Proxy access: a monumental pendulum swing.

• Author: Genkin, Barry H.
• Position: LITIGATION

The recently passed financial reform law allowing shareholders access to the company's proxy to propose board candidates marks a significant development in the protracted battle for shareholder rights. Though compliance with the access rules has been temporarily put on hold, it's a good time to start planning now.

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The U.S. Securities and Exchange Commission in August adopted rules providing shareholders of public companies that meet certain requirements the opportunity to propose board of director candidates using a company's proxy statements. This monumental change enhances shareholder's ability to access the company proxy materials and marks a significant development in the protracted battle for shareholder rights.

However, on Oct. 4, the SEC stayed the effectiveness of the rule, pending resolution by the U.S. Court of Appeals of the petition filed by the Business Roundtable and U.S. Chamber of Commerce challenging the legality of the proxy access rule. As a result of this action, the implementation of the access rules will be delayed for the majority of public companies until the 2012 proxy season; for non-calendar year companies, the access rules would be in effect later in 2011.

The issue of access, which some argue is a matter of state law, has been debated for years, as has the SEC's authority to adopt rules in this area. The SEC specifically asked Congress to address this issue in the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act. The following will discuss the SEC's new access rule requirements, as well as steps companies should consider to prepare for future proxy seasons in light of the new mandates.

And, although the access rules are currently on hold, the delay in implementation provides an excellent opportunity to start planning for eventual compliance.

New Rule 14a-11 permits an individual shareholder or group of shareholders meeting certain requirements to include its nominee or nominees for director in the company's proxy materials, provided such action is not prohibited by state law or the company's governing documents.

To utilize these new rules, a nominating shareholder must own or represent at least a 3-percent stake in the company. Shareholders who are part of a group may aggregate their holdings to satisfy this requirement. In addition, the nominating shareholder is required to have the designated minimum amount of voting securities continuously for at least three years prior to filing notice of intent to submit a nominee for inclusion in the company's proxy materials.

A company is not required to include in its proxy materials information regarding any nominee whose candidacy or potential board membership would violate state or federal law or the tenets of a national securities exchange.

In order to prevent shareholders from using the new access rules as a means to effect a change of company control, they limit the number of shareholder nominees a company is required to include in the proxy materials to the greater of one or 25 percent of the board of directors.

In situations where more than one eligible shareholder or group submits a nomination, the rule provides that the nominating shareholder or group with the highest percentage of the company's voting power would have its nominees included in the company's proxy materials. In addition, the nominating shareholder is...