Lugar de Noticias Haynes and Boone
On June 10, 2009, the U.S. Securities and Exchange Commission (the “SEC”) proposed a series of amendments to rules promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”) to facilitate shareholders’ rights to nominate directors. See Release Nos. 33-9046, 34-60089, and IC-28765; http://www.sec.gov/rules/proposed/2009/33-9046.pdf.1 The three-to-two vote on the proposed rules marks the third time in the last six years that the SEC has addressed a debate of more than 30 years – shareholders’ access to company proxy materials to nominate their own directors to a company’s board of directors.
The debate on increased shareholder proxy access generally focuses on the need for greater director accountability and responsiveness to shareholders, versus the importance of allowing directors to focus their energies on leading the company. On the one hand, shareholders want some degree of oversight; on the other, directors who are overly preoccupied or hampered by having to cater to shareholder demands may not be able to maximize shareholder value to the same extent they would otherwise.
The purpose of the federal proxy process is to replicate the conditions of a shareholder meeting as closely as is practical without requiring attendance of a large and widely dispersed group of shareholders. Currently, a company’s proxy materials need provide only for the election of those directors nominated by the incumbent board. Shareholders may submit their own slate of nominees to be voted upon by the shareholders, but this requires a very costly process of preparing and distributing separate proxy materials. It is also possible to attend an annual meeting and present an opposing slate of nominees to be voted upon, though at that point many proxy votes have already been cast. The push for an efficient, less costly approach to exercising a shareholder’s right to nominate a director is key to this debate.
Many recent market events have helped spur the SEC to action. The SEC cites what it describes as one of the most serious economic crises of the past century and a resulting loss of investor confidence as the impetus for its proposed amendments. Additionally, recent complaints that directors are too cozy with management resulting in trillions of dollars of write-downs and losses, as well as corporate scandals over the last several years, have provided support for finding more effective ways to hold directors accountable and motivate the board to monitor and reign in management.
The goal of the proposed amendments is to provide more viable means for shareholders to exercise their rights under state law to nominate directors. The amendments do not empower shareholders seeking to change the control of the company. Rather, they are to allow shareholders limited access to the company’s proxy statement by submitting a short slate of director nominees to be nominated at the expense of the company. While the SEC acknowledges there are several costs associated with shareholder access to the company’s proxy materials, it anticipates the proposed amendments will result in a reduction of the cost to shareholders of soliciting votes for a nominee and improved board performance.
1 Except where otherwise noted, this alert discusses the proposed amendments as if adopted as presently written in the SEC’s release, though the amendments have not yet been adopted and are still subject to change.
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For more information, please contact any of the members of the Securities/Capital Markets and Corporate Governance practice groups listed at the end of the alert.