Facilitating Shareholder Director Nominations

Federal RegisterSep 16, 2010

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SECURITIES AND EXCHANGE COMMISSION

17 CFR PARTS 200, 232, 240 and 249

[Release Nos. 33-9136; 34-62764; IC-29384; File No. S7-10-09]

RIN 3235-AK27

Facilitating Shareholder Director Nominations

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

We are adopting changes to the Federal proxy rules to facilitate the effective exercise of shareholders' traditional State law rights to nominate and elect directors to company boards of directors. The new rules will require, under certain circumstances, a company's proxy materials to provide shareholders with information about, and the ability to vote for, a shareholder's, or group of shareholders', nominees for director. We believe that these rules will benefit shareholders by improving corporate suffrage, the disclosure provided in connection with corporate proxy solicitations, and communication between shareholders in the proxy process. The new rules apply only where, among other things, relevant state or foreign law does not prohibit shareholders from nominating directors. The new rules will require that specified disclosures be made concerning nominating shareholders or groups and their nominees. In addition, the new rules provide that companies must include in their proxy materials, under certain circumstances, shareholder proposals that seek to establish a procedure in the company's governing documents for the inclusion of one or more shareholder director nominees in the company's proxy materials. We also are adopting related changes to certain of our other rules and regulations, including the existing solicitation exemptions from our proxy rules and the beneficial ownership reporting requirements.

DATES:

Effective Date:

November 15, 2010.

Compliance Dates:

November 15, 2010, except that companies that qualify as “smaller reporting companies” (as defined in 17 CFR 240.12b-2) as of the effective date of the rule amendments will not be subject to Rule 14a-11 until three years after the effective date.

FOR FURTHER INFORMATION CONTACT:

Lillian Brown, Tamara Brightwell, or Ted Yu, Division of Corporation Finance, at (202) 551-3200, or, with regard to investment companies, Kieran G. Brown, Division of Investment Management, at (202) 551-6784, U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

We are adding new Rule 82a of Part 200 Subpart D—Information and Requests,

and new Rules 14a-11,

and 14a-18,

and new Regulation 14N

and Schedule 14N,

and amending Rule 13

of Regulation S-T,

Rules 13a-11,

13d-1,

14a-2,

14a-4,

14a-5,

14a-6,

14a-8,

14a-9,

14a-12,

and 15d-11,

Schedule 13G,

Schedule 14A,

and Form 8-K,

under the Securities Exchange Act of 1934.

Although we are not amending Schedule 14C

under the Exchange Act, the amendments will affect the disclosure provided in Schedule 14C, as Schedule 14C requires disclosure of some items contained in Schedule 14A.

17 CFR 200.82a.

17 CFR 240.14a-11.

17 CFR 240.14a-18.

17 CFR 240.14n

et seq.

17 CFR 240.14n-101.

17 CFR 232.13.

17 CFR 232.10

et seq.

17 CFR 240.13a-11.

17 CFR 240.13d-1.

17 CFR 240.14a-2.

17 CFR 240.14a-4.

17 CFR 240.14a-5.

17 CFR 240.14a-6.

17 CFR 240.14a-8.

17 CFR 240.14a-9.

17 CFR 240.14a-12.

17 CFR 240.15d-11.

17 CFR 240.13d-102.

17 CFR 240.14a-101.

17 CFR 249.308.

15 U.S.C. 78a

et seq.

(the “Exchange Act”). Part 200 Subpart D—Information and Requests and Regulation S-T are also promulgated under the Securities Act of 1933 [15 U.S.C. 77a

et seq.

] (the “Securities Act”).

17 CFR 240.14c-101.

Table of Contents

I. Background and Overview of Amendments

A. Background

B. Our Role in the Proxy Process

C. Summary of the Final Rules

II. Changes to the Proxy Rules

A. Introduction

B. Exchange Act Rule 14a-11

1. Overview

2. When Rule 14a-11 Will Apply

a. Interaction With State or Foreign Law

b. Opt-In Not Required

c. No Opt-Out

d. No Triggering Events

e. Concurrent Proxy Contests

3. Which Companies Are Subject to Rule 14a-11

a. General

b. Investment Companies

c. Controlled Companies

d. “Debt Only” Companies

e. Application of Exchange Act Rule 14a-11 to Companies That Voluntarily Register a Class of Securities Under Exchange Act Section 12(g)

f. Smaller Reporting Companies

4. Who Can Use Exchange Act Rule 14a-11

a. General

b. Ownership Threshold

i. Percentage of Securities

ii. Voting Power

iii. Ownership Position

iv. Demonstrating Ownership

c. Holding Period

d. No Change in Control Intent

e. Agreements With the Company

f. No Requirement To Attend the Annual or Special Meeting

g. No Limit on Resubmission

5. Nominee Eligibility Under Exchange Act Rule 14a-11

a. Consistent With Applicable Law and Regulation

b. Independence Requirements and Other Director Qualifications

c. Agreements With the Company

d. Relationship Between the Nominating Shareholder or Group and the Nominee

e. No Limit on Resubmission of Shareholder Director Nominees

6. Maximum Number of Shareholder Nominees To Be Included in Company Proxy Materials

a. General

b. Different Voting Rights With Regard to Election of Directors

c. Inclusion of Shareholder Nominees in Company Proxy Materials as Company Nominees

7. Priority of Nominations Received by a Company

a. Priority When Multiple Shareholders Submit Nominees

b. Priority When a Nominating Shareholder or Group or a Nominee Withdraws or Is Disqualified

8. Notice on Schedule 14N

a. Proposed Notice Requirements

b. Comments on the Proposed Notice Requirements

c. Adopted Notice Requirements

i. Disclosure

ii. Schedule 14N Filing Requirements

9. Requirements for a Company That Receives a Notice From a Nominating Shareholder or Group

a. Procedure If Company Plans To Include Rule 14a-11 Nominee

b. Procedure If Company Plans To Exclude Rule 14a-11 Nominee

c. Timing of Process

d. Information Required in Company Proxy Materials

i. Proxy Statement

ii. Form of Proxy

e. No Preliminary Proxy Statement

10. Application of the Other Proxy Rules to Solicitations by the Nominating Shareholder or Group

a. Rule 14a-2(b)(7)

b. Rule 14a-2(b)(8)

11. 2011 Proxy Season Transition Issues

C. Exchange Act Rule 14a-8(i)(8)

1. Background

2. Proposed Amendment

3. Comments on the Proposal

4. Final Rule Amendment

5. Disclosure Requirements

D. Other Rule Changes

1. Disclosure of Dates and Voting Information

2. Beneficial Ownership Reporting Requirements

3. Exchange Act Section 16

4. Nominating Shareholder or Group Status as Affiliates of the Company

E. Application of the Liability Provisions in the Federal Securities Laws to Statements Made by a Nominating Shareholder or Nominating Shareholder Group

III. Paperwork Reduction Act

A. Background

B. Summary of the Final Rules and Amendments

C. Summary of Comment Letters and Revisions to Proposal

D. Revisions to PRA Reporting and Cost Burden Estimates

1. Rule 14a-11

2. Amendment to Rule 14a-8(i)(8)

3. Schedule 14N and Exchange Act Rule 14a-18

4. Amendments to Exchange Act Form 8-K

5. Schedule 13G Filings

6. Form ID Filings

E. Revisions to PRA Reporting and Cost Burden Estimates

IV. Cost-Benefit Analysis

A. Background

B. Summary of Rules

C. Factors Affecting Scope of the New Rules

D. Benefits

1. Facilitating Shareholders' Ability To Exercise Their State Law Rights To Nominate and Elect Directors

2. Minimum Uniform Procedure for Inclusion of Shareholder Director Nominations and Enhanced Ability for Shareholders To Adopt Director Nomination Procedures

3. Potential Improved Board Performance and Company Performance

4. More Informed Voting Decisions in Director Elections Due to Improved Disclosure of Shareholder Director Nominations and Enhanced Shareholder Communications

E. Costs

1. Costs Related to Potential Adverse Effects on Company and Board Performance

2. Costs Related to Additional Complexity of Proxy Process

3. Costs Related to Preparing Disclosure, Printing and Mailing and Costs of Additional Solicitations and Shareholder Proposals

V. Consideration of Burden on Competition and Promotion of Efficiency, Competition and Capital Formation

VI. Final Regulatory Flexibility Analysis

A. Need for the Amendments

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Rules

D. Reporting, Recordkeeping and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

VII. Statutory Authority and Text of the Amendments

I. Background and Overview of Amendments

A. Background

On June 10, 2009, we proposed a number of changes to the Federal proxy rules designed to facilitate shareholders' traditional State law rights to nominate and elect directors. Our proposals sought to accomplish this goal in two ways: (1) By facilitating the ability of shareholders with a significant, long-term stake in a company to exercise their rights to nominate and elect directors by establishing a minimum standard for including disclosure concerning, and enabling shareholders to vote for, shareholder director nominees in company proxy materials; and (2) by narrowing the scope of the Commission rule that permitted companies to exclude shareholder proposals that sought to establish a procedure for the inclusion of shareholder nominees in company proxy materials.

We recognized at that time that the financial crisis that the nation and markets had experienced heightened the serious concerns of many shareholders about the accountability and responsiveness of some companies and boards of directors to shareholder interests, and that these concerns had resulted in a loss of investor confidence. These concerns also led to questions about whether boards were exercising appropriate oversight of management, whether boards were appropriately focused on shareholder interests, and whether boards need to be more accountable for their decisions regarding issues such as compensation structures and risk management.

See Facilitating Shareholder Director Nominations,

Release No. 33-9046, 34-60089 (June 10, 2009) [74 FR 29024] (“Proposal” or “Proposing Release”). The Proposing Release was published for comment in the Federal Register on June 18, 2009, and the initial comment period closed on August 17, 2009. The Commission re-opened the comment period as of December 18, 2009 for thirty days to provide interested persons the opportunity to comment on additional data and related analyses that were included in the public comment file at or following the close of the original comment period. In total, the Commission received approximately 600 comment letters on the proposal. The public comments we received are available on our Web site at

http://www.;sec.gov/comments/s7-10-09/s71009.shtml.

Comments also are available for Web site viewing and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m.

A principal way that shareholders can hold boards accountable and influence matters of corporate policy is through the nomination and election of directors. The ability of shareholders to effectively use their power to nominate and elect directors is significantly affected by our proxy regulations because, as has long been recognized, a federally-regulated corporate proxy solicitation is the primary way for public company shareholders to learn about the matters to be decided by the shareholders and to make their views known to company management.

