At an open commission meeting earlier today, the U.S. Securities and Exchange Commission voted 3-2 to release a proposal on shareholder proxy access (i.e., providing shareholders access to nominate directors through the proxy process). UPDATE 5:45 pm: Here is the SEC's press release summarizing the proposal. According to the press release, there will be a 60-day comment period on the proposal. The remainder of this blog post is based on the remarks of the SEC commissioners and staff at today's open commission meeting.
Certain minimum thresholds of percentage of shares owned, and holding periods, will be required for shareholders or groups of shareholders to nominate directors, and the nominating shareholder(s) will be required to certify that they are not seeking to effect a change of control in the company. The two Republican appointees, Commissioner Troy Paredes and Commissioner Kathleen Casey voted against releasing the proposal; Chairman Mary L. Schapiro (an Independent) and the two Democrat appointees Elisse Walter and Luis Aguilar voted for releasing the proposal.
‘The Time Has Come To Resolve This Debate’
In her opening remarks, Chairman Schapiro observed, “No less than three times in recent memory has the Commission considered the question of amending our proxy rules to address so-called ‘“proxy access.’ She added, “The time has come to resolve this debate.” Echoing this view, Commissioner Walter said – quoting Victor Hugo, “There is nothing more powerful than an idea whose time has come.” Similarly, Commissioner Aguilar said, “Now is the time to finally take seriously the realities of proxy voting.”
Two Rules Addressed in Proposal
The proposal is aimed at strengthening shareholder rights in two ways, by establishing requirements, including minimum ownership and holding period requirements, and related disclosures, for shareholders or groups of shareholders to nominate directors, and by proposing a means for shareholders to propose amendments to a company’s governing documents relating to the shareholder nomination process.
Brian Breheny, Deputy Director for Legal and Regulatory Policy in the Division of Corporation Finance, and Lily Brown, Senior Special Counsel to the Director of the Division of Corporation Finance, outlined further details of the proposal. According to Breheny and Brown, the proposal includes a new Rule 14a11 for shareholder nomination of directors, and this new rule would apply to all companies with a class of equity securities subject to the Exchange Act’s proxy rules, that is, not only to operating companies, but also to investment companies regulated under Section 8 of the Investment Company Act. However, they said, the rule would not apply if shareholders do not have the right to nominate directors under state law, or under the company’s governing documents. The proposal also would amend Rule 14a8 regarding shareholder proposals to amend or request amendments to the companies governing documents relating to the right to nominate directors.
Minimum Threshholds of Ownership, Holding Periods, To Nominate Directors
Breheny and Brown explained the proposed new Rule 14a11 includes certain minimum ownership thresholds and holding periods, among other requirements, for shareholders or groups of shareholders to nominate directors through the proxy process, as summarized below. (Note: The section immediately below regarding minimum ownership thresshold has been updated to conform to the language in the SEC's press release linked above; references to 'worldwide market value' below pertain to public companies; the same quantitative threshholds below apply to investment companies, but the applicable term for investment companies is 'net assets'.)
- Minimum ownership threshold - tiered based on company size, percents listed below pertain to percent of the shares to be voted: less than $75 million worldwide market cap (non-accelerated filers)-5% ownership; $75 million to $699 million worldwide market cap- 3% ownership; $700 million worldwide market cap and above-1% ownership.
- Minimum holding period (for all size companies): one year
- Disclosure, certification, and other requirements: Shareholders or groups of shareholders that meet the specified criteria above would also be required to: Provide a notice of intent to the company; represent their intent to continue to hold the securities through the annual meeting date [note: reference should be made to the proposal to confirm if that is the specified date]; certify they are not seeking to control the company (also referred to as ‘lack of control intent’); meet new disclosure provisions [Note: the SEC staff specified that the nominating shareholder or group of shareholders would be liable for any false or misleading statements included in the company’s proxy materials which they had provided to the company], and, meet certain other requirements.
