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Review of SEC’s Prior Proxy Access Proposal

By | August 10, 2010

Section 971 of the Dodd-Frank Act provides that the SEC may prescribe rules that permit shareholders to include nominees for election as directors in proxy statements and prescribe certain procedures the issuer must follow.  This provision will eliminate debate that has occurred in the past as to whether the SEC has power to adopt proxy access rules.  While the SEC is not required to adopt proxy access rules, it is widely expected that it will do so.

Given the expectation that the SEC will adopt proxy access rules, it is useful to review the SEC’s prior rule making efforts since those proposed rules may serve as a starting point for rules to be issued by the SEC in the future.  In July 2009, the SEC issued proposed rules pursuant to Release No. 33-9052 titled “Proxy Disclosure and Solicitation Enhancements.” After extensive comments were received on the prior proposal, the SEC reopened the comment period, as noted in Release No. 33-9086 titled “Facilitating Shareholder Director Nominations.”

Under the prior proposal, certain shareholders would have been able to include their nominees to the board of directors in the company’s proxy materials unless the shareholders were otherwise prohibited — either by applicable state law or a company’s charter/bylaws — from nominating a candidate for election as a director.

The prior proposal applied to all Exchange Act reporting companies, including investment companies, other than companies which only have a class of debt securities registered under the Exchange Act.

Shareholders would have been eligible, under the prior proposal, to have their nominee included in the proxy materials if:

  • They owned at least 1 percent of the voting securities of a “large accelerated filer” (a company with a worldwide market value of $700 million or more) or of a registered investment company with net assets of $700 million or more.
  • They owned at least 3 percent of the voting securities of an “accelerated filer” (a company with a worldwide market value of $75 million or more but less than $700 million), or of a registered investment company with net assets of $75 million or more but less than $700 million.
  • They owned at least 5 percent of the voting securities of a non-accelerated filer (a company with a worldwide market value of less than $75 million) or of a registered investment company with net assets of less than $75 million.

The prior proposal limited the number of directors a shareholder may nominate and have elected to the board.  No more than one shareholder nominee, or a number of nominees that represents up to 25 percent of the company’s board of directors, whichever is greater, could be nominated or hold board seats at any one time.  For example, if the board was comprised of three members, one shareholder nominee could be included in the proxy materials. If the board was comprised of eight members, up to two shareholder nominees could be included in the proxy materials.

Other facets of the prior proposal included:

  • Groups of shareholders would have been able to aggregate holdings to meet applicable thresholds.
  • Shareholders would have been required to have held their shares for at least one year.
  • Shareholders would have been required to sign a statement declaring their intent to continue to own their shares through the annual meeting at which directors are elected.
  • Shareholders would have been required to certify that they were not holding their stock for the purpose of changing control of the company, or to gain more than minority representation on the board of directors.

Of course, we have no way of predicting whether the SEC will use the prior proposal as a starting point, but we think it is useful for those interested in the subject to refresh their recollection on the mechanics involved.

Contact Jill Radloff for more information.