# Facilitating Shareholder Director Nominations

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URL: https://www.frixlaw.com/law-library/documents/fr%3AE9-14090

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** June 18, 2009
- **Citation:** 74 FR 29024

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 232, 240, 249 and 274
[Release Nos. 33-9046; 34-60089; IC-28765; File No. S7-10-09]
RIN 3235-AK27
Facilitating Shareholder Director Nominations

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

We are proposing changes to the federal proxy rules to remove impediments to the exercise of shareholders' rights to nominate and elect directors to company boards of directors. The new rules would require, under certain circumstances, a company to include in the company's proxy materials a shareholder's, or group of shareholders', nominees for director. The proposal includes certain requirements, key among which are a requirement that use of the new procedures be in accordance with state law, and provisions regarding the disclosures required to be made concerning nominating shareholders or groups and their nominees. In addition, the new rules would require companies to include in their proxy materials, under certain circumstances, shareholder proposals that would amend, or that request an amendment to, a company's governing documents regarding nomination procedures or disclosures related to shareholder nominations, provided the proposal does not conflict with the Commission's disclosure rules—including the proposed new rules. We also are proposing changes to certain of our other rules and regulations—including the existing exemptions from our proxy rules and the beneficial ownership reporting requirements—that may be affected by the new proposed procedures.

DATES:

Comments should be received on or before August 17, 2009.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's Internet comment form (
http://www.sec.gov/rules/proposed.shtml
); or

• Send an e-mail to
rule-comments@sec.gov.
Please include File Number S7-10-09 on the subject line; or

• Use the Federal eRulemaking Portal (
http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

• Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-10-09. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (
http://www.sec.gov/rules/final.shtml
). Comments are also available for public inspection 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. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT:

Lillian Brown, Tamara Brightwell, or Eduardo Aleman, 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 proposing new Rule 82a of Part 200 Subpart D—Information and Requests,
1

and new Rules 14a-11,
2

14a-18,
3

and 14a-19,
4

new Regulation 14N
5

and Schedule 14N,
6

and amendments to Rule 13
7

of Regulation S-T,
8

Rules 13a-11,
9

13d-1,
10

14a-2,
11

14a-4,
12

14a-6,
13

14a-8,
14

14a-9,
15

14a-12,
16

and 15d-11,
17

Schedule 14A,
18

and Form 8-K,
19

under the Securities Exchange Act of 1934.
20

Although we are not proposing amendments to Schedule 14C
21

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

1
17 CFR 200.82a.

2
17 CFR 240.14a-11.

3
17 CFR 240.14a-18.

4
17 CFR 240.14a-19.

5
17 CFR 240.14n
et seq.

6
17 CFR 240.14n-101.

7
17 CFR 232.13.

8
17 CFR 232.10
et seq.

9
17 CFR 240.13a-11.

10
17 CFR 240.13d-1.

11
17 CFR 240.14a-2.

12
17 CFR 240.14a-4.

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 240.14a-101.

19
17 CFR 249.308.

20
15 U.S.C. 78a
et seq.

21
17 CFR 240.14c-101.

Table of Contents

Facilitating Shareholder Director Nominations

I. The Need for Reforms to the Federal Proxy Rules

A. Overview

B. Shareholder Participation in the Nomination and Election Process

1. Existing Shareholder Options

2. Recent Corporate Governance and Other Reforms

II. Recent Commission Consideration of the Proxy Rules and Regulations Addressing the Election of Directors

A. 2003 Review of the Proxy Process and Subsequent Rulemaking

B. 2007 Rulemaking Concerning Shareholder Proposals Seeking To Establish Bylaw Procedures for Shareholder Director Nominations

III. Proposed Changes to the Proxy Rules

A. Introduction

B. Proposed Exchange Act Rule 14a-11

1. Overview

2. Application of Exchange Act Rule 14a-11

3. Eligibility To Use Exchange Act Rule 14a-11

4. Shareholder Nominee Requirements

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

6. Notice and Disclosure Requirements

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

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

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

1. Background

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

3. Disclosure Requirements

4. Codification of Prior Staff Interpretations

D. Other Rule Changes

1. Beneficial Ownership Reporting Requirements

2. Exchange Act Section 16

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

F. General Request for Comment

IV. Paperwork Reduction Act

A. Background

B. Summary of Proposed Amendments

C. Paperwork Reduction Act Burden Estimates

1. Proposed Rule 14a-11

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

3. Proposed Schedule 14N and Proposed Exchange Act Rules 14a-18 and 14a-19

4. Proposed Amendments to Exchange Act Form 8-K

5. Form ID Filings

D. Revisions to PRA Reporting and Cost Burden Estimates

E. Solicitation of Comment

V. Cost-Benefit Analysis

A. Background

B. Benefits

1. Reduction in Costs Related to Shareholder Nominations

2. Improved Disclosure of Shareholder Nominated Director Candidates

3. Potential Improved Board Performance and Company Performance

4. Enhanced Ability for Shareholders and Companies To Adopt Procedures

C. Costs

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

2. Costs Related to Potential Complexity of Proxy Process

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

D. Small Business Issuers

E. Request for Comment

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

VII. Initial Regulatory Flexibility Act Analysis

A. Reasons for, and Objectives of, the Proposed Action

B. Legal Basis

C. Small Entities Subject to the Proposed Rules

D. Reporting, Recordkeeping and Other Compliance Requirements

E. Duplicative, Overlapping or Conflicting Federal Rules

F. Significant Alternatives

G. Solicitation of Comment

VIII. Small Business Regulatory Enforcement Fairness Act

IX. Statutory Basis and Text of Proposed Amendments

I. The Need for Reforms to the Federal Proxy Rules

A. Overview

The nation and the markets have recently experienced, and remain in the midst of, one of the most serious economic crises of the past century. This crisis has led many to raise serious concerns about the accountability and responsiveness of some companies and boards of directors to the interests of shareholders, and has resulted in a loss of investor confidence. These concerns have included questions about whether boards are exercising appropriate oversight of management, whether boards are appropriately focused on shareholder interests, and whether boards need to be more accountable for their decisions regarding such issues as compensation structures and risk management. In light of the current economic crisis and these continuing concerns, the Commission has determined to revisit whether and how the federal proxy rules may be impeding the ability of shareholders to hold boards accountable through the exercise of their fundamental right to nominate and elect members to company boards of directors.

Regulation of the proxy process and disclosure is a core function of the Commission and is one of the original responsibilities that Congress assigned to the Commission in 1934. Section 14(a) of the Exchange Act
22

stemmed from a Congressional belief that “[f]air corporate suffrage is an important right that should attach to every equity security bought on a public exchange.”
23

The Congressional committees recommending passage of Section 14(a) proposed that “the solicitation and issuance of proxies be left to regulation by the Commission”
24

and explained that Section 14(a) would give the Commission the “power to control the conditions under which proxies may be solicited.”
25

Congress thus recognized a federal interest in the way public corporations handle the proxy process, and granted the Commission authority to prescribe rules to regulate the solicitation of proxies “as necessary or appropriate in the public interest or for the protection of investors.”
26

22
15 U.S.C. 78n(a).

23
H.R. Rep. No. 1383, 73d Cong., 2d Sess., 13.
See also Mills
v.
Electric Auto-Lite Co.,
396 U.S. 375, 381 (1970);
J. I. Case Co.
v.
Borak,
377 U.S. 426, 431 (1964).

24
S. Rep. No. 792, 73d Cong., 2d Sess., 12 (1934).

25
H.R. Rep. No. 1383, 73d Cong., 2d Sess., 14 (1934). The same report demonstrated a congressional intent to prevent frustration of the “free exercise of the voting rights of stockholders.”
Id.
Courts have found that the relevant legislative history also demonstrates an “intent to bolster the intelligent exercise of shareholder rights granted by state corporate law.”
Roosevelt
v.
E.I. Du Pont de Nemours & Co.,
958 F.2d 416, 421 (D.C. Cir. 1992);
see Borak,
377 U.S. at 431.

26
15 U.S.C. 78n(a).

Responding to the Commission's mandate from Congress, the Commission has actively overseen the development of the proxy process since 1934. The Commission has monitored the process and has considered changes when it appeared that the process was not functioning in a manner that adequately protected the interests of investors.
27

At the same time, the Commission has been mindful of the traditional role of the states in regulating corporate governance. For example, Exchange Act Rule 14a-8,
28

the shareholder proposal rule, explicitly provides that a company is permitted to exclude a shareholder proposal if it “is not a proper subject for action by shareholders under the laws of the jurisdiction of the company's organization”
29

or “[i]f the proposal would, if implemented, cause the company to violate any state, federal, or foreign law to which it is subject.”
30

27
For example, as discussed in further detail below, the Commission has considered changes to the proxy rules 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.

28
17 CFR 240.14a-8.

29
17 CFR 240.14a-8(i)(1).

30
17 CFR 240.14a-8(i)(2).

In identifying the rights that the proxy process should protect, the Commission has sought to take as a touchstone the rights of shareholders under state corporate law. As Chairman Ganson Purcell explained to a committee of the House of Representatives in 1943:

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.
31

31
Securit[ies] and Exchange Commission Proxy Rules: Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 before the House Committee on Interstate and Foreign Commerce, 78th Cong., 1st Sess. 172 (1943) (statement of SEC Chairman Ganson Purcell).

This principle has given rise to a shorthand that explains much of the Commission's activity in regulating the proxy process. The proxy rules seek to improve the corporate proxy process so that it functions, as nearly as possible, as a replacement for an actual in-person meeting of shareholders.

Refining the proxy process so that it replicates, as nearly as possible, the annual meeting is particularly important given that the proxy process has become the primary way for shareholders to learn about the matters to be decided by the shareholders and to make their views known to company management.
32

Our recent examinations

of the proxy process and the comments that we have received in the course of these examinations suggest that the director nomination and shareholder proposal processes are two areas in which our current proxy rules pose impediments to the exercise of shareholders' rights.
33

These proposed amendments are intended to remove impediments so shareholders may more effectively exercise their rights under state law to nominate and elect directors at meetings of shareholders.

32

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 the 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.”).

33

See,

e.g.,
Unofficial Transcript of the Roundtable Discussion on Proposals for Shareholders, May 25, 2007, comments of Leo E. Strine Jr., Vice Chancellor, Court of Chancery of the State of Delaware (Vice Chancellor Strine), at 112,
available at:

http://www.sec.gov/news/openmeetings/2007/openmtg_trans052507.pdf
(observing that it is “a little bit perverse” that “a bylaw dealing with the election process that might well have been viable under state law was kept off the ballot when you could have something that was precatory mandated to be on the ballot”).

There are many competing policy arguments about the effect that shareholder-nominated directors or shareholder-proposed nomination procedures might have on a company and its governance. Some commenters believe that the presence of shareholder-nominated directors would make boards more accountable to the shareholders who own the company and that this accountability would improve corporate governance and make companies more responsive to shareholder concerns.
34

Some commenters further express the belief that, absent an effective way for shareholders to exercise rights to nominate and elect directors that state corporate law presumes shareholders have, the election of directors is a self-sustaining process of the board determining its members, with little actual input from shareholders.
35

Commenters have noted that without competition for director elections, directors are effectively unaccountable to shareholders and may lose sight of their proper role as representatives of the company.
36

34

See,

e.g.,
comment letters on the 2007 Proposals (SEC File Nos. S7-16-07 and S7-17-07) from James McRitchie, Corporate Governance (October 1, 2007) (“McRitchie 2007”); and Stephen Abrecht, Executive Director, SEIU Master Trust (October 1, 2007) (“SEIU”).

