On June 10, 2009, the Securities and Exchange Commission released its proposed Proxy Access Rules, a set of controversial rules that have been up for debate since 2003. Under the current federal proxy rules, shareholders' ability to nominate and elect members to a board of directors can be limited and costly. To elect candidates, for example, shareholders must launch a proxy fight and mail their own proxy-soliciting materials to voting shareholders. Under the proposed Proxy Access Rules, Rule 14a-11 would be added to the Exchange Act of 1934 to require companies to include shareholder slates of nominees in their proxy materials – as long as certain shareholder and nominee eligibility requirements and other conditions are satisfied.  Shareholders would be limited to nominating one director or up to 25 percent of the company's board of directors, whichever is greater.

Proposed Rule 14a-11, which would apply to all Exchange Act reporting companies, including investment companies, includes the following shareholder eligibility requirements:

  • Shareholders would be required to own one percent, three percent, or five percent of a company's voting securities for at least one year. Specifically, shareholders would be required to own at least one percent of the voting securities of large accelerated filers or registered investment companies with net assets of $700 million or more. For accelerated filers or registered investment companies with net assets between $75 million and $700 million, shareholders would be required to hold at least three percent of the voting securities. Finally, for non-accelerated filers and registered investment companies with net assets of less than $75 million, shareholders would need to own at least five percent of the voting securities.
  • If there are more shareholder nominations than available director slots, priority would be given to shareholders who submit nominations earliest.  Priority would be given to shareholders who submit their nominations earliest, regardless of shareholders' ownership stake in a company. This means that a shareholder with a significantly large stake in a company may be unable to get a director nominee included in the company’s proxy materials if a smaller shareholder submitted nominations more quickly.
  • Shareholders must intend to own their shares through the meeting date. To satisfy this requirement, shareholders would be required to provide a signed statement of their intent to own their shares through the relevant annual meeting.
  • Shareholders would need to certify that they are not holding shares of the company for change of control purposes. In particular, shareholders would be required to certify that they do not intend to effect a change of control of the company or to gain majority control of the company's board of directors. Note that this requirement does not explicitly require a certificate as to future intent to effect a change of control of the company and may not sufficiently protect against a future change of control once a shareholder nominee takes office.

A shareholder's nominee would also be required to meet the following requirements under proposed Rule 14a-11:

  • The nominee's candidacy and possible board membership must not violate applicable federal and state laws and regulations.
  • The nominee must be found to be "independent" under the independence standards of the company's national securities exchange or national securities association.
  • The company and the nominating shareholder must not have an agreement regarding the candidacy of the nominee.

In addition to Rule 14a-11, the proposed Proxy Access Rules would amend Rule 14a-8(i)(8) to prohibit companies from excluding shareholder proposals that amend, or request an amendment to, a company's nominating procedures. To be eligible to submit a proposal under amended Rule 14a-8(i)(8), shareholders would need to satisfy the current eligibility requirements of Rule 14a-8 – that is, shareholders would be required to own the lesser of $2,000 in market value or one percent of the company's securities for at least one year before submission, and they must continue to own such securities through the relevant meeting date.

Public comments on the proposed amendments are due on August 17, 2009. If we can be of assistance in preparing your comments, or if you have questions or concerns about the proposed amendments, please feel free to contact Scott Towers (215.864.8632, towerss@ballardspahr.com) or any member of Ballard Spahr's Securities Group.


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This newsletter is a periodic publication of Ballard Spahr LLP and is intended to alert the recipients to new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and specific legal questions you have.

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