56668 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

1 17 CFR 200.82a. 

2 17 CFR 240.14a–11. 

3 17 CFR 240.14a–18. 

4 17 CFR 240.14n et seq. 5 17 CFR 240.14n–101. 

6 17 CFR 232.13. 

7 17 CFR 232.10 et seq. 

8 17 CFR 240.13a–11. 

9 17 CFR 240.13d–1. 

10 17 CFR 240.14a–2. 

11 17 CFR 240.14a–4. 

12 17 CFR 240.14a–5. 

13 17 CFR 240.14a–6. 

14 17 CFR 240.14a–8. 

15 17 CFR 240.14a–9. 

16 17 CFR 240.14a–12. 

17 17 CFR 240.15d–11. 

18 17 CFR 240.13d–102. 

19 17 CFR 240.14a–101. 

20 17 CFR 249.308. 

21 15 U.S.C. 78a et seq. (the ‘‘Exchange Act’’). Part 

200 Subpart D—Information and Requests and 

Regulation S–T are also promulgated under the 

Securities Act of 1933 [15 U.S.C. 77a et seq.] (the 

‘‘Securities Act’’). 

22 17 CFR 240.14c–101. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR PARTS 200, 232, 240 and 249 

[Release Nos. 33–9136; 34–62764; IC– 

29384; File No. S7–10–09] 

RIN 3235–AK27 

Facilitating Shareholder Director 

Nominations 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Final rule. 

SUMMARY: We are adopting changes to 

the Federal proxy rules to facilitate the 

effective exercise of shareholders’ 

traditional State law rights to nominate 

and elect directors to company boards of 

directors. The new rules will require, 

under certain circumstances, a 

company’s proxy materials to provide 

shareholders with information about, 

and the ability to vote for, a 

shareholder’s, or group of shareholders’, 

nominees for director. We believe that 

these rules will benefit shareholders by 

improving corporate suffrage, the 

disclosure provided in connection with 

corporate proxy solicitations, and 

communication between shareholders 

in the proxy process. The new rules 

apply only where, among other things, 

relevant state or foreign law does not 

prohibit shareholders from nominating 

directors. The new rules will require 

that specified disclosures be made 

concerning nominating shareholders or 

groups and their nominees. In addition, 

the new rules provide that companies 

must include in their proxy materials, 

under certain circumstances, 

shareholder proposals that seek to 

establish a procedure in the company’s 

governing documents for the inclusion 

of one or more shareholder director 

nominees in the company’s proxy 

materials. We also are adopting related 

changes to certain of our other rules and 

regulations, including the existing 

solicitation exemptions from our proxy 

rules and the beneficial ownership 

reporting requirements. 

DATES: Effective Date: November 15, 

2010. 

Compliance Dates: November 15, 

2010, except that companies that qualify 

as ‘‘smaller reporting companies’’ (as 

defined in 17 CFR 240.12b–2) as of the 

effective date of the rule amendments 

will not be subject to Rule 14a–11 until 

three years after the effective date. 

FOR FURTHER INFORMATION CONTACT: 

Lillian Brown, Tamara Brightwell, or 

Ted Yu, Division of Corporation 

Finance, at (202) 551–3200, or, with 

regard to investment companies, Kieran 

G. Brown, Division of Investment 

Management, at (202) 551–6784, U.S. 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549. 

SUPPLEMENTARY INFORMATION: We are 

adding new Rule 82a of Part 200 

Subpart D—Information and Requests,1

and new Rules 14a–11,2 and 14a–18,3

and new Regulation 14N 4 and Schedule 

14N,5 and amending Rule 13 6 of 

Regulation S–T,7 Rules 13a–11,8 13d–1,9

14a–2,10 14a–4,11 14a–5,12 14a–6,13

14a–8,14 14a–9,15 14a–12,16 and 15d– 

11,17 Schedule 13G,18 Schedule 14A,19

and Form 8–K,20 under the Securities 

Exchange Act of 1934.21 Although we 

are not amending Schedule 14C22 under 

the Exchange Act, the amendments will 

affect the disclosure provided in 

Schedule 14C, as Schedule 14C requires 

disclosure of some items contained in 

Schedule 14A. 

Table of Contents 

I. Background and Overview of Amendments 

A. Background 

B. Our Role in the Proxy Process 

C. Summary of the Final Rules 

II. Changes to the Proxy Rules 

A. Introduction 

B. Exchange Act Rule 14a–11 

1. Overview 

2. When Rule 14a–11 Will Apply 

a. Interaction With State or Foreign Law 

b. Opt-In Not Required 

c. No Opt-Out 

d. No Triggering Events 

e. Concurrent Proxy Contests 

3. Which Companies Are Subject to Rule 

14a–11 

a. General 

b. Investment Companies 

c. Controlled Companies 

d. ‘‘Debt Only’’ Companies 

e. Application of Exchange Act Rule 14a– 

11 to Companies That Voluntarily 

Register a Class of Securities Under 

Exchange Act Section 12(g) 

f. Smaller Reporting Companies 

4. Who Can Use Exchange Act Rule 14a– 

11 

a. General 

b. Ownership Threshold 

i. Percentage of Securities 

ii. Voting Power 

iii. Ownership Position 

iv. Demonstrating Ownership 

c. Holding Period 

d. No Change in Control Intent 

e. Agreements With the Company 

f. No Requirement To Attend the Annual 

or Special Meeting 

g. No Limit on Resubmission 

5. Nominee Eligibility Under Exchange Act 

Rule 14a–11 

a. Consistent With Applicable Law and 

Regulation 

b. Independence Requirements and Other 

Director Qualifications 

c. Agreements With the Company 

d. Relationship Between the Nominating 

Shareholder or Group and the Nominee 

e. No Limit on Resubmission of 

Shareholder Director Nominees 

6. Maximum Number of Shareholder 

Nominees To Be Included in Company 

Proxy Materials 

a. General 

b. Different Voting Rights With Regard to 

Election of Directors 

c. Inclusion of Shareholder Nominees in 

Company Proxy Materials as Company 

Nominees 

7. Priority of Nominations Received by a 

Company 

a. Priority When Multiple Shareholders 

Submit Nominees 

b. Priority When a Nominating Shareholder 

or Group or a Nominee Withdraws or Is 

Disqualified 

8. Notice on Schedule 14N 

a. Proposed Notice Requirements 

b. Comments on the Proposed Notice 

Requirements 

c. Adopted Notice Requirements 

i. Disclosure 

ii. Schedule 14N Filing Requirements 

9. Requirements for a Company That 

Receives a Notice From a Nominating 

Shareholder or Group 

a. Procedure If Company Plans To Include 

Rule 14a–11 Nominee 

b. Procedure If Company Plans To Exclude 

Rule 14a–11 Nominee 

c. Timing of Process 

d. Information Required in Company Proxy 

Materials 

i. Proxy Statement 

ii. Form of Proxy 

e. No Preliminary Proxy Statement 

10. Application of the Other Proxy Rules 

to Solicitations by the Nominating 

Shareholder or Group 

a. Rule 14a–2(b)(7) 

b. Rule 14a–2(b)(8) 

11. 2011 Proxy Season Transition Issues 

C. Exchange Act Rule 14a–8(i)(8) 

1. Background 

2. Proposed Amendment 

3. Comments on the Proposal 

4. Final Rule Amendment 

5. Disclosure Requirements 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56669 

23See Facilitating Shareholder Director 

Nominations, Release No. 33–9046, 34–60089 (June 

10, 2009) [74 FR 29024] (‘‘Proposal’’ or ‘‘Proposing 

Release’’). The Proposing Release was published for 

comment in the Federal Register on June 18, 2009, 

and the initial comment period closed on August 

17, 2009. The Commission re-opened the comment 

period as of December 18, 2009 for thirty days to 

provide interested persons the opportunity to 

comment on additional data and related analyses 

that were included in the public comment file at or 

following the close of the original comment period. 

In total, the Commission received approximately 

600 comment letters on the proposal. The public 

comments we received are available on our Web 

site at http://www.;sec.gov/comments/s7-10-09/

s71009.shtml. Comments also are available for Web 

site viewing and copying in the Commission’s 

Public Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official business days 

between the hours of 10 a.m. and 3 p.m. 

24See, e.g., Securit[ies] and Exchange 

Commission Proxy Rules: Hearings on H.R. 1493, 

H.R. 1821, and H.R. 2019 Before the House Comm. 

on Interstate and Foreign Commerce, 78th Cong., 

1st Sess., at 17–19 (1943) (Statement of the 

Honorable Ganson Purcell, Chairman, Securities 

and Exchange Commission) (explaining the initial 

Commission rules requiring the inclusion of 

shareholder proposals in company proxy materials: 

‘‘We give [a stockholder] the right in the rules to put 

his proposal before all of his fellow stockholders 

along with all other proposals * * * so that they 

can see then what they are and vote accordingly. 

* * * The rights that we are endeavoring to assure 

to the stockholders are those rights that he has 

traditionally had under State law, to appear at the 

meeting; to make a proposal; to speak on that 

proposal at appropriate length; and to have his 

proposal voted on. But those rights have been 

rendered largely meaningless through the process of 

dispersion of security ownership through[out] the 

country. * * * [T]he assurance of these 

fundamental rights under State laws which have 

been, as I say, completely ineffective * * * because 

of the very dispersion of the stockholders’ interests 

throughout the country[;] whereas formerly * * * 

a stockholder might appear at the meeting and 

address his fellow stockholders[, t]oday he can only 

address the assembled proxies which are lying at 

the head of the table. The only opportunity that the 

stockholder has today of expressing his judgment 

comes at the time he considers the execution of his 

proxy form, and we believe * * * that this is the 

time when he should have the full information 

before him and ability to take action as he sees fit.’’); 

see also S. Rep. 792, 73d Cong., 2d Sess., 12 (1934) 

(‘‘[I]t is essential that [the stockholder] be 

enlightened not only as to the financial condition 

of the corporation, but also as to the major 

questions of policy, which are decided at 

stockholders’ meetings.’’). 

25 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Public Law 111–203, § 971, 124 Stat. 

1376 (2010) (‘‘Dodd-Frank Act’’). 

D. Other Rule Changes 

1. Disclosure of Dates and Voting 

Information 

2. Beneficial Ownership Reporting 

Requirements 

3. Exchange Act Section 16 

4. Nominating Shareholder or Group Status 

as Affiliates of the Company 

E. Application of the Liability Provisions 

in the Federal Securities Laws to 

Statements Made by a Nominating 

Shareholder or Nominating Shareholder 

Group 

III. Paperwork Reduction Act 

A. Background 

B. Summary of the Final Rules and 

Amendments 

C. Summary of Comment Letters and 

Revisions to Proposal 

D. Revisions to PRA Reporting and Cost 

Burden Estimates 

1. Rule 14a–11 

2. Amendment to Rule 14a–8(i)(8) 

3. Schedule 14N and Exchange Act Rule 

14a–18 

4. Amendments to Exchange Act Form 8– 

K 

5. Schedule 13G Filings 

6. Form ID Filings 

E. Revisions to PRA Reporting and Cost 

Burden Estimates 

IV. Cost-Benefit Analysis 

A. Background 

B. Summary of Rules 

C. Factors Affecting Scope of the New 

Rules 

D. Benefits 

1. Facilitating Shareholders’ Ability To 

Exercise Their State Law Rights To 

Nominate and Elect Directors 

2. Minimum Uniform Procedure for 

Inclusion of Shareholder Director 

Nominations and Enhanced Ability for 

Shareholders To Adopt Director 

Nomination Procedures 

3. Potential Improved Board Performance 

and Company Performance 

4. More Informed Voting Decisions in 

Director Elections Due to Improved 

Disclosure of Shareholder Director 

Nominations and Enhanced Shareholder 

Communications 

E. Costs 

1. Costs Related to Potential Adverse 

Effects on Company and Board 

Performance 

2. Costs Related to Additional Complexity 

of Proxy Process 

3. Costs Related to Preparing Disclosure, 

Printing and Mailing and Costs of 

Additional Solicitations and Shareholder 

Proposals 

V. Consideration of Burden on Competition 

and Promotion of Efficiency, 

Competition and Capital Formation 

VI. Final Regulatory Flexibility Analysis 

A. Need for the Amendments 

B. Significant Issues Raised by Public 

Comments 

C. Small Entities Subject to the Rules 

D. Reporting, Recordkeeping and Other 

Compliance Requirements 

E. Agency Action To Minimize Effect on 

Small Entities 

VII. Statutory Authority and Text of the 

Amendments 

I. Background and Overview of 

Amendments 

A. Background 

On June 10, 2009, we proposed a 

number of changes to the Federal proxy 

rules designed to facilitate shareholders’ 

traditional State law rights to nominate 

and elect directors. Our proposals 

sought to accomplish this goal in two 

ways: (1) By facilitating the ability of 

shareholders with a significant, longterm stake in a company to exercise 

their rights to nominate and elect 

directors by establishing a minimum 

standard for including disclosure 

concerning, and enabling shareholders 

to vote for, shareholder director 

nominees in company proxy materials; 

and (2) by narrowing the scope of the 

Commission rule that permitted 

companies to exclude shareholder 

proposals that sought to establish a 

procedure for the inclusion of 

shareholder nominees in company 

proxy materials.23 We recognized at that 

time that the financial crisis that the 

nation and markets had experienced 

heightened the serious concerns of 

many shareholders about the 

accountability and responsiveness of 

some companies and boards of directors 

to shareholder interests, and that these 

concerns had resulted in a loss of 

investor confidence. These concerns 

also led to questions about whether 

boards were exercising appropriate 

oversight of management, whether 

boards were appropriately focused on 

shareholder interests, and whether 

boards need to be more accountable for 

their decisions regarding issues such as 

compensation structures and risk 

management. 

A principal way that shareholders can 

hold boards accountable and influence 

matters of corporate policy is through 

the nomination and election of 

directors. The ability of shareholders to 

effectively use their power to nominate 

and elect directors is significantly 

affected by our proxy regulations 

because, as has long been recognized, a 

federally-regulated corporate proxy 

solicitation is the primary way for 

public company shareholders to learn 

about the matters to be decided by the 

shareholders and to make their views 

known to company management.24 As 

discussed in detail below, in light of 

these concerns, we reviewed our proxy 

regulations to determine whether they 

should be revised to facilitate 

shareholders’ ability to nominate and 

elect directors. We have taken into 

consideration the comments received on 

the proposed amendments as well as 

subsequent congressional action 25 and 

are adopting final rules that will, for the 

first time, require company proxy 

materials, under certain circumstances, 

to provide shareholders with 

information about, and the ability to 

vote for a shareholder’s, or group of 

shareholders’, nominees for director. We 

also are amending our proxy rules to 

provide shareholders the ability to 

include in company proxy materials, 

under certain circumstances, 

shareholder proposals that seek to 

establish a procedure in the company’s 

governing documents for the inclusion 

of one or more shareholder director 


emcdonald on DSK2BSOYB1PROD with RULES2
56670 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

26For example, the Commission has considered 

changes to the proxy rules related to the election 

of directors in recent years. See Security Holder 

Director Nominations, Release No. 34–48626 

(October 14, 2003) [68 FR 60784] (‘‘2003 Proposal’’); 

Shareholder Proposals, Release No. 34–56160 (July 

27, 2007) [72 FR 43466] (‘‘Shareholder Proposals 

Proposing Release’’); Shareholder Proposals 

Relating to the Election of Directors, Release No. 

34–56161 (July 27, 2007) [72 FR 43488] (‘‘Election 

of Directors Proposing Release’’); and Shareholder 

Proposals Relating to the Election of Directors, 

Release No. 34–56914 (December 6, 2007) [72 FR 

70450] (‘‘Election of Directors Adopting Release’’). 

When we refer to the ‘‘2007 Proposals’’ and the 

comments received in 2007, we are referring to the 

Shareholder Proposals Proposing Release and the 

Election of Directors Proposing Release and the 

comments received on those proposals, unless 

otherwise specified. 

