On August 25, 2010, the Securities and Exchange Commission voted to adopt new rules that will require companies to include in their proxy materials nominations for election as directors submitted by eligible shareholders, subject to certain conditions. The proposal was adopted by a divided 3-2 vote at an SEC open meeting. Commissioners Casey and Paredes dissented, viewing the rules as intruding on substantive corporate affairs traditionally regulated by state law.
The new rules will apply to all companies subject to SEC proxy rules, including investment companies and controlled companies, except:
- Companies subject to such rules solely due to debt registered under Section 12 of the Securities Exchange Act of 1934; and
- Where state or foreign law or governing documents prohibit shareholders from nominating a candidate for director.
Foreign private issuers are not covered, as they are exempt from SEC proxy rules.
The new rules will be effective 60 days after publication in the Federal Register, with shareholder access permitted no earlier than 150 days and no later than 120 days prior to the anniversary date of the mailing of prior year’s proxy materials. The rules will be available if the window remains open after their effective date. Accordingly, if the new rules were to become effective on November 1, 2010, they would apply to companies that mailed their 2010 proxy statements after March 1.
Effectiveness of the new rules will be delayed for three years for smaller reporting companies, to allow the SEC time to monitor implementation and make adjustments, if desired.
The text of the new rules is available online as is a print-friendly version of this client alert.
Executive Summary
Eligible shareholders can require a company to include one or more nominees in the company’s proxy materials, unless applicable laws or governing documents prohibit nominations by shareholders. Companies will only be required to include up to the greater of (i) 25% of the company’s directors or (ii) one nominee. The rule sets priorities in case of multiple nominations.
To be eligible, the nominating shareholder or group must, among other requirements, (i) own at least 3% of the total voting power (which may be aggregated among shareholders), (ii) have held such securities for at least three years, and continue to hold them through the shareholder meeting, (iii) not have intent to change control of the company or to gain more board seats than permitted by the rule, and (iv) not have any agreement with the company regarding the nomination.
On July 1, 2009, the SEC proposed a rule to implement the “Say-on-Pay” provisions contained in the TARP executive compensation restrictions.
The proposal would add a new Exchange Act Rule 14a-20, which would require TARP recipient to provide a separate shareholder vote to approve the compensation of their executives, as disclosed under Item 402 of Regulation S-K, in their proxy solicitations for an annual meeting at which directors are to be elected. In addition, a TARP recipient would be required to explain the general effect of the vote, such as whether the vote is non-binding.
The SEC is not dictating the specific language, form of resolution, or proxy disclosure that a TARP recipient must use to provide shareholders with a “Say-on-Pay.” However, footnote 14 to the Proposing Release contains an important caveat:
“However, as stated in Section 111(e)(1) of the EESA, the vote must be to approve “the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Commission (which disclosure shall include the compensation discussion and analysis, the compensation tables, and any related material).” We believe that a vote to approve a proposal on a different subject matter, such as a vote to approve only compensation policies and procedures, would not satisfy the requirements of Section 111(e)(1) of the EESA or proposed Rule 14a-20.”
The proposed rule also (i) continues to require that TARP recipients submit a preliminary proxy statement for potential SEC review; and (ii) confirms that TARP recipients that qualify as smaller reporting companies under the SEC disclosure framework may rely on the smaller reporting company disclosure requirements, and are therefore not required to provide a Compensation Discussion & Analysis.
The Treasury’s fourth round of completed TARP Capital infusions added four more public companies that are traded on the Over-The-Counter Bulletin Board (OTCBB): Blue Valley Ban Corp., Coastal Banking Company, Inc., Manhattan Bancorp, and Oak Valley Bancorp. As a result, it seems clear that the Treasury is willing to allow public reporting companies that are traded over the OTCBB participate in the TARP Capital program under the public company terms.
As we’ve previously noted, the definition provided by the Treasury of a publicly traded company is “a company (1) whose securities are traded on a national securities exchange and (2) required to file, under the federal securities laws, periodic reports such as the annual (Form 10-K) and quarterly (Form 10-Q) reports with either the Securities and Exchange Commission or its primary federal bank regulator.” While the Treasury has not defined what constitutes a national securities exchange, the OTCBB is generally not considered a “national securities exchange.” The SEC does not consider the OTCBB to be a national securities exchange. Neither does the OTCBB itself, which states that it is “not an issuer listing service, market or exchange.”
On November 24, 2008, the SEC and RiskMetrics Group (previously ISS) each published new guidance for public companies seeking authorization of blank check preferred stock.
SEC Guidance
The SEC Guidance is based on the staff’s review of a number of preliminary proxy statements filed by institutions seeking to participate in the TARP Capital program. (We have provided a list of a number of such proxy statements.) The SEC guidance is designed to aid financial institutions in preparing proxy statements and provides actual comments the staff has issued in its filing reviews. For those that have not yet filed, a close review of these comments may reduce the risk of comments in the preliminary proxy process.
We have added two new pages to the site for banks looking to see how other bankers are handling certain TARP Capital issues. (We’ve always found bankers prefer to listen to other bankers rather than lawyers.)
For examples of press releases of banks that have decided to publicly announce that they will not be participating in the TARP Capital program, see our TARP Capital Decliners.
For examples of proxy statements where banks have decided to seek shareholder approval to put in blank check preferred stock, see our TARP Capital Proxies.