The SEC s Proposed Proxy Access Rules, Related Delaware Law Changes, and Proposed Federal Corporate Governance Legislation

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1 July 2009 The SEC s Prpsed Prxy Access Rules, Related Delaware Law Changes, and Prpsed Federal Crprate Gvernance Legislatin BY KEITH D. PISANI AND JARED M. BRANDMAN On June 10, 2009, the SEC published a cmprehensive series f prpsed rule amendments that wuld prvide sharehlders with access t the prxy statements f mst public cmpanies fr the purpse f electing directrs, therwise knwn as prxy access. Currently, sharehlders must file and distribute their wn prxy materials and engage in an expensive prxy fight if they want t seek t elect their wn directr candidates. The SEC has als prpsed t amend its sharehlder prpsal rules t allw sharehlder prpsals that, if apprved by stckhlders, wuld facilitate alternative prxy access regimes that wuld substitute fr the SEC s baseline regime. Prxy access has been a highly cntrversial tpic that has been the subject f tw prir SEC prpsals as well as significant litigatin. 1 On April 10, 2009, certain amendments t the Delaware General Crpratin Law (the DGCL ) were signed int law that, amng ther things, facilitate bth prxy access and the reimbursement f prxy slicitatin expenses. Mrever, n May 19, 2009, Senatrs Charles Schumer (D-NY) and Maria Cantwell (D-WA) intrduced a bill entitled Sharehlder Bill f Rights Act f 2009, which, amng ther things, wuld instruct and authrize the SEC t adpt prxy access rules, thereby preempting state law and eliminating any debate ver whether the SEC has authrity t implement the prpsed prxy access rules. Finally, n June 12, 2009, Cngressman Gary Peters (D-MI) intrduced federal legislatin entitled Sharehlder Empwerment Act, which als prvides fr prxy access. While the SEC s prpsed prxy access rules are subject t cmment and mdificatin, given the recent amendments t the DGCL and the current plitical climate surrunding the intrductin f federal crprate gvernance legislatin, it is increasingly likely that stckhlders will be affrded significantly expanded access t the prxy statements f public cmpanies fr the purpse f nminating directrs. Accrdingly, the remainder f this client alert prvides an verview f: the SEC s prpsed prxy access rules; prpsed changes t the SEC s sharehlder prpsal rules t facilitate alternative prxy access regimes; recent amendments t the DGCL that take effect n August 10, 2009, including thse relating t prxy access and reimbursement f prxy slicitatin expenses and ther matters; the prpsed federal Sharehlder Bill f Rights Act f 2009; and 1 1

2 the prpsed Sharehlder Empwerment Act. The SEC s Prpsed Prxy Access Rules Backgrund Fllwing the May 20, split vte t prpse new prxy access rules, the SEC issued a prpsing release n prxy access entitled Facilitating Sharehlder Directr Nminatins (the Release ). Cmments n the Release are due n r befre August 17, This is third time the SEC has prpsed prxy access rules. Given the lng histry and heated nature f debate abut prxy access, we expect the SEC will receive a large number f cmments bth supprting and ppsing the prpsed rules and that the prpsed rules may change significantly befre they are adpted, if they are adpted at all. While certain business grups have requested mre time t prvide cmments, final prxy access rules may be in effect fr the 2010 prxy seasn. The prpsed rules require a cmpany t include a limited number f sharehlder directr nminees in its prxy materials under specified circumstances as lng as the nminating sharehlders are nt seeking t effect a change in cntrl f the cmpany. In the Release, the SEC emphasized that [t]he prxy rules seek t imprve the crprate prxy prcess s that it functins, as nearly as pssible, as a replacement fr an actual in-persn meeting f sharehlders, and that allwing prxy access furthers that bjective by facilitating the exercise f rights granted t sharehlders under state law t nminate and elect directrs at sharehlder meetings. Prpsed Changes t the Prxy Rules The fllwing is a general summary f the prpsed changes t the SEC s prxy rules. New Rule 14a-11 Sharehlder Nminatins General. The SEC has prpsed new Rule 14a-11, which wuld apply t all cmpanies subject t the prxy rules, except cmpanies subject t the prxy rules slely because they have a class f debt registered under Sectin 12 f the Securities Exchange Act f 1934 (the Exchange Act ). Under Rule 14a-11, a cmpany wuld be required t include in its prxy materials fr a meeting at which directrs are elected the name and ther specified infrmatin abut a limited number f sharehlder nminees and abut the sharehlders that nminated the nminee r nminees, prvided that: applicable state law r the cmpany s gverning dcuments d nt prhibit sharehlders frm nminating directrs; the nminees candidacy r bard membership wuld nt vilate state law, the registrant s gverning dcuments, federal law, r rules f a stck exchange (ther than rules f a stck exchange relating t directr independence); and all the specified infrmatin is included in the required ntice n new Schedule 14N ( Schedule 14N ). Ownership Requirements. Rule 14a-11 requires that a nminating sharehlder r a nminating sharehlder grup (referred t herein as a nminating sharehlder) beneficially wn a specified percentage f the subject cmpany s vting stck n the date the nminating sharehlder prvides ntice t the cmpany n Schedule 14N, as fllws: 2 2

