# Facilitating Shareholder Director Nominations > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2010-22218 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** September 16, 2010 - **Citation:** 75 FR 56668 ## Text 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, 1 and new Rules 14a-11, 2 and 14a-18, 3 and new Regulation 14N 4 and Schedule 14N, 5 and amending Rule 13 6 of Regulation S-T, 7 Rules 13a-11, 8 13d-1, 9 14a-2, 10 14a-4, 11 14a-5, 12 14a-6, 13 14a-8, 14 14a-9, 15 14a-12, 16 and 15d-11, 17 Schedule 13G, 18 Schedule 14A, 19 and Form 8-K, 20 under the Securities Exchange Act of 1934. 21 Although we are not amending Schedule 14C 22 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. 1 17 CFR 200.82a. 2 17 CFR 240.14a-11. 3 17 CFR 240.14a-18. 4 17 CFR 240.14n et seq. 5 17 CFR 240.14n-101. 6 17 CFR 232.13. 7 17 CFR 232.10 et seq. 8 17 CFR 240.13a-11. 9 17 CFR 240.13d-1. 10 17 CFR 240.14a-2. 11 17 CFR 240.14a-4. 12 17 CFR 240.14a-5. 13 17 CFR 240.14a-6. 14 17 CFR 240.14a-8. 15 17 CFR 240.14a-9. 16 17 CFR 240.14a-12. 17 17 CFR 240.15d-11. 18 17 CFR 240.13d-102. 19 17 CFR 240.14a-101. 20 17 CFR 249.308. 21 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”). 22 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. 23 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. 23 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. 24 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 25 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. 24 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 S. Rep. 792, 73d Cong., 2d Sess., 12 (1934) (“[I]t is essential that [the stockholder] be enlightened not only as to the financial condition of the corporation, but also as to the major questions of policy, which are decided at stockholders' meetings.”). 25 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, § 971, 124 Stat. 1376 (2010) (“Dodd-Frank Act”). Regulation of the proxy process was one of the original responsibilities that Congress assigned to the Commission as part of its core functions in 1934. The Commission has actively monitored the proxy process since receiving this authority and has considered changes when it appeared that the process was not functioning in a manner that adequately protected the interests of investors. 26 One of the key tenets of the Federal proxy rules on which the Commission has consistently focused is whether the proxy process functions, as nearly as possible, as a replacement for an actual in-person meeting of shareholders. 27 This is important because the proxy process represents shareholders' principal means of participating effectively at an annual or special meeting of shareholders. 28 In our Proposal we noted our concern that the Federal proxy rules may not be facilitating the exercise of shareholders' State law rights to nominate and elect directors. Without the ability to effectively utilize the proxy process, shareholder nominees do not have a realistic prospect of being elected because most, if not all, shareholders return their proxy cards in advance of the shareholder meeting and thus, in essence, cast their votes before the meeting at which they may nominate directors. Recognizing that this failure of the proxy process to facilitate shareholder nomination rights has a practical effect on the right to elect directors, the new rules will enable the proxy process to more closely approximate the conditions of the shareholder meeting. In addition, because companies will be required to include shareholder-nominated candidates for director in company proxy materials, shareholders will receive additional information upon which to base their voting decisions. Finally, we believe these changes will significantly enhance the confidence of shareholders who link the recent financial crisis to a lack of responsiveness of some boards to shareholder interests. 29 26 For example, the Commission has considered changes to the proxy rules related to the election of directors in recent years. See Security Holder Director Nominations, Release No. 34-48626 (October 14, 2003) [68 FR 60784] (“2003 Proposal”); Shareholder Proposals, Release No. 34-56160 (July 27, 2007) [72 FR 43466] (“Shareholder Proposals Proposing Release”); Shareholder Proposals Relating to the Election of Directors, Release No. 34-56161 (July 27, 2007) [72 FR 43488] (“Election of Directors Proposing Release”); and Shareholder Proposals Relating to the Election of Directors, Release No. 34-56914 (December 6, 2007) [72 FR 70450] (“Election of Directors Adopting Release”). When we refer to the “2007 Proposals” and the comments received in 2007, we are referring to the Shareholder Proposals Proposing Release and the Election of Directors Proposing Release and the comments received on those proposals, unless otherwise specified. 27 Professor Karmel has described the Commission's proxy rules as having the purpose “to make the proxy device the closest practicable substitute for attendance at the [shareholder] meeting.” Roberta S. Karmel, The New Shareholder and Corporate Governance: Voting Power Without Responsibility or Risk: How Should Proxy Reform Address the De-Coupling of Economic and Voting Rights?, 55 Vill. L. Rev. 93, 104 (2010). 28 Historically, a shareholder's voting rights generally were exercised at a shareholder meeting. As discussed in the Proposing Release, in passing the Exchange Act, Congress understood that the securities of many companies were held through dispersed ownership, at least in part facilitated by stock exchange listing of shares. Although voting rights in public companies technically continued to be exercised at a meeting, the votes cast at the meeting were by proxy and the voting decision was made during the proxy solicitation process. This structure continues to this day. 29 See letters from American Federation of Labor and Congress of Industrial Organizations (“AFL-CIO”); California Public Employees' Retirement System (“CalPERS”); Council of Institutional Investors (“CII”); Lynne L. Dallas (“L. Dallas”); Los Angeles County Employees Retirement Association (“LACERA”); Laborers' International Union of North America (“LIUNA”); The Nathan Cummings Foundation (“Nathan Cummings Foundation”); Pax World Management Corp. (“Pax World”); Pershing Square Capital Management, L.P. (“Pershing Square”); Relational Investors, LLC (“Relational”); RiskMetrics Group, Inc. (“RiskMetrics”); Shareowner Education Network and Shareowners.org (“Shareowners.org”); Social Investment Forum (“Social Investment Forum”); State of Wisconsin Investment Board (“SWIB”); International Brotherhood of Teamsters (“Teamsters”); Trillium Asset Management Corporation (“Trillium”); Universities Superannuation Scheme—UK (“Universities Superannuation”); Washington State Investment Board (“WSIB”). The Commission has, on a number of prior occasions, considered whether its proxy rules needed to be amended to facilitate shareholders' ability to nominate directors by having their nominees included in company proxy materials. 