PROXY ACCESS ANNOUNCED

SHAREHOLDERS GAIN ACCESS TO THE PROXY

• When Will it be Effective?
• What is in the Regulation?
• Should Issuers be Concerned?
• What Preparations Issuers Can Take

When Will It Be Effective?

On August 25, 2010, in a 3-2 vote along party lines, the SEC approved the passage of Proxy Access. The rule passed with one dissenting commissioner flatly stating that the Rule will never stand up to a challenge in the courts. The Rule becomes effective 60 days after being published in the Federal Register. This requirement, coupled with a requirement that notice of shareholder nominations be provided 120 days before the first anniversary date of the mailing of the company's proxy statement for the prior year, makes the Rule likely to be effective for larger listed companies that mailed their 2010 proxy statements on or after March 1, 2010. The Rule will be deferred for three years for smaller companies that have a market capitalization of less than $75 million.

The regulation that passed was far different from the trial balloons floated last year. Here is a brief synopsis of the Rule as we understand it:

• A shareholder or group of shareholders must hold, in the aggregate, at least 3% of the company's voting stock for a period of at least 3 years to nominate directors. Shares cannot be borrowed for this purpose, but shares can be loaned provided the shareholder or group has the right to recall the shares. There aren't any tiered ownership levels as envisioned in the discussion last year;
• Directors nominated by shareholders cannot exceed 25% of the directors on the Board. If more than one shareholder or group nominates directors and the total nominated by such group would exceed 25% of the total directors, then the nominee of shareholder or group with the most shares would prevail in the listing request;
• The shareholder or group must certify that a change of control will not be sought. Also, the nominee(s) must meet the objective independent standards of the listing exchange or association;
• The SEC also approved amending Rule 14a-8 to require companies to include qualifying shareholder proposals seeking to establish procedures for the inclusion of shareholder nominees, provided the proposals do not limit the availability of the new Rule 14a-11. The current shareholder eligibility requirements to submit a proposal under Rule 14a-8 is that a shareholder hold at least $2,000 in stock in current market value or 1% of the company's voting securities, whichever is less.

Should Issuers Be Concerned?

Should issuers be concerned? Absolutely!!! Even though many companies may never have a shareholder nominate a director, just the prospect of having a shareholder nominee should make most companies nervous - very nervous. While it might depend upon each issuer's situation, the elimination of cost as a deterrent for unwanted nominations makes it far too easy for opponents and gadflies to mount a nominee campaign. We all realize that there is at least some likelihood that shareholders may vote without really looking at the nominees. Recall the recent senatorial primary winner that had no experience and only $10,000 in funding. The complete unknown surprisingly prevailed, probably because he had a nice sounding name and perhaps fortuitous placement on the ballot.

Certainly there are some companies that will find the prospect of having a shareholder nominated board member a daunting proposition. We have observed a number of proxy contests that were focused on getting just one shareholder nominee elected. The nominee, if elected, would then advocate for a sale of the company (although this is prohibited under the new regulation). Still, it sometimes only takes one adversarial director to turn the board agenda, dynamics and productivity on its head. The elimination of most of the cost of the process may turn some boardrooms into turf battles.

Companies are not powerless to prevent shareholder nominations. With well considered preparation and planning, issuers may significantly reduce the potential of a shareholder-nominated director or, when nominated, thwart the election of the shareholder nominee. Here are some strategies that may be considered to prevent nominations and actions to take should a nomination occur.

Know the Opposition - Not to characterize these proponents as enemies, but, as the old expression goes, "Keep your friends close, but keep your enemies closer." Issuers should first know the disposition of significant share positions by having periodic analysis of their shareholder base. They should also know the voting pre-disposition of institutional holders that hold significant positions. This can be accomplished to some degree by a proxy solicitor. Senior management should then conduct frequent dialogues with potential dissidents. Such discussions can often defuse potentially adverse positions. Just getting heard and having a sense that management will consider an activist's concerns may take the prospect of a nominee off the table. However, knowing who the shareholders are that have or could aggregate a 3% position may be difficult.

Make Sure the Directors are qualified and have good attendance records - Ensure that your directors are well qualified. It might be time to reevaluate long standing directors to see if better-qualified alternatives are appropriate. Certainly director attendance, always a sore issue if a director is consistently AWOL, can spur a rebellion and generate support for a replacement.

Be ready to take action should you receive a shareholder nomination - If a shareholder nominee is submitted, issuers should already have a battle plan in place. For example, drafting pro forma proxy cards and shareholder communications can be prepared in advance. Carefully consider the structure of the proxy card to differentiate between shareholder and issuer nominees. Also, don't wait until the eleventh hour to select a proxy solicitor. Having one already familiar with your shareholder base will enhance the development of shareholder communications and solicitation efforts. Of course, getting transparency of shareholder voting positions, as many have proposed in response to the July SEC proxy mechanics Concept Release, would make a big difference in the costs and potential for success for issuers.

As noted by one of the SEC Commissioners, the new Proxy Access regulation may not survive a challenge in court. But as we have learned all too often, trying to predict how or if courts will rule on certain matters is risky at best. Proxy access should be taken seriously by all but the most closely-held companies. Gaining low cost access to the proxy has the potential of being a game-changing event for many companies that never considered an adverse director nomination as a viable threat.