PROXY ACCESS ANNOUNCED
SHAREHOLDERS GAIN ACCESS TO THE PROXY
By Thomas L. Montrone
August 31, 2010
- 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.What was in the Regulation that Passed?
The regulation that passed was far different from the trial balloons
floated last year. Here is a brief synopsis of the Rule as we
- 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
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.Can Anything Be Done to Improve a Company's Position?
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