May 21, 2009

SEC Proposes Shareholder Access Again: Third Time’s a Charm?

For the third time this decade, the SEC proposed a proxy access rule – Rule 14a-11 – yesterday in an open Commission meeting (Dave blogged about the proposal’s long history last week). The vote was 3-2 – with Commissioners Casey and Paredes dissenting – and there is a 60-day comment period. Here is the SEC’s press release in a nice Q&A format – and here are statements by Chair Schapiro and Commissioners Aguilar, Walter, Casey and Paredes.

Ahead of the proposing release being available, here are the basic of the proposal:

Sliding Scale Ownership Requirements – The ownership threshold would vary depending on a company’s size: 1% of voting shares for large accelerated filers; 3% for accelerated filers; and 5% for non-accelerated filers.

One-Year Holding Period – Nominating shareholder (or group) must have held the requisite percentage for at least one year at the time of providing notice to the company.

Up to 25% of the Board – Shareholders can nominate the greater of one nominee or the number that equals up to 25% of the board. If shareholders nominate too many candidates, it’s “first in, first on the ballot.”

120-Day Deadline – Nominating shareholders must provide notice to the company and the SEC at least 120 days before the first anniversary of the date that the prior year’s proxy materials were first released (i.e. the Rule 14a-8 deadline), unless the company has an advance notice bylaw that provides a different timeframe.

Schedule 14N Certification– Nominating shareholders must file a Schedule 14N reporting the percentage beneficially owned, period of time held, intent to hold shares through date of the shareholders meeting and other disclosures and certifying that the nomination is not intended to result in a change in control or result in more than minority representation on the board.

Nominee Candidate Must Be Independent – Any nominee must meet state law and stock exchange independence standards and the nominating shareholder can’t have any agreement with the company regarding the nomination. However, there is no restriction on shareholders nominating persons with whom they have a relationship, including themselves.

Rule 14a-11 Trumps State Law – Rule 14a-11 would preempt any proxy access provisions set forth in state law or in a company’s charter or bylaws (as noted by Prof. Verret).

More Access Proposals Allowed Under Rule 14a-8 – Revised Rule 14a-8 would allow more shareholder proposals relating to the processes for the nomination and election of directors, requiring inclusion of proposals that would amend a company’s governing documents regarding election procedures.

Here are a few completely random thoughts:

– Regarding nomenclature, I guess “proxy access” is in and “shareholder access” is out.

– Although I didn’t go down to the SEC (I hear not too many did – it’s easy to watch via webcast), I do know that meetings now open with a slideshow warning about what to do in case of emergency, including the SEC’s “Shelter-in-Place” procedures. And that the SEC’s security guards now carry guns.

– A number of folks “live-tweeted” the meeting (eg. @nminow and @simonbillenness), thus putting pressure on the firms that rush out their firm memos hours after meeting to join the Twitter brigade. You can’t beat real-time! You can see a collection of tweets about proxy access using the hash tag of #proxyaccess.

– The “first firm to issue a memo” sweepstakes? Simpson Thacher over O’Melveny and Davis Polk in a sqeaker. I’ve seen a dozen more already. Of course, alacrity doesn’t equal quality…

The First Model Proxy Access Bylaw

Recently, Wachtell Lipton shared this model proxy access bylaw for those companies seeking to take advantage of the new amendments to the Delaware General Corporation Law, which allows companies to pick and choose their own proxy access process. I imagine we’ll see a few other models as we approach the August 1st effective date for the DGCL amendments and we’ll be posting them in our “Proxy Access” Practice Area.

Some Perspective on Shareholder Access

Recently, Ted Allen – RiskMetrics’ Director of Publications – wrote this nice recap of proxy access as it exists today:

Existing Corporate Provisions

A few U.S. companies have access provisions in place. Comverse Technology instituted an access bylaw in 2007 during an overhaul of its governance policies after an options backdating scandal. Under that bylaw, an investor group that owns a 5 percent stake for at least two years may nominate one director to appear on the company’s proxy statement. The Comverse bylaw also bars investor groups from making nominations for four years if its nominee fails to receive at least 25 percent support. (Editor’s note: RiskMetrics Group allows investors who hold a 4 percent stake for two years to nominate a candidate.)

In 2003, California-based Apria Healthcare adopted a policy to allow shareholders to submit names for inclusion on its ballot, but the company’s board can reject those candidates, according to Bloomberg News. In 2005, two shareholder nominees appeared on the company ballot at Gateway Energy, a small-cap natural gas firm based in Houston. UnitedHealth created an advisory committee in 2006 to allow investors to provide input on board nominees. In 2007, Pfizer held a town hall meeting with large investors to solicit their input on directors and other issues. Other firms, such as H-P, allow shareholders to suggest nominees, but investors have no recourse but to wage a costly proxy solicitation if management ignores those suggestions.

Activist investors have sought less rigorous ownership requirements. The proposals filed at H-P and UnitedHealth in 2007 called for allowing two nominations by investors who collectively own a 3 percent stake for at least two years. The Council of Institutional Investors supports a similar standard for access, provided that investors who nominate board candidates adhere to the same SEC disclosure requirements that now apply to proxy contests.

Access in Other Markets

Other major markets, such as the United Kingdom and Japan, allow investors to nominate board candidates to appear on management proxy statements. Under the U.K. Companies Act, investors can nominate candidates at an annual meeting if they collectively own at least 5 percent of a company’s share capital or are part of a group of at least 100 shareholders who each hold stakes worth 100 pounds ($146) or more. Since January 2008, investors have nominated board candidates at nine U.K. firms, according to RiskMetrics data. The most high-profile case was Aegis Group, where the Bollore Group, which now holds a 30 percent stake, nominated two board candidates who were not elected.

In Japan, shareholders who own at least 1 percent of a company’s capital or 300 share units for six months may propose business for a corporate agenda, including nominating board candidates or seeking the removal of directors. Nevertheless, dissident board slates are quite rare; one notable exception is the proxy fight now being waged at Japanese wigmaker Aderans Holdings by the Steel Partners Japan Strategic Fund.

– Broc Romanek