27Professor Karmel has described the 

Commission’s proxy rules as having the purpose ‘‘to 

make the proxy device the closest practicable 

substitute for attendance at the [shareholder] 

meeting.’’ Roberta S. Karmel, The New Shareholder 

and Corporate Governance: Voting Power Without 

Responsibility or Risk: How Should Proxy Reform 

Address the De-Coupling of Economic and Voting 

Rights?, 55 Vill. L. Rev. 93, 104 (2010). 

28Historically, a shareholder’s voting rights 

generally were exercised at a shareholder meeting. 

As discussed in the Proposing Release, in passing 

the Exchange Act, Congress understood that the 

securities of many companies were held through 

dispersed ownership, at least in part facilitated by 

stock exchange listing of shares. Although voting 

rights in public companies technically continued to 

be exercised at a meeting, the votes cast at the 

meeting were by proxy and the voting decision was 

made during the proxy solicitation process. This 

structure continues to this day. 

29See letters from American Federation of Labor 

and Congress of Industrial Organizations (‘‘AFL– 

CIO’’); California Public Employees’ Retirement 

System (‘‘CalPERS’’); Council of Institutional 

Investors (‘‘CII’’); Lynne L. Dallas (‘‘L. Dallas’’); Los 

Angeles County Employees Retirement Association 

(‘‘LACERA’’); Laborers’ International Union of North 

America (‘‘LIUNA’’); The Nathan Cummings 

Foundation (‘‘Nathan Cummings Foundation’’); Pax 

World Management Corp. (‘‘Pax World’’); Pershing 

Square Capital Management, L.P. (‘‘Pershing 

Square’’); Relational Investors, LLC (‘‘Relational’’); 

RiskMetrics Group, Inc. (‘‘RiskMetrics’’); 

Shareowner Education Network and 

Shareowners.org (‘‘Shareowners.org’’); Social 

Investment Forum (‘‘Social Investment Forum’’); 

State of Wisconsin Investment Board (‘‘SWIB’’); 

International Brotherhood of Teamsters 

(‘‘Teamsters’’); Trillium Asset Management 

Corporation (‘‘Trillium’’); Universities 

Superannuation Scheme—UK (‘‘Universities 

Superannuation’’); Washington State Investment 

Board (‘‘WSIB’’). 

30For a discussion of the Commission’s previous 

actions in this area, see the Proposing Release and 

the 2003 Proposal. 

31See letters from CII; Colorado Public 

Employees’ Retirement Association (‘‘COPERA’’); 

CtW Investment Group (‘‘CtW Investment Group’’); 

L. Dallas; Thomas P. DiNapoli (‘‘T. DiNapoli’’); 

Florida State Board of Administration (‘‘Florida 

State Board of Administration’’); International 

Corporate Governance Network (‘‘ICGN’’); Denise L. 

Nappier (‘‘D. Nappier’’); Ohio Public Employees 

Retirement System (‘‘OPERS’’); Pax World; 

Teamsters. 

32 Id. 

33See letters from AFL–CIO; CalPERS; California 

State Teachers’ Retirement System (‘‘CalSTRS’’); CII; 

L. Dallas; LACERA; LIUNA; Nathan Cummings 

Foundation; Pax World; Pershing Square; 

Relational; RiskMetrics; Shareowners.org; Social 

Investment Forum; SWIB; Teamsters; Trillium; 

Universities Superannuation; WSIB. 

34See letters from Group of 26 Corporate 

Secretaries and Governance Professionals (‘‘26 

Corporate Secretaries’’); 3M Company (‘‘3M’’); 

Advance Auto Parts, Inc. (‘‘Advance Auto Parts’’); 

The Allstate Corporation (‘‘Allstate’’); Avis Budget 

Group, Inc. (‘‘Avis Budget’’); American Express 

Company (‘‘American Express’’); Anadarko 

Petroleum Corporation (‘‘Anadarko’’); Association of 

Corporate Counsel (‘‘Association of Corporate 

Counsel’’); AT&T Inc. (‘‘AT&T’’); Lawrence Behr (‘‘L. 

Behr’’); Best Buy Co., Inc. (‘‘Best Buy’’); The Boeing 

Company (‘‘Boeing’’); Business Roundtable (‘‘BRT’’); 

Robert N. Burt (‘‘R. Burt’’); State Bar of California, 

Corporations Committee of Business Law Section 

(‘‘California Bar’’); Sean F. Campbell (‘‘S. 

Campbell’’); Carlson (‘‘Carlson’’); Caterpillar Inc. 

(‘‘Caterpillar’’); U.S. Chamber of Commerce Center 

for Capital Markets Competitiveness (‘‘Chamber of 

Commerce/CMCC’’); Chevron Corporation 

(‘‘Chevron’’); CIGNA Corporation (‘‘CIGNA’’); W. Don 

Cornwell (‘‘W. Cornwell’’); CSX Corporation 

(‘‘CSX’’); Cummins Inc. (‘‘Cummins’’); Davis Polk & 

Wardwell LLP (‘‘Davis Polk’’); Dewey & LeBoeuf 

(‘‘Dewey’’); E.I. du Pont de Nemours and Company 

(‘‘DuPont’’); Eaton Corporation (‘‘Eaton’’); Michael 

Eng (‘‘M. Eng’’); FedEx Corporation (‘‘FedEx’’); FMC 

Corporation (‘‘FMC Corp.’’); FPL Group, Inc. (‘‘FPL 

Group’’); Frontier Communications Corporation 

(‘‘Frontier’’); General Electric Company (‘‘GE’’); 

General Mills, Inc. (‘‘General Mills’’); Charles O. 

Holliday, Jr. (‘‘C. Holliday’’); Honeywell 

International Inc. (‘‘Honeywell’’); Constance J. 

nominees in the company’s proxy 

materials. 

Regulation of the proxy process was 

one of the original responsibilities that 

Congress assigned to the Commission as 

part of its core functions in 1934. The 

Commission has actively monitored the 

proxy process since receiving this 

authority and has considered changes 

when it appeared that the process was 

not functioning in a manner that 

adequately protected the interests of 

investors.26 One of the key tenets of the 

Federal proxy rules on which the 

Commission has consistently focused is 

whether the proxy process functions, as 

nearly as possible, as a replacement for 

an actual in-person meeting of 

shareholders.27 This is important 

because the proxy process represents 

shareholders’ principal means of 

participating effectively at an annual or 

special meeting of shareholders.28 In our 

Proposal we noted our concern that the 

Federal proxy rules may not be 

facilitating the exercise of shareholders’ 

State law rights to nominate and elect 

directors. Without the ability to 

effectively utilize the proxy process, 

shareholder nominees do not have a 

realistic prospect of being elected 

because most, if not all, shareholders 

return their proxy cards in advance of 

the shareholder meeting and thus, in 

essence, cast their votes before the 

meeting at which they may nominate 

directors. Recognizing that this failure 

of the proxy process to facilitate 

shareholder nomination rights has a 

practical effect on the right to elect 

directors, the new rules will enable the 

proxy process to more closely 

approximate the conditions of the 

shareholder meeting. In addition, 

because companies will be required to 

include shareholder-nominated 

candidates for director in company 

proxy materials, shareholders will 

receive additional information upon 

which to base their voting decisions. 

Finally, we believe these changes will 

significantly enhance the confidence of 

shareholders who link the recent 

financial crisis to a lack of 

responsiveness of some boards to 

shareholder interests.29

The Commission has, on a number of 

prior occasions, considered whether its 

proxy rules needed to be amended to 

facilitate shareholders’ ability to 

nominate directors by having their 

nominees included in company proxy 

materials.30 Most recently, in June 2009, 

we proposed amendments to the proxy 

rules that included both a new proxy 

rule, Exchange Act Rule 14a–11, that 

would require a company’s proxy 

materials to provide shareholders with 

information about, and the ability to 

vote for, candidates for director 

nominated by long-term shareholders or 

groups of long-term shareholders with 

significant holdings, and amendments 

to Rule 14a–8(i)(8) to prohibit exclusion 

of certain shareholder proposals seeking 

to establish a procedure in the 

company’s governing documents for the 

inclusion of one or more shareholder 

director nominees in the company’s 

proxy materials. We received significant 

comment on the proposed amendments. 

Overall, commenters were sharply 

divided on the necessity for, and the 

workability of, the proposed 

amendments. Supporters of the 

amendments generally believed that, if 

adopted, they would facilitate 

shareholders’ ability to exercise their 

State law right to nominate directors 

and provide meaningful opportunities 

to effect changes in the composition of 

the board.31 These commenters 

predicted that the amendments would 

lead to more accountable, responsive, 

and effective boards.32 Many 

commenters saw a link between the 

recent economic crisis and 

shareholders’ inability to have nominees 

included in a company’s proxy 

materials.33

Commenters opposed to our Proposal 

believed that recent corporate 

governance developments, including 

increased use of a majority voting 

standard for the election of directors 

and certain State law changes, already 

provide shareholders with meaningful 

opportunities to participate in director 

elections.34 These commenters viewed 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56671 

Horner (‘‘C. Horner’’); International Business 

Machines Corporation (‘‘IBM’’); Jones Day (‘‘Jones 

Day’’); Keating Muething & Klekamp PLL (‘‘Keating 

Muething’’); James M. Kilts (‘‘J. Kilts’’); Reatha Clark 

King, Ph.D. (‘‘R. Clark King’’); Ned C. Lautenbach 

(‘‘N. Lautenbach’’); MeadWestvaco Corporation 

(‘‘MeadWestvaco’’); MetLife, Inc. (‘‘MetLife’’); 

Motorola, Inc. (‘‘Motorola’’); O’Melveny & Myers 

LLP (‘‘O’Melveny & Myers’’); Office Depot, Inc. 

(‘‘Office Depot’’); Pfizer Inc. (‘‘Pfizer’’); Protective 

Life Corporation (‘‘Protective’’); Sullivan & 

Cromwell LLP (‘‘S&C’’); Safeway Inc. (‘‘Safeway’’); 

Sara Lee Corporation (‘‘Sara Lee’’); Shearman & 

Sterling LLP (‘‘Shearman & Sterling’’); The SherwinWilliams Company (‘‘Sherwin-Williams’’); Sidley 

Austin LLP (‘‘Sidley Austin’’); Simpson Thacher & 

Bartlett LLP (‘‘Simpson Thacher’’); Tesoro 

Corporation (‘‘Tesoro’’); Textron Inc. (‘‘Textron’’); 

Texas Instruments Corporation (‘‘TI’’); Gary L. 

Tooker (‘‘G. Tooker’’); UnitedHealth Group 

Incorporated (‘‘UnitedHealth’’); Unitrin, Inc. 

(‘‘Unitrin’’); U.S. Bancorp (‘‘U.S. Bancorp’’); 

Wachtell, Lipton, Rosen & Katz (‘‘Wachtell’’); Wells 

Fargo & Company (‘‘Wells Fargo’’); West Chicago 

Chamber of Commerce & Industry (‘‘West Chicago 

Chamber’’); Weyerhaeuser Company 

(‘‘Weyerhaeuser’’); Xerox Corporation (‘‘Xerox’’); 

Yahoo! (‘‘Yahoo’’). 

35See letters from 26 Corporate Secretaries; 

American Bar Association (‘‘ABA’’); ACE Limited 

(‘‘ACE’’); Advance Auto Parts; AGL Resources 

(‘‘AGL’’); Aetna Inc. (‘‘Aetna’’); Allstate; Alston & 

Bird LLP (‘‘Alston & Bird’’); American Bankers 

Association (‘‘American Bankers Association’’); The 

American Business Conference (‘‘American 

Business Conference’’); American Electric Power 

Company, Inc. (‘‘American Electric Power’’); 

Anadarko; Applied Materials, Inc. (‘‘Applied 

Materials’’); Artistic Land Designs LLC (‘‘Artistic 

Land Designs’’); Association of Corporate Counsel; 

Avis Budget; Atlantic Bingo Supply, Inc. (‘‘Atlantic 

Bingo’’); L. Behr; Best Buy; Biogen Idec Inc. 

(‘‘Biogen’’); James H. Blanchard (‘‘J. Blanchard’’); 

Boeing; Tammy Bonkowski (‘‘T. Bonkowski’’); 

BorgWarner Inc. (‘‘BorgWarner’’); Boston Scientific 

Corporation (‘‘Boston Scientific’’); The Brink’s 

Company (‘‘Brink’s’’); BRT; Burlington Northern 

Santa Fe Corporation (‘‘Burlington Northern’’); R. 

Burt; California Bar; Callaway Golf Company 

(‘‘Callaway’’); S. Campbell; Carlson; Carolina Mills 

(‘‘Carolina Mills’’); Caterpillar; Chamber of 

Commerce/CMCC; Chevron; Rebecca Chicko (‘‘R. 

Chicko’’); CIGNA; Comcast Corporation (‘‘Comcast’’); 

Competitive Enterprise Institute’s Center for 

Investors and Entrepreneurs (‘‘Competitive 

Enterprise Institute’’); W. Cornwell; CSX; Edwin 

Culwell (‘‘E. Culwell’’); Cummins; Darden 

Restaurants, Inc. (‘‘Darden Restaurants’’); Daniels 

Manufacturing Corporation (‘‘Daniels 

Manufacturing’’); Davis Polk; Delaware State Bar 

Association (‘‘Delaware Bar’’); Tom Dermody (‘‘T. 

Dermody’’); Devon Energy Corporation (‘‘Devon’’); 

DTE Energy Company (‘‘DTE Energy’’); Eaton; The 

Edison Electric Institute (‘‘Edison Electric 

Institute’’); Eli Lilly and Company (‘‘Eli Lilly’’); 

Emerson Electric Co. (‘‘Emerson Electric’’); M. Eng; 

Erickson Retirement Communities, LLC 

(‘‘Erickson’’); ExxonMobil Corporation 

(‘‘ExxonMobil’’); FedEx; Financial Services 

Roundtable (‘‘Financial Services Roundtable’’); 

Flutterby Kissed Unique Treasures (‘‘Flutterby’’); 

FPL Group; Frontier; GE; Allen C. Goolsby (‘‘A. 

Goolsby’’); C. Holliday; IBM; Investment Company 

Institute (‘‘ICI’’); Intelect Corporation (‘‘Intelect’’); 

JPMorgan Chase & Co. (‘‘JPMorgan Chase’’); Jones 

Day; R. Clark King; Leggett & Platt Incorporated 

(‘‘Leggett’’); Teresa Liddell (‘‘T. Liddell’’); Little 

Diversified Architectural Consulting (‘‘Little’’); 

McDonald’s Corporation (‘‘McDonald’s’’); 

MeadWestvaco; MedFaxx, Inc. (‘‘MedFaxx’’); 

Medical Insurance Services (‘‘Medical Insurance’’); 

MetLife; Mary S. Metz (‘‘M. Metz’’); Microsoft 

Corporation (‘‘Microsoft’’); John R. Miller (‘‘J. 

Miller’’); Marcelo Moretti (‘‘M. Moretti’’); Motorola; 

National Association of Corporate Directors 

(‘‘NACD’’); National Association of Manufacturers 

(‘‘NAM’’); National Investor Relations Institute 

(‘‘NIRI’’); O’Melveny & Myers; Office Depot; Omaha 

Door & Window (‘‘Omaha Door’’); The Procter & 

Gamble Company (‘‘P&G’’); PepsiCo, Inc. 

(‘‘PepsiCo’’); Pfizer; Realogy Corporation 

(‘‘Realogy’’); Jared Robert (‘‘J. Robert’’); Marissa 

Robert (‘‘M. Robert’’); RPM International Inc. 

(‘‘RPM’’); Ryder System, Inc. (‘‘Ryder’’); Safeway; 

Ralph S. Saul (‘‘R. Saul’’); Shearman & Sterling; 

Sherwin-Williams; Raymond F. Simoneau (‘‘R. 

Simoneau’’); Society of Corporate Secretaries and 

Governance Professionals, Inc. (‘‘Society of 

Corporate Secretaries’’); The Southern Company 

(‘‘Southern Company’’); Southland Properties, Inc. 

