SEC Approves Proxy Access Rule


On August 25, 2010, the U.S. Securities and Exchange Commission (“SEC”) voted to adopt new proxy access rules to make it easier for shareholders of a public company to nominate directors to the company’s board.

The SEC’s adoption of the new rules follows the recent enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which gave the SEC express authority to make rules dealing with shareholder access to company proxy materials.

Prior to this rule, in most cases, the existing directors of a company would nominate the candidates for board positions, and then send this information to shareholders through proxy circular materials. If a shareholder wanted to exercise their right to nominate and elect a director, they were required to prepare and mail out their own proxy statement to shareholders, a process that involved considerable costs. Under Rule 14a-11 of the Securities Exchange Act of 1934 (the “New Rule”), significant and long-standing shareholders of a company will automatically have the right to list their nominees for board seats on corporate proxy circulars.

Shareholder Criteria

In order for a shareholder or group of shareholders to require a company to include its nominee for directors in the company’s proxy circular, the nominating shareholders must meet the following criteria:

  • the shareholders must own at least 3% of the total voting power entitled to vote at the annual meeting. Shareholders can aggregate their holdings in order to meet the 3% requirement;
  • the shareholders must have held their shares for at least three years and must continue to hold at least the required number of securities through to the date of the meeting at which directors are elected;
  • the shareholders must not otherwise be prohibited, by applicable state or foreign law or the company’s governing documents, from nominating candidates to the board of directors; and
  • the shareholder must not be holding the shares for “the purpose of changing control of the company.”

If a shareholder is eligible, it will be able to include in the corporation’s proxy materials nominations for the greater of one nominee, or a number of nominees that represents up to 25% of the company’s board of directors. If a company receives shareholder nominations for more than the maximum number of nominees, then it must include in its proxy materials the nominees of the shareholder(s) holding the highest percentage of voting power, up to the maximum number of nominees.

Notice Requirements

In order to include a nominee in a company’s proxy materials, a nominating shareholder (or group of shareholders) must file with the SEC, and provide to the company, a Schedule 14N, notifying the company of its intent to require inclusion of its nominee in the company’s proxy materials and containing disclosure required by Schedule 14N. A nominating shareholder must submit the Schedule 14N no earlier than 150 days and no later than 120 days before the anniversary of the date a company mailed its proxy circular for the prior year’s annual meeting.

Applicability of the New Rule

The New Rule applies to all Securities Exchange Act reporting companies, including investment companies, other than companies whose only public securities are debt securities. While there is no “opt out” available, smaller reporting companies are exempt from these requirements for a three year phase-in period.

The New Rule takes effect 60 days after publication in the Federal Register. For smaller reporting companies, the New Rule will become effective three years after the date it becomes effective for all other companies.