US SEC Proxy Access Proposal

Transcription

1 Securities Update July 6, 2009 US SEC Proxy Access Proposal On June 10, 2009, the US Securities and Exchange Commission issued its proposed rules on facilitating shareholder director nominations, Release Nos ; , available at (the Proposal ). The Proposal solicits comments on numerous aspects of the rule change. Comments are due by August 17, As proposed, if certain conditions are met, a company would be required to include in its proxy statement shareholder nominations for director (but not if the shareholder is seeking to change control of the board of directors). The Proposal would also require the inclusion in a company s proxy statement of shareholder proposals to amend a company s governing documents with respect to director nomination procedures. There is considerable momentum in the current political environment for the SEC to adopt final rules granting shareholders greater access to company proxy statements for nominations of directors, so the SEC may move quickly following the close of the comment period to have adopt rules in time for the 2010 proxy season. Including Shareholder Director Nominations in a Company s Proxy Statement Eligibility. Under the Proposal, new Rule 14a-11 would be added to the proxy rules, governing the circumstances in which companies would be required to include shareholder nominees for director in their proxy materials. Rule 14a-11 would apply to all companies that are subject to the proxy rules, unless subject to the proxy rules solely because they have a class of debt registered under Section 12 of the Securities Exchange Act of 1934 (the Exchange Act ). Shareholders would be entitled to have their director nominees included in the company s proxy statement if the shareholders satisfy, individually or as part of a group, a minimum ownership threshold, which varies based on the size of the company: nominating shareholders of large accelerated filers must own at least 1 percent of the company s voting securities; nominating shareholders of accelerated filers must own at least 3 percent of the company s voting securities; and nominating shareholders of non-accelerated filers must hold at least 5 percent of the company s voting securities. These shares must have been held for at least one year. Nomination Requirements. The Proposal does not require a shareholder nominee to be included in a company s proxy materials if applicable state law, or the company s governing documents, prohibit shareholders from nominating candidates for election as directors. Similarly, the Proposal does not require a shareholder nominee to be included in the company s proxy materials if the nominee s candidacy or board membership violates state or federal law, stock exchange regulations, or the company s governing documents, and such violation cannot be cured. If the company is subject to stock exchange rules regarding independence, a shareholder nominee must be independent in accordance with the objective standards set forth by the applicable stock exchange, but the shareholder nominee need not be independent in accordance with any subjective or additional standards imposed by the company s board of directors.

2 The Proposal would require the nominating shareholder or group to represent that no relationships or agreements exist between the nominee and the company or its management, or between the nominating shareholder or group and the company or its management. Failed negotiations between the nominating shareholder or group and the nominating committee to have the nominee included as a management nominee would not be considered direct or indirect agreements with the company for the purposes of this rule. There is no limitation on relationships between the nominating shareholder or group and its nominee. However, once a nominee is elected to the board of directors, the SEC notes that the director will be subject to state law fiduciary duties, and will owe the same duty to the company as does any other director on the board. No Affiliated Status Created by Use of the Rule. Using Rule 14a-11, by itself, will not create an affiliate relationship between the nominating shareholder and the company. If the shareholder nominee is elected, and the nominating shareholder does not have an agreement or relationship with that director other than relating to the nomination, the nominating shareholder will not be deemed to be an affiliate of the company solely as a result of having nominated the director. Maximum Number of Shareholder Nominees. Under proposed Rule 14a-11, companies would only be required to include in their proxy statements the greater of one shareholder nominee or the number of shareholder nominees that represents 25 percent of the company s board of directors. If there are directors serving on the board who were elected as shareholder nominees and who have terms continuing past the meeting, the company would not have to include in its proxy materials more shareholder nominees than could result in the total number of shareholder-nominated directors exceeding the greater of one or 25 percent of the company s board of directors. If a company receives shareholder nominations pursuant to Rule 14a-11 from more than one shareholder or group, the number of available slots for shareholder nominees in the company s proxy statement would be filled on a first-come first-served basis, determined by the order of receipt of the notice of intent to nominate. Schedule 14N. The nominating shareholder or group must file a Schedule 14N with the SEC giving notice of intent to require the company to include a shareholder nominee in the company s proxy materials. This must be filed by the date specified in the company s advance notice bylaw provision or, if none, no later than 120 calendar days before first anniversary of the date the company mailed its proxy materials for the prior year s annual meeting. (If the meeting date changes by more than 30 days from the prior year, the company must file a Form 8-K within four business days after it determines the meeting date and the nominating shareholder or group would then have a reasonable time before the company mails its proxy materials to provide notice.) The Schedule 14N must contain: The name and address of the nominating shareholder or each member of the nominating group, The amount and percentage of company securities beneficially owned and entitled to be voted at the meeting by the nominating shareholder or group, A written statement from the record holder, if other than the beneficial owner, verifying that the beneficial owner held the shares for at least one year, A written statement of the nominating shareholder s or group s intent to hold the securities through the date of the meeting, A written statement of the nominating shareholder s or group s intent with respect to continued ownership after the meeting, and A certification that the nominating shareholder or group is not seeking to change control of the company or to gain more than a limited number of seats on the board of directors. 2 Mayer Brown US SEC Proxy Access Proposal

