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

Jill covered some of the basic points of the SEC’s prior proposal on proxy access here.  My recollection is  the proposal received a record number of comments from the public.  To some, the proposal was highly controversial, and to others the proposal just did not work well.  The only thing we can predict with accuracy is the final rules will contain some significant deviations from the proposal and not everyone who voiced an opinion is going to be happy with any final rule.

 My comment letter to the SEC is here.  Some of the points I raised in my comment letter were:

 The Rules Should be Revised to Specify What Steps a Registrant Can Take to Oppose a Shareholder Nominee

 The proposed amendment to Item 7 of Schedule 14A will require the registrant to include a 500 word statement of the nominating shareholder in support of the nominating shareholder pursuant to Rule 14a-18(l).  However, the Rules do not provide any clarity as to what the registrant may state in opposition to this statement, other than the registrant’s board recommendation included on a proxy card as set forth in Rule 14a-4.  While footnote 217 to the proposing release states the process will be similar to the practice under Rule 14a-8, the extent that the registrant may lawfully oppose the shareholder nominee is not clearly set forth in the rules.  In this regard I note that Rule 14a-8(m) specifically permits the registrant to oppose a shareholder proposal, and that guidance is missing from the proposed rules. The Commission should adopt proposed rules similar to Rule 14a-8(m).

 Likewise, the rules permit nominating shareholders wide latitude to make statements in support of its nominee outside of the proxy statement under Rule 14a-2(8).  The Commission should clarify the ability for the registrant to permissibly make solicitations in opposition to the shareholder nominee outside of the proxy statement.

The Rules Should be Revised so that They Will Not Deter Settlements with Activist Investors

 Rule 14a-18(d) as written will likely have the effect of deterring settlements between the registrant and activist investors.  Activist investors often negotiate with registrants for representation on the board of directors.  Ideally, one way for a registrant to satisfy an activist investor would be to agree not to oppose the eligibility of an activist’s nominee pursuant to the proposed rules and let the shareholders decide whether to elect the activist.  However, if the registrant were to agree to such an arrangement, an activist investor could not represent there is no agreement with the registrant regarding the nominee as required by Rule 14a-18(d).  In addition, a registrant may be reluctant to otherwise settle with an activist if another shareholder nominee can be included in the proxy statement by another shareholder.  As a result, Rule 14a-18(d) should be revised to (i) permit a registrant to agree not to contest the eligibility of a shareholder nominee and (ii) if the registrant has settled a threatened election contest by placing a shareholder’s designee on the board of directors, further shareholder nominees would not be permitted under the proposed rules for a specified period of time.

 The Rules Should be Revised to Specify the Appropriate Course of Action When Multiple Nominations Are Received on the Same Day

 It is possible that a registrant could receive multiple nominations from different shareholders or groups on the same day.  In such event, how does the registrant determine who is the “first nominating shareholder or shareholder group from which the registrant receives timely notice” under proposed Rule 14a-11(d)? Does the rule hinge on receipt of the notice “sent” to the registrant pursuant to the fist paragraph of Rule 14a-18, the “simultaneous” notice to the registrant referred to in Rule 14n-1, dissemination of the notice pursuant to Rule 14n-3, or constructive receipt by filing of the notice on the EDGAR system? If it is in the order in which the Schedule 14N is received on the EDGAR system that should be made clear.

 The Rules Should be Revised to Provide Guidance on a Registrant’s Course of Action When the Registrant Believes One Nomination is Not Eligible and Another Nomination is Received

 A registrant may receive a nomination which the registrant believes does not meet the criteria for inclusion under Rule 14a-11, and the registrant may then follow the procedures under Rule 14a-11(f).  A registrant may then receive a proposal from a second nominating shareholder that it believes is eligible for inclusion under Rule 14a-11.  However, at this point the registrant may not know whether the Commission will agree with its decision to exclude the first proposal, yet the registrant is required to advise the second nominating shareholder within 14 days of whether its proposal will be excluded as required by Rule 14a-11(f)(3).  The rules should provide for guidance in this area.  Is the registrant supposed to notify the second nominating shareholder that the nomination is not eligible pursuant to the procedures under Rule 14a-11(f) and wait until eligibility for the first nomination is finally determined?  Or the rules could be revised to allow the registrant to defer notifying the second nominating shareholder as to exclusion of its proposal until such time as the SEC has taken action on the first nomination.