35

See,

e.g.,
2004 Roundtable Submission of Lucian Bebchuk: Lucian Arye Bebchuk,
The Case for Shareholder Access to the Ballot,
59 The Business Lawyer 43, 49 (2003) (“Bebchuk 2003 Article”) (“Suppose that there is a widespread concern among shareholders that a board with a majority of independent directors is failing to serve shareholder interests. It is precisely under such circumstances that the nominating committee cannot be relied on to make desirable replacements of members of the board or even of members of the committee itself—at least not unless shareholders have adequate means of applying pressure on the committee.”).

36

See,

e.g.,
comment letter on 2007 Proposals (SEC File Nos. S7-16-07 and S7-17-07) from William Apfel, et al., Walden Asset Management (September 11, 2007).

Similarly, foreign investors have noted the lack of accountability of directors in the United States compared with other countries, stating among other things that “[t]he harsh reality is that U.S. corporate governance practices are on a relative decline compared to other leading markets.”
37

In that vein, the Committee on Capital Markets Regulation has observed that this “difference creates an important potential competitiveness problem for U.S. companies.”
38

Other commenters have expressed concern that the relative inability of shareholders of U.S. companies to participate in the selection of directors compared with shareholders of their foreign competitors creates a competitiveness problem for U.S. companies.
39

37
Comment letter on 2007 Proposals (SEC File Nos. S7-16-07 and S7-17-07) from Michael O'Sullivan, President, Australian Council of Super Investors, et al. (October 2, 2007).
See also
Michelle Edkins, Acting Chairman, International Corporate Governance Network Shareholder Rights Committee (October 2, 2007) and Knut Kjer, CEO, Norges Bank Investment Management, et al. (September 28, 2007).

38
Committee on Capital Markets Regulation,
Interim Report
(November 30, 2006) at 109,
available at:

http://www.capmktsreg.org/pdfs/11.30Committee_Interim_ReportREV2.pdf.

39

See
comment letter on 2007 Proposals (SEC File Nos. S7-16-07 and S7-17-07) from Carl Levin, United States Senator, (September 27, 2007) at page 6.

Academic literature also has highlighted the roles of boards of directors at companies that have demonstrated corporate governance failings. Such literature points to a link between board accountability and company performance.
40

In recognition of this link, Congress passed the Sarbanes-Oxley Act of 2002 to help strengthen corporate governance at public companies.
41

Commenters additionally have argued that competition for board seats might lead companies to nominate directors who are better qualified and more independent.
42

40

See,

e.g.,
Michael E. Murphy,
The Nominating Process for Corporate Boards of Directors—A Decision-Making Analysis,
5 Berkeley Bus. L.J. 131 (2008).

41

See,

e.g.,
Section 301 of the Sarbanes-Oxley Act of 2002, inserting Section 10A(m) to the Exchange Act, which directed the Commission to promulgate rules requiring the national securities exchanges to “prohibit the listing of any security of an issuer that is not in compliance” with the Act's audit committee provisions. As a consequence, listed companies are now required to have audit committees composed solely of independent directors.

42

See generally
Bebchuk 2003 Article.
See also

In re Oracle Corp. Derivative Litigation,
824 A.2d 917, 941 (Del. Ch. 2003) (“The recent reforms enacted by Congress and by the stock exchanges reflect a narrower conception of who they believe can be an independent director. These definitions, however, are blanket labels that do not take into account the decision at issue. Nonetheless, the definitions recognize that factors other than the ones explicitly identified in the new exchange rules might compromise a director's independence, depending on the circumstances.”).

On the other side of the debate, some commenters have raised concerns that shareholder-nominated directors could impede the proper functioning of companies and cause inefficiencies. For example, some argue that a shareholder-nominated director may be beholden to and focused solely on the concerns of the nominating shareholder or group, with the potential result being that a small number of shareholders could impose their unique concerns on the company and the rest of shareholders.
43

Additionally, some commenters have suggested that the presence of a shareholder-nominated director could disrupt the functioning of the board and could even lead to the company moving in a direction that does not reflect the interests of its shareholders overall.
44

Others have raised concerns that the possibility of a contested election could deter qualified candidates from seeking to serve as members of a board.
45

43

See,

e.g.,
comment letters on 2007 Proposals from Thomas Wilson, President, The Allstate Corporation (October 2, 2007) and David T. Hirschmann, Senior Vice President, U.S. Chamber of Commerce (October 2, 2007).

44

See,

e.g.,
comment letter on 2007 Proposals from Anne M. Mulcahy, Chairman, Business Roundtable Corporate Governance Task Force, Business Roundtable (October 1, 2007) (“Mulcahy, BRT”).

45

Id.

We recognize that there are long-held and deeply felt views on both sides of these issues. The action we take today is focused on removing burdens that the federal proxy process currently places on the ability of shareholders to exercise their basic rights to nominate and elect directors. If we adopted rules to remove those burdens, we believe that these rules would facilitate shareholders' ability to participate more fully in the debates surrounding these issues. To the extent shareholders have the right to nominate directors at meetings of shareholders, the federal proxy rules should not impose unnecessary barriers to the exercise of this right.
46

The SEC's mission is investor protection, and we believe that investors are best protected when they can exercise the rights they have as shareholders, without unnecessary obstacles imposed by the federal proxy rules.

46

See,

e.g.,
Unofficial Transcript of the Roundtable on the Federal Proxy Rules and State Corporation Law (May 7, 2007), comments of R. Franklin Balotti, Director, Richards, Layton & Finger, P.A., at 14-17,
available at:

http://www.sec.gov/spotlight/proxyprocess/proxy-transcript050707.pdf;
Unofficial Transcript of the Roundtable on the Federal Proxy Rules and State Corporation Law (May 7, 2007), comments of Vice Chancellor Strine, at 18-23; and Unofficial Transcript of the Roundtable on the Federal Proxy Rules and State Corporation Law (May 7, 2007), comments of Stanley Keller, Edwards Angell Palmer & Dodge LLP, at 142-143.

Based on the staff's and Commission's review of the proxy solicitation process and the extensive public input that we have received over the past several years on the topic of shareholders' ability to meaningfully exercise their rights to vote for and nominate directors of the companies in which they invest, we have decided to propose changes to the current proxy rules relating to the nomination of directors. First, we believe that we can and should structure the proxy rules to better facilitate the exercise of shareholders' rights to nominate and elect directors. The right to nominate is inextricably linked to, and essential to the vitality of, a right to vote for a nominee.
47

The failure of the proxy process to adequately facilitate shareholder nomination rights has a direct and practical effect on the right to elect directors.
48

As noted, the proxy rules have been designed to improve the proxy process so that it functions, as nearly as possible, as a replacement for an in-person meeting of shareholders. This is important because the proxy process today represents shareholders' principal means of participating effectively at an annual or special meeting of shareholders.
49

Based on the feedback we have received over the last few years, it appears that the federal proxy process may not be adequately replicating the conditions of the shareholder meeting. Second, we believe that parts of the federal proxy process may unintentionally frustrate voting rights arising under state law, and thereby fail to provide fair corporate suffrage. These two potential shortcomings in our regulations provide compelling reasons for us to reform the proxy process and our disclosure requirements relating to director nominations.
50

The comments received on the Commission's recent proposals on this topic in 2003 and in 2007, as well as the Roundtables held by the Commission in 2004 and 2007, helped form the basis for our beliefs.
51

47

See,

e.g.,

Durkin
v.
Nat'l Bank of Olyphant,
772 F.2d 55, 59 (3d Cir. 1985) (stating that “the unadorned right to cast a ballot in a contest for office, a vehicle for participatory decisionmaking and the exercise of choice, is meaningless without the right to participate in selecting the contestants. As the nominating process circumscribes the range of the choice to be made, it is a fundamental and outcome-determinative step in the election of officeholders. To allow for voting while maintaining a closed candidate selection process thus renders the former an empty exercise. This is as true in the corporate suffrage context as it is in civic elections, where federal law recognizes that access to the candidate selection process is a component of constitutionally-mandated voting rights.
See United States
v.
Classic,
313 U.S. 299, 316-317, 85 L.Ed. 1368, 61 S.Ct. 1031 (1941) (article I, section 2, right to choose congressional representatives includes the right to participate in primary elections);
Smith
v.
Allwright,
321 U.S. 649, 661-662, 88 L.Ed. 987, 64 S.Ct. 757 (1944) (fifteenth amendment prohibition of race-based abridgement of voting rights applies to primary as well as general elections). Banks do not exist for the purpose of creating an aristocracy of directors and officers which can continue in office indefinitely, immune from the wishes of the shareholder-owners of the corporation. And there is no more justification for precluding shareholders from nominating candidates for their board of directors than there would be for public officials to deny citizens the right to vote because of their race, poverty or sex.
Cf.
U.S. Const. amends. XV, XXIV, and XIX.”
id.
at 59 (emphasis added)); and
Hubbard
v.
Hollywood Park Realty Enterprises, Inc.,
1991 Del. Ch. LEXIS 9 (Del. Ch. Jan. 14, 1991) (quoting
Durkin
).

48

Shoen
v.
Amerco,
885 F.Supp. 1332, 1342 (D. Nev. 1994) (“unadorned right to cast a ballot in a contest for office, after all, is meaningless without the right to participate in selecting the contestants” (internal quotation marks omitted)).

49
Historically, a shareholder's voting rights generally were exercised at a shareholder meeting. As discussed above, in passing the Securities Exchange Act, Congress understood that many companies had become held nationwide 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 persists to this day.

50
The Commission's proxy rules have required shareholder proposals on certain matters to be included in company proxy materials since 1940 (
see
Release No. 34-2376 (January 12, 1940)), subject to amendment from time to time pursuant to the Commission's dynamic regulation of the proxy process.

51

See
2003 Proposal; Shareholder Proposals Proposing Release; Election of Directors Proposing Release; and Election of Directors Adopting Release.
See also,
Section II, below, regarding the Commission's consideration of the proxy rules.

B. Shareholder Participation in the Nomination and Election Process

1. Existing Shareholder Options

Many commenters have noted that current procedures available for director nominations afford little practical ability for shareholders to participate effectively in the nomination process and, through that process, exercise their rights and responsibilities as owners of their companies.
52

If shareholders are dissatisfied with their company's performance and believe that the problem lies with the ineffectiveness of the company's board of directors, the existing proxy process provides shareholders with three principal options to attempt to effect change.
53

First, shareholders can mount a proxy contest in accordance with our proxy rules. Second, shareholders can use the shareholder proposal procedure in Rule 14a-8 to submit proposals and have a vote on topics that are important to them. Third, shareholders can conduct a “withhold vote” or “vote no” campaign against one or more directors.
54

52

See,

e.g.,
2003 Staff Report and summary of comments in response to the Commission's May 1, 2003 solicitation of comments.

53
Commenters on the 2003 Proposal discussed the range of options currently available.
See,

e.g.,
comment letters from Ashland, Inc. (December 17, 2003) (“Ashland”); Conoco-Phillips (December 31, 2003); Delphi Corporation (December 10, 2003); Emerson Electric Co. (December 15, 2003); Financial Services Roundtable (December 22, 2003); Kerr-McGee Corporation (December 22, 2003) (“Kerr-McGee”); Independent Community Bankers of America (December 22, 2003); Letter Type D; Malcom S. Morris (November 6, 2003) (“Morris”); Office Depot, Inc. (December 22, 2003) (“Office Depot”); Valero Energy Corporation (December 18, 2003) (“Valero”); and Wachtell Lipton Rosen & Katz (November 14, 2003) (“Wachtell”).
Cf.