3 The Schedule 14N would also have to include the following disclosures to satisfy new Rule 14a-18. A representation regarding the eligibility to submit a nominee under Rule 14a-11, A representation that the nominating shareholder or group has no knowledge of any violation of law or applicable listing standards that would result from the nomination or candidacy, A representation regarding the satisfaction of applicable stock exchange objective criteria for independence, A representation that neither the nominee nor the nominating shareholder or group member has an agreement with the company regarding such nomination, A consent from the nominee to being named in the proxy statement and to serve on the board, if elected, Disclosures required for the company to comply with specified proxy statement items, Disclosure about the nominating shareholder or group members consistent with that required for contested elections, Disclosure about the involvement of the nominating shareholder or group members in certain legal proceedings, Disclosures regarding the nature and extent of relationships between the nominating shareholder or group, the nominee, and the company or any affiliate, Disclosure of any web site address on which the nominating shareholder or group may publish soliciting materials, and If desired, any statement in support of the shareholder nominee for inclusion in the proxy statement, which may not exceed 500 words. Nominating shareholders or groups will need to obtain EDGAR codes to file a Schedule 14N. The schedule would have to be amended promptly for any material changes in the facts disclosed therein, including a withdrawal of the shareholder nomination. A final amendment would be required within 10 days after the announcement of the final election results to update the nominating shareholders intention with respect to continued ownership of shares. The Schedule 14N, and all amendments, would be subject to liability under Exchange Act Rule 14a-9, the proxy rules antifraud provision. Requirements After a Notice is Received. Rule 14a-11 permits a company to exclude a shareholder nominee for director from its proxy statement in the following circumstances: Rule 14a-11 not being applicable to the company (for example, if the company only has registered debt securities), The nominating shareholder or group not complying with the applicable requirements of Rule 14a-11, The nominee not meeting the requirements of Rule 14a-11, A required representation in the notice of intent being materially false or misleading, or The company receiving more nominees than it is required to include and the nominating shareholder or group not being entitled to have its nominee included under Rule 14a-11. Not later than 30 days before filing its definitive proxy statement, a company must notify the nominating shareholder about whether the company will include the nominee in, or exclude the nominee from, its proxy statement. If the nominating shareholder has submitted a statement of support for its nominee, that statement is required to be included in the company s proxy statement. 3 Mayer Brown US SEC Proxy Access Proposal

4 The company and the nominating shareholder can each solicit in favor of their nominees outside of the proxy statement as long as the soliciting party complies with applicable proxy solicitation rules. There will be a no-action letter process by which a company could seek SEC staff concurrence on its determination that it is permissible to exclude a shareholder nominee from its proxy materials. Certain procedural deficiencies may be remedied by the nominating shareholder. This process is similar to the existing proxy rules for shareholder proposals pursuant to Rule 14a-8. A company will not be required to file a preliminary proxy statement with the SEC solely because it includes a shareholder nominee and related supporting statement in its proxy statement in accordance with Rule 14a-11. Time Frame for Proxy Access Process. The proposing release includes the following chart showing how the timing of the proxy access process would work: Due Date Date set by company s advance notice provision or, in the absence of such a provision, 120 days before the anniversary of the date that the company mailed the prior year s proxy materials Within 14 calendar days after the company s receipt of the nominating shareholder s or group s notice on Schedule 14N Within 14 calendar days after the nominating shareholder s or group s receipt of the company s deficiency notice No later than 80 calendar days before the company files its definitive proxy statement and form of proxy with the Commission Within 14 calendar days of the nominating shareholder s or group s receipt of the company s notice to the Commission As soon as practicable No later than 30 calendar days before the company files its definitive proxy statement and form of proxy with the Commission Action Required Nominating shareholder or group must provide and file notice on Schedule 14N Company must notify the nominating shareholder or group of any determination not to include the nominee or nominees Nominating shareholder must respond to the company s deficiency notice Company must provide notice of its intent to exclude the nominating shareholder s or group s nominee or nominees and the basis for its determination to the Commission Nominating shareholder or group could submit a response to the company s notice to the Commission staff Commission staff would, at its discretion, provide an informal statement of its views to the company and the nominating shareholder or group Company must provide the nominating shareholder or group with notice of whether it will include or exclude the shareholder s nominee or nominees Proxy Card. If a shareholder nominee for director is required to be included in a company s proxy statement, the company s proxy card must provide for voting on each director separately. Slate voting for or against all of a company s nominees for director as a whole would not be permitted. 4 Mayer Brown US SEC Proxy Access Proposal