(‘‘Southland’’); The Steele Group (‘‘Steele Group’’); 

Style Crest Enterprises, Inc. (‘‘Style Crest’’); Tesoro; 

Textron; Theragenics Corporation (‘‘Theragenics’’); 

TI; Richard Trummel (‘‘R. Trummel’’); Terry 

Trummel (‘‘T. Trummel’’); Viola Trummel (‘‘V. 

Trummel’’); tw telecom inc. (‘‘tw telecom’’); Laura 

D’Andrea Tyson (‘‘L. Tyson’’); United Brotherhood 

of Carpenters and Joiners of America (‘‘United 

Brotherhood of Carpenters’’); UnitedHealth; U.S. 

Bancorp; VCG Holding Corporation (‘‘VCG’’); 

Wachtell; The Way to Wellness (‘‘Wellness’’); Wells 

Fargo; Whirlpool Corporation (‘‘Whirlpool’’); Xerox; 

Yahoo; Jeff Young (‘‘J. Young’’). 

36See letters from ABA; American Mailing 

Service (‘‘American Mailing’’); All Cast, Inc. (‘‘All 

Cast’’); Always N Bloom (‘‘Always N Bloom’’); 

American Carpets (‘‘American Carpets’’); John 

Arquilla (‘‘J. Arquilla’’); Beth Armburst (‘‘B. 

Armburst’’); Artistic Land Designs; Charles Atkins 

(‘‘C. Atkins’’); Book Celler (‘‘Book Celler’’); Kathleen 

G. Bostwick (‘‘K. Bostwick’’); Brighter Day Painting 

(‘‘Brighter Day Painting’’); Colletti and Associates 

(‘‘Colletti’’); Commercial Concepts (‘‘Commercial 

Concepts’’); Complete Home Inspection (‘‘Complete 

Home Inspection’’); Debbie Courtney (‘‘D. 

Courtney’’); Sue Crawford (‘‘S. Crawford’’); Crespin’s 

Cleaning, Inc. (‘‘Crespin’’); Don’s Tractor Repair 

(‘‘Don’s’’); Theresa Ebreo (‘‘T. Ebreo’’); M. Eng; 

eWareness, Inc. (‘‘eWareness’’); Evans Real Estate 

Investments, LLC (‘‘Evans’’); Fluharty Antiques 

(‘‘Fluharty’’); Flutterby; Fortuna Italian Restaurant & 

Pizza (‘‘Fortuna Italian Restaurant’’); Future Form 

Inc. (‘‘Future Form Inc.’’); Glaspell Goals 

(‘‘Glaspell’’); Cheryl Gregory (‘‘C. Gregory’’); 

Healthcare Practice Management, Inc. (Healthcare 

Practice’’); Brian Henderson (‘‘B. Henderson’’); Sheri 

Henning (‘‘S. Henning’’); Jaynee Herren (‘‘J. Herren’’); 

Ami Iriarte (‘‘A. Iriarte’’); Jeremy J. Jones (‘‘J. Jones’’); 

Juz Kidz Nursery and Preschool (‘‘Juz Kidz’’); 

Kernan Chiropractic Center (‘‘Kernan’’); LMS Wine 

Creators (‘‘LMS Wine’’); Tabitha Luna (‘‘T. Luna’’); 

Mansfield Children’s Center, Inc. (‘‘Mansfield 

Children’s Center’’); Denise McDonald (‘‘D. 

McDonald’’); Meister’s Landscaping (‘‘Meister’’); 

Merchants Terminal Corporation (‘‘Merchants 

Terminal’’); Middendorf Bros. Auctioneers and Real 

Estate (‘‘Middendorf’’); Mingo Custom Woods 

(‘‘Mingo’’); Moore Brothers Auto Truck Repair 

(‘‘Moore Brothers’’); Mouton’s Salon (‘‘Mouton’’); 

Doug Mozack (‘‘D. Mozack’’); Ms. Dee’s Lil Darlins 

Daycare (‘‘Ms. Dee’’); Gavin Napolitano (‘‘G. 

Napolitano’’); NK Enterprises (‘‘NK’’); Hugh S. Olson 

(‘‘H. Olson’’); Parts and Equipment Supply Co. 

(‘‘PESC’’); Pioneer Heating & Air Conditioning 

(‘‘Pioneer Heating & Air Conditioning’’); RC 

Furniture Restoration (‘‘RC’’); RTW Enterprises Inc. 

(‘‘RTW’’); Debbie Sapp (‘‘D. Sapp’’); Southwest 

Business Brokers (‘‘SBB’’); Security Guard IT&T 

Alarms, Inc. (‘‘SGIA’’); Peggy Sicilia (‘‘P. Sicilia’’); 

Slycers Sandwich Shop (‘‘Slycers’’); Southern 

Services (‘‘Southern Services’’); Steele Group; 

Sylvron Travels (‘‘Sylvron’’); Theragenics; Erin 

White Tremaine (‘‘E. Tremaine’’); Wagner Health 

Center (‘‘Wagner’’); Wagner Industries (‘‘Wagner 

Industries’’); Wellness; West End Auto Paint & Body 

(‘‘West End’’); Y.M. Inc. (‘‘Y.M.’’); J. Young. 

37See, e.g., letters from 26 Corporate Secretaries; 

3M; Advance Auto Parts; Allstate; Avis Budget; 

American Express; Anadarko; Association of 

Corporate Counsel; AT&T; L. Behr; Best Buy; 

Boeing; BRT; R. Burt; California Bar; S. Campbell; 

Carlson; Caterpillar; Chamber of Commerce/CMCC; 

Chevron; CIGNA; W. Cornwell; CSX; Cummins; 

Davis Polk; Dewey; DuPont; Eaton; M. Eng; FedEx; 

FMC Corp.; FPL Group; Frontier; GE; General Mills; 

Joseph A. Grundfest, Stanford Law School (July 24, 

2009) (‘‘Grundfest’’); C. Holliday; Honeywell; C. 

Horner; IBM; Jones Day; Keating Muething; J. Kilts; 

R. Clark King; N. Lautenbach; MeadWestvaco; 

Metlife; Motorola; O’Melveny & Myers; Office 

Depot; Pfizer; Protective; S&C; Safeway; Sara Lee; 

Shearman & Sterling; Sherwin-Williams; Sidley 

Austin; Simpson Thacher; Tesoro; Textron; TI; G. 

Tooker; UnitedHealth; Unitrin; U.S. Bancorp; 

Wachtell; Wells Fargo; West Chicago Chamber; 

Weyerhaeuser; Xerox; Yahoo. 

38We refer to Delaware law frequently because of 

the large percentage of public companies 

incorporated under that law. The Delaware Division 

of Corporations reports that over 50% of U.S. public 

companies are incorporated in Delaware. See 

http://www.corp.delaware.gov. 

39 Del. Code Ann. tit. 8, § 112. In December 2009, 

the Committee on Corporate Laws of the American 

Bar Association Section of Business Law Committee 

adopted amendments to the Model Act that 

explicitly authorize bylaws that prescribe 

Continued 

the amendments as inappropriately 

intruding into matters traditionally 

governed by State law or imposing a 

‘‘one size fits all’’ rule for all companies 

and expressed concerns about ‘‘special 

interest’’ directors, forcing companies to 

focus on the short-term rather than the 

creation of long-term shareholder value, 

and other perceived negative effects of 

the amendments, if adopted, on boards 

and companies.35 Finally, commenters 

worried about the impact of the 

proposed amendments on small 

businesses.36

After considering the comments and 

weighing the competing interests of 

facilitating shareholders’ ability to 

exercise their State law rights to 

nominate and elect directors against 

potential disruption and cost to 

companies, we are convinced that 

adopting the proposed amendments to 

the proxy rules serves our purpose to 

regulate the proxy process in the public 

interest and on behalf of investors. We 

are not persuaded by the arguments of 

some commenters that the provisions of 

Rule 14a–11 are unnecessary.37 Those 

commenters argued that changes in 

corporate governance over the past six 

years have obviated the need for a 

Federal rule to allow shareholders to 

place their nominees in company proxy 

materials and that shareholders should 

be left to determine whether, on a 

company-by-company basis, such a rule 

is necessary at any particular company. 

While we recognize that some states, 

such as Delaware,38 have amended their 

state corporate law to enable companies 

to adopt procedures for the inclusion of 

shareholder director nominees in 

company proxy materials,39 as was 


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56672 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

shareholder access to company proxy materials or 

reimbursement of proxy solicitation expenses. See 

ABA Press Release, ‘‘Corporate Laws Committee 

Adopts New Model Business Corporation Act 

Amendments to Provide For Proxy Access And 

Expense Reimbursement,’’ December 17, 2009, 

available at http://www.abanet.org/abanet/media/ 

release/news_release.cfm?releaseid=848. 

In addition, in 2007, North Dakota amended its 

corporate code to permit 5% shareholders to 

provide a company notice of intent to nominate 

directors and require the company to include each 

such shareholder nominee in its proxy statement 

and form of proxy. N.D. Cent. Code § 10–35–08 

(2009); see North Dakota Publicly Traded 

Corporations Act, N.D. Cent. Code § 10–35 et al. 

(2007). 

40See letters from American Federation of State, 

County and Municipal Employees (‘‘AFSCME’’); 

AllianceBernstein L.P. (‘‘AllianceBernstein’’); 

Amalgamated Bank LongView Funds 

(‘‘Amalgamated Bank’’); Association of British 

Insurers (‘‘British Insurers’’); CalPERS; CII; The 

Corporate Library (‘‘Corporate Library’’); L. Dallas; 

Florida State Board of Administration; ICGN; 

LIUNA; D. Nappier; Paul M. Neuhauser (‘‘P. 

Neuhauser’’); Comment Letter of Nine Securities 

and Governance Law Firms (‘‘Nine Law Firms’’); Pax 

World; Pershing Square; theRacetotheBottom.org 

(‘‘RacetotheBottom’’); RiskMetrics; Schulte Roth & 

Zabel LLP (‘‘Schulte Roth & Zabel’’); Sodali 

(‘‘Sodali’’); Teachers Insurance and Annuity 

Association of America and College Retirement 

Equities Fund (‘‘TIAA–CREF’’); United States Proxy 

Exchange (‘‘USPE’’); ValueAct Capital, LLC 

(‘‘ValueAct Capital’’). 

41 Despite the rate of adoption of a majority voting 

standard for director elections by companies in the 

S&P 500, only a small minority of firms in the 

Russell 3000 index have adopted them. See 

discussion in footnote 69 in the Proposing Release. 42See letters from AFSCME; AllianceBernstein; 

CalPERS; CII; L. Dallas; D. Nappier; P. Neuhauser; 

RiskMetrics; TIAA–CREF. One commenter 

characterized a majority voting standard as a 

mechanism for ‘‘registering negative sentiment’’ 

about an incumbent board nominee, not a 

mechanism to ensure board accountability. See 

letter from AFSCME. 

43See letters from CII; Sodali; USPE. 

44For a list of these commenters, see footnotes 

677, 678, and 679 below. 

45See letters from CII; USPE. 

46See letters from 26 Corporate Secretaries; ABA; 

ACE; Advance Auto Parts; AGL; Aetna; Allstate; 

Alston & Bird; American Bankers Association; 

American Business Conference; American Electric 

Power; Anadarko; Applied Materials; Artistic Land 

Designs; Association of Corporate Counsel; Avis 

Budget; Atlantic Bingo; L. Behr; Best Buy; Biogen; 

J. Blanchard; Boeing; T. Bonkowski; BorgWarner; 

Boston Scientific; Brink’s; BRT; Burlington 

Northern; R. Burt; California Bar; Callaway; S. 

Campbell; Carlson; Carolina Mills; Caterpillar; 

Chamber of Commerce/CMCC; Chevron; R. Chicko; 

CIGNA; Comcast; Competitive Enterprise Institute; 

W. Cornwell; CSX; E. Culwell; Cummins; Darden 

Restaurants; Daniels Manufacturing; Davis Polk; 

Delaware Bar; T. Dermody; Devon; DTE Energy; 

Eaton; Edison Electric Institute; Eli Lilly; Emerson 

Electric; M. Eng; Erickson; ExxonMobil; FedEx; 

Financial Services Roundtable; Flutterby; FPL 

Group; Frontier; GE; A. Goolsby; Grundfest; C. 

Holliday; IBM; ICI; Intelect; JPMorgan Chase; Jones 

Day; R. Clark King; Leggett; T. Liddell; Little; 

McDonald’s; MeadWestvaco; MedFaxx; Medical 

Insurance; Metlife; M. Metz; Microsoft; J. Miller; M. 

Moretti; Motorola; NACD; NAM; NIRI; O’Melveny 

& Myers; Office Depot; Omaha Door; P&G; PepsiCo; 

Pfizer; Realogy; J. Robert; M. Robert; RPM; Ryder; 

Safeway; R. Saul; Shearman & Sterling; SherwinWilliams; R. Simoneau; Society of Corporate 

Secretaries; Southern Company; Southland; Steele 

Group; Style Crest; Tesoro; Textron; Theragenics; 

TI; R. Trummel; T. Trummel; V. Trummel; tw 

telecom; L. Tyson; United Brotherhood of 

Carpenters; UnitedHealth; U.S. Bancorp; VCG; 

Wachtell; Wellness; Wells Fargo; Whirlpool; Xerox; 

Yahoo; J. Young. 

47See id. 

48For example, quite a few aspects of Delaware 

corporation law are mandatory (i.e., not capable of 

modification by agreement or provision in the 

certificate of incorporation or bylaws), including: (i) 

The requirement to hold an annual election of 

directors (Del. Code Ann., tit. 8, § 211(b); Jones 

Apparel Group v. Maxwell Shoe Co., 883 A.2d 837, 

highlighted by a number of commenters, 

other states have not.40 These 

commenters noted that, as a result, 

companies not incorporated in Delaware 

could frustrate shareholder efforts to 

establish procedures for shareholders to 

place board nominees in the company’s 

proxy materials by litigating the validity 

of a shareholder proposal establishing 

such procedures, or possibly repealing 

shareholder-adopted bylaws 

establishing such procedures. In 

addition, due to the difficulty that 

shareholders could have in establishing 

such procedures, we believe that it 

would be inappropriate to rely solely on 

an enabling approach to facilitate 

shareholders’ ability to exercise their 

State law rights to nominate and elect 

directors. Even if bylaw amendments to 

permit shareholders to include 

nominees in company proxy materials 

were permissible in every state, 

shareholder proposals to so amend 

company bylaws could face significant 

obstacles. 

We also considered whether the move 

by many companies away from plurality 

voting to a general policy of majority 

voting in uncontested director elections 

should lead to a conclusion that our 

actions are unnecessary or whether we 

should premise our actions on the 

failure of a company to adopt majority 

voting.41 We agree with commenters 42

who argued that a majority voting 

standard in director elections does not 

address the need for a rule to facilitate 

the inclusion of shareholder nominees 

for director in company proxy materials. 

While majority voting impacts 

shareholders’ ability to elect candidates 

put forth by management, it does not 

affect shareholders’ ability to exercise 

their right to nominate candidates for 

director. 

We also do not believe that the recent 

amendments to New York Stock 

Exchange (NYSE) Rule 452, which 

eliminated brokers’ discretionary voting 

authority in director elections, negate 

the need for the rule. Certain 

commenters specifically noted their 

concurrence with us on this point.43

The amendments to NYSE Rule 452 

address who exercises the right to vote 

rather than shareholders’ ability to have 

their nominees put forth for a vote. 

While these and other changes have 

been important events, they bolster 

shareholders’ ability to elect directors 

who are already on the company’s proxy 

card, not their ability to affect who 

appears on that card. We therefore are 

convinced that the Federal proxy rules 

should be amended to better facilitate 

the exercise of shareholders’ rights 

under State law to nominate directors. 