3 fr large accelerated filers 2 and investment cmpanies registered under the Investment Cmpany Act f 1940 with net assets f $700 millin r mre, at least 1% f the large accelerated filer s r investment cmpany s securities entitled t vte n the electin f directrs; fr accelerated filers 3 and investment cmpanies with net assets f $75 millin r mre but less than $700 millin, at least 3% f the accelerated filer s r investment cmpany s securities entitled t vte n the electin f directrs; and fr nn-accelerated filers 4 and investment cmpanies with net assets f less than $75 millin, at least 5% f the nn-accelerated filer s r investment cmpany s securities entitled t vte n the electin f directrs. In determining whether the requisite wnership percentages abve are met, under the prpsed rules, nminating sharehlders may rely n the fllwing (unless they knw r have reasn t knw that the relevant infrmatin is inaccurate): fr cmpanies ther than investment cmpanies, the cmpany s mst recent quarterly r annual reprt and any current reprt subsequent theret, filed with the SEC; fr cmpanies that are series cmpanies defined in Rule 18f-2 under the Investment Cmpany Act, the infrmatin cntained in a Frm 8-K that wuld be required t be filed by the series cmpany within fur business days after it determined the anticipated meeting date, disclsing its net assets as f June 30 f the calendar year immediately preceding the calendar year f the meeting and the ttal number f the cmpany s shares that are entitled t vte fr the electin f directrs at the annual meeting (r special meeting in lieu f the annual meeting) as f the mst recent calendar quarter; and fr ther investment cmpanies, the investment cmpany s mst recent annual r semi-annual reprt filed with the SEC n Frm N-CSR. Sharehlder Ntice. T have a nminee r nminees included in a cmpany s prxy materials, the nminating sharehlder must prvide written ntice t the subject cmpany n Schedule 14N and include disclsures specified in new Rule 14a-18. The Schedule 14N must be filed with the SEC n the same date it is prvided t the cmpany. Number f Sharehlder Nminees. A cmpany is nt required t include in its prxy statement and frm f prxy mre than ne sharehlder nminee r the number f nminees equal t 25% f its bard f directrs, whichever is greater. 5 In additin, where a cmpany has ne r mre directrs n its bard that were elected as sharehlder nminees pursuant t Rule 14a-11 and the term f that directr r thse directrs extends past the meeting f stckhlders fr which the cmpany is sliciting prxies, the cmpany will nt be required t include in its prxy statement r frm f prxy mre sharehlder nminees than culd result in the ttal number f directrs wh are elected as sharehlder nminees pursuant t Rule 14a-11 and serving n the bard being mre than ne sharehlder nminee r 25% f the cmpany s bard f directrs, whichever is greater. Race t Submit Schedule 14N. T the extent mre than ne sharehlder r sharehlder grup submits Schedule 14Ns such that the ttal number f sharehlder nminees exceeds the number f sharehlder nminees permitted by Rule 14a-11, the first sharehlder submitting a Schedule 14N will be the sharehlder entitled t include its nminee r nminees in the registrant s prxy statement and frm f prxy. If the first nminating sharehlder des nt nminate the maximum number f 3 3

4 nminees, the subject cmpany must take additinal sharehlder nminees in the rder in which it receives timely ntice n Schedule 14N. Subject Cmpany Nt Respnsible fr False r Misleading Statements f Nminating Sharehlder. The subject cmpany is nt respnsible fr any statements made by a sharehlder nminee r the nminating sharehlder in its Schedule 14N, unless the cmpany knws r has reasn t knw that the infrmatin is false r misleading. Prcedure t Exclude a Prpsed Sharehlder Nminee Frm Prxy Materials. Rule 14a-11 prvides a prcedure pursuant t which a subject cmpany may seek t exclude a sharehlder nminee frm its prxy statement r prxy card if the nminating sharehlder r grup has nt cmplied with applicable rules r prcedures r the sharehlder nminee des nt meet certain eligibility requirements. The prcess is very similar t the prcess required t be fllwed if a cmpany wants t exclude a sharehlder prpsal frm its prxy statement under Rule 14a-8, and, unless the cmpany can persuade the nminating sharehlder t withdraw its nminee r nminees, the cmpany must btain a n-actin letter frm the SEC staff t exclude the nminee r nminees frm its prxy materials. A cmpany r a nminating sharehlder may, hwever, always seek a judicial determinatin f their respective rights if they d nt agree with the psitin taken by the SEC staff. All materials submitted t the SEC in cnnectin with an attempt t exclude a nminee frm a cmpany s prxy materials wuld be publicly available immediately upn submissin. New Rule 14a-18 Infrmatin t Be Included in the Schedule 14N Ntice fr Sharehlder Nminees Submitted Pursuant t Rule 14a-11 General. The SEC has prpsed new Rule 14a-18, which sets frth the infrmatinal requirements fr the ntice n Schedule 14N. Timing f Ntice t Be Prvided t Cmpany. The nminating sharehlder must send its Schedule 14N t the subject cmpany by the date specified in the cmpany s advance ntice bylaw r, where n such bylaw exists, n later than 120 days befre the date that the subject cmpany mailed its prxy materials fr the prir year s meeting. If the subject cmpany did nt hld an annual meeting during the prir year, r if the date f that meeting is mved by mre than 30 calendar days, then the nminating sharehlder must prvide and file its ntice a reasnable time befre the registrant mails its prxy materials, as specified by the registrant in a Frm 8-K filed pursuant t prpsed new Item 5.07 f Frm 8-K, which is discussed belw. The Schedule 14N wuld be required t be filed with the SEC n the same date as it is sent t the cmpany. 6 The Schedule 14N ntice must include: a representatin that the nminee s candidacy r bard membership wuld nt vilate cntrlling state law, federal law, r rules f a natinal securities exchange (ther than the rules f a natinal securities exchange regarding directr independence); a representatin that the nminating sharehlder satisfies the eligibility cnditins set frth in Rule 14a-11(b), including a statement regarding the nminating sharehlder s beneficial wnership f the subject securities and intent t cntinue hlding the securities thrugh the date f the meeting; with respect t a cmpany ther than an investment cmpany, a representatin that the nminee meets the bjective criteria fr independence 7 f the natinal securities exchange, if any, n which the cmpany is listed r, in the case f a cmpany that is an investment cmpany, a 4 4