Blasius,
564 A.2d at 659 (“Generally, shareholders have only two protections against perceived inadequate business performance. They may sell their stock (which, if done in sufficient numbers, may so affect security prices as to create an incentive for altered managerial performance), or they may vote to replace incumbent board members.”).

54
In the case of plurality voting, shareholders may vote in the election of directors for, or withhold authority to vote for, each nominee rather than vote for, against or abstain, as is the case for other matters to be voted on by shareholders.
See
Exchange Act Rule 14a-4(b)(2).

Shareholders also can use options that exist outside of the proxy process. For example, shareholders can sell their shares (sometimes referred to as the “Wall Street Walk”); they can engage in a dialogue with management (including recommending a candidate to the

nominating committee); or they can propose a board nominee at a shareholder meeting. Each of these options has drawbacks that limit its effectiveness.
55

55

See,

e.g.,
comment letter on the 2003 Proposal from The Corporate Library (December 22, 2003) (“Corporate Library”) (“Shareholders can sell the stock at what they perceive to be a substantial discount. Or they can run their own slate of candidates, paying 100 percent of the costs, which may come to hundreds of thousands or even millions of dollars, for only a pro rata share of any increase in shareholder value as a result of the contested election. Meanwhile, management will spend the shareholders' money to fight them. This is not a level playing field. It is close to perpendicular.”).

a. Options Using the Proxy Process

Shareholders' existing options under the proxy rules to exercise their ownership rights are often criticized. The chief complaint from shareholders about the existing options is the high cost involved in mounting a proxy contest under the Commission's proxy rules. Because this cost must be borne by the shareholders undertaking the contest, the option generally is not used outside the corporate-control context, where the cost may be better justified.
56

A shareholder or group of shareholders that is dissatisfied with the leadership of a company generally, but is not seeking a change in control must, as a result of our proxy rules, nevertheless undertake a proxy contest, along with its related expenses and other burdens, to put nominees before the shareholders for a vote. The shareholder proposal process in Rule 14a-8, under which a company may be required to include a shareholder proposal in the company proxy materials, also has been criticized as an ineffective tool for exercising ownership rights, as Rule 14a-8 is not available for proposals that relate to director elections.
57

With regard to withhold vote and vote no campaigns, because some companies use plurality voting for board elections and therefore candidates can be elected regardless of whether they receive more than 50% of the shareholder vote, withhold vote campaigns may be limited in their effectiveness. In addition, restrictions under the proxy rules may limit the effectiveness of withhold vote and vote no campaigns because shareholders cannot solicit proxy authority through these campaigns.

56

See,

e.g.,
Corporate Library.
See also
Bebchuk 2003 Article at 46. Surveying data from contested elections from 1996 to 2002, Professor Bebchuk concludes that “the safety valve of potential ouster via the ballot is currently not working. In the absence of an attempt to acquire the company, the prospect of being removed in a proxy contest is far too remote to provide directors with incentives to serve shareholders.” The principal reason the costs could be better justified in the corporate control context is because benefits that are expected to arise from a successful contest are internalized by the shareholder undertaking the contest.

57
Exchange Act Rule 14a-8(i)(8).

Further, in any vote for the election of directors, customary election processes may serve to amplify the practical effect that the proxy rules have in impeding shareholder nominees.
58

In particular, as noted with regard to withhold vote campaigns, for companies using plurality rather than majority voting for board elections, nominees generally can be elected as director regardless of whether they receive a majority of the shareholder vote.
59

Therefore, in an election in which there are the same number of nominees as there are board positions open, each nominee receiving even a single vote will be elected, regardless of the number of votes withheld from a nominee.

58

See,

e.g.,
Unofficial Transcript of the Security Holder Director Nominations Roundtable (March 10, 2004) (“2004 Roundtable Transcript”), comments of Ira M. Millstein, Weil, Gotshal & Manges,
available at:

http://www.sec.gov/spotlight/dir-nominations/transcript03102004.txt.

59
Under plurality voting, the nominee with the greatest number of votes is elected.
But see
footnote 69, below (noting that some companies using a plurality standard have adopted policies requiring incumbent directors to resign if they receive less than majority support). Shareholders at companies using majority voting, or some other voting method other than plurality voting, may be better able to express dissatisfaction with a company's nominee or nominees. As discussed, in recent years, many companies have adopted a majority voting standard.

b. Options Outside the Proxy Process

Shareholders also are critical of the options available to them outside the proxy process. The “Wall Street Walk” is not an optimal solution because it may not be practical for large institutional shareholders and others who follow a passive management or indexing strategy, and it may require investors to lock in a loss.
60

Selling shares may be very costly for these types of investors because they may face liquidity issues as a result of the size of their holdings and may be forced to sell their holdings in a manner that results in capital gains and therefore is not tax efficient. In addition, while selling shares may depress the stock price, leading to higher cost of capital for the firm and thus may ultimately spur management changes,
61

the investor who sold its shares will not benefit from any improvement that follows the management change.

60

See
2003 Summary of Comments, text at notes 9-10. Although the AFL-CIO noted that active managers of mutual funds can sell their shares in a company with an “ineffective or unresponsive board,” pension fund managers, including the AFL-CIO and Amalgamated Bank Longview Fund, noted that the issue of director accountability is more important to them because they may manage index funds that are necessarily long-term investors who cannot easily sell.
See
comment letters from American Federation of Labor and Congress of Industrial Organizations (December 19, 2003) (“AFL-CIO”) and Amalgamated Bank LongView Funds (December 21, 2003) (“LongView”).
See also
2004 Roundtable Transcript, comments of Richard H. Moore, Treasurer of North Carolina.

61

See
2004 Roundtable Transcript, comments of Peter J. Wallison, American Enterprise Institute.

Engaging management in a dialogue also may not be an effective option for shareholders because company management may be unresponsive to investor concerns.
62

While shareholders can recommend an individual for nomination as director to a company's nominating committee, we understand these recommendations are rarely accepted by nominating committees.
63

Moreover, in some cases, shareholders may not be able to exercise their state law rights effectively because they have had difficulty gaining access to members of company boards and their committees.
64

62

See,

e.g.,
comment letters on the 2003 Proposal from Lucian A. Bebchuk (December 22, 2003) (“Bebchuk”); California Public Employees' Retirement System (“CalPERS”); California State Teachers' Retirement System (“CalSTRS”) (December 4, 2003); Charles Capito (October 20, 2003); Council of Institutional Investors (“CII”) (December 12, 2003); Creative Investment Research (“CIR”) (December 22, 2003); Corporate Library; and Aaron Rosenthal (October 20, 2003).

63

See,

e.g.,
Division of Corporation Finance, U.S. Securities and Exchange Commission,
Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors
(July 15, 2003),
available at:

http://www.sec.gov/news/studies/proxyreport.pdf;

see also,
comment letter on the 2003 Proposal from CII; and Michael E. Murphy,
The Nominating Process for Corporate Boards of Directors—A Decision-Making Analysis,
5 Berkeley Bus. L.J. 131 (2008).

64

See,

e.g.,
comment letter on the 2003 Proposal from CII; comment letter on 2007 Proposals from SEIU.
See also
Michael E. Murphy,
The Nominating Process for Corporate Boards of Directors—A Decision-Making Analysis,
5 Berkeley Bus. L.J. 131 (2008).
See also
Division of Corporation Finance, U.S. Securities and Exchange Commission,
Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors
(July 15, 2003),
available at:

http://www.sec.gov/news/studies/proxyreport.pdf.

Finally, given the near universal use of proxy voting and the inability of shareholders to use the company proxy to vote for shareholder nominees, it can be futile to nominate a director in person at a shareholder meeting.
65

65

See
Unofficial Transcript of the Roundtable Discussion Regarding the Federal Proxy Rules and State Corporation Law (May 7, 2007), comments of Vice Chancellor Strine at 79 (commenting that “this annual meeting thing could be a fix” where the most active shareholder institutions gain representation on the board through other means such as through litigation settlement);
see generally,
5 Fletcher Cyclopedia of Corporations § 2049.10 (Perm. Ed.) (“In large corporations, the shareholders' meeting is now only a necessary formality; the shareholders' expression can only be had by the statutory device of proxies and solicitation of proxies.”).

2. Recent Corporate Governance and Other Reforms

Over the past several years there have been a number of changes in corporate governance practices and the federal securities laws that may have mitigated some of the concerns expressed by commenters in 2003 and 2007 but, in our view, have not sufficiently addressed the central problem that we are seeking to solve—shareholders' limited ability to exercise their rights to nominate directors and have the nominations disclosed to and considered by the shareholders. For example, some commenters on the 2003 Proposal urged the Commission to defer action in order to assess the effectiveness of the then recently-enacted Sarbanes-Oxley Act of 2002 and other reforms, including enhanced director independence requirements and expansion of the nominating committee function at public companies.
66

Other commenters, while praising these reforms, doubted that they would be sufficient to address the problems that they hoped would be remedied through reform of the proxy process itself.
67

In particular, commenters in 2003 argued that objective independence standards for directors and the use of independent nominating committees, without more, may not counteract the perceived tendency of some boards to defer to management, given factors such as the significant personal relationships that can exist between directors and officers.
68

Therefore, shareholders may still want, but currently may not be able, to effectively nominate and elect directors that satisfy independence concerns specific to the companies in which they invest.

66

See,

e.g.,
comment letter from American Bar Association (January 7, 2004) (“ABA”).

67
2004 Roundtable Transcript, comments of Nell Minow and Ralph V. Whitworth.

68

See generally,
Bebchuk.
See also

In re Oracle Corp.,
824 A.2d at 941.
See
footnote 42, above.

Since the 2003 Proposal, a number of other changes in the governance landscape have occurred, including a significant movement by larger companies toward majority voting rather than plurality voting in director elections,
69

and changes in state law to more expressly indicate that corporate governing documents may set out shareholders' right to nominate directors.
70

The Commission also has adopted changes to our rules, including enhanced disclosure requirements concerning nominating committees
71

and changes to our proxy rules to facilitate the use of electronic shareholder forums.
72

While these and other changes have been significant, after considering the views discussed throughout the release, we believe the federal proxy process could still be improved to further remove impediments to the exercise of shareholders' rights under state law to nominate directors.

69
The Corporate Library reports that as of December 2008, 49.5 percent of companies in the S&P 500 had made the switch to majority voting for director elections and another 18.4 percent had, while retaining a plurality standard, adopted a policy requiring that a director that does not receive majority support must submit his or her resignation. On the other hand, the plurality voting standard is still the standard at the majority of smaller companies in the Russell 1000 and 3000 indices, with 54.5 percent of companies in the Russell 1000 and 74.9 percent of the companies in the Russell 3000 still using a straight plurality voting standard. The Corporate Library Analyst Alert, December 2008.
See also
Broadridge letter dated March 27, 2009 and attached analysis in response to File No. SR-NYSE-2006-92 (stating that in calendar year 2007, 373 NYSE-listed companies had a majority vote standard for the election of directors).

