxy card as a management nominee, where those negotiations are unsuccessful, or negotiations that are limited to whether the company is required to include the shareholder nominee for director on the company's proxy card in accordance with Rule 14a-11, would not be considered a direct or indirect agreement with the company. In contrast to the 2003 proposal, the current proposal does not include any limitations on the relationships between a nominating shareholder or group and their director nominee or nominees designed to address the possibility of "special interest" or "single issue" directors that would advance the interests of the nominating shareholder over the interests of shareholders as a group. The SEC believes that these limitations may not be appropriate or necessary, that any director elected director will be subject to the same state law fiduciary duties as any other director on the board and that the rule should instead facilitate exercises of state law rights and afford a shareholder or group meeting the proposed standards the ability to propose a nominee for director that, in the nominating shareholder's view, better represents the interests of shareholders than those put forward by the nominating committee or board.
• Nominating shareholder or group will not be deemed affiliates of the company. An instruction will make clear that the mere use of proposed Rule 14a-11, by itself, will not be deemed to establish an affiliate relationship between the nominating shareholder or group and the company, nor will the nominating shareholder or group be deemed an affiliate solely by virtue of having nominated that director under the proposed rules, in the absence of an agreement or relationship with that director other than one relating to the nomination.

The proposed rule would not be available for any shareholder or group seeking to change the control of the issuer or to gain more than a limited number of seats on the board. Accordingly, the proposal would not require a company to include more than one shareholder nominee or the number of nominees that represents 25% of the company's board of directors (rounded down), whichever is greater. Where a company has a director (or directors) currently serving on its board of directors who was elected as a shareholder nominee pursuant to Rule 14a-11 and the term of that director extends past the date of the shareholders' meeting, the company would not be required to include in its proxy materials more shareholder nominees than could result in the maximum number otherwise permitted under the rule. Where more than one shareholder or group would be eligible to have its nominees included in the company's proxy statement, the nominees would be included on a first-in basis, thus allowing the first timely shareholder or group to nominate all permitted shareholder nominees. Where the first nominating shareholder does not nominate the maximum number of directors allowed, the next timely shareholder could include its nominees up to the maximum.

To submit a nominee, a shareholder or group must provide a notice on Schedule 14N to the company and the SEC of its intent to submit a nominee by the date specified by the company's advance notice provision or, where no such provision is in place, no later than 120 calendar days before the date that the company mailed its proxy materials for the prior year's annual meeting. If no annual meeting was held, or if the date of the meeting changed by more than 30 calendar days from the prior year, however, then the nominating shareholder must provide notice a reasonable time before the company mails its proxy materials. The company would be required to disclose the date by which the shareholder must submit the required notice in a Form 8-K filed pursuant to proposed Item 5.07 within four business days after the company determines the anticipated meeting date.

The new Schedule 14N would require:

• The name and address of the nominating shareholder or each member of the nominating shareholder group;
• Information regarding the amount and percentage of securities beneficially owned and entitled to vote at the meeting;
• A written statement from the "record" holder of the shares beneficially owned by the nominating shareholder or each member of the nominating shareholder group (usually a broker or bank) verifying that, as of the date of the shareholder notice, the shareholder continuously held the securities for at least one year;
• A written statement of the nominating shareholder's or group's intent to continue to own the requisite shares through the shareholder meeting at which directors are elected and a written statement regarding intent with respect to continued ownership after the election; and
• A best-knowledge certification that the securities are not held for the purpose of, or with the effect of, changing the control of the issuer or gaining more than a limited number of seats on the board of directors.

In addition to representations regarding eligibility and compliance with the requirements discussed above, the Schedule would mandate disclosure by the nominating shareholder or group similar in content to that required in a contested election for inclusion in the company's proxy materials. The disclosure would require information about the nominee's transactions and relationships with the company, biographical information and disclosure about certain interests of the nominee, whether the nominating shareholder or group member has been involved in any legal proceeding during the past five years, the nature and extent of the relationships between the nominating shareholder or group and nominee and the company, material interests in agreements between the nominating shareholder or group or the nominee and the company, and material pending or threatened litigation involving the nominating shareholder or group or nominee and the company. If desired, the Schedule may provide a statement supporting the nominee, to be included in the company's proxy statement, not to exceed 500 words. The Schedule 14N would be required to be amended promptly for any material change in the facts set forth in the originally filing, including for the withdrawal of a nominating shareholder or group, or of a director nominee, and the reasons for the withdrawal. A final amendment to the Schedule would be required within 10 days of the announcement by the company of the final results of the election to disclose the nominating shareholder's or group's intention with regard to continued ownership of their shares. This amendment would indicate whether the outcome of the election may have altered the intent of the shareholder as originally disclosed and any further plans with regard to the company the nominating shareholder may have. The Schedule 14N would be subject to liability under Rule 14a-9. The nature of the disclosure required for the proposed Schedule is not as extensive as the disclosure proposed in 2003, which the SEC now views as impractical and potentially a deterrent, but the SEC believes it is sufficient to provide transparency and facilitate informed decision-making, especially in light of the absence of fiduciary obligations on the part of the nominating shareholder or group comparable to those of a company's nominating committee.