We also considered whether we 

should amend Rule 14a–8 to narrow the 

‘‘election exclusion,’’ without also 

adopting Rule 14a–11. We note that a 

significant number of commenters 

supported the proposed amendments to 

Rule 14a–8(i)(8).44 We concluded, 

however, as certain commenters pointed 

out, that adopting only the proposed 

amendments to Rule 14a–8(i)(8), 

without Rule 14a–11, would not achieve 

the Commission’s stated objectives.45We 

believe that the amendments to Rule 

14a–8(i)(8) will provide shareholders 

with an important mechanism for 

including in company proxy materials 

proposals that would address the 

inclusion of shareholder director 

nominees in the company’s proxy 

materials in ways that supplement Rule 

14a–11, such as with a lower ownership 

threshold, a shorter holding period, or 

to allow for a greater number of 

nominees if shareholders of a company 

support such standards. 

We recognize that many commenters 

advocated that shareholders’ ability to 

include nominees in company proxy 

materials should be determined 

exclusively by what individual 

companies or their shareholders 

affirmatively choose to provide, or that 

companies or their shareholders should 

be able to opt out of Rule 14a–11 or 

otherwise alter its terms for individual 

companies (the ‘‘private ordering’’ 

arguments).46 After careful 

consideration of the numerous 

comments advocating this 

perspective,47 we believe that the 

arguments in favor of this perspective 

are flawed for several reasons. 

First, corporate governance is not 

merely a matter of private ordering. 

Rights, including shareholder rights, are 

artifacts of law, and in the realm of 

corporate governance some rights 

cannot be bargained away but rather are 

imposed by statute. There is nothing 

novel about mandated limitations on 

private ordering in corporate 

governance.48


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848–849 (Del. Ch. 2004) citing Rohe v. Reliance 

Training Network, Inc., 2000 Del. Ch. LEXIS 108 at 

*10–*11 (Del. Ch. July 21, 2000)); (ii) the limitation 

against dividing the board of directors into more 

than three classes (Del. Code Ann., tit. 8, § 141(d); 

see also Jones Apparel); (iii) the entitlement of 

stockholders to inspect the list of stockholders and 

other corporate books and records (Del. Code Ann., 

tit. 8, §§ 219(a) and 220(b); Loew’s Theatres, Inc. v. 

Commercial Credit Co., 243 A.2d 78, 81 (Del. Ch. 

1968)); (iv) the right of stockholders to vote as a 

class on certain amendments to the certificate of 

incorporation (Del. Code Ann., tit. 8, § 242(b)(2)); 

(v) appraisal rights (Del. Code Ann., tit. 8, § 262(b)); 

and (vi) fiduciary duties of corporate directors 

(Siegman v. Tri-Star Pictures, Inc., C.A. No. 9477 

(Del. Ch. May 5, 1989, revised May 30, 1989), 

reported at 15 Del. J. Corp. L. 218, 236 (1990); cf. 

Del. Code Ann., tit. 8, § 102(b)(7), permitting 

elimination of director liability for monetary 

damages for breach of the duty of care). See also 

Edward P. Welch and Robert S. Saunders, What We 

Can Learn From Other Statutory Schemes: Freedom 

And Its Limits In The Delaware General 

Corporation Law, 33 Del. J. Corp. L. 845, 857–859 

(2008); Jeffrey N. Gordon, Contractual Freedom In 

Corporate Law: Articles & Comments; The 

Mandatory Structure Of Corporate Law, 89 Colum. 

L. Rev. 1549, 1554 n.16 (1989) (identifying several 

of these and other mandatory aspects of Delaware 

corporation law). 

49See letters from Grundfest; Form Letter Type A. 

Cf. letter from Nine Law Firms. 

50 In the case of a non-U.S. domiciled issuer that 

does not qualify as a foreign private issuer (as 

defined in Exchange Act Rule 3b–4), we will look 

to the underlying law of the jurisdiction of 

organization. See Rule 14a–11(a). 

51 It has been argued to us, as a basis for 

excluding a shareholder proposal under Rule 14a– 

8, that Delaware law does not permit a bylaw to 

deprive the board of directors of the power to 

amend or repeal it, where the corporation’s 

certificate of incorporation confers upon the board 

the power to adopt, amend and repeal bylaws. See, 

e.g., CVS Caremark Corp., No-Action Letter (March 

9, 2010). See also Del. Code Ann., tit. 8, § 109(b) 

and Centaur Partners, IV v. National Intergroup, 

Inc., 582 A.2d 923, 929 (Del. 1990). 

52See Beth Young, The Corporate Library, ‘‘The 

Limits of Private Ordering: Restrictions on 

Shareholders’ Ability to Initiate Governance Change 

and Distortions of the Shareholder Voting Process’’ 

(November 2009), available at http://www.sec.gov/ 

comments/s7-10-09/s71009-568.pdf. See, e.g., Ind. 

Code § 23–1–39–1; Okla. Stat., tit. 18, § 18–1013. 

53Throughout this release, when we refer to ‘‘a 

nomination pursuant to Rule 14a–11,’’ a ‘‘Rule 14a– 

11 nomination,’’ or other similar statement, we are 

referring to a nomination submitted for inclusion in 

a company’s proxy materials pursuant to Rule 14a– 

11. 

Second, the argument that there is an 

inconsistency between mandating 

inclusion of shareholder nominees in 

company proxy materials and our 

concern for the rights of shareholders 

under the Federal securities laws 49

mistakenly assumes that basic 

protections of, and rights of, particular 

shareholders provided under the 

Federal proxy rules should be able to be 

abrogated by ‘‘the shareholders’’ of a 

particular corporation, acting in the 

aggregate. The rules we adopt today 

provide individual shareholders the 

ability to have director nominees 

included in the corporate proxy 

materials if State law 50 and governing 

corporate documents permit a 

shareholder to nominate directors at the 

shareholder meeting and the 

requirements of Rule 14a–11 are 

satisfied. Those rules similarly facilitate 

the right of individual shareholders to 

vote for those nominated, whether by 

management or another shareholder, if 

the shareholder has voting rights under 

State law and the company’s governing 

documents. The rules we adopt today 

reflect our judgment that the proxy rules 

should better facilitate shareholders’ 

effective exercise of their traditional 

State law rights to nominate directors 

and cast their votes for nominees. When 

the Federal securities laws establish 

protections or create rights for security 

holders, they do so individually, not in 

some aggregated capacity. No provision 

of the Federal securities laws can be 

waived by referendum. A rule that 

would permit some shareholders (even 

a majority) to restrict the Federal 

securities law rights of other 

shareholders would be without 

precedent and, we believe, a 

fundamental misreading of basic 

premises of the Federal securities laws. 

In addition, allowing some shareholders 

to impair the ability of other 

shareholders to have their director 

nominees included in company proxy 

materials cannot be reconciled with the 

purpose of the rules we are adopting 

today. In our view, it would be no more 

appropriate to subject a Federal proxy 

rule that provides the ability to include 

nominees in the company proxy 

statement to a shareholder vote than it 

would be to subject any other aspect of 

the proxy rules—including the other 

required disclosures—to abrogation by 

shareholder vote. 

Third, the net effect of our rules will 

be to expand shareholder choice, not 

limit it. Our rules will result in a greater 

number of nominees appearing on a 

proxy card. Shareholders will continue 

to have the opportunity to vote solely 

for management candidates, but our 

rules will also give shareholders the 

opportunity to vote for director 

candidates who otherwise might not 

have been included in company proxy 

materials. 

In addition to these basic conclusions, 

we note that there are other significant 

concerns raised by a private ordering 

approach. A company-by-company 

shareholder vote on the applicability of 

Rule 14a–11 would involve substantial 

direct and indirect, market-wide costs, 

and it is possible that boards of 

directors, or shareholders acting with 

their explicit or implicit encouragement, 

might seek such shareholder votes, 

perhaps repeatedly, at no financial cost 

to themselves but at considerable cost to 

the company and its shareholders. 

Another concern relates to the nature of 

the shareholder vote on whether to opt 

out of Rule 14a–11: Specifically, in that 

context management can draw on the 

full resources of the corporation to 

promote the adoption of an opt-out, 

while disaggregated shareholders have 

no similarly effective platform from 

which to advocate against an opt-out. 

In addition, the path to shareholder 

adoption of a procedure to include 

nominees in company proxy materials is 

by no means free of obstructions. While 

shareholders may ordinarily have the 

State law right to adopt bylaws 

providing for inclusion of shareholder 

nominees in company proxy materials 

even in the absence of an explicit 

authorizing statute like Delaware’s, the 

existence of that right in the absence of 

such a statute may be challenged. 

Moreover, we understand that under 

Delaware law, the board of directors is 

ordinarily free, subject to its fiduciary 

duties, to amend or repeal any 

shareholder-adopted bylaw.51 In 

addition, not all state statutes confer 

upon shareholders the power to adopt 

and amend bylaws, and even where 

shareholders have that power it is 

frequently limited by requirements in 

the company’s governing documents 

that bylaw amendments be approved by 

a supermajority shareholder vote.52

After careful consideration of the 

options that commenters have 

suggested, we have determined that the 

most effective way to facilitate 

shareholders’ exercise of their 

traditional State law rights to nominate 

and elect directors would be through 

Rule 14a–11 and the related 

amendments to the proxy rules that we 

proposed in June 2009. We have 

concluded that the ability to include 

shareholder nominees in company 

proxy materials pursuant to Rule 14a– 

11 53 must be available to shareholders 

who are entitled under State law to 

nominate and elect directors, regardless 

of any provision of State law or a 

company’s governing documents that 

purports to waive or prohibit the use of 

Rule 14a–11. In this regard, we note that 

although the rules we are adopting do 

not permit a company or its 

shareholders to opt out of or alter the 

application of Rule 14a–11, the 

amendments do contemplate that any 

additional ability to include shareholder 

nominees in the company’s proxy 

materials that may be established in a 

company’s governing documents will be 

permissible under our rules. Moreover, 

our amendments to Rule 14a–8 will 

facilitate the presentation of proposals 

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54 In the case of a non-U.S. domiciled issuer that 

does not qualify as a foreign private issuer, we will 

look to the underlying law of the jurisdiction of 

organization. See footnote 50 above. 

55See letters from Ameriprise; AT&T; L. Behr; 

BRT; Burlington Northern; CMCC; Dewey; M. Eng; 

FedEx; Grundfest; Keating Muething; OPLP; Sidley 

Austin. 

56When it adopted Section 14(a) of the Exchange 

Act, Congress determined that the exercise of 

shareholder voting rights via the corporate proxy is 

a matter of Federal concern, and the statute’s grant 

of authority is not limited to regulating disclosure. 

Roosevelt v. E.I. DuPont de Nemours & Co., 958 

F.2d 416, 421–422 (D.C. Cir. 1992) (Congress ‘‘did 

not narrowly train [S]ection 14(a) on the interest of 

stockholders in receiving information necessary to 

the intelligent exercise of their’’ State law rights; 

Section 14(a) also ‘‘shelters use of the proxy 

solicitation process as a means by which 

stockholders * * * may communicate with each 

other.’’); see also, e.g., TSC Indus., Inc. v. Northway, 

Inc., 426 U.S. 438, 449 n.10 (1976) (Section 14(a) 

is a grant of ‘‘broad statutory authority’’). The 

adoption of Rule 14a–11 reflects our continuing 

purpose to ensure that proxies are used as a means 

to enhance the ability of shareholders to make 

informed choices, especially on the critical subject 

of who sits on the board of directors. 

57 Dodd-Frank Act § 971(a) and (b). These 

provisions expressly provide that the Commission 

may issue rules permitting shareholders to use an 

issuer’s proxy solicitation materials for the purpose 

of nominating individuals to membership on the 

board of directors of the issuer. 

58Exchange Act § 14(a) and Investment Company 

Act § 20(a). 

59 Dodd-Frank Act § 971(b). 

60See letter from BRT. 

61Pacific Gas and Electric Company v. Public 

Utilities Comm’n of California, 475 U.S. 1, 14 n.10 

(1986) (emphasis in original). 

62Nor does Rule 14a–11 violate the Fifth 

Amendment, as it does not constitute a regulatory 

taking. See, e.g., Lingle v. Chevron U.S.A., 544 U.S. 

528, 546–47 (2005); Penn Central Transp. Co. v. 

City of New York, 438 U.S. 104 (1978). 

63Throughout this release, the terms ‘‘proxy 

contest,’’ ‘‘election contest,’’ and ‘‘contested election’’ 

refer to any election of directors in which another 

party commences a solicitation in opposition 

subject to Exchange Act Rule 14a–12(c). 

specific procedures for including 

shareholder nominees for director in 

company proxy materials, and our 

adoption of new Exchange Act Rule 

14a–18 (which requires disclosure 

concerning the nominating shareholder 

or group and the nominee or nominees 

that generally is consistent with that 

currently required in an election 

contest) will help assure that investors 

are adequately informed about 

shareholder nominations made through 

such procedures. 

In contrast, if State law 54 or a 

provision of the company’s governing 

documents were ever to prohibit a 

shareholder from making a nomination 

(as opposed to including a validly 

nominated individual in the company’s 

proxy materials), Rule 14a–11 would 

not require the company to include in 

its proxy materials information about, 

and the ability to vote for, any such 

nominee. The rule defers entirely to 

State law as to whether shareholders 

have the right to nominate directors and 

what voting rights shareholders have in 

the election of directors. 

While we have concluded that we 

should provide shareholders the means 

to have nominees included in proxy 

materials in certain circumstances, we 

also are mindful that to accomplish this 

goal the regulatory structure must arrive 

at a solution that ultimately is workable. 

Accordingly, we are adopting a number 

of significant changes to the rules we 

proposed in order to address the many 

thoughtful and constructive comments 

we received on the specifics of our 

proposed amendments. The changes 

that we are making to the amendments 

are described in detail throughout this 

release. There also were a number of 

suggested changes that we considered 

and decided not to adopt, as detailed 

below. 

B. Our Role in the Proxy Process 

Several commenters challenged our 

authority to adopt Rule 14a–11.55 We 

considered those comments carefully 

but continue to believe that we have the 

authority to adopt Rule 14a–11 under 

Section 14(a) as originally enacted.56 In 

any event, Congress confirmed our 

authority in this area and removed any 

doubt that we have authority to adopt a 

rule such as Rule 14a–11.57 As 

described more fully below, Rule 14a– 

11 is necessary and appropriate in the 

public interest and for the protection of 

investors.58 Additionally, as explained 

below, the terms and conditions of Rule 

14a–11 are also in the interests of 

shareholders and for the protection of 

investors.59 Therefore, this challenge is 

now moot. 

Although our statutory authority to 

adopt Rule 14a–11 is no longer at issue, 

the constitutionality of Rule 14a–11 also 

has been challenged by commenters. We 

disagree with their arguments.60 Proxy 

regulations do not infringe on corporate 

First Amendment rights both because 

‘‘management has no interest in 

corporate property except such interest 

as derives from the shareholders,’’ and 

because such regulations ‘‘govern speech 

by a corporation to itself’’ and therefore 

‘‘do not limit the range of information 

that the corporation may contribute to 

the public debate.’’ 61 Even if statements 

in proxy materials are viewed as more 

than merely internal communications, 

this communication is of a 

commercial—not political—nature, and 

regulation of such statements through 

Rule 14a–11 is consistent with 

applicable First Amendment 

standards.62

C. Summary of the Final Rules 

As noted above, we carefully 

considered the comments and have 

decided to adopt new Exchange Act 

Rule 14a–11 with significant 

modifications in response to the 

comments. We believe that the new rule 

will benefit shareholders and protects 

investors by improving corporate 

suffrage, the disclosure provided in 

connection with corporate proxy 

solicitations, and communication 

between shareholders in the proxy 

process. Consistent with the Proposal, 

Rule 14a–11 will apply only when 

applicable State law or a company’s 

governing documents do not prohibit 

shareholders from nominating a 

candidate for election as a director. In 

addition, as adopted, the rule will apply 

to a foreign issuer that is otherwise 

subject to our proxy rules only when 

applicable foreign law does not prohibit 

shareholders from making such 

nominations. Also consistent with the 

Proposal, companies may not ‘‘opt out’’ 

of the rule—either in favor of a different 

framework for inclusion of shareholder 

director nominees in company proxy 

materials or no framework. In addition, 

as was proposed, the rule will apply 

regardless of whether any specified 

event has occurred to trigger the rule 

and will apply regardless of whether the 

company is subject to a concurrent 

proxy contest.63 Also as proposed, the 

final rule will apply to companies that 

are subject to the Exchange Act proxy 

rules, including investment companies 

and controlled companies, but will not 

apply to ‘‘debt-only’’ companies. The 

rule will apply to smaller reporting 

companies, but we have decided to 

delay the rule’s application to these 

companies for three years. We believe 

that a delayed effective date for smaller 

reporting companies should allow those 

companies to observe how the rule 

operates for other companies and 

should allow them to better prepare for 

implementation of the rules. Delayed 

implementation for these companies 

also will allow us to evaluate the 

implementation of Rule 14a–11 by 

larger companies and provide us with 

the additional opportunity to consider 

whether adjustments to the rule would 

be appropriate for smaller reporting 

companies before the rule becomes 

applicable to them. To use Rule 14a–11, 

a nominating shareholder or group will 

be required to satisfy an ownership 

threshold of at least 3% of the voting 

power of the company’s securities 

entitled to be voted at the meeting. 

