Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

As many know, the SEC adopted the proxy access rules on August 25, 2010.  The new rules will be effective 60 days from publication in the Federal Register, excepting smaller reporting companies, for which the rules are deferred for three years.  Federal Register publication is expected fairly quickly barring some bureaucratic snafu.

 We recommend that public companies gain an understanding of the proxy access rules as soon as possible, even if your annual meeting is months away.  The reason—the rules permit activist shareholders to begin taking public steps toward submitting nominations, or in some cases actually submitting nominations, once the 60 day waiting period has passed.  By SEC standards, the rules are taking effect with a lightning speed not seen since the days following Sarbanes-Oxley.

 In addition, proxy statements filed after the 60 days have passed will be required to include new disclosures.  There are new Form 8-K triggering items as well.

 What public steps can an activist take after the 60 days have passed?  The activists will begin filing new Schedule 14N.  It’s likely some activists will use the 60 day period to select targets (if they have not already) and begin laying the groundwork for filing a Schedule 14N.

 A Schedule 14N filed by an activist will contain the following information that will be important for public company targets to immediately understand and digest.  That information includes:

  • A shareholder’s intent to use written soliciting materials to form a shareholder group to submit a nominee for inclusion in a company’s proxy statement under rule 14a-2(b)(7).  Under the rules shareholders can form a group to meet the 3% ownership threshold necessary to submit a nominee.  Basically, the filing of the Schedule 14N is a written advertisement of interest to form a shareholders group, a tactic that would not have been allowed before the proxy access rules.
  • A shareholder’s intent to orally solicit other shareholders to form a nominating committee.  Again, another written advertisement.

 Public companies should monitor EDGAR for Schedule 14N filings with respect to their company.  If one should come to their attention, a core team should be formed, including legal counsel, to consider an appropriate action plan.

 New Rule 14a-11(b)(10) requires a shareholder or shareholder group that wishes to include a nominee in a company’s proxy statement to file a Schedule 14N during a specified “window period.”  The window period is not more than 150 calendar days and not less than 120 calendar days before the anniversary of the date the company mailed its proxy statement for the prior year’s annual meeting.  At this point, the public company will engage in a complex dance with the nominating shareholder and the SEC to determine whether the nominee must be included or may be excluded from the company’s proxy statement.

 There are other disclosure and Form 8-K filing requirements that will become effective 60 days after publication in the Federal Register.  Under amended Rule 14a-5, every proxy statement filed after the new rules become effective will have to disclose the deadline for submitting nominees for inclusion in the company’s proxy materials for the next annual meeting of shareholders.

 A Form 8-K will be required if the company did not hold an annual meeting in the prior year, or if the date of the meeting has changed by more than 30 calendar days from the prior year.  The Form 8-K must advise shareholders of the date by when a Schedule 14N must be filed to be considered timely to include a nominee in the company’s proxy statement.

Check frequently for updates on the new proxy access rules.