Upon receipt of a notice of a shareholder nominee under the proxy access rules, public companies have a series of decisions to make with tight time lines imposed by the new proxy access rules. Decisions will have to be made beginning on receipt of the notice and will continue through the filing of the proxy statement, the solicitation period before the meeting and at the shareholders’ meeting itself.
Public companies will generally become aware through the filing of a Schedule 14N on EDGAR by a nominating shareholder or shareholder group. Schedule 14N includes a variety of information, including information about the nominating shareholder, the nominee and a statement of up to 500 words supporting the nominee.
Upon Receipt of a Proxy Access Nominee
The first step to take is to verify the eligibility of the nomination. Public companies should take the following steps:
- Determine whether the nomination was submitted during the required window period. Generally the window period is not more than 150 calendar days and not less than 120 calendar days before the anniversary of the date the company mailed its proxy statement for the prior year’s annual meeting.
- Verify that the shareholder or shareholder group owns the requisite securities and has held them for the requisite period of time. Under Rule 14a-11(b)(1), the shareholder or group must own at least 3% of the voting power of the company’s securities that are entitled to be voted on the election of directors at the annual meeting of shareholders. The shares used to satisfy the minimum ownership requirement must have been held continuously for at least three years as of the date of the shareholder notice on Schedule 14N. Proof of ownership can include record ownership (which an issuer can verify with the transfer agent) or referencing Schedule 13D, Schedule 13G or Forms 3, 4 or 5. In addition, the nominating shareholder or group can attach a statement to Schedule 14N from brokers or banks stating that the nominating shareholder continuously held the securities used to satisfy the ownership requirement for three or more years.
- Verify that the remainder of Schedule 14N has been prepared in accordance with the rules. For instance, Rule 14a-11(b)(4) requires a statement by the nominating shareholder or each member of the shareholder group that such persons intend to continue to hold the securities used to satisfy the minimum ownership requirement through the date of the shareholders’ meeting. Likewise, under Rule 14a-11(b)(5) the nominating shareholder or group must include a statement of intent with respect to continued ownership after the election of directors.
It is possible that a company may receive nominations from more than one shareholder or shareholder group. In that instance, Rule 14a-11(e) specifies that the number of available nominations are filled based on those proposed by the nominating shareholder or group with the highest qualifying voting power percentage disclosed as of the date of the filing of the Schedule 14N. The rule permits the nomination of the greater of one director or 25% of the registrant’s board of directors. If multiple nominations are received, issuers will want to verify all nominations as discussed above and determine the order of priority.
As we have noted, the proxy access rules grant nominating shareholders and groups exemptions to the proxy solicitation rules. During this period and through the shareholders’ meeting, we recommend that public companies monitor the solicitation activities of nominating shareholders and groups for violations of the proxy rules.
Excluding a Nominee
Under Rule 14a-11(g), a public company may exclude a shareholder nominee for the following reasons:
- Rule 14a-11 is not applicable to the company. For instance, the company could be a debt only issuer or state or foreign law or the company’s governing documents could prohibit a shareholder from nominating a candidate.
- The nominating shareholder or group or nominee failed to satisfy the eligibility requirements in Rule 14a-11(b) (i.e., the 3% ownership test or three year holding requirement was not met).
- Including the nominee or nominees would result in the company exceeding the maximum number of nominees it is required to include in its proxy statement and form of proxy.
In addition, a company would be permitted to exclude a statement in support of a nominee or nominees included with the Schedule 14N if the statement in support exceeds 500 words for each nominee. In such cases, a company would be required to include the nominee or nominees, provided the eligibility requirements were satisfied, but would be permitted to exclude the statement in support. Under the final rule a company may not exclude a nominee or a statement in support on the basis that, in the company’s view, the Schedule 14N (including the statement in support) contains materially false or misleading statements. Nominating shareholders and groups will have liability for any materially false or misleading information or for making a false or misleading certification in the notice filed on Schedule 14N, and companies will not be responsible for that information.
If a company determines it may exclude a nomination or a statement of support, the registrant must notify the nominating shareholder of group no later than 14 calendar days after the close of the window period. The notice must include a basis for the determination. The nominating shareholder or group then has 14 calendar days after receipt of the company’s notice to respond to the company notice and correct certain eligibility or procedural deficiencies identified in the notice. If, after receipt of the response, the company intends to continue to exclude the nominee or statement of support, the company must generally notify the SEC 80 calendar days before it files its definitive proxy statement. The notice to the SEC must include:
- Identification of the nominating shareholder or each member of the nominating shareholder group, as applicable.