As discussed in detail below, in light of these concerns, we reviewed our proxy regulations to determine whether they should be revised to facilitate shareholders' ability to nominate and elect directors. We have taken into consideration the comments received on the proposed amendments as well as subsequent congressional action

and are adopting final rules that will, for the first time, require company proxy materials, under certain circumstances, to provide shareholders with information about, and the ability to vote for a shareholder's, or group of shareholders', nominees for director. We also are amending our proxy rules to provide shareholders the ability to include in company proxy materials, under certain circumstances, shareholder proposals that seek to establish a procedure in the company's governing documents for the inclusion of one or more shareholder director

nominees in the company's proxy materials.

See, e.g.,

Securit[ies] and Exchange Commission Proxy Rules: Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 Before the House Comm. on Interstate and Foreign Commerce, 78th Cong., 1st Sess., at 17-19 (1943) (Statement of the Honorable Ganson Purcell, Chairman, Securities and Exchange Commission) (explaining the initial Commission rules requiring the inclusion of shareholder proposals in company proxy materials: “We give [a stockholder] the right in the rules to put his proposal before all of his fellow stockholders along with all other proposals * * * so that they can see then what they are and vote accordingly. * * * The rights that we are endeavoring to assure to the stockholders are those rights that he has traditionally had under State law, to appear at the meeting; to make a proposal; to speak on that proposal at appropriate length; and to have his proposal voted on. But those rights have been rendered largely meaningless through the process of dispersion of security ownership through[out] the country. * * * [T]he assurance of these fundamental rights under State laws which have been, as I say, completely ineffective * * * because of the very dispersion of the stockholders' interests throughout the country[;] whereas formerly * * * a stockholder might appear at the meeting and address his fellow stockholders[, t]oday he can only address the assembled proxies which are lying at the head of the table. The only opportunity that the stockholder has today of expressing his judgment comes at the time he considers the execution of his proxy form, and we believe * * * that this is the time when he should have the full information before him and ability to take action as he sees fit.”);

See also

Edward P. Welch and Robert S. Saunders,

What We Can Learn From Other Statutory Schemes: Freedom And Its Limits In The Delaware General Corporation Law,

33 Del. J. Corp. L. 845, 857-859 (2008); Jeffrey N. Gordon,

Contractual Freedom In Corporate Law: Articles & Comments; The Mandatory Structure Of Corporate Law,

89 Colum. L. Rev. 1549, 1554 n.16 (1989) (identifying several of these and other mandatory aspects of Delaware corporation law).

Second, the argument that there is an inconsistency between mandating inclusion of shareholder nominees in company proxy materials and our concern for the rights of shareholders under the Federal securities laws

mistakenly assumes that basic protections of, and rights of, particular shareholders provided under the Federal proxy rules should be able to be abrogated by “the shareholders” of a particular corporation, acting in the aggregate. The rules we adopt today provide individual shareholders the ability to have director nominees included in the corporate proxy materials if State law

and governing corporate documents permit a shareholder to nominate directors at the shareholder meeting and the requirements of Rule 14a-11 are satisfied. Those rules similarly facilitate the right of individual shareholders to vote for those nominated, whether by management or another shareholder, if the shareholder has voting rights under State law and the company's governing documents. The rules we adopt today reflect our judgment that the proxy rules should better facilitate shareholders' effective exercise of their traditional State law rights to nominate directors and cast their votes for nominees. When the Federal securities laws establish protections or create rights for security holders, they do so individually, not in some aggregated capacity. No provision of the Federal securities laws can be waived by referendum. A rule that would permit some shareholders (even a majority) to restrict the Federal securities law rights of other shareholders would be without precedent and, we believe, a fundamental misreading of basic premises of the Federal securities laws. In addition, allowing some shareholders to impair the ability of other shareholders to have their director nominees included in company proxy materials cannot be reconciled with the purpose of the rules we are adopting today. In our view, it would be no more appropriate to subject a Federal proxy rule that provides the ability to include nominees in the company proxy statement to a shareholder vote than it would be to subject any other aspect of the proxy rules—including the other required disclosures—to abrogation by shareholder vote.

See

letters from Grundfest; Form Letter Type A.

Cf.

letter from Nine Law Firms.

In the case of a non-U.S. domiciled issuer that does not qualify as a foreign private issuer (as defined in Exchange Act Rule 3b-4), we will look to the underlying law of the jurisdiction of organization.

See

Rule 14a-11(a).

Third, the net effect of our rules will be to expand shareholder choice, not limit it. Our rules will result in a greater number of nominees appearing on a proxy card. Shareholders will continue to have the opportunity to vote solely for management candidates, but our rules will also give shareholders the opportunity to vote for director candidates who otherwise might not have been included in company proxy materials.

In addition to these basic conclusions, we note that there are other significant concerns raised by a private ordering approach. A company-by-company shareholder vote on the applicability of Rule 14a-11 would involve substantial direct and indirect, market-wide costs, and it is possible that boards of directors, or shareholders acting with their explicit or implicit encouragement, might seek such shareholder votes, perhaps repeatedly, at no financial cost to themselves but at considerable cost to the company and its shareholders. Another concern relates to the nature of the shareholder vote on whether to opt out of Rule 14a-11: Specifically, in that context management can draw on the full resources of the corporation to promote the adoption of an opt-out, while disaggregated shareholders have no similarly effective platform from which to advocate against an opt-out.

In addition, the path to shareholder adoption of a procedure to include nominees in company proxy materials is by no means free of obstructions. While shareholders may ordinarily have the State law right to adopt bylaws providing for inclusion of shareholder nominees in company proxy materials even in the absence of an explicit authorizing statute like Delaware's, the existence of that right in the absence of such a statute may be challenged. Moreover, we understand that under Delaware law, the board of directors is ordinarily free, subject to its fiduciary duties, to amend or repeal any shareholder-adopted bylaw.

In addition, not all state statutes confer upon shareholders the power to adopt and amend bylaws, and even where shareholders have that power it is frequently limited by requirements in the company's governing documents that bylaw amendments be approved by a supermajority shareholder vote.

It has been argued to us, as a basis for excluding a shareholder proposal under Rule 14a-8, that Delaware law does not permit a bylaw to deprive the board of directors of the power to amend or repeal it, where the corporation's certificate of incorporation confers upon the board the power to adopt, amend and repeal bylaws.

See, e.g.,

CVS Caremark Corp.,

No-Action Letter (March 9, 2010).

See also

Del. Code Ann., tit. 8, § 109(b) and

Centaur Partners, IV

National Intergroup, Inc.,

582 A.2d 923, 929 (Del. 1990).

See

Beth Young, The Corporate Library, “The Limits of Private Ordering: Restrictions on Shareholders' Ability to Initiate Governance Change and Distortions of the Shareholder Voting Process” (November 2009),

available at http://www.sec.gov/comments/s7-10-09/s71009-568.pdf.

See, e.g.,

Ind. Code § 23-1-39-1; Okla. Stat., tit. 18, § 18-1013.

After careful consideration of the options that commenters have suggested, we have determined that the most effective way to facilitate shareholders' exercise of their traditional State law rights to nominate and elect directors would be through Rule 14a-11 and the related amendments to the proxy rules that we proposed in June 2009. We have concluded that the ability to include shareholder nominees in company proxy materials pursuant to Rule 14a-11

must be available to shareholders who are entitled under State law to nominate and elect directors, regardless of any provision of State law or a company's governing documents that purports to waive or prohibit the use of Rule 14a-11. In this regard, we note that although the rules we are adopting do not permit a company or its shareholders to opt out of or alter the application of Rule 14a-11, the amendments do contemplate that any additional ability to include shareholder nominees in the company's proxy materials that may be established in a company's governing documents will be permissible under our rules. Moreover, our amendments to Rule 14a-8 will facilitate the presentation of proposals by shareholders to adopt company-

specific procedures for including shareholder nominees for director in company proxy materials, and our adoption of new Exchange Act Rule 14a-18 (which requires disclosure concerning the nominating shareholder or group and the nominee or nominees that generally is consistent with that currently required in an election contest) will help assure that investors are adequately informed about shareholder nominations made through such procedures.

Throughout this release, when we refer to “a nomination pursuant to Rule 14a-11,” a “Rule 14a-11 nomination,” or other similar statement, we are referring to a nomination submitted for inclusion in a company's proxy materials pursuant to Rule 14a-11.

In contrast, if State law

or a provision of the company's governing documents were ever to prohibit a shareholder from making a nomination (as opposed to including a validly nominated individual in the company's proxy materials), Rule 14a-11 would not require the company to include in its proxy materials information about, and the ability to vote for, any such nominee. The rule defers entirely to State law as to whether shareholders have the right to nominate directors and what voting rights shareholders have in the election of directors.

In the case of a non-U.S. domiciled issuer that does not qualify as a foreign private issuer, we will look to the underlying law of the jurisdiction of organization.

See

footnote 50 above.

While we have concluded that we should provide shareholders the means to have nominees included in proxy materials in certain circumstances, we also are mindful that to accomplish this goal the regulatory structure must arrive at a solution that ultimately is workable. Accordingly, we are adopting a number of significant changes to the rules we proposed in order to address the many thoughtful and constructive comments we received on the specifics of our proposed amendments. The changes that we are making to the amendments are described in detail throughout this release. There also were a number of suggested changes that we considered and decided not to adopt, as detailed below.

B. Our Role in the Proxy Process

Several commenters challenged our authority to adopt Rule 14a-11.

We considered those comments carefully but continue to believe that we have the authority to adopt Rule 14a-11 under Section 14(a) as originally enacted.

In any event, Congress confirmed our authority in this area and removed any doubt that we have authority to adopt a rule such as Rule 14a-11.

As described more fully below, Rule 14a-11 is necessary and appropriate in the public interest and for the protection of investors.

Additionally, as explained below, the terms and conditions of Rule 14a-11 are also in the interests of shareholders and for the protection of investors.

Therefore, this challenge is now moot.

See

letters from Ameriprise; AT&T; L. Behr; BRT; Burlington Northern; CMCC; Dewey; M. Eng; FedEx; Grundfest; Keating Muething; OPLP; Sidley Austin.

When it adopted Section 14(a) of the Exchange Act, Congress determined that the exercise of shareholder voting rights via the corporate proxy is a matter of Federal concern, and the statute's grant of authority is not limited to regulating disclosure.

Roosevelt

E.I. DuPont de Nemours & Co.,

958 F.2d 416, 421-422 (D.C. Cir. 1992) (Congress “did not narrowly train [S]ection 14(a) on the interest of stockholders in

receiving information

necessary to the intelligent exercise of their” State law rights; Section 14(a) also “shelters use of the proxy solicitation process as a means by which stockholders * * * may

communicate with each other.”

