New Rule 14a-11 is the product of several controversial court decisions in the mid-2000s that spurred several years of debate on proxy access and shareholder rights. In December 2009, the SEC published proposed rules and requested public comment, and with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which was signed into law by President Obama July 21, 2010, Congress mandated that the SEC implement proxy access rules.
Only certain shareholders and shareholder groups will be eligible to seek proxy access. Shareholder qualifications, notice procedures and other key aspects of Rule 14a-11 are:
- Proxy access is limited to shareholders and shareholder groups who have owned 3% or more of the issuer’s stock for at least three years prior to the time they deliver notice to the company seeking proxy access, and they must continue to hold their shares through the date of the election.
- Shareholders must submit to the SEC and to the company a notice, on new Schedule 14N, seeking proxy access. Schedule 14N must be delivered to the company and filed with the SEC no more than 150 days and no less than 120 days prior to the anniversary date of the company’s proxy mailing for the previous year.
- If multiple shareholders (or shareholder groups) seek proxy access with respect to the same election, only the shareholder or shareholder group holding the greatest number of shares will be entitled to proxy access for that election.
- The shareholder or group that is granted proxy access is entitled to nominate candidates for no more than 25% of the company’s total board seats (irrespective of whether the board is staggered).
- Rule 14a-11 also contains procedures for a company to challenge a shareholder’s or group’s right to proxy access if the company believes the shareholder or group has failed to meet the rule’s qualification or notice requirements.
Rule 14a-11 does not apply to all publicly-traded companies. A public company is not required to grant proxy access if the law of their state of incorporation prohibits shareholders from nominating directors. However, a company may not opt out of Rule 14a-11 through amendments to its charter documents, even if the law of its state would permit it to do so. Also, smaller reporting companies (defined under SEC rules as companies with a public float of less than $75 million and certain other small companies) will be exempt for three years; congruent with provisions of the Dodd-Frank Act, the SEC will evaluate the effect of the new rules and consider if modifications are warranted prior to implementing them for smaller reporting companies. Additionally, companies that are subject to SEC proxy rules solely because they have registered a class of debt securities with the SEC are exempt indefinitely.
As a result of these changes, public companies should expect increased activism by shareholders and proxy advisory firms on proxy matters and an acceleration of the trend towards contested director elections, and prepare accordingly. The rules will go into effect 60 days after publication in the federal register. If you would like further information on Rule 14a-11 and how it may affect companies and shareholders in the upcoming 2011 proxy season, please contact one of the attorneys listed below: