U.S. SEC ADOPTS FINAL RULES ON PROXY ACCESS

Transcription

1 U.S. SEC ADOPTS FINAL RULES ON PROXY ACCESS T Our Clients and Friends: August 25, 2010 Tday the U.S. Securities and Exchange Cmmissin ("SEC") adpted amendments t its prxy rules t permit sharehlders t nminate directrs in a cmpany's prxy materials--cmmnly referred t as "prxy access." The vte n the amendments was 3-2, with Cmmissiners Casey and Paredes dissenting due t numerus cncerns, including that the prxy access rules encrach n state crprate law and interfere with private rdering by cmpanies and their sharehlders. The SEC previusly prpsed amendments t the federal prxy rules regarding prxy access in 2003 and The rules adpted tday are based n thse prpsed n June 10, Mre recently, the Ddd-Frank Wall Street Refrm and Cnsumer Prtectin Act amended Sectin 14(a) f the Securities Exchange Act f 1934 t authrize, but nt require, the SEC t issue rules regarding the inclusin f sharehlder nminees in a cmpany's prxy materials. The SEC's final release adpting the prxy access rules, which ttals 451 pages, is available here. We will issue an additinal memrandum upn further analysis f the adpting release. The final rules take effect sixty days after publicatin in the Federal Register, except fr smaller reprting cmpanies (as defined in Rule 12b-2, generally cmpanies with a public flat f less than $75 millin), as described belw. Thus, prxy access will be in effect in time fr the 2011 prxy seasn fr mst calendar year issuers. Overview f the Final Prxy Access Rules There are tw cmpnents t the prxy access rules apprved by the SEC tday: (1) establishing a federal prxy access right pursuant t Rule 14a-11 and related amendments, and (2) amending Rule 14a-8 t permit sharehlder prpsals that wuld establish additinal, mre flexible prxy access prcedures. Federal Prxy Access Right Created by Rule 14a-11 Rule 14a-11 creates a federal law prcess fr a sharehlder r grup f sharehlders t nminate ne r mre directrs and have thse nminees included in a cmpany's prxy materials if certain requirements are satisfied. Rule 14a-11 will nt apply where applicable state r freign law r a cmpany's gverning dcuments (e.g., charter, bylaws, certificate f designatins, etc.) prhibit the cmpany's sharehlders frm nminating directrs. Cmpanies Subject t Prxy Access: Rule 14a-11 will apply t cmpanies (including investment cmpanies and cntrlled cmpanies) subject t the Exchange Act prxy rules ther than cmpanies subject t such rules slely because they have debt securities registered under Sectin 12 f the Exchange Act. In additin, Rule 14a-11 will

2 apply t cmpanies that vluntarily register a class f securities under Sectin 12(g). Rule 14a-11 will nt apply t freign private issuers. Unlike previusly prpsed prxy access rules, cmpanies will be subject t Rule 14a-11 regardless f any "triggers" that may demnstrate an bjective need fr prxy access. Cmpanies cannt "pt ut" f being subject t Rule 14a-11: the prxy access right will apply regardless f whether a cmpany has a prvisin in its gverning dcuments prviding fr r prhibiting the inclusin f sharehlder nminees in its prxy materials. The nly exceptin t Rule 14a-11's applicability is if state r freign law r a cmpany's gverning dcuments prhibit sharehlders frm nminating directrs. Ownership Requirement: T be eligible t use the Rule 14a-11 prcess, sharehlders must wn at least three percent f the ttal vting pwer f the cmpany's securities entitled t vte n the electin f directrs at the annual meeting. The rules cntain detailed instructins n hw t calculate wnership. Sharehlders may aggregate their securities with ther sharehlders in rder t meet the three percent threshld. Hwever, nly shares ver which the sharehlder has investment and vting cntrl will be cunted tward the three percent threshld--brrwed shares will be excluded. Securities that have been laned t a third party by a nminating sharehlder may be cunted tward the wnership threshld if the nminating sharehlder has the right t recall the securities and will recall the laned securities upn ntificatin that the sharehlder's nminee will be included in the cmpany's prxy materials. Sharehlders must have held their shares fr at least three years, must prvide a statement that they intend t cntinue t wn at least the required amunt f securities thrugh the date f the meeting at which directrs are elected and must disclse their intent regarding cntinued wnership f the securities after the electin. Sharehlders wh hld the securities fr the purpse f changing cntrl f the cmpany r t gain a number f seats n the bard f directrs that exceeds the maximum number f nminees a cmpany culd be required t include under new Rule 14a-11 are nt eligible t nminate directrs under Rule 14a-11. Other Eligibility Requirements: The directr nminee's candidacy and, if elected, service n the bard must nt vilate federal, state r freign law, r the rules f a natinal securities exchange, if applicable, and the nminee must satisfy the bjective independence standards f the applicable natinal securities exchange.[1] 2