);

See also

the Roundtable on the Federal Proxy Rules and State Corporation Law and the Roundtable on Proposals of Shareholders

available at

http://www.sec.gov/spotlight/proxyprocess.htm.

See

letters from CII; COPERA; CtW Investment Group; L. Dallas; T. DiNapoli; Florida State Board of Administration; ICGN; D. Nappier; OPERS; Pax World; Teamsters.

On the other hand, many commenters have expressed concern that mandating shareholder access to company proxy materials would lead to more proxy contests or “politicized elections,”

which would be distracting, expensive, time-consuming, and inefficient for companies, boards, and management.

Commenters also opined that the increased likelihood of a contested election could discourage experienced and capable individuals from serving on boards, making it more difficult for companies to recruit qualified directors or create boards with the proper mix of experience, skills, and characteristics.

The current filing and other requirements applicable to shareholders who wish to propose an alternate slate are, in the view of these commenters, more appropriate than including shareholder nominees for director in company proxy materials.

See

letters from ABA; Advance Auto Parts; Atlas Industries, Inc. (“Atlas”); J. Blanchard; Samuel W. Bodman (“S. Bodman”); Boeing; Brink's; BRT; Burlington Northern; Callaway; Cargill (“Cargill”); Carlson; Carolina Mills; Chamber of Commerce/CMCC; Jaime Chico (“J. Chico”); Consolidated Edison, Inc. (“Con Edison”); Anthony Conte (“A. Conte”); W. Cornwell; Crown Battery Manufacturing Co. (“Crown Battery”); CSX; Darden Restaurants; Eaton; FedEx; FPL Group; Frontier; Hickory Furniture Mart (“Hickory Furniture”); IBM; Keating Muething; Little; Louisiana Agencies LLC (“Louisiana Agencies”); Massey Services, Inc. (“Massey Services”); John B. McCoy (“J. McCoy”); D. McDonald; MedFaxx; Metlife; M. Metz; Norfolk Southern Corporation (“Norfolk Southern”); O3 Strategies, Inc. (“O3 Strategies”); Office Depot; Victor Pelson (“V. Pelson”); PepsiCo; Pfizer; Ryder; Sidley Austin; Southland; Style Crest; Tenet Healthcare Corporation (“Tenet”); TI; tw telecom; L. Tyson; United Brotherhood of Carpenters; T. White.

See

letters from ABA; Anonymous letter dated June 26, 2009 (“Anonymous #2”); Atlas; AT&T; Book Celler; Carlson; Carolina Mills; Chamber of Commerce/CMCC; Chevron; Crespin; M. Eng; Erickson; ExxonMobil; Fenwick & West LLP (“Fenwick”); GE; General Mills; Glass, Lewis & Co., LLC (“Glass Lewis”); Glaspell Goals (“Glaspell”); Intelect; R. Clark King; Koppers Inc. (“Koppers”); MCO Transport, Inc. (“MCO”); MeadWestvaco; MedFaxx; Medical Insurance; Merchants Terminal; Dana Merilatt (“D. Merilatt”); NAM; NIRI; NK; O3 Strategies; Roppe Holding Company (“Roppe”); Rosen Hotels and Resorts (“Rosen”); Safeway; Sara Lee; Schneider National, Inc. (“Schneider”); Southland; Style Crest; Tenet; TI; tw telecom; Rick VanEngelenhoven (“R. VanEngelenhoven”); Wachtell; Wells Fargo; Weyerhaeuser; Yahoo.

See

letters from 3M; ABA; American Electric Power; Atlantic Bingo; AT&T; Avis Budget; Biogen; Boeing; BRT; Burlington Northern; Callaway; Carlson; Chamber of Commerce/CMCC; CIGNA; Columbine Health Plan (“Columbine”); Cummins; CSX; John T. Dillon (“J. Dillon”); Emerson Electric; Erickson; ExxonMobil; FedEx; Headwaters Incorporated (“Headwaters”); C. Holliday; IBM; Intelect; R. Clark King; Lange Transport (“Lange”); Louisiana Agencies; MetLife; NIRI; O3 Strategies; V. Pelson; PepsiCo; Pfizer; Roppe; Rosen; Ryder; Sara Lee; Sidley Austin; tw telecom; Wachtell; Wells Fargo; Weyerhaeuser; Yahoo.

See

letters from Ameriprise; Anonymous #2; Artistic Land Designs; Chamber of Commerce/CMCC; Crown Battery; Evelyn Y. Davis (“E. Davis”); Kernan; Medical Insurance; Mouton; Unitrin; R. VanEngelenhoven; Wells Fargo.

As we also noted in the Proposing Release, we recognize that there are long-held and deeply felt views on every side of these issues. To the extent shareholders have the right to nominate directors at meetings of shareholders, the Federal proxy rules should facilitate the exercise of this right. We believe the rules we are adopting today will better accomplish this goal and will further our mission of investor protection.

New Rule 14a-11 will require companies to include information about shareholder nominees for director in company proxy statements, and the names of the nominee or nominees as choices on company proxy cards, under specified conditions.

The rule will permit companies to exclude a nominee or nominees from the company's proxy materials under certain circumstances, such as when a nominating shareholder or group fails to satisfy the eligibility requirements of the rule. In the following sections we describe, in detail, the final rules, comments received on the Proposal, and changes made in response to the comments.

See

new Exchange Act Rule 14a-11.

2. When Rule 14a-11 Will Apply

In this section, we address the rule's application, including when there are conflicting or overlapping provisions under state or foreign law or a company's governing documents, during concurrent proxy contests, and in the absence of any specific triggering events. We also address the reasons why neither an opt-in nor opt-out provision is necessary or appropriate.

a. Interaction With State or Foreign Law

While we are not aware of any law in any state or in the District of Columbia that prohibits shareholders from nominating directors, consistent with the Proposal, a company to which the rule would otherwise apply will not be subject to Rule 14a-11 if applicable State law or the company's governing documents prohibit shareholders from nominating candidates for the board of directors. The final rule also clarifies that, in the case of a non-U.S. domiciled issuer that does not meet the definition of foreign private issuer under the Federal securities laws, the rule will not apply if applicable foreign law prohibits shareholders from nominating a candidate for election as a director.

If a company's governing documents prohibit shareholder nominations, shareholders could seek to amend the provision by submitting a shareholder proposal under Rule 14a-8.

See

letters from S&C; Curtis, Mallet-Prevost, Colt & Mosle LLP (“Curtis”).

See

footnote 70 above.

Consistent with the Proposal, Rule 14a-11 will apply regardless of whether state or foreign law or a company's governing documents prohibit inclusion of shareholder director nominees in company proxy materials or set share ownership or other terms that are more restrictive than Rule 14a-11 under which shareholder director nominees will be included in company proxy materials. For example, if applicable state or foreign law or a company's governing documents were to require that shareholder nominees be included in company proxy materials only if submitted by a 10% shareholder of the company, a shareholder who does not meet the 10% threshold but does meet the requirements of Rule 14a-11, including the 3% ownership threshold described below, would be able to submit their nominee or nominees for inclusion in the company's proxy materials pursuant to Rule 14a-11. If, on the other hand, applicable state or foreign law or a company's governing documents sets the ownership threshold lower than the 3% ownership threshold required under Rule 14a-11, then Rule 14a-11 would not be available to holders with ownership below the Rule 14a-11 threshold. Those shareholders meeting the lower ownership threshold would have the ability to have their nominees included in the company's proxy materials to whatever extent is provided under applicable state or foreign law or the company's governing documents. In this instance, new Exchange Act Rule 14a-18, discussed in Section II.C.5. below, would require specified disclosures concerning the nominating shareholder or group and the shareholder nominee or nominees.

There also may be situations where applicable state or foreign law or a company's governing documents are more permissive in certain respects, and more restrictive in other respects, than Rule 14a-11. For example, applicable state or foreign law or a company's governing documents could require 10% ownership to have a nominee or nominees included in a company's proxy materials, but allow a shareholder that owns 10% to have nominees up to the full number of board seats included in a company's proxy materials or to otherwise have a change in control intent. While Rule 14a-11 would continue to be available in that case for a shareholder that is eligible to use it, a shareholder could choose to proceed under the alternate procedure and standards. In this instance, a shareholder would be required to clearly evidence its intent to rely either on Rule 14a-11 or on the applicable state or foreign law or company's governing documents, and then meet all of the requirements of whichever procedure it selects.

A shareholder could not “pick and choose” different aspects of different procedures. If a shareholder chooses to rely on a provision under applicable state or foreign law or a company's governing documents to include a nominee in a company's proxy materials, it would be required to satisfy the disclosure requirements of new Rule 14a-18.

New Schedule 14N, which is described further in Section II.B.8. below, includes check boxes where a nominating shareholder or group must specify whether it is seeking to include the nominee or nominees in the company's proxy materials under Rule 14a-11 or pursuant to a provision in State law, foreign law, or a company's governing documents.

b. Opt-In Not Required

In the Proposing Release, we requested comment on whether Rule 14a-11 should apply only if shareholders of a company elect to have it apply at their company. While commenters did not specifically address the possibility of shareholders opting into Rule 14a-11, many commenters opposed the Commission's Proposal on the basis that it would create a “one size fits all” Federal rule that intrudes into matters that traditionally have been the province of state or local law.

Those

commenters asked the Commission to permit private ordering so that companies and shareholders could devise, if they chose to, a process for the inclusion of shareholder director nominees in company proxy materials that best suits their particular circumstances. Commenters also expressed fears that the Commission's Proposal, if adopted, would stifle future innovations relating to inclusion of shareholder director nominees in company proxy materials and corporate governance in general.

On the other hand, some commenters expressed general support for uniform applicability of proposed Rule 14a-11, unless State law or the company's governing documents prohibit shareholders from nominating candidates to the board.

