SEC Adopts New Rules to Facilitate Director Nominations by Shareholders

By Final Rule adopted August 25 and to be effective 60 days after publication in the Federal Register, companies will be required to include a shareholder nominee for director in company proxy materials if the nominating shareholder or shareholders acting together own at least 3% of the voting power of securities that are entitled to vote and the shares have been continuously held for at least three years.  Shareholders may not use the rule for the purpose of changing control of the company or in an attempt to obtain a number of seats on the board that exceeds that number allowable under new Exchange Act Rule 14a-11.

The rule applies to all Exchange Act reporting companies, including investment companies, other than companies whose only public securities are debt securities.  "Smaller reporting companies" are subject to the rule, but it does not apply to them until after a three-year phase-in period.  Foreign companies that come within the definition of "foreign private issuer" are not currently subject to the SEC's proxy rules and would not be subject to these new rules. Foreign companies that do not qualify as foreign private issuers would be subject to the rules.


The nominating shareholder or group will be required to file with the Commission and submit to the company a new Schedule 14N, which would be publicly available on EDGAR, the SEC's electronic filing system. The Schedule 14N will require, among other things, disclosure of the amount and percentage of the voting power of the securities owned by the nominating shareholder, the length of ownership, and a statement that the nominating shareholder intends to continue to hold the securities through the date of the meeting.

The nominating shareholder must file and transmit the notice on Schedule 14N no earlier than 150, and no later than 120, calendar days before the anniversary of the date that the company mailed its proxy materials for the prior year’s annual meeting.  If the company did not hold an annual meeting during the prior year, or if the date of the meeting has changed more than 30 days from the prior year, then the nominating shareholder will be required to provide notice a reasonable time before the company mails its proxy materials, as specified by the company in a Form 8-K filed pursuant to new Item 5.08 of Form 8-K.