5 representatin that the nminee is nt an interested persn f the cmpany as defined in Sectin 2(a)(19) f the Investment Cmpany Act; a representatin that there is n agreement between the subject cmpany and the nminating sharehlder (r any member f a nminating sharehlder grup) with respect t the nminatin f the sharehlder nminee; a statement frm the nminee that he r she cnsents t be named in the prxy statement and t serve n the subject cmpany s bard if elected; infrmatin abut the sharehlder nminee that is required t be disclsed under the prxy rules fr a directr nminee; infrmatin abut the nminating sharehlder cnsistent with what is currently required t be disclsed in a prxy statement with respect t a slicitatin and slicitatin participants in a cntested electin cntest; disclsure f certain relatinships between the nminating sharehlder r the nminee and the registrant r any affiliate f the registrant; disclsure regarding certain material pending r threatened litigatin invlving the nminating sharehlder r the nminee and the subject cmpany r its affiliates; the website address n which the nminating sharehlder may publish sliciting materials, if any; and any statement in supprt f the sharehlder nminee r nminees, which may nt exceed 500 wrds, if the nminating sharehlder elects t have such statement included in the subject cmpany s prxy materials. New Rule 14a-19 Schedule 14N Ntice Requirements fr Sharehlder Nminees Submitted Pursuant t Applicable State Law r a Cmpany s Gverning Dcuments Rule 14a-19 is similar t Rule 14a-18, except that it cvers a situatin where a nminating sharehlder submits a nminee fr electin pursuant t applicable state law r a cmpany s gverning dcuments, nt Rule 14a-11. Because the rules gverning disclsure with respect t these types f nminees will be varied, Rule 14a-19 requires less disclsure than Rule 14a-18, which specifically relates t Rule 14a-11. Presumably, there wuld be disclsure requirements under state law r a cmpany s gverning dcuments. Rule 14a-19 des, hwever, seek t ensure that nminating sharehlders prvide disclsure similar t the disclsure required in a cntested electin and many f the disclsure requirements f Rule 14a-18 als appear in Rule 14a-19. Requirements With Respect t Schedule 14N The SEC has prpsed new Regulatin 14N, which gverns filings n Schedule 14N by nminating sharehlders. In additin t requiring nminating sharehlders t file a Schedule 14N, Regulatin 14N requires, amng ther things, a nminating sharehlder t prmptly file an amendment t its Schedule 14N whenever there is a material change in the infrmatin set frth in Schedule 14N. One item f Schedule 14N that we believe is cntrversial, is a requirement that a nminating stckhlder disclse its intent with respect t its cntinued wnership f the subject cmpany s securities after the electin in its riginal Schedule 14N and a requirement t amend its Schedule 14N within 10 calendar 5 5

6 days f the annuncement f the final results f the electin disclsing its intentin with respect t cntinued wnership f the subject cmpany s securities. It is expected that the investr cmmunity will resist these requirements, as disclsing an intent t sell may put dwnward pressure n a cmpany s stck price, which is exactly what a selling stckhlder wuld nt want t happen. Schedule 14N als requires the nminating sharehlder t certify that, t the best f its knwledge, the vting securities it hlds in the subject cmpany are nt held fr the purpse f r with the effect f changing cntrl f the issuer f the securities r t gain mre than a limited number f bard seats. As pinted ut in the Release, this requirement culd be prblematic, as a persn s intent with respect t cntrl culd change ver time. The SEC has requested cmment with respect t whether it shuld require a sharehlder t represent that it will nt seek t effect a change in cntrl f the subject cmpany r gain mre than a limited number f bard seats fr a specified perid f time after the electin f directrs. The infrmatin included in the Schedule 14N fr inclusin in the subject cmpany s prxy materials wuld be subject t new paragraph (c) f Rule 14a-9, which prhibits false and misleading statements by a nminee r nminating sharehlder in cnnectin with the sharehlder nminatin f a directr. Amendments t Schedule 14A As prpsed, Schedule 14A wuld be amended t require a cmpany t include mst f the infrmatin submitted by a sharehlder nminee n Schedule 14N in the cmpany s prxy materials, including the sharehlder nminee s statement in supprt f its nminee r nminees. Exemptin Frm Prxy Rules fr Written Slicitatins in Cnnectin With the Frmatin f a Nminating Sharehlder Grup Pursuant t Rule 14a-11 The SEC has prpsed a new exemptin frm its prxy slicitatin rules (ther than Rule 14a-9, which prhibits false and misleading slicitatins) that wuld allw written cmmunicatins by a nminating sharehlder in cnnectin with the frmatin f a sharehlder grup pursuant t Rule 14a-11, prvided that: Each written cmmunicatin cntains n mre than: a statement f each sliciting sharehlder s intent t frm a nminating sharehlder grup t nminate a directr under Rule 14a-11; identificatin f, and a brief statement regarding, the ptential nminee r nminees r, where n nminee r nminees have been identified, the characteristics f the nminee r nminees that the sharehlder intends t nminate, if any; the percentage f securities that each sliciting sharehlder beneficially wns r the aggregate percentage wned by any grup t which the sharehlder belngs; and infrmatin with respect t hw sharehlders may cntact the sliciting party. This sliciting material wuld have t be filed with the SEC by the nminating sharehlder under cver f Schedule 14A n later than the date it is first published, sent, r given t sharehlders and at the same time be filed with r mailed t each natinal securities exchange upn which any class f securities f the registrant is listed and registered. 6 6

