Director elections get a shake up: new proxy access rules provide an opportunity for directors to reflect on board composition.

• Author: Raymond, Doug
• Position: LEGAL BRIEF

WITH MUCH fanfare, Congress has, as part of the Dodd-Frank legislation, mandated new rules that grant shareholders greater access to the proxy materials of public companies. The new rules enable certain shareholders who nominate a director in opposition to the management slate to include information about their nominee for director in the company's proxy materials, which is intended to facilitate such election contests. Directors now must familiarize themselves with the new rules and plan accordingly.

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New Requirements: If a shareholder or group holds at least 3% of a public company's voting securities and have held their shares for at least three years, they now have the right to include information regarding their director nominee in the proxy materials. The nominating shareholders must also satisfy certain other requirements.

The rules also permit shareholders, under certain circumstances, to propose bylaw amendments that provide even greater proxy access than is required by the new rules and to require that the company include the proposal in its proxy materials. Shareholders, for example, could propose giving shareholders the right to have their director nominee included in the proxy materials regardless of their percentage or duration of ownership. The shareholders proposing the access bylaws need to have held only 1% of a company's voting securities for a period of one year, which is a significantly lower threshold than is required by the SEC's rules for shareholders to have their director nominee included in the proxy materials. Consequently, companies may encounter more shareholder bylaw proposals than shareholder director nominations in upcoming proxy seasons.

Implications for the Board: Waging a successful proxy contest has historically been extremely expensive and time-consuming. Under the new rules, the challenges, though still significant, are likely to be less difficult.

Directors should consider how they should react to a shareholder proposal for more liberal access procedures or a shareholder nomination itself. Of course, the board will want to consider all the facts and circumstances in play at that time, including the identity and motivations of the nominating shareholder or group, and the board should seek to understand the reasons behind any shareholder nomination.

However, in the past, many boards reflexively viewed shareholder nominations with hostility, as a threat to the corporation, as well as...