On October 8, 2003, the SEC announced rule proposals that would require companies to include in their proxy materials the names of shareholder nominees to the board of directors, as well as disclosures concerning those nominees including biographical information.
Currently, shareholders who wish to nominate a director must (1) incur the expense of preparing and disseminating their own proxy materials to conduct an election contest, (2) offer such nominations at the company's annual meeting after most shareholders have already voted by proxy prior to the meeting, or (3) recommend candidates to the company's nominating committee, which is usually ineffective. By requiring companies to include shareholder nominees in their proxy materials, the proposed rules are designed to facilitate shareholder nominations, make corporate boards more responsive and accountable to shareholders, and make for more diverse board composition.
Under the proposed rules, companies that are subject to the SEC's proxy rules would be required to include information about shareholder nominees if:
- State law establishes the right of a shareholder to nominate director candidates, and
- One or more triggering events has occurred which demonstrate shareholder dissatisfaction with the effectiveness of the company's proxy process.
The July 15, 2003 Staff Report of the Division of Corporate Finance (See http://www.sec.gov/news/studies/proxyreport.pdf) identified possible triggering events such as (i) a company's failure to act on shareholder proposals that receive majority shareholder votes, (ii) the receipt of significant percentages of shareholder "withhold" votes in director elections, and (iii) the approval of a shareholder proposal to activate the shareholder access rule.
The number of shareholder nominees that a company would be required to include in its proxy would vary based on the company's board size as follows:
| No. of Board Members | No. of Shareholder Nominees |
| 8 or less | 1 |
| 9-19 | 2 |
| 20 or more | 3 |
The proposed rules will also outline eligibility requirements for shareholders and their nominees. The July 15 staff report identified share ownership and length of investment as possible requirements for nominating shareholders. The report also indicated that shareholder nominees should satisfy appropriate independence requirements.
There is a 60-day comment period on the proposed rules. The text of the SEC announcement is available on the SEC's website at http://www.sec.gov/news/press/2003-133.htm. The SEC will post the full text of the proposed rules described in the announcement on its website (http://www.sec.gov/rules/proposed.shtml) within the next few days.
If you have questions regarding these rules or their implications for your company, please contact your Davis Wright Tremaine corporate finance attorney or email us at corporatefinanceadvisory@dwt.com.
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