On May 20, 2009, the U.S. Securities and Exchange Commission (SEC) approved, by a narrow 3-2 vote, a proposed rulemaking to change the federal proxy rules to facilitate director nominations by shareholders. While the actual proposing release has not yet been published, the rule proposal is expected to permit large shareholders to propose nominees for the greater of one seat or 25 percent of the seats available on the board at the annual shareholders' meeting. Nominees proposed by shareholders would be included in the company's proxy materials alongside management's proposed slate of director nominees. Shareholder proponents must have held their shares for at least one year and must hold a significant stake in the company, with "significance" measured in relation to the size of the company. Shareholders of "large accelerated filers" (roughly the 700 largest public companies) must hold a minimum of 1 percent of the outstanding shares of the company to be eligible to nominate a director candidate. Shareholding percentages increase to 3 percent for "accelerated filers" and 5 percent for "non-accelerated filers."
Shareholder proponents will need to file a notice of intent to nominate director candidates. This notice must include various representations and disclosures relating to both the shareholder proponent and the director nominee, including a representation that the director nominee satisfies the objective independence criteria of the company's stock exchange.
The May 20, 2009, action marks the fourth proposal by the SEC in the past six years to address the controversial issue of "shareholder access." The last two attempts in 2007 and 2003 met with significant opposition by major corporations, lawmakers and Bush administration officials, and were ultimately abandoned. While most expect similar debate during the upcoming 60-day comment period, this most recent "shareholder access" proposal benefits from significant support from the current Congress as well as President Obama. On May 19, 2009, Senator Charles Schumer introduced the Shareholder Bill of Rights Act of 2009, which includes a provision that would require the SEC to adopt rules requiring companies to provide shareholders with access to company proxy materials to propose their own director candidates.
Meera Popat was also a principal author of this Hot Topic.