Requirements for a Company That Receives a Notice from a Nominating Shareholder or Group

Inclusion of a Shareholder Director Nominee. Upon receipt of a shareholder's or group's notice, a company would consider the shareholder nominee and assess whether it was permitted to exclude the shareholder nominee. If not, the company would be required to notify the nominating shareholder or group in writing, no later than 30 calendar days before it files its definitive proxy statement, that it will include the nominee or nominees. Disclosure regarding the shareholder nominee and the nominating shareholder or group would be required in the company's proxy statement and the name of the nominee would be required on the company's form of proxy. The company could identify any shareholder nominees as such and recommend whether shareholders should vote for, against or withhold votes on those nominees and management nominees on the form of proxy. However, similar to the practice with regard to Rule 14a-8 shareholder proposals, the company would otherwise be required to present the nominees in an impartial manner in accordance with Rule 14a-4. When a shareholder nominee is included, the form of proxy could not provide shareholders the option of voting for or withholding authority to vote for the company nominees as a group, but would instead require a separate vote for each nominee. The proxy statement must also include a nominating shareholder's or group's statement of support for the shareholder nominee, if provided, so long as it does not exceed 500 words. Of course, a company could also include its own statement of support for its nominees. Both the company and the nominating shareholder or group would be able to solicit in favor of its nominees outside the proxy statement (for example, on a designated website), provided that the solicitations were made within the parameters of the applicable proxy rules.

Excluding a Shareholder Nomination That Does Not Comply with the Requirements of Rule 14a-11. A company may exclude a shareholder nominee from its proxy materials if it determines any of the following:

• Proposed Rule 14a-11 is not applicable to the company;
• The nominating shareholder or group has not complied with the requirements of Rule 14a-11;
• The nominee does not meet the requirements of Rule 14a-11;
• Any representation required to be included in the notice to the company is false or misleading in any material respect; or
• The company has received more nominees than it is required to include by proposed Rule 14a-11 and the nominating shareholder or group is not entitled to have its nominee included under the criteria proposed in Rule 14a-11(d)(3).

To address the complex issues that may arise and to ensure that a nominating shareholder or group has sufficient time to consider the validity of the company's determination to exclude its nominee, the SEC has developed a process for dealing with exclusions. The company would be required to notify the nominating shareholder or group of its determination, and the nominating shareholder or group may then seek to remedy certain eligibility or procedural deficiencies in a nomination. However, neither the composition of a nominating shareholder group nor a shareholder nominee could be changed as a means to correct a deficiency identified in the company's notice to the nominating shareholder or group except where a nominating shareholder or group inadvertently submits a number of nominees that exceeds the maximum number required to be included by the company, in which case, the nominating shareholder or group may specify which nominees are not to be included in the company's proxy materials.

If the company determines that it is still permitted to exclude a shareholder nominee, the company would be required to provide notice of the basis for its determination to the SEC, seeking a no-action response comparable to that under Rule 14a-8. The company's notice to the SEC would include:

• identification of the nominating shareholder or each member of the nominating shareholder group, as applicable;
• the name of the nominee or nominees;
• an explanation of the company's basis for determining that it may exclude the nominee or nominees; and
• a supporting opinion of counsel when the company's basis for excluding a nominee or nominees relies on a matter of state law.

Unless otherwise provided in Rule 14a-11, the burden would be on the company to demonstrate that it may exclude a nominee or nominees. The nominating shareholder or group could submit a response to the company's notice to the SEC. The SEC staff would then, at its discretion, provide an informal statement of its views to the company and the nominating shareholder or group. (Note that the staff determinations reached in these no-action letters cannot adjudicate the merits of a company's position with respect to exclusion of a shareholder nominee under Rule 14a-11. Accordingly, a discretionary staff determination would not preclude an interested person from pursuing a judicial determination regarding the application of Rule 14a-11.) The company would provide the nominating shareholder or group with notice, no later than 30 calendar days before it files its definitive proxy statement and form of proxy with the SEC, of whether it will include or exclude the shareholder nominees. All materials submitted to the SEC in relation to Rule 14a-11(f) would be publicly available upon submission. The company or any nominating shareholder or group could request that the staff seek the SEC's views with respect to a determination of the staff under Rule 14a-11(f). The staff, upon such a request or on its own motion, would generally present questions to the SEC that involve matters of substantial importance and where the issues are novel or highly complex, although the granting of a request for an informal statement by the SEC is entirely within its discretion.