3 Additinally, neither the nminee nr the nminating sharehlder (including any member f the nminating sharehlder grup) may have any direct r indirect agreement with the cmpany regarding the nminatin. Ntably, Rule 14a-11 des nt restrict the ability f sharehlders t nminate directrs with whm they have a relatinship. Ntice Requirements: If a sharehlder seeks t nminate ne r mre directr candidates, the nminating sharehlder must file a new Schedule 14N with the SEC and prvide a cpy t the cmpany, n later than 120 days befre the anniversary f the mailing date fr the cmpany's definitive prxy statement in the previus year. Schedule 14N, which will be publicly available when filed, requires any nminating sharehlders t make certain disclsures, including reprting: the name and address f the nminating sharehlder r each member f the nminating sharehlder grup; the amunt and percentage f the cmpany's shares held and entitled t vte in the directr electin and related wnership infrmatin; that the shares used t satisfy the wnership threshld have been held cntinuusly fr at least three years; that the nminating sharehlder r each member f the nminating sharehlder grup intends t hld their shares thrugh the date f the meeting; the intent f the nminating sharehlder r each member f the nminating sharehlder grup with respect t cntinued wnership after the electin; any relatinship between the nminating sharehlder r grup and nminee r nminees and the cmpany; bigraphical infrmatin abut the nminating sharehlder r each member f the nminating sharehlder grup and the nminee r nminees; a statement that, t the best f the nminating sharehlder's r grup's knwledge, the nminee meets the bjective criteria fr "independence" under applicable stck exchange rule, and a statement f whether, t the best f the nminating sharehlder's r grup's knwledge, the nminee meets the directr qualificatins, if any, set frth in the cmpany's gverning dcuments; disclsure f any legal prceeding that the nminating sharehlder r member f the nminating sharehlder grup has been invlved in during the past ten years; a representatin that the nminee's candidacy and, if elected, service wuld nt vilate cntrlling state, federal r freign law, r rules f a natinal securities exchange r natinal securities assciatin, and therwise wuld satisfy the eligibility requirements f Rule 14a-11; 3

4 a statement in supprt f the nminee r nminees nt exceeding 500 wrds per nminee, if the nminating sharehlder r grup elects t include such a statement included in the cmpany's prxy statement; and a certificatin by the nminating sharehlder r grup that the nminatin is nt intended either t result in a change in cntrl f the cmpany r t gain mre than the maximum number f bard seats permitted under Rule 14a-11. Number f Directrs: Sharehlders may include in a cmpany's prxy materials the greater f ne directr nminee r a number f directr nminees that equals up t twenty-five percent f the cmpany's bard, which number may be runded dwn. If the number f nminees submitted exceeds the authrized number f permissible nminees under Rule 14a-11, then pririty is given t the nminees frm the nminating sharehlder r sharehlder grup hlding the greatest percentage f securities eligible t vte in the electin f directrs. If a cmpany agrees t nminate a candidate wh is prpsed by a sharehlder under Rule 14a-11, the candidate will cunt against the twenty-five percent limit. Fr cmpanies with classified bards, this limit is calculated based n the ttal number f directrs n the bard even thugh nly ne-third f the directrs may be up fr electin at the meeting. Deadlines under Rule 14a-11: Sharehlders seeking t submit a directr nminee under Rule 14a-11 and the cmpanies subject t Rule 14a-11 must fllw the fllwing timeline, which is similar t the timeline fr sharehlder prpsals submitted under Rule 14a-8: Sharehlders must file Schedule 14N with the SEC and prvide a cpy t the cmpany n earlier than 150 days and n later than 120 days befre the anniversary f the mailing f the cmpany's prxy statement in the previus year. If a cmpany determines t include the sharehlder nminee in its prxy materials, it must ntify the nminating sharehlder r grup n later than thirty days befre the cmpany files its definitive prxy statement with the SEC. If the cmpany seeks t exclude the sharehlder nminee frm its prxy materials, the cmpany must prvide ntice t the sharehlder n later than furteen days after the applicable deadline fr transmitting a Schedule 14N fr such annual meeting. The nminating sharehlder then will have furteen days after receipt f the ntice by the cmpany t respnd and crrect any eligibility r prcedural deficiencies identified in the ntice. If the cmpany cntinues t believe that it has a basis fr nt including the nminee in its prxy materials, the cmpany must prvide ntice f the basis fr its exclusin t the SEC n less than eighty days befre it files its definitive prxy statement with the SEC. The cmpany als may request that the SEC staff issue a n-actin letter cncurring that the cmpany may exclude the directr nminee r the statement in supprt f such nminee. 4

