November 19, 2003

SEC Adopts Nominating Committee/Shareholder Communication

Today, at an open Commission meeting, the SEC adopted the proposed rules on disclosures regarding nominating committee functions and communications between security holders and boards of directors. During the meeting, Commissioner Goldschmid pushed Corp Fin Director Alan Beller pretty hard about finalizing the rules on shareholder access as soon as possible (for which the comment period does not end until late December). Goldschmid asked about possibly getting it out in February and Beller did not commit.

On the new rules, the SEC has issued a press release – but not an adopting release yet. Below are notes from Mike Holliday on today’s meeting (note how the SEC was responsive to a number of the points made in the comments):

1. A required disclosure was added to provide the company’s policy, if it has one, on director attendance at annual meetings, and a statement of the number of directors attending the prior year’s annual meeting.

2. A requirement was added to require disclosure of changes in nominating committee procedures in periodic reports.

3. Instead of describing the material terms of a nominating committee charter, the registrant is required to make the charter available by posting on its website and disclosing in the proxy statement where the charter is located, or the charter can be attached to the proxy statement every three years.

4. While disclosure of qualifications for board membership is required, disclosure of specific standards for the overall structure and composition of the board will not be required.

5. The name of the source of each nominee (other than nominees who are executive officers or directors standing for re-election) will not have to be disclosed. Instead, the registant will disclose the source by category of source (security holder, non-management director, CEO, other executive officer, third party search firm, or other specified source).

6. The 3% beneficial ownership trigger to require additional information where the committee does not nominate a candidate recommend by a security holder is increased to more than 5%.

7. The requirement to disclose the specific reasons for the nominating committee’s determination not to nominate a recommended candidate in certain circumstances is eliminated.

8. The name of the recommended nominee will be required to be disclosed in addition to the name of the nominating shareholder(s) where the committee determines not to nominate a candidate recommended by a more than 5% shareholder(s), but written consent to the disclosure must be given by the recommended nominee and the nominating shareholder(s).

9. The requirement to disclose material actions taken as a result of shareholder communications is eliminated.

Effective Date of New Rules – September 30th Companies Beware!

Mike Holliday points out that these new rules may be particularly burdensome to companies with September 30th fiscal year ends. The SEC’s press release states that the rules will apply to proxy statements first sent or given to security holders on or after the date that is 30 days after publication in the federal register. This could pick up September 30 companies who may be preparing and printing their proxy statements soon for their upcoming annual meetings. The effective date does not allow much lead time to plan and take timely corporate action (not to mention draft, review, print, stuff in envelopes, etc.). The following is the SEC’s paragraph on effectiveness:

“The rules adopted today are expected to be available on the Commission’s website within the next few days and will apply to proxy and information statements first sent or given to security holders on or after the date that is 30 days after their publication in the Federal Register.”