At yesterday's open meeting of the Securities and Exchange Commission (SEC), a split Commission approved rule amendments to permit shareholders to nominate directors for corporate boards.  The new rules, which will be effective for the 2011 proxy season for most calendar year-end companies, will require, under certain circumstances, a company to permit “proxy access” to shareholders to allow them to include in its proxy materials a shareholder’s, or a group of shareholders’, nominees for director.

This update highlights what we took away from the SEC’s open meeting.  In the near future we will be publishing a more detailed update with a complete summary and analysis of the proxy access rules.

General Application of Proxy Access

Three Years and 3%.  Companies that are subject to the proxy rules under the Securities Exchange Act of 1933 (including controlled companies and voluntary registrants) will now include eligible shareholder nominees for director in their annual proxy statements if the nominating shareholder, or shareholders

• • have held in the aggregate at least 3% of the company’s voting power continuously for the last three years; and
  • continue to hold those shares through the date of the company’s annual meeting.

In contrast to the June 2009 proposing release, companies will be subject to the proxy access rules regardless of applicable state law or their governing documents.  A company’s shareholders may choose to adopt, either through a management recommendation or a Rule 14a-8 proposal, access rules that provide for greater access, but they cannot limit the availability of the new proxy access rules.

Notice of Nominations on New Schedule 14N.  An eligible shareholder interested in nominating a director must submit a notice to the company on the new Schedule 14N no later than 120 days before the anniversary date of the company’s release or the mailing of its proxy statement for the previous year’s annual meeting.

No Proxy Access if Seeking Change of Control.  Proxy access will not be available to a nominating shareholder or group that is seeking to change the control of the company or more than the permitted 25% of seats on the board or directors.

No‑Action Process Available to Challenge Nominees.  The no‑action process can be used by companies to exclude shareholder nominees if they believe a shareholder nominee or a nominating shareholder or group does not satisfy the new rule’s eligibility requirements.

Limitation on Shareholder Nominees in Proxy Materials

The number of shareholder nominees for director that a company is required to include in its proxy materials is capped at the greater of

• • one shareholder nominee for each director and
  • up to 25% of a company’s total seats on the board (even if the company uses a staggered board).

Implementation of the Proxy Access Rules

Proxy Access Generally Effective for 2011 Proxy Season. The rule amendments will become effective 60 days from publication of the adopting release in the Federal Register.

• • Example of Potential Timing for Effectiveness.  By way of example, if the adopting release is published in the Federal Register on September 2, 2010, the rule amendments would become effective on November 1, 2010.  Under this scenario, in light of the 120-day advance notice requirement, the proxy access rules would apply only to companies that mailed their proxy materials for the previous year’s annual meeting on or after March 1, 2010.

Proxy Access Deferred for Smaller Reporting Companies.  The implementation of the proxy access rules as they apply to smaller reporting companies (generally under $75 million in public float) will be deferred for three years after the effective date of the rule amendments.

Additional Information

This update is intended only as our summary of highlights from the SEC’s open meeting.  You can find the full text of the final rule at http://www.sec.gov/rules/final/2010/33-9136.pdf.