Shareholders will be able to aggregate 

their shares to meet the threshold. The 


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64 In the case of an investment company, the 

nominee may not be an ‘‘interested person’’ of the 

company as defined in Section 2(a)(19) of the 

Investment Company Act of 1940 (15 U.S.C. 80a– 

2(a)(19)). See Section II.B.3.b. for a more detailed 

discussion of the applicability of Rule 14a–11 to 

registered investment companies. 

required ownership threshold has been 

modified from the Proposal, which 

would have required that a nominating 

shareholder or group hold 1%, 3%, or 

5% of the company’s securities entitled 

to be voted on the election of directors, 

depending on accelerated filer status or, 

in the case of registered investment 

companies, depending on the net assets 

of the company. The final rule requires 

that a nominating shareholder or group 

must hold both investment and voting 

power, either directly or through any 

person acting on their behalf, of the 

securities. In calculating the ownership 

percentage held, under certain 

conditions, a nominating shareholder or 

member of the nominating shareholder 

group would be able to include 

securities loaned to a third party in the 

calculation of ownership. In 

determining the total voting power held 

by the nominating shareholder or any 

member of the nominating shareholder 

group, securities sold short (as well as 

securities borrowed that are not 

otherwise excludable) must be deducted 

from the amount of securities that may 

be counted towards the required 

ownership threshold. In addition, a 

nominating shareholder (or in the case 

of a group, each member of the group) 

will be required to have held the 

qualifying amount of securities 

continuously for at least three years as 

of the date the nominating shareholder 

or group submits notice of its intent to 

use Rule 14a–11 (on a filed Schedule 

14N), rather than for one year, as was 

proposed. Consistent with the proposed 

amendments, we are adopting a 

requirement that the nominating 

shareholder or members of the group 

must continue to own the qualifying 

amount of securities through the date of 

the meeting at which directors are 

elected and provide disclosure 

concerning their intent with regard to 

continued ownership of the securities 

after the election of directors. In 

addition, the nominating shareholder 

(or where there is a nominating 

shareholder group, any member of the 

nominating shareholder group) may not 

be holding the company’s securities 

with the purpose, or with the effect, of 

changing control of the company or to 

gain a number of seats on the board of 

directors that exceeds the maximum 

number of nominees that the company 

could be required to include under Rule 

14a–11, and may not have a direct or 

indirect agreement with the company 

regarding the nomination of the 

nominee or nominees prior to filing the 

Schedule 14N. 

The nominating shareholder or group 

must provide notice to the company of 

its intent to use Rule 14a–11 no earlier 

than 150 days prior to the anniversary 

of the mailing of the prior year’s proxy 

statement and no later than 120 days 

prior to this date. The final rule differs 

from the Proposal, which would have 

required the nominating shareholder or 

group to provide notice to the company 

no later than 120 days prior to the 

anniversary of the mailing of the prior 

year’s proxy statement or in accordance 

with the company’s advance notice 

provision, if applicable. As was 

proposed, under the final rule the 

nominating shareholder or group will be 

required to file on EDGAR and transmit 

to the company its notice on Schedule 

14N on the same date. 

The rule also includes certain 

requirements applicable to the 

shareholder nominee. Consistent with 

the Proposal, the final rule provides that 

the company will not be required to 

include any nominee whose candidacy 

or, if elected, board membership would 

violate controlling state or Federal law, 

or the applicable standards of a national 

securities exchange or national 

securities association, except with 

regard to director independence 

requirements that rely on a subjective 

determination by the board, and such 

violation could not be cured during the 

provided time period.64 In addition, the 

rule we are adopting provides that a 

company will not be required to include 

any nominee whose candidacy or, if 

elected, board membership would 

violate controlling foreign law. As we 

proposed, the rule does not include any 

restrictions on the relationships 

between the nominee and the 

nominating shareholder or group. 

As was proposed, under Rule 14a–11, 

a company will not be required to 

include more than one shareholder 

nominee, or a number of nominees that 

represents up to 25% of the company’s 

board of directors, whichever is greater. 

Where there are multiple eligible 

nominating shareholders, the 

nominating shareholder or group with 

the highest percentage of the company’s 

voting power would have its nominees 

included in the company’s proxy 

materials, rather than the nominating 

shareholder or group that is first to 

submit a notice on Schedule 14N, as we 

had proposed. We also have clarified in 

the final rule that when a company has 

a classified (staggered) board, the 25% 

calculation would still be based on the 

total number of board seats. In addition, 

in response to public comment, we have 

added a provision to the rule designed 

to prevent the potential unintended 

consequences of discouraging dialogue 

and negotiation between company 

management and nominating 

shareholders. Under this provision, 

shareholder nominees of an eligible 

nominating shareholder or group with 

the highest qualifying voting power 

percentage that a company agrees to 

include as company nominees after the 

filing of the Schedule 14N would count 

toward the 25%. 

The notice on Schedule 14N will be 

required to include: 

• Disclosure concerning: 

• The amount and percentage of 

voting power of the company’s 

securities entitled to be voted by the 

nominating shareholder or group 

and the length of ownership of 

those securities; 

• Biographical and other information 

about the nominating shareholder 

or group and the shareholder 

nominee or nominees, similar to the 

disclosure currently required in a 

contested election; 

• Whether or not the nominee or 

nominees satisfy the company’s 

director qualifications, if any (as 

provided in the company’s 

governing documents); 

• Certifications that, after reasonable 

inquiry and based on the nominating 

shareholder’s or group’s knowledge, 

the: 

• Nominating shareholder (or where 

there is a nominating shareholder 

group, each member of the 

nominating shareholder group) is 

not holding any of the company’s 

securities with the purpose, or with 

the effect, of changing control of the 

company or to gain a number of 

seats on the board of directors that 

exceeds the maximum number of 

nominees that the company could 

be required to include under Rule 

14a–11; 

• Nominating shareholder or group 

otherwise satisfies the requirements 

of Rule 14a–11, as applicable; and 

• Nominee or nominees satisfy the 

requirements of Rule 14a–11, as 

applicable; 

• A statement that the nominating 

shareholder or group members will 

continue to hold the qualifying 

amount of securities through the date 

of the meeting and a statement with 

regard to the nominating 

shareholder’s or group member’s 

intended ownership of the securities 

following the election of directors 

(which may be contingent on the 


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56676 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

results of the election of directors); 

and 

• A statement in support of each 

shareholder nominee, not to exceed 

500 words per nominee (the statement 

would be at the option of the 

nominating shareholder or group). 

These requirements for Schedule 14N 

are largely consistent with the Proposal, 

with some modifications made in 

response to comments. Among the 

modifications is the new disclosure 

requirement concerning whether, to the 

best of the nominating shareholder’s or 

group’s knowledge, the nominee or 

nominees satisfy the company’s director 

qualifications, if any (as provided in the 

company’s governing documents). We 

also have revised the certifications to 

require certification not only with 

regard to control intent, but also with 

regard to the other nominating 

shareholder and nominee eligibility 

requirements. 

A company that receives a notice on 

Schedule 14N from an eligible 

nominating shareholder or group will be 

required to include in its proxy 

statement disclosure concerning the 

nominating shareholder or group and 

the shareholder nominee or nominees, 

and include on its proxy card the names 

of the shareholder nominees. The 

nominating shareholder or group will be 

liable for any statement in the notice on 

Schedule 14N which, at the time and in 

light of the circumstances under which 

it is made, is false or misleading with 

respect to any material fact or that omits 

to state any material fact necessary to 

make the statements therein not false or 

misleading, including when that 

information is subsequently included in 

the company’s proxy statement. The 

company will not be responsible for this 

information. These liability provisions 

are included in the final rules largely as 

proposed, but with two changes in 

response to comments. Final Rule 14a– 

9(c) makes clear that the nominating 

shareholder or group will be liable for 

any statement in the Schedule 14N or 

any other related communication that is 

false or misleading with respect to any 

material fact, or that omits to state any 

material fact necessary to make the 

statements therein not false or 

misleading, regardless of whether that 

information is ultimately included in 

the company’s proxy statement. In 

addition, consistent with the existing 

approach in Rule 14a–8, under Rule 

14a–11 as adopted, a company will not 

be responsible for any information 

provided by the nominating shareholder 

or group and included in the company’s 

proxy statement. Under the Proposal, a 

company would not have been 

responsible for any information 

provided by the nominating shareholder 

or group except where the company 

knows or has reason to know that the 

information is false or misleading. 

A company will not be required to 

include a nominee or nominees if the 

nominating shareholder or group or the 

nominee fails to satisfy the eligibility 

requirements of Rule 14a–11. A 

company that determines it may 

exclude a nominee or nominees must 

provide a notice to the Commission 

regarding its intent to exclude the 

nominee or nominees. The company 

also may submit a request for the staff’s 

informal view with respect to the 

company’s determination that it may 

exclude the nominee or nominees 

(commonly referred to as ‘‘no-action’’ 

requests). In addition, a company could 

exclude a nominating shareholder’s or 

group’s statement of support if the 

statement exceeds 500 words per 

nominee and could seek a no-action 

letter from the staff with regard to this 

determination if it so desired. In the 

event that a nominating shareholder or 

group or nominee withdraws or is 

disqualified prior to the time the 

company commences printing the proxy 

materials, under certain circumstances 

companies will be required to include a 

substitute nominee if there are other 

eligible nominees. Therefore, companies 

seeking a no-action letter from the staff 

with respect to their decision to exclude 

any Rule 14a–11 nominee or nominees 

would need to seek a no-action letter on 

all nominees that they believe they can 

exclude at the outset. 

We also have adopted two new 

exemptions, slightly modified from the 

Proposal, to the proxy rules for 

solicitations in connection with a Rule 

14a–11 nomination. The first exemption 

applies to written and oral solicitations 

by shareholders who are seeking to form 

a nominating shareholder group. 

Reliance on this new exemption will 

require: 

• That the shareholder not be holding 

the company’s securities with the 

purpose, or with the effect, of changing 

control of the company or to gain a 

number of seats on the board of 

directors that exceeds the maximum 

number of nominees that the registrant 

could be required to include under Rule 

14a–11; 

• Limiting the content of written 

communications to certain information 

specified in the rule; 

• Filing all written soliciting 

materials sent to shareholders in 

reliance on the exemption with the 

Commission or, in the case of oral 

communications, a filing under cover of 

Schedule 14N with the appropriate box 

checked before or at the same time as 

the first solicitation in reliance on the 

new exemption; and 

• No solicitations in connection with 

the subject election of directors other 

than pursuant to the provisions of Rule 

14a–11 and the new exemption 

described below. 

Shareholders that do not want to rely on 

this new exemption could opt to rely on 

other exemptions from the proxy rules 

(e.g., Rule 14a–2(b)(2), which is limited 

to solicitations of not more than 10 

persons). 

The second new exemption applies to 

written and oral solicitations by or on 

behalf of a nominating shareholder or 

group whose nominee or nominees are 

or will be included in the company’s 

proxy materials pursuant to Rule 14a–11 

in favor of shareholder nominees or for 

or against company nominees. Reliance 

on this new exemption will require: 

• That the nominating shareholder or 

group does not seek the power to act as 

a proxy for another shareholder; 

• Disclosing certain information 

(including the identity of the 

nominating shareholder or group, and a 

prominent legend about availability of 

the proxy materials) in all written 

communications; 

• Filing all written soliciting 

materials sent to shareholders in 

reliance on the exemption with the 

Commission under cover of Schedule 

14N with the appropriate box checked; 

and 

• No solicitations in connection with 

the subject election of directors other 

than pursuant to the provisions of Rule 

14a–11 and this new exemption. 

Consistent with the Proposal, we also 

are amending our beneficial ownership 

reporting rules so that shareholders 

relying on Rule 14a–11 would not 

become ineligible to file a Schedule 

13G, in lieu of filing a Schedule 13D, 

solely as a result of activities in 

connection with inclusion of a nominee 

under Rule 14a–11. Also consistent with 

the proposed amendments, we are not 

adopting an exclusion from Exchange 

Act Section 16 for activities in 

connection with a nomination under 

Rule 14a–11 that may trigger a filing 

requirement by nominating 

shareholders. In addition, after 

considering the comments, we are not 

adopting a specific exclusion from the 

definition of affiliate for nominating 

shareholders. 

Finally, consistent with the Proposal, 

we are narrowing the scope of the 

exclusion in Rule 14a–8(i)(8) relating to 

the election of directors. The revised 

rule will provide that companies must 

include in their proxy materials, under 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56677 

65See Section II.C.5. below. 

66See discussion in footnote 50 above. 

67Under State law, a company’s governing 

documents may have various names. When we refer 

to governing documents throughout the release and 

rule text, we generally are referring to a company’s 

charter, articles of incorporation, certificate of 

incorporation, declaration of trust, and/or bylaws, 

as applicable. 

68We are not aware of any law in any state or in 

the District of Columbia or in any country that 

currently prohibits shareholders from nominating 

directors. Nonetheless, should any such law be 

enacted in the future, Rule 14a–11 will not apply. 

69See discussion in Section II.C.5. below. 

70As would currently be the case if a State law 

permitted a company to prohibit shareholders from 

nominating candidates for director, a shareholder 

proposal seeking to prohibit shareholder 

nominations for director generally or, conversely, to 

allow shareholder nominations for director, would 

not be excludable pursuant to Rule 14a–8(i)(8). 

71See the Proposing Release; the 2003 Proposal; 

the Election of Directors Proposing Release; and the 

Shareholder Proposals Proposing Release. See also 

the Roundtable on the Federal Proxy Rules and 

State Corporation Law and the Roundtable on 

Proposals of Shareholders available at http:// 

www.sec.gov/spotlight/proxyprocess.htm. 

72See letters from CII; COPERA; CtW Investment 

Group; L. Dallas; T. DiNapoli; Florida State Board 

of Administration; ICGN; D. Nappier; OPERS; Pax 

World; Teamsters. 

73See letters from ABA; Advance Auto Parts; 

Atlas Industries, Inc. (‘‘Atlas’’); J. Blanchard; Samuel 

W. Bodman (‘‘S. Bodman’’); Boeing; Brink’s; BRT; 

Burlington Northern; Callaway; Cargill (‘‘Cargill’’); 

Carlson; Carolina Mills; Chamber of Commerce/ 

CMCC; Jaime Chico (‘‘J. Chico’’); Consolidated 

Edison, Inc. (‘‘Con Edison’’); Anthony Conte (‘‘A. 

Conte’’); W. Cornwell; Crown Battery Manufacturing 

Co. (‘‘Crown Battery’’); CSX; Darden Restaurants; 

Eaton; FedEx; FPL Group; Frontier; Hickory 

Furniture Mart (‘‘Hickory Furniture’’); IBM; Keating 

Muething; Little; Louisiana Agencies LLC 

(‘‘Louisiana Agencies’’); Massey Services, Inc. 

(‘‘Massey Services’’); John B. McCoy (‘‘J. McCoy’’); D. 