30 Most recently, in June 2009, we proposed amendments to the proxy rules that included both a new proxy rule, Exchange Act Rule 14a-11, that would require a company's proxy materials to provide shareholders with information about, and the ability to vote for, candidates for director nominated by long-term shareholders or groups of long-term shareholders with significant holdings, and amendments to Rule 14a-8(i)(8) to prohibit exclusion of certain shareholder proposals seeking 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 received significant comment on the proposed amendments. Overall, commenters were sharply divided on the necessity for, and the workability of, the proposed amendments. Supporters of the amendments generally believed that, if adopted, they would facilitate shareholders' ability to exercise their State law right to nominate directors and provide meaningful opportunities to effect changes in the composition of the board. 31 These commenters predicted that the amendments would lead to more accountable, responsive, and effective boards. 32 Many commenters saw a link between the recent economic crisis and shareholders' inability to have nominees included in a company's proxy materials. 33 30 For a discussion of the Commission's previous actions in this area, see the Proposing Release and the 2003 Proposal. 31 See letters from CII; Colorado Public Employees' Retirement Association (“COPERA”); CtW Investment Group (“CtW Investment Group”); L. Dallas; Thomas P. DiNapoli (“T. DiNapoli”); Florida State Board of Administration (“Florida State Board of Administration”); International Corporate Governance Network (“ICGN”); Denise L. Nappier (“D. Nappier”); Ohio Public Employees Retirement System (“OPERS”); Pax World; Teamsters. 32 Id. 33 See letters from AFL-CIO; CalPERS; California State Teachers' Retirement System (“CalSTRS”); CII; L. Dallas; LACERA; LIUNA; Nathan Cummings Foundation; Pax World; Pershing Square; Relational; RiskMetrics; Shareowners.org; Social Investment Forum; SWIB; Teamsters; Trillium; Universities Superannuation; WSIB. Commenters opposed to our Proposal believed that recent corporate governance developments, including increased use of a majority voting standard for the election of directors and certain State law changes, already provide shareholders with meaningful opportunities to participate in director elections. 34 These commenters viewed the amendments as inappropriately intruding into matters traditionally governed by State law or imposing a “one size fits all” rule for all companies and expressed concerns about “special interest” directors, forcing companies to focus on the short-term rather than the creation of long-term shareholder value, and other perceived negative effects of the amendments, if adopted, on boards and companies. 35 Finally, commenters worried about the impact of the proposed amendments on small businesses. 36 34 See letters from Group of 26 Corporate Secretaries and Governance Professionals (“26 Corporate Secretaries”); 3M Company (“3M”); Advance Auto Parts, Inc. (“Advance Auto Parts”); The Allstate Corporation (“Allstate”); Avis Budget Group, Inc. (“Avis Budget”); American Express Company (“American Express”); Anadarko Petroleum Corporation (“Anadarko”); Association of Corporate Counsel (“Association of Corporate Counsel”); AT&T Inc. (“AT&T”); Lawrence Behr (“L. Behr”); Best Buy Co., Inc. (“Best Buy”); The Boeing Company (“Boeing”); Business Roundtable (“BRT”); Robert N. Burt (“R. Burt”); State Bar of California, Corporations Committee of Business Law Section (“California Bar”); Sean F. Campbell (“S. Campbell”); Carlson (“Carlson”); Caterpillar Inc. (“Caterpillar”); U.S. Chamber of Commerce Center for Capital Markets Competitiveness (“Chamber of Commerce/CMCC”); Chevron Corporation (“Chevron”); CIGNA Corporation (“CIGNA”); W. Don Cornwell (“W. Cornwell”); CSX Corporation (“CSX”); Cummins Inc. (“Cummins”); Davis Polk & Wardwell LLP (“Davis Polk”); Dewey & LeBoeuf (“Dewey”); E.I. du Pont de Nemours and Company (“DuPont”); Eaton Corporation (“Eaton”); Michael Eng (“M. Eng”); FedEx Corporation (“FedEx”); FMC Corporation (“FMC Corp.”); FPL Group, Inc. (“FPL Group”); Frontier Communications Corporation (“Frontier”); General Electric Company (“GE”); General Mills, Inc. (“General Mills”); Charles O. Holliday, Jr. (“C. Holliday”); Honeywell International Inc. (“Honeywell”); Constance J. Horner (“C. Horner”); International Business Machines Corporation (“IBM”); Jones Day (“Jones Day”); Keating Muething & Klekamp PLL (“Keating Muething”); James M. Kilts (“J. Kilts”); Reatha Clark King, Ph.D. (“R. Clark King”); Ned C. Lautenbach (“N. Lautenbach”); MeadWestvaco Corporation (“MeadWestvaco”); MetLife, Inc. (“MetLife”); Motorola, Inc. (“Motorola”); O'Melveny & Myers LLP (“O'Melveny & Myers”); Office Depot, Inc. (“Office Depot”); Pfizer Inc. (“Pfizer”); Protective Life Corporation (“Protective”); Sullivan & Cromwell LLP (“S&C”); Safeway Inc. (“Safeway”); Sara Lee Corporation (“Sara Lee”); Shearman & Sterling LLP (“Shearman & Sterling”); The Sherwin-Williams Company (“Sherwin-Williams”); Sidley Austin LLP (“Sidley Austin”); Simpson Thacher & Bartlett LLP (“Simpson Thacher”); Tesoro Corporation (“Tesoro”); Textron Inc. (“Textron”); Texas Instruments Corporation (“TI”); Gary L. Tooker (“G. Tooker”); UnitedHealth Group Incorporated (“UnitedHealth”); Unitrin, Inc. (“Unitrin”); U.S. Bancorp (“U.S. Bancorp”); Wachtell, Lipton, Rosen & Katz (“Wachtell”); Wells Fargo & Company (“Wells Fargo”); West Chicago Chamber of Commerce & Industry (“West Chicago Chamber”); Weyerhaeuser Company (“Weyerhaeuser”); Xerox Corporation (“Xerox”); Yahoo! (“Yahoo”). 35 See letters from 26 Corporate Secretaries; American Bar Association (“ABA”); ACE Limited (“ACE”); Advance Auto Parts; AGL Resources (“AGL”); Aetna Inc. (“Aetna”); Allstate; Alston & Bird LLP (“Alston & Bird”); American Bankers Association (“American Bankers Association”); The American Business Conference (“American Business Conference”); American Electric Power Company, Inc. (“American Electric Power”); Anadarko; Applied Materials, Inc. (“Applied Materials”); Artistic Land Designs LLC (“Artistic Land Designs”); Association of Corporate Counsel; Avis Budget; Atlantic Bingo Supply, Inc. (“Atlantic Bingo”); L. Behr; Best Buy; Biogen Idec Inc. (“Biogen”); James H. Blanchard (“J. Blanchard”); Boeing; Tammy Bonkowski (“T. Bonkowski”); BorgWarner Inc. (“BorgWarner”); Boston Scientific Corporation (“Boston Scientific”); The Brink's Company (“Brink's”); BRT; Burlington Northern Santa Fe Corporation (“Burlington Northern”); R. Burt; California Bar; Callaway Golf Company (“Callaway”); S. Campbell; Carlson; Carolina Mills (“Carolina Mills”); Caterpillar; Chamber of Commerce/CMCC; Chevron; Rebecca Chicko (“R. Chicko”); CIGNA; Comcast Corporation (“Comcast”); Competitive Enterprise Institute's Center for Investors and Entrepreneurs (“Competitive Enterprise Institute”); W. Cornwell; CSX; Edwin Culwell (“E. Culwell”); Cummins; Darden Restaurants, Inc. (“Darden Restaurants”); Daniels Manufacturing Corporation (“Daniels Manufacturing”); Davis Polk; Delaware State Bar Association (“Delaware Bar”); Tom Dermody (“T. Dermody”); Devon Energy Corporation (“Devon”); DTE Energy Company (“DTE Energy”); Eaton; The Edison Electric Institute (“Edison Electric Institute”); Eli Lilly and Company (“Eli Lilly”); Emerson Electric Co. (“Emerson Electric”); M. Eng; Erickson Retirement Communities, LLC (“Erickson”); ExxonMobil Corporation (“ExxonMobil”); FedEx; Financial Services Roundtable (“Financial Services Roundtable”); Flutterby Kissed Unique Treasures (“Flutterby”); FPL Group; Frontier; GE; Allen C. Goolsby (“A. Goolsby”); C. Holliday; IBM; Investment