70
In
CA, Inc.
v.
AFSCME,
953 A.2d 227 (Del. 2008), the Delaware Supreme Court held that shareholders can propose and adopt a bylaw regulating the process by which directors are elected. In light of this ruling, Delaware recently amended the Delaware General Corporation Law to add new Section 112, effective August 1, 2009, clarifying that the bylaws of a Delaware corporation may provide that, if the corporation solicits proxies with respect to an election of directors, the corporation may be required to include in its solicitation materials one or more individuals nominated by a stockholder in addition to the individuals nominated by the board of directors. The obligation of the corporation to include such stockholder nominees will be subject to the procedures and conditions set forth in the bylaw adopted under Section 112. Delaware also added new Section 113, which will allow a Delaware corporation's bylaws to include a provision that the corporation, under certain circumstances, will reimburse a stockholder for the expenses incurred in soliciting proxies in connection with an election of directors. In addition, the American Bar Association's Committee on Corporate Laws, which is responsible for the Model Business Corporation Act, is considering similar changes to the Model Act.
See
American Bar Association, Section of Business Law, “Corporate Laws Committee To Address Current Governance Issues,” April 29, 2009 (noting that Delaware's recent statutory amendments “are being actively considered by the Committee”) (
available at:

http://www.abanet.org/abanet/media/release/news_release.cfm?releaseid=662
). Thirty states have adopted all or substantially all of the Model Act as their general corporation statute.

Also, in 2007, North Dakota amended its corporate code to permit five percent 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 section 10-35
et al.
(2007).

71

See Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors,
Release No. 33-8340 (December 11, 2003) [68 FR 69204].

72

See Electronic Shareholder Forums,
Release No. 34-57172 (January 18, 2008) [73 FR 4450] (“Electronic Shareholder Forums Release”).

II. Recent Commission Consideration of the Proxy Rules and Regulations Addressing the Election of Directors
73

73
The Commission also has considered the topic on at least three earlier occasions—in 1942, 1977, and 1992. For a discussion,
see
2003 Proposal.

A. 2003 Review of the Proxy Process and Subsequent Rulemaking

In April 2003, the Commission directed the Division of Corporation Finance to review the proxy rules and regulations and interpretations regarding procedures for the nomination and election of corporate directors
74

and on May 1, 2003, the Commission solicited public input with respect to the Division's review.
75

Commenters generally supported the Commission's decision to review the proxy rules and regulations with respect to director nominations and elections and, in July 2003, the Division of Corporation Finance provided to the Commission its report and recommended changes to the proxy rules related to the nomination and election of directors.
76

The Division recommended proposed changes in two areas: (1) Disclosure related to nominating committee functions and shareholder communications with boards of directors; and (2) enhanced shareholder access to the proxy process relating to the nomination of directors.
77

The Commission proposed and adopted the recommended disclosure requirements concerning nominating committee functions and shareholder communications with boards of directors.
78

In addition, in October 2003, the Commission proposed rules that would have created a mechanism for nominees of long-term shareholders, or groups of long-term shareholders, with significant shareholdings to be included in company proxy materials.
79

The proposed new rules were intended to address perceived inadequacies in the proxy process with respect to director nominations and elections.
80

The proposal generated significant public comment, with shareholders generally supporting adoption of rules that would facilitate their right to nominate directors and companies and their advisors generally opposing such rules because of concerns that a requirement to include shareholder director nominees in the company's proxy materials would impede the proper functioning of boards and cause inefficiencies.
81

The Commission did not adopt final rules based on the proposal.

74

See
Press Release No. 2003-46 (April 14, 2003).

75

See
Release No. 34-47778 (May 1, 2003) [68 FR 24530] and comment file number S7-10-03.

76

See
Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors, Division of Corporation Finance (July 15, 2003) (“2003 Staff Report”),
available at: http://www.sec.gov/news/studies/proxyrpt.htm
.
See also
Summary of Comments in Response to the Commission's Solicitation of Public Views Regarding Possible Changes to the Proxy Rules (July 15, 2003), attached as Appendix A to the Staff Report.

77

See
2003 Staff Report.

78

Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors,
Release No. 33-8340 (December 11, 2003) [68 FR 69204].

79

See
2003 Proposal. The proposal would have required shareholders to have held the requisite amount of securities to meet the ownership

threshold for two years as of the date of the nomination.

80

See
2003 Proposal (explaining that the proposal would “apply only in those instances where criteria suggest that the company has been unresponsive to security holder concerns as they relate to the proxy process”).

81

See
2003 Summary of Comments.

B. 2007 Rulemaking Concerning Shareholder Proposals Seeking to Establish Bylaw Procedures for Shareholder Director Nominations

One of the means that shareholders use to express their views on the management and affairs of a company is through shareholder proposals, which are addressed in Rule 14a-8. Rule 14a-8 provides shareholders with an opportunity to place a proposal in a company's proxy materials for a vote at an annual or special meeting of shareholders. Under this rule, a company generally is required to include the proposal unless the shareholder has not complied with the rule's procedural requirements or the proposal falls within one of the rule's 13 substantive bases for exclusion. One of the substantive bases that a company may rely on in excluding a shareholder proposal is Rule 14a-8(i)(8), which addresses shareholder proposals concerning director elections.
82

This provision frequently is referred to as the “election exclusion.” In interpreting this provision, the Commission took the position in 2007 that Rule 14a-8(i)(8) permits exclusion of a proposal that would establish a procedure that may result in contested elections to the board.
83

82
Rule 14a-8(i)(8) provides that a company need not include a proposal that “relates to a nomination or an election for membership on the company's board of directors or analogous governing body or a procedure for such nomination or election[.]”

83

See
Election of Directors Adopting Release (citing Commission statements made in Release No. 34-12598 (July 7, 1976) (“[T]he principal purpose of [Rule 14a-8(i)(8)] is to make clear, with respect to corporate elections, that Rule 14a-8 is not the proper means for conducting campaigns or effecting reforms in elections of that nature, since other proxy rules, including Rule 14a-[12], are applicable thereto.”)).
See also
Division of Corporation Finance no-action letters to
Citigroup, Inc.
(January 31, 2003) and
AOL Time Warner
(February 29, 2003). As noted in the Election of Directors Proposing Release, in each of 1993 and 1995, the Division issued one letter that took a contrary view.
See Dravo Corp.
(February 21, 1995); and
Pinnacle West Capital Corp.
(March 26, 1993) (not permitting exclusion under Rule 14a-8(i)(8) of proposals seeking to include qualified nominees in the company's proxy statement).

In 2006, the U.S. Court of Appeals for the Second Circuit, in
American Federation of State, County and Municipal Employees, Employees Pension Plan
v.
American International Group, Inc.,
84

held that AIG could not rely on Rule 14a-8(i)(8) to exclude a shareholder proposal that, if adopted, would have amended AIG's bylaws to require the company, under specified circumstances, to include shareholder nominees for director in the company's proxy materials at subsequent meetings. The Second Circuit interpreted the language of the rule
85

and the Commission's statements in adopting the rule in 1976 as limiting the election exclusion “to shareholder proposals used to oppose solicitations dealing with an identified board seat in an upcoming election and reject[ing] the somewhat broader interpretation that the election exclusion applies to shareholder proposals that would institute procedures making such election contests more likely.”
86

The effect of the
AFSCME
decision was to permit the bylaw proposal to be included in company proxy materials and, had the bylaw been approved by shareholders, for subsequent election contests conducted under it to take place in the company's proxy materials without compliance with the disclosure requirements applicable to election contests under the Commission's other proxy rules.
87

The Commission was concerned that the Second Circuit's decision resulted in uncertainty and confusion with respect to the appropriate application of Rule 14a-8(i)(8), and that it could lead to contested elections for directors without the disclosure otherwise required under the proxy rules for contested elections.
88

This concern led the Commission to reopen the issue of shareholder involvement in the nomination and election process.
89

84
462 F.3d 121 (2d Cir. 2006) (
AFSCME
).

85
At the time of the
AFSCME
decision, Rule 14a-8(i)(8) provided that a company need not include a proposal that “relates to an election for membership on the company's board of directors or analogous governing body.”
See id.
at 125. This language was amended in 2007.
See
Election of Directors Adopting Release.

86
462 F.3d at 128.

87
Exchange Act Rule 14a-12(c) [17 CFR 240.14a-12(c)] defines an election contest as “[s]olicitations by any person or group of persons for the purposes of opposing a solicitation subject to this regulation by any other person or group of persons with respect to the election or removal of directors at any annual or special meeting of security holders * * *.” Items 4(b) and 5(b) of Exchange Act Schedule 14A set out special disclosure requirements for solicitations subject to Rule 14a-12(c).

88

See
Election of Directors Proposing Release. In this regard, the Commission was concerned that shareholders and companies would be unable to know with certainty whether a proposal that could result in an election contest may be excluded under Rule 14a-8(i)(8), depending on where the company was incorporated or conducting business, and that the staff would be severely limited in their ability to interpret Rule 14a-8 in responding to companies' notices of intent to exclude shareholder proposals.

89
Although the Second Circuit's decision was binding only within that Circuit, it created uncertainty elsewhere about the continuing validity of the interpretation of Rule 14a-8(i)(8). After the
AFSCME
decision and prior to the Commission's codification of the interpretation in December 2007, the staff of the Division of Corporation Finance received three no-action requests seeking to exclude similar proposals under Rule 14a-8(i)(8). In
Hewlett-Packard
(January 22, 2007), the staff took a position of “no view” on the company's request for no-action relief. A second request for no-action relief was submitted by Reliant Energy. Subsequent to the staff of the Division of Corporation Finance taking a “no view” position on Hewlett-Packard's request, Reliant Energy filed a complaint in the U.S. District Court for the Southern District of Texas seeking a declaratory judgment that the company could properly omit a similar proposal that it had received for inclusion in its proxy materials. During the pendency of this litigation and prior to the staff's response to Reliant's no-action request, the shareholder withdrew the proposal and the company therefore withdrew its no-action request. (
See Reliant Energy, Inc.
(February 23, 2007)). A third request for no-action relief from UnitedHealth Group, Inc. was withdrawn after the company agreed to include the proposal in its proxy materials. (
See UnitedHealth Group, Inc.
(March 29, 2007)).

In May 2007, the Commission hosted three roundtables on the proxy process during which a number of individuals and representatives from the public and private sector focused on the relationship between the proxy rules and state corporate law,
90

proxy voting mechanics,
91

and shareholder proposals.
92

Following the roundtables, in July 2007, the Commission published for comment two alternative proposals addressing the election exclusion in Rule 14a-8. The first would have amended Rule 14a-8 to enable

shareholders to include proposals on shareholder director nomination bylaws in company proxy materials where certain conditions were met.
93

The conditions that could be included in such a proposal would not have been limited under the rule proposal so long as they complied with applicable state law and governing corporate documents. As noted in the proposing release, the goal underlying the proposal was to better align the proxy rules with shareholders' rights under state law, in particular the right to nominate directors. The Commission's alternative proposal sought to amend Rule 14a-8 so that a shareholder nomination bylaw proposal could be excluded by a company.
94

The Commission adopted this proposal in December 2007 to provide certainty to companies and shareholders in light of the
AFSCME
decision.
95

The Commission did not take final action on the first proposal, with the exception of the portion of the first proposal intended to facilitate the creation and use of electronic shareholder forums, which the Commission adopted in January 2008.
96

90
Roundtable on the Federal Proxy Rules and State Corporation Law (May 7, 2007). Materials related to the roundtable, including an archived broadcast and a transcript of the roundtable, are
available at: http://www.sec.gov/spotlight/proxyprocess.htm
.

