Sullivan & Cromwell LLP
125 Broad Street
New York, New York 10004-2498
December 22, 2003
VIA E-MAIL: firstname.lastname@example.org
Mr. Jonathan G. Katz,
Securities and Exchange Commission,
450 Fifth Street, N.W.,
Washington, D.C. 20549-0609.
Re: Proposed Rule Relating to Security Holder Director
Nominations (File No. S7-19-03)
Dear Mr. Katz:
We are pleased to respond to Release Nos. 34-48626, IC-26206 (the "Proposing Release") in which the Securities and Exchange Commission (the "Commission") solicited comments on a proposed rule which will, under certain circumstances, require companies to include in their proxy materials shareholder nominees for election as director.
I. Withdrawal of Proposal
We have serious reservations regarding the proposed rule and believe that it should be withdrawn entirely, subject to future re-evaluation in light of the experiences in 2004 and 2005 under the many new governance requirements. While we appreciate the Commission's efforts to present a balanced proxy access procedure aimed at companies where there is significant shareholder dissatisfaction with the proxy process, we believe that in many cases the proposed rule will not operate as intended. Notwithstanding the Commission's effort to craft a "limited access right," we are concerned that the proxy access procedure is likely to be applied to many companies whether or not they are responsive to shareholder concerns. Accordingly, for these and the other reasons noted below, we respectfully urge that the Commission withdraw the proposal.
The direct access proposal triggering event provides too easy access and is not indicative of shareholder dissatisfaction. We are particularly concerned by the triggering event relating to a direct access proposal by an over 1% shareholder. We believe that this triggering event will allow an over 1% shareholder or shareholder group, at virtually no cost to itself, to start a process that will require the company to expend significant management time and resources (at a cost to all shareholders). The relative ease with which a shareholder can begin the access process is likely to mean that many companies may become subject to the proxy access procedure even if the proposal is not supported by a majority of their shareholders and regardless of companies' level of responsiveness to shareholder concerns. In general, we believe that the Commission's approach in defining the triggering events is at odds with the stated objective that the access procedure should apply only where there is significant shareholder dissatisfaction with the company's proxy process.
The proxy card may become dysfunctional. We are also concerned that there are significant and very real possibilities of shareholder confusion in any election to which the access procedure applies. Such an election would require, for the first time, the use of a universal ballot which will contain the names of both management's nominees and shareholder nominees. As discussed further below, there are multiple scenarios in which a shareholder may, intentionally or by mistake, complete a universal proxy card in such a way as to disenfranchise himself or herself.
There is no evidence that the new rule is needed. Most significantly, we believe that the proxy access procedure is not necessary. Neither the Proposing Release nor proponents of the proxy access have presented a convincing argument that the inclusion of the shareholder nominees on a company's proxy card will result in an improvement in corporate governance or provide shareholder value sufficient to outweigh the negative consequences of a costly, complicated, disruptive and divisive proxy access process.
The new SRO governance rules should be given time to work. We maintain our belief, as expressed in our prior comment letters in connection with the Commission staff's review of the proxy process earlier this year and the Commission's subsequent rulemaking regarding nomination process disclosure, that the new corporate governance listing standards will provide sufficient incentives for board accountability and responsiveness and should be given time to work. The new New York Stock Exchange and Nasdaq Stock Market corporate governance rules were approved by the Commission only last month and will generally become effective at a NYSE- or Nasdaq-listed company's 2004 annual meeting. As stated before, we also believe that the nominating system contemplated by these rules, which requires director nominations to be made by a nominating committee composed entirely of independent directors (or, in the case of Nasdaq, a majority of independent directors), will best serve the interests of all shareholders. Last month, the Commission also adopted new disclosure requirements regarding nominating committee functions and shareholder communication with the board, which implemented the first set of recommendations arising out of the Commission's review of the proxy process. We respectfully suggest that the Commission should allow sufficient time to evaluate the performance of corporate boards and committees based on the new stock exchange rules, as buttressed by the new proxy statement disclosure requirements, before imposing novel and untested shareholder access requirements, the consequences of which are difficult to accurately predict.
Questionable legal authority. We are also very concerned that there are serious questions regarding the Commission's authority to promulgate the proposed rule under Section 14(a) of the Exchange Act, which does not extend to matters of corporate governance traditionally regulated under state corporate law.1 While the proposed rule is drafted as essentially a regulation of proxy statement disclosure and related procedures, there is no doubt among both proponents and opponents of the proposal that it would create a new substantive right of access by large shareholders. This conclusion is not altered by the fact that the proposed rule is limited to companies organized in states where shareholders are not prohibited from making director nominations. While we agree that the Commission's regulation of proxy solicitations coexists with state corporate law in a number of cases, we are not convinced by the Proposing Release's analogy to Rule 14a-8 under the Exchange Act for the obvious reason that Rule 14a-8 specifically excludes proposals relating to director elections. In short, we believe that, absent clear legislative intent, the Commission should not interpret its authority under Section 14(a) so as to alter the balance between state and federal regulation of corporate governance or the balance of power under state law between corporations and large shareholders.2 We believe that the proposed rule creates a new substantive right to have a nominee included in the company's proxy statement, and even to nominate the director, in the significant majority of states that do not prohibit it. This is just the type of substantive shareholder right found in the Business Roundtable decision to be outside the Commission's authority to create.
If not withdrawn, the proposal and triggering events should be narrowed and a transition period added. If the proposal is not withdrawn, we believe that it is essential for the proposed triggering events to be revised so that they are more narrowly tailored to situations where there is truly a significant level of shareholder dissatisfaction with the company's proxy process. Our comments in Section II below provide specific suggestions to that effect. We also urge the Commission to provide for an appropriate transition period which will afford shareholders a meaningful opportunity to take into account a company's implementation of recent governance initiatives before reaching a conclusion on the performance of the company's board of directors for purposes of the proposed triggering events. We also have a number of other specific suggestions which we believe are necessary to address other serious concerns that are raised by the proposed rule.
II. Triggering Events
1. The direct access proposal triggering event is not indicative of shareholder dissatisfaction with the company's proxy process and should be removed.
(a) The direct access proposal triggering event should be removed.
