SEC Passes Proxy Access Rule
August 25, 2010 — This just in from the Social Investment Forum:
In a widely anticipated three-two vote along party lines, the Securities and Exchange Commission (SEC) today enacted a new rule 14a-11 granting shareholder access to the proxy, following more than three decades of debate. The new rule, however, includes some significant changes from the draft rule the SEC posted on June 10, 2009, which received more than 600 comments. The biggest change is on ownership thresholds and holding requirements. The ownership thresholds, originally 1 percent for large-cap, 3 percent for mid-cap, and 5 percent for the smallest issuers, have been changed to a uniform 3 percent ownership requirement across the board. In addition, holding requirements have been increased from one to three years. For the smallest companies, the rule will not come into effect for three years. The delay for the smallest issuers is to allow them and the commission to see how the rule plays out at larger companies to see if the rule needs to be changed.
Shareholders will be limited to a total number of nominees not to exceed 25 percent of the board at any given company and cannot be nominating with intent to take over the company or control of the board. Shareholders will be able to pool assets and can include securities loaned to a third party as long as they can be called back. Securities sold, shorted or not held through the company’s annual meeting would need to be deducted from the qualifying ownership threshold. The shareholder or shareowner group will need to file a Schedule 14-N on Edgar to notify the issuer of its or their intent to use the proxy access rule not earlier than 150 but no later than 120 days before the anniversary of the filing of the company’s last year’s proxy statement. The nominee’s statement is restricted to 500 words. There will be a no-action process for companies to challenge whether they need to include a director nominee in their proxy statement.
The new rule creates a federal proxy access rule that sets a minimum threshold right of access for state law and deems proxy access a fundamental shareholder right. States and companies with more liberal proxy access rules are permitted to keep these requirements. The SEC was granted clear authority to proceed with a proxy access rule by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Chairman Mary L. Schapiro said, enactment of the rule is essential because, “As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own—candidates that all shareholder-voters may then consider alongside those who are nominated by the incumbent board.” She added, “Nominating a director candidate is not the same as electing a candidate to the board. I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director. To me, the critical point is that shareholders have the ability to make this choice.”
Commissioner Elisse B. Walter says it reflects “a balanced approach to the comments received” and “sound judgment.” Walter also said, “The financial crisis has taught us that the status quo is not good enough,” and that proxy access “is a necessary step to restore confidence to markets” and to “bring fair corporate suffrage into the 21st century.”
Commissioner Luis A. Aguilar said the new rule reflects “extensive research on appropriate ownership thresholds” and an exhaustive process that included three public roundtables since the last proxy access rule was proposed in 2003.
Commissioner Kathleen L. Casey believes the rule will lie in the “pantheon of SEC’s poor decisions” next to, among other decisions, “recent interpretive guidance related to climate change disclosure.” Casey views the rule as “fundamentally flawed” and “will have difficulty surviving judicial scrutiny.” If it does, she says, it will end up overburdening the SEC with complaints and inquiries and inflict “significant harm to our economy and capital markets.” She added that the SEC should have dealt with proxy access first.
Commissioner Paredes says his vote against the rule reflects his belief that it “forces a universal governance scheme on all companies…a one size fits all mandate…that prevents companies to tailor rules to the individual attributes and qualities” of the company. He says the move is “ill advised.”
The new rule is effective 60 days after publication in the federal register.
Director of Programs
Social Investment Forum