91
Roundtable on Proxy Voting Mechanics (May 24, 2007). Materials related to the roundtable, including an archived broadcast and a transcript of the roundtable, are
available at: http://www.sec.gov/spotlight/proxyprocess.htm
.

92
Roundtable on Proposals of Shareholders (May 25, 2007). Materials related to the roundtable, including an archived broadcast and a transcript of the roundtable, are
available at:

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

93

See
Shareholder Proposals Proposing Release.

94

See
Election of Directors Proposing Release.

95

See
Election of Directors Adopting Release.

96

See
Electronic Shareholder Forums Release.

III. Proposed Changes to The Proxy Rules

A. Introduction

We are proposing amendments to the proxy rules to require companies to include disclosures about shareholder nominees for director in the companies' proxy materials, under certain circumstances, so long as the shareholders are not seeking to change the control
97

of the issuer or to gain more than a limited number of seats on the board. These proposed amendments build on the Commission's 2003 and 2007 proposals. They also reflect our experience with, and continued consideration of, the issue of shareholder involvement in the proxy process, the interaction between the proxy rules and state law, and the extensive comment that we have received over the past six years on these topics. As stated previously, due to dispersed ownership, director elections are largely conducted by proxy rather than in person and, as a result, impediments that the Federal proxy rules create to shareholders nominating directors through the proxy process translate into the inability of shareholders to effectively exercise their rights to nominate and to elect those directors. We believe the proposed rule changes will provide shareholders with a greater voice and an avenue to exercise the rights they have to effect change on the boards of the companies in which they invest that they no longer can exercise effectively through attending a shareholder meeting in person.

97
A change in control could include any number of extraordinary transactions, including a sale of substantially all of the company's assets.
See,

e.g.,
Item 14(a) of Schedule 14A.

The Commission's proposals would provide shareholders with two ways to more fully exercise their rights to nominate directors. First, we are proposing a new proxy rule (Exchange Act Rule 14a-11) that would, under certain circumstances, require companies to include shareholder nominees for director in the companies' proxy materials. This requirement would apply unless state law or a company's governing documents
98

prohibits shareholders from nominating directors.
99

In this regard, state law or a company's governing documents may provide for nomination or disclosure rights in addition to those provided pursuant to Rule 14a-11 (
e.g.,
a company could choose to provide a right for shareholders to have their nominees disclosed in the company's proxy materials regardless of share ownership—in that instance, the company's provision would apply for certain shareholders who would not otherwise have their nominees included in the company's proxy materials pursuant to Rule 14a-11). Second, we are proposing an amendment to Exchange Act Rule 14a-8(i)(8), the election exclusion, to preclude companies from relying on Rule 14a-8(i)(8) to exclude from their proxy materials shareholder proposals by qualifying shareholders that would amend, or that request an amendment to, a company's governing documents regarding nomination procedures or disclosures related to shareholder nominations, provided the proposal does not conflict with proposed Rule 14a-11.

98
Under state law, a company's governing documents may have various names. When we refer to governing documents throughout the release, we generally are referring to a company's charter, articles of incorporation, certificate of incorporation, and/or bylaws, as applicable.

99
We are not aware of any law in any state or in the District of Columbia that prohibits shareholders from nominating directors. Nonetheless, should any such law be enacted in the future, then this condition would not be satisfied.

Request for Comment

A.1. Does the Commission need to facilitate shareholder director nominations or remove impediments to help make the proxy process better reflect the rights a shareholder would have at a shareholder meeting?

A.2. Should the Commission adopt revisions to the proxy rules to facilitate the inclusion of shareholder nominees in company proxy materials, or are the existing means that are available to shareholders to exercise their rights to nominate directors adequate? How have changes in corporate governance over the past six years, including the move by many companies away from plurality voting to majority voting, affected a shareholder's ability to place nominees in company proxy materials? How have other developments, as well as ongoing developments such as some states adopting statutes allowing companies to reimburse shareholders who conduct director election contests and enabling companies to include in their bylaws provisions for inclusion of shareholder director nominees in company proxy materials, affected a shareholder's ability to nominate directors? Have other changes in law or practice created a greater or lesser need for such a rule?

A.3. Would the proposed amendments enable shareholders to effect change in a company's board of directors? Please explain and provide any empirical data in support of any arguments or analyses.

A.4. What would be the costs and benefits to companies and shareholders if the Commission adopted new proxy rules that would facilitate the inclusion of shareholder director nominees in company proxy materials? What would be the costs and benefits to companies if the Commission adopted the proposed amendment to Rule 14a-8(i)(8)?

A.5. What direct or indirect effect, if any, would the proposed changes to the proxy rules have on companies' corporate governance policies relating to the election of directors?

A.6. Could the proposed amendments to the proxy rules be modified to better meet the Commission's stated intent? If so, how? Please explain and provide empirical data or other specific information in support of any arguments or analyses. Please identify and discuss any other rules that would need to be amended.

A.7. We note concerns regarding investor confidence. Would amending the proxy rules as proposed help restore investor confidence? Why or why not? Please explain and provide empirical data or other specific information in support of any arguments or analyses.

A.8. We also note concerns about board accountability and shareholder participation in the proxy process. Would the proposed amendments to the proxy rules address concerns about board accountability and shareholder

participation on the one hand, and board dynamics, on the other? If so, how? If not, why not? Please explain and provide empirical data in support of any arguments or analyses.

A.9. Would adoption of only proposed Rule 14a-11 meet the Commission's stated objectives? If so, why? If not, why not? What modifications to the proposed rule and related disclosure requirements would be necessary, if any?

A.10. Would adoption of only the proposed amendment to Rule 14a-8(i)(8) and the related disclosure requirements meet the Commission's stated objectives? If so, why? If not, why not? What modifications to the proposed rule amendment and related disclosure requirements would be necessary, if any?

A.11. Would other revisions to our proxy rules achieve the same or similar objectives as the Commission's proposal? For example, regardless of what other action the Commission may take in this area, should we adopt new disclosure requirements and liability provisions to address recent changes in some state laws concerning the inclusion of shareholder nominees for director in company proxy materials pursuant to a company's governing documents?

A.12. Are there any states that prohibit, or permit companies to prohibit, shareholders from nominating a candidate or candidates for election as director?

B. Proposed Exchange Act Rule 14a-11

1. Overview

As discussed, currently, a shareholder or group of shareholders must undertake a proxy contest and incur the related expenses to have any reasonable chance at successfully putting director nominees before the shareholders for a vote. A board's nominees, on the other hand, are listed in the company's proxy materials, which are funded out of corporate assets.

We believe it is an appropriate time for us to revisit whether and how the federal proxy rules may be impeding the ability of shareholders to exercise their fundamental rights to nominate and elect board members. As mentioned above, we are aware of the concerns and questions about the accountability and responsiveness of some companies and boards of directors to the interests of shareholders, particularly in the current market environment. Additionally, based on the comments received in response to our solicitation of public input on the topic in prior releases and roundtables, we have learned that shareholders face significant obstacles to efficiently exercising their right to determine the leadership of the companies in which they invest. Much of the public input that we have received suggests 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.
100

100

See
2003 Summary of Comments.

On the other hand, the business community and many of its legal advisors have expressed concern that mandating shareholder access to company proxy materials could turn every election of directors into a contest, which would be costly and disruptive to companies and could discourage some qualified board candidates from agreeing to appear on a company's slate of nominees. Because the composition of the board of directors is fundamental to a company's governance, 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.
101

101

See id.

In light of the erosion of investor confidence that has taken place over the past several months, and after further consideration of the issue, we have determined to propose a rule that would require companies to include disclosure about shareholder nominees for director in company proxy materials under specified conditions.
102

These nominees would then also be included on a company's form of proxy in accordance with the requirements of Rule 14a-4.
103

Rule 14a-11 would not apply where shareholders relying on the rule are seeking to change the control of the issuer or to gain more than a limited number of seats on the board of directors. In this regard, we believe that shareholders who are seeking such a change should continue to use the procedures currently available for election contests.

102

See
proposed Exchange Act Rule 14a-11.

103

See
proposed amendment to Rule 14a-4.

2. Application of Exchange Act Rule 14a-11

Proposed Rule 14a-11 would apply to all companies subject to the Exchange Act proxy rules
104

(including investment companies registered under Section 8 of the Investment Company Act of 1940),
105

other than companies that are subject to the proxy rules solely because they have a class of debt registered under Section 12 of the Exchange Act. As proposed, a company would be subject to Rule 14a-11 unless applicable state law or a company's governing documents prohibits shareholders from nominating candidates for the board of directors. When a company's governing documents do prohibit nomination rights, shareholders who want to amend the provision may seek to do so by submitting a shareholder proposal.
106

104
Exchange Act Rule 3a12-3 [17 CFR 240.3a12-3] exempts foreign private issuers from the Commission's proxy rules. As such, the proposed rule would not apply to foreign private issuers.

105
15 U.S.C. 80a
et seq.
Investment companies currently are required to comply with the proxy rules under the Exchange Act when soliciting proxies, including proxies relating to the election of directors.
See
Investment Company Act Rule 20a-1 [17 CFR 270.20a-1] (requiring registered investment companies to comply with regulations adopted pursuant to Section 14(a) of the Exchange Act that would be applicable to a proxy solicitation if it were made in respect of a security registered pursuant to Section 12 of the Exchange Act).

106
A company generally would not be permitted to exclude such a shareholder proposal under our proposed amendment to Rule 14a-8(i)(8), discussed in Section III.C., below.

In the 2003 Proposal, the Commission proposed to make the new requirement concerning shareholder director nominations operative for a company only 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 (provided, that 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). The second proposed triggering event was that a shareholder proposal submitted under Rule 14a-8 providing that the 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 (1) held more than 1% of the company's securities entitled to vote on the proposal and (2) 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 that meeting.
107

107
Only votes for and against a proposal would have been included in the calculation of the shareholder vote.

Today's proposal does not require a triggering event. Instead, Rule 14a-11 would apply to all companies subject to

Exchange Act Section 14(a), other than companies that are subject to the proxy rules solely because they have a class of debt registered under Exchange Act Section 12. Accordingly, a company would be required to disclose the nominee or nominees of any shareholder or shareholder group meeting the proposed eligibility standards and other conditions in Rule 14a-11, discussed below. Our decision not to include triggering events in the current proposal reflects our concern that the federal proxy rules may be impeding the exercise of shareholders' ability under state law to nominate directors at all companies, not just those with demonstrated governance issues. In addition, we note that many commenters on the 2003 Proposal expressed concern about that proposal's complexity
108

and indicated that the multi-year process created by the trigger requirement could make it more difficult for shareholders to efficiently effect change in the composition of boards of directors.
109

Finally, in light of our concerns about restoring investor confidence to the greatest number of shareholders as quickly as possible, we do not want to add a layer of complexity and delay to the operation of the proposed rule that would frustrate our stated objectives.

108

See
2003 Summary of Comments and Letter Type I from 5,858 individuals or entities.

109

See
2003 Summary of Comments;
see also
comment letter from American Federation of State, County, and Municipal Employees (September 24, 2003) (“AFSCME 2003”).