One of the two triggering events which, under the proposed rule, will result in a company becoming subject to the shareholder access procedure is the approval, based on majority of votes cast, of a shareholder proposal to activate the access procedure submitted by a shareholder (or group of shareholders) that has held for more than one year more than 1% of the company's securities entitled to vote on the proposal. We believe that the direct access shareholder proposal triggering event should be removed for the following reasons:
- Tenuous relationship to shareholder dissatisfaction. The Proposing Release expresses the Commission's belief that the "nomination procedure triggering events should be tied closely to evidence of ineffectiveness or shareholder dissatisfaction with a company's proxy process." We fully support the position that, to the extent a shareholder access right is created, it should not apply to all companies but should be limited to cases where criteria suggest that the "company has been unresponsive to shareholder concerns as they relate to the proxy process." However, we believe that the proposed direct access proposal triggering event has, at best, a tenuous relationship with, and does not by itself provide an indication of, shareholder dissatisfaction with the company proxy process.
First, while the submission of a direct access proposal will by itself require the company to expend significant resources, it does not require the proposing shareholder to provide, and does not by itself constitute, evidence that the company has been unresponsive to shareholder concerns. Second, since a direct access proposal amounts to a "free option," such a proposal may well receive support from many other shareholders for a variety of reasons that are unrelated to the performance of a particular company's board of directors or the effectiveness of its proxy process. In fact, many institutional shareholders may develop policies to automatically vote in favor of such proposals without any consideration of specific concerns regarding the subject company. In that case, a company whose board of directors is effective and responsive may face a costly and disruptive nomination process the end result of which may be the election of a nominee that undermines the board's effectiveness and qualifications and directors' ability to work together. In sum, we believe that this triggering event fails to meet the Commission's standard of being "tied closely" to evidence of shareholder dissatisfaction with the company's proxy process.
- Company resources. We also believe that the mere submission of a direct access proposal will require the expenditure of significant company resources and represent a distraction from potentially more important matters. Having made the investment, an over 1% shareholder or group can start the process without any justification and without any cost to itself, other than the cost of a stamp, which is likely to lead to frequent submissions of such proposals. In the Proposing Release, the Commission uses historical data to support its belief that the incidence of direct access proposals "would not be overwhelming." The historical incidence of Rule 14a-8 proposals by 1% shareholders is, in our view, in no way indicative of how frequently such proposals will be made if such shareholders, individually or as a group, had the ability to trigger the access procedure. Similarly, the low incidence of success for these proposals in the past does not provide any indication about what the approval rate will be if shareholders had the incentive provided by the proposed rule. Therefore, we believe that the aggregate corporate costs of this triggering event, which will be borne by all shareholders, could be high and not justified by the stated objective of the rule.
- Abuse by dissident shareholders. The ability of over 1% shareholders or groups to submit direct access proposals may also present an opportunity for dissidents to abuse the process. Unlike a nominating shareholder under the rule, a shareholder submitting a direct access proposal will not necessarily be an institutional or passive investor and may have special interest unrelated to shareholder access. A direct access proposal may be invoked by a shareholder or group which is dissatisfied by the company's action in a matter completely unrelated to the proxy process or is simply seeking publicity. Knowing that such proposals are likely to obtain support because there is virtually no downside, some shareholders may use the threat of making such a proposal to obtain leverage against management in order to advance goals that are not shared by other shareholders.
Based on the foregoing, we believe that the direct access proposal triggering event should be eliminated entirely and the triggering event relating to withhold votes, revised as suggested below, should be the only triggering event.
(b) If retained, the direct access proposal triggering event should be narrowed.
If, however, the direct access proposal triggering event is retained, it should be revised as follows:
- Approval by majority of votes outstanding. In the Proposing Release, the Commission states that it has selected the requirement of majority of votes cast because majority of the votes outstanding will work only in a minority of cases. We believe that such a concern is fundamentally inconsistent with the stated goal of applying the access procedure to companies where there is significant dissatisfaction with the proxy process. Under the laws of most states, significant changes to a corporation's structure (e.g., amendments to a company's charter, mergers or consolidations) require approval of at least a majority of votes outstanding.3 We believe that the change in board of director elections and operation as a result of the proposed rule easily rises to the same level of importance and should require a showing that a majority of all shareholders are in favor. We also believe that the ease with which the direct access proposal can be invoked should be balanced by a higher vote threshold to lower the incidence of companies becoming subject to the access procedure under this triggering event, where there is little evidence of widespread shareholder dissatisfaction.
- No resubmission for three years, if defeated. The triggering event should be revised to provide that if a direct access proposal is submitted for a shareholder vote and fails to receive the required approval, the company will be entitled to exclude any direct access proposal submitted in the next three years. During that period, the company could still become subject to the access procedure through the withhold votes triggering event.
- No 13D filer as proponent. We would suggest that the triggering event should also provide that the over 1% proposing shareholder cannot have filed a Schedule 13D with respect to the company's shares. If the proposing shareholder owns more than 5% of the company's shares, it should meet the standard that it is eligible to file on Schedule 13G (one of the criteria for nominating shareholders under paragraph (b) of the rule) in order to effectuate the stated purpose that the proposed rule should not be used to change or influence the company's control.
- Clarification of share ownership and holding period requirements. The triggering event should clarify that the shareholder or shareholder group submitting a direct access proposal is the beneficial owner of more than 1% of the voting power of securities entitled to vote on that proposal in order to address those situations where a company has two or more classes of shares, with each class having different voting power.4 In addition, Instruction 1 to paragraph (a) of the proposed rule should be redrafted to clarify that the share ownership and holding period should be determined based on the company's quarterly or annual reports filed during the period (similar to the manner provided in Rule 13d-1(j)). This will avoid a situation where a shareholder who has reached the more than 1% ownership level shortly before submitting the proposal as a result of a reduction in the number of outstanding shares, such as due to share repurchases by the company, will be eligible to make a direct access proposal. The same instruction should also be applied to paragraphs (b)(1) and (b)(2) of the rule, which sets forth the share ownership and holding period requirements for nominating shareholders and groups.
2. The withhold votes triggering event should be the only triggering event and should be revised to confine the application of the proposed proxy access procedure to circumstances that demonstrate a significant disconnect between shareholders and the board of directors.
(a) The withhold votes triggering event should apply only if votes are withheld from a majority of directors.
We believe that the triggering event relating to withhold votes in director elections should be the only triggering event. In order to confine the proxy access process to situations truly involving a significant disconnect between the board of directors and shareholders, we suggest that the triggering event should be revised to require the receipt of 35% withhold votes (but not less than 25% of outstanding shares) for a majority of directors up for election. Basing the triggering event on withhold votes for one director is not a reliable indicator of unresponsiveness by the company or the board of directors as a whole, thereby also resulting in the proxy access procedure applying to significantly more companies than intended. The receipt of a significant percentage of withhold votes for only one director may relate to considerations specific to the individual director, rather than dissatisfaction with the board as a whole or the company's proxy process. Public allegations about misconduct by an individual director (or simply about another company where he or she is employed or serves as director) may result in a significant percentage of withhold votes for that director even though the alleged misconduct does not involve the company at all. We believe that the appropriate measure reflecting dissatisfaction with the board as a whole would be the receipt of 35% withhold votes for a majority of the directors up for election. In addition, in order to avoid a situation where a very small percentage of shareholders can trigger the access procedure, the triggering event should require the receipt of withhold votes in respect of at least 25% of all shares outstanding. Finally, the rule should provide that the receipt of 35% withhold votes will not be a valid triggering event with respect to a director if that director has received affirmative support from the holders of a majority of shares outstanding. The receipt of affirmative support by a majority of all shareholders will, in our view, provide a clear indication that there is no widespread shareholder dissatisfaction justifying the application of the access procedure.