Separately, under the proposed amendments to Rule 14a8, Brown explained “The election exclusion would be narrowed, thereby allowing more shareholder proposals that are not otherwise excludable under 14a8” that would amend, or request to amend, the governing documents of the company with respect to shareholder nomination of directors.
Casey, Paredes Dissent Over "Paternalism," "Encroachment"
All five commissioners expressed their appreciation to the SEC staff for their hard work in crafting the proposals, including the two dissenting commissioners, Casey and Paredes.
Calling the proposal an ‘example of paternalism,” Commissioner Casey’s dissent focused on encroachment of the proposal on states’ rights to regulate corporations. “Let there be no doubt," said Casey, "the proposed rules would regulate [what is] normally [within the] province of the states… including the conditions under which… eligibility requirements, minimum ownership and holding… requirements for those seeking proxy access… matters that properly go to the heart of states’ [rights to regulate corporations].. or to shareholders.” Thus, she added the proposals are not simply procedural changes.
The other dissenting commissioner, Commissioner Paredes, said “Unfortunately, I am not able to support the proposal, especially [proposed rule] 14a11 dictating a direct right of access to company proxy materials, [which] encroaches far too much on internal corporate [governance]… .. [which is in the] traditional domain of state corporate law.” He added, “The whole of the proposal … reaches too far past the point of disclosure or voting process, but the fundamental essence of the proposal is to realign control at the federal level; even if a majority of company shareholders determine 14a11 is not in the company’s best interests, the proposal nonetheless would force the company into the 14a11 regime… nor can the board, even when in compliance with its fiduciary duties, choose for the company not to be subject to 14a11.”
Paredes Offers Counterproposal
Paredes also provided an example whereby the proposed rule could potentially trump more stringent rules proposed by shareholders or in state law with respect to minimum share ownership requirements or holding period.
“None of this is to say nothing should be done when it comes to … the regime for shareholder voting,” said Paredes. He then offered what he described as a ‘counterproposal’: “Amend 14a8 to permit shareholders to include in proxy materials a bylaw proposal to allow [a] process for nominating directors, so long as the company has adopted a provision specifically allowing [that]; .. such a rule would accommodate… and place on firm[er] ground,,, would not require the Commission to assert itself in corporate governance by drawing lines; the Commission is not well positioned to decide who is in and who is out, yet under the proposal the Commission is voting on today, shareholders have no choice but to accept mandatory [bright lines/rules].” Paredes added that other areas relating to shareholder rights are also in need of attending, mentioning among those areas e-proxy and ‘empty voting.’
Can the System Withstand This Change Now?
Chairman Schapiro, before calling for the vote, asked Breheny, “Can the system withstand this change now?”
Breheny responded, “There are lots of areas involved, I think if we were to go forward, and I know your office has asked us to put together some meetings, debates, discussions over the next couple of moths, I do think the system can handle it, I’m sure once the release goes out.. I think it can work.” He referenced some matters the NYSE-Euronext is presently considering, adding, “people are concerned about [quorum], even with the NYSE [proposal]… your [staff] have asked us to put some groups together to start to think about this.”
Commission Urges Public Comment
Schapiro noted the proposals attempt to “strike the appropriate balance between facilitating shareholder rights and understanding the logistical mechanics of putting together proxy materials and holding annual shareholder meetings,” and encouraged public comment as to “whether we have reached the right balance.”
Among the particulars that Commission especially seeks comment on are timeline issues, i.e. if the timeline for various steps to occur in the shareholder director nomination process as outlined in the proposal are reasonable.
Links to documents posted today by the SEC relating to this rule proposal:
SEC Press Release
Statements of: Chairman Schapiro, Commissioner Aguilar, Commissioner Paredes, Commissioner Walter.
Remarks of: Lillian Brown, Senior Special Counsel, Division of Corporation Finance.
For more details from today's SEC meeting, see this FEI Summary.