See

letters from 26 Corporate Secretaries; ABA; ACE; Advance Auto Parts; AGL; Aetna; Allstate; Alston & Bird; American Bankers Association;

American Business Conference; American Electric Power; Anadarko; Applied Materials; Artistic Land Designs; Association of Corporate Counsel; Avis Budget; Atlantic Bingo; L. Behr; Best Buy; Biogen; J. Blanchard; Boeing; T. Bonkowski; BorgWarner; Boston Scientific; Brink's; BRT; Burlington Northern; R. Burt; California Bar; Callaway; S. Campbell; Carlson; Carolina Mills; Caterpillar; Chamber of Commerce/CMCC; Chevron; R. Chicko; CIGNA; Comcast; Competitive Enterprise Institute; W. Cornwell; CSX; E. Culwell; Cummins; Darden Restaurants; Daniels Manufacturing; Davis Polk; Delaware Bar; T. Dermody; Devon; DTE Energy; Eaton; Edison Electric Institute; Eli Lilly; Emerson Electric; M. Eng; Erickson; ExxonMobil; FedEx; Financial Services Roundtable; Flutterby; FPL Group; Frontier; GE; A. Goolsby; Grundfest; C. Holliday; IBM; ICI; Intelect; JPMorgan Chase; Jones Day; R. Clark King; Leggett; T. Liddell; Little; McDonald's; MeadWestvaco; MedFaxx; Medical Insurance; MetLife; M. Metz; Microsoft; J. Miller; M. Moretti; Motorola; NACD; NAM; NIRI; O'Melveny & Myers; Office Depot; Omaha Door; P&G; PepsiCo; Pfizer; Realogy; J. Robert; M. Robert; RPM; Ryder; Safeway; R. Saul; Shearman & Sterling; Sherwin-Williams; R. Simoneau; Society of Corporate Secretaries; Southern Company; Southland; Steele Group; Style Crest; Tesoro; Textron; Theragenics; TI;. R. Trummel; T. Trummel; V. Trummel; tw telecom; L. Tyson; United Brotherhood of Carpenters; UnitedHealth; U.S. Bancorp; VCG; Wachtell; Wellness; Wells Fargo; Whirlpool; Xerox; Yahoo; J. Young.

See

letters from ABA; BRT; Davis Polk; Delaware Bar; Frontier; IBM; Protective.

See

letters from 13D Monitor (“13D Monitor”); AFL-CIO; CalPERS; CFA Institute Centre for Market Integrity (“CFA Institute”); CII; Florida State Board of Administration; ICGN; LIUNA; D. Nappier; P. Neuhauser; OPERS; Pax World; RiskMetrics; SWIB; Teamsters; USPE.

Though we considered commenters' views concerning a private ordering approach, as discussed in Section I.A. above, we have concluded that our rules should provide shareholders the ability to include director nominees in company proxy materials without the need for shareholders to bear the burdens of overcoming the substantial obstacles to creating that ability on a company-by-company basis. Rule 14a-11 is designed to facilitate the effective exercise of shareholder director nomination and election rights. Requiring shareholders to persuade other shareholders to opt into a system that better facilitates such State law rights would frustrate the benefits that our new rule seeks to promote.

c. No Opt-Out

In the Proposing Release, we sought comment on whether Rule 14a-11 should be inapplicable where a company has or adopts a provision in its governing documents that provides for, or prohibits, the inclusion of shareholder director nominees in the company's proxy materials. We also sought comment on whether Rule 14a-11 should apply in various circumstances, such as where shareholders approve provisions in the governing documents that are more or less restrictive than Rule 14a-11.

Commenters were divided on whether companies and shareholders should be permitted to adopt alternative requirements for shareholder director nominations, or to completely opt out of Rule 14a-11. Many commenters generally supported a provision that would permit companies and shareholders to adopt alternative requirements for shareholder director nominations that could be either more restrictive or less restrictive than those of Rule 14a-11.

Among these commenters, some argued that creating a “one-size-fits-all” rule that cannot be altered by companies and shareholders conflicts with the traditional enabling approach of state corporation laws and denies shareholder choice.

Some commenters advocated allowing companies to opt out of Rule 14a-11 through a shareholder-approved bylaw (including through a Rule 14a-8 shareholder proposal), with some suggesting that Rule 14a-11 apply initially only to companies that have not opted out through a shareholder-approved process by the time of the first annual meeting held after the adoption of the proposed rules.

See

letters from ABA; Advance Auto Parts; Aetna; American Bankers Association; American Electric Power; American Express; Applied Materials; Association of Corporate Counsel; Best Buy; BRT; California Bar; Carlson; J. Chico; Cleary Gottlieb Steen & Hamilton LLP (“Cleary”); Comcast; Con Edison; CSX; Cummins; L. Dallas; Davis Polk; Devon; Dupont; ExxonMobil; Financial Services Roundtable; FPL Group; IBM; JPMorgan Chase; Keating Muething; Koppers; Alexander Krakovsky (“A. Krakovsky”); Group of 10 Harvard Business School and Harvard Law School Professors (“Lorsch

et al.”

); Brett H. McDonnell (“B. McDonnell”); Motorola; O'Melveny & Myers; P&G; Pfizer; S&C; Sara Lee; Group of Seven Law Firms (“Seven Law Firms”); Shearman & Sterling; Securities Industry and Financial Markets Association (“SIFMA”); Society of Corporate Secretaries; Southern Company; U.S. Bancorp; Wachtell.

See

letters from ABA; BRT; Delaware Bar.

See

letters from DTE Energy (endorsing the opt-out approach described in the letter submitted by the Society of Corporate Secretaries); JPMorgan Chase; P&G; Seven Law Firms; Society of Corporate Secretaries; U.S. Bancorp.

On the other hand, several commenters expressed support for the uniform applicability of Rule 14a-11.

These commenters expressed general support for the Commission's Proposal that Rule 14a-11 apply to all companies subject to the Federal proxy rules unless State law or the company's governing documents prohibit shareholders from nominating candidates to the board.

Several commenters stated they oppose a provision that would permit companies to opt out of Rule 14a-11.

Some commenters expressed a general concern that if companies are allowed to opt out of the rule, boards would adopt provisions in a company's governing documents that are so restrictive that it would be impossible for shareholders to have their candidates included in company proxy materials,

with one commenter noting that the laws of most states would allow a board to adopt such provisions in a company's bylaws without a shareholder vote.

Further, a commenter warned that boards would use corporate funds to defeat shareholders' attempts to change such board-adopted provisions through shareholder proposals.

One commenter argued that the “idea that individual corporations should be given the right to `opt out' of the proposed regulations through bylaws or otherwise is contrary to the Commission's entire regulatory scheme” and referred to Section 14 of the Securities Act,

which voids “[a]ny condition, stipulation, or provision binding any person acquiring any security to waive compliance with any provision of this

title or of the rules and regulations of the Commission* * *.”

See

letters from 13D Monitor; AFL-CIO; CalPERS; CFA Institute; CII; Florida State Board of Administration; ICGN; LIUNA; D. Nappier; P. Neuhauser; Pax World; OPERS; RiskMetrics; SWIB; Teamsters; USPE.

See

letters from 13D Monitor; AFL-CIO; CalPERS; CFA Institute; CII; Florida State Board of Administration; ICGN; LIUNA; D. Nappier; P. Neuhauser; Pax World; OPERS; RiskMetrics; SWIB; Teamsters; USPE.

See

letters from AFL-CIO; Amalgamated Bank; William Baker (“W. Baker”); Florida State Board of Administration; International Association of Machinists and Aerospace Workers (“IAM”); The Marco Consulting Group (“Marco Consulting”); P. Neuhauser; Nine Law Firms; Norges Bank Investment Management (“Norges Bank”); Relational; Shamrock Capital Advisors, Inc. (“Shamrock”); TIAA-CREF; USPE; ValueAct Capital.

See

letters from Florida State Board of Administration; P. Neuhauser; Shamrock.

See

letter from Shamrock.

See

letter from P. Neuhauser.

Letter from Nine Law Firms.

15 U.S.C. 77n.

After carefully considering the comments, we have determined that Rule 14a-11 should not provide an exemption for companies that have or adopt a provision in their governing documents that provides for or prohibits the inclusion of shareholder director nominees in the company's proxy materials. Thus, regardless of whether a company has a provision for the inclusion of shareholder nominees in its proxy materials, Rule 14a-11 will apply. As noted, the only exception is if state or foreign law or a company's governing documents prohibits shareholders from making director nominations.

We believe the rights to nominate and elect directors are traditional State law rights of all shareholders and we believe the current proxy rules could better facilitate the effective exercise of these State law rights. We do not believe that it is appropriate for our rules to permit a company's board or a majority of shareholders to elect to opt out of Rule 14a-11 and thus deprive other shareholders of an effective means to exercise their State law right to nominate directors and to freely exercise their franchise rights. Thus, allowing a vote to opt out of the rule would contravene a fundamental rationale of Rule 14a-11—improving the degree to which shareholders participating through the proxy process are able “to control the corporation as effectively as they might have by attending a shareholder meeting.”

Business Roundtable

SEC,

905 F.2d 406, 410 (D.C. Cir. 1990).

When shareholders have the right to nominate candidates for director at a shareholder meeting, we believe shareholder choice is enhanced if our rules facilitate the ability of shareholders to nominate candidates for director through the proxy process. Allowing a company or a majority of its shareholders to opt out of the rule would diminish the rights of shareholders who participate by proxy by preventing shareholder nominees from being included in company proxy materials, thus reducing shareholder choice in the critical area of director elections. Similarly, allowing a company or a majority of its shareholders to opt out of the rule would diminish the ability of shareholders to vote for nominees put forth by other shareholders.

In addition, companies and their shareholders do not have the option to elect to opt out of other Federal proxy rules and we do not believe they should have the ability to do so with this rule. In our view, shareholders' electoral rights through the proxy process should not be impaired by a unilateral act of the board of directors, or even by a shareholder vote supported by management. Further, as we describe above, allowing some portion of shareholders to alter the application of Rule 14a-11 would effectively reduce choices for shareholders who do not favor that decision.

Our view in this regard has been sharply criticized.

E.g.,

Joseph A. Grundfest,

The SEC's Proposed Proxy Access Rules: Politics, Economics, and the Law,

65 Bus. Law. 361, 370 (2010) (this article also was included as an attachment to the January 18, 2010 letter from Joseph A. Grundfest (“Grundfest II”)) (“there is no intellectually credible argument that shareholders are * * * competent to elect directors but incompetent to determine the rules governing the election of directors. There is also no support for the proposition that shareholders can be trusted to relax the mandatory minimum standards established by the Commission, but not to strengthen them.”). In our view, these assertions are flawed. This is not an issue of shareholder competence. It is, instead, a recognition that permitting a company or a group of shareholders to prevent shareholders from effectively participating in governing the corporation through participation in the proxy process is fundamentally inconsistent with the goal of Federal proxy regulation.

See Business Roundtable,

905 F.2d at 410.

Finally, we considered the objections of some commenters to a “one-size-fits-all” rule and concerns that for some companies with various capital structures the rule may raise more complex issues.