McDonald; MedFaxx; Metlife; M. Metz; Norfolk 

Southern Corporation (‘‘Norfolk Southern’’); O3 

Strategies, Inc. (‘‘O3 Strategies’’); Office Depot; 

Victor Pelson (‘‘V. Pelson’’); PepsiCo; Pfizer; Ryder; 

Sidley Austin; Southland; Style Crest; Tenet 

Healthcare Corporation (‘‘Tenet’’); TI; tw telecom; L. 

Tyson; United Brotherhood of Carpenters; T. White. 

74See letters from ABA; Anonymous letter dated 

June 26, 2009 (‘‘Anonymous #2’’); Atlas; AT&T; 

Book Celler; Carlson; Carolina Mills; Chamber of 

Commerce/CMCC; Chevron; Crespin; M. Eng; 

Erickson; ExxonMobil; Fenwick & West LLP 

(‘‘Fenwick’’); GE; General Mills; Glass, Lewis & Co., 

LLC (‘‘Glass Lewis’’); Glaspell Goals (‘‘Glaspell’’); 

Intelect; R. Clark King; Koppers Inc. (‘‘Koppers’’); 

MCO Transport, Inc. (‘‘MCO’’); MeadWestvaco; 

MedFaxx; Medical Insurance; Merchants Terminal; 

Dana Merilatt (‘‘D. Merilatt’’); NAM; NIRI; NK; O3 

Strategies; Roppe Holding Company (‘‘Roppe’’); 

Rosen Hotels and Resorts (‘‘Rosen’’); Safeway; Sara 

Lee; Schneider National, Inc. (‘‘Schneider’’); 

Southland; Style Crest; Tenet; TI; tw telecom; Rick 

VanEngelenhoven (‘‘R. VanEngelenhoven’’); 

Wachtell; Wells Fargo; Weyerhaeuser; Yahoo. 

certain circumstances, shareholder 

proposals that seek to establish a 

procedure in the company’s governing 

documents for the inclusion of one or 

more shareholder director nominees in 

a company’s proxy materials. 

As we proposed, the final rules 

provide that a nominating shareholder 

that is relying on a procedure under 

State law or a company’s governing 

documents to include a nominee in a 

company’s proxy materials would be 

required to provide disclosure 

concerning the nominating shareholder 

and nominee or nominees to the 

company on Schedule 14N and file the 

Schedule 14N on EDGAR. In response to 

comment, we have clarified that the 

disclosure also would be required for 

nominations made pursuant to foreign 

law.65 The disclosure requirements on 

Schedule 14N for nominations made 

pursuant to a procedure under state or 

foreign law, or a company’s governing 

documents largely mirror those for a 

Rule 14a–11 nomination. As with Rule 

14a–11 nominees, a company would 

include in its proxy materials disclosure 

concerning the nominating shareholder 

or group and shareholder nominee 

similar to the disclosure currently 

required in a contested election. The 

nominating shareholder or group would 

have liability for any statement in the 

notice on Schedule 14N or in 

information otherwise provided to the 

company and included in the 

company’s proxy materials which, at the 

time and in light of the circumstances 

under which it is made, is false or 

misleading with respect to any material 

fact or that omits to state any material 

fact necessary to make the statements 

therein not false or misleading. The 

company would not be responsible for 

the information provided to the 

company and required to be included in 

the company proxy statement. 

II. Changes to the Proxy Rules 

A. Introduction 

After careful consideration of the 

comments received on the Proposal, we 

are adopting amendments to the proxy 

rules to facilitate the effective exercise 

of shareholders’ traditional State law 

rights to nominate and elect directors to 

company boards of directors. Under the 

new rules, shareholders meeting certain 

requirements will have two ways to 

more fully exercise their right to 

nominate directors. First, we are 

adopting a new proxy rule, Rule 14a–11, 

which will, under certain 

circumstances, require companies to 

provide shareholders with information 

about, and the ability to vote for, a 

shareholder’s, or group of shareholders’, 

nominees for director in the companies’ 

proxy materials. This requirement will 

apply unless State law, foreign law,66 or 

a company’s governing documents 67

prohibits shareholders from nominating 

directors.68 In addition to the standards 

provided in new Rule 14a–11, 

provisions under State law, foreign law, 

or a company’s governing documents 69

could provide an additional avenue for 

shareholders to submit nominees for 

inclusion in company proxy materials, 

but would not act as a substitute for 

Rule 14a–11. Thus, Rule 14a–11 will 

continue to be available to shareholders 

regardless of whether they also can avail 

themselves of a provision under State 

law, foreign law, or a company’s 

governing documents. 

Second, we are amending Rule 14a– 

8(i)(8) to preclude companies from 

relying on Rule 14a–8(i)(8) to exclude 

from their proxy materials shareholder 

proposals by qualifying shareholders 

that seek to establish a procedure under 

a company’s governing documents for 

the inclusion of one or more 

shareholder director nominees in the 

company’s proxy materials. A company 

must include such a shareholder 

proposal under the final rules as long as 

the procedural requirements of Rule 

14a–8 are met and the proposal is not 

subject to exclusion under one of the 

other substantive bases. In this regard, a 

shareholder proposal seeking to limit or 

remove the availability of Rule 14a–11 

would be subject to exclusion under 

Rule 14a–8.70

As described throughout this release, 

we have made many changes to the final 

rules in response to comments received. 

We believe the final rules reflect a 

careful balancing of the policy, 

workability, and other comments we 

received on the Proposal. 

B. Exchange Act Rule 14a–11 

1. Overview 

Based on the comments received in 

response to our solicitation of public 

input on the Proposal and on prior 

releases and in roundtables,71 we 

understand that shareholders face 

significant obstacles to effectively 

exercising their rights to nominate and 

elect directors to corporate boards. We 

have received significant public 

comment supporting the view that 

including shareholder nominees for 

director in company proxy materials 

would be the most direct and effective 

method of facilitating shareholders’ 

rights in connection with the 

nomination and election of directors.72

On the other hand, many commenters 

have expressed concern that mandating 

shareholder access to company proxy 

materials would lead to more proxy 

contests or ‘‘politicized elections,’’ 73

which would be distracting, expensive, 

time-consuming, and inefficient for 

companies, boards, and management.74


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75See letters from 3M; ABA; American Electric 

Power; Atlantic Bingo; AT&T; Avis Budget; Biogen; 

Boeing; BRT; Burlington Northern; Callaway; 

Carlson; Chamber of Commerce/CMCC; CIGNA; 

Columbine Health Plan (‘‘Columbine’’); Cummins; 

CSX; John T. Dillon (‘‘J. Dillon’’); Emerson Electric; 

Erickson; ExxonMobil; FedEx; Headwaters 

Incorporated (‘‘Headwaters’’); C. Holliday; IBM; 

Intelect; R. Clark King; Lange Transport (‘‘Lange’’); 

Louisiana Agencies; MetLife; NIRI; O3 Strategies; V. 

Pelson; PepsiCo; Pfizer; Roppe; Rosen; Ryder; Sara 

Lee; Sidley Austin; tw telecom; Wachtell; Wells 

Fargo; Weyerhaeuser; Yahoo. 

76See letters from Ameriprise; Anonymous #2; 

Artistic Land Designs; Chamber of Commerce/ 

CMCC; Crown Battery; Evelyn Y. Davis (‘‘E. Davis’’); 

Kernan; Medical Insurance; Mouton; Unitrin; R. 

VanEngelenhoven; Wells Fargo. 

77See new Exchange Act Rule 14a–11. 

78See letters from S&C; Curtis, Mallet-Prevost, 

Colt & Mosle LLP (‘‘Curtis’’). 

79See footnote 70 above. 

80New Schedule 14N, which is described further 

in Section II.B.8. below, includes check boxes 

where a nominating shareholder or group must 

specify whether it is seeking to include the nominee 

or nominees in the company’s proxy materials 

under Rule 14a–11 or pursuant to a provision in 

State law, foreign law, or a company’s governing 

documents. 

81See letters from 26 Corporate Secretaries; ABA; 

ACE; Advance Auto Parts; AGL; Aetna; Allstate; 

Alston & Bird; American Bankers Association; 

Commenters also opined that the 

increased likelihood of a contested 

election could discourage experienced 

and capable individuals from serving on 

boards, making it more difficult for 

companies to recruit qualified directors 

or create boards with the proper mix of 

experience, skills, and characteristics.75

The current filing and other 

requirements applicable to shareholders 

who wish to propose an alternate slate 

are, in the view of these commenters, 

more appropriate than including 

shareholder nominees for director in 

company proxy materials.76

As we also noted in the Proposing 

Release, we recognize that there are 

long-held and deeply felt views on 

every side of these issues. To the extent 

shareholders have the right to nominate 

directors at meetings of shareholders, 

the Federal proxy rules should facilitate 

the exercise of this right. We believe the 

rules we are adopting today will better 

accomplish this goal and will further 

our mission of investor protection. 

New Rule 14a–11 will require 

companies to include information about 

shareholder nominees for director in 

company proxy statements, and the 

names of the nominee or nominees as 

choices on company proxy cards, under 

specified conditions.77 The rule will 

permit companies to exclude a nominee 

or nominees from the company’s proxy 

materials under certain circumstances, 

such as when a nominating shareholder 

or group fails to satisfy the eligibility 

requirements of the rule. In the 

following sections we describe, in 

detail, the final rules, comments 

received on the Proposal, and changes 

made in response to the comments. 

2. When Rule 14a–11 Will Apply 

In this section, we address the rule’s 

application, including when there are 

conflicting or overlapping provisions 

under state or foreign law or a 

company’s governing documents, 

during concurrent proxy contests, and 

in the absence of any specific triggering 

events. We also address the reasons why 

neither an opt-in nor opt-out provision 

is necessary or appropriate. 

a. Interaction With State or Foreign Law 

While we are not aware of any law in 

any state or in the District of Columbia 

that prohibits shareholders from 

nominating directors, consistent with 

the Proposal, a company to which the 

rule would otherwise apply will not be 

subject to Rule 14a–11 if applicable 

State law or the company’s governing 

documents prohibit shareholders from 

nominating candidates for the board of 

directors. The final rule also clarifies 

that, in the case of a non-U.S. domiciled 

issuer that does not meet the definition 

of foreign private issuer under the 

Federal securities laws, the rule will not 

apply if applicable foreign law prohibits 

shareholders from nominating a 

candidate for election as a director.78 If 

a company’s governing documents 

prohibit shareholder nominations, 

shareholders could seek to amend the 

provision by submitting a shareholder 

proposal under Rule 14a–8.79

Consistent with the Proposal, Rule 

14a–11 will apply regardless of whether 

state or foreign law or a company’s 

governing documents prohibit inclusion 

of shareholder director nominees in 

company proxy materials or set share 

ownership or other terms that are more 

restrictive than Rule 14a–11 under 

which shareholder director nominees 

will be included in company proxy 

materials. For example, if applicable 

state or foreign law or a company’s 

governing documents were to require 

that shareholder nominees be included 

in company proxy materials only if 

submitted by a 10% shareholder of the 

company, a shareholder who does not 

meet the 10% threshold but does meet 

the requirements of Rule 14a–11, 

including the 3% ownership threshold 

described below, would be able to 

submit their nominee or nominees for 

inclusion in the company’s proxy 

materials pursuant to Rule 14a–11. If, on 

the other hand, applicable state or 

foreign law or a company’s governing 

documents sets the ownership threshold 

lower than the 3% ownership threshold 

required under Rule 14a–11, then Rule 

14a–11 would not be available to 

holders with ownership below the Rule 

14a–11 threshold. Those shareholders 

meeting the lower ownership threshold 

would have the ability to have their 

nominees included in the company’s 

proxy materials to whatever extent is 

provided under applicable state or 

foreign law or the company’s governing 

documents. In this instance, new 

Exchange Act Rule 14a–18, discussed in 

Section II.C.5. below, would require 

specified disclosures concerning the 

nominating shareholder or group and 

the shareholder nominee or nominees. 

There also may be situations where 

applicable state or foreign law or a 

company’s governing documents are 

more permissive in certain respects, and 

more restrictive in other respects, than 

Rule 14a–11. For example, applicable 

state or foreign law or a company’s 

governing documents could require 

10% ownership to have a nominee or 

nominees included in a company’s 

proxy materials, but allow a shareholder 

that owns 10% to have nominees up to 

the full number of board seats included 

in a company’s proxy materials or to 

otherwise have a change in control 

intent. While Rule 14a–11 would 

continue to be available in that case for 

a shareholder that is eligible to use it, 

a shareholder could choose to proceed 

under the alternate procedure and 

standards. In this instance, a 

shareholder would be required to 

clearly evidence its intent to rely either 

on Rule 14a–11 or on the applicable 

state or foreign law or company’s 

governing documents, and then meet all 

of the requirements of whichever 

procedure it selects.80 A shareholder 

could not ‘‘pick and choose’’ different 

aspects of different procedures. If a 

shareholder chooses to rely on a 

provision under applicable state or 

foreign law or a company’s governing 

documents to include a nominee in a 

company’s proxy materials, it would be 

required to satisfy the disclosure 

requirements of new Rule 14a–18. 

b. Opt-In Not Required 

In the Proposing Release, we 

requested comment on whether Rule 

14a–11 should apply only if 

shareholders of a company elect to have 

it apply at their company. While 

commenters did not specifically address 

the possibility of shareholders opting 

into Rule 14a–11, many commenters 

opposed the Commission’s Proposal on 

the basis that it would create a ‘‘one size 

fits all’’ Federal rule that intrudes into 

matters that traditionally have been the 

province of state or local law.81 Those 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56679 

American Business Conference; American Electric 

Power; Anadarko; Applied Materials; Artistic Land 

Designs; Association of Corporate Counsel; Avis 

Budget; Atlantic Bingo; L. Behr; Best Buy; Biogen; 

J. Blanchard; Boeing; T. Bonkowski; BorgWarner; 

Boston Scientific; Brink’s; BRT; Burlington 

Northern; R. Burt; California Bar; Callaway; S. 

Campbell; Carlson; Carolina Mills; Caterpillar; 

Chamber of Commerce/CMCC; Chevron; R. Chicko; 

CIGNA; Comcast; Competitive Enterprise Institute; 

W. Cornwell; CSX; E. Culwell; Cummins; Darden 

Restaurants; Daniels Manufacturing; Davis Polk; 

Delaware Bar; T. Dermody; Devon; DTE Energy; 

Eaton; Edison Electric Institute; Eli Lilly; Emerson 

Electric; M. Eng; Erickson; ExxonMobil; FedEx; 

Financial Services Roundtable; Flutterby; FPL 

Group; Frontier; GE; A. Goolsby; Grundfest; C. 

Holliday; IBM; ICI; Intelect; JPMorgan Chase; Jones 

Day; R. Clark King; Leggett; T. Liddell; Little; 

McDonald’s; MeadWestvaco; MedFaxx; Medical 

Insurance; MetLife; M. Metz; Microsoft; J. Miller; M. 

Moretti; Motorola; NACD; NAM; NIRI; O’Melveny 

& Myers; Office Depot; Omaha Door; P&G; PepsiCo; 

Pfizer; Realogy; J. Robert; M. Robert; RPM; Ryder; 

Safeway; R. Saul; Shearman & Sterling; SherwinWilliams; R. Simoneau; Society of Corporate 

Secretaries; Southern Company; Southland; Steele 

Group; Style Crest; Tesoro; Textron; Theragenics; 

TI;. R. Trummel; T. Trummel; V. Trummel; tw 

telecom; L. Tyson; United Brotherhood of 

Carpenters; UnitedHealth; U.S. Bancorp; VCG; 

Wachtell; Wellness; Wells Fargo; Whirlpool; Xerox; 

Yahoo; J. Young. 

82See letters from ABA; BRT; Davis Polk; 

Delaware Bar; Frontier; IBM; Protective. 

83See letters from 13D Monitor (‘‘13D Monitor’’); 

AFL–CIO; CalPERS; CFA Institute Centre for Market 

Integrity (‘‘CFA Institute’’); CII; Florida State Board 

of Administration; ICGN; LIUNA; D. Nappier; P. 