7 This exemptin wuld allw a sharehlder t put ut a ntice t the wrld seeking persns t jin a grup fr the purpse f nminating directrs under Rule 14a-11. Hwever, as currently prpsed, this exemptin des nt cver slicitatins where sharehlders are seeking t nminate a directr under applicable state law r a cmpany s gverning dcuments. In additin, ral slicitatins wuld nt be permitted under this prpsed rule. Sharehlders wuld have t rely n ther exemptins in these cntexts, such as Rule 14a-2(b)(2), which exempts slicitatins made by persns ther than the subject cmpany where the ttal number f persns slicited is nt mre than 10. Exemptin Frm Prxy Rules fr Oral r Written Slicitatins by r n Behalf f a Nminating Sharehlder in Supprt f Its Rule 14a-11 Nminee r Nminees The SEC has prpsed a secnd new exemptin frm its prxy slicitatin rules (ther than Rule 14a- 9, which prhibits false and misleading slicitatins) that wuld allw any ral r written slicitatin by r n behalf f a nminating sharehlder in supprt f a nminee placed n a cmpany s frm f prxy in accrdance with Rule 14a-11, prvided that: The sliciting party des nt, at any time during such slicitatin, seek the pwer t act as prxy fr a sharehlder; Each written cmmunicatin includes: The identity f each nminating sharehlder and a descriptin f his r her direct r indirect interests, by security hldings r therwise; A specified legend that, amng ther things, advises sharehlders t read the subject cmpany s prxy statement because it cntains imprtant infrmatin; and Any sliciting material published, sent, r given t sharehlders under this new exemptin must be filed by the nminating sharehlder with the SEC under cver f Schedule 14A n later than the date the material is first published, sent, r given t sharehlders and must at the same time be filed with r mailed t each natinal securities exchange upn which any class f securities f the registrant is listed and registered. These slicitatins culd be made thrugh a designated website, a press release, r therwise. In additin, as currently prpsed, this exemptin des nt cver sliciting activities in supprt f a sharehlder nminee where sharehlders have nminated a directr under applicable state law r a cmpany s gverning dcuments. Sharehlders wuld have t rely n ther exemptins in these cntexts, such as Rule 14a-2(b)(2), which exempts slicitatins made by persns ther than the subject cmpany where the ttal number f persns slicited is nt mre than 10. Amendments t Rule 14a-4 t Prhibit Vting fr a Cmpany s Nminees as a Grup When Sharehlder Nminees Are Included n the Prxy Card Under Rule 14a-4, a cmpany may currently design its prxy card s that sharehlders have the ability t vte fr (r withhld authrity t vte fr) all f the cmpany s nminees as a grup, as lng as sharehlders are given the means t withhld vting authrity fr specific nminees within the grup. As prpsed, Rule 14a-4 wuld be amended t prvide that, if a sharehlder nminee is 7 7

8 included n cmpany s prxy card, the cmpany wuld nt be permitted t grup its nminees tgether and must design its prxy card s that each nminee culd be vted n separately. Amendment t Rule 14a-6 t Prvide That Preliminary Prxy Materials D Nt Need t Be Filed Because a Prxy Statement Cntains a Sharehlder Nminee The SEC has prpsed amending Rule 14a-6 s that preliminary prxy materials d nt need t be filed merely because thse materials cntain a directr that has been nminated pursuant t Rule 14a-11, applicable state law, r a cmpany s gverning dcuments. Accrdingly, prxy materials that include a sharehlder nminee culd be filed in definitive frm and wuld nt be subject t SEC staff review, prvided they did nt cntain sme ther prpsal requiring the filing f preliminary materials. New Item 5.07 f Frm 8-K The prxy access prpsal als cntemplates new Item 5.07 f Frm 8-K, which wuld require certain disclsures relating t the timetable fr submissin f sharehlder nminatins if a cmpany did nt hld an annual meeting during the previus year, r if the date f the annual meeting has been changed by mre than 30 calendar days frm the date f the prir year s meeting. In such cases, the cmpany wuld be required t disclse the date by which a nminating sharehlder must submit its Schedule 14N, and that date must be a reasnable time befre the registrant mails its prxy materials fr the meeting. Fr cmpanies that are series cmpanies defined in Rule 18f-2 under the Investment Cmpany Act, Item 5.07 wuld als require disclsure f infrmatin abut the cmpany s net assets and ttal shares entitled t vte in the electin f directrs as discussed abve under Prpsed Changes t the Prxy Rules New Rule 14a-11 Sharehlder Nminatins Ownership Requirements. A late filing f an Item 5.07 Frm 8-K wuld result in a cmpany lsing its eligibility t use Frm S-3. Amendments t Rule 13d-1 t Allw Passive Investrs t Cntinue t File Schedule 13G Filings When Using Rule 14a-11 Any persn wh is directly r indirectly the beneficial wner f mre than 5% f a class f equity securities f an issuer that is registered under Sectin 12 f the Exchange Act must reprt that wnership n a Schedule 13D. In determining whether the 5% wnership threshld is triggered, Rule 13d-5(b)(1) prvides that, when tw r mre persns act tgether fr the purpse f acquiring, hlding, vting, r dispsing f equity securities f an issuer, the grup frmed thereby will be deemed t have acquired beneficial wnership f all equity securities f that issuer beneficially wned by all members f the grup. It wuld appear that persns wuld be acting tgether fr the purpse f vting their securities in cnnectin with the frmatin f a nminating sharehlder grup. Accrdingly, the security hldings f all members f a nminating sharehlder grup wuld be aggregated in determining the 5% threshld fr filing a Schedule 13D in additin t being aggregated fr purpses f determining whether Rule 14a-11 s wnership requirements are met. Certain 5% beneficial wners qualify t use an abbreviated Schedule 13G, which has significantly reduced disclsure requirements frm thse required by Schedule 13D. In rder t use a Schedule 13G, amng ther things, an investr must have acquired the subject securities with neither the purpse nr the effect f changing r influencing cntrl f the cmpany. The SEC has prpsed changes t Rule 13d-1 t make it clear that a nminating sharehlder r nminating sharehlder grup will still be able t use Schedule 13G if it engages in sliciting activities in cnnectin with a 8 8

