,
Shelly Heyduk 
,
David Lavan
Bjorn Hall , and
Leanna Albrecht
The Securities and Exchange Commission (the "Commission"), by a 3-2 vote, adopted fundamental changes to the federal proxy rules that will require public companies to include shareholder director nominees in their proxy materials. These new "proxy access" rules will be effective 60 days after they are published in the federal register.
The Commission's release adopting the proxy access rules is available here.
The Amendments to the Federal Proxy Rules
New Rule 14a-11 will require any company that is subject to the proxy rules under Section 14(a) of the Securities Exchange Act of 1934 (including investment companies but excluding smaller reporting companies) to include shareholder nominees to the board of directors in its proxy materials. Application of Rule 14a-11 to "smaller reporting companies" will be deferred for three years. Under new Rule 14a-11, any subject company that receives a notice from an eligible shareholder (or group of shareholders) regarding its intent to nominate directors for election at a company's meeting will be required to include those nominees in the company's proxy materials. The inclusion of shareholder nominees will not be required if the nominees are otherwise prohibited by the company's governing documents or applicable state law. The number of such shareholder nominees that a company will be required to include in its proxy materials will be limited to the greater of one director or 25% of the number of directors on the company's board.
Eligibility Requirements. To be eligible to nominate directors for inclusion in a company's proxy materials, a shareholder (or group of shareholders) will be required to satisfy the following requirements:
- The nominating shareholder (or group of shareholders) must have both investment and voting power over 3% of the company's securities that are entitled to vote on the election of directors at the company's meeting of shareholders.
- The nominating shareholder (or group of shareholders) must have held the requisite percentage of securities for at least three years at the time of providing notice to the company of its intent to nominate directors, must certify its intent to hold those securities continuously through the meeting at which directors will be elected, and must disclose its intentions about whether it will retain those securities after the meeting at which directors will be elected.
- The nominating shareholder (or group of shareholders) must certify that it has no intent to seek a change in control of the company or to gain a number of board seats that is more than the number of nominees a company could be required to include in its proxy materials under Rule 14a-11.
Notice Requirements. The nominating shareholder (or group of shareholders) will be required to provide notice to the company indicating that it satisfies the above eligibility and certification requirements. The nominating shareholder also must file a copy of the notice with the Commission under cover of a new Schedule 14N. Specifically, the notice must include the following information:
- disclosure of the amount of securities held by the nominating shareholder (or group of shareholders) and the length of time those securities have been held;
- a statement of the shareholder's intent to hold those securities through the meeting at which directors will be elected and disclosure regarding the shareholder's intent to hold those securities after the meeting at which directors will be elected (which may be contingent on results of the election of directors);
- a certification that the shareholder does not intend to seek to gain control of the board or to gain a number of seats on the board that is more than the number of nominees a company could be required to include in its proxy materials under Rule 14a-11;
- information about the nominating shareholder and nominees that is based upon the information required to be provided to shareholders in a proxy contest (including disclosure as to whether the nominee meets the company's director independence and director qualification standards); and
- a statement of support for the nominee that is no longer than 500 words.
This notice must be submitted to the company and the Commission no more than 150 days and no less than 120 days before the first anniversary of the date that the prior year's proxy materials were first released to shareholders. The deadline required by this timing is consistent with the timing for the submission of shareholder proposals in Rule 14a-8.
If the company does not believe that the nominating shareholder (or group of shareholders) or the nominee meets all of the Rule 14a-11 eligibility requirements, the company must provide notice to the nominating shareholder (or group of shareholders) of the deficiency and a chance to respond. If the company continues to believe that the nominating shareholder (or group of shareholders) or the nominee does not meet the eligibility requirements, the company must submit notice of its intention to exclude the nominee from its proxy materials no later than 80 days before the company files its proxy statement with the Commission. There will be a process through which companies can seek the informal views of the Commission's staff with regard to its intention to exclude a nominee.
If separate shareholders (or separate groups of shareholders) submit director nominees and the total number of nominees covered by the notices exceeds the greater of one director or 25% of the number of directors on the company's board, the company will be required to include the nominees submitted by the shareholder (or group of shareholders) holding the highest percentage of the company's securities that are entitled to vote on the election of directors at the company's meeting of shareholders.
Conditions Applicable to Nominees. A shareholder (or group of shareholders) may not nominate an individual for election to the company's board of directors unless the following conditions are satisfied:
- the nominee's candidacy and board membership (if the nominee is elected) must be consistent with applicable laws and regulations;
- the nominee must satisfy any applicable exchange listing standards regarding director independence; and
- the nominating shareholder (or a group of shareholders) must have no direct or indirect agreement with the company regarding nomination of the nominee prior to the shareholder's submission of notice to the company.
There is no limitation on the extent of relationships between the nominating shareholder and the nominee (as a result, the shareholder could nominate herself or himself for director).
Exemption from the Proxy Solicitation Rules. To facilitate the operation of Rule 14a-11, the Commission adopted conditional amendments to the federal proxy rules that provide an exemption from those rules for both solicitations in support of a shareholder nominee for director and solicitations by a shareholder that is seeking to form a nominating group. These exemptions will be based, in part, on the filing of any such soliciting materials. Further, the proposals would make clear that a shareholder (or group of shareholders) would not lose eligibility to file beneficial ownership reports on Schedule 13G as a result of such shareholder's (or shareholder group's) nomination of director nominees for election to the company's board, such shareholder's (or shareholder group's) solicitation in favor of such a nominee, or the election of such a nominee to the company's board.
Amendments to Rule 14a-8
Commission also amended Rule 14a-8(i)(8), which is often referred to as the "election exclusion" provision of the shareholder proposal rule. Amended Rule 14a-8(i)(8) will require the inclusion of shareholder proposals that would amend or request an amendment to a company's governing documents regarding a shareholder's right to nominate directors or that relate to other disclosure or procedural matters concerning that nomination right, so long as the proposals do not conflict with applicable law (including proposed Rule 14a‑11). As a result, the shareholder proposals that will be required to be included in a company's proxy materials may go beyond Rule 14a-11, but may not limit the operation of that rule.
If You Have Any Questions about the Proxy Access Rules
The rules adopted today by the Commission will fundamentally alter the nature of the proxy process for the election of directors for U.S. public companies. If you have any questions regarding the new proxy access rules, please contact the authors of this Client Alert or your O'Melveny & Myers advisor.
O'Melveny & Myers LLP routinely provides advice to clients on complex transactions in which these issues may arise, including finance, mergers and acquisitions, and licensing arrangements. If you have any questions about the operation of the applicable statutory provisions or the case law interpreting these provisions, please contact any of the attorneys listed on this alert.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.