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U.S. Securities and Exchange Commission

Facilitating Shareholder Director Nominations

A Small Entity Compliance Guide1

Introduction

On August 25, 2010, the Commission adopted an amendment to Exchange Act Rule 14a-8 (the shareholder proposal rule) to require that companies include in their proxy materials, under certain circumstances, shareholder proposals that seek to establish a procedure in the company’s governing documents for the inclusion of one or more shareholder director nominees in the company’s proxy materials. The Commission also adopted related changes to certain other rules and regulations, including new disclosure requirements that apply when a shareholder is relying on a procedure under state or foreign law or a company’s governing documents to include a nominee in a company’s proxy materials. The changes apply to companies that are subject to the Exchange Act proxy rules, including registered investment companies.2

Rule 14a-8(i)(8) — The “Election Exclusion” under the Shareholder Proposal Rule

The Commission has narrowed the scope of the exclusion in Rule 14a-8(i)(8) relating to the election of directors. Under the revised rule, companies must include in their proxy materials, under certain circumstances, shareholder proposals that seek to establish a procedure in the company’s governing documents for the inclusion of one or more shareholder director nominees in the company’s proxy materials. In amending Rule 14a-8(i)(8), the Commission also codified prior staff interpretations of the exclusion. The amended rule now provides that companies will be permitted to exclude a shareholder proposal pursuant to Rule 14a-8(i)(8) if it:

  • Would disqualify a nominee who is standing for election;
     
  • Would remove a director from office before his or her term expired;
     
  • Questions the competence, business judgment, or character of one or more nominees or directors;
     
  • Seeks to include a specific individual in the company’s proxy materials for election to the board of directors; or
     
  • Otherwise could affect the outcome of the upcoming election of directors.

The amendment to Rule 14a-8(i)(8) does not change the manner in which the exclusion has been interpreted by the staff with respect to other types of proposals.

Disclosure Requirements for Nominations under State or Foreign Law or a Company’s Governing Documents

The new rules adopted by the Commission also require certain disclosures when a nominating shareholder relies on a procedure under state or foreign law or a company’s governing documents to include a nominee in a company’s proxy materials. The nominating shareholder is required to provide disclosure concerning the nominating shareholder and nominee or nominees to the company on new Schedule 14N and file the Schedule 14N electronically with the SEC using the agency’s Electronic Data Gathering and Retrieval (EDGAR) system.3 The company is required to include certain of this disclosure in its proxy materials. This disclosure is similar to that currently required in a contested election.

The company is not responsible for the information provided to the company and required to be included in the company’s proxy statement. The nominating shareholder or group has liability for any statement in the notice on Schedule 14N or in information otherwise provided to the company and included in the company’s proxy materials which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact or that omits to state any material fact necessary to make the statements therein not false or misleading.

Other Resources

The adopting release for the amendments can be found on the SEC’s Web site at http://www.sec.gov/rules/final/2010/33-9136.pdf.

The notice of effective date for the amendments can be found on the SEC’s Web site at http://www.sec.gov/rules/final/2011/33-9259.pdf.

Contacting the SEC

The SEC’s Division of Corporation Finance is available to assist small companies and others with questions regarding the amendments. You can contact the Division for this purpose at (202) 551-3500 or at https://tts.sec.gov/cgi-bin/corp_fin_interpretive.

Questions on other SEC regulatory matters concerning small companies may be directed to the Division’s Office of Small Business Policy by e-mail at SmallBusiness@sec.gov, or by telephone at (202) 551-3460.

The SEC’s Division of Investment Management also is available to assist small companies with questions regarding registered investment companies. You can contact the Division of Investment Management’s Office of Legal and Disclosure at (202) 551-6725.


1 This guide was prepared by the staff of the U.S. Securities and Exchange Commission as a “small entity compliance guide” under Section 212 of the Small Business Regulatory Enforcement Fairness Act of 1996, as amended. The guide summarizes and explains rules adopted by the SEC, but is not a substitute for a rule itself. Only a rule itself can provide complete and definitive information regarding its requirements.

2 On October 4, 2010, the new rules and amendments were stayed by the Commission pending resolution of litigation concerning new Exchange Act Rule 14a-11, which was adopted concurrently with the amendment to Rule 14a-8. On July 22, 2011, the United States Court of Appeals for the District of Columbia Circuit issued an order vacating Rule 14a-11 in Business Roundtable et al v. Securities and Exchange Commission (No. 10-1305). The Court’s opinion did not affect the amendment to Rule 14a-8 or the related rules and amendments adopted concurrently with Rule 14a-11 and the amendment to Rule 14a-8.

3 The disclosure requirements on Schedule 14N for nominations made pursuant to a procedure under state or foreign law or a company’s governing documents include:

  • A statement that the nominee consents to be named in the company’s proxy statement and to serve on the board if elected;
     
  • Disclosure about the nominee and nominating shareholder or group similar to the disclosure that would be provided in a contested election;
     
  • Disclosure about whether the nominating shareholder or any member of a nominating shareholder group has been involved in certain legal proceedings during the past ten years;
     
  • Disclosure about the nature and extent of the relationships between the nominating shareholder or group and nominee and the company or any affiliate of the company including:
     
    • Any direct or indirect material interest in any contract or agreement between the nominating shareholder or group or the nominee and the company or any affiliate of the company (including any employment agreement, collective bargaining agreement, or consulting agreement);
       
    • Any material pending or threatened litigation in which the nominating shareholder or group or nominee is a party or a material participant, and that involves the company, any of its officers or directors, or any affiliate of the company; and
       
    • Any other material relationship between the nominating shareholder or group or the nominee and the company or any affiliate of the company not otherwise disclosed; and
       
  • Disclosure of any Web site address on which the nominating shareholder or group may publish soliciting materials.

 

http://www.sec.gov/info/smallbus/secg/14a-8-secg.htm


Modified: 09/19/2011