9 nminatin under Rule 14a-11. N such relief frm filing a Schedule 13D is prvided if a nminating sharehlder r nminating sharehlder grup submits its nminatin pursuant t an applicable state law prvisin r a cmpany s gverning dcuments because, unlike Rule 14a-11, the applicable prvisins in thse circumstances may nt limit the number f bard seats fr which a sharehlder r grup f sharehlders may nminate candidates r include a requirement that the sharehlder r sharehlder grup lack the intent t change cntrl f the issuer r gain mre than a limited number f bard seats. N Relief Frm Sectin 16 Requirements fr Nminating Sharehlder Grups Under Sectin 16 f the Exchange Act and the rules prmulgated thereunder, 10% beneficial wners f any class f equity security registered under the Exchange Act and each directr and fficer f the issuer f such security are: required t file Sectin 16 beneficial wnership reprts; subject t disgrgement f shrt-swing prfits (generally, prfits made frm the purchase and sale f securities made within six mnths f ne anther); and generally prhibited frm shrt selling equity securities f that issuer. The SEC has nt prvided any relief frm the requirements f Sectin 16 f the Exchange Act fr nminating sharehlder grups that cme tgether fr the purpse f nminating directrs pursuant t Rule 14a-11 r therwise. Sharehlder grups need t be mindful f Sectin 16 s requirements if they frm a grup that beneficially wns mre than 10% f a class f a cmpany s equity securities. Prpsed Changes t the SEC s Sharehlder Prpsal Rules t Facilitate Alternative Prxy Access Regimes In additin t allwing prxy access pursuant t Rule 14a-11, applicable state law, and a cmpany s gverning dcuments, the Release includes prpsed amendments t Rule 14a-8(i)(8) that wuld change the SEC s current psitin and allw sharehlder prpsals relating t the adptin f amendments t a cmpany s gverning dcuments that wuld grant sharehlders access t a cmpany s prxy statement fr the purpse f nminating directrs. As discussed in ur prir client alert, 8 Rule 14a-8(i)(8) currently prvides that a sharehlder prpsal may be excluded frm a cmpany s prxy statement [i]f the prpsal relates t a nminatin r an electin fr membership n the cmpany s bard f directrs... r a prcedure fr such nminatin r electin. This prvisin permits cmpanies t exclude sharehlder prpsals that wuld result in an immediate electin cntest r wuld set up a prcess pursuant t which sharehlders culd cnduct an electin cntest in the future. As amended, Rule 14a-8(i)(8) wuld, under specified cnditins, require a cmpany t include in its prxy materials sharehlder prpsals that wuld amend, r request an amendment t, a cmpany s gverning dcuments t allw prxy access, as lng as the prpsal des nt cnflict with Rule 14a-11 (i.e., prpsals that wuld preclude nminatins by sharehlders that wuld qualify t have their nminee included in the cmpany s prxy statement under Rule 14a-11) r state law. Accrdingly, the amendments t Rule 14a-8(i)(8) culd facilitate a prxy access regime ttally separate frm that prvided in Rule 14a-11 and with perhaps lwer wnership threshlds and a shrter hlding perid than thse in prpsed Rule 14a

10 The SEC has als prpsed amending Rule 14a-8(i)(8) t cdify prir SEC staff interpretatins. As amended, Rule 14a-8(i)(8) wuld allw a cmpany t exclude a sharehlder prpsal if it: wuld disqualify a nminee that is standing fr electin; wuld remve a directr frm ffice befre his r her term expired; questins the cmpetence, character, r business judgment f ne r mre nminees r directrs; nminates a specific individual fr electin t the bard f directrs, ther than pursuant t Rule 14a-11, an applicable state law prvisin, r the cmpany s gverning dcuments; r therwise culd affect the utcme f the upcming electin f directrs. The prpsed changes t the exclusin in Rule 14a-8(i)(8) cmbined with changes t the DGCL (discussed belw) that wuld allw bylaw prvisins t specifically prvide fr prxy access and the reimbursement f prxy slicitatin expenses wuld permit sharehlders f a Delaware crpratin t submit bylaw amendments t a sharehlder vte that culd (i) facilitate prxy access n terms mre favrable t sharehlders than thse prvided fr by prpsed Rule 14a-11 and (ii) require a crpratin t reimburse sharehlders fr their sliciting expenses in cnnectin with a nminatin f a directr by a sharehlder. Recent Delaware General Crpratin Law Amendments On April 10, 2009, the gvernr f Delaware signed int law certain amendments t the DGCL, which will becme effective n August 1, These amendments: permit the adptin f a bylaw t allw stckhlders f Delaware crpratins t include ne r mre f their directr nminees in management s prxy materials (DGCL 112); permit the adptin f a bylaw prviding fr the reimbursement f a stckhlder s sliciting expenses in cnnectin with an electin f directrs (DGCL 113); allw a bard t set a recrd date fr stckhlders entitled t vte at a meeting f stckhlders that is later than the recrd date fr the stckhlders entitled t ntice f meeting f stckhlders s that it is mre likely that persns vting the shares are the persns wh actually wn the shares (DGCL 213(a)); 9 limit the ability f a Delaware crpratin t eliminate a right t indemnificatin after the event triggering the indemnificatin right arises (DGCL 145(f)); and prvide a prcedure by which a crpratin (r a stckhlder derivatively in the right f the crpratin) may apply t have the Delaware Curt f Chancery remve a directr frm ffice under certain circumstances (DGCL 225(c)). Prxy Access (DGCL 112) Under new Sectin 112 f the DGCL, a Delaware crpratin s bylaws may prvide that, if the crpratin slicits prxies fr the electin f directrs, the crpratin may be required, t the extent and subject t such prcedures and cnditins as may be prvided in the bylaws, t include in its prxy slicitatin materials, in additin t nminees nminated by the bard f directrs, ne r mre 10 10

