The Securities and Exchange Commission voted this morning to adopt changes to the federal proxy and other rules to facilitate director nominations by shareholders by allowing shareholders to more easily nominate directors to corporate boards.
This will definitely change the balance of power between general investors and management at many U.S. companies. This is the fourth time the SEC considered questions about proxy access over the past few years.
The Dodd-Frank Wall Street Reform and Consumer Protection Act finally confirmed the Commission’s authority to resolve the issue. “The proxy is often the principal means for shareholders and public companies to communicate with one another, and for shareholders to weigh in on issues of importance to the corporation,” said SEC Chairman Mary L. Schapiro.
The rule was passed on a 3-2 vote, with two Republican commissioners, Troy Paredes and Kathleen Casey, opposing. “The rule is fundamentally and fatally flawed, and it will have great difficulty surviving judicial scrutiny..the SEC's staff will be burdened with the unenviable responsibility of brokering disputes between shareholders and companies every board-election season,” Ms. Casey predicted.
The matter, debated at the SEC for years, had dogged two prior chairmen, Christopher Cox and William Donaldson. "Proxy access" would force public companies to print the names of shareholder-nominated board candidates directly onto corporate ballots if certain conditions are met. Under the new rule, "proxy access" will be available to a shareholder, or group of shareholders, who own — and have owned continually for at least the prior 3 years — at least 3 percent of the company's voting stock. The Commission decreased the ownership threshold for small companies from 5 to 3 percent. The Commission increased ownership thresholds for large companies from 1 percent to 3 percent, and increased the period of required ownership for companies of all sizes from 1 to 3 years. In order to reduce uncertainty, the final rule includes detailed provisions on how to calculate these requirements.
During the deferral period, the Commission will monitor how these new rules have been implemented at larger companies and will continue to assess the distribution of stock among holders of smaller company shares.
Under the new rules:
- Shareholders who otherwise are provided the opportunity to nominate directors at a shareholder meeting under applicable state or foreign law would be able to have their nominees included in the company proxy materials sent to all shareholders.
- Shareholders also have the ability to use the shareholder proposal process to establish procedures for the inclusion of shareholder director nominations in company proxy materials.
Application of the new access rules for the smallest public companies — those defined as "smaller reporting companies" under SEC rules — will be deferred for three years.
Generally, the new rules will become effective 60 days after their publication in the Federal Register. (Adopted from www.sec.gov/news/press/2010/2010-155.htm)
We think the SEC’s adoption of the Proxy Access rule is a huge move forward for investors. The rule shifts the balance of power toward shareholders and away from company management and boards. It will certainly give rise to more competition among Board candidates: this is actually healthy. We believe proxy access will invigorate shareholders and force boards to be more vigilant in their oversight of companies.