SEC Proposes Rules To Increase Proxy Access by Shareholders

On Oct. 8, The Securities and Exchange Commission approved rule proposals that would require companies to include in their proxy materials the names of nominees for director that are submitted by certain shareholders, as well as disclosure relating to those nominees.

The proposals follow the recommendations made by the Division of Corporation Finance in its July 15 staff report on the nomination and election process (available at right).

"For the first time in its history, the Commission has proposed rules that would provide shareholders a procedure that promotes access to the proxy process," said SEC Chairman William Donaldson.

Overview

The proposed rules would create a requirement for companies to include in their proxy materials the names and certain other information regarding security holder nominees for election as director.

The requirement would arise in cases where:

State law establishes the right of a shareholder to nominate a candidate for such an election, and

One or more specified events has occurred, providing evidence of shareholder dissatisfaction with the effectiveness of the company's proxy process.

Triggers

The "specified events" mentioned above refer to two types of triggers. Companies would be subject to the requirement to include shareholder nominees in its proxy statement for a two-year period following the occurrence of one of the following two triggering events:

More than 35 percent of the company’s shareholders withhold votes for one or more

candidates for director; or

A shareholder resolution to activate the access process receives a majority of the

votes cast by the company’s shareholders.

Disclosures

The number of nominees about whom a company would be required to include information in its proxy materials would vary depending on the size of its board of directors:

Companies with eight or fewer board members would be required to include information regarding one nominee;

Companies with between nine and 19 board members would be required to include information regarding two nominees; and

Companies with boards of 20 or more members would be required to include information regarding three nominees.

The proposed procedure would require a company to include information regarding a security holder nominee for election as a director where:

State law provides security holders with the right to make such a nomination;

The procedure is applicable to a particular company (for example, the procedure would not be applicable to foreign issuers);

The security holders submitting the nomination meet specified eligibility requirements, and

The nominee meets specified eligibility requirements.

Comments

The Commission is soliciting comment on the proposals for a 60-day period following their publication in the Federal Register.

Other

On August 8, the Commission proposed new rules designed to implement the staff report's other major recommendations:

Requiring more robust disclosure of the nominating committee processes of public companies, including the consideration of candidates recommended by shareholders, and

Requiring specific disclosure of the processes by which shareholders may communicate with the directors of the companies in which they invest.

NOTE: Please note that this is a summary of a proposed SEC rule, and should not be construed to be a complete or final rule. Please refer to the SEC's Web site for updated and final rule information.