As we have noted, no Federal proxy rule allows shareholders or boards to alter how the rules apply to companies. The concept that our rules are not subject to company-by-company variation is entirely consistent with our mandate to protect all investors. In this regard, we are not persuaded that we should allow our rules to be altered by shareholders or boards to the potential detriment of other shareholders. We believe that having a uniform standard that applies to all companies subject to the rule will simplify use of the rule for shareholders and allowing different procedures and requirements to be adopted by each company could add significant complexity and cost for shareholders and undermine the purposes of our new rule. While other procedures and standards could be adopted by companies or shareholders to supplement Rule 14a-11, shareholders would benefit from the predictability of the uniform application of Rule 14a-11 at all companies.

See

letters from 26 Corporate Secretaries; ABA; ACE; Advance Auto Parts; AGL; Aetna; Allstate; Alston & Bird; American Bankers Association; American Business Conference; American Electric Power; Anadarko; Applied Materials; Artistic Land Designs; Association of Corporate Counsel; Avis Budget; Atlantic Bingo; L. Behr; Best Buy; Biogen; J. Blanchard; Boeing; T. Bonkowski; BorgWarner; Boston Scientific; Brink's; BRT; Burlington Northern; R. Burt; California Bar; Callaway; S. Campbell; Carlson; Carolina Mills; Caterpillar; Chamber of Commerce/CMCC; Chevron; R. Chicko; CIGNA; Comcast; Competitive Enterprise Institute; W. Cornwell; CSX; E. Culwell; Cummins; Darden Restaurants; Daniels Manufacturing; Davis Polk; Delaware Bar; T. Dermody; Devon; DTE Energy; Eaton; Edison Electric Institute; Eli Lilly; Emerson Electric; M. Eng; Erickson; ExxonMobil; FedEx; Financial Services Roundtable; Flutterby; FPL Group; Frontier; GE; A. Goolsby; C. Holliday; IBM; ICI; Intelect; JPMorgan Chase; Jones Day; R. Clark King; Leggett; T. Liddell; Little; McDonald's; MeadWestvaco; MedFaxx; Medical Insurance; Metlife; M. Metz; Microsoft; J. Miller; M. Moretti; Motorola; NACD; NAM; NIRI; O'Melveny & Myers; Office Depot; Omaha Door; P&G; PepsiCo; Pfizer; Realogy; J. Robert; M. Robert; RPM; Ryder; Safeway; R. Saul; Shearman & Sterling; Sherwin-Williams; R. Simoneau; Society of Corporate Secretaries; Southern Company; Southland; Steele Group; Style Crest; Tesoro; Textron; Theragenics; TI;. R. Trummel; T. Trummel; V. Trummel; tw telecom; L. Tyson; United Brotherhood of Carpenters; UnitedHealth; U.S. Bancorp; VCG; Wachtell; Wellness; Wells Fargo; Whirlpool; Xerox; Yahoo; J. Young.

It is important to note that while Rule 14a-11 facilitates the existing rights of shareholders and we do not believe the rule should be altered, it is not the exclusive way by which a candidate other than a management nominee may be put to a shareholder vote. Shareholders may continue to choose to conduct traditional proxy contests. Regardless of whether a shareholder uses Rule 14a-11 or conducts a traditional proxy contest to nominate a candidate for director, a company concerned about how such a shareholder nominee fits into its particular capital structure or other unique fact patterns presumably would address that concern in its proxy materials.

d. No Triggering Events

Under the Commission's 2003 Proposal, a company would have been subject to the shareholder director nomination requirements after the occurrence of one or both of two possible triggering events. The first triggering event was that at least one of the company's nominees for the board of directors for whom the company solicited proxies received withhold votes from more than 35% of the votes cast at an annual meeting of shareholders at which directors were elected.

The second triggering event was that a shareholder proposal submitted under Rule 14a-8 providing that a company become subject to the proposed shareholder nomination procedure was submitted for a vote of

shareholders at an annual meeting by a shareholder or group of shareholders that held more than 1% of the company's securities entitled to vote on the proposal and the shareholder or group of shareholders held those securities for one year as of the date the proposal was submitted, and the proposal received more than 50% of the votes cast on that proposal at the meeting.

In 2003, these triggering events were included because they were believed to be indications that a company had a demonstrated corporate governance issue, such that shareholders should have the opportunity to include director nominees in the company's proxy materials.

This triggering event could not occur in a contested election to which Rule 14a-12(c) would apply or an election to which the proposed shareholder nomination procedure would have applied.

Only votes for and against a proposal would have been included in the calculation of the shareholder vote.

Unlike the 2003 Proposal, our current proposal did not include a triggering event requirement in Rule 14a-11. As noted in the Proposing Release, we did not include such a requirement because we were concerned that the Federal proxy rules may be impeding the exercise of shareholders' ability under State law to nominate and elect directors at all companies, not just those with demonstrated governance issues. In addition, we noted our concern, and the concern expressed by commenters on the 2003 Proposal, that the inclusion of triggering events would result in unnecessary complexity and would delay the operation of the rule. However, we solicited comment about whether triggers for the application of Rule 14a-11 would be appropriate.

Many commenters opposed the inclusion of a triggering event requirement,

100

with some commenters expressing concern that triggering events would cause significant delays and introduce undue complexity into the rule.

101

On the other hand, other commenters supported the inclusion of a triggering event requirement, believing that such a requirement would serve as a useful indicator of the companies with demonstrated governance issues (

e.g.,

companies that do not act within a certain time period on a shareholder proposal that received majority support).

102

100

See

letters from AFSCME; CalSTRS; CFA Institute; CII; COPERA; T. DiNapoli; Florida State Board of Administration; ICGN; N. Lautenbach; LIUNA; D. Nappier; Nathan Cummings Foundation; OPERS; Pax World; Relational; Sodali; SWIB; TIAA-CREF; G. Tooker; USPE; ValueAct Capital.

101

See

letters from AFSCME; CFA Institute; CII; T. DiNapoli; LIUNA.

102

See

letters from Automatic Data Processing, Inc. (“ADP”); Alaska Air Group, Inc. (“Alaska Air”); Allstate; American Electric Power; Anadarko; AT&T; Avis Budget; Barclays Global Investors (“Barclays”); Biogen; Boeing; BRT; Burlington Northern; R. Burt; Callaway; Chevron; CIGNA; CNH Global N.V. (“CNH Global”); Comcast; Cummins; Deere & Company (“Deere”); Eaton; ExxonMobil; FedEx; FMC Corp.; FPL Group; Frontier; General Mills; C. Holliday; IBM; ITT Corporation (“ITT”); J. Kilts; Ellen J. Kullman (“E.J. Kullman”); N. Lautenbach; McDonald's; J. Miller; Motorola; Office Depot; O'Melveny & Myers; P&G; PepsiCo; Pfizer; Protective; Ryder; Sara Lee; Sherwin-Williams; Theragenics; TI; tw telecom; G. Tooker; UnitedHealth; Xerox.

We remain concerned that the Federal proxy rules may not be facilitating the exercise of shareholders' ability under State law to nominate and elect directors and this concern is not limited to shareholders' ability to nominate directors at companies with demonstrated governance issues. Indeed, allowing shareholders to include nominees in company proxy materials before there are demonstrated governance failures could have the benefit of increasing director responsiveness and avoiding future governance failures. In addition, we share the concerns of some commenters that inclusion of triggering events would introduce undue complexity to the rule. Therefore, we are adopting the rule as proposed, without a triggering event requirement.

e. Concurrent Proxy Contests

As proposed, Rule 14a-11 would apply regardless of whether a company is engaged in, or anticipates being engaged in, a concurrent proxy contest; however, we requested comment on whether a company should be exempted from complying with Rule 14a-11 if another party commences or evidences its intent to commence a solicitation in opposition subject to Rule 14a-12(c). Of the commenters that responded, a few stated that shareholders of a company that is the subject of a traditional proxy contest should be allowed to use Rule 14a-11 to have nominees included in the company's proxy materials,

103

and others stated that shareholders of a company engaged in a traditional proxy contest should not be allowed to use Rule 14a-11 to have nominees included in the company's proxy materials.

104

103

See

letters from CII; Florida State Board of Administration; Sodali; USPE.

104

See

letters from ABA; American Express; Biogen; BorgWarner; BRT; Davis Polk; Dewey; Eli Lilly; Fenwick; Honeywell; JPMorgan Chase; Leggett; PepsiCo; Seven Law Firms; Society of Corporate Secretaries; Tenet; U.S. Bancorp; Verizon; Wachtell.

In support of enabling shareholders to use Rule 14a-11 during a traditional proxy contest, one commenter argued that exempting companies subject to a traditional proxy contest from Rule 14a-11 would be inconsistent with the Commission's objective of changing the proxy process to better reflect the rights shareholders would have at a shareholder meeting, and that dissatisfied shareholders who are not seeking a change in control and who otherwise meet the eligibility criteria under Rule 14a-11 would be disenfranchised.

105

The commenter stated that dissatisfied shareholders should not be forced to make a choice between a change in control or “business as usual.” Another commenter stated that contested elections have been conducted successfully with more than two slates.

106

105

See

letter from CII.

106

See

letter from Florida State Board of Administration.

On the other hand, commenters that sought a limitation on use of Rule 14a-11 during a traditional proxy contest were concerned that Rule 14a-11 could have the effect of facilitating a change in control of the company.

107

Commenters noted that under certain staff positions,

108

as well as the Commission's discussion of Rule 14a-4(d)(4), as set forth in the

Proxy Disclosure and Solicitation Enhancements

proposing release,

109

a dissident shareholder could “round out” its short-slate proxy card by seeking authority to vote for Rule 14a-11 shareholder nominees, thereby facilitating a change in control.

110

Further, commenters believed that under the Proposal shareholders that submit nominees in reliance on Rule 14a-11 would not be barred from actively soliciting for the nominees of a shareholder using a traditional proxy contest and, conversely, a shareholder using a traditional proxy contest could actively engage in soliciting activities for Rule 14a-11 shareholder nominees.

111

Commenters also worried that multiple groups of shareholders who simultaneously propose different directors for different purposes could lead to substantial confusion for other shareholders.

112

Commenters warned that shareholder confusion would increase if there are two or more proxy cards with more than twice the number

of nominees than available slots.

113

According to these commenters, further confusion would result from any assumption by shareholders that the Rule 14a-11 slate is allied with the insurgent slate, despite the Rule 14a-11 representation regarding the lack of control intent.

114

One commenter also argued that, despite the Rule 14a-11 representation regarding the lack of control intent, it is “easy to imagine that in some contested elections, a [R]ule 14a-11 nominee would be the swing vote, tipping the majority of the board and thus control of the company.”