Company Institute (“ICI”); Intelect Corporation (“Intelect”); JPMorgan Chase & Co. (“JPMorgan Chase”); Jones Day; R. Clark King; Leggett & Platt Incorporated (“Leggett”); Teresa Liddell (“T. Liddell”); Little Diversified Architectural Consulting (“Little”); McDonald's Corporation (“McDonald's”); MeadWestvaco; MedFaxx, Inc. (“MedFaxx”); Medical Insurance Services (“Medical Insurance”); MetLife; Mary S. Metz (“M. Metz”); Microsoft Corporation (“Microsoft”); John R. Miller (“J. Miller”); Marcelo Moretti (“M. Moretti”); Motorola; National Association of Corporate Directors (“NACD”); National Association of Manufacturers (“NAM”); National Investor Relations Institute (“NIRI”); O'Melveny & Myers; Office Depot; Omaha Door & Window (“Omaha Door”); The Procter & Gamble Company (“P&G”); PepsiCo, Inc. (“PepsiCo”); Pfizer; Realogy Corporation (“Realogy”); Jared Robert (“J. Robert”); Marissa Robert (“M. Robert”); RPM International Inc. (“RPM”); Ryder System, Inc. (“Ryder”); Safeway; Ralph S. Saul (“R. Saul”); Shearman & Sterling; Sherwin-Williams; Raymond F. Simoneau (“R. Simoneau”); Society of Corporate Secretaries and Governance Professionals, Inc. (“Society of Corporate Secretaries”); The Southern Company (“Southern Company”); Southland Properties, Inc. (“Southland”); The Steele Group (“Steele Group”); Style Crest Enterprises, Inc. (“Style Crest”); Tesoro; Textron; Theragenics Corporation (“Theragenics”); TI; Richard Trummel (“R. Trummel”); Terry Trummel (“T. Trummel”); Viola Trummel (“V. Trummel”); tw telecom inc. (“tw telecom”); Laura D'Andrea Tyson (“L. Tyson”); United Brotherhood of Carpenters and Joiners of America (“United Brotherhood of Carpenters”); UnitedHealth; U.S. Bancorp; VCG Holding Corporation (“VCG”); Wachtell; The Way to Wellness (“Wellness”); Wells Fargo; Whirlpool Corporation (“Whirlpool”); Xerox; Yahoo; Jeff Young (“J. Young”). 36 See letters from ABA; American Mailing Service (“American Mailing”); All Cast, Inc. (“All Cast”); Always N Bloom (“Always N Bloom”); American Carpets (“American Carpets”); John Arquilla (“J. Arquilla”); Beth Armburst (“B. Armburst”); Artistic Land Designs; Charles Atkins (“C. Atkins”); Book Celler (“Book Celler”); Kathleen G. Bostwick (“K. Bostwick”); Brighter Day Painting (“Brighter Day Painting”); Colletti and Associates (“Colletti”); Commercial Concepts (“Commercial Concepts”); Complete Home Inspection (“Complete Home Inspection”); Debbie Courtney (“D. Courtney”); Sue Crawford (“S. Crawford”); Crespin's Cleaning, Inc. (“Crespin”); Don's Tractor Repair (“Don's”); Theresa Ebreo (“T. Ebreo”); M. Eng; eWareness, Inc. (“eWareness”); Evans Real Estate Investments, LLC (“Evans”); Fluharty Antiques (“Fluharty”); Flutterby; Fortuna Italian Restaurant & Pizza (“Fortuna Italian Restaurant”); Future Form Inc. (“Future Form Inc.”); Glaspell Goals (“Glaspell”); Cheryl Gregory (“C. Gregory”); Healthcare Practice Management, Inc. (Healthcare Practice”); Brian Henderson (“B. Henderson”); Sheri Henning (“S. Henning”); Jaynee Herren (“J. Herren”); Ami Iriarte (“A. Iriarte”); Jeremy J. Jones (“J. Jones”); Juz Kidz Nursery and Preschool (“Juz Kidz”); Kernan Chiropractic Center (“Kernan”); LMS Wine Creators (“LMS Wine”); Tabitha Luna (“T. Luna”); Mansfield Children's Center, Inc. (“Mansfield Children's Center”); Denise McDonald (“D. McDonald”); Meister's Landscaping (“Meister”); Merchants Terminal Corporation (“Merchants Terminal”); Middendorf Bros. Auctioneers and Real Estate (“Middendorf”); Mingo Custom Woods (“Mingo”); Moore Brothers Auto Truck Repair (“Moore Brothers”); Mouton's Salon (“Mouton”); Doug Mozack (“D. Mozack”); Ms. Dee's Lil Darlins Daycare (“Ms. Dee”); Gavin Napolitano (“G. Napolitano”); NK Enterprises (“NK”); Hugh S. Olson (“H. Olson”); Parts and Equipment Supply Co. (“PESC”); Pioneer Heating & Air Conditioning (“Pioneer Heating & Air Conditioning”); RC Furniture Restoration (“RC”); RTW Enterprises Inc. (“RTW”); Debbie Sapp (“D. Sapp”); Southwest Business Brokers (“SBB”); Security Guard IT&T Alarms, Inc. (“SGIA”); Peggy Sicilia (“P. Sicilia”); Slycers Sandwich Shop (“Slycers”); Southern Services (“Southern Services”); Steele Group; Sylvron Travels (“Sylvron”); Theragenics; Erin White Tremaine (“E. Tremaine”); Wagner Health Center (“Wagner”); Wagner Industries (“Wagner Industries”); Wellness; West End Auto Paint & Body (“West End”); Y.M. Inc. (“Y.M.”); J. Young. After considering the comments and weighing the competing interests of facilitating shareholders' ability to exercise their State law rights to nominate and elect directors against potential disruption and cost to companies, we are convinced that adopting the proposed amendments to the proxy rules serves our purpose to regulate the proxy process in the public interest and on behalf of investors. We are not persuaded by the arguments of some commenters that the provisions of Rule 14a-11 are unnecessary. 37 Those commenters argued that changes in corporate governance over the past six years have obviated the need for a Federal rule to allow shareholders to place their nominees in company proxy materials and that shareholders should be left to determine whether, on a company-by-company basis, such a rule is necessary at any particular company. 37 See, e.g., letters from 26 Corporate Secretaries; 3M; Advance Auto Parts; Allstate; Avis Budget; American Express; Anadarko; Association of Corporate Counsel; AT&T; L. Behr; Best Buy; Boeing; BRT; R. Burt; California Bar; S. Campbell; Carlson; Caterpillar; Chamber of Commerce/CMCC; Chevron; CIGNA; W. Cornwell; CSX; Cummins; Davis Polk; Dewey; DuPont; Eaton; M. Eng; FedEx; FMC Corp.; FPL Group; Frontier; GE; General Mills; Joseph A. Grundfest, Stanford Law School (July 24, 2009) (“Grundfest”); C. Holliday; Honeywell; C. Horner; IBM; Jones Day; Keating Muething; J. Kilts; R. Clark King; N. Lautenbach; MeadWestvaco; Metlife; Motorola; O'Melveny & Myers; Office Depot; Pfizer; Protective; S&C; Safeway; Sara Lee; Shearman & Sterling; Sherwin-Williams; Sidley Austin; Simpson Thacher; Tesoro; Textron; TI; G. Tooker; UnitedHealth; Unitrin; U.S. Bancorp; Wachtell; Wells Fargo; West Chicago Chamber; Weyerhaeuser; Xerox; Yahoo. While we recognize that some states, such as Delaware, 38 have amended their state corporate law to enable companies to adopt procedures for the inclusion of shareholder director nominees in company proxy materials, 39 as was highlighted by a number of commenters, other states have not. 40 These commenters noted that, as a result, companies not incorporated in Delaware could frustrate shareholder efforts to establish procedures for shareholders to place board nominees in the company's proxy materials by litigating the validity of a shareholder proposal establishing such procedures, or possibly repealing shareholder-adopted bylaws establishing such procedures. In addition, due to the difficulty that shareholders could have in establishing such procedures, we believe that it would be inappropriate to rely solely on an enabling approach to facilitate shareholders' ability to exercise their State law rights to nominate and elect directors. Even if bylaw amendments to permit shareholders to include nominees in company proxy materials were permissible in every state, shareholder proposals to so amend company bylaws could face significant obstacles. 