Neuhauser; OPERS; Pax World; RiskMetrics; SWIB; 

Teamsters; USPE. 

84See letters from ABA; Advance Auto Parts; 

Aetna; American Bankers Association; American 

Electric Power; American Express; Applied 

Materials; Association of Corporate Counsel; Best 

Buy; BRT; California Bar; Carlson; J. Chico; Cleary 

Gottlieb Steen & Hamilton LLP (‘‘Cleary’’); Comcast; 

Con Edison; CSX; Cummins; L. Dallas; Davis Polk; 

Devon; Dupont; ExxonMobil; Financial Services 

Roundtable; FPL Group; IBM; JPMorgan Chase; 

Keating Muething; Koppers; Alexander Krakovsky 

(‘‘A. Krakovsky’’); Group of 10 Harvard Business 

School and Harvard Law School Professors (‘‘Lorsch 

et al.’’); Brett H. McDonnell (‘‘B. McDonnell’’); 

Motorola; O’Melveny & Myers; P&G; Pfizer; S&C; 

Sara Lee; Group of Seven Law Firms (‘‘Seven Law 

Firms’’); Shearman & Sterling; Securities Industry 

and Financial Markets Association (‘‘SIFMA’’); 

Society of Corporate Secretaries; Southern 

Company; U.S. Bancorp; Wachtell. 

85See letters from ABA; BRT; Delaware Bar. 

86See letters from DTE Energy (endorsing the optout approach described in the letter submitted by 

the Society of Corporate Secretaries); JPMorgan 

Chase; P&G; Seven Law Firms; Society of Corporate 

Secretaries; U.S. Bancorp. 

87See letters from 13D Monitor; AFL–CIO; 

CalPERS; CFA Institute; CII; Florida State Board of 

Administration; ICGN; LIUNA; D. Nappier; P. 

Neuhauser; Pax World; OPERS; RiskMetrics; SWIB; 

Teamsters; USPE. 

88See letters from 13D Monitor; AFL–CIO; 

CalPERS; CFA Institute; CII; Florida State Board of 

Administration; ICGN; LIUNA; D. Nappier; P. 

Neuhauser; Pax World; OPERS; RiskMetrics; SWIB; 

Teamsters; USPE. 

89See letters from AFL–CIO; Amalgamated Bank; 

William Baker (‘‘W. Baker’’); Florida State Board of 

Administration; International Association of 

Machinists and Aerospace Workers (‘‘IAM’’); The 

Marco Consulting Group (‘‘Marco Consulting’’); P. 

Neuhauser; Nine Law Firms; Norges Bank 

Investment Management (‘‘Norges Bank’’); 

Relational; Shamrock Capital Advisors, Inc. 

(‘‘Shamrock’’); TIAA–CREF; USPE; ValueAct 

Capital. 

90See letters from Florida State Board of 

Administration; P. Neuhauser; Shamrock. 

91See letter from Shamrock. 

92See letter from P. Neuhauser. 

93Letter from Nine Law Firms. 

commenters asked the Commission to 

permit private ordering so that 

companies and shareholders could 

devise, if they chose to, a process for the 

inclusion of shareholder director 

nominees in company proxy materials 

that best suits their particular 

circumstances. Commenters also 

expressed fears that the Commission’s 

Proposal, if adopted, would stifle future 

innovations relating to inclusion of 

shareholder director nominees in 

company proxy materials and corporate 

governance in general.82 On the other 

hand, some commenters expressed 

general support for uniform 

applicability of proposed Rule 14a–11, 

unless State law or the company’s 

governing documents prohibit 

shareholders from nominating 

candidates to the board.83

Though we considered commenters’ 

views concerning a private ordering 

approach, as discussed in Section I.A. 

above, we have concluded that our rules 

should provide shareholders the ability 

to include director nominees in 

company proxy materials without the 

need for shareholders to bear the 

burdens of overcoming the substantial 

obstacles to creating that ability on a 

company-by-company basis. Rule 14a– 

11 is designed to facilitate the effective 

exercise of shareholder director 

nomination and election rights. 

Requiring shareholders to persuade 

other shareholders to opt into a system 

that better facilitates such State law 

rights would frustrate the benefits that 

our new rule seeks to promote. 

c. No Opt-Out 

In the Proposing Release, we sought 

comment on whether Rule 14a–11 

should be inapplicable where a 

company has or adopts a provision in its 

governing documents that provides for, 

or prohibits, the inclusion of 

shareholder director nominees in the 

company’s proxy materials. We also 

sought comment on whether Rule 14a– 

11 should apply in various 

circumstances, such as where 

shareholders approve provisions in the 

governing documents that are more or 

less restrictive than Rule 14a–11. 

Commenters were divided on whether 

companies and shareholders should be 

permitted to adopt alternative 

requirements for shareholder director 

nominations, or to completely opt out of 

Rule 14a–11. Many commenters 

generally supported a provision that 

would permit companies and 

shareholders to adopt alternative 

requirements for shareholder director 

nominations that could be either more 

restrictive or less restrictive than those 

of Rule 14a–11.84 Among these 

commenters, some argued that creating 

a ‘‘one-size-fits-all’’ rule that cannot be 

altered by companies and shareholders 

conflicts with the traditional enabling 

approach of state corporation laws and 

denies shareholder choice.85 Some 

commenters advocated allowing 

companies to opt out of Rule 14a–11 

through a shareholder-approved bylaw 

(including through a Rule 14a–8 

shareholder proposal), with some 

suggesting that Rule 14a–11 apply 

initially only to companies that have not 

opted out through a shareholderapproved process by the time of the first 

annual meeting held after the adoption 

of the proposed rules.86

On the other hand, several 

commenters expressed support for the 

uniform applicability of Rule 14a–11.87

These commenters expressed general 

support for the Commission’s Proposal 

that Rule 14a–11 apply to all companies 

subject to the Federal proxy rules unless 

State law or the company’s governing 

documents prohibit shareholders from 

nominating candidates to the board.88

Several commenters stated they oppose 

a provision that would permit 

companies to opt out of Rule 14a–11.89

Some commenters expressed a general 

concern that if companies are allowed to 

opt out of the rule, boards would adopt 

provisions in a company’s governing 

documents that are so restrictive that it 

would be impossible for shareholders to 

have their candidates included in 

company proxy materials,90 with one 

commenter noting that the laws of most 

states would allow a board to adopt 

such provisions in a company’s bylaws 

without a shareholder vote.91 Further, a 

commenter warned that boards would 

use corporate funds to defeat 

shareholders’ attempts to change such 

board-adopted provisions through 

shareholder proposals.92 One 

commenter argued that the ‘‘idea that 

individual corporations should be given 

the right to ‘opt out’ of the proposed 

regulations through bylaws or otherwise 

is contrary to the Commission’s entire 

regulatory scheme’’ and referred to 

Section 14 of the Securities Act,93

which voids ‘‘[a]ny condition, 

stipulation, or provision binding any 

person acquiring any security to waive 

compliance with any provision of this 


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94 15 U.S.C. 77n. 

95Business Roundtable v. SEC, 905 F.2d 406, 410 

(D.C. Cir. 1990). 

96Our view in this regard has been sharply 

criticized. E.g., Joseph A. Grundfest, The SEC’s 

Proposed Proxy Access Rules: Politics, Economics, 

and the Law, 65 Bus. Law. 361, 370 (2010) (this 

article also was included as an attachment to the 

January 18, 2010 letter from Joseph A. Grundfest 

(‘‘Grundfest II’’)) (‘‘there is no intellectually credible 

argument that shareholders are * * * competent to 

elect directors but incompetent to determine the 

rules governing the election of directors. There is 

also no support for the proposition that 

shareholders can be trusted to relax the mandatory 

minimum standards established by the 

Commission, but not to strengthen them.’’). In our 

view, these assertions are flawed. This is not an 

issue of shareholder competence. It is, instead, a 

recognition that permitting a company or a group 

of shareholders to prevent shareholders from 

effectively participating in governing the 

corporation through participation in the proxy 

process is fundamentally inconsistent with the goal 

of Federal proxy regulation. See Business 

Roundtable, 905 F.2d at 410. 

97See letters from 26 Corporate Secretaries; ABA; 

ACE; Advance Auto Parts; AGL; Aetna; Allstate; 

Alston & Bird; American Bankers Association; 

American Business Conference; American Electric 

Power; Anadarko; Applied Materials; Artistic Land 

Designs; Association of Corporate Counsel; Avis 

Budget; Atlantic Bingo; L. Behr; Best Buy; Biogen; 

J. Blanchard; Boeing; T. Bonkowski; BorgWarner; 

Boston Scientific; Brink’s; BRT; Burlington 

Northern; R. Burt; California Bar; Callaway; S. 

Campbell; Carlson; Carolina Mills; Caterpillar; 

Chamber of Commerce/CMCC; Chevron; R. Chicko; 

CIGNA; Comcast; Competitive Enterprise Institute; 

W. Cornwell; CSX; E. Culwell; Cummins; Darden 

Restaurants; Daniels Manufacturing; Davis Polk; 

Delaware Bar; T. Dermody; Devon; DTE Energy; 

Eaton; Edison Electric Institute; Eli Lilly; Emerson 

Electric; M. Eng; Erickson; ExxonMobil; FedEx; 

Financial Services Roundtable; Flutterby; FPL 

Group; Frontier; GE; A. Goolsby; C. Holliday; IBM; 

ICI; Intelect; JPMorgan Chase; Jones Day; R. Clark 

King; Leggett; T. Liddell; Little; McDonald’s; 

MeadWestvaco; MedFaxx; Medical Insurance; 

Metlife; M. Metz; Microsoft; J. Miller; M. Moretti; 

Motorola; NACD; NAM; NIRI; O’Melveny & Myers; 

Office Depot; Omaha Door; P&G; PepsiCo; Pfizer; 

Realogy; J. Robert; M. Robert; RPM; Ryder; Safeway; 

R. Saul; Shearman & Sterling; Sherwin-Williams; R. 

Simoneau; Society of Corporate Secretaries; 

Southern Company; Southland; Steele Group; Style 

Crest; Tesoro; Textron; Theragenics; TI;. R. 

Trummel; T. Trummel; V. Trummel; tw telecom; L. 

Tyson; United Brotherhood of Carpenters; 

UnitedHealth; U.S. Bancorp; VCG; Wachtell; 

Wellness; Wells Fargo; Whirlpool; Xerox; Yahoo; J. 

Young. 

98This triggering event could not occur in a 

contested election to which Rule 14a–12(c) would 

apply or an election to which the proposed 

shareholder nomination procedure would have 

applied. 

title or of the rules and regulations of 

the Commission* * *.’’ 94

After carefully considering the 

comments, we have determined that 

Rule 14a–11 should not provide an 

exemption for companies that have or 

adopt a provision in their governing 

documents that provides for or prohibits 

the inclusion of shareholder director 

nominees in the company’s proxy 

materials. Thus, regardless of whether a 

company has a provision for the 

inclusion of shareholder nominees in its 

proxy materials, Rule 14a–11 will apply. 

As noted, the only exception is if state 

or foreign law or a company’s governing 

documents prohibits shareholders from 

making director nominations. 

We believe the rights to nominate and 

elect directors are traditional State law 

rights of all shareholders and we believe 

the current proxy rules could better 

facilitate the effective exercise of these 

State law rights. We do not believe that 

it is appropriate for our rules to permit 

a company’s board or a majority of 

shareholders to elect to opt out of Rule 

14a–11 and thus deprive other 

shareholders of an effective means to 

exercise their State law right to 

nominate directors and to freely 

exercise their franchise rights. Thus, 

allowing a vote to opt out of the rule 

would contravene a fundamental 

rationale of Rule 14a–11—improving the 

degree to which shareholders 

participating through the proxy process 

are able ‘‘to control the corporation as 

effectively as they might have by 

attending a shareholder meeting.’’ 95

When shareholders have the right to 

nominate candidates for director at a 

shareholder meeting, we believe 

shareholder choice is enhanced if our 

rules facilitate the ability of 

shareholders to nominate candidates for 

director through the proxy process. 

Allowing a company or a majority of its 

shareholders to opt out of the rule 

would diminish the rights of 

shareholders who participate by proxy 

by preventing shareholder nominees 

from being included in company proxy 

materials, thus reducing shareholder 

choice in the critical area of director 

elections. Similarly, allowing a 

company or a majority of its 

shareholders to opt out of the rule 

would diminish the ability of 

shareholders to vote for nominees put 

forth by other shareholders. 

In addition, companies and their 

shareholders do not have the option to 

elect to opt out of other Federal proxy 

rules and we do not believe they should 

have the ability to do so with this rule. 

In our view, shareholders’ electoral 

rights through the proxy process should 

not be impaired by a unilateral act of the 

board of directors, or even by a 

shareholder vote supported by 

management. Further, as we describe 

above, allowing some portion of 

shareholders to alter the application of 

Rule 14a–11 would effectively reduce 

choices for shareholders who do not 

favor that decision.96

Finally, we considered the objections 

of some commenters to a ‘‘one-size-fitsall’’ rule and concerns that for some 

companies with various capital 

structures the rule may raise more 

complex issues.97 As we have noted, no 

Federal proxy rule allows shareholders 

or boards to alter how the rules apply 

to companies. The concept that our 

rules are not subject to company-bycompany variation is entirely consistent 

with our mandate to protect all 

investors. In this regard, we are not 

persuaded that we should allow our 

rules to be altered by shareholders or 

boards to the potential detriment of 

other shareholders. We believe that 

having a uniform standard that applies 

to all companies subject to the rule will 

simplify use of the rule for shareholders 

and allowing different procedures and 

requirements to be adopted by each 

company could add significant 

complexity and cost for shareholders 

and undermine the purposes of our new 

rule. While other procedures and 

standards could be adopted by 

companies or shareholders to 

supplement Rule 14a–11, shareholders 

would benefit from the predictability of 

the uniform application of Rule 14a–11 

at all companies. 

It is important to note that while Rule 

14a–11 facilitates the existing rights of 

shareholders and we do not believe the 

rule should be altered, it is not the 

exclusive way by which a candidate 

other than a management nominee may 

be put to a shareholder vote. 

Shareholders may continue to choose to 

conduct traditional proxy contests. 

Regardless of whether a shareholder 

uses Rule 14a–11 or conducts a 

traditional proxy contest to nominate a 

candidate for director, a company 

concerned about how such a 

shareholder nominee fits into its 

particular capital structure or other 

unique fact patterns presumably would 

address that concern in its proxy 

materials. 

d. No Triggering Events 

Under the Commission’s 2003 

Proposal, a company would have been 

subject to the shareholder director 

nomination requirements after the 

occurrence of one or both of two 

possible triggering events. The first 

triggering event was that at least one of 

the company’s nominees for the board 

of directors for whom the company 

solicited proxies received withhold 

votes from more than 35% of the votes 

cast at an annual meeting of 

shareholders at which directors were 

elected.98 The second triggering event 

was that a shareholder proposal 

submitted under Rule 14a–8 providing 

that a company become subject to the 

proposed shareholder nomination 

procedure was submitted for a vote of 


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99Only votes for and against a proposal would 

have been included in the calculation of the 

shareholder vote. 

100See letters from AFSCME; CalSTRS; CFA 

Institute; CII; COPERA; T. DiNapoli; Florida State 

Board of Administration; ICGN; N. Lautenbach; 

LIUNA; D. Nappier; Nathan Cummings Foundation; 

OPERS; Pax World; Relational; Sodali; SWIB; 

TIAA–CREF; G. Tooker; USPE; ValueAct Capital. 

101See letters from AFSCME; CFA Institute; CII; 

T. DiNapoli; LIUNA. 

102See letters from Automatic Data Processing, 

Inc. (‘‘ADP’’); Alaska Air Group, Inc. (‘‘Alaska Air’’); 

Allstate; American Electric Power; Anadarko; 

AT&T; Avis Budget; Barclays Global Investors 

(‘‘Barclays’’); Biogen; Boeing; BRT; Burlington 

Northern; R. Burt; Callaway; Chevron; CIGNA; CNH 

Global N.V. (‘‘CNH Global’’); Comcast; Cummins; 

Deere & Company (‘‘Deere’’); Eaton; ExxonMobil; 

FedEx; FMC Corp.; FPL Group; Frontier; General 

Mills; C. Holliday; IBM; ITT Corporation (‘‘ITT’’); J. 

