Jeff Jinnett: SEC Adopts Final Rule on Proxy Nominations for Board of Directors
My June 29th blog posting on this topic noted the Dodd-Frank legislation authorizes the SEC to issue rules granting shareholder access to management’s proxy statement for the purpose of nominating directors to the board. On August 25, 2010, the U.S. Securities and Exchange Commission adopted a final rule entitled “Facilitating Shareholder Director Nominations”[i]. Under the final rule, shareholders of public companies subject to SEC oversight that have held a three percent (3%) equity interest for at least three years may nominate directors for election to the board of directors using the management’s proxy statement. Although there is no restriction on the relationship between the 3% shareholder and its nominee(s), the nomination of directors may not be for the purpose of accomplishing a change of control of the company.
It has been reported that the SEC estimates that 33% of public companies have at least one institutional shareholder owning at least 3% of their securities for at least three years[ii]. Examples of such major shareholders would include CalPERS and other large pension funds. Although large hedge often hold positions of 3% of greater in public companies, only a subset of these same hedge funds hold their 3% equity positions for at least three years.
Under the new SEC final rule, management is not required to include shareholder nominees for more than 25% of the total board seats. If multiple shareholders nominate directors for more than 25% of the board seats, the largest shareholders will take precedence over the smaller shareholders, irrespective of which shareholder nomination was received first by management. Under New York Stock Exchange Rule 452, brokers are no longer permitted to vote the shares they hold on behalf of customers, unless the beneficial owners of the shares direct them as to how to vote the shares. Since brokers in the past typically voted shares in favor of the management’s slate of directors, this new SEC final rule, when combined with NYSE Rule 452, may now have a significant impact on the composition of boards of public companies with large institutional investor shareholders. In light of the new SEC final rule on proxy access, some companies may attempt to enact procedural barriers to thwart large institutional shareholders from replacing management-nominated directors. In a recent article, J.W. Verret of the George Mason University School of Law explored some of the legal defenses public companies might attempt.[iii]
These new developments may mean that boards of directors of some public companies over the next few years will include a significant number of independent directors nominated by large institutional investors unhappy with the way the current management is running the companies. From an information technology point of view, this may result in the independent directors requesting the board have its own IT infrastructure in the “cloud” that would not be subject to operational oversight and control by management. Boards of directors have relatively simple record-keeping requirements. For example, boards must maintain records of whistleblower complaints made to the board under the Sarbanes-Oxley Act and vendors already exist to provide record-keeping extranets specifically for boards of directors[iv]. The primary IT requirements of boards tend to be in the areas of business intelligence, communication and collaboration and document production and review. These requirements could easily be satisfied with through a cloud environment, such as the Microsoft Business Productivity Online Suite (BPOS)[v].
[i] See https://www.sec.gov/rules/final/2010/33-9136.pdf.
[ii] See Lisa Fairfax posting at https://www.theconglomerate.org/forum-proxy-access/.
[iii] See J.W. Verret, “Defending Against Shareholder Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank,” located at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1655482.
[iv] See, e.g., https://boardextranet.com/.