5 Exemptions From Other Proxy Rules. The Proposal contains an exemption from specified proxy rules of solicitations for limited written solicitations in connection with the formation of a nominating shareholder group. Shareholders also could structure both written and oral solicitations to fall within existing exemptions from the proxy rules, such as the exemptions for solicitations of not more than 10 shareholders or communications occurring in an electronic shareholder forum. The Proposal also contains a new exemption for solicitations by a nominating shareholder in support of a nominee included in a company s proxy statement. Shareholder Proposals Regarding Nomination Procedures Rule 14a-8(i)(8). Under existing Rule 14a-8(i)(8), companies are permitted to exclude from their proxy statements shareholder proposals relating to a nomination or an election for membership on the company s board of directors or analogous governing body or a procedure for such nomination or election. The Proposal would amend Rule 14a-8(i)(8), requiring companies to include in their proxy materials shareholder proposals that would amend the companies governing documents relating to nomination procedures or disclosures related to shareholder nominations. This rule change would not require inclusion of a shareholder proposed amendment that conflicts with Rule 14a-11 or state law. That is, the shareholder proposal process under Rule 14a-8 cannot be used to eliminate or restrict the rights granted by Rule 14a-11. Subject to the foregoing, proposals relating to nomination procedures would be permitted that establish different ownership thresholds, holding periods or other qualifications or representations. The amendments to Rule 14a-8(i)(8) would codify certain prior staff positions, permitting exclusion of a proposal to amend nomination procedures if it: Would disqualify a nominee who is standing for elections, Would remove a director before his or her term expired, Questions the competence, business judgment or character of any nominee, Nominates a specific individual for election other than pursuant to Rule 14a-11, state law or a governing document provision, or Otherwise could affect the outcome of the upcoming election of directors. Other Related Rules Group Determinations. Forming a group solely for the purpose of nominating a director would not result in the nominating shareholder losing its eligibility to report beneficial ownership of 5 percent of a company s securities on the streamlined format of Schedule 13G, rather than Schedule 13D. However, a group formed for this purpose would be analyzed the same way as any other to determine whether its members constitute a group required to report beneficial ownership under Section 13(d) of the Exchange Act or required to disgorge short swing profits and file reports pursuant to Section 16 of the Exchange Act. Liability. The nominating shareholder or group would be liable under Rule 14a-9 for any false or misleading statement in the information it provides that is included in the company s proxy materials. Rule 14a-11(e) specifically provides that the company is not responsible for information that is provided by the nominating shareholder and then repeated in the company s proxy statement, unless the company knows or has reason to know that the information is false or misleading. Rule 14a-19 contains a similar provision with regard to information that is provided by the nominating shareholder pursuant to a state law or company governing document requirement. 5 Mayer Brown US SEC Proxy Access Proposal