5 Liability: The nminating sharehlder r grup will be liable fr any statement in Schedule 14N r any ther related cmmunicatin that is false r misleading with respect t any material fact, r that mits t state any material fact necessary t make the statements nt false r misleading, regardless f whether that infrmatin is ultimately included in the cmpany's prxy statement. Cmpanies will nt be liable fr infrmatin prvided by the nminating sharehlder r grup under Rule 14a-11 that the cmpany then includes in its prxy statement except t the extent that the cmpany subsequently specifically incrprates the infrmatin by reference r "therwise adpt[s] the infrmatin as its wn." Amendments t Related SEC Rules: The SEC als amended the fllwing related rules: Nminating sharehlder grups may reprt their aggregate wnership n Schedule 13G, rather than Schedule 13D, if the grup was frmed slely fr the purpse f nminating directr(s) pursuant t Rule 14a-11. In prviding this exceptin, the SEC nted that the mre burdensme Schedule 13D disclsure requirements culd deter sme sharehlders frm frming such nminating grups. The exceptin, hwever, is unavailable t nminating sharehlders r grups that either: (i) engage in activities beynd nminating directrs, sliciting prxies fr their directr nminees, r against a cmpany's nminees in accrdance with Rule 14a-11, r (ii) therwise submit a nminatin pursuant t a cmpany's gverning dcuments r applicable state r freign law prvisins. Nminating sharehlders r grups submitting a nminatin pursuant t a cmpany's gverning dcuments r applicable state r freign law prvisins will nt be eligible fr the exceptin t reprting n Schedule 13D. The SEC did nt exempt nminating sharehlders and grups frm the applicability f Sectin 16. The SEC nted that grups culd frm in rder t nminate directrs withut crssing the ten percent threshld that triggers Sectin 16 reprting and shrt swing prfit recvery prvisins. Sharehlder grups with greater than ten percent beneficial wnership will cntinue t be analyzed under Sectin 16 in the same way as grups frmed fr any ther purpse. Likewise, nminating sharehlders and grups are nt exempted frm the peratin f the Securities Act f 1933 standards fr affiliates. Written and ral cmmunicatins made pursuant t Rule 14a-11, which wuld be deemed slicitatins under the SEC prxy rules, will be exempt frm certain disclsure, filing, and ther requirements f thse rules, s lng as the sharehlder is nt hlding the cmpany's securities with the purpse r effect f changing cntrl f the cmpany. Rule 14a-2(b)(7) generally will exempt sharehlder slicitatins in cnnectin with effrts t frm a nminating grup and Rule 14a-2(b)(8) generally will exempt sharehlder slicitatins made in supprt f the grup's nminee(s) and/r against the cmpany's nminees. Slicitatins 5