38 We refer to Delaware law frequently because of the large percentage of public companies incorporated under that law. The Delaware Division of Corporations reports that over 50% of U.S. public companies are incorporated in Delaware. See http://www.corp.delaware.gov. 39 Del. Code Ann. tit. 8, § 112. In December 2009, the Committee on Corporate Laws of the American Bar Association Section of Business Law Committee adopted amendments to the Model Act that explicitly authorize bylaws that prescribe shareholder access to company proxy materials or reimbursement of proxy solicitation expenses. See ABA Press Release, “Corporate Laws Committee Adopts New Model Business Corporation Act Amendments to Provide For Proxy Access And Expense Reimbursement,” December 17, 2009, available at http://www.abanet.org/abanet/media/release/news_release.cfm?releaseid=848. In addition, in 2007, North Dakota amended its corporate code to permit 5% shareholders to provide a company notice of intent to nominate directors and require the company to include each such shareholder nominee in its proxy statement and form of proxy. N.D. Cent. Code § 10-35-08 (2009); see North Dakota Publicly Traded Corporations Act, N.D. Cent. Code § 10-35 et al. (2007). 40 See letters from American Federation of State, County and Municipal Employees (“AFSCME”); AllianceBernstein L.P. (“AllianceBernstein”); Amalgamated Bank LongView Funds (“Amalgamated Bank”); Association of British Insurers (“British Insurers”); CalPERS; CII; The Corporate Library (“Corporate Library”); L. Dallas; Florida State Board of Administration; ICGN; LIUNA; D. Nappier; Paul M. Neuhauser (“P. Neuhauser”); Comment Letter of Nine Securities and Governance Law Firms (“Nine Law Firms”); Pax World; Pershing Square; theRacetotheBottom.org (“RacetotheBottom”); RiskMetrics; Schulte Roth & Zabel LLP (“Schulte Roth & Zabel”); Sodali (“Sodali”); Teachers Insurance and Annuity Association of America and College Retirement Equities Fund (“TIAA-CREF”); United States Proxy Exchange (“USPE”); ValueAct Capital, LLC (“ValueAct Capital”). We also considered whether the move by many companies away from plurality voting to a general policy of majority voting in uncontested director elections should lead to a conclusion that our actions are unnecessary or whether we should premise our actions on the failure of a company to adopt majority voting. 41 We agree with commenters 42 who argued that a majority voting standard in director elections does not address the need for a rule to facilitate the inclusion of shareholder nominees for director in company proxy materials. While majority voting impacts shareholders' ability to elect candidates put forth by management, it does not affect shareholders' ability to exercise their right to nominate candidates for director. 41 Despite the rate of adoption of a majority voting standard for director elections by companies in the S&P 500, only a small minority of firms in the Russell 3000 index have adopted them. See discussion in footnote 69 in the Proposing Release. 42 See letters from AFSCME; AllianceBernstein; CalPERS; CII; L. Dallas; D. Nappier; P. Neuhauser; RiskMetrics; TIAA-CREF. One commenter characterized a majority voting standard as a mechanism for “registering negative sentiment” about an incumbent board nominee, not a mechanism to ensure board accountability. See letter from AFSCME. We also do not believe that the recent amendments to New York Stock Exchange (NYSE) Rule 452, which eliminated brokers' discretionary voting authority in director elections, negate the need for the rule. Certain commenters specifically noted their concurrence with us on this point. 43 The amendments to NYSE Rule 452 address who exercises the right to vote rather than shareholders' ability to have their nominees put forth for a vote. While these and other changes have been important events, they bolster shareholders' ability to elect directors who are already on the company's proxy card, not their ability to affect who appears on that card. We therefore are convinced that the Federal proxy rules should be amended to better facilitate the exercise of shareholders' rights under State law to nominate directors. 43 See letters from CII; Sodali; USPE. We also considered whether we should amend Rule 14a-8 to narrow the “election exclusion,” without also adopting Rule 14a-11. We note that a significant number of commenters supported the proposed amendments to Rule 14a-8(i)(8). 44 We concluded, however, as certain commenters pointed out, that adopting only the proposed amendments to Rule 14a-8(i)(8), without Rule 14a-11, would not achieve the Commission's stated objectives. 45 We believe that the amendments to Rule 14a-8(i)(8) will provide shareholders with an important mechanism for including in company proxy materials proposals that would address the inclusion of shareholder director nominees in the company's proxy materials in ways that supplement Rule 14a-11, such as with a lower ownership threshold, a shorter holding period, or to allow for a greater number of nominees if shareholders of a company support such standards. 44 For a list of these commenters, see footnotes 677, 678, and 679 below. 45 See letters from CII; USPE. We recognize that many commenters advocated that shareholders' ability to include nominees in company proxy materials should be determined exclusively by what individual companies or their shareholders affirmatively choose to provide, or that companies or their shareholders should be able to opt out of Rule 14a-11 or otherwise alter its terms for individual companies (the “private ordering” arguments). 46 After careful consideration of the numerous comments advocating this perspective, 47 we believe that the arguments in favor of this perspective are flawed for several reasons. 46 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. 47 See id. First, corporate governance is not merely a matter of private ordering. Rights, including shareholder rights, are artifacts of law, and in the realm of corporate governance some rights cannot be bargained away but rather are imposed by statute. There is nothing novel about mandated limitations on private ordering in corporate governance. 48 48 For example, quite a few aspects of Delaware corporation law are mandatory ( i.e., not capable of modification by agreement or provision in the certificate of incorporation or bylaws), including: (i) The requirement to hold an annual election of directors (Del. Code Ann., tit. 8, § 211(b); Jones Apparel Group v. Maxwell Shoe Co., 883 A.2d 837, 848-849 (Del. Ch. 2004) citing Rohe v. Reliance Training Network, Inc., 2000 Del. Ch. LEXIS 108 at *10-*11 (Del. Ch. July 21, 2000)); (ii) the limitation against dividing the board of directors into more than three classes (Del. Code Ann., tit. 8, § 141(d); see also Jones Apparel ); (iii) the entitlement of stockholders to inspect the list of stockholders and other corporate books and records (Del. Code Ann., tit. 8, §§ 219(a) and 220(b); Loew's Theatres, Inc. v. Commercial Credit Co., 243 A.2d 78, 81 (Del. Ch. 1968)); (iv) the right of stockholders to vote as a class on certain amendments to the certificate of incorporation (Del. Code Ann., tit. 8, § 242(b)(2)); (v) appraisal rights (Del. Code Ann., tit. 8, § 262(b)); and (vi) fiduciary duties of corporate directors ( Siegman v. Tri-Star Pictures, Inc., C.A. No. 9477 (Del. Ch. May 5, 1989, revised May 30, 1989), reported at 15 Del. J. Corp. L. 218, 236 (1990); cf. Del. Code Ann., tit. 8, § 102(b)(7), permitting elimination of director liability for monetary damages for breach of the duty of care). 