Kilts; Ellen J. Kullman (‘‘E.J. Kullman’’); N. 

Lautenbach; McDonald’s; J. Miller; Motorola; Office 

Depot; O’Melveny & Myers; P&G; PepsiCo; Pfizer; 

Protective; Ryder; Sara Lee; Sherwin-Williams; 

Theragenics; TI; tw telecom; G. Tooker; 

UnitedHealth; Xerox. 

103See letters from CII; Florida State Board of 

Administration; Sodali; USPE. 

104See letters from ABA; American Express; 

Biogen; BorgWarner; BRT; Davis Polk; Dewey; Eli 

Lilly; Fenwick; Honeywell; JPMorgan Chase; 

Leggett; PepsiCo; Seven Law Firms; Society of 

Corporate Secretaries; Tenet; U.S. Bancorp; Verizon; 

Wachtell. 

105See letter from CII. 

106See letter from Florida State Board of 

Administration. 

107See letters from ABA; BRT; Davis Polk; Eli 

Lilly; Seven Law Firms; Society of Corporate 

Secretaries. 

108See Eastbourne Capital LLC No-Action Letter 

(March 30, 2009) and Icahn Associates Corp. NoAction Letter (March 30, 2009). 

109Release No. 33–9052, 34–60280 (July 10, 2009) 

[74 FR 35076]. 

110See letters from ABA; Eli Lilly; JPMorgan 

Chase; Society of Corporate Secretaries. 

111See letters from ABA; Society of Corporate 

Secretaries. 

112See letters from ABA; BRT; Davis Polk; Eli 

Lilly; PepsiCo; Seven Law Firms; Society of 

Corporate Secretaries. 

shareholders at an annual meeting by a 

shareholder or group of shareholders 

that held more than 1% of the 

company’s securities entitled to vote on 

the proposal and the shareholder or 

group of shareholders held those 

securities for one year as of the date the 

proposal was submitted, and the 

proposal received more than 50% of the 

votes cast on that proposal at the 

meeting.99 In 2003, these triggering 

events were included because they were 

believed to be indications that a 

company had a demonstrated corporate 

governance issue, such that 

shareholders should have the 

opportunity to include director 

nominees in the company’s proxy 

materials. 

Unlike the 2003 Proposal, our current 

proposal did not include a triggering 

event requirement in Rule 14a–11. As 

noted in the Proposing Release, we did 

not include such a requirement because 

we were concerned that the Federal 

proxy rules may be impeding the 

exercise of shareholders’ ability under 

State law to nominate and elect 

directors at all companies, not just those 

with demonstrated governance issues. 

In addition, we noted our concern, and 

the concern expressed by commenters 

on the 2003 Proposal, that the inclusion 

of triggering events would result in 

unnecessary complexity and would 

delay the operation of the rule. 

However, we solicited comment about 

whether triggers for the application of 

Rule 14a–11 would be appropriate. 

Many commenters opposed the 

inclusion of a triggering event 

requirement,100 with some commenters 

expressing concern that triggering 

events would cause significant delays 

and introduce undue complexity into 

the rule.101 On the other hand, other 

commenters supported the inclusion of 

a triggering event requirement, believing 

that such a requirement would serve as 

a useful indicator of the companies with 

demonstrated governance issues (e.g., 

companies that do not act within a 

certain time period on a shareholder 

proposal that received majority 

support).102

We remain concerned that the Federal 

proxy rules may not be facilitating the 

exercise of shareholders’ ability under 

State law to nominate and elect 

directors and this concern is not limited 

to shareholders’ ability to nominate 

directors at companies with 

demonstrated governance issues. 

Indeed, allowing shareholders to 

include nominees in company proxy 

materials before there are demonstrated 

governance failures could have the 

benefit of increasing director 

responsiveness and avoiding future 

governance failures. In addition, we 

share the concerns of some commenters 

that inclusion of triggering events would 

introduce undue complexity to the rule. 

Therefore, we are adopting the rule as 

proposed, without a triggering event 

requirement. 

e. Concurrent Proxy Contests 

As proposed, Rule 14a–11 would 

apply regardless of whether a company 

is engaged in, or anticipates being 

engaged in, a concurrent proxy contest; 

however, we requested comment on 

whether a company should be exempted 

from complying with Rule 14a–11 if 

another party commences or evidences 

its intent to commence a solicitation in 

opposition subject to Rule 14a–12(c). Of 

the commenters that responded, a few 

stated that shareholders of a company 

that is the subject of a traditional proxy 

contest should be allowed to use Rule 

14a–11 to have nominees included in 

the company’s proxy materials,103 and 

others stated that shareholders of a 

company engaged in a traditional proxy 

contest should not be allowed to use 

Rule 14a–11 to have nominees included 

in the company’s proxy materials.104

In support of enabling shareholders to 

use Rule 14a–11 during a traditional 

proxy contest, one commenter argued 

that exempting companies subject to a 

traditional proxy contest from Rule 14a– 

11 would be inconsistent with the 

Commission’s objective of changing the 

proxy process to better reflect the rights 

shareholders would have at a 

shareholder meeting, and that 

dissatisfied shareholders who are not 

seeking a change in control and who 

otherwise meet the eligibility criteria 

under Rule 14a–11 would be 

disenfranchised.105 The commenter 

stated that dissatisfied shareholders 

should not be forced to make a choice 

between a change in control or 

‘‘business as usual.’’ Another commenter 

stated that contested elections have 

been conducted successfully with more 

than two slates.106

On the other hand, commenters that 

sought a limitation on use of Rule 14a– 

11 during a traditional proxy contest 

were concerned that Rule 14a–11 could 

have the effect of facilitating a change in 

control of the company.107 Commenters 

noted that under certain staff 

positions,108 as well as the 

Commission’s discussion of Rule 14a– 

4(d)(4), as set forth in the Proxy 

Disclosure and Solicitation 

Enhancements proposing release,109 a 

dissident shareholder could ‘‘round out’’ 

its short-slate proxy card by seeking 

authority to vote for Rule 14a–11 

shareholder nominees, thereby 

facilitating a change in control.110

Further, commenters believed that 

under the Proposal shareholders that 

submit nominees in reliance on Rule 

14a–11 would not be barred from 

actively soliciting for the nominees of a 

shareholder using a traditional proxy 

contest and, conversely, a shareholder 

using a traditional proxy contest could 

actively engage in soliciting activities 

for Rule 14a–11 shareholder 

nominees.111 Commenters also worried 

that multiple groups of shareholders 

who simultaneously propose different 

directors for different purposes could 

lead to substantial confusion for other 

shareholders.112 Commenters warned 

that shareholder confusion would 

increase if there are two or more proxy 

cards with more than twice the number 


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113See letters from ABA; Davis Polk. 

114See Section II.B.4. below for a further 

discussion of change in control intent and the 

certifications required by the new rules. 

115Letter from Davis Polk. 

116See letter from Society of Corporate 

Secretaries. 

117See letters from BRT; Verizon. 

118See letter from ABA. 119See letter from P. Neuhauser. 

120See, e.g., letters from ABA; Seven Law Firms. 121See Instruction to Rule 14a–11(b). 

of nominees than available slots.113

According to these commenters, further 

confusion would result from any 

assumption by shareholders that the 

Rule 14a–11 slate is allied with the 

insurgent slate, despite the Rule 14a–11 

representation regarding the lack of 

control intent.114 One commenter also 

argued that, despite the Rule 14a–11 

representation regarding the lack of 

control intent, it is ‘‘easy to imagine that 

in some contested elections, a [R]ule 

14a–11 nominee would be the swing 

vote, tipping the majority of the board 

and thus control of the company.’’ 115

Citing these same concerns, another 

commenter recommended that when a 

company’s board receives notice of a 

traditional proxy contest, the company 

should be permitted to exclude Rule 

14a–11 nominees from the company’s 

proxy materials (and, if the proxy 

materials have already been distributed, 

to issue supplemental proxy materials 

eliminating these nominees from the 

company’s materials).116

Finally, some commenters argued that 

Rule 14a–11 is unnecessary when a 

company is engaged in a traditional 

proxy contest because the company’s 

shareholders are already effectively 

exercising their rights under State law to 

nominate and elect directors.117 One 

commenter stated that if the 

Commission decides not to prohibit a 

concurrent vote on Rule 14a–11 

nominees and nominees presented 

through a traditional proxy contest, it 

should at least provide that the 

nominees presented through the 

traditional proxy contest be counted 

against the number of permissible Rule 

14a–11 nominees to reduce the 

likelihood of a change in control.118 The 

commenter stated that if Rule 14a–11 

could be used concurrently with a 

traditional proxy contest, the 

nominating shareholder should not be 

allowed to be a ‘‘participant’’ (as defined 

under Schedule 14A) in the traditional 

proxy contest or to engage in any 

soliciting activity for a nominee of 

another shareholder. The commenter 

also suggested that dissidents in a 

traditional proxy contest be precluded 

from including Rule 14a–11 nominees 

on their proxy card. Acknowledging the 

possibility of collusion, shareholder 

confusion, and change in control, one 

commenter expressed support for 

reasonable limitations on a Rule 14a–11 

nomination if there is a simultaneous 

proxy contest.119

While we appreciate commenters’ 

concerns, we do not believe that our 

efforts to facilitate the exercise of 

shareholders’ State law right to 

nominate directors should be limited by 

the activities of other persons engaged 

in a traditional proxy contest. We also 

believe that, as described below, Rule 

14a–11 and the related rule 

amendments, together with our staff 

review process, can adequately address 

concerns about investor confusion and 

potential abuse of the process by those 

seeking a change in control. Therefore, 

we are adopting the rule as proposed, 

without an exception for companies that 

are subject to or anticipate being subject 

to a concurrent proxy contest. In this 

regard, we agree with those commenters 

that opposed including a limitation 

because to do so would be inconsistent 

with the goals of our rulemaking, which 

are not limited by the nomination 

activities of other persons. In addition, 

we note that there is no current 

limitation in the Federal proxy rules on 

the number of proxy contests that can 

take place simultaneously and we do 

not believe that there is sufficient reason 

to provide such a limitation in this 

circumstance. Companies and 

shareholders have been able, to date, to 

successfully navigate multiple slates on 

those occasions when more than one 

person undertakes a proxy contest. In 

addition, we believe that a company can 

address commenters’ concerns through 

disclosure in its proxy materials. For 

example, the company may disclose in 

its proxy statement potential effects of 

electing non-management nominees 

(whether those nominees are included 

in the company’s materials or in other 

soliciting persons’ materials), such as 

the potential to cause the company to 

violate law or the independence 

requirements of the exchange listing 

standards, and allow shareholders to 

consider that information when making 

their voting decisions. Similarly, we 

believe that appropriate disclosure in 

the company’s proxy materials, as well 

as the dissident’s proxy materials, could 

serve to potentially avoid shareholder 

confusion about how many nominees a 

shareholder may vote for and how to 

mark the card. 

We also have not revised Rule 14a–11, 

as suggested by commenters, to count 

nominees put forth by persons outside 

of Rule 14a–11 for purposes of the 

calculation of the maximum number of 

nominees required to be included in the 

company’s proxy materials pursuant to 

Rule 14a–11. We believe that to do so 

would, like an outright exception, be 

inconsistent with the goal of our 

rulemaking—to change the proxy 

process to better reflect the rights 

shareholders would have at a 

shareholder meeting, which are not 

limited by the nomination activities of 

other persons. 

While we are not adopting an 

exception from the rule for companies 

that are, or anticipate being, subject to 

a concurrent proxy contest, we do 

understand concerns about the 

possibility of confusion and abuse in 

this area absent clear guidance.120

Accordingly, we have made clear in our 

discussion, in Section II.B.10. below, 

that a nominating shareholder or group 

relying on new Rule 14a–2(b)(7) or (8) 

to engage in an exempt solicitation to 

form a nominating shareholder group or 

in connection with a nomination 

included in the company’s proxy 

materials pursuant to Rule 14a–11 

would lose the exemption if they engage 

in a non-Rule 14a–11 solicitation for 

directors or another person’s solicitation 

with regard to the election of directors. 

In addition, we are adopting an 

instruction to Rule 14a–11 121 to make 

clear that, in order to rely on Rule 14a– 

11 to have a nominee or nominees 

included in a company’s proxy 

materials, a nominating shareholder or 

group or any member of the nominating 

shareholder or group may not be a 

member of any other group with persons 

engaged in solicitations or other 

nominating activities in connection 

with the subject election of directors; 

may not separately conduct a 

solicitation in connection with the 

subject election of directors other than 

a Rule 14a–2(b)(8) exempt solicitation in 

relation to those nominees it has 

nominated pursuant to Rule 14a–11 or 

for or against the company’s nominees; 

and may not act as a participant in 

another person’s solicitation in 

connection with the subject election of 

directors. 

3. Which Companies Are Subject to 

Rule 14a–11 

a. General 

In this section, we discuss which 

companies will be subject to new Rule 

14a–11, including the rule’s application 

to investment companies, controlled 

companies, ‘‘debt-only’’ companies, 

voluntary registrants, and smaller 

reporting companies. 

New Rule 14a–11 will apply to 

companies that are subject to the 

Exchange Act proxy rules, including 


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122 15 U.S.C. 80a et seq. Registered investment 

companies currently are required to comply with 

the proxy rules under the Exchange Act when 

soliciting proxies, including proxies relating to the 

election of directors. See Investment Company Act 

Rule 20a–1 [17 CFR 270.20a–1] (requiring registered 

investment companies to comply with regulations 

adopted pursuant to Section 14(a) of the Exchange 

Act that would be applicable to a proxy solicitation 

if it were made in respect of a security registered 

pursuant to Section 12 of the Exchange Act). 

123Exchange Act Rule 3a12–3 [17 CFR 240.3a12– 

3] exempts securities of certain foreign issuers from 

Section 14(a) of the Exchange Act. 

124The Commission has considered the impact of 

this issue on investment companies on prior 

occasions. See, e.g., 2003 Proposal. 

125See, e.g., letters from AFSCME; CalPERS; CII; 

Mutual Fund Directors Forum (‘‘MFDF’’); Julian 

Reid (‘‘J. Reid’’); Jennifer S. Taub (‘‘J. Taub’’); TIAA– 

CREF. 

126See letter from MFDF. 

127Letter from J. Reid. 

128See letter from J. Taub. 

129See, e.g., letters from AFSCME; J. Taub. 

130See letter from J. Taub. 

131See, e.g., letters from ABA; American Bar 

Association (September 18, 2009) (‘‘ABA II’’); 

Barclays; ICI; Investment Company Institute and 

Independent Directors Counsel (‘‘ICI/IDC’’); 

Independent Directors Council (‘‘IDC’’); S&C; T. 

Rowe Price Associates, Inc. (‘‘T. Rowe Price’’); The 

Vanguard Group, Inc. (‘‘Vanguard’’). One commenter 

opposed the inclusion of business development 

companies in the rule for the same reasons that it 

opposed including registered investment companies 

in the rule. See letter from ICI. Business 

development companies are a category of closedend investment companies that are not registered 

under the Investment Company Act, but are subject 

to certain provisions of that Act. See Sections 

2(a)(48) and 54–65 of the Investment Company Act 

[15 U.S.C. 80a–2(a)(48) and 80a–53–64]. We are 

including business development companies in the 

rule for the same reasons provided below with 

respect to registered investment companies. 

132See letters from ICI; ICI/IDC; IDC; T. Rowe 

Price; S&C. Among other things, commenters noted 

that 90% of fund complexes have boards that are 

75% or more comprised of independent directors 

and the vast majority of fund boards have an 

independent director serving as chairman or as lead 

independent director. See letters from ICI/IDC; IDC. 

Two letters also cited a 1992 report by Commission 

staff that observed that the governance model 

embodied by the Investment Company Act is