6 made pursuant t either rule will need t be reprted n Schedule 14N n later than the date f first use. Slicitatins made pursuant t Rule 14a- 2(b)(8) may cmmence nce the nminating sharehlder r grup receives ntice frm the cmpany that the sharehlder nminee will be included in the cmpany's prxy materials. Written slicitatins t frm a nminating grup, in supprt f the sharehlder's nminee(s) and/r against the cmpany's nminees nevertheless will need t be filed with the SEC under cver f Schedule 14N and will be subject t certain cntent requirements. Written grup slicitatins may nly include certain infrmatin (e.g., the sharehlder's intent t frm a grup, the sharehlder's vting pwer, the means by which the sharehlder may be cntacted, and a brief statement abut the identity and characteristics f the nminee). Written supprt slicitatins must include the identity f the nminating sharehlder r grup and their interests in the cmpany, as well as a legend indicating that the nminee will be included in the cmpany's prxy materials, which sharehlders can access n the SEC website. Oral slicitatins will nt be subject t cntent requirements, but will need t be reprted n Schedule 14N. If a nminating sharehlder r grup subsequently engages in a nn-rule 14a-11 slicitatin r nminatin, their exemptin under either rule wuld be lst. Amendment t Rule 14a-8(i)(8) n Prxy Access Sharehlder Prpsals Rule 14a-8(i)(8) currently permits cmpanies t exclude prxy access sharehlder prpsals. Pursuant t the amendment t Rule 14a-8(i)(8) adpted tday, cmpanies will nt be able t exclude a prxy access sharehlder prpsal under Rule 14a-8(i)(8) slely because it relates t prxy access but can exclude a prxy access sharehlder prpsal if it cnflicts with state law r Rule 14a-11. A sharehlder prpsal culd expand prxy access t a brader grup f sharehlders r create alternative prxy access rights, but culd nt have the effect f preventing a sharehlder r grup that satisfies the requirements f Rule 14a-11 frm having its nminee included in a cmpany's prxy materials. Fr example, a sharehlder prpsal culd nt simply prpse higher wnership threshlds than thse fund in Rule 14a-11. In the cntext f any alternative access mechanism established under Rule 14a-8(i)(8), the amended rules als change a number f ther prxy rules in a manner that is generally cnsistent with Rule 14a-11 and new Schedule 14N. The current eligibility prvisins f Rule 14a-8 remain unchanged, requiring that a sharehlder prpnent have cntinuusly held at least $2,000 in market value (r ne percent, whichever is less) f the cmpany's securities entitled t be vted n the prpsal at the meeting, fr a perid f at least ne year prir t submitting the prpsal. Effective Date These prxy access rules will becme effective sixty days after publicatin in the Federal Register. Because sharehlders seeking t submit a directr nminee under Rule 14a-11 must d 6

7 s n later than 120 days befre the anniversary f the mailing f the cmpany's prxy statement in the previus year, if the rules are published in the Federal Register n September 2, they wuld becme effective n Nvember 1, and sharehlders at cmpanies that mailed their prxy statement n r after March 1, 2010 culd nminate directrs under the requirements f Rule 14a-11. Hwever, the effective date f Rule 14a-11--but nt the amendments t Rule 14a-8(i)(8)--fr smaller reprting cmpanies is three years frm the rule's effective date. This delayed effective date is intended t give the SEC time t make any adjustments it deems apprpriate, after study, fr smaller cmpanies and t allw smaller cmpanies time t prepare fr the implementatin f Rule 14a-11. Hwever, this deferral des nt apply t the Rule 14a-8 amendment. Thus, during that deferral perid a smaller reprting cmpany still culd be subject t prxy access thrugh sharehlder apprval f a binding prxy access bylaw amendment submitted under Rule 14a- 8(i)(8). [1] Nte that this memrandum des nt address rules applicable t investment cmpanies. Gibsn, Dunn & Crutcher's lawyers are available t assist in addressing any questins yu may have regarding these issues. Please cntact the Gibsn Dunn lawyer with whm yu wrk, r any f the fllwing: Jhn F. Olsn - Washingtn, D.C. ( , jlsn@gibsndunn.cm) Brian J. Lane - Washingtn, D.C. ( , blane@gibsndunn.cm) Rnald O. Mueller - Washingtn, D.C. ( , rmueller@gibsndunn.cm) David M. Hernand - Ls Angeles ( , dhernand@gibsndunn.cm) Amy L. Gdman - Washingtn, D.C. ( , agdman@gibsndunn.cm) James J. Mlney - Orange Cunty ( , jmlney@gibsndunn.cm) Elizabeth Ising - Washingtn, D.C. ( , eising@gibsndunn.cm) 2010 Gibsn, Dunn & Crutcher LLP Attrney Advertising: The enclsed materials have been prepared fr general infrmatinal purpses nly and are nt intended as legal advice. 7