(b) If not applied to a majority of directors, the trigger should be heightened.
If the triggering event is not revised to require the receipt of withhold votes for a majority of directors, we believe that, at a minimum, it should be amended to include the following requirements:
- Parity with permitted shareholder nominees. Depending on the size of the board of directors, the proposed rule may require a company to include two or three shareholder nominees in its proxy materials. We believe that it would be illogical if the receipt of 35% withhold votes for one director resulted in the required inclusion of two or three shareholder nominees. Therefore, as an absolute minimum, the rule should require the receipt of 35% withhold votes for a number of directors equal to the maximum number of shareholder nominees the company may be required to include in its proxy materials under the rule.
- 35% withhold votes based on shares outstanding. The receipt of 35% withhold votes for less than a majority of directors does not establish a "close" connection to a widespread dissatisfaction with the company process when it represents the vote of what could be a relatively small minority of all shareholders entitled to vote for directors. Accordingly, we believe that at a minimum the triggering event should be based on votes outstanding and not votes cast.
- Exclusion of elections subject to the access procedure. To avoid even greater shareholder confusion, the withhold votes triggering event should not apply to any election of directors where a shareholder nominee is on the ballot due to the prior occurrence of a triggering event.
3. The withhold votes triggering event should address the conduct of "withhold the vote" campaigns.
The rule should also address the conduct of "withhold the vote" campaigns that may be used for purposes of triggering the access procedure. Given the significance that may attach to "withhold the vote" campaigns, we believe that the rule should be revised to require such campaigns to be exposed to public light. Accordingly, we propose that the rule provide that any solicitations conducted by shareholders to withhold the vote on any nominee would be deemed a "solicitation" as defined in Rule 14a-1(l) (subject to the exemptions contained in Rule 14a-2(b)). This would ensure that shareholders holding more than $5 million of market value of the company's shares would be required publicly to file any written materials used in connection with a "withhold the vote" campaign and reduce the prospects of an organized stealth campaign targeting incumbent directors. Making "withhold the vote" campaigns subject to a public filing requirement will serve the interests of all shareholders by disclosing who is actively seeking to cause the triggering event to occur. At the same time, shareholders engaged in such an activity could still take advantage of Rule 14a-1(l)(2)(iv), allowing public statements of how a security holder intends to vote, and oral solicitations not covered by any filing requirements.
The Proposing Release suggests that Section 13(d) may be applicable to shareholders who agree to act together to withhold votes with respect to directors. We agree that it would be appropriate to allow any group formed for the purpose of triggering the access procedure through a "withhold the vote" campaign to file on Schedule 13G so long as each person involved makes the required certifications under existing Item 10 and, as suggested in Section V.1 below, the "group" is dissolved after the election is concluded. Similar to our discussion above with respect to the direct access proposal triggering event, we also believe that generally any shareholder who initiates a "withhold the vote" campaign should be a shareholder eligible to file on Schedule 13G. As discussed, we believe that this is necessary in order to effectuate the stated purpose that the proposed rule should not be used to change or influence the company's control.
4. The proposed rule should not contain an additional triggering event relating to non-implementation of a shareholder proposal.
In the Proposing Release, the Commission states that it is considering, and seeks comment on, the inclusion of an additional triggering event premised on a company's not implementing a Rule 14a-8 security holder proposal that has been approved by a majority of votes cast. We believe the Commission should not include such triggering event for reasons similar to those stated in the Proposing Release: there is virtually no connection between a board's non-implementation of a shareholder proposal and ineffectiveness of the director nomination and election process (particularly in light of the diversity of subjects that can be addressed in security holder proposals) and the complexity and potential for dispute regarding the issue of whether the company has implemented a particular proposal. Most significantly, the board of directors must be able to make business judgments on the merits of a proposal, without the presence of unrelated incentives, such as the perceived need to avoid the application of the access procedure to the company.
The Commission also seeks comment on the related issue whether companies that agree not to exclude any Rule 14a-8 security holder proposal or that implement all Rule 14a-8 proposals that received passing votes in a given year should be exempt from the proposed access procedure for a period of time. For the reasons discussed above, we strongly believe that the rule should not provide for any such exemptions in order to avoid the introduction of inappropriate incentives.
5. The triggering events should apply only after the adoption of the rule and an appropriate transition period reflecting the significance of the proposed proxy access requirement.
Under the proposed rule, the occurrence of any of the triggering events after January 1, 2004 will result in the company becoming subject to the proxy access procedure. We are very concerned by the prospect that companies will be required to deal with direct access proposals under Rule 14a-8 even though the proposed proxy access rule is not likely to be adopted by the time such proposals are required to be submitted. We believe that a shareholder's decision whether to submit a direct access proposal and a company's decision whether and how to contest such a proposal should be based on a rule that is final and effective and not a proposal that may change significantly and whose application may be unclear in many cases. The proposed proxy access rule represents a fundamental change in director election requirements, which would call for an appropriate transition period. Implementing the rule in the manner proposed would raise serious issues under the public notice and comment requirements of the Administrative Procedures Act.
Furthermore, under the new NYSE and Nasdaq rules, companies must generally meet the majority board independence, independent committees and other corporate governance requirements for the first time by their 2004 annual meeting. We believe that shareholders should be afforded time to evaluate the operation of corporate boards and committees reformed as applicable to meet these requirements before taking action to trigger the proxy access procedure. Generally, the new NYSE and Nasdaq corporate governance rules, considered together with the new rules promulgated by the Commission under the Sarbanes-Oxley Act of 2002, which have recently become effective or will become effective in the next few months, highlight the need for an appropriate transition period. It would be inappropriate to force companies to react to an unadopted rule proposal with unpredictable consequences at the same time as they work to meet these requirements.
Similarly, we believe that companies should not face the prospect that a newly elected director recruited to meet the independence requirements may not be reelected at the following meeting because of the application of the proxy access procedure, particularly in light of the change in the new NYSE rules (from the previously proposed version), which required retroactive application of relationships precluding independence and which may have made it harder for NYSE-listed companies to identify and recruit director candidates meeting the independence standards.