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 49 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 50 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. 49 See letters from Grundfest; Form Letter Type A. Cf. letter from Nine Law Firms. 50 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. 51 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. 52 51 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 v. National Intergroup, Inc., 582 A.2d 923, 929 (Del. 1990). 52 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 53 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. 53 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 54 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. 54 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. 55 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. 56 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. 57 As described more fully below, Rule 14a-11 is necessary and appropriate in the public interest and for the protection of investors. 58 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. 59 Therefore, this challenge is now moot. 55 See letters from Ameriprise; AT&T; L. Behr; BRT; Burlington Northern; CMCC; Dewey; M. Eng; FedEx; Grundfest; Keating Muething; OPLP; Sidley Austin. 56 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 v. 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, e.g., TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 n.10 (1976) (Section 14(a) is a grant of “broad statutory authority”). The adoption of Rule 14a-11 reflects our continuing purpose to ensure that proxies are used as a means to enhance the ability of shareholders to make informed choices, especially on the critical subject of who sits on the board of directors. 57 Dodd-Frank Act § 971(a) and (b). These provisions expressly provide that the Commission may issue rules permitting shareholders to use an issuer's proxy solicitation materials for the purpose of nominating individuals to membership on the board of directors of the issuer. 58 Exchange Act § 14(a) and Investment Company Act § 20(a). 59 Dodd-Frank Act § 971(b). Although our statutory authority to adopt Rule 14a-11 is no longer at issue, the constitutionality of Rule 14a-11 also has been challenged by commenters. We disagree with their arguments. 60 Proxy regulations do not infringe on corporate First Amendment rights both because “management has no interest in corporate property except such interest as derives from the shareholders,” and because such regulations “govern speech by a corporation to itself” and therefore “do not limit the range of information that the corporation may contribute to the public debate.” 61 Even if statements in proxy materials are viewed as more than merely internal communications, this communication is of a commercial—not political—nature, and regulation of such statements through Rule 14a-11 is consistent with applicable First Amendment standards. 62 60 See letter from BRT. 61 Pacific Gas and Electric Company v. Public Utilities Comm'n of California, 475 U.S. 1, 14 n.10 (1986) (emphasis in original). 62 Nor does Rule 14a-11 violate the Fifth Amendment, as it does not constitute a regulatory taking. See, e.g., Lingle v. Chevron U.S.A., 544 U.S. 528, 546-47 (2005); Penn Central Transp. Co. v. City of New York, 438 U.S. 104 (1978). C. Summary of the Final Rules As noted above, we carefully considered the comments and have decided to adopt new Exchange Act Rule 14a-11 with significant modifications in response to the comments. We believe that the new rule will benefit shareholders and protects investors by improving corporate suffrage, the disclosure provided in connection with corporate proxy solicitations, and communication between shareholders in the proxy process. Consistent with the Proposal, Rule 14a-11 will apply only when applicable State law or a company's governing documents do not prohibit shareholders from nominating a candidate for election as a director. In addition, as adopted, the rule will apply to a foreign issuer that is otherwise subject to our proxy rules only when applicable foreign law does not prohibit shareholders from making such nominations. Also consistent with the Proposal, companies may not “opt out” of the rule—either in favor of a different framework for inclusion of shareholder director nominees in company proxy materials or no framework. In addition, as was proposed, the rule will apply regardless of whether any specified event has occurred to trigger the rule and will apply regardless of whether the company is subject to a concurrent proxy contest. 63 Also as proposed, the final rule will apply to companies that are subject to the Exchange Act proxy rules, including investment companies and controlled companies, but will not apply to “debt-only” companies. The rule will apply to smaller reporting companies, but we have decided to delay the rule's application to these companies for three years. We believe that a delayed effective date for smaller reporting companies should allow those companies to observe how the rule operates for other companies and should allow them to better prepare for implementation of the rules. Delayed implementation for these companies also will allow us to evaluate the implementation of Rule 14a-11 by larger companies and provide us with the additional opportunity to consider whether adjustments to the rule would be appropriate for smaller reporting companies before the rule becomes applicable to them. To use Rule 14a-11, a nominating shareholder or group will be required to satisfy an ownership threshold of at least 3% of the voting power of the company's securities entitled to be voted at the meeting. Shareholders will be able to aggregate their shares to meet the threshold. The required ownership threshold has been modified from the Proposal, which would have required that a nominating shareholder or group hold 1%, 3%, or 5% of the company's securities entitled to be voted on the election of directors, depending on accelerated filer status or, in the case of registered investment companies, depending on the net assets of the company. The final rule requires that a nominating shareholder or group must hold both investment and voting power, either directly or through any person acting on their behalf, of the securities. In calculating the ownership percentage held, under certain conditions, a nominating shareholder or member of the nominating shareholder group would be able to include securities loaned to a third party in the calculation of ownership. In determining the total voting power held by the nominating shareholder or any member of the nominating shareholder group, securities sold short (as well as securities borrowed that are not otherwise excludable) must be deducted from the amount of securities that may be counted towards the required ownership threshold. In addition, a nominating shareholder (or in the case of a group, each member of the group) will be required to have held the qualifying amount of securities continuously for at least three years as of the date the nominating shareholder or group submits notice of its intent to use Rule 