SEC Adopts Controversial New Proxy Access Rules

On Wednesday, August 25, 2010, the SEC finally adopted new proxy access rules that have sparked intense commentary in the last few years. The recently enacted Dodd-Frank Wall Street Reform Bill provides express authority for the SEC to adopt proxy access rules (therefore removing questions about the SEC’s ability to do so), and the Commission acted quickly. The final 3-2 vote, with the two Republican members of the Commission opposing the new rules, illustrates the controversial nature of the action. The rules were the latest iteration of draft rules most recently proposed in May 2009. Approximately 600 comment letters were received during the comment period. As more fully discussed below, the new rules guarantee that long-term holders of more than 3% of a public company’s stock will have the right to nominate their own board members and have those nominees included in the proxy materials that are circulated by the company.

Current Practice.

Currently, the existing board, or a nominating committee of the board, typically selects a slate of nominees (often the current board members themselves) to be presented to the shareholders for approval at a shareholders meeting. The company prepares and circulates, at company expense, proxy materials relating to that slate of nominees. While most companies state that their boards or nominating committees will consider potential nominees
proposed by shareholders, many companies have adopted bylaw provisions making it very difficult for shareholders to guarantee that their nominees are submitted to a vote of the shareholders. In recent years, activist shareholder groups have advocated that guaranteed access to the company’s proxy process to submit shareholder-proposed nominees would make boards of directors more accountable to the shareholders.

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