The process is illustrated in the following SEC graphics:

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Application of the Other Proxy Rules to Solicitations By the Nominating Shareholder or Group. Because Rule 14a-11 would permit shareholders to aggregate their securities with other shareholders to meet the applicable minimum ownership threshold to nominate a director, the SEC anticipates that shareholders would communicate with each other to form a nominating shareholder group. Accordingly, the SEC is proposing an exemption from certain of the proxy rules for communications made by shareholders in connection with proposed Rule 14a-11 that are limited in content and filed with the SEC. The proposed exemption would not apply to solicitations made when seeking to have a nominee included in a company's proxy materials pursuant to a procedure specified in the company's governing documents or pursuant to applicable state law provisions (discussed below). In addition, the exemption would not apply to oral communications because they cannot easily satisfy the filing requirement, which the SEC believes is important in determining compliance with the content restriction in the proposed exemption.

Under the proposed new rule, Rules 14a-3 to 14a-6 (other than paragraphs 14a-6(g) and 14a-6(p)), 14a-8, 14a-10, and 14a-12 to 14a-15 would not apply to any solicitation by or on behalf of any shareholder in connection with the formation of a nominating shareholder group, provided that each written communication includes no more than:

• A statement of the shareholder's intent to form a nominating shareholder group to nominate a director under the proposed rule;
• Identification of, and a brief statement regarding, the potential nominee or, where no nominee has been identified, the characteristics of the nominee that the shareholder intends to nominate, if any;
• The percentage of securities that the shareholder beneficially owns or the aggregate percentage owned by any group to which the shareholder belongs; and
• The means by which shareholders may contact the soliciting party

As a condition of the exemption, any written soliciting material provided to shareholders must be filed with the SEC no later than the date the material is first published, sent or given to shareholders.

To facilitate solicitations by shareholders in favor of their candidates, the SEC is also proposing a second new exemption providing that solicitations by or on behalf of a nominating shareholder or group in support of a nominee included in the company's proxy statement in accordance with the proposed rule would not be subject to the various proxy rules identified above, provided that the soliciting party does not seek to obtain or revoke a proxy during the solicitation. Each written communication, which must be filed with the SEC, must include the identity of the nominating shareholder or group, a description of his or her interests and a prominent legend advising others to read about the nominee in the proxy statement.

Rule 14a-8(i)(8) allows a company to exclude from its proxy statement a shareholder proposal that relates to a nomination or an election for membership on the company's board of directors or a procedure for such nomination or election. In 2007, to provide certainty to companies and shareholders following a court decision that had caused confusion about the application of the proxy disclosure and liability rules, the SEC amended this rule to add the language above clarifying that it was permissible to exclude a proposal that would result in an immediate election contest or would set up a process for shareholders to conduct an election contest in the future by requiring the company to include shareholders' director nominees in the company's proxy materials for subsequent meetings. (See the postings on 11/28/07 and 12/06/07)

The SEC is now proposing an amendment to Rule 14a-8(i)(8) that would require companies to include in company proxy materials shareholder proposals to amend, or request an amendment to, a company's governing documents regarding nomination procedures or disclosures related to shareholder nominations, provided the proposal does not conflict with proposed Rule 14a-11 and otherwise meets the substantive (e.g., no conflict with state law) and procedural requirements of Rule 14a-8. The amended rule would not restrict the types of amendments that a shareholder could propose to a company's governing documents to address the company's provisions regarding nomination procedures or disclosures related to shareholder nominations; they may even establish procedures for nominating directors that require a different ownership threshold, holding period or other qualifications or representations than those proposed in Rule 14a-11, as long as they do not conflict with it or with applicable state law (i.e., further restrict the ability of shareholders to make nominations).

No new disclosure requirements are being proposed with regard to amendment of procedures because the SEC believes that a shareholder may simply want to amend the procedures without any intent to nominate any particular individual to be a director. (You may recall that, in prior efforts, the SEC required extensive new disclosure regarding the shareholder proponent.)