6 Interplay with Recent Delaware Amendments Delaware has amended its corporation statute, effective August 1, 2009, in two ways that impact proxy access. A new Section 112 has been added to the Delaware General Corporation Law (the DGCL ) permitting bylaws to provide that if a corporation solicits proxies with respect to an election of directors, it must include shareholder nominees for director in its proxy solicitation materials (including any form of proxy), in addition to individuals nominated by the board of directors, subject to procedures or conditions set forth in the bylaws. Section 112 of the DGCL specifies the following as the types of procedures or conditions that may be included in a proxy access bylaw provision: Minimum ownership or duration of ownership requirements, Requirements that the nominating shareholder submit specified information, Eligibility based on the number or proportion of directors nominated by stockholders or whether the stockholder previously sought to require inclusion, Preclusion of nominations by a person who has acquired or announced the acquisition of a specified percentage of the voting power within a specified period before the election of directors, Indemnification of the company by the nominating stockholder for false or misleading statements, and Any other lawful condition. Delaware also adopted a new Section 113 to the DGCL, permitting bylaws to contain an expense reimbursement provision so that the corporation would reimburse the shareholder for expenses incurred in soliciting proxies in connection with the election of directors. Section 113 allows the expense reimbursement bylaw provision to contain procedures and conditions including: Eligibility based on the number or proportion of persons nominated by the stockholder seeking reimbursement or whether such stockholder previously sought reimbursement, Limitations on amount based on the proportion of the votes cast in favor of the person nominated by the stockholder or upon the amount spent by the corporation in soliciting proxies in connection with the election, Limitations concerning elections of directors by cumulative voting, and Any other lawful condition. While these Delaware amendments will only directly affect Delaware corporations, they reflect the increasing political pressure to address proxy access in the election of directors, as does the SEC s proposal to increase shareholder access to proxy statements. This political environment may suggest an increased likelihood that the SEC will adopt final proxy access rules that may apply to next proxy season. Rule 14a-11, as proposed by the SEC, will not permit companies to adopt bylaw provisions under the amended Delaware statute, or otherwise, that will limit the proxy access granted by Rule 14a-11. The Proposal sets forth a minimum standard for proxy access for shareholder director nominations, applicable to all companies covered by the rule the Delaware approach permits companies to take a more customized approach to proxy access. The existence of the new Delaware law provisions (including the permissive bylaw expense reimbursement provision, which has no counterpart in the SEC s Proposal) may make it more likely that companies will receive shareholder proposals requesting amendments to bylaws governing proxy access. Under the Proposal, such shareholder proposed bylaw amendments would generally be required to be included in a company s proxy statement. 6 Mayer Brown US SEC Proxy Access Proposal

7 Practical Considerations Although the rule changes discussed above are only proposals, the SEC may adopt these provisions so that they will be in effect for the upcoming proxy season. If that is the case, companies will have little time to prepare if they wait until after the SEC has adopted final rules. Accordingly, following are practical issues that companies should begin to consider today. The deadline to provide notice of intent to require inclusion of a shareholder nominee for director under Rule 14a-11 references the deadline set forth in the company s advance notice bylaw provisions, providing a default rule where no such provision exists. Companies that do not have such a provision may want to consider adopting an advance notice bylaw provision reflecting best current practice sufficiently in advance of their next annual meeting to have such a provision be applicable rather than relying upon the 120-day notice period provided for in the Proposal. Companies that have an advance notice bylaw provision should review it carefully to determine if the deadline it contains works with the timing requirements of Rule 14a-11. The new SEC procedures to determine if a company must include a shareholder nominee in its proxy statement can take close to 120 days prior to the mailing of definitive proxy materials to complete. Assuming a typical 30-day proxy solicitation period, this means that the procedures would need to be commenced at least 150 days before the annual meeting date. Advance notice bylaw provisions currently in effect often specify notice deadlines in reference to the meeting date, as opposed to the anniversary of the prior year s mailing date, and may use a time frame such as 90 to 120 days in advance of the meeting date, which may not allow sufficient time for the company to pursue the SEC s proposed no-action process for shareholder nominations. Therefore, existing advance notice bylaw provisions should be reviewed and consideration should be given as to whether any amendments are warranted for the provision to work with the proposed SEC rule change. This review also provides an opportunity to consider whether an existing bylaw provision reflects the most current developments in advance notice bylaw provisions. To the extent that a shareholder nominee is included in a company s proxy materials, it will be necessary to work through the mechanics of proxy tabulation with the company s transfer agent and proxy solicitor, if any. If a company has majority voting for directors, and the total company and shareholder nominees exceeds the number of positions on the board up for election (as it usually would), it will become necessary to determine whether a plurality voting standard will apply. While liability for statements provided by the nominating shareholder for inclusion in the company s proxy materials rests with the shareholder, the company will also be liable if it knows or has reason to know that any shareholder provided statements are false or misleading. Reason to know is a very subjective concept. Companies should consider developing processes to review and confirm statements provided by shareholders for inclusion in proxy materials. Delaware companies might want to adopt a bylaw provision in accordance with new DGCL Section 112, requiring a nominating shareholder to indemnify the company for false or misleading statements. While the Proposal specifies that formation of a group solely for the purpose of causing a company to include a shareholder nominee in its proxy statement does not make group members ineligible to use Schedule 13G, the Proposal specifically states that nominating shareholders will need to consider whether they have formed a group under Exchange Act 7 Mayer Brown US SEC Proxy Access Proposal