14a-11 (on a filed Schedule 14N), rather than for one year, as was proposed. Consistent with the proposed amendments, we are adopting a requirement that the nominating shareholder or members of the group must continue to own the qualifying amount of securities through the date of the meeting at which directors are elected and provide disclosure concerning their intent with regard to continued ownership of the securities after the election of directors. In addition, the nominating shareholder (or where there is a nominating shareholder group, any member of the nominating shareholder group) may not be holding the company's securities with the purpose, or with the effect, of changing control of the company or to gain a number of seats on the board of directors that exceeds the maximum number of nominees that the company could be required to include under Rule 14a-11, and may not have a direct or indirect agreement with the company regarding the nomination of the nominee or nominees prior to filing the Schedule 14N. 63 Throughout this release, the terms “proxy contest,” “election contest,” and “contested election” refer to any election of directors in which another party commences a solicitation in opposition subject to Exchange Act Rule 14a-12(c). The nominating shareholder or group must provide notice to the company of its intent to use Rule 14a-11 no earlier than 150 days prior to the anniversary of the mailing of the prior year's proxy statement and no later than 120 days prior to this date. The final rule differs from the Proposal, which would have required the nominating shareholder or group to provide notice to the company no later than 120 days prior to the anniversary of the mailing of the prior year's proxy statement or in accordance with the company's advance notice provision, if applicable. As was proposed, under the final rule the nominating shareholder or group will be required to file on EDGAR and transmit to the company its notice on Schedule 14N on the same date. The rule also includes certain requirements applicable to the shareholder nominee. Consistent with the Proposal, the final rule provides that the company will not be required to include any nominee whose candidacy or, if elected, board membership would violate controlling state or Federal law, or the applicable standards of a national securities exchange or national securities association, except with regard to director independence requirements that rely on a subjective determination by the board, and such violation could not be cured during the provided time period. 64 In addition, the rule we are adopting provides that a company will not be required to include any nominee whose candidacy or, if elected, board membership would violate controlling foreign law. As we proposed, the rule does not include any restrictions on the relationships between the nominee and the nominating shareholder or group. 64 In the case of an investment company, the nominee may not be an “interested person” of the company as defined in Section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(19)). See Section II.B.3.b. for a more detailed discussion of the applicability of Rule 14a-11 to registered investment companies. As was proposed, under Rule 14a-11, a company will not be required to include more than one shareholder nominee, or a number of nominees that represents up to 25% of the company's board of directors, whichever is greater. Where there are multiple eligible nominating shareholders, the nominating shareholder or group with the highest percentage of the company's voting power would have its nominees included in the company's proxy materials, rather than the nominating shareholder or group that is first to submit a notice on Schedule 14N, as we had proposed. We also have clarified in the final rule that when a company has a classified (staggered) board, the 25% calculation would still be based on the total number of board seats. In addition, in response to public comment, we have added a provision to the rule designed to prevent the potential unintended consequences of discouraging dialogue and negotiation between company management and nominating shareholders. Under this provision, shareholder nominees of an eligible nominating shareholder or group with the highest qualifying voting power percentage that a company agrees to include as company nominees after the filing of the Schedule 14N would count toward the 25%. The notice on Schedule 14N will be required to include: • Disclosure concerning: • The amount and percentage of voting power of the company's securities entitled to be voted by the nominating shareholder or group and the length of ownership of those securities; • Biographical and other information about the nominating shareholder or group and the shareholder nominee or nominees, similar to the disclosure currently required in a contested election; • Whether or not the nominee or nominees satisfy the company's director qualifications, if any (as provided in the company's governing documents); • Certifications that, after reasonable inquiry and based on the nominating shareholder's or group's knowledge, the: • Nominating shareholder (or where there is a nominating shareholder group, each member of the nominating shareholder group) is not holding any of the company's securities with the purpose, or with the effect, of changing control of the company or to gain a number of seats on the board of directors that exceeds the maximum number of nominees that the company could be required to include under Rule 14a-11; • Nominating shareholder or group otherwise satisfies the requirements of Rule 14a-11, as applicable; and • Nominee or nominees satisfy the requirements of Rule 14a-11, as applicable; • A statement that the nominating shareholder or group members will continue to hold the qualifying amount of securities through the date of the meeting and a statement with regard to the nominating shareholder's or group member's intended ownership of the securities following the election of directors (which may be contingent on the results of the election of directors); and • A statement in support of each shareholder nominee, not to exceed 500 words per nominee (the statement would be at the option of the nominating shareholder or group). These requirements for Schedule 14N are largely consistent with the Proposal, with some modifications made in response to comments. Among the modifications is the new disclosure requirement concerning whether, to the best of the nominating shareholder's or group's knowledge, the nominee or nominees satisfy the company's director qualifications, if any (as provided in the company's governing documents). We also have revised the certifications to require certification not only with regard to control intent, but also with regard to the other nominating shareholder and nominee eligibility requirements. A company that receives a notice on Schedule 14N from an eligible nominating shareholder or group will be required to include in its proxy statement disclosure concerning the nominating shareholder or group and the shareholder nominee or nominees, and include on its proxy card the names of the shareholder nominees. The nominating shareholder or group will be liable for any statement in the notice on Schedule 14N which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact or that omits to state any material fact necessary to make the statements therein not false or misleading, including when that information is subsequently included in the company's proxy statement. The company will not be responsible for this information. These liability provisions are included in the final rules largely as proposed, but with two changes in response to comments. Final Rule 14a-9(c) makes clear that the nominating shareholder or group will be liable for any statement in the Schedule 14N or any other related communication that is false or misleading with respect to any material fact, or that omits to state any material fact necessary to make the statements therein not false or misleading, regardless of whether that information is ultimately included in the company's proxy statement. In addition, consistent with the existing approach in Rule 14a-8, under Rule 14a-11 as adopted, a company will not be responsible for any information provided by the nominating shareholder or group and included in the company's proxy statement. Under the Proposal, a company would not have been responsible for any information provided by the nominating shareholder or group except where the company knows or has reason to know that the information is false or misleading. A company will not be required to include a nominee or nominees if the nominating shareholder or group or the nominee fails to satisfy the eligibility requirements of Rule 14a-11. A company that determines it may exclude a nominee or nominees must provide a notice to the Commission regarding its intent to exclude the nominee or nominees. The company also may submit a request for the staff's informal view with respect to the company's determination that it may exclude the nominee or nominees (commonly referred to as “no-action” requests). In addition, a company could exclude a nominating shareholder's or group's statement of support if the statement exceeds 500 words per nominee and could seek a no-action letter from the staff with regard to this determination if it so desired. In the event that a nominating shareholder or group or nominee withdraws or is disqualified prior to the time the company commences printing the proxy materials, under certain circumstances companies will be required to include a substitute nominee if there are other eligible nominees. Therefore, companies seeking a no-action letter from the staff with respect to their decision to exclude any Rule 14a-11 nominee or nominees would need to seek a no-action letter on all nominees that they believe they can exclude at the outset. We also have adopted two new exemptions, slightly modified from the Proposal, to the proxy rules for solicitations in connection with a Rule 14a-11 nomination. The first exemption applies to written and oral solicitations by shareholders who are seeking to form a nominating shareholder group. Reliance on this new exemption will require: • That the shareholder not be holding the company's securities with the purpose, or with the effect, of changing control of the company or to gain a number of seats on the board of directors that exceeds the maximum number of nominees that the registrant could be required to include under Rule 14a-11; • Limiting the content of written communications to certain information specified in the rule; • Filing all written soliciting materials sent to shareholders in reliance on the exemption with the Commission or, in the case of oral communications, a filing under cover of Schedule 14N with the appropriate box checked before or at the same time as the first solicitation in reliance on the new exemption; and • No solicitations in connection with the subject election of directors other than pursuant to the provisions of Rule 14a-11 and the new exemption described below. Shareholders that do not want to rely on this new exemption could opt to rely on other exemptions from the proxy rules ( e.g., Rule 14a-2(b)(2), which is limited to solicitations of not more than 10 persons). The second new exemption applies to written and oral solicitations by or on behalf of a nominating shareholder or group whose nominee or nominees are or will be included in the company's proxy materials pursuant to Rule 14a-11 in favor of shareholder nominees or for or against company nominees. Reliance on this new exemption will require: • That the nominating shareholder or group does not seek the power to act as a proxy for another shareholder; • Disclosing certain information (including the identity of the nominating shareholder or group, and a prominent legend about availability of the proxy materials) in all written communications; • Filing all written soliciting materials sent to shareholders in reliance on the exemption with the Commission under cover of Schedule 14N with the appropriate box checked; and • No solicitations in connection with the subject election of directors other than pursuant to the provisions of Rule 14a-11 and this new exemption. Consistent with the Proposal, we also are amending our beneficial ownership reporting rules so that shareholders relying on Rule 14a-11 would not become ineligible to file a Schedule 13G, in lieu of filing a Schedule 13D, solely as a result of activities in connection with inclusion of a nominee under Rule 14a-11. Also consistent with the proposed amendments, we are not adopting an exclusion from Exchange Act Section 16 for activities in connection with a nomination under Rule 14a-11 that may trigger a filing requirement by nominating shareholders. In addition, after considering the comments, we are not adopting a specific exclusion from the definition of affiliate for nominating shareholders. Finally, consistent with the Proposal, we are narrowing the scope of the exclusion in Rule 14a-8(i)(8) relating to the election of directors. The revised rule will 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 a company's proxy materials. As we proposed, the final rules provide that a nominating shareholder that is relying on a procedure under State law or a company's governing documents to include a nominee in a company's proxy materials would be required to provide disclosure concerning the nominating shareholder and nominee or nominees to the company on Schedule 14N and file the Schedule 14N on EDGAR. In response to comment, we have clarified that the disclosure also would be required for nominations made pursuant to foreign law. 65 The disclosure requirements on Schedule 14N for nominations made pursuant to a procedure under state or foreign law, or a company's governing documents largely mirror those for a Rule 14a-11 nomination. As with Rule 14a-11 nominees, a company would include in its proxy materials disclosure concerning the nominating shareholder or group and shareholder nominee similar to the disclosure currently required in a contested election. The nominating shareholder or group would have liability for any statement in the notice on Schedule 14N or in information otherwise provided to the company and included in the company's proxy materials which, at the time and in light of the circumstances under which it is made, is false or misleading with respect to any material fact or that omits to state any material fact necessary to make the statements therein not false or misleading. The company would not be responsible for the information provided to the company and required to be included in the company proxy statement. 