III. Applicability of the Proxy Access Procedure
1. The proxy access procedure should apply only to the annual meeting of shareholders (or special meeting in lieu of an annual meeting) following the meeting at which a triggering event occurs.
Under paragraph (a)(2) of the proposed rule, once a triggering event occurs, the proxy access procedure becomes operative for a period of approximately two years, which, as discussed in the Proposing Release, is intended to make the access procedure available for the two meetings following the occurrence of a triggering event. We believe that the access procedure should apply only to the annual meeting (or special meeting in lieu of an annual meeting) following the meeting at which the triggering event occurs. The period between the occurrence of a triggering event and the time when a nominating shareholder or group must present its notice to the company under paragraph (c) of the rule in connection with the next shareholders meeting will afford sufficient time for the formation of a nominating shareholder group and for the selection of director candidates by the nominating shareholder or group. At the same time, having the access procedure apply for an additional year will needlessly prolong a period of uncertainty regarding director elections and the board's composition. To the extent that the rule seeks to address significant shareholder dissatisfaction with a company's proxy process, it should encourage eligible nominating shareholders to act promptly to address such dissatisfaction. Conversely, if an eligible shareholder or group exists, the fact that such shareholder or group has not presented nominees for inclusion in the company's proxy materials at the next annual meeting will call into question the existence of significant shareholder dissatisfaction and the ultimate need to include shareholder nominees.
In addition, as drafted, the rule would appear to allow a nominating shareholder to nominate one nominee in the first annual meeting after the occurrence of a triggering event and a second nominee in the second meeting (in cases where the shareholder is entitled to make two or more nominations under paragraph (d) of the rule) or perhaps make another nomination for the second meeting if the shareholder withdraws his previous nomination or if management voluntarily includes the shareholder's nominee elected in the prior year on its slate. We believe that the company should not be subject to two contested elections as a result of the same triggering event. Accordingly, the access procedure should apply only to the shareholder meeting following the occurrence of a triggering event and, in any case, should not continue into a second year if a shareholder nominee is elected at the first annual meeting.
2. The rule should address the applicability of the proxy access procedure following the election of a shareholder nominee and, more broadly, the consequences of such election.
While the proposed rule sets forth the procedures leading to an election of a shareholder's nominee to the board of directors, it fails to address the consequences of such an election. We believe the difficult issues that may arise from such election represent one additional reason why the Commission should reconsider this proxy access proposal altogether. In particular, what should a company's nominating committee do if a director elected under the access procedure ceases to be independent or if the committee believes that the director is otherwise not qualified, acts in a manner hostile to the best interest of the company (e.g., leaks information about board meetings) or serves parochial interests? What will be the consequences under the rule of such director not being re-nominated?
We believe that, at a minimum, the rule should be revised to address the following issues arising from the election of a shareholder nominee to the board:
- Continued service of director. The proposed rule does not address the situation where management includes in its slate a director who was elected as a shareholder nominee at the previous meeting. We believe that, as drafted, the rule may encourage the opposite result - a decision by the nominating committee or the board not to re-nominate the director in order to avoid that person from becoming a "management" director and therefore allowing yet another nominee to be put forth by shareholders under the access procedure. Therefore, we believe that the rule should be revised to provide that once the maximum number of shareholder nominees permitted by paragraph (d) of the rule are elected to the board, the company will be exempt from the application of the proxy access procedure for a period of three years (the same period as would apply automatically under paragraph (d)(2) of the proposed rule if the company has a staggered board) so long as the shareholder nominee remains on the board.
- Continued representations by the nominating shareholder. The Commission should amend Schedule 13G to require that a nominating shareholder or group whose nominee has been elected to the board under proposed Rule 14a-11 must file amendments to its Schedule 13G if anything comes to the attention of the shareholder, following the submission of its notice under paragraph (c) of the proposed rule, that will not allow the shareholder or group to provide any of the representations required to be included in that notice. This would including a situation where the shareholder or any member of the shareholder group subsequently forms a relationships with the director elected as its nominee that would be disallowed by paragraph (c)(3) of the proposed rule. Clearly, the purpose of the paragraph (c)(3) representations will be undermined if the nominating shareholder develops any of the covered relationships with the director following his or her election to the board, such as if it subsequently employs the director or otherwise makes payments to him or her, particularly if it would allow the shareholder to influence the director's vote. Similarly, if the nominating shareholder subsequently discovers that any of its representations to the company were inaccurate (such as that the candidate does not meet the objective criteria for independence in applicable listing standards), the shareholder should be required to provide public notice. Furthermore, we suggest that if the nominating shareholder does develop any such relationships or discloses that any of the representations contained in the shareholder's notice under paragraph (c) of the proposed rule was not accurate, the shareholder or group should be prohibited from making a nomination under the access procedure for the subsequent three shareholder meetings.
- Nominating committee determination. The rule should clarify that a decision by the company's nominating committee or board of directors not to re-nominate a director who was elected pursuant to the access procedure will not be subject to challenge by the nominating shareholder within the framework of the rule or otherwise.
3. The proxy access procedure should cease to apply at the commencement of a proxy contest or a stock-based business combination.
The proposed rule should be revised to provide that neither the triggering events nor the proxy access procedure (if previously triggered) should apply to an election in which another party commences a solicitation in opposition. We believe this clarification is essential to avoid duplicative and confusing procedures - one with control implications and the other not.5 While the proposed rule currently provides that the withhold votes triggering event will not occur with regard to any contested election to which Rule 14a-12(c) applies, it should also provide that the subsequent commencement of a solicitation in opposition would nullify the earlier triggering event since it will provide shareholders with an alternative avenue of expressing dissatisfaction with the company's board of directors or proxy process.
More broadly, the rule should also provide that the access procedure will cease to apply from the time of public announcement of any merger, acquisition or similar transaction involving a recapitalization or any tender offer for the company's securities eligible to vote for directors and the company should be exempt from the application of the triggering events until the consummation (or withdrawal or termination) of such transaction.
4. The proxy access procedure should not apply where it is inconsistent with a company's jurisdiction of incorporation.
Paragraph (a)(1) of the proposed rule provides that the access procedure will apply only if applicable state law does not prohibit the company's shareholders from nominating candidates for election as director. This provision should be revised to refer not only to applicable state law, but also to the law of a company's country of incorporation in order to address the case of companies who are organized in non-U.S. jurisdictions but do not meet the definition of a "foreign private issuer" under Exchange Act Rule 3b-4 and are therefore not exempt from the proxy rules. The reference to "state" should also be clarified to include the U.S. District of Columbia and U.S. territories and possessions.
