Speech by SEC Staff:
Opening Remarks at the SEC Open Meeting
Senior Special Counsel, Division of Corporation Finance
U.S. Securities and Exchange Commission
May 20, 2009
Good morning. Today we provide for the Commission’s consideration proposed rules that would enable shareholders to have their nominees for director included in company proxy materials, provided that shareholders are not otherwise prohibited — either by applicable state law or a company’s governing documents — from nominating a candidate for election as a director. The proposed rules would apply to all companies that have a class of equity securities subject to the Commission’s proxy rules, including both operating companies registered under Section 12 of the Exchange Act and investment companies registered under Section 8 of the Investment Company Act.
To have a nominee or nominees included in a company’s proxy materials, a shareholder, or a group of shareholders, would have to own a specified percentage of the company’s securities entitled to be voted on the election of directors, have held those securities for at least one year as of the date the nominating shareholder or group provides notice to the company of its intent to include a nominee or nominees in the company’s proxy materials, and represent their intent to continue to hold the subject securities through the date of the meeting.
The required ownership threshold would be tiered according to company size:
- For large accelerated filers and registered investment companies with net assets of $700 million or more, at least 1% of the company’s securities entitled to be voted on the election of directors;
- For accelerated filers and registered investment companies with net assets of $75 million or more but less than $700 million, at least 3% of the company’s securities entitled to be voted on the election of directors; and
- For non-accelerated filers and registered investment companies with net assets of less than $75 million, at least 5% of the company’s securities entitled to be voted on the election of directors.
A nominating shareholder also would have to certify that they are not seeking to change the control of the company or gain more than a limited number of seats on the board. Where these requirements are met, a nominating shareholder or group would be able to include in the company proxy materials nominees representing up to 25% of the company’s board of directors, or one nominee, whichever is greater. Where a company receives more shareholder nominees than it is required to include in its proxy materials, the nominees to be included would be those put forward by the nominating shareholder or group that first provides timely notice to the company.
Any person nominated under the proposed rule also would be required to meet specified criteria, including that:
- the nominee’s candidacy or, if elected, board membership is consistent with applicable law and regulation;
- the nominee satisfies the objective independence standards of the national securities exchange on which the company is listed; and
- the nominating shareholder (or any member of the nominating shareholder group, if applicable) may have no direct or indirect agreement with the company regarding the nomination of the nominee.
In addition, the proposal would include:
- a new exemption for solicitations made by shareholders that are seeking to form a nominating shareholder group;
- a new exemption for solicitations by a nominating shareholder or group in support of a shareholder nominee for director; and
- clarification that a beneficial owner who acquires or holds a company’s securities in connection with a nomination under the procedure would not lose Schedule 13G eligibility solely as a result of making a nomination, soliciting in favor of a nominee, or having a nominee elected to the board under the proposed new rules.
The Division’s recommendations also include new disclosure provisions applicable to nominating shareholders or groups and their nominees. The nominating shareholder would be required to provide notice to the company of its intent to nominate a candidate and file this notice with the Commission on the date provided to the company. The notice would include disclosure of the amount and percentage of securities owned by the nominating shareholder, the length of ownership, and intent to continue to hold the securities through the date of the meeting, certain representations concerning the shareholder’s or group’s eligibility to submit a nomination, as well as the required certification concerning lack of control intent. In addition, the notice would include information concerning the nominating shareholder or group and their nominee or nominees similar to that currently required in a proxy contest. This information would be included by the company in its proxy materials. The nominating shareholder or group would be liable for any false or misleading statements in this information.
In addition, the Division recommends that the Commission propose an amendment to Rule 14a-8 — the “shareholder proposal rule.” Under the Division’s recommendation, the “election exclusion” in Rule 14a-8 would be narrowed, thereby allowing more shareholder proposals to be included in company proxy materials. Specifically, shareholder proposals that are not otherwise excludable under Rule 14a-8 that would amend, or that request an amendment to, provisions of a company’s governing documents to address the company’s nomination rights or disclosures or procedures related to shareholder nominations, would be included in company proxy materials, provided that the disclosure provisions do not conflict with the Commission’s disclosure rules — including the new rules we are recommending today.
In connection with this recommendation, the Division also recommends that the Commission propose disclosure requirements for nominations made pursuant to a company’s governing documents.
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The Division believes that the recommended proposals would address impediments that may currently exist in the federal proxy rules to the exercise of shareholders’ rights to nominate and elect directors to the boards of directors of the companies in which they invest. The recommended proposals would do so by providing a meaningful opportunity for shareholders to place board nominees before the shareholders for a vote. Accordingly, the Division recommends that the Commission propose and seek comment on the rules that we provide for your consideration today.
We are happy to answer any questions you may have.