115

Citing these same concerns, another commenter recommended that when a company's board receives notice of a traditional proxy contest, the company should be permitted to exclude Rule 14a-11 nominees from the company's proxy materials (and, if the proxy materials have already been distributed, to issue supplemental proxy materials eliminating these nominees from the company's materials).

116

107

See

letters from ABA; BRT; Davis Polk; Eli Lilly; Seven Law Firms; Society of Corporate Secretaries.

108

See Eastbourne Capital LLC

No-Action Letter (March 30, 2009) and

Icahn Associates Corp.

No-Action Letter (March 30, 2009).

109

Release No. 33-9052, 34-60280 (July 10, 2009) [74 FR 35076].

110

See

letters from ABA; Eli Lilly; JPMorgan Chase; Society of Corporate Secretaries.

111

See

letters from ABA; Society of Corporate Secretaries.

112

See

letters from ABA; BRT; Davis Polk; Eli Lilly; PepsiCo; Seven Law Firms; Society of Corporate Secretaries.

113

See

letters from ABA; Davis Polk.

114

See

Section II.B.4. below for a further discussion of change in control intent and the certifications required by the new rules.

115

Letter from Davis Polk.

116

See

letter from Society of Corporate Secretaries.

Finally, some commenters argued that Rule 14a-11 is unnecessary when a company is engaged in a traditional proxy contest because the company's shareholders are already effectively exercising their rights under State law to nominate and elect directors.

117

One commenter stated that if the Commission decides not to prohibit a concurrent vote on Rule 14a-11 nominees and nominees presented through a traditional proxy contest, it should at least provide that the nominees presented through the traditional proxy contest be counted against the number of permissible Rule 14a-11 nominees to reduce the likelihood of a change in control.

118

The commenter stated that if Rule 14a-11 could be used concurrently with a traditional proxy contest, the nominating shareholder should not be allowed to be a “participant” (as defined under Schedule 14A) in the traditional proxy contest or to engage in any soliciting activity for a nominee of another shareholder. The commenter also suggested that dissidents in a traditional proxy contest be precluded from including Rule 14a-11 nominees on their proxy card. Acknowledging the possibility of collusion, shareholder confusion, and change in control, one commenter expressed support for reasonable limitations on a Rule 14a-11 nomination if there is a simultaneous proxy contest.

119

117

See

letters from BRT; Verizon.

118

See

letter from ABA.

119

See

letter from P. Neuhauser.

While we appreciate commenters' concerns, we do not believe that our efforts to facilitate the exercise of shareholders' State law right to nominate directors should be limited by the activities of other persons engaged in a traditional proxy contest. We also believe that, as described below, Rule 14a-11 and the related rule amendments, together with our staff review process, can adequately address concerns about investor confusion and potential abuse of the process by those seeking a change in control. Therefore, we are adopting the rule as proposed, without an exception for companies that are subject to or anticipate being subject to a concurrent proxy contest. In this regard, we agree with those commenters that opposed including a limitation because to do so would be inconsistent with the goals of our rulemaking, which are not limited by the nomination activities of other persons. In addition, we note that there is no current limitation in the Federal proxy rules on the number of proxy contests that can take place simultaneously and we do not believe that there is sufficient reason to provide such a limitation in this circumstance. Companies and shareholders have been able, to date, to successfully navigate multiple slates on those occasions when more than one person undertakes a proxy contest. In addition, we believe that a company can address commenters' concerns through disclosure in its proxy materials. For example, the company may disclose in its proxy statement potential effects of electing non-management nominees (whether those nominees are included in the company's materials or in other soliciting persons' materials), such as the potential to cause the company to violate law or the independence requirements of the exchange listing standards, and allow shareholders to consider that information when making their voting decisions. Similarly, we believe that appropriate disclosure in the company's proxy materials, as well as the dissident's proxy materials, could serve to potentially avoid shareholder confusion about how many nominees a shareholder may vote for and how to mark the card.

We also have not revised Rule 14a-11, as suggested by commenters, to count nominees put forth by persons outside of Rule 14a-11 for purposes of the calculation of the maximum number of nominees required to be included in the company's proxy materials pursuant to Rule 14a-11. We believe that to do so would, like an outright exception, be inconsistent with the goal of our rulemaking—to change the proxy process to better reflect the rights shareholders would have at a shareholder meeting, which are not limited by the nomination activities of other persons.

While we are not adopting an exception from the rule for companies that are, or anticipate being, subject to a concurrent proxy contest, we do understand concerns about the possibility of confusion and abuse in this area absent clear guidance.

120

Accordingly, we have made clear in our discussion, in Section II.B.10. below, that a nominating shareholder or group relying on new Rule 14a-2(b)(7) or (8) to engage in an exempt solicitation to form a nominating shareholder group or in connection with a nomination included in the company's proxy materials pursuant to Rule 14a-11 would lose the exemption if they engage in a non-Rule 14a-11 solicitation for directors or another person's solicitation with regard to the election of directors. In addition, we are adopting an instruction to Rule 14a-11

121

to make clear that, in order to rely on Rule 14a-11 to have a nominee or nominees included in a company's proxy materials, a nominating shareholder or group or any member of the nominating shareholder or group may not be a member of any other group with persons engaged in solicitations or other nominating activities in connection with the subject election of directors; may not separately conduct a solicitation in connection with the subject election of directors other than a Rule 14a-2(b)(8) exempt solicitation in relation to those nominees it has nominated pursuant to Rule 14a-11 or for or against the company's nominees; and may not act as a participant in another person's solicitation in connection with the subject election of directors.

120

See, e.g.,

letters from ABA; Seven Law Firms.

121

See

Instruction to Rule 14a-11(b).

3. Which Companies Are Subject to Rule 14a-11

a. General

In this section, we discuss which companies will be subject to new Rule 14a-11, including the rule's application to investment companies, controlled companies, “debt-only” companies, voluntary registrants, and smaller reporting companies.

New Rule 14a-11 will apply to companies that are subject to the Exchange Act proxy rules, including

investment companies registered under Section 8 of the Investment Company Act of 1940.

122

The rule also will apply to controlled companies and those companies that choose to voluntarily register a class of securities under Section 12(g). Smaller reporting companies will be subject to the rule, but on a delayed basis. Consistent with the Proposal, we have excepted from the rule's application companies that are subject to the proxy rules solely because they have a class of debt registered under Section 12 of the Exchange Act. In addition, foreign private issuers are exempt from the Commission's proxy rules with respect to solicitations of their shareholders, so the rule will not apply to these issuers.

123

122

15 U.S.C. 80a

et seq.

Registered investment companies currently are required to comply with the proxy rules under the Exchange Act when soliciting proxies, including proxies relating to the election of directors.

See

Investment Company Act Rule 20a-1 [17 CFR 270.20a-1] (requiring registered investment companies to comply with regulations adopted pursuant to Section 14(a) of the Exchange Act that would be applicable to a proxy solicitation if it were made in respect of a security registered pursuant to Section 12 of the Exchange Act).

123

Exchange Act Rule 3a12-3 [17 CFR 240.3a12-3] exempts securities of certain foreign issuers from Section 14(a) of the Exchange Act.

b. Investment Companies

Under the Proposal, Rule 14a-11 would apply to registered investment companies. We sought comment on whether Rule 14a-11 should apply to these companies.

124

The Commission has considered the impact of this issue on investment companies on prior occasions.

See, e.g.,

2003 Proposal.

Several commenters supported including registered investment companies in the rule.

125

Commenters noted that investment company boards, like other boards, must be responsive and accountable to their shareholders;

126

that some investment company boards are “too cozy” with the company's investment adviser;

127

and that the proposed rule will add competition to the board nomination process, which may create some traction in board negotiations with the company's investment adviser.

128

A number of commenters did not believe that the rule would result in unreasonable cost or an excessive number of contested elections.

129

One commenter suggested that investment company shareholders would use the rule infrequently and then only if the investment company is experiencing a real governance or other failure.

130

125

See, e.g.,

letters from AFSCME; CalPERS; CII; Mutual Fund Directors Forum (“MFDF”); Julian Reid (“J. Reid”); Jennifer S. Taub (“J. Taub”); TIAA-CREF.

126

See

letter from MFDF.

127

Letter from J. Reid.

128

See

letter from J. Taub.

129

See, e.g.,

letters from AFSCME; J. Taub.

130

See

letter from J. Taub.

On the other hand, a number of commenters, largely from the investment company industry, opposed the inclusion of registered investment companies in the rule.

131

Commenters asserted that the Commission had not presented any empirical evidence of governance problems with respect to investment companies that would support extending the rule to them and that the trend for investment company boards is to have strong governance practices.

132

Commenters also argued that investment companies are subject to a unique regulatory regime under the Investment Company Act that provides additional protection to investors, such as the requirement to obtain shareholder approval to engage in certain transactions or activities,

133

and that investment companies and their boards have very different functions from non-investment companies and their boards.

134

One commenter noted that the Proposal would be inappropriate and not particularly useful for most open-end management investment companies, because open-end management investment company shares are held on a short-term basis and open-end management investment companies are not typically required to hold annual meetings under State law.

135

131

See, e.g.,

letters from ABA; American Bar Association (September 18, 2009) (“ABA II”); Barclays; ICI; Investment Company Institute and Independent Directors Counsel (“ICI/IDC”); Independent Directors Council (“IDC”); S&C; T. Rowe Price Associates, Inc. (“T. Rowe Price”); The Vanguard Group, Inc. (“Vanguard”). One commenter opposed the inclusion of business development companies in the rule for the same reasons that it opposed including registered investment companies in the rule.

See

letter from ICI. Business development companies are a category of closed-end investment companies that are not registered under the Investment Company Act, but are subject to certain provisions of that Act.

See

Sections 2(a)(48) and 54-65 of the Investment Company Act [15 U.S.C. 80a-2(a)(48) and 80a-53-64]. We are including business development companies in the rule for the same reasons provided below with respect to registered investment companies.

132

See

letters from ICI; ICI/IDC; IDC; T. Rowe Price; S&C. Among other things, commenters noted that 90% of fund complexes have boards that are 75% or more comprised of independent directors and the vast majority of fund boards have an independent director serving as chairman or as lead independent director.

See

letters from ICI/IDC; IDC. Two letters also cited a 1992 report by Commission staff that observed that the governance model embodied by the Investment Company Act is sound and should be retained with limited modifications.

See

letters from ICI; ICI/IDC.