5. The rule should provide for exemptions from the proxy access procedure for companies that (i) have voluntarily included a nominee of an over 5% shareholder or group of shareholders, (ii) have "opted out" of the access procedure or have adopted an alternative proxy access procedure through an act of shareholders, (iii) are "controlled companies," or (iv) have recently become public companies.
We recommend that the rule should provide for exemptions from the proxy access procedure in the following cases:
- Voluntary inclusion of a shareholder nominee. In November, the Commission adopted new proxy statement disclosure requirements which will require, among other things, disclosure of whether a company's nominating committee has received a candidate recommended by an over 5% shareholder or group who has held its shares for over one year and has decided not to nominate such candidate. This required disclosure will clearly provide incentives for such shareholders to submit nominations as well as disincentives for nominating committees to reject such candidates. We believe that to the extent a company voluntarily includes one or more nominees of such a shareholder in its proxy materials, it should be exempt from the application of the proxy access procedure as well as the triggering events if it has included the maximum number of nominees permitted by paragraph (d) of the rule. As discussed in Section III.2 above, we believe that the exemption should last for a period of three years (the same period as would apply automatically under paragraph (d)(2) of the proposed rule if the company has a staggered board). The rule should not operate in a manner that discourages a company and an over 5% shareholder or group of shareholders from opting for a course of consensual conduct that forgoes the cost and distraction of a mini proxy contest. As currently drafted, the rule would discourage a company from ever agreeing to put a shareholder's nominee on management's slate if the nominee does not qualify as a "security holder nominee" because Instruction 1 to paragraph (d) of the rule provides that a nominee will not be included in calculating the number of nominees permitted under paragraph (d) if there is a direct or indirect agreement with the company or any affiliate of the company regarding the nomination of such a candidate. This would have the effect of undermining the disclosure requirement of Item 7(d)(1)(L) of Schedule 14A (regarding the submission of a nominee to the nominating committee by an over 5% shareholder) adopted by the Commission in November. Therefore, we would suggest that both paragraph (c)(5) and Instruction 1 to paragraph (d) of the rule be revised accordingly. In general, we urge the Commission to craft the rule in such a way as to encourage discussions between a large shareholder or group and a company's nominating committee, rather than disfavoring such discussions.
We also suggest that a shareholder nominee should not be counted in determining how many shareholder nominees are permitted under paragraph (d) of the rule. Clearly, a company would be more likely to resist the inclusion of a nominee, as implicitly encouraged by new Item 7(d)(1)(L) of Schedule 14A, if increasing the size of its board to include such nominee will open up another slot for a shareholder nominee under paragraph (d) of the rule.
- Shareholder "opt out" of the access procedure. The rule should also be revised to provide that a company will be exempt from the application of the triggering events or the access procedure if its shareholders have voted to exempt the company from the new rule or to approve an alternative access procedure. Since the rule's basic purpose is to enhance the shareholders' ability to influence the proxy process, it would seem only logical to allow shareholders to "opt out" of the proxy access procedure if they wish or to approve a different kind of proxy access procedure. As an example, a company may decide to subject itself to the rule's access procedure but without the application of triggering events. In this context, the text of the rule should specifically include the statement in the Proposing Release that a company will not be subject to the proxy access procedure if, consistent with applicable law, the company's governing instruments prohibit shareholder nominations of directors.6 This suggested revision to the rule should also specifically cover any provision in the company's governing instruments or act adopted by its shareholders that opts out of Rule 14a-11 (or any portion thereof).
- Controlled companies. The rule should also exempt controlled companies from the application of the proxy access procedure. It would clearly be futile to subject to the rule companies where a controlling shareholder or group has the ability to elect all directors, particularly with respect to the submission of direct access proposals. For instance, the new NYSE and Nasdaq corporate governance rules provide exemptions for some of the requirements, such as having a majority of independent directors, for controlled companies. In these cases, "controlled companies" would be companies where more than 50% of the voting power is held by an individual, a group or another company.
- IPO companies. Finally, the rule should provide for an appropriate grace period for companies that have recently completed their IPO. The new NYSE and Nasdaq rules allow IPO companies a one-year transition period to meet the majority board independence requirement. It will be unwarranted and counterproductive for an IPO company to become subject to the access procedure at the same time as it struggles to recruit independent directors and to resolve basic organizational issues. Accordingly, we suggest that an IPO company should be exempt from the application of triggering events for the three annual shareholder meetings following the consummation of its IPO.
The Proposing Release also seeks comment on whether companies that are not "accelerated filers" should be exempt from the proposed rule. We see no reason why this group of companies should be treated differently from companies meeting the definition of "accelerated filer" under Exchange Act Rule 12b-2. To the extent that there are reasons why the rule should not apply to companies that are not "accelerated filers," we believe that these reasons would generally call for the Commission not to adopt the proposed rule.
IV. Eligibility Criteria and Number of Nominees
1. The eligibility criteria for nominating shareholders should include a requirement that the shareholder or each member of a shareholder group must hold its shares in the company until the shareholder meeting following the meeting at which its nominee was elected.
The eligibility criteria for nominating shareholders in the proposed rule provide that the nominating shareholder or each member of a nominating shareholder group must continue to hold its shares in the company through the date of the subject election of directors. We believe that a nominating shareholder or group should be required to hold the shares for the shorter of (i) one year or (ii) the term of the director elected as its nominee. We think it is a matter of basic fairness that a nominating shareholder or group should "live with" its own nominee. While the access procedure is intended to provide incentives to companies for greater responsiveness, it should also provide incentives to nominating shareholders to give careful consideration to their nominees and to be prepared to show a commitment to the company that matches the level of influence in the company's proxy process they have been afforded by the rule. We suggest that a nominating shareholder who fails to meet this requirement should be denied eligibility to use Schedule 13G for any of the company's securities for the next three years.
With the exception noted above, we generally support the eligibility requirements for nominating shareholders, including the share ownership and holding period requirements. However, the over 5% ownership threshold for a shareholder nominee should take into account those situations where a company has two or more classes of shares, with each class having different voting power. We believe that in order to be a qualifying nominating shareholder under paragraph (b) of the rule in those cases, the nominating shareholder should own more than 5% of the class entitled to elect a majority of directors. Alternatively, shareholders of either class meeting the threshold could be allowed to make nominations, but paragraph (d)(3) of the rule should be clarified to provide that in cases where two such shareholders make a nomination, only the nominee or nominees of the shareholder with the greater voting power should be required to be included in the company's proxy materials.