Request for Comment

B.1. Would adoption of Rule 14a-11 conflict with any state law, federal law, or rule of a national securities exchange or national securities association? To the extent you indicate that the rule would conflict with any of these provisions, please be specific in your discussion of those provisions that you believe would conflict. How should the Commission address these conflicts? Should the rule also address conflicts with a company's country of incorporation where the company is organized in a non-U.S. jurisdiction but does not meet the definition of foreign private issuer? Should the rule also explicitly refer to conflicts with laws of U.S. possessions or territories?

B.2. Should Rule 14a-11 apply as proposed? Is it appropriate for proposed Rule 14a-11 to be unavailable where state law or a company's governing documents prohibit shareholders from nominating candidates for director? Would the proposed rule effectively facilitate shareholders' basic rights, particularly the right to nominate directors?

B.3. As proposed, Rule 14a-11 would apply to all companies subject to the proxy rules, other than companies that are subject to the proxy rules solely because they have a class of debt registered under Exchange Act Section 12. What effect, if any, will this application have on any particular group of companies (
e.g.,
on smaller reporting companies)? Are there modifications that would accommodate the needs of a particular group of companies (
e.g.,
smaller reporting companies) while accomplishing the goals of the proposal? Would it instead be more appropriate to exclude from operation of the procedure smaller reporting companies, either on a temporary basis through staggered compliance dates based on company size, or on a permanent basis? Should any other groups of companies be excluded from operation of the rule (
e.g.,
companies subject to the proxy rules for less than a specified period of time (
e.g.,
one year, two years, or three years))? If so, for what period of time should the companies be excluded from operation of the rule (
e.g.,
one year, two years, three years, permanently)?

B.4. Should proposed Rule 14a-11 apply to registered investment companies? Are there any aspects of the proposed nomination procedure that should be modified in the case of registered investment companies?

B.5. Should companies that are subject to the proxy rules solely because they have a class of debt registered under Exchange Act Section 12 be excluded from application of Rule 14a-11, as proposed? Please explain why or why not.

B.6. As proposed, Rule 14a-11 would apply to companies that have voluntarily registered a class of equity securities pursuant to Exchange Act Section 12(g). Should companies that have registered on a voluntary basis be subject to Rule 14a-11? If so, should nominating shareholders of these companies be subject to the same ownership eligibility thresholds as those shareholders of companies that were required to register a class of equity securities pursuant to Section 12? Should we adjust any other aspects of Rule 14a-11 for companies that have voluntarily registered a class of equity securities pursuant to Section 12(g)?

B.7. Should proposed Rule 14a-11 be inapplicable to a company that has or adopts a provision in its governing documents that provides for or prohibits the inclusion of shareholder director nominees in the company proxy materials? Should the Commission's rules respond to variations in shareholder director nomination disclosures and procedures adopted, for example, under state corporate laws that specify that a company's governing documents may address the use of a company's proxy materials for shareholder nominees to the board of directors? Would it be more appropriate to only permit companies to comply with governing document provisions or state laws where those provisions or laws provide shareholders with greater nomination or proxy disclosure rights than those provided under proposed Rule 14a-11? Should Rule 14a-11 provide that a company's governing documents may render the rule inapplicable to a company only if the shareholders have approved, as contrasted to the board implementing without shareholder approval, a provision in the company's governing documents addressing the inclusion of shareholder nominees in company proxy materials? Should Rule 14a-11 be inapplicable if such shareholder-approved provisions are more restrictive than Rule 14a-11? Should Rule 14a-11 be inapplicable if such shareholder-approved provisions are less restrictive than Rule 14a-11? Or both?

B.8. The New York Stock Exchange has filed with the Commission a proposed rule change to amend NYSE Rule 452 and corresponding Section 402.08 of the Listed Company Manual to eliminate broker discretionary voting for the election of directors. The Commission published the proposed rule change, as amended on February 26, 2009, for comment in the Federal Register on March 6, 2009.
110

If the amendment to Rule 452 is approved, what would be its effect on operation of proposed Rule 14a-11? Would any changes to Rule 14a-11 be required? Please be specific in your response.

110

See
Release No. 34-59464 (February 26, 2009) [74 FR 9864].

B.9. Should proposed Rule 14a-11 exempt companies where state law or the company's governing documents require that directors be elected by a majority of shares present in person or represented by proxy at the meeting and entitled to vote? What specific issues would arise in an election where state law or the company's governing documents provided for other than plurality voting (
e.g.,
majority voting)? What specific issues would arise in an election that is conducted by cumulative voting? Would these issues need to be addressed in revisions to the proposed rule text? If so, how?

B.10. Should companies be able to take specified steps or actions, such as

adopting a majority vote standard or bylaw specifying procedures for the inclusion of shareholder nominees in company proxy materials, to prevent application of proposed Rule 14a-11 where it otherwise would apply? If so, what such steps or actions would be appropriate and why would they be appropriate? For example, should companies that agree with a shareholder proponent not to exclude a shareholder proposal submitted by an eligible shareholder pursuant to Rule 14a-8 be exempted from application of the proposed rule for a specified period of time? Should a company that implements any shareholder proposals that receive a majority of votes cast in a given year be exempted?

B.11. Should companies subject to Rule 14a-11 be permitted to exclude certain shareholder proposals that they otherwise would be required to include? If so, what categories of proposals? For example, should the company be able to exclude proposals that are non-binding, proposals that relate to corporate governance matters generally, proposals that relate to the structure or composition of boards of directors, or other proposals?

B.12. One concern that has been raised about the effectiveness of the present proxy rules is the high cost to a shareholder to conduct a solicitation to nominate a director. Should the proposed rule provide that it does not apply to a company whose governing documents include a provision for reimbursement of expenses incurred by a participant or participants in the course of a solicitation in opposition as defined in Rule 14a-12(c)? If so, should the rule specify what manner of reimbursement would be sufficient for proposed Rule 14a-11 not to apply?

B.13. Should Rule 14a-11 be widely available, as proposed, or should application of the rule be limited to companies where specific events have occurred to trigger operation of the rule? If so, what events should trigger operation of the rule?

B.14. If the Commission were to include triggering events in Rule 14a-11, would either of the triggering events proposed in 2003 and described above be appropriate? In responding, please discuss how any changes in corporate governance practices over the past six years have affected the usefulness of the triggering events proposed in 2003. For example, over the past six years many companies have adopted majority voting. If the triggering events proposed in 2003 are not appropriate, are there alternative events that the Commission should consider in place of, or in addition to, the above events? For example, should application of Rule 14a-11 be triggered by other factors such as economic performance (
e.g.,
lagging a peer index for a specified number of consecutive years), being delisted by an exchange, being sanctioned by the Commission or other regulators, being indicted on criminal charges, having to restate earnings, having to restate earnings more than once in a specified period, or failing to take action on a shareholder proposal that received a majority shareholder vote?

B.15. In the 2003 Proposal, the rule proposed would have been triggered by withhold votes for one or more directors of more than 35% of the votes cast. Is it appropriate to apply such a trigger to current proposed Rule 14a-11? If so, what would be an appropriate percentage and why? Would it be appropriate to base this trigger on votes cast rather than votes outstanding? Please provide a basis for any alternate recommendations, including numeric data, where available. Is the percentage of withhold votes the appropriate standard in all cases? For example, what standard is appropriate for companies that do not use plurality voting? If your comments are based upon data with regard to withhold votes for individual directors, please provide such data in your response.

B.16. If the Commission were to include a triggering event requirement, for what period of time after a triggering event should Rule 14a-11 apply (
e.g.,
one year, two years, three years, or permanently)? Should there be a means other than the adoption of a provision in the company's governing documents for the company or shareholders to terminate application of the requirement at a company? If so, what other means would be appropriate?

B.17. What would be the possible consequences of the use of triggering events? Would the withhold vote trigger result in more campaigns seeking withhold votes? How would any such consequences affect the operation and governance of companies?

B.18. If the proposed requirement applied only after a specified triggering event, how would the company make shareholders aware when a triggering event has occurred? If the rule became operative based on the occurrence of triggering events, should the rule require additional disclosures in a company's Exchange Act Form 10-Q,
111

10-K,
112

or 8-K
113

or, in the case of a registered investment company, Form N-CSR?
114

For example, the rule could require the following:

111
17 CFR 249.308a.

112
17 CFR 249.310.

113
17 CFR 249.308.

114
17 CFR 249.331 and 17 CFR 274.128.

• A company would be required to disclose the shareholder vote with regard to the directors receiving a withhold vote or a shareholder proposal, either of which may result in a triggering event, in its quarterly report on Form 10-Q for the period in which the matter was submitted to a vote of shareholders or, where the triggering event occurred during the fourth quarter of the fiscal year, on Form 10-K;
115

and

115
Item 4 of Part II to Exchange Act Form 10-Q and Item 4 of Part I to Exchange Act Form 10-K currently require that companies disclose the results of the voting on all matters submitted to a vote of shareholders during the period covered by the report. We could add a provision to these items that would require disclosure of specific information relating to the application of Rule 14a-11 or a shareholder director nomination process provided for under applicable state law or in a company's governing documents.

• A company would be required to include in that Form 10-Q or 10-K information disclosing that it would be subject to Rule 14a-11 as a result of such vote, if applicable.

B.19. Should the company's disclosure regarding the applicability of Rule 14a-11 be filed or made public in some other manner? If so, what manner would be appropriate?

B.20. Should companies be exempted from complying with Rule 14a-11 for any election of directors in which another party commences or evidences its intent to commence a solicitation in opposition subject to Rule 14a-12(c) prior to the company mailing its proxy materials? What should be the effect if another party commences a solicitation in opposition after the company has mailed its proxy materials?

B.21. If a triggering event is required and companies are exempted from complying with Rule 14a-11 because another party has commenced or evidenced its intent to commence a solicitation in opposition subject to Rule 14a-12(c), should the period in which Rule 14a-11 applies be extended to the next year? What should be the effect if another party commences a solicitation in opposition after the company has mailed its proxy materials?

B.22. What provisions, if any, would the Commission need to make for the transition period after adoption of a rule based on this proposal? Would it be necessary to adjust the timing requirements of the rule depending on the effective date of the rule (
e.g.,
if the rules are adopted shortly before a proxy season)?

B.23. Should the Commission consider rulemaking under Section 19(c) of the Exchange Act to amend the

listing standards of registered exchanges to require that shareholders have access to the company's proxy materials to nominate directors under the requirements and procedures described in connection with proposed Rule 14a-11 to reflect, for example, changes the Sarbanes-Oxley Act made to director and independence requirements, among other matters?

3. Eligibility To Use Exchange Act Rule 14a-11

In seeking to balance shareholders' ability to participate more fully in the nomination and election process against the potential cost and disruption to companies subject to the proposed new rule, we are proposing that only holders of a significant, long-term interest in a company be able to rely on Rule 14a-11 to have disclosure about their nominees for director included in company proxy materials. We are proposing that the requirement for a company to include a shareholder's nominee or nominees for director in the company's proxy materials and on its form of proxy be based on a minimum ownership threshold, which would be tiered according to company size. Assuming the other conditions of proposed Rule 14a-11 are met, companies would not be able to exclude a shareholder nominee or nominees if the nominating shareholder or group:

• Beneficially owns, as of the date of the shareholder notice on Schedule 14N, either individually or in the aggregate:
116

116
The manner in which a nominating shareholder or group would establish its eligibility to use proposed Rule 14a-11 is discussed further, below.