11 nminees submitted by stckhlders. Sectin 112 als includes a nnexclusive list f prcedures and cnditins that the bylaws may impse befre allwing prxy access, including the fllwing: requiring a minimum recrd r beneficial wnership and/r duratin f wnership by the nminating stckhlder and defining beneficial wnership t take int accunt ptins r ther derivative rights; requiring the nminating stckhlder t submit specified infrmatin cncerning the stckhlder and the stckhlder s nminee(s), including infrmatin regarding such persn s wnership f the crpratin s capital stck r derivative securities; cnditining eligibility upn the number r prprtin f directrs nminated by stckhlders r whether the stckhlder previusly sught t require such inclusin; precluding nminatins by a persn if such persn, any nminee f such persn, r any affiliate r assciate f such persn r nminee has acquired r publicly prpsed t acquire shares cnstituting a specified percentage f the vting pwer f the crpratin within a specified perid befre the electin f directrs; and requiring the nminating stckhlder t indemnify the crpratin in respect f any lss arising as a result f any false r misleading infrmatin r statement submitted by the nminating stckhlder in cnnectin with a nminatin. Prxy Expense Reimbursement (DGCL 113) New Sectin 113 f the DGCL allws a Delaware crpratin t include a prvisin in its bylaws prviding fr the reimbursement by the crpratin f a stckhlder s sliciting expenses in cnnectin with an electin f directrs (regardless f whether the stckhlder included its nminee in management s prxy materials r prepared and distributed its wn prxy materials), subject t cnditins that may be set frth in the bylaws. Sectin 113 als identifies a nnexclusive list f cnditins that may be impsed n any such right t reimbursement, including the fllwing: cnditining eligibility fr reimbursement n the number r prprtin f persns nminated by the stckhlder seeking reimbursement r whether such stckhlder previusly sught reimbursement fr similar expenses; limiting the amunt f reimbursement based upn the prprtin f vtes cast in favr f ne r mre f the persns nminated by the stckhlder seeking reimbursement, r upn the amunt spent by the crpratin in sliciting prxies in cnnectin with the electin; r limitatins cncerning electins f directrs by cumulative vting. Separatin f the Recrd Date fr Vting at Stckhlder s Meeting Frm the Recrd Date fr Ntice f the Meeting (DGCL 213(a)) Currently, Sectin 213(a) f the DGCL requires crpratins t use the same recrd date, which must be n mre than 60 nr less than 10 days befre the meeting date, fr bth ntice f a stckhlder meeting and fr determining wh may vte at that meeting. Beginning n August 1, 2009, Delaware crpratins will be able t bifurcate these recrd dates s that there can be ne recrd date used t determine what stckhlders are entitled t ntice f the meeting, which must be n mre than 60 nr less than 10 days befre the meeting date, and a subsequent recrd date used t determine what 11 11

12 stckhlders are entitled t vte at the meeting. The recrd date used t determine wh is entitled t vte at the meeting can be any date prir t the meeting date. This change will increase the likelihd that the persns vting at the stckhlder meeting are the persns wh wn the shares entitled t vte, which is nt the case currently when a stckhlder sells its shares after the recrd date, but prir t the meeting date. Limitatin n the Ability f Crpratin t Eliminate Indemnificatin Rights After the Fact (DGCL 145(f)) A secnd sentence has been added t Sectin 145(f) f the DGCL, which prvides that, if there is a right t indemnificatin r advancement f expenses under a crpratin s bylaws r certificate f incrpratin, that right may nt be impaired by an amendment t the crpratin s bylaws r certificate f incrpratin that ccurs subsequent t the act r missin giving rise t the right f indemnificatin r advancement f expenses, unless the prvisin prviding fr such indemnificatin specifically prvides that such right t indemnificatin r advancement f expenses may be retractively eliminated. Prcedure t Have the Delaware Curt f Chancery Remve a Directr Frm Office Under Certain Circumstances (DGCL 225(c)) New paragraph (c) f Sectin 225 f the DGCL prvides a mechanism pursuant t which a crpratin (r a stckhlder derivatively in the right f the crpratin) may apply t have the Delaware Curt f Chancery remve a directr frm ffice. The right t apply t have a directr remved is triggered if the directr has been cnvicted f a felny in cnnectin with the directr s duties t the crpratin, r if there has been a prir judgment n the merits that the subject directr has cmmitted a breach f the duty f lyalty in cnnectin with his r her duties t the crpratin. Upn such applicatin, the Curt f Chancery may remve a directr frm ffice if it determines that the directr did nt act in gd faith in perfrming the acts resulting in the prir cnvictin r judgment and judicial remval is necessary t avid irreparable harm t the crpratin. A Federal Sharehlder Bill f Rights Overview. The prpsed Sharehlder Bill f Rights Act f 2009 (the Prpsed Act ) wuld prvide stckhlders with access t the prxy statements f U.S. public cmpanies fr the purpse f nminating individuals fr electin t a cmpany s bard f directrs and t implement certain mandatry crprate gvernance standards. The Prpsed Act lists several Cngressinal findings, including that: amng the current ecnmic and financial crisis in the United States has been the failure f crprate gvernance; in t many situatins, executive management and bards f directrs have failed in their mst basic duties, which include: enacting cmpensatin plicies that are linked t the lng-term prfitability f their institutins; apprpriately analyzing and verseeing enterprise risk; and priritizing the lng-term health f their firms and their sharehlders; and 12 12