2. The eligibility criteria for shareholder nominees should include a requirement that each nominee must meet the objective qualification standards for directors of the company as well as any additional company independence standards.
In general, we support the eligibility criteria for shareholder nominees in the proposed rule, including the criteria for lack of affiliation with the nominating shareholder. However, we believe that in the interest of fairness and promoting compliance with other requirements, a nominee should also meet the objective qualification standards for directors of the company as well as any additional company independence standards. The nominating committee disclosure requirements adopted by the Commission last month would require companies to disclose any specific, minimum qualifications that are required for board nominees. Many companies have already adopted and made publicly available qualification standards for director nominees. The proposed rule's eligibility criteria for shareholder nominees, as set forth in the notice to the company required by paragraph (c) of the rule, do not address any qualification standards adopted by the company. We believe that shareholder nominees submitted for inclusion in the company's proxy materials under the rule should be required to meet these qualification standards. In particular, the paragraph (c) nominating shareholder notice should include a representation that, after review of the company's qualification standards and a reasonable investigation of the candidate's background and experience, the nominating shareholder has concluded that the candidate meets the company's qualification standards.
Moreover, the rule requires a representation by the nominating shareholder that its nominee meets the objective criteria for "independence" of applicable stock exchange rules. However, companies may also adopt objective independence criteria in addition to those required by applicable listing standards. The new NYSE corporate governance rules allow companies to adopt and disclose categorical standards of independence to assist the board of directors in making independence determinations. Many NYSE-listed companies have already adopted, or are in the process of adopting, categorical standards of independence which include bright-line tests for director independence in addition to those required by the NYSE rules. Accordingly, paragraph (c)(4) of the rule should be revised to require a shareholder nominee to meet not only the objective criteria of independence in the applicable listing standards but also any additional objective director independence standards adopted by the company. Given the NYSE and Nasdaq requirements that companies must have audit, compensation and nominating committees composed entirely of independent directors, if a shareholder nominee is not eligible to be considered independent, the other directors will bear the burden of filling any vacancies on these committees resulting from the application of the access procedure. In addition, paragraph (c)(4) should be clarified to make clear that a nominee must meet the criteria of all applicable listing standards, in cases where a company is listed on more than one stock exchange.
3. The rule should address the interaction of the proxy access procedure with audit committee requirements, particularly the consequences of an audit committee financial expert or any other member of the audit committee not being reelected as a result of the election of a shareholder nominee under the rule, and with any other committee qualifications.
The eligibility requirements for shareholder nominees in the proposed rule do not address the audit committee independence and financial literacy requirements of the NYSE, Nasdaq and other stock exchange rules or the related requirement pursuant to the Sarbanes-Oxley Act that the company must disclose if it has an audit committee financial expert. In particular, Rule 10A-3 under the Exchange Act imposes additional independence standards on the audit committee members of listed companies (that are in addition to the general independence standards of the applicable listing rules) and the NYSE and Nasdaq rules also impose financial literacy requirements on audit committee members.7 We are very concerned about the possibility that the election of a shareholder nominee, who is not required to meet these additional audit committee requirements, could result also in a member of the audit committee not being elected. At best, this would lead to a company losing one or more members of its audit committee and making it more difficult for the committee to perform its greatly expanded responsibility under the Sarbanes-Oxley Act and stock exchange rules. At worst, it would result in the company failing to meet the applicable listing requirement of the NYSE or Nasdaq, which requires that audit committees have a minimum of three members. Furthermore, the election of a shareholder nominee could result in a director identified as "audit committee financial expert" not being reelected. For companies who have identified only one committee member as such expert, this could result in the potentially harmful disclosure that the company does not have an audit committee financial expert, not to mention the loss of a particularly valuable member of the committee. To the extent that this person is also the only audit committee member who has "accounting or related financial management expertise," as required by the NYSE rules (or who meets the corresponding financial experience requirement that Nasdaq requires for at least one audit committee member), it would also result in the company failing to meet a listing requirement.
These scenarios are not purely hypothetical - in fact, it is quite possible that audit committee members could be the most vulnerable as a result of the committee's responsibilities. In particular, many institutional shareholders may adhere to voting guidelines that would call for withholding votes for an audit committee member who has voted in a certain way, such as to approve the provision of tax-related services by the company's auditors or to resist rotation of the auditors.8 Thus, particular actions by the committee, even if legally permitted and taken in proper exercise of directors' business judgment, may lead to the receipt of a large number of withhold votes for audit committee members and, in an election in which shareholder nominees are included on the company's proxy card, in one or even more of such members not being reelected.
Given that the election of a shareholder nominee could potentially displace a director on any other committee, the proposed rule should also address qualification standards adopted by the company for members of any of its other committees. For example, a company's compensation committee charter or other governance documents may require some or all members of the compensation committee to satisfy the standards of Rule 16b-3 under the Exchange Act or Section 162(m) of the Internal Revenue Code. The loss of a compensation committee member who satisfies one or both of these standards as a result of the application of the proposed access procedure may hinder the board's ability to administer the company's compensation policies.
4. The number of shareholder nominees that a company should be required to include in its proxy materials should be one for a company with a board of nine or less directors, two for a board of between 10 and 20 directors and three for a board of over 20 directors.
The proposed rule requires the inclusion of one shareholder nominee if the size of the board is eight or fewer. We recommend that the maximum board size requiring the inclusion of one nominee should be raised from eight to nine directors. A staggered board with three sets of three directors is a fairly common structure, and permitting two out of three directors elected in a given year to be shareholder nominees would be unnecessarily disruptive to the functioning of the board. More generally, the Proposing Release cites data indicating that the median public company board size is nine directors. We believe that, in light of the rule's significance, it should not be geared to putting two nominees on the boards of what is likely to be a majority of public companies.
In some cases, a company may decide to increase the size of its board of directors in order to include a shareholder candidate nominated under the rule without having contested elections or to voluntarily include in management's slate a candidate of a 5% shareholder. The rule should clarify that, in those cases, any shareholder nominee elected to the board will not be counted for purposes of determining the number of nominees shareholders can nominate based on the board of directors. This is necessary in order to avoid a situation where increasing the board size in order to include a shareholder nominee results in the company having to potentially include an additional nominee. For example, based on the proposed rule, if a company has a board consisting of eight directors and increases the size of its board to nine directors in order to include a shareholder nominee, the company should not be required to include an additional shareholder nominee because its board size is now in the category permitting the inclusion of two shareholder nominees. Finally, where a class of shareholders is entitled to elect one or more directors (but less than a majority), these directors should not be counted for purposes of determining the board's size under paragraph (d) of the rule.