• For large accelerated filers as defined in Exchange Act Rule 12b-2,
117

and registered investment companies with net assets of $700 million or more, at least 1% of the company's securities that are entitled to be voted on the election of directors at the annual meeting of shareholders (or, in lieu of such an annual meeting, a special meeting of shareholders);
118

117
17 CFR 240.12b-2.

118

See
proposed Rule 14a-11(b)(1)(i).

• For accelerated filers as defined in Rule 12b-2, and registered investment companies with net assets of $75 million or more but less than $700 million, at least 3% of the company's securities that are entitled to be voted on the election of directors at the annual meeting of shareholders (or, in lieu of such an annual meeting, a special meeting of shareholders);
119

and

119

See
proposed Rule 14a-11(b)(1)(ii).

• For non-accelerated filers as defined in Rule 12b-2, and registered investment companies with net assets of less than $75 million, at least 5% of the company's securities that are entitled to be voted on the election of directors at the annual meeting of shareholders (or, in lieu of such an annual meeting, a special meeting of shareholders);
120

120

See
proposed Rule 14a-11(b)(1)(iii).

• Has beneficially owned the securities that are used for purposes of determining the ownership threshold continuously for at least one year as of the date of the shareholder notice on Schedule 14N (in the case of a shareholder group, each member of the group must have held the securities that are used for purposes of determining the ownership threshold for at least one year as of the date of the shareholder notice on Schedule 14N);
121

and

121

See
proposed Rule 14a-11(b)(2). The one-year holding period requirement applies only to the securities that are used for purposes of determining the ownership threshold.

• Represents that it intends to continue to own those securities through the date of the annual or special meeting.
122

122

Id.
Pursuant to proposed Rule 14a-18(b), the nominating shareholder or group would be required to include in its notice to the company of the intent to nominate a representation that the nominating shareholder or group satisfies the conditions in Rule 14a-11(b).

The issue of the appropriate eligibility ownership threshold generated a great deal of comment when proposed in the 2003 Proposal.
123

While some commenters believed that all shareholders, regardless of the amount of shares owned, should be able to include nominees in the company proxy materials for the purpose of nominating one or more directors, others advocated share ownership thresholds ranging from the $2,000 threshold required to submit a Rule 14a-8 proposal to share ownership percentages such as 3%, 5% or 10% of a company's outstanding common stock.
124

Those who advocated no threshold or a nominal dollar amount argued that the imposition of a threshold would discriminate against smaller investors or unfairly advantage larger shareholders who already may have the resources to run their own slates using the existing rules for contested elections.
125

Those who advocated a larger share ownership threshold argued that a nominating shareholder should have a substantial, long-term stake in the company in order to require the use of company funds to nominate a candidate.
126

In addition, advocates of a larger share ownership threshold pointed out that the composition of the board of directors is critical to a corporation's functions and, accordingly, shareholders should have to evidence a significant financial interest by satisfying a substantial ownership threshold in order to require a company to include in its proxy materials a shareholder director nominee or nominees.
127

123

See
2003 Summary of Comments; comment letter on the Shareholder Proposals Proposing Release from California Public Employees' Retirement System (September 26, 2007) (“CalPERS 2007”) (noting that a 2003 analysis of the holdings of three of the largest public pension funds showed that their combined ownership exceeded 2% in only one instance, and exceeded 1.5% in only 12 instances).

124

See
2003 Summary of Comments.

125

See id.

126

See id.

127

See id.

The tiered beneficial ownership thresholds that we are proposing represent an effort to balance the varying considerations and address the possibility that certain companies could be impacted disproportionately based on their size.
128

In determining the proposed ownership thresholds, we considered two different samples of data on security ownership as an indicator of the ownership of securities that are entitled to be voted on the election of directors. First, we considered the current ownership make-up of a sample provided by an outside source of 5,327 companies that have held meetings between January 1, 2008 and April 15, 2009.
129

In this sample, roughly 26% of the firms are classified as large accelerated filers, 35% are classified as accelerated filers, and 38% are classified as non-accelerated filers. The second sample is derived from CDA Spectrum and is based on filings of Forms 13F in the third quarter of 2008.
130

In this sample, roughly 26% of the firms are classified as large accelerated filers, 33% are classified as accelerated filers, and 40% are classified as non-accelerated filers.
131

128
In this regard, we believe that the relative resource requirement for larger issuers to fund and administer the process would be smaller. Therefore, the thresholds we are proposing will more likely result in more large accelerated and accelerated filers receiving qualifying nominations than non-accelerated filers.

129
The staff received beneficial ownership information for these companies aggregated at various thresholds and matched the information on market value of the float (obtained from Datastream). The sample excludes mutual funds.

130
Institutional investment managers who exercise investment discretion over $100 million or more in Section 13(f) securities must report their holdings on Form 13F with the SEC. The sample includes 6,700 companies that are referenced in the Form 13F form that have common equity and are traded on NYSE, NYSE Amex Equities, or NASDAQ. Of these we were able to match the information on the market value of float (obtained from Datastream) for 5,877 observations.

131
Under Rule 12b-2, a large accelerated filer must have an aggregate worldwide market value of

the voting and non-voting common equity held by its non-affiliates of $700 million or more, and an accelerated filer must have an aggregate worldwide market value of the voting and non-voting common equity held by its non-affiliates of $75 million or more but less than $700 million. Filers that do not meet the criteria for accelerated or large accelerated filer status are classified as non-accelerated filers.

In the first sample, nearly all (above 99%) of large accelerated filers have at least one shareholder that could meet the 1% threshold individually, while a somewhat greater number of large accelerated filers (also above 99%) have two or more shareholders that each have held at least 0.5% of the shares outstanding for the appropriate period and, thus, could more easily aggregate their securities in order to meet the 1% ownership requirement. In the CDA sample, 98% of large accelerated filers have at least one shareholder that could meet the 1% threshold individually, while 99% of large accelerated filers have two or more shareholders that each have held at least 0.5% of the shares outstanding for the appropriate period. By contrast, based on the first sample, using an ownership threshold of 3% would reduce the number of large accelerated filers where a single shareholder could make a nomination to 77% of large accelerated filers and reduce the number of large accelerated filers that have two or more shareholders that have held at least 1.5% of the shares for the appropriate period to 89%. Using the CDA sample these numbers would drop to 96% and 97% respectively.

With regard to accelerated filers, roughly 85% of filers have at least one shareholder that could meet the 3% threshold individually, while roughly 92% of accelerated filers have two or more shareholders that each have held at least 1.5% of the shares outstanding for the appropriate period and, thus, could more easily aggregate their securities in order to meet the 3% ownership requirement. In the CDA sample, 91% of accelerated filers have at least one shareholder that could meet the 3% threshold individually, while 93% of accelerated filers have two or more shareholders that each have held at least 1.5% of the shares outstanding for the appropriate period. By contrast, based on the first sample, using an ownership threshold of 5% would reduce the number of accelerated filers where a single shareholder could make a nomination to 58% of accelerated filers. Further, 78% of accelerated filers have two or more shareholders that have held at least 2.5% of the shares for the appropriate period. Using the CDA sample these numbers would drop to 66% and 88% respectively.

With regard to non-accelerated filers, roughly 59% of filers in the first sample have at least one shareholder that could meet the 5% threshold individually, while roughly 71% of non-accelerated filers have two or more shareholders that each have held at least 2.5% of the shares outstanding for the appropriate period and, thus, could more easily aggregate their securities in order to meet the 5% ownership requirement. In the CDA sample, 41% of non-accelerated filers have at least one shareholder that could meet the 5% threshold individually, while 49% of non-accelerated filers have two or more shareholders that each have held at least 2.5% of the shares outstanding for the appropriate period. By contrast, based on the first sample, using an ownership threshold of 7% would reduce the number of non-accelerated filers where a single shareholder could make a nomination to 41% of non-accelerated filers. Further, only 43% of non-accelerated filers have two or more shareholders that have held at least 4% and 62% have two or more shareholders that have held at least 3% of the shares for the appropriate period.
132

Using the CDA sample these numbers would drop to 33%, 37% and 45% respectively.

132
The staff did not have information regarding the beneficial ownership for the 3.5% threshold.

With regard to registered investment companies, we are proposing tiered thresholds based on the net assets of the companies.
133

Consistent with our approach to reporting companies (other than registered investment companies), the tiered beneficial ownership thresholds that we are proposing represent an effort to balance the various competing views and address the possibility that certain registered investment companies could be impacted disproportionately based on their size. Because registered investment companies are not classified as large accelerated filers, accelerated filers, and non-accelerated filers, we propose to base the tiers on the net assets of the companies.
134

In particular, we are proposing tiers for registered investment companies that are based on the worldwide market value levels used by reporting companies (other than registered investment companies) to determine filing status.
135

Under the proposal, the amount of net assets of a registered investment company for these purposes would be the amount of net assets of the company as of the end of the company's second fiscal quarter in the fiscal year immediately preceding the fiscal year of the meeting, as disclosed in the company's Form N-CSR filed with the Commission, except that, for a series investment company the amount of net assets would be the company's net assets as of June 30 of the calendar year immediately preceding the calendar year of the meeting, as disclosed in a Form 8-K filed in connection with the meeting where directors are to be elected.
136

133
In the case of a registered investment company, in determining the securities that are entitled to be voted on the election of directors for purposes of establishing whether the applicable threshold has been met, the nominating shareholder or group may rely on information set forth in the following documents, unless the nominating shareholder or group knows or has reason to know that the information contained therein is inaccurate: (1) In the case of a series company, a Form 8-K that would be required to be filed in connection with the meeting where directors are to be elected (for a further discussion of Form 8-K filing requirements for registered investment companies,
see
footnote 138, below, and accompanying text); or (2) in the case of other registered investment companies, the company's most recent annual or semi-annual report filed with the Commission on Form N-CSR.
See
Instruction 1 to proposed Rule 14a-11(b).

134

See
Instruction 2 to proposed Rule 14a-11(b). For registered investment companies that are organized in series form, we are proposing that the net assets thresholds apply to the company as a whole, and not on a series by series basis, because directors are elected for the company by the shareholders of all series rather than separately for each series of the company.
See
Investment Company Act Rule 18f-2(g) [17 CFR 270.18f-2(g)].

135

See
footnote 131, above.

136

See
Instructions 2 and 3 to proposed Rule 14a-11(b).

The requirement that the net asset determination for investment companies other than series investment companies be made as of the end of the company's second fiscal quarter in the fiscal year immediately preceding the fiscal year of the meeting is similar to the requirements for reporting companies (other than registered investment companies), which determine large accelerated filer, accelerated filer, and non-accelerated filer status as of the end of the fiscal year, using the market value of the issuer's common equity as of the last business day of the immediately preceding second fiscal quarter.
137

However, we have chosen a single date, June 30 of the calendar year immediately preceding the calendar year of the meeting, for series investment companies, due to the fact that different series of a series company may have different fiscal year and semi-annual period ending dates. Moreover, although registered investment companies generally are not required to file Form 8-K, we are proposing to require a registered investment company that is a series company to file Form 8-K within four business days after the company determines the anticipated meeting date, disclosing the company's net assets as of June 30 of the

calendar year immediately preceding the calendar year of the meeting and the total number of the company's shares that are entitled to vote for the election of directors (or if votes are to be cast on a basis other than one vote per share, then the total number of votes entitled to be voted and the basis for allocating such votes) at the annual meeting of shareholders (or, in lieu of such an annual meeting, a special meeting of shareholders) as of the end of the most recent calendar quarter.
138

Registered investment companies, including series investment companies, currently disclose net asset and outstanding share information in their annual and semi-annual reports filed on Form N-CSR, but we believe that the additional Form 8-K filing is necessary for series companies because a series company may file multiple Form N-CSRs with respect to different series covering different fiscal year and semi-annual period ending dates and is required to disclose net asset and outstanding share information on a series by series basis, rather than for the company as a whole.

