August 26, 2010

The SEC Adopts Proxy Access

After nearly a decade of battle, the SEC adopted proxy access during an open Commission meeting by a 3-2 vote – and then promptly posted the 451-page adopting release. Here’s a press release – and Chair Schapiro’s opening remarks (and commentary from Harvey Pitt on Bloomberg News). Here are dissenting remarks from Commissioners Casey and Paredes – and supporting remarks from Commissioners Walter and Aguilar.

Here are the basics:

What are the thresholds for a Rule 14a-11 access right? – Shareholders (or groups) must have 3% of the voting power (so it doesn’t vary by company size as proposed) and have have held their shares for three years (up from one year as proposed) when they give notice of the nomination on Schedule 14N. When calculating the 3%, shareholders will be able to pool assets and include securities loaned to a third party as long as they can be called back – but securities sold, shorted or not held through the company’s annual meeting will need to be deducted.

Who can be nominated as a shareholder candidate? – Shareholder nominees must satisfy the applicable stock exchange’s independence standards – and the shareholder exercising the right must not have the intent of changing control of the company. If a company wants to challenge a nominee’s qualification, it can use the Staff’s no-action process.

How many nominees can be placed on the ballot by shareholders? – Greater of one director or 25% of the entire board. If the number of shareholder nominees exceeds the number permitted under Rule 14a-11, then preference will be given to the larger holder – not the first to nominate as the SEC had proposed.

Is there any “opt-out” of the process rules? – Nope, it’s mandatory and neither companies nor shareholders are not permitted to opt out or select a more restrictive mechanism. Rule 14a-8 was amended so that companies may not exclude shareholder proposals that seek to establish less restrictive proxy access procedures.

When do the new rules take effect? – 60 days after their publication in the Federal Register, which is expected to happen next week. However, the deadline for submitting a nominee is120 days before the anniversary of this year’s proxy mailing. So access essentially applies to an annual meeting next year only if the first anniversary of the mailing of this year’s proxy materials occurs 120 days or more after effectiveness. The example given during the open meeting: if the rules are effective on November 1st, then shareholders have a proxy access right if the company mailed their proxy materials on or after March 1st during 2010.

How are smaller companies treated? – They get a three-year delay in effectiveness if the company has a public float of less than $75 million.

How are foreign private issuers treated? – They aren’t subject to the new access rules, just like the other proxy rules.

We’ll be posting memos in our “Proxy Access” Practice Area analyzing the new rules – and we’ll be covering them during our “5th Annual Proxy Disclosure Conference” coming up in less than a month. Register now for this important two-day event.

FINRA Rule 5121 Supercedes NASD Rule 2720

A few weeks ago, the SEC approved FINRA’s proposal to renumber NASD Rule 2720 – relating to public offerings of securities with certain conflicts of interest – to FINRA Rule 5121 as part of the process of FINRA’s development of a consolidated rulebook.

Third Circuit Rejects A “Fraud Created The Market” Theory for Presumption of Reliance

As noted in this Edwards Angell Palmer & Dodge memo, a ruling last week – Malack v. BDO Seidman LLP, No. 09-4475 (3d Cir.; 8/16/10) – by the US Court of Appeals for the Third Circuit should help to limit federal securities fraud class actions. The 3rd Circuit court squarely rejected use of the “fraud created the market” theory to establish presumption of the essential element of reliance in securities fraud claims.

– Broc Romanek