V. The Nominating Process
1. The rule's exemption for solicitations to form a nominating shareholder group should be conformed to the existing non-management solicitations exemption.
As proposed, paragraph (f) of the rule would create a broad exemption for solicitations of not more than 30 persons in connection with the formation of a nominating shareholder group. We believe there is no reason to go beyond the 10-person exemption long contained in Rule 14a-2(b)(2), which permits a limited amount of testing the waters before applying the notice and filing requirements of the proxy rules. The proposed exemption in paragraph (f) of the rule, which would dramatically expand the number of solicitees that could be contacted privately, with no public filing of any solicitation materials, runs counter to the basic premise that the access procedure should not be used for change in control purposes. We suggest that the rule should ensure that the exemption be limited to solicitations solely for the limited purpose of forming a nominating shareholder group and not for any other purpose. We believe the 30-person exemption could be used for control purposes: for example, a large shareholder with an undeclared control intent could prepare written materials and enter into private discussions with 30 other shareholders about the need to change the board of directors of a company in connection with a stated intention to form a nominating group. After gauging the reaction of the other shareholders under the cloak of this exemption, the shareholder could decide to abandon the limited nominating group formation process and proceed to mount a full scale proxy contest based on the understandings obtained through this secret solicitation process. Creating this potential for abuse is unnecessary because paragraph (f) provides an alternative public mechanism by which a shareholder can "advertise" that it is seeking to form a group for this limited purpose. Accordingly, we believe the number of persons referred to in paragraph (f)(1)(i) should be no more than 10, consistent with existing limitations. The positive effect of this change would be that shareholders wanting to engage in a solicitation of more than 10 shareholders using written materials would be required to do so by means of written communication limited to the information set forth in paragraph (f)(1)(ii).
In addition, we believe that, given its purpose, the exemption set forth in paragraph (f) should only apply to a shareholder capable of meeting the nominating shareholder eligibility requirements of paragraph (b) of the rule. Therefore, the shareholder seeking to rely on the solicitations exemption of paragraph (f) should satisfy the requirement of paragraph (b)(2) that it has had continuous beneficial ownership of voting securities of the company for at least two years before being able to avail itself of this exemption. Written communications by the soliciting shareholder under paragraph (f)(1)(ii) should state the number of shares beneficially owned continuously over two years by the shareholder and advise other shareholders that only similarly situated shareholders are eligible to become part of the nominating group.
Finally, to avoid continuing actions in concert by a shareholder group which has been formed for the limited nominating purpose under the rule and which has been unsuccessful in having its nominee elected to the board, the rule should make it clear that, immediately following the annual meeting at which its nominee was defeated, the group should be dissolved by the filing of a final amendment to its Schedule 13G. This will also be necessary to make sure that the proposed Instruction to paragraphs (b) and (c) of Rule 13d-1 will not be able to be used to mask continuing group activities beyond the scope of the original reason for forming the shareholder group.
2. The shareholder notice under paragraph (c) of the rule should be required to be submitted by the same deadline as required for shareholder proposals under Rule 14a-8 and should contain a representation that the nominating shareholder will respond to requests for information by the company.
The proposed rule would generally require a nominating shareholder to submit its notice to the company regarding its nomination, with certain representations as specified in paragraph (c) of the rule, no later than 80 days before the first anniversary of the date that the company mailed its proxy materials for the prior year's annual meeting. We believe that this period is too short to allow for the process contemplated in Instruction 4 to paragraph (a) to work (i.e., determination by the company whether there are grounds for excluding the nominee, notice to the nominating shareholder, and potential inclusion of a supporting statement by the nominating shareholder in the proxy statement) as well as the need for the company to be able to request additional information, as discussed below. We suggest that the submission deadline in paragraph (c) of the rule be the 120-day period required for shareholder proposals under Rule 14a-8.
We also believe that a nominating shareholder should be required to provide a representation in its notice to the company that it would respond to requests for information by the company. This is necessary in order to both assist the company in making its determination of whether it must include the nominee of such shareholder in its proxy materials and reduce the risk of a serious dispute following a decision not to nominate a candidate. For example, the company should be able to request records that establish that the nominating shareholder or group meets the share ownership required by paragraph (b) of the rule and that all such shares have been held by the shareholder or each member of a shareholder group for the required period of two years. Accordingly, the shareholder notice should include a representation by the shareholder that, upon request by the company, it will provide any information that is reasonably necessary for the company to make its determination. In order to regulate this process, the rule should also provide a specific deadline by which the company must request additional information (we suggest that one month is appropriate to accommodate the need for the company to conduct any independent investigation), give the company an opportunity to obtain follow-up information and prescribe a deadline by which the nominating shareholder must respond to such requests for information (we suggest that a period of two weeks will be appropriate). Finally, the rule should specifically provide that a nominee may be excluded from a company's proxy materials if the nominating shareholder does not provide the requested information in the required timeframe or the information does not confirm the representations included in the shareholder's notice to the company.
3. The rule should clarify that a company should not be required to include a shareholder nominee in its proxy materials if the nominating shareholder has failed to submit or file its notice by the required deadline.
As discussed above, it will be difficult for the nomination procedure contemplated in Instruction 4 to paragraph (a) to work if a timely notice is not provided to the company. We also believe that this notice should be filed with the Commission not later than the next business day after it is provided to the company so that all shareholders have access to this information and suggest that proposed Rule 14a-6(q) be revised accordingly. Based on the foregoing, we believe that a company should not be required to include a shareholder nominee in its proxy materials unless the nominating shareholder or group has provided its notice, and has filed its notice with the Commission, by the required deadlines.
4. The use of a universal ballot containing both management and shareholder nominees, while not allowing a vote for management's nominees as a group, will create the potential for considerable shareholder confusion and disenfranchisement.
We are concerned by the significant potential for confusion resulting from the use, for the first time, of a universal ballot contemplated by the proposed access procedure, which will contain the names of both management's nominees and shareholder nominees. It is not hard to imagine various scenarios in which a shareholder may, intentionally or by mistake, complete such a proxy card in a way as to ultimately disenfranchise himself or herself:
- It is likely that many shareholders, relying on common practice, will execute a blank proxy card without checking the boxes for any of the nominees, with the result most likely being an invalid proxy card.
- Other shareholders may mistakenly check all boxes, including the boxes for the shareholder nominees and the boxes for all management nominees.
- A shareholder may also check the box only for the shareholder nominees in an effort to underscore his or her support for them or check boxes for some management nominees but less than the number required for a full slate.
