Website: Wilson Sonsini Goodrich & Rosati - U.S. Senator Schumer Introduces Shareholder Bill of Rights Act of 2009; SEC Votes to Re-Propose Proxy Access Rules

On May 19, 2009, U.S. Senator Charles Schumer (D-NY) introduced the Shareholder Bill of Rights Act of 2009 (the bill). The full text of the bill can be found here. The bill is the most ambitious legislation affecting corporate governance since the Sarbanes-Oxley Act of 2002, and if adopted, would have a widespread effect on all public companies in the United States. A summary of the bill follows.

The bill would require the Securities and Exchange Commission (SEC) to adopt rules mandating that all public companies provide their shareholders with:

Presently, over 400 U.S. public companies are subject to say-on-pay requirements as a result of receiving federal bailout funds. So far this year, proposals granting annual advisory votes to shareholders have been adopted by 11 U.S. public companies, matching the number of such proposals adopted by shareholders in all of 2008, and another 70 proposals are expected to be voted upon.¹ Thus far, however, shareholders have supported management in actual say-on-pay votes; according to a recent Wall Street Journal article, no company has lost such a vote to date.

The bill is not the only say-on-pay legislation expected this Congress. U.S. Senator Richard Durbin (D-IL) has already introduced the Excessive Pay Shareholder Approval Act, which would require a supermajority shareholder vote to approve excessive compensation of any employee of a publicly traded company. It has also been reported that U.S. Representative Barney Frank (D-MA), chair of the House Financial Services Committee, plans to introduce say-on-pay legislation. Representative Frank's previous say-on-pay bill passed the House several years ago, only to stall in the Senate in advance of the 2008 presidential elections.

The bill would also clarify that the SEC has "full authority to determine the use of the issuer proxy with regards to the nomination and election of directors by shareholders," and would direct the SEC to establish rules requiring public companies to grant proxy access for director elections to a shareholder, or a group of shareholders acting by agreement, who have beneficially owned, directly or indirectly, at least 1 percent of the voting securities of a company for at least two years preceding an annual meeting. This would permit shareholders to launch a "short slate" director election contest on the corporation's own proxy, where shareholders' director nominees are considered for election without the shareholders having to go through the cost and expense of issuing their own proxy statement and solicitation.

Separately, on May 20, 2009, the SEC voted to propose proxy access rules, as discussed in detail below.

The bill and the SEC's proposed rules follow a recent amendment to the Delaware General Corporation Law permitting proxy access bylaws, described in this WSGR Alert. Some have speculated that the Delaware amendment was an attempt to preempt federal regulation of proxy access. It remains to be seen whether the bill or SEC action will be affected by the fact that shareholders of corporations incorporated in Delaware now have the ability to obtain proxy access.

The bill would require the SEC to direct the national securities exchanges and national securities associations to establish rules within one year requiring public companies to take a number of corporate-governance-related actions that have traditionally been solely the subject of state corporate law. The bill would also authorize the SEC to exempt certain companies from such requirements, based on market capitalization, public float, or other criteria as determined by the SEC.

The bill would require that the chairman of the board of directors be independent, as determined in accordance with the rules of the exchange on which the securities of such company are listed, and not have previously served as an executive officer of the company.

The bill would prohibit classified boards, in which boards of directors are subject to election once every three years, and require that each director stand for election annually.

The bill would require majority voting in uncontested elections but would permit plurality voting in contested elections.

Should a member of the board of directors not receive the necessary number of votes to be elected, such director would be required to tender his or her resignation and the board of directors would be required to accept such resignation and determine when it shall be effective, avoiding a "holdover" situation under state law.

The bill also would require boards of directors of companies to establish a special committee to oversee risk management within the company, to be comprised entirely of independent directors.

Separately from Senator Schumer's introduction of the bill, on May 20, 2009, the SEC, in a split 3-2 decision, voted to propose new Rule 14a-11 under the Securities Exchange Act of 1934, as amended (the Exchange Act) and an amendment to Exchange Act Rule 14a-8. These Exchange Act rules govern shareholder access to the proxy materials of public companies. The proposed rules are not yet publicly available, but a press release from the SEC describing the proposed rules is available here. A discussion of the SEC proposals follows.

Proposed Exchange Act Rule 14a-11 would, where not prohibited by applicable state law or a company's certificate of incorporation or bylaws, grant proxy access for director elections to a shareholder, or a group of shareholders, who have owned for at least one year shares representing:

Each eligible shareholder, or eligible group of shareholders, would be permitted to include in a company's proxy materials the greater of one nominee or nominees representing up to 25 percent of a company's board of directors. For example, an eligible shareholder, or eligible group of shareholders, would be permitted to include in a company's proxy materials one nominee where a company's board of directors consists of three members, and up to two nominees where a company's board of directors consists of eight members.