The proposed amendment notwithstanding, the SEC is proposing to codify certain staff interpretations that would allow companies to exclude proposals related to particular elections and nominations where those proposals could result in an election contest between company and shareholder nominees without the important protections provided by the disclosure and liability provisions otherwise provided for in the proxy rules. A company would be permitted to exclude a proposal under Rule 14a-8(i)(8) if it:

• Would disqualify a nominee who is standing for election;
• Would remove a director from office before his or her term expired;
• Questions the competence, business judgment or character of one or more nominees or directors;
• Nominates 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 the upcoming election of directors (intended to address new proposals that may be developed in the future that are comparable to the four specified categories and would undermine the exclusion).

Rule 14a-8(i)(8) should not, however, be read to permit the exclusion of proposals regarding the qualifications of directors, shareholder voting procedures, board nomination procedures and other election matters of importance to shareholders that would not directly result in an election contest between management and shareholder nominees.

The release speculates that states may amend their corporate codes and shareholders or companies could amend the company's governing instruments to provide for nomination or disclosure rights in addition to those provided in Rule 14a-11. As a result, the SEC is proposing new Rule 14a-19, which would apply to a shareholder nomination for director for inclusion in the company's proxy materials made pursuant to procedures established pursuant to state law or by a company's governing documents. Under the proposed rule, a nominating shareholder or group would need to provide the company and file with the SEC a shareholder notice on Schedule 14N that would include disclosures about the nominating shareholder or group and their nominee that are similar to the disclosures required in an election contest and generally comparable to those required for nominations under Rule 14a-11 described above. These disclosures would then be included in the company's proxy materials pursuant to proposed new Item 7(f) of Schedule 14A.

Because shareholders would be able to engage in limited solicitations to form nominating shareholder groups, some of which may beneficially own in the aggregate more than 5% of the company's securities, nominating shareholders may need to consider whether they have formed a "group" under Exchange Act Section 13(d)(3) that is required to report its members' beneficial ownership on Schedules 13D or 13G. The SEC believes that the formation of a shareholder group solely for the purpose of nominating one or more directors pursuant to proposed Rule 14a-11, the nomination of one or more directors pursuant to proposed Rule 14a-11, soliciting activities in connection with that nomination (including soliciting in opposition to a company's nominees), or the election of a nominee as a director under proposed Rule 14a-11, should not result in a loss of eligibility to file on Schedule 13G, rather than the more complex Schedule 13D, for the nominating shareholder or group. Toward that end, the SEC is proposing to expand two of the exceptions that allow persons who would otherwise be required to file on Schedule 13D to instead report their ownership on Schedule 13G. One of these exceptions applies to a specified list of qualified institutional investors who have acquired the securities in the ordinary course of their business and with neither the purpose nor the effect of changing or influencing control of the company. A second exception applies to persons, not specified in the first exception, but who acquired the securities with neither the purpose nor the effect of changing or influencing control of the company and are not directly or indirectly the beneficial owner of 20% or more of the subject class of securities. The SEC is proposing to revise these exceptions to provide an exception to the "change in control" language for activities solely in connection with a nomination under Rule 14a-11. These rule changes would not apply to nominations pursuant to an applicable state law provision or a company's governing documents because the applicable provisions may not limit the number of board seats or require a lack of intent to change the control of the company. In addition, this exception would be available only for purposes of the nomination, but not following the election.

Section 16

Although a Section 16 exception was proposed in prior iterations of this proxy access proposal, the SEC is not now proposing any special exceptions related to Section 16 and instead believes that it would be appropriate to apply the existing analysis of whether a group has formed (under the Rule 13d-5(b) analysis) and whether Section 16 applies. Similarly, the SEC is not proposing any standards for establishing the independence of the nominee from the nominating shareholder or group for purposes of the deputization theory under Section 16.

The SEC proposes to amend Rule 14a-9 to add a new paragraph (c) to make clear that nominating shareholders or groups would be liable for any materially false or misleading statements provided to the company (in the shareholder notice on Schedule 14N) that is then included in the company's proxy materials. In addition, proposed new Rule 14a-11(e) contains express language providing that the company would not be responsible for information that is provided by the nominating shareholder or group under Rule 14a-11 and then repeated by the company in its proxy statement, except where the company knows or has reason to know that the information is false or misleading. A similar provision is included in proposed Rule 14a-19 in connection with a nomination made pursuant to an applicable state law provision or the company's governing documents. The SEC is also proposing that any information provided to the company in the notice from the nominating shareholder or group and then included in the company's proxy materials would not be incorporated by reference into any filing under the Securities Act or the Exchange Act unless the company determines to specifically incorporate that information by reference, in which case it would be considered the company's own statement for antifraud purposes.