133

One joint comment letter noted that the Investment Company Act requires investment companies to obtain shareholder approval of contracts with the company's investment adviser and distributor and to change from an open-end, closed-end, or diversified company; to borrow money; to issue senior securities; to underwrite securities issued by other persons; to purchase or sell real estate or commodities; to make loans to other persons, except in accordance with the policy in the company's registration statement; to change the nature of its business so as to cease to be an investment company; or to deviate from a stated policy with respect to concentration of investments in an industry or industries, from any investment policy which is changeable only by shareholder vote, or from any stated fundamental policy. The commenters also noted that investment company shareholders have the right to bring an action against the company's investment adviser for breach of fiduciary duty with respect to receipt of compensation.

See

letter from ICI/IDC.

134

See

letters from ABA; Barclays; ICI; ICI/IDC; IDC; T. Rowe Price; S&C; Vanguard. However, we note that, in response to the 2003 Proposal, ABA and ICI indicated that there were no reasons to treat investment companies differently from non-investment companies.

See

letter from Investment Company Institute (December 22, 2003) on File No. S7-19-03; letter from American Bar Association (January 7, 2004) on File No. S7-19-03.

135

See

letter from ABA.

See also

letter from S&C (urging that at a minimum Rule 14a-11 should not apply to open-end investment companies, “which do not generally hold regular meetings and for which compliance would be particularly burdensome”). An open-end management investment company is an investment company, other than a unit investment trust or face-amount certificate company, that offers for sale or has outstanding any redeemable security of which it is the issuer.

See

Sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a-4 and 80a-5(a)(1)].

Commenters also were concerned about the costs of the Proposal, particularly for fund complexes that utilize a “unitary” board consisting of one group of individuals who serve on the board of every fund in the complex, or “cluster” boards consisting of two or more groups of individuals that each oversee a different set of funds in the complex.

136

Commenters noted that if a

shareholder-nominated director were to be elected to a unitary or cluster board, the investment companies in the fund complex would incur significant additional administrative costs and burdens (

e.g.,

the shareholder-nominated director would have to leave during discussions that pertain to the other investment companies in the complex, board materials would have to be customized for the director, and the fund complex would face challenges in preserving the status of privileged information) and the benefits of the unitary or cluster board that result in the increased effectiveness of such boards would be lost.

137

One commenter also stated that if a shareholder nomination causes an election to be “contested” under rules of the New York Stock Exchange, brokers would not be able to vote client shares on a discretionary basis, making it difficult and more expensive for investment companies to achieve a quorum for a meeting.

138

136

See

letters from ABA; ICI; ICI/IDC; IDC; MFDF; S&C; T. Rowe Price; Vanguard. Commenters noted that a recent survey of fund complexes representing 93% of the industry's total net assets indicated that 83% of fund complexes had a unitary board structure and 17% of fund complexes had a cluster board structure.

See

letters from ICI/IDC; IDC. However, one comment letter included materials noting that, while the average number of registered investment companies per fund complex is five, the median number of registered investment companies per fund complex is one.

See

letter from ICI/IDC. In cases where the fund complex consists of only one company, commenters' concerns about the loss of the unitary board would not be present.

Commenters also noted that among fund complexes that use unitary or cluster boards there are other aspects of board organization that vary from complex to complex.

See

letter from ICI/IDC. For example, one board may oversee all of the open-end funds in the complex and all but three of its closed-end funds, while a second board oversees the other closed-end funds. Alternatively, one board may oversee the open-end and closed-end fixed income funds advised by one particular adviser, while a second board oversees the open-end and closed-end equity and international funds advised by a second adviser, etc. However, the commenters did not note any specific issues that would be raised by the use of different structures among fund complexes using unitary or cluster boards if the Proposal were to be adopted.

137

Commenters noted that unitary and cluster boards can result in enhanced board efficiency and greater board knowledge of the many aspects of fund operations that are complex-wide in nature.

See, e.g.,

letters from ABA; ICI; ICI/IDC; IDC; MFDF; S&C; T. Rowe Price; Vanguard. For instance, commenters noted that many of the same regulatory, valuation, compliance, disclosure, accounting, and business issues may arise for all of the funds that the unitary or cluster board oversees and that consistency among funds in the complex greatly enhances both board efficiency and shareholder protection.

See, e.g.,

letter from ICI/IDC. One joint comment letter also suggested that “[b]ecause they are negotiating on behalf of multiple funds, unitary and cluster boards have a greater ability than single fund boards to negotiate with management over matters such as fund expenses; the level of resources devoted to technology; and compliance and audit functions.”

See id.

138

See

letter from S&C.

After considering these comments, we agree with the commenters who believe that Rule 14a-11 should apply to registered investment companies, as was proposed. The purpose of Rule 14a-11 is to facilitate the exercise of shareholders' traditional State law rights to nominate and elect directors to boards of directors and thereby enable shareholders to participate more meaningfully in the nomination and election of directors at the companies in which they invest. These State law rights apply to the shareholders of investment companies, including each investment company in a fund complex, regardless of whether or not the fund complex utilizes a unitary or cluster board.

139

Moreover, although investment companies and their boards may have different functions from non-investment companies and their boards, investment company boards, like the boards of other companies, have significant responsibilities in protecting shareholder interests, such as the approval of advisory contracts and fees.

140

Therefore, we are not persuaded that exempting registered investment companies would be consistent with our goals. We also do not believe that the regulatory protections offered by the Investment Company Act (including requirements to obtain shareholder approval to engage in certain transactions and activities), the trend asserted by commenters for investment companies to have good governance practices, or the fact that open-end management investment companies are not required by State law to hold annual meetings serves to decrease the importance of the rights that are granted to shareholders under State law.

141

In fact, the separate regulatory regime to which investment companies are subject emphasizes the importance of investment company directors in dealing with the conflicts of interest created by the external management structure of most investment companies.

142

We also note that some commenters have raised governance concerns regarding the relationship between boards and investment advisers.

143

139

We note that “unitary” or “cluster” boards are not required by State law.

140

See Jones v. Harris Assocs.,

130 S.Ct. 1418, 1423, 176 L. Ed. 2d 265, 273-274 (2010).

See also

S. Rep. No. 91-184; 91st Congress 1st Session; S. 2224 (1969) (“This section is not intended to authorize a court to substitute its business judgment for that of the mutual fund's board of directors in the area of management fees. * * * The directors of a mutual fund, like directors of any other corporation will continue to have * * * overall fiduciary duties as directors for the supervision of all of the affairs of the fund.”); letter from ICI/IDC (“The Investment Company Act of 1940 and the rules under it impose significant responsibilities on fund directors in addition to the duties of loyalty and care to which directors are typically bound under State law.”).

141

In the 1992 report cited by two comment letters in footnote 132 above, the Commission staff also observed that the Investment Company Act “establishes a comprehensive regulatory framework predicated upon principles of corporate democracy” and was intended to provide an additional safeguard for investors by according “voting powers to investment company shareholders

beyond those required by State corporate law.”

Division of Investment Management, U.S. Securities and Exchange Commission,

Protecting Investors: A Half Century of Investment Company Regulation,

at pp. 251-52, 260 (May 1992) (emphasis added).

142

See, e.g.,

Commission Guidance Regarding the Duties and Responsibilities of Investment Company Boards of Directors with Respect to Investment Adviser Portfolio Trading Practices, Release No. IC-28345 (July 30, 2008) [73 FR 45646, 45649 (August 6, 2008)] (“In addition to statutory and common law obligations, fund directors are also subject to specific fiduciary obligations relating to the special nature of funds under the Investment Company Act. * * * A fund board has the responsibility, among other duties, to monitor the conflicts of interest facing the fund's investment adviser and determine how the conflicts should be managed to help ensure that the fund is being operated in the best interest of the fund's shareholders.”) (footnotes omitted); Interpretive Matters Concerning Independent Directors of Investment Companies, Release No. IC-24083 (October 14, 1999) [64 FR 59877, 59877-78 (November 3, 1999)] (listing various duties and responsibilities of the independent directors of an investment company and noting that “Each of these duties and responsibilities is vital to the proper functioning of fund operations and, ultimately, the protection of fund shareholders.”).

143

See

letters from J. Reid; J. Taub.

We are cognizant of the fact that the rule will impose some costs on investment companies. We believe, however, that policy goals and the benefits of the rule justify these costs. As discussed above, we believe that facilitating the exercise of traditional State law rights to nominate and elect directors is as much of a concern for investment company shareholders as it is for shareholders of non-investment companies. We continue to believe that parts of the proxy process may frustrate the exercise of shareholders' rights to nominate and elect directors arising under State law, and thereby fail to provide fair corporate suffrage. The new rules seek to facilitate shareholders' effective exercise of their rights under State law to both nominate and elect directors. In this regard, we note that commenters have stated that interest in mutual fund governance has increased in recent years.

144

See

letters from AFSCME; J. Taub.

We recognize that it may be more costly for investment companies to achieve a quorum at shareholder meetings if a shareholder director nomination causes an election to be “contested” under rules of the New York Stock Exchange and brokers cannot vote customer shares on a discretionary basis. Furthermore, for fund complexes that utilize unitary or cluster boards, the election of a shareholder director nominee may, in some circumstances, increase costs and potentially decrease the efficiency of the boards.

We note, however, that these costs are associated with the State law right to nominate and elect directors, and are not costs incurred for including shareholder nominees in the company's proxy statement. With respect to fund complexes utilizing unitary or cluster boards, we note that any increased costs and decreased efficiency of an investment company's board as a result of the fund complex no longer having a unitary or cluster board would occur, if at all, only in the event that investment company shareholders elect the shareholder nominee. Investment companies may include information in the proxy materials making investors aware of the company's views on the perceived benefits of a unitary or cluster board and the potential for increased

costs and decreased efficiency if the shareholder nominees are elected. Moreover, we note that a fund complex can take steps to minimize the cost and burden of a shareholder-nominated director by, for example, entering into a confidentiality agreement in order to preserve the status of confidential information regarding the fund complex.

145

Two commenters argued in a joint comment letter that there are a number of practical and legal issues that prevent confidentiality agreements from being sufficient to address the issues that arise when a shareholder-nominated director is elected to the board of an investment company in a fund complex using a unitary or cluster board.

See

letter from ICI/IDC. We emphasize that entering into a confidentiality agreement is only one method of preserving the confidentiality of information revealed in board meetings attended by the shareholder-nominated director. The fund complex can have separate meetings and board materials for the board with the shareholder-nominated director, especially if particularly sensitive legal or other matters will be discussed or to protect attorney-client privilege. For a further discussion of this comment,

see

Section IV.E.1.

We believe that the costs imposed on investment companies will be less significant than the costs imposed on other companies for three reasons. First, to the extent investment companies do not hold annual meetings as permitted by State law, investment company shareholders will have less opportunity to use the rule.

