On August 25, the Securities and Exchange Commission (SEC) adopted amendments to its proxy rules permitting major shareholders to use company proxy materials to nominate their own director candidates (proxy access).
Proxy access, which was authorized by Section 971 of the Dodd-Frank Act, had been previously proposed by the SEC to protest from issuers and encouragement from shareholder advocates.
Proxy access has two components:
- A federal proxy access right provided by new Exchange Act Rule 14a-11
- Amendments to Exchange Act Rule 14a-8 permitting shareholders to propose more liberal proxy access procedures
What does it mean?
Corporate governance will be profoundly affected by Dodd-Frank. Proxy access, together with say on pay and other Dodd-Frank reforms implemented by SEC rules, could have a compelling impact on board behavior and shareholder relations. The ability of major shareholders to use a company’s proxy materials to nominate their own board candidates, and the right of shareholders generally to vote on executive pay, is bound to amplify shareholder participation in, and influence on, compensation and management decisions.
Companies have expressed lingering concerns about the unintended consequences of proxy access, including the toll on management time and attention, potential domination by large shareholders, the challenge of rapidly adapting governance documents and processes, and potential uncertainties in its application.
The exact contours of proxy access will remain shrouded until the next round of shareholder nominations. The SEC will hopefully address regulatory gaps and lingering concerns through further rulemaking and interpretive guidance. But the dominant take-away from proxy access and say on pay should become a new mantra: directors must prepare for a major increase in owner involvement. This means an acute focus on shareholder sentiment, anticipating how board decisions will appear in disclosure, expanding dialogue with major shareholders, and effectively communicating the rationale for board decisions.
While it may not be easy to balance the interests of large shareholders and shareholders at large, we believe proxy access and say on pay will introduce a new era in management-shareholder relations that both informs the management process and provides greater context for owner appreciation of management challenges and strategies. Beyond the technical compliance issues discussed in this alert, we encourage boards to contemplate and discuss with leading shareholders how this revolution in corporate governance will impact their processes, decisions and disclosures.
When do the new rules become effective?
The rules become effective on or about November 1, 2010. Companies with a public float of at least $75 million will be subject to 14a-11 immediately, meaning the rule will apply commencing with next year’s proxy season.
Smaller reporting companies will be exempt from proxy access until the 2014 proxy season, but will be subject to amended Rule 14a-8 this year.
To read more about the new rules, click here.
For More Information
For more information, please contact Marc Salle at msalle@polsinelli.com or 816.360.4137. |
