SEC Adopts Final Rules Expanding Access to Public Company Proxy Statements for Activist Hedge Funds and Other Major Shareholders

On August 25, 2010, the SEC adopted, by a 3-to-2 vote, final rules granting significant shareholders mandatory access to the proxy statements of public companies.  Under new Rule 14a-11, any shareholder or group of shareholders collectively holding an investment and voting interest of at least three percent of a public company’s total voting power continuously for at least three years may include nominees for director on the company’s ballot and describe the nominees (in up to 500 words per nominee) in the company’s proxy statement.  Rule 14a-11 will be effective 60 days from publication in the Federal Register, in time for the 2011 proxy season.  On the same day, the SEC adopted new Rule 14a-8(i)(8), which requires companies to include in their proxy materials shareholder proposals to broaden proxy access, for example, by lowering ownership thresholds, reducing holding periods or increasing the number of permitted nominees.  Although Rule 14a-11 limits the ability of major shareholders to use the proxy access regime to effect a change of control of the company, the new rules likely will make it easier, faster and cheaper for activist hedge funds to engage in proxy contests and to nominate at least some of a company’s directors.  This article details: the range of companies covered by Rule 14a-11; the three percent ownership and holding period requirements; the intent of the use of a “voting power” concept in the rule; the rule’s definition of “ownership” (including discussions of the exclusion of private share classes, the definitions of “investment power” and “voting power,” and treatment under the rule of borrowed securities and securities sold short); required disclosures; the purpose and limits of the required “no change in control intent” certification; timing of required disclosures and the interaction of stated periods with advance notice bylaws; number of permitted nominees; the rule’s limited independence requirements; the process for companies wishing to exclude shareholder nominees; the narrowed “election exclusion” and what it may portend for alliances between large and small shareholders in contests for “influence”; and analogous Delaware law – and why, in the SEC’s view, such state law is insufficient to effectuate the policy goals of Rule 14a-11.

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