- The name of the nominee or nominees.
- An explanation of the company’s basis for determining that the company may exclude the nominee or nominees or a statement of support.
- A supporting opinion of counsel when the company’s basis for excluding a nominee or nominees relies on a matter of state or foreign law.
At the time the company files its notice, the company also may seek a no-action letter from the SEC staff with regard to its determination to exclude from its proxy materials a nominee or nominees or a statement of support. If a company seeks a no-action letter from the staff with respect to its decision to exclude any Rule 14a-11 nominee or nominees, it should seek a no-action letter with regard to all nominees that it wishes to exclude at the outset and should assert all available bases for exclusion at that time. For example, if a company receives more nominees than it is required to include, its reasons for exclusion would note that basis. In addition, if the company believes it has other bases to exclude the nominee, it should note those other bases in its notice and include the other bases in its request for a no-action letter. The company must provide the nominating shareholder or group with notice of whether it will include the shareholder nominee, promptly upon receipt of the staff response to the no-action letter request.
Disclosure in the Proxy Statement
If a shareholder or shareholder group’s nominee is included in the proxy statement there are detailed disclosure requirements. Item 7(e) of Schedule 14A requires the company to disclose in its proxy statement the information included in Item 5 of Schedule 14N. That information includes:
- A statement that the nominee consents to be named in the proxy statement.
- Biographical information about the nominee, information about related party transactions and information regarding independence “as applicable.”
- Information about the nominating shareholder or shareholder group, including certain information as to legal proceedings.
- Information about relationships between the nominating shareholder or group, the nominee and the company and its affiliates.
- The nominating shareholder or group’s statement in support of the nominee.
Companies will also be required to include additional disclosures, in addition to including information about the nominating shareholder or group and the nominee which is provided on Schedule 14N. Here, the SEC chose not to amend existing disclosure requirements with its final rules, but pointed out that companies are obligated to make the disclosures in existing Rule 14a-12(c). The adopting release also states a company has “the option to include a statement in support of the management nominees” but there is no further elaboration or new rules that illuminate on the company’s boundaries in this regard.
New Rules for the Proxy Card
Rule 14a-4(b)(2) now provides the form of proxy must include any person nominated in accordance with Rule 14a-11. In a change from the existing rules, if there is a proxy access nominee, the proxy card cannot grant authority to vote for any nominees as a group or to withhold authority for any nominees as a group.
Between Filing the Proxy and the Shareholders’ Meeting
The SEC noted both the nominating shareholder or group and the company may wish to solicit in favor of their nominees for director by various means, including orally, by U.S. mail, electronic mail, and Web site postings. The SEC noted that the company ultimately would file a proxy statement and therefore could rely on the existing proxy rules to solicit outside the proxy statement.
In new Rule 14a2-(b)(8), the SEC provided an exemption from the disclosure, filing and other requirements of the proxy rules for solicitations by or on behalf of a nominating shareholder group. The requirements to rely on the rule provide that:
- The soliciting party does not seek the power to act as proxy and does not furnish or request a form of proxy revocation, abstention, consent or authorization.
- Each written communication must include certain information, including the identity of the nominating shareholder or group and his or her direct or indirect interests, by security holdings or otherwise and a legend urging readers to read the proxy statement and other matters.
- Each written communication must be filed by Schedule 14N.
The Shareholders’ Meeting
Under the rules, a nominating shareholder or group have no obligation to attend the annual or special meeting at which its nominee or nominees is being presented to shareholders for a vote. The SEC decided not to include such a requirement because it believes that shareholders will have sufficient incentive to take steps to assure that their nominees are voted on at the meeting, whether through attending the meeting or sending a qualified representative, or through other arrangements with the company.
The SEC noted that state law will control what happens if a candidate is not nominated at the meeting because the person supporting the candidate does not attend the meeting or make other arrangements. In a footnote, the SEC elaborated that while state statutes are largely silent on the subject of presentation of nominations, motions or other business at meetings of shareholders, the chairman of the meeting typically has broad discretionary authority over its conduct. The SEC believes it is prevailing practice for the chairman to invite nominations of directors from the meeting floor.
Check http://dodd-frank.com/ frequently for updates on the new proxy access rules.