13 a key cntributing factr t the failure f crprate gvernance was the lack f accuntability f bards t their ultimate wners, the sharehlders. Prxy Access. The Prpsed Act wuld direct the SEC t adpt rules that wuld prvide sharehlders beneficially wning at least 1% f a public cmpany s vting securities fr the tw-year perid preceding the next scheduled annual sharehlders meeting. While the prxy access cmpnent f the Prpsed Act is duplicative f the SEC s prxy access prpsal discussed abve, the Prpsed Act, if enacted int law, wuld prvide specific authrizatin fr the SEC t regulate the directr nminatin prcess, an area that has histrically been left t the states. This culd prevent future legal challenges t the SEC s authrity t implement prxy access rules. Annual Say n Pay Vte. The Prpsed Act wuld prvide sharehlders with a nnbinding, advisry vte with respect t the cmpensatin f executives in any situatin (e.g., an annual meeting, special meeting, r cnsent slicitatin) where the SEC s prxy slicitatin rules require cmpensatin disclsure. As currently drafted, the Prpsed Act wuld nt nly require an advisry say n pay vte at a cmpany s annual sharehlder meeting, but wuld als require such a vte at a special sharehlder meeting at which, fr example, sharehlders are vting t apprve an amendment t a cmpensatin benefit plan. The SEC wuld have ne year frm the date f enactment f the Prpsed Act t issue final rules t implement this prvisin. S-called say n pay legislatin has had strng supprters fr years, including President Barack Obama, wh, as a senatr in 2007, intrduced say n pay legislatin in the Senate after it had passed in the Huse. While Senatr Obama s legislatin stalled in the Senate in 2007, sme frm f say n pay legislatin is likely t pass this year. 10 Say n Pay With Respect t Glden Parachute Cmpensatin. The Prpsed Act wuld require a nnbinding, advisry vte with respect t any cmpensatin arrangements r understandings with principal executive fficers cncerning an acquisitin, merger, cnslidatin, r prpsed sale r ther dispsitin f substantially all f the assets f an issuer, t the extent such agreements r understandings were nt previusly subject t an advisry vte f stckhlders. The SEC wuld have ne year frm the date f enactment f the Prpsed Act t issue final rules t implement this prvisin. Crprate Gvernance Standards. In additin t mandating prxy access, the Prpsed Act wuld require the SEC t adpt rules directing the natinal securities exchanges t prhibit the listing f any security f an issuer that is nt in cmpliance with the crprate gvernance standards listed belw. The SEC s rules wuld be required t prvide apprpriate prcedures fr an issuer t have an pprtunity t get int cmpliance and t cure any defects. Separate Chairman and CEO The chairman f the bard f a cmpany with securities listed n a natinal securities exchange (a listed cmpany ) must be independent (as defined under the rules f the applicable exchange) and must nt have previusly served as an executive fficer f the issuer. N Staggered Bards All directrs f listed cmpanies wuld be required t stand fr electin annually. This wuld eliminate staggered bards, which are usually designed s that nly ne-third f the directrs are elected annually. A staggered bard can be used t prevent an insurgent frm waging a prxy cntest and btaining cntrl f a bard f directrs at a single annual meeting. Majrity Vting in Uncntested Electins and Mandatry Resignatin f Directrs Nt Elected by Majrity The Prpsed Act wuld require a majrity vting standard in uncntested directr electins f listed cmpanies. In additin, any directr nt elected by a majrity vte wuld be 13 13

14 required t resign. The bard wuld be required t accept that resignatin and t als make the resignatin effective within a specified perid f time t be determined by the SEC. Risk Cmmittee A listed cmpany wuld be required t establish a risk cmmittee, cmprised entirely f independent directrs, which wuld be respnsible fr the establishment and evaluatin f the risk management practices f the listed cmpany. Likelihd f Passage f a Federal Sharehlder Bill f Rights. We questin whether the Prpsed Act will be passed by Cngress in its current frm. Hwever, certain elements f the Prpsed Act, such as say n annual pay and the prvisin f federal authrity fr the SEC t implement prxy access, may vercme the ppsitin, pass, and be signed int law. Certain prvisins f the Prpsed Act, including the prvisin eliminating staggered bards, wuld be a highly unusual exercise f federal authrity in an area that has been largely left t state regulatin. The current financial crisis ntwithstanding, we questin whether there is supprt in the Cngress fr federal intrusin t such a degree int matters histrically left t state law. The Sharehlder Empwerment Act In additin t the Prpsed Act, the Sharehlder Empwerment Act intrduced by Cngressman Gary Peters wuld implement crprate gvernance refrms, many f which are duplicative f, r are similar t, prvisins in the Prpsed Act. The Sharehlder Empwerment Act wuld: subject t cure prvisins, require natinal securities exchanges t prhibit the listing f any security f an issuer that des nt: have majrity vting fr the electin f directrs; have a prcedure pursuant t which a directr wh is nt elected t a new term ffers t tender his r her resignatin; and prvide public disclsure with respect t the bard s decisin regarding what actin is taken with respect t the tender f a bard member s resignatin discussed abve and the ratinale fr that decisin; require the SEC t implement prxy access rules that wuld allw certain lng-term investrs t have prxy access by nminating their wn directr candidates; require the SEC t adpt rules that wuld eliminate uninstructed brker vtes in uncntested directr electins, i.e., brkers wuld n lnger be permitted t vte shares fr which they have nt received vting instructins frm beneficial wners in uncntested directr electins; 11 subject t cure prvisins, require natinal securities exchanges t prhibit the listing f a cmpany that des nt have an independent chairman; implement nnbinding annual sharehlder apprval f executive cmpensatin; require the SEC t implement rules requiring cmpensatin cnsultants t be independent and prhibiting issuers frm indemnifying r limiting the liability f cmpensatin advisers r advisry firms; subject t cure prvisins, require natinal securities exchanges t prhibit the listing f a cmpany that des nt develp and disclse a plicy fr reviewing unearned bnus payments, 14 14