8 Section 13(d)(3) and Rule 13d-5(b)(1). Companies may have provisions in their governing documents or contracts (such as a poison pill shareholder rights plan), or be subject to state law provisions, that incorporate the Section 13(d) group concept. Therefore, it advisable to review such provisions to determine the ramifications of shareholders forming a group to nominate a director under Rule 14a-11. Some companies may want to consider revising, or proposing revisions to, their governing documents regarding director nomination procedures to make it less likely that they will receive a shareholder proposal on such procedures. To the extent that shareholders are granted access to a company s proxy statement to propose nominees for directors, the role of the company s investor relations department will become increasingly important. Awareness of the company s shareholder base and ongoing dialog to ascertain shareholder issues may forestall shareholder requests to include nominees in the company s proxy materials. Because shareholder access to company proxy statements for the purpose of nominating directors has the potential to affect governance by the board of directors, it is important to keep the board of directors apprised of developments in this area. The proposed proxy access rules are not the only SEC development affecting the election of directors. The SEC has approved the amendment of NYSE Rule 452 to prevent brokers from voting in the election of directors if they do not receive voting direction from their clients. This rule change is likely to result in reduced voting for directors, especially by retail investors. If large stockholders are able to nominate directors in companies proxy statements and smaller stockholders, as a practical matter do not vote, the implications on board elections could be significant. The reduction in participation by retail investors following the implementation of the SEC s e-proxy rules may accentuate this issue for companies that rely upon the notice and access proxy delivery method. The SEC has solicited comments on a multitude of questions in connection with its proxy access proposal. Comments are due by August 17, Companies should prepare and submit comment letters on issues of significance to them. If you have any questions regarding the SEC s proxy access proposal, please contact the author of this Securities Update, Laura D. Richman, at , or any of the lawyers listed below or any other member of our Corporate & Securities group. Edward S. Best ebest@mayerbrown.com Michael T. Blair mblair@mayerbrown.com James B. Carlson jcarlson@mayerbrown.com Robert E. Curley rcurley@mayerbrown.com Paul C. de Bernier pdebernier@mayerbrown.com Sterling M. Dorish sdorish@mayerbrown.com Eric J. Finseth efinseth@mayerbrown.com Marc H. Folladori mfolladori@mayerbrown.com 8 Mayer Brown US SEC Proxy Access Proposal

9 Ricardo M. Gonzalez Robert F. Gray Lawrence R. Hamilton Michael L. Hermsen Philip J. Niehoff Laura D. Richman David A. Schuette Jodi A. Simala Frederick B. Thomas Mark R. Uhrynuk Elizabeth A. Raymond Mayer Brown is a leading global law firm with approximately 1,000 lawyers in the Americas, 300 in Asia and 500 in Europe. We serve many of the world s largest companies, including a significant proportion of the Fortune 100, FTSE 100, DAX and Hang Seng Index companies and more than half of the world s largest investment banks. We provide legal services in areas such as Supreme Court and appellate; litigation; corporate and securities; finance; real estate; tax; intellectual property; government and global trade; restructuring, bankruptcy and insolvency; and environmental. Office Locations Americas: Charlotte, Chicago, Houston, Los Angeles, New York, Palo Alto, São Paulo, Washington Asia: Bangkok, Beijing, Guangzhou, Hanoi, Ho Chi Minh City, Hong Kong, Shanghai Europe: Berlin, Brussels, Cologne, Frankfurt, London, Paris Alliance Law Firms Mexico (Jáuregui, Navarrete y Nader); Spain (Ramón & Cajal); Italy and Eastern Europe (Tonucci & Partners) Please visit our web site for comprehensive contact information for all Mayer Brown offices. This Mayer Brown publication provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein. IRS Circular 230 Notice. Any advice expressed herein as to tax matters was neither written nor intended by Mayer Brown LLP to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed under US tax law. If any person uses or refers to any such tax advice in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to any taxpayer, then (i) the advice was written to support the promotion or marketing (by a person other than Mayer Brown LLP) of that transaction or matter, and (ii) such taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor Mayer Brown LLP, Mayer Brown International LLP, and/or JSM. All rights reserved. Mayer Brown is a global legal services organization comprising legal practices that are separate entities (the Mayer Brown Practices ). The Mayer Brown Practices are: Mayer Brown LLP, a limited liability partnership established in the United States; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales; and JSM, a Hong Kong partnership, and its associated entities in Asia. The Mayer Brown Practices are known as Mayer Brown JSM in Asia. Mayer Brown and the Mayer Brown logo are the trademarks of the individual Mayer Brown Practices in their respective jurisdictions. 0709