The separation of legal and beneficial ownership is even now a source of considerable confusion in the proxy process. The potential for confusion expands when one considers the possible uncertainties and mistakes in completing and tabulating voting instruction forms sent to beneficial holder in connection with a universal proxy card and the back-office tabulation of votes by Automatic Data Processing ("ADP"). In this context, it is worthwhile pointing out that ADP does not offer electronic returns of voting instructions in contested elections.
Furthermore, the Commission has proposed to revise paragraph (b)(2)(iv) of Rule 14a-4 to prohibit the grant of authority to vote for nominees as a group on a proxy card if the proxy card includes a shareholder nominee. We are very concerned that this will add further disruption to the proxy voting process in an election subject to the access procedure. Many proxy cards are currently returned signed by the shareholder without checking particular boxes. We think it is apparent that such shareholders are intending to vote as recommended by management or would not have otherwise signed and returned the card. In so voting, they are relying on a long-standing process which allows them to vote with the board's recommendations if they do not check the boxes. No matter what efforts are taken, it is highly likely that a substantial portion of those shareholders will continue to sign and return proxy cards in the way they have in the past. This will have the unintended consequences of disenfranchising these shareholders and distorting the vote on directors. It could also result in the company failing to obtain a quorum for the shareholders meeting.
To address these concerns, we strongly recommend that the proxy be voted in essentially the same manner that shareholders are used to today but require a clear delineation of the management slate and the shareholder nominee(s) and state on the face of the proxy card in bold face that: "In order to vote for a shareholder nominee, you must check the box for that nominee and strike a candidate from the management slate." We believe that this method will also minimize the risk that a shareholder will either vote for all nominees - thus rendering the proxy invalid - or vote for only a partial slate - which will disenfranchise the shareholder with respect to his or her vote on the full slate of directors. In the interest of giving shareholders greater influence in the proxy process and avoiding the almost certain confusion that will stem from a universal proxy card, the rule should not require any more changes to the form of proxy than are necessary to give effect to the proxy access procedure. The more shareholders can rely on what has become customary, the lower the risk that a considerable number of invalid proxies will be returned in an election to which the access procedure applies.
5. The rule should require the filing of all nominating shareholder solicitations and, in light of the availability of solicitations by any means, should not require the company to include a supporting statement in its proxy.
Paragraph (c)(10) of the rule contemplates the possibility that a nominating shareholder can conduct solicitations in support of its nominee through a website. We believe that paragraph (f)(2) should clarify that the word "communication," as used to refer to any soliciting communication, includes all materials posted on such website as well as all electronic communications. It is essential that the public have access to all information that is being used on behalf of a nominee.
Instruction 4 to paragraph (a) of the rule would require the company to include in its proxy statement a nominating shareholder's statement in support of a nominee if the company includes a supporting or opposing statement. We would suggest that this requirement is unnecessary in light of the fact that a nominating shareholder is allowed under paragraph (f)(2) to conduct solicitations by any means, including through a website. Accordingly, it will be sufficient if the company provides in its proxy statement the website address at which a nominating shareholder conducts solicitations. It is likely that the company will be sensitive about what information is mailed on its behalf and that each side will dispute the accuracy of statements in support or opposition. Allowing the company to provide only the website at which a nominating shareholder or group conducts solicitations will avoid the waste of time and resources inherent in such disputes as well as the involvement of the Commission's staff in issues regarding the accuracy of supporting statements.
6. The rule should disallow the resubmission of the same nominee or by the same shareholder for a specified period of time.
We believe that the rule should discourage a waste of corporate resources that will result from the repeated submission of the same nominee or by the same shareholder under the access procedure. The rule should provide appropriate incentives to a nominating shareholder not to resubmit a nomination where this is likely to be futile and, in general, to select nominees that are likely to receive at least some shareholder support. Specifically, we suggest that a nominating shareholder, or any member of a nominating shareholder group as part of the same or a different group, should not be eligible to submit a nominee under the access procedure for a period of three years following a shareholder election in which its nominee received less than 35% of the votes cast. Similarly, the shareholder notice under paragraph (c) of the rule should include a representation that the nominee whose name is proposed to be included in the company's proxy materials has not been submitted as a shareholder nominee under the rule in the past three years.
* * *
We appreciate the opportunity to comment to the Commission on the proposed rule, and would be pleased to discuss any questions the Commission may have with respect to this letter. Any questions about this letter may be directed to John T. Bostelman (212-558-3840), James C. Morphy (212-558-3988) or Donald C. Walkovik (212-558-3911) in our New York office.
Very truly yours,
SULLIVAN & CROMWELL LLP
cc: Giovanni P. Prezioso
Alan L. Beller
Director, Division of Corporation Finance
|1|| See Business Roundtable v. SEC, 905 F.2d 406 (D.C. Cir. 1990).
|2|| In this context, we note that the extensive corporate governance reforms enacted by Congress through the Sarbanes-Oxley Act of 2002 did not address the issue of shareholder access, even though these reforms were also fundamentally related to improving company responsiveness and accountability. Thus, the Sarbanes-Oxley Act did not extend the Commission's authority in the Section 14(a) area and the limitations on that authority set forth in the Business Roundtable decision continue to apply.
|3|| See, e.g., Delaware General Corporation Law, §§ 242, 251; New York Business Corporation Law §§ 803, 903.
|4|| As a general comment on the proposed rule, all percentages based on share ownership, for purposes of triggering events and other threshold ownership requirements, should be determined based on the voting power in the election of the directors, rather than the number of shares, to address cases where there are multiple classes of shares entitled to vote in the election of directors or multiple classes of directors as to which there are different voting rights or election requirements.
|5|| In this context, we agree with the proposal that the inclusion of a shareholder nominee in a company's proxy materials under the proposed rule should not be deemed a solicitation in opposition that would require the company to file its proxy statement in preliminary form.
|6|| The Proposing Release states, in the paragraph referencing footnote 61, that "If state law permits companies incorporated in that state to prohibit security holder nominations through provisions in companies' articles of incorporation or bylaws, the proposed procedure would not be available to security holders of a company that had included validly such a provision in its governing instruments."
|7|| A company's audit committee charter or categorical standards of independence may include an additional layer of audit committee member standards. For instance, while the NYSE rules do not expressly prohibit an audit committee member from serving on the audit committees of more than three public companies (and merely require related disclosure), the audit committee charters of some companies specifically prohibit service by audit committee members on the audit committees of more than two other companies.
|8|| For instance, on April 15, 2003, CalPERS sent a letter to companies in which it hold shares stating its intent to withhold votes for all of the company's audit committee members if the company has used its auditor for non-audit services, such as certain permitted forms of tax related consulting and information systems design and implementation services. The letter is available at < http://www.calpers-governance.org/viewpoint/speeches/anson041403.asp>.