15 incentive payments, r equity payments that were awarded t executive fficers due t fraud, financial results that require restatement, r sme ther cause and requiring recvery r cancellatin f any unearned payments, t the extent that it is feasible and practical t d s; subject t cure prvisins, require natinal securities exchanges t prhibit the listing f a cmpany whse bard enters int severance agreements with a senir executive fficer wh is terminated due t pr perfrmance; and require the SEC t implement rules prviding fr imprved disclsure f cmpensatin targets. As discussed abve with respect t the Prpsed Act, it is uncertain what, if any, f these prvisins will be implemented. We will cntinue t keep yu infrmed f significant crprate gvernance develpments as they ccur. If yu have any questins cncerning these develping issues, please d nt hesitate t cntact any f the fllwing Paul Hastings lawyers: Atlanta Jared M. Brandman jaredbrandman@paulhastings.cm Elizabeth H. Ne elizabethne@paulhastings.cm Hng Kng Neil Trpey neiltrpey@paulhastings.cm Jseph A. Sevack jsephsevack@paulhastings.cm Ls Angeles Rbert R. Carlsn rbcarlsn@paulhastings.cm Rbert A. Miller, Jr rbertmiller@paulhastings.cm New Yrk Jeffrey J. Pellegrin jeffreypellegrin@paulhastings.cm Keith D. Pisani keithpisani@paulhastings.cm Vince Pisan vincepisan@paulhastings.cm Sctt R. Saks scttsaks@paulhastings.cm William F. Schwitter williamschwitter@paulhastings.cm Michael L. Zuppne michaelzuppne@paulhastings.cm Orange Cunty Stephen D. Cke stephencke@paulhastings.cm Jhn F. Della Grtta jhndellagrtta@paulhastings.cm Pal Alt Rbert A. Claassen rbertclaassen@paulhastings.cm Paris Jel M. Simn jelsimn@paulhastings.cm San Dieg Leigh P. Ryan leighryan@paulhastings.cm Teri O Brien teribrien@paulhastings.cm San Francisc Jeffrey T. Hartlin jeffhartlin@paulhastings.cm Thmas R. Pllck thmaspllck@paulhastings.cm Gregg F. Vigns greggvigns@paulhastings.cm Shanghai Jim Hildebrandt jimhildebrandt@paulhastings.cm Tky Kenju Watanabe kenjuwatanabe@paulhastings.cm 15 15

16 1 Fr mre infrmatin, see the January 2009 Stay Current entitled Sharehlder Prpsals, Prxy Access and the Current Prxy Seasn, which can be accessed at: 2 A large accelerated filer is generally defined in Rule 12b-2 as an issuer with an aggregate wrldwide market value f vting and nnvting cmmn equity held by nn-affiliates f $700 millin r mre as f the last business day f the issuer s secnd mst recently cmpleted fiscal quarter where certain ther requirements are met. 3 An accelerated filer is generally defined in Rule 12b-2 as an issuer with an aggregate wrldwide market value f vting and nnvting cmmn equity held by nn-affiliates f $75 millin r mre, but less than $700 millin, as f the last business day f the issuer s secnd mst recently cmpleted fiscal quarter where certain ther requirements are met. 4 A nn-accelerated filer is nt specifically defined in Rule 12b-2, but is generally a filer that is neither a large accelerated filer nr an accelerated filer. 5 Where 25% f the bard is nt a whle number, the maximum number f sharehlder nminees required t be included in a cmpany s prxy materials is the clsest whle number belw 25%. 6 The SEC has prpsed t amend Regulatin S-T t permit Schedule 14Ns t be filed up until 10:00 p.m. ET n a given day and still receive that day s filing date; mst ther filings must be received by 5:30 p.m. ET t receive that day s filing date. 7 The sharehlder nminee wuld nly have t meet the exchange s general bjective standards fr independence and wuld nt be required t meet any heightened standard f independence applicable t audit cmmittees. A sharehlder nminee wuld nt be required t represent that it meets any subjective standard f independence (e.g., the NYSE has an independence standard, which, amng ther things, requires the bard f directrs t make an affirmative determinatin that an independent directr has n material relatinship with the subject cmpany; a sharehlder nminee wuld nt have t represent that it meets this subjective standard). 8 Sharehlder Prpsals, Prxy Access and the Current Prxy Seasn, which can be accessed at the fllwing link: 9 In additin, the DGCL amendments cntain technical amendments t DGCL 211(c), 219(a), 222, 228(e), 262, and 275(a) t cnfrm t the amendment t DGCL 213(a). 10 The SEC recently prpsed rules with respect t the say n pay vte required t be implemented by recipients f financial assistance under the Trubled Asset Relief Prgram. 11 On July 1, 2009, the SEC vted t apprve a prpsed rule change by the NYSE that eliminates discretinary brker vting fr the electin f directrs, except fr cmpanies registered under the Investment Cmpany Act. 18 Offices Wrldwide Paul, Hastings, Janfsky & Walker LLP StayCurrent is published slely fr the interests f friends and clients f Paul, Hastings, Janfsky & Walker LLP and shuld in n way be relied upn r cnstrued as legal advice. The views expressed in this publicatin reflect thse f the authrs and nt necessarily the views f Paul Hastings. Fr specific infrmatin n recent develpments r particular factual situatins, the pinin f legal cunsel shuld be sught. These materials may be cnsidered ATTORNEY ADVERTISING in sme jurisdictins. Paul Hastings is a limited liability partnership. Cpyright 2009 Paul, Hastings, Janfsky & Walker LLP. IRS Circular 230 Disclsure: As required by U.S. Treasury Regulatins gverning tax practice, yu are hereby advised that any written tax advice cntained herein r attached was nt written r intended t be used (and cannt be used) by any taxpayer fr the purpse f aviding penalties that may be impsed under the U.S. Internal Revenue Cde