Proposed Exchange Act Rule 14a-11 would introduce Schedule 14N, to be filed with the SEC by nominating shareholders. Schedule 14N would require that nominating shareholders (i) disclose the number, percentage, and length of ownership of all company securities owned; (ii) sign a statement declaring their intent to continue to own such shares at least until the date of the annual meeting at which their nominee(s) would stand for election; and (iii) certify that they are not holding their shares for the purposes of changing control of the company or to gain more than minority representation on such company's board of directors.

Additionally, proposed Exchange Act Rule 14a-11 would prohibit a nominating shareholder from having any direct or indirect agreement with the company regarding the nomination of the nominee.

Nominees included by shareholders in a company's proxy materials under proposed Exchange Act Rule 14a-11 would be required to satisfy the independence standards of the national securities exchanges or national securities associations applicable to the company. Further, the candidacy and/or board membership of a shareholder nominee must not violate applicable laws and regulations.

The liability scheme under proposed Exchange Act Rule 14a-11 would remain similar to those rules currently in place. A company would be required to include disclosure in its proxy materials concerning both a nominating shareholder and any shareholder nominee similar to that currently required in a contested director election. Nominating shareholders would be liable for any false or misleading statements contained in Schedule 14N that are subsequently included in a company's proxy materials. A company would not be liable for false or misleading information provided by a nominating shareholder unless the company knows or has reason to know that the information is false or misleading.

The SEC also voted to propose an amendment to Exchange Act Rule 14a-8(i)(8) that would expand the right of shareholders, where not in conflict with state law, to include proposals in a company's proxy materials.² Exchange Act Rule 14a-8(i)(8) presently permits exclusion of a shareholder proposal if the proposal "relates to an election." The proposed amendment to Exchange Act Rule 14a-8(i)(8) would remove the ability of a company to exclude shareholder proposals by eligible shareholders that seek to amend, or request an amendment to, provisions of a company's certificate of incorporation or bylaws regarding a company's director-nomination procedures and disclosure provisions (so long as such shareholder proposals would not conflict with proposed Exchange Act Rule 14a-11, above).

The eligibility provisions of Exchange Act Rule 14a-8 would apply to shareholders seeking to include such proposals in a company's proxy materials. Exchange Act Rule 14a-8 requires that a shareholder seeking to include a proposal have continuously held the lesser of at least $2,000 in market value or 1 percent of the company's securities entitled to be voted on the proposal at the meeting for at least one year prior to submission of the proposal and must continue to hold such securities through the date of the meeting at which the proposal would be voted upon.

The bill is expected to be sharply debated. Even before the bill was formally introduced, opponents lined up, including The Business Roundtable, an industry group representing public company CEOs. Opponents highlight that the bill federalizes areas that for hundreds of years have been the province of state corporate law, that companies and state legislatures (including Delaware) are already taking action in these matters,³ and that the bill takes an overly simplistic "one-size-fits-all" approach to corporate governance.

The proposed SEC rules are also expected to be sharply debated. The May 20, 2009, SEC vote marks the third time in less than six years that the SEC has proposed proxy access rules. The SEC has, however, considered proxy access rules a number of times since 1942, but has rejected the concept each previous time.⁴

Given the intense lobbying expected against the bill, the SEC proposals, and other announced SEC initiatives, it is unclear what form any legislation and rules, if either is adopted, would take. Wilson Sonsini Goodrich & Rosati will provide more information regarding these matters as legislation and rule proposals are made public and considered.

Please contact Richard Cameron Blake, Steven E. Bochner, Katharine A. Martin, Matthew M. Tolland, your regular Wilson Sonsini Goodrich & Rosati contact, or any member of the firm's corporate and securities practice or securities litigation department with any questions you may have about these matters and the potential implications they could have for your company.

¹ See RiskMetrics Group article published March 9, 2009, "Momentum Continues for 'Say on Pay,'" available here.

² Pursuant to SEC Rule 14a-8, public companies must include a shareholder's proposal in their annual meeting proxy statement if the shareholder complies with certain requirements. The company may, however, exclude the shareholder's proposal if the company submits a no-action letter to the SEC indicating that the shareholder's proposal falls within a prohibited category (e.g., the proposal relates to an election), and the SEC grants the no-action request.

³ See the WSGR Alert here.

⁴ See SEC Staff Report: Review of the Proxy Process Regarding the Nomination and Election of Directors.

U.S. Senator Schumer Introduces Shareholder Bill of Rights Act of 2009; SEC Votes to Re-propose Proxy Access Rules