65 See Section II.C.5. below. II. Changes to the Proxy Rules A. Introduction After careful consideration of the comments received on the Proposal, we are adopting amendments to the proxy rules to facilitate the effective exercise of shareholders' traditional State law rights to nominate and elect directors to company boards of directors. Under the new rules, shareholders meeting certain requirements will have two ways to more fully exercise their right to nominate directors. First, we are adopting a new proxy rule, Rule 14a-11, which will, under certain circumstances, require companies to provide shareholders with information about, and the ability to vote for, a shareholder's, or group of shareholders', nominees for director in the companies' proxy materials. This requirement will apply unless State law, foreign law, 66 or a company's governing documents 67 prohibits shareholders from nominating directors. 68 In addition to the standards provided in new Rule 14a-11, provisions under State law, foreign law, or a company's governing documents 69 could provide an additional avenue for shareholders to submit nominees for inclusion in company proxy materials, but would not act as a substitute for Rule 14a-11. Thus, Rule 14a-11 will continue to be available to shareholders regardless of whether they also can avail themselves of a provision under State law, foreign law, or a company's governing documents. 66 See discussion in footnote 50 above. 67 Under State law, a company's governing documents may have various names. When we refer to governing documents throughout the release and rule text, we generally are referring to a company's charter, articles of incorporation, certificate of incorporation, declaration of trust, and/or bylaws, as applicable. 68 We are not aware of any law in any state or in the District of Columbia or in any country that currently prohibits shareholders from nominating directors. Nonetheless, should any such law be enacted in the future, Rule 14a-11 will not apply. 69 See discussion in Section II.C.5. below. Second, we are amending Rule 14a-8(i)(8) to preclude companies from relying on Rule 14a-8(i)(8) to exclude from their proxy materials shareholder proposals by qualifying shareholders that seek to establish a procedure under a company's governing documents for the inclusion of one or more shareholder director nominees in the company's proxy materials. A company must include such a shareholder proposal under the final rules as long as the procedural requirements of Rule 14a-8 are met and the proposal is not subject to exclusion under one of the other substantive bases. In this regard, a shareholder proposal seeking to limit or remove the availability of Rule 14a-11 would be subject to exclusion under Rule 14a-8. 70 70 As would currently be the case if a State law permitted a company to prohibit shareholders from nominating candidates for director, a shareholder proposal seeking to prohibit shareholder nominations for director generally or, conversely, to allow shareholder nominations for director, would not be excludable pursuant to Rule 14a-8(i)(8). As described throughout this release, we have made many changes to the final rules in response to comments received. We believe the final rules reflect a careful balancing of the policy, workability, and other comments we received on the Proposal. B. Exchange Act Rule 14a-11 1. Overview Based on the comments received in response to our solicitation of public input on the Proposal and on prior releases and in roundtables, 71 we understand that shareholders face significant obstacles to effectively exercising their rights to nominate and elect directors to corporate boards. We have received significant public comment supporting the view that including shareholder nominees for director in company proxy materials would be the most direct and effective method of facilitating shareholders' rights in connection with the nomination and election of directors. 72 71 See the Proposing Release; the 2003 Proposal; the Election of Directors Proposing Release; and the Shareholder Proposals Proposing Release. 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. 72 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,” 73 which would be distracting, expensive, time-consuming, and inefficient for companies, boards, and management. 74 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. 75 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. 76 73 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. 74 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. 75 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. 76 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. 77 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. 77 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. 78 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. 79 78 See letters from S&C; Curtis, Mallet-Prevost, Colt & Mosle LLP (“Curtis”). 79 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. 80 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. 80 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. 81 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. 82 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. 83 81 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. 82 See letters from ABA; BRT; Davis Polk; Delaware Bar; Frontier; IBM; Protective. 83 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. 84 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. 85 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. 86 84 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. 85 See letters from ABA; BRT; Delaware Bar. 86 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. 87 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. 88 Several commenters stated they oppose a provision that would permit companies to opt out of Rule 14a-11. 89 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, 90 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. 91 Further, a commenter warned that boards would use corporate funds to defeat shareholders' attempts to change such board-adopted provisions through shareholder proposals. 92 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, 93 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* * *.” 94 87 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. 88 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. 89 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. 90 See letters from Florida State Board of Administration; P. Neuhauser; Shamrock. 91 See letter from Shamrock. 92 See letter from P. Neuhauser. 93 Letter from Nine Law Firms. 94 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.” 95 95 Business Roundtable v. 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. 96 96 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. 97 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. 97 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. 98 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. 99 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. 98 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. 99 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, [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2010-22218. Public record. Not legal advice.