146

Second, even when investment company shareholders do have the opportunity to use the rule, the disproportionately large and generally passive retail shareholder base of investment companies will probably mean that the rule will be used less frequently than will be the case with non-investment companies.

147

Third, because we have sought to limit the cost and burden on all companies, including investment companies, by limiting use of Rule 14a-11 to shareholders who have maintained significant continuous holdings in the company for at least three years, and because many funds, such as money market funds, are held by shareholders on a short-term basis,

148

we believe that the situations where shareholders will meet the eligibility requirements will be limited.

146

See

letters from ABA; MFDF.

147

See

letter from J. Taub.

148

See

letter from ABA.

Although commenters argued that the election of a shareholder-nominated director to a unitary or cluster board will necessarily result in decreased effectiveness of the board, we disagree. In this regard, one commenter argued that competition in the board nomination process may improve efficiency by providing additional leverage for boards in negotiations with the investment adviser.

149

In any event, we believe that investment company shareholders should have a more meaningful opportunity to exercise their traditional State law rights to elect a non-unitary or non-cluster board if they so choose.

149

See

letter from J. Taub.

c. Controlled Companies

As proposed, Rule 14a-11 would allow eligible shareholders to submit director nominees at all companies subject to the Exchange Act proxy rules other than companies that are subject to the proxy rules solely because they have a class of debt registered under Section 12 of the Exchange Act. We sought comment on whether Rule 14a-11 also should provide an exception for controlled companies.

In response to our request for comment, one commenter argued that controlled companies should not be excluded from Rule 14a-11,

150

acknowledging that while there may be no mathematical possibility of a shareholder nominee submitted pursuant to Rule 14a-11 being elected at a controlled company, in a controlled company there could be an even greater need for non-controlling shareholders to express their concerns. The commenter noted that a large—even if not a majority—vote by non-controlling shareholders could send an important message to the board. Other commenters noted that controlled companies are commonly structured with dual classes of stock, which allows shareholders of the non-controlling class of stock to elect a set number of directors that is less than the full board.

151

Another commenter noted that dual-class companies with supervoting stock often can benefit the most from having the interests of non-controlling shareholders better represented in the boardroom.

152

This commenter encouraged the Commission to include some means by which minority shareholders of dual-class and parent-controlled companies could meaningfully avail themselves of the rule, even if a different set of eligibility or disclosure requirements is determined to be more appropriate in these cases.

150

See

letter from P. Neuhauser.

151

See

letters from ABA; Duane Morris; Media General, Inc. (“Media General”); The New York Times Company (“New York Times”).

152

See

letter from T. Rowe Price.

On the other hand, several commenters argued that controlled companies should be excluded from Rule 14a-11.

153

According to these commenters, providing shareholders the ability to include nominees in company proxy materials in this context would be ineffective and needlessly disruptive and costly because there is no prospect that a shareholder nominee would be elected.

154

Two of these commenters also noted that subjecting these companies to Rule 14a-11 would possibly cause investor confusion.

155

These commenters remarked that shareholders would continue to have other avenues to express their views to the company, such as through the Rule 14a-8 process. Commenters who supported an exclusion for controlled companies suggested that for purposes of the exclusion the definition of “controlled company” should be similar to the definition used by the national securities exchanges in connection with director independence requirements.

156

Some commenters suggested that if Rule 14a-11 excluded controlled companies using the same definition as the national securities exchanges in connection with director independence requirements, then the rule should contain an instruction providing that whether more than 50% of the voting power of a company is held by an individual, group, or other company would be determined by any schedules filed under Section 13(d) of the Exchange Act.

157

153

See

letters from ABA; AllianceBernstein; Cleary; Seven Law Firms; Duane Morris LLP (“Duane Morris”); Sidley Austin.

154

See

letters from ABA; AllianceBernstein; Cleary; Seven Law Firms; Duane Morris; Sidley Austin.

155

See

letters from ABA; Seven Law Firms.

156

See

letters from ABA; AllianceBernstein; Cleary; Seven Law Firms; Duane Morris; Sidley Austin.

See, e.g.,

New York Stock Exchange Rule 303A.00 and NASDAQ Stock Market LLC Rule 5615(c) (defining “controlled companies” as a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company).

157

See

letters from AllianceBernstein; Duane Morris.

After considering the issue further, we are persuaded that Rule 14a-11 should apply to controlled companies, as we proposed. As commenters noted, it is common for companies structured with dual classes of stock to allow shareholders of the non-controlling class to elect a set number of directors that is less than the full board. In that situation, it may be useful for non-controlling shareholders to be able to include shareholder nominations in company proxy materials with respect to the directors the non-controlling class is entitled to elect. In addition, though applying Rule 14a-11 to controlled companies would be unlikely to result in the election of shareholder-nominated directors in cases in which these are not directors elected exclusively by the non-controlling shareholders, we appreciate that shareholders at controlled companies

may have other reasons for nominating candidates for director.

158

We note that controlled companies are not excluded from Rule 14a-8 despite the same improbability that a shareholder proposal will receive the approval of the majority of the votes cast at a controlled company. Shareholders may use Rule 14a-8 to submit a proposal to the board even though controlling shareholders may vote against the proposal and prevent it from being approved.

d. “Debt Only” Companies

As proposed, Rule 14a-11 would allow eligible shareholders to submit director nominees at all companies subject to the Exchange Act proxy rules other than companies that are subject to the proxy rules solely because they have a class of debt securities registered under Section 12 of the Exchange Act. We sought comment on whether this exclusion from Rule 14a-11 was appropriate.

Commenters that specifically addressed this question agreed with our approach and stated generally that Rule 14a-11 should not apply to companies subject to the Federal proxy rules solely because they have a class of debt securities registered under Exchange Act Section 12.

159

Most of these commenters stated that the ability to submit nominees for inclusion in a company's proxy materials should be limited to holders of equity securities registered under the Exchange Act.

160

One commenter warned that subjecting companies with a registered class of debt securities to Rule 14a-11 would deter private companies from accessing the public debt market and, in any case, private companies typically have shareholder agreements and other arrangements in place that address the election of directors.

161

159

See

letters from ABA; CII; Cleary; S&C.

160

See

letters from ABA; Cleary; S&C.

161

See

letter from S&C. This commenter also stated that Rule 14a-11 should not apply to those reporting companies who voluntarily continue to file Exchange Act reports while they are not required to do so under Exchange Act Section 13(a) or Section 15(d). It argued that these voluntary filers should be treated the same as companies with Exchange Act reporting obligations relating solely to debt securities. We note that Rule 14a-11 will not apply to a company filing Exchange Act reports when neither Exchange Act Section 13(a) nor Section 15(d) requires that it do so (for example, to comply with a covenant contained in an indenture relating to outstanding debt securities).

We are adopting this exclusion as proposed. We note that this approach was supported by investor and corporate commenters. We believe that Rule 14a-11 should not apply to companies that are subject to the Federal proxy rules solely because they have a class of debt securities registered under Section 12 of the Exchange Act.

e. Application of Exchange Act Rule 14a-11 to Companies That Voluntarily Register a Class of Securities Under Exchange Act Section 12(g)

In the Proposing Release, we noted that Rule 14a-11 would apply to companies that have voluntarily registered a class of equity securities pursuant to Exchange Act Section 12(g); however, we solicited comment on whether Rule 14a-11 should apply to these companies.

162

We also asked whether nominating shareholders of these companies should be subject to the same ownership eligibility thresholds as those shareholders of companies that were required to register a class of equity securities pursuant to Section 12, or whether we should adjust any other aspects of Rule 14a-11 for these companies.

162

A company must register a class of equity securities under Section 12(g) if, on the last day of its fiscal year, the class of equity securities is held by 500 or more record holders and the company has total assets of more than $10 million. An issuer may, however, register any class of equity securities under Section 12(g) even if these thresholds have not been met. Reporting after this form of voluntary registration is distinguished from a company that continues to file Exchange Act reports when neither Exchange Act Section 13(a) nor Section 15(d) requires that it do so.

See

footnote 161 above.

Three commenters stated that Rule 14a-11 should apply to companies that voluntarily register a class of equity securities under Exchange Act Section 12(g).

163

One explained that investors in securities registered under Section 12 should be provided some assurance that the company is subject to various rules safeguarding their interests, such as the proposed rule, and expressed concern that less than uniform application could lead to investor confusion.

164

One commenter stated that nominating shareholders of voluntarily-registered companies should be subject to the same ownership thresholds as shareholders of companies that were required to register a class of securities under Exchange Act Section 12.

165

163

See

letters from ABA; CII; USPE.

164

See

letter from USPE.

165

See

letter from ABA.

We agree with the commenters that Rule 14a-11 generally should apply to those companies that choose to avail themselves of the obligations and benefits of Section 12(g) registration. As Section 12 registrants, these companies are subject to the full panoply of the Exchange Act, including Section 14(a), and their shareholders receive proxy materials in connection with annual and special meetings of shareholders in accordance with the proxy rules. We believe disparate treatment among these Section 12 registrants is unwarranted and shareholders of these companies should enjoy the same protections generally available to shareholders of other companies with a class of equity securities registered pursuant to Section 12. Accordingly, Rule 14a-11 will apply to companies that have voluntarily registered a class of equity securities pursuant to Exchange Act Section 12(g), with the same ownership eligibility thresholds as those of companies that were required to register a class of equity securities pursuant to Section 12.

f. Smaller Reporting Companies

Under the Proposal, Rule 14a-11 would apply to all companies subject to the proxy rules, other than companies that are subject to the proxy rules solely because they have a class of debt registered under Exchange Act Section 12. Thus, Rule 14a-11, as proposed, would apply to smaller reporting companies. We sought comment in the Proposal on what effect, if any, the application of Rule 14a-11 would have on any particular group of companies, and in particular, smaller reporting companies.

166

The Commission has considered this issue on prior occasions.

See, e.g.,

2003 Proposal; Division of Corporation Finance, Briefing Paper for Roundtable Discussion on the Proposed Security Holder Director Nominations Rules, February 25, 2004,

available at http://www.sec.gov/spotlight/dir-nominations/dir-nom-briefing.htm

A number of commenters stated generally that Rule 14a-11 should not apply to small businesses.

167

One commenter argued that Rule 14a-11 should be limited to accelerated filers and that there should possibly be a transition period where the rule was only applicable to large accelerated filers.

168

That commenter believed that

smaller companies would have trouble recruiting directors because the pool of qualified directors is already small for smaller companies, and directors would not want to risk the exposure to a proxy contest. Another commenter argued tha

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