On August 8, 2003, the Securities and Exchange Commission (SEC) proposed changes to the proxy rules that would expand disclosure regarding (a) the nominating committee and the process of nominating directors and (b) the process by which shareholders are able to communicate with a company's board of directors. The proposals do not require substantive changes by a company with respect to its nomination or shareholder communication processes; rather the proposals require disclosure of the details of the processes.
The accelerated comment period for the proposed rules ends on September 15, 2003, and rapid finalization of the proposed rules by the SEC could put the rules in place for the 2004 proxy season.
Yet to Come: Additional Proposed Rules on Shareholder Access.
The proposed rules are the first step in the process of implementing recent controversial recommendations by the SEC's Division of Corporation Finance relating to the nomination and election of directors. The SEC is expected to publish a second proposal as early as this fall that would give shareholders additional access to the proxy process in connection with the nomination and election of directors. The proposal is expected to give additional access to major, long-term shareholders (or groups of long-term shareholders) following certain triggering events that may indicate that shareholders have not had sufficient access to the proxy process. Our July 18, 2003 Update: SEC's Division of Corporation Finance Recommends Major Changes to Proxy Rules Concerning the Nomination and Election of Directors has more information on these recommendations.
Enhanced Nominating Committee Disclosure
Currently, the proxy rules require companies to disclose whether they have a nominating committee and, if so, whether the committee considers nominees recommended by shareholders and how shareholders may submit recommendations. The SEC believes that these disclosure requirements, adopted in 1978, have not been sufficient to elicit important information concerning the director nominating process. The proposed rules are designed to increase the transparency of that process by requiring the following additional disclosure in a company's proxy materials with respect to the election of directors:
whether a company has a nominating committee and, if not, why not;
- whether any members of the nominating committee were not independent as set forth in applicable listing standards; if the company does not have listed securities, it must choose a definition of independence established by a national exchange or quotation system and make the appropriate disclosure under that definition;
- whether the nominating committee has a policy with regard to consideration of candidates recommended by shareholders and a description of the policy, including whether it will consider candidates recommended by shareholders and procedures for shareholders to follow to submit recommendations;
- any specific qualifications, qualities or skills that the nominating committee believes must be met by director nominees and any standards for the overall structure and composition of the board;
- the nominating committee's process for identifying and evaluating candidates to be nominated as directors, including whether the nominating committee evaluates shareholder-recommended nominees differently from other nominees;
- a statement as to the specific source of each nominee named on the proxy card, other than continuing directors and executive officers;
- the function performed by any third party to which the company pays a fee to assist in the process of identifying and evaluating candidates; and
- if a company has rejected a nomination by a shareholder or group of shareholders who have held more than 3% of the company's voting common stock for at least one year, the name of the shareholder(s) making the recommendation and the specific reasons for not nominating the candidate.
Under the proposed rules, "nominating committee" refers not only to an actual nominating committee, but also to any group of directors fulfilling the role of a nominating committee, including the whole board.
New Disclosure Regarding Shareholder Communications With Directors
The SEC is also seeking to increase the transparency of the process by which shareholders may communicate with the board. The proposed rules would require a company to disclose the following information in its proxy statement:
whether the company has a process for shareholders to send communications to the board and, if not, why not;
- if the company has such a process:
- a description of the manner in which shareholders can send communications to the board;
- the identity of those board members to whom shareholders can send communications;
- if shareholders cannot communicate directly with the board (i.e., the communications are screened), how, and who within, the company determines which communications will be relayed to the board; and
- a description of any material action taken by the board during the preceding fiscal year that resulted from a shareholder communication.
Interaction of Proposed Rules With Proposed NYSE and Nasdaq Listing Standards
Enhanced Nominating Committee Disclosure. The New York Stock Exchange and the Nasdaq Stock Market have proposed revised listing standards that would require listed companies to have independent nominating committees or, alternatively, in the case of Nasdaq, directors nominated by a majority of independent directors. The NYSE proposed standards would also require a listed company to have a nominating committee charter and corporate governance principles that address the board's criteria for selecting directors and director qualification standards.
Disclosure Regarding Shareholder Communication With the Board. The NYSE proposed listing standards would require a company to disclose a method for "interested parties" to communicate directly and confidentially with a presiding director of nonmanagement directors or with the nonmanagement directors as a group.
The SEC believes that the proposed rules would operate in conjunction with the proposed listing standards.
Text of the Proposed Rules
This Update is intended only as a summary of the SEC's proposed amendments. You can find the full text of the proposed amendments at http://www.sec.gov/rules/proposed/34-48301.htm.
You can find discussion of other recent laws, regulations and rule proposals of interest to public companies on our website.