137

See
Rule 12b-2.

138

See
proposed General Instruction B.1 and proposed Item 5.07(b) of Form 8-K; proposed Rules 13a-11(b)(3) and 15d-11(b)(3); and Instruction 3 to proposed Rule 14a-11(b).

The purpose of the proposed rule would be to remove impediments the federal proxy rules create to shareholders' exercise of their rights to nominate and elect members of boards of directors. At the same time, we recognize that there are competing concerns that also need to be taken into account, such as the potential cost and disruption to the company of a rule with no shareholder eligibility requirements. To balance those interests, we are proposing a rule that includes shareholder eligibility requirements. In particular, we are proposing eligibility requirements based on the duration of ownership and minimum ownership levels.

With respect to duration of ownership eligibility criteria, we believe that long-term shareholders are more likely to have interests that are better aligned with other shareholders and are less likely to use the rule solely for short-term gain. We are proposing a one year holding requirement for each nominating shareholder or member of a nominating group rather than the two year requirement proposed in 2003. The holding period generated less comment in 2003 than the ownership threshold, with the majority of commenters that addressed the topic supporting the proposed holding period.
139

Some commenters, however, advocated either lowering the holding period to one year,
140

or raising it (
e.g.,
to 5 years).
141

Some of these commenters suggested that the two year holding period was too onerous.
142

After further consideration, we believe that a one year holding requirement would be sufficient to appropriately limit use of Rule 14a-11 to long-term shareholders without placing an undue burden on shareholders seeking to use the rule. In addition, a one year requirement is consistent with the existing eligibility requirement for shareholders to submit proposals under Rule 14a-8.

139

See
2003 Summary of Comments;
see also
comment letters from AFL-CIO; Alliance Capital Management L.P. (December 15, 2003) (“Alliance Capital”); American Society of Corporate Secretaries (December 22, 2003) (“ASCS”); Henry A. McKinnell, Chairman, The Business Roundtable (December 22, 2003) (“McKinnell, BRT”); United States Chamber of Commerce (December 19, 2003) (“Chamber”); Carl T. Hagberg (December 22, 2003); Committee on Securities Regulation, New York State Bar Association (December 22, 2003) (“NYS Bar”); State Teachers Retirement System of Ohio (December 18, 2003) (“STRS Ohio”); Sullivan & Cromwell LLP (December 22, 2003) (“Sullivan”); T. Rowe Price Associates, Inc. (December 24, 2003) (“T. Rowe”); Valero; and Wachtell.

140

See
2003 Summary of Comments;
see also
comment letters from CalPERS; CIR; Gary K. Duberstein (December 22, 2003) (“Duberstein”); Gary Tannahill (December 6, 2003) (“Tannahill”); and Wolf Haldenstein Adler Freeman & Herz LLP (December 19, 2003) (“Wolf Haldenstein”).

141

See
2003 Summary of Comments;
see also
letters from Compass Bancshares, Inc. (December 22, 2003) (“Compass”); and W. Paul Fitzgerald, Director, EMC Corporation (December 19, 2003), Gail Deegan, Director, EMC Corporation (December 22, 2003), and Alfred Zeien, Director, EMC Corporation (December 22, 2003) (collectively, “EMC Corporation”).

142

See
2003 Summary of Comments;
see also
comment letters from CalPERS; CIR; Duberstein; Tannahill; and Wolf Haldenstein.

With regard to a minimum ownership level as a shareholder eligibility requirement, we believe it is important that any shareholder or group that intends to submit a nominee to a company for inclusion in the company's proxy materials continue to have a significant economic interest in the company. Therefore, we have proposed the requirement that a nominating shareholder or group provide a statement as to the nominating shareholder's or group's intent to continue to hold the requisite amount of securities through the date of the meeting. Commenters in 2003 generally supported a holding requirement through the date of the meeting,
143

with some suggesting an even longer holding period (
e.g.,
through the term of the nominee's service on the board, if elected).
144

We continue to believe that a requirement to hold the securities through the date of the meeting is appropriate to demonstrate the nominating shareholder's commitment to the director nominee and the election process; however, we also have proposed a disclosure requirement under which a nominating shareholder or group would state their intent with respect to continued ownership of their shares after the election.
145

143

See
2003 Summary of Comments;
see also
comment letters from America's Community Bankers (December 18, 2003) (“ACB”); Alliance Capital; ASCS; Blackwell Sanders Peper Martin LLP (December 22, 2003) (“Blackwell Sanders”); McKinnell, BRT; CalPERS; Chamber; CIR; Compass; FedEx Corporation (December 19, 2003) (“FedEx”); Intel Corporation (December 22, 2003) (“Intel”); International Paper Company (December 22, 2003) (“International Paper”); Peter O. Clauss and J. Peter Wolf of Pepper Hamilton, LLP (December 16, 2003) (“Clauss & Wolf”); Sullivan; Tannahill; Valero; Wachtell; and Wells Fargo & Company (December 19, 2003) (“Wells Fargo”).

144

See
2003 Summary of Comments;
see also
comment letters from ACB; McKinnell, BRT; Chamber; Compass; FedEx; Intel; International Paper; Clauss & Wolf; Sullivan; Valero; Wachtell; and Wells Fargo.

145

See
proposed Rule 14a-18(f) and proposed Item 5(b) of Schedule 14N.

In addition, to rely on proposed Rule 14a-11 to have disclosure about their nominee or nominees included in the company proxy materials, a nominating shareholder or group must:

• Not acquire or hold the securities for the purpose of or with the effect of changing control of the company or to gain more than a limited number of seats on the board;

• Provide and file with the Commission a notice to the company on proposed new Schedule 14N
146

of the nominating shareholder's or group's intent to require that the company include that nominating shareholder's or group's nominee in the company's proxy materials by the date specified by the company's advance notice provision or, where no such provision is in place, no later than 120 calendar days before the date that the company mailed its proxy materials for the prior year's annual meeting,
147

except that if the company did not hold an annual meeting during the prior year, or if the date of the meeting has changed by more than 30 days from the prior year, then the nominating shareholder or group must provide notice a reasonable time before the company mails its proxy materials, as specified by the company in a Form 8-K filed within four business days after the company determines the anticipated meeting date pursuant to proposed Item 5.07;
148

and

146

See
Section III.B.6. for a discussion of Schedule 14N and the disclosure required to be filed.

147
This date would be calculated by determining the release date disclosed in the previous year's proxy statement, increasing the year by one, and counting back 120 calendar days.

148

See
proposed Instruction 2 to paragraph (a) of Rule 14a-11 and proposed General Instruction B.1.

to Form 8-K. A late filing of such form would result in the registrant losing eligibility to file on Form S-3.

• Include in the shareholder notice on Schedule 14N disclosure about the amount and percentage of securities owned by the nominating shareholder or group, length of ownership of such securities, and the nominating shareholder's or group's intent to continue to hold the securities through the date of the meeting as well as intent with respect to continued ownership after the election, a certification that the nominating shareholder or group is not seeking to change the control of the company or to gain more than a limited number of seats on the board of directors, and disclosure meeting the requirements of Rule 14a-18.
149

149

See
proposed Exchange Act Rules 14a-18 and 14n-1.
See
discussion in Section III.B.5. regarding proposed Rule 14a-11(d), which limits the number of nominees a company would be required to include in its proxy materials.

Request for Comment

C.1. Are the proposed shareholder eligibility criteria for Rule 14a-11 necessary or appropriate? If not, why not? Should there be any restrictions regarding which shareholders can use proposed Rule 14a-11 to nominate directors for inclusion in company proxy materials? Should those restrictions be consistent with the requirements of Rule 14a-8 or should they be more extensive than the minimum requirements in Rule 14a-8?

C.2. The proposed eligibility threshold is based on the percentage of securities owned and entitled to vote on the election of directors. This threshold is based on current Rule 14a-8 and reflects our intent to focus on those shareholders eligible to vote for directors. Is the proposed threshold appropriate or could it be better focused to accomplish our objective? For example, should eligibility instead be based on record ownership? Should eligibility be based on the value of shares owned? If so, on what date should the value be measured? What would be an appropriate value amount? Is there another standard or criteria? Is submission of the nomination the correct date on which to make these eligibility determinations? If not, what date should be used?

C.3. For companies that have more than one class of securities entitled to vote on the election of directors, does the rule provide adequate guidance on how to determine whether a shareholder meets the requisite ownership thresholds? Should the rule specifically address how to make this determination if one class of securities has greater voting rights than another class?

C.4. What other criteria or alternatives should the Commission consider to determine the eligibility standards for shareholders to nominate directors?

C.5. Is it appropriate to use a tiered approach to the ownership threshold for reporting companies (other than registered investment companies)? If so, is it appropriate and workable to use large accelerated filer, accelerated filer, and non-accelerated filer to define the three tiers? Are there aspects of the definitions of these groups that do not work with the proposed rule? Should we instead define the tiers strictly by public float or strictly by market capitalization? If so, what should the public float or market capitalization thresholds be (
e.g.
, 5% for companies with less than $75,000,000 in public float; 3% for companies with more than $75,000,000 but less than $700,000,000 in public float; 1% for companies with greater than $700,000,000 in public float)?

C.6. Is the 1% standard that we have proposed for large accelerated filers appropriate? Should the standard be lower (
e.g.
, $2,000 or 0.5%) or higher (
e.g.
, 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9%, 10%, 15%, 20%, or 25%)? Is the 3% standard that we have proposed for accelerated filers appropriate? Should the standard be lower (
e.g.
, 1% or 2%) or higher (
e.g.
, 4%, 5%, 6%, 7%, 8%, 9%, 10%, 15%, 20%, or 25%)? Is the 5% standard that we have proposed for non-accelerated filers appropriate? Should the standard be lower (
e.g.
, 1%, 2%, 3%, or 4%) or higher (
e.g.
, 6%, 7%, 8%, 9%, 10%, 15%, 20%, or 25%)?

C.7. Should groups of shareholders composed of a large number of beneficial holders, but who collectively own a percentage of shares below the proposed thresholds, be permitted to have a nominee included in the company proxy materials? If so, what would be a sufficiently large group? Would a group composed of over 1%, 3%, 5% or 10% of the number of beneficial holders be sufficient? Should there be different disclosure requirements for a large shareholder group?

C.8. Is it appropriate to use a tiered approach to the ownership threshold for registered investment companies? Should the tiers and ownership percentages for registered investment companies be similar to those for reporting companies other than registered investment companies, as proposed, or should they be different? Is it appropriate and workable to base the tiers on a registered investment company's net assets? Should another measure be used instead? Should the determination of which tier a series investment company belongs to be made on a series by series basis, rather than for the company as a whole? Should the levels of net assets for each category be higher or lower? If so, why?

C.9. Should the determination of which tier a series investment company is in be based on the company's net assets as of June 30 of the calendar year immediately preceding the calendar year of the meeting, as disclosed in a Form 8-K filed in connection w

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3AE9-14090. Public record. Not legal advice.