SEC Enacts New Proxy Access Rule

The U.S. Securities and Exchange Commission ("SEC") adopted new proxy rules on August 25, 2010. The ruling requires public companies to include stockholder nominees for directors in the companies' proxy materials. The new rules give shareholders limited access to an issuer's proxy statement for the purpose of proposing alternative director candidates for election to the issuer's Board. Historically, a shareholder wishing to propose alternative director candidates would have to incur the expense of preparing, printing and mailing its own proxy statement. The purpose of the rules is to increase shareholder participation in corporate governance by decreasing the cost barriers to proposing alterative directors.

The new rules generally take effect 60 days after publication in the Federal Register, and thus will be in effect in time for the 2011 annual meeting season, which kicks off in February-March, 2011. Initially, these new rules will apply only to large cap "seasoned" issuers, with more universal coverage being phased in over 3 years for smaller cap issuers.

Under the new rules, a shareholder owning at least 3% of the outstanding shares of the issuer and having held such position for at least three (3) years, may require the issuer to include in its proxy materials director nominees proposed by such shareholders. Shareholders are not permitted to "borrow" stock to meet these thresholds, but are permitted to aggregate the holdings of more than one shareholder. The rules also limit the number of alternative director candidates that can be nominated by a shareholder to no more than one (1) or a maximum of twenty five percent (25%) of the entire Board. These eligibility requirements are designed to limit "free" access to the issuer's proxy material to significant, long term shareholders. The limitations on the number of alternative candidates that may be nominated at any one meeting are designed, among other things, to limit the chaos of potential wholesale changes of control annually. These and other aspects of the rules are sure to draw plenty of comments over the course of the next several months.

The exemption (at least for the first three (3) years) for smaller cap issuers is troubling since many of the worst offenders on the corporate governance scale are smaller cap issuers. Many fear that the initial three (3) year exemption will be extended over time to effectively shield small cap issuers from the corporate governance enhancements most needed by that universe, much the way that the initial exemption from certain Sarbanes Oxley requirements for small caps has become effectively permanent.

The new rules also permit shareholders meeting the ownership requirements (3% / 3 years) to submit proposals that seek to establish a procedure in the issuer's governing documents (Charter and By-Laws) for the inclusion of shareholder director nominees in the issuer's proxy materials. Even with the limitations of the new rules as currently enacted, they represent an important step in the direction of increased shareholder participation and corporate democracy; and will have significant implications for corporate issuers and activist investors alike.

If you have any questions regarding this Alert, please contact John O'Connor at 212.573.8029 or


Cheryl Spratt