The SEC's Access Proposal: Some Observations

We are overdue in commenting on the SEC's access proposal.  We will provide some thoughts over the next few days.

The SEC has put out a lengthy release (250 pages) that addresses access.  The release involves a new rule, 14a-11, that would allow large shareholders to include nominations in the company's proxy statement.  In addition, however, the release proposes to amend Rule 14a-8(i)(8), the election exclusion, to permit some proposals that deal with elections.  Much of the release involves other amendments that would allow shareholders to organize and put together groups that meet the threshold for submitting a nomination (1% for companies above $750 million; 3% for companies above $75 million; 5% for companies below $75 million) without triggering most of the requirements of the proxy rules.

The proposal is a good one.  There will be some debate.  The thresholds for share ownership may need to be lower.  While the release notes that many companies below $75 million have 5% shareholders, it is also likely the case that these companies more often have controlling shareholders.  Thus, the 5% shareholders may already have control of the board.  In those circumstances, there may be even greater need to enable minority shareholders to elect their own nominees.  This may require a lowering of the percentage.

In addition, the release allows companies to include the greater of one nominee or 25% of the board.  If more than one shareholder submits nominees, the company must include those received first in time.  This creates a kind of rush to the courthouse approach (perhaps causing nominees to be submitted long before the shareholder meeting).  The release notes that the 2003 proposal used a different approach, giving priority to nominees from the largest shareholders.  While more complicated and, perhaps, more uncertain, this would seem a more appropriate approach.

There are a few items, however, that warrant more extended discussion, particularly the proposal's connection to state law.  We will look at them in the next few posts.  In the meantime, the release is here.  Consider writing a comment letter supporting the proposal.