SEC Adopts New Rules On Shareholder-Nominated Directors
Monday, August 30, 2010

The United States’ Securities and Exchange Commission (SEC) has adopted changes to the federal proxy and other rules to facilitate the rights of shareholders to nominate directors to a company's board.

The SEC's approval of the new measures follows enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which provided the SEC with explicit authority to make rules addressing shareholder access to company proxy materials.

The new rules require companies to include the nominees of “significant, long-term shareholders” in their proxy materials, alongside the nominees of management. This "proxy access" is designed to facilitate the ability of shareholders to exercise their traditional rights under state law to nominate and elect members to company boards of directors.

Under the rules, shareholders will be eligible to have their nominees included in the proxy materials if they own at least 3% of the company's shares continuously for at least the prior three years.

Shareholders, who otherwise are provided the opportunity to nominate directors at a shareholder meeting under applicable state or foreign law, would be able to have their nominees included in the company proxy materials sent to all shareholders. Shareholders also have the ability to use the shareholder proposal process to establish procedures for the inclusion of shareholder director nominations in company proxy materials.

However, application of the new access rules to the smallest public companies, those that are defined as "smaller reporting companies" under SEC rules, will be deferred for three years.

The new rules will become effective 60 days after their publication in the Federal Register.

"As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own," said SEC Chairman Mary L. Schapiro. "I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfil the responsibilities of serving as a director. The critical point is that shareholders have the ability to make this choice."

On the other hand, David Hirschmann, chief executive of the US Chamber of Commerce’s Center for Capital Markets Competitiveness, stated: “This special interest-driven rule is a giant step backwards for average investors. Using the proxy process to give labor union pension funds and others greater leverage to try to ram through their agenda makes no sense. Instead of giving some investors front-of-the-line passes, the SEC should be focused on advancing the interests of all investors, including retail investors.”

“We are concerned that proxy access will allow certain shareholders to have a louder voice than others and harm the very investors this rule purports to defend. The Chamber is committed to a system that allows all shareholders to have an equal voice.”