M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, May 21, 2009

SEC Shareholder Access Proposal

The SEC has announced proposed rules to amend Exchange Act Rule 14a-8(i)(8).  Video of Chaiman Schapiro 's opening statement is here.  This amendment will allow certain shareholders to use the corporate proxy machinery to nominate directors.  Shareholders who hold their shares for more than 1 year and hold more than 1% of a reporting company's outstanding shares may nominate one director (or no more than 25% of the board) provided such a nomination does not violate state law.  Nominations pursuant to this proposed rule will come on a new Schedule 14N.   Shareholders submitting nominations via the Sched 14N will have to certiify that they are not seeking a change in control of the corporation.  

This comes on the heals of Delaware's recent amendment of the DGCL to permit shareholder nominations (new section 112).  The amendment specifically permits a corporation's bylaws to include a process by which a shareholder can get access to the corporate proxy machinery for the purpose of nominating corporate directors.  While the proposed SEC rules limit the number of directors that a qualified director may nominate, there is no such limitation written into the Delaware code.  

This may set up an eventual conflict between corporate bylaws, which may permit a shareholder to nominate large number of directors and engage in a change in control through the corproate proxy and the SEC rules that limit the number of allowable nominations.  The SEC rules appear to have the limited goal of improving communications with shareholders rather than facilitate proxy contests.  Delaware's bylaw provision is more relaxed and leaves open the door to more aggressive use of the corporate machinery by shareholders seeking to engage in proxy contests.  Of course, it's entirely possible that without pressure by shareholders boards will adopt bylaws with Sec 112 procedures that simply mimic the SEC process. 

- bjmq


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