The SEC’s 2010 amendments to its proxy rules provided two ways for shareholders “to more fully exercise their right to nominate directors.”265
First, the SEC adopted a new proxy access rule—Rule 14a-11266—under
which companies would have been required to include shareholder- nominated directors in their proxy materials, as long as the nominating shareholders met certain requirements.267 Second, the SEC amended Rule
14a-8 to require companies to include in their proxy materials proposals from qualifying shareholders for new procedures in the companies’ governing documents that would include shareholder director nominees in the company’s proxy statements.268 The SEC stayed the implementation of
both Rules on October 4, 2010269 following the filing of a lawsuit by the
Business Roundtable and Chamber of Commerce of the United States of America. The D.C. Circuit vacated Rule 14a-11 on July 22, 2011,270
One driving force behind the SEC’s adoption of the 2010 Rules was its acknowledgment that the financial crisis had “heightened the serious concerns of many shareholders about the accountability and responsiveness of some companies and boards of directors to shareholder interests, and that these concerns had resulted in a loss of investor confidence.” leaving the amended Rule 14a-8 in place. At the time of this writing, the SEC has not lifted the stay on the new Rule 14a-8, and the future of proxy access is uncertain. Nevertheless, we believe that a brief description of the 2010 Rules is helpful in placing our proposals in context.
271
Accordingly, the rule changes were aimed, in large part, at restoring shareholder confidence in boards of directors.272
Far from granting any form of universal proxy access to shareholders, however, the new proxy access rules, even if enacted, would have included significant additional hurdles to shareholders. For instance, Rule 14a-11 required that shareholders “hold a significant, long term interest in the
263. See id. § 971(a)–(b).
264. See Facilitating Shareholder Director Nominations, 75 Fed. Reg. 56,668 (Sept. 16, 2010) (to be codified at 17 C.F.R. pts. 200, 232, 240, 249).
265. Id. at 56,677. 266. Id.
267. Id. 268. Id.
269. See Business Roundtable and the Chamber of Commerce of the United States of America, Order Granting Stay, No. S7-10-09 (Oct. 4, 2010), available at http://www.sec.gov/rules/other/2010/33-9149.pdf.
270. Bus. Roundtable v. SEC, No. 10-1305, 2011 WL 2936808 (D.C. Cir. July 22, 2011). 271. Facilitating Shareholder Director Nominations, 75 Fed. Reg. at 56,669.
company,”273 which the SEC specifically defined as holding at least 3
percent of the total voting power of the company’s securities that would be entitled to vote at the annual shareholders’ meeting for at least three continuous years.274 In addition, Rule 14a-11 required the shareholder to
hold that amount through the date of the meeting275 and specified that the
nominating shareholders could not be holding the company’s securities for the purpose or effect of changing control of the company, nor could the shareholders have made “an agreement with the company regarding the nomination.”276
Furthermore, Rule 14a-11 required that shareholder nominees meet certain requirements to be eligible for nomination. First, their candidacy, and ultimately their board membership, could not violate applicable federal law, state law, or regulations.277 Second, the nominees needed to meet the
objective independence criteria set forth by a national securities exchange or national securities association.278 Finally, neither the nominee nor the
nominators could have made an agreement with the corporation’s management regarding the nominee’s candidacy.279
Finally, under the Rule, companies were “required to include no more than one shareholder nominee or the number of nominees that represents 25 percent of the company’s board of directors, whichever is greater.”280 By
including these provisos and additional requirements, the SEC made Rule 14a-11 consistent with its desire to avoid making the Rule a venue for shareholders that are “seeking to change the control of the company or to gain more than a limited number of seats on the board.”281 Accordingly,
shareholder nominees who first gave “timely notice of intent to nominate a director pursuant to the rule” would have been granted effective priority “up to and including the total number of shareholder nominees required to be included by the company.”282
In contrast to these limitations, however, the new proxy access rules also created mechanisms which granted shareholders a greater ability to communicate with each other, thus aiding proxy access. For instance, under the new rules, shareholders could have “engage[d] in communications with other shareholders in an effort to form a nominating shareholder group to aggregate their holdings to meet the . . . ownership threshold.”283
273. Id. at 56,688.
Normally, such communications would have been banned as solicitations under the general proxy rules, so the SEC created a new
274. Id. The Rule allowed for a group of shareholders to aggregate holdings to meet this requirement. Id. 275. Id. 276. Id. 277. See id. at 56,702. 278. See id. at 56,702–03. 279. See id. at 56,705. 280. Id. at 56,706. 281. See id. at 56,707. 282. Id. at 56,710. 283. Id. at 56,725.
exemption “for written communications made in connection with using proposed Rule 14a-11.”284 The SEC also created an exemption from the
rules for “solicitations by or on behalf of a nominating shareholder or group in support of its nominee who is included in the company’s proxy statement and form of proxy.”285 The rules also required that shareholders availing
themselves of this exemption must not be seeking proxy authority and must include specific disclosures set forth in the Rule as part of the written communications.286
Before the adoption of these new amendments, Rule 14a-8(i)(8)—the election exclusion—allowed companies to exclude shareholder proposals relating to nominating or electing directors, or to the procedure for nominating or electing directors, from the company’s proxy statements.287
Under the newly amended Rule 14a-8(i)(8), however, the SEC had narrowed the election exclusion.288 “As adopted, companies [would] no
longer [have been] able to rely on Rule 14a-8(i)(8) to exclude a proposal seeking to establish a procedure in a company’s governing documents for the inclusion of one or more shareholder nominees for director in the company’s proxy materials.”289 The new rule did, however, provide a few
circumstances in which a company would be able to exclude a proposed shareholder procedure.290 Each of those circumstances covered situations
in which the proposal would have had an effect on current directors’ standing or specific influence on nominees in an upcoming election.291