SEC Adopts Mandatory Proxy Access: Rule Provides Proxy Access for 3% Shareholders or Groups with a Three-Year Holding Period, with No Right for Companies or Shareholders to Opt Out; Generally Applicable for 2011 Proxy Season, with Three-Year Delay for Smaller Reporting Companies

Sullivan & Cromwell LLP - August 25, 2010
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At an open meeting on August 25, 2010, the SEC voted to permit shareholders or groups holding 3% of the voting power of U.S. public companies who have held their shares for three years to include director nominees in company proxy materials. The proxy access regime set out in new Rule 14a-11 under the Securities Exchange Act of 1934 is mandatory, not simply a default rule – companies or shareholders are not permitted to opt out or select a more restrictive mechanism. In addition, the SEC voted to amend Rule 14a-8 to provide that companies may not exclude from their proxy materials shareholder proposals that seek to establish less restrictive proxy access procedures, and adopted a number of related rule amendments intended to facilitate proxy access.

The new rules were approved by a 3 to 2 vote, with two Commissioners vigorously opposing the rules at the open meeting. The rules will be effective 60 days after their publication in the Federal Register, and proxy access will apply for a company’s 2011 annual meeting if the first anniversary of the mailing of the 2010 proxy materials occurs within 120 days of effectiveness. So, for example, if the rules are effective November 1, 2010, then shareholders will have a proxy access right in 2011 if the company mailed their 2010 proxy materials on or after March 1, 2010. The proxy access rules provide for a three-year delay in effectiveness for “smaller reporting companies” – generally, companies that have a public float of less than $75 million.

The new rules apply to all companies that have a class of equity securities subject to SEC proxy rules, including investment companies registered under the Investment Company Act of 1940. Like the other proxy rules, the new rules do not apply to foreign private issuers.

The full text of the final rules were published shortly after the meeting and are available here. This memorandum summarizes the more significant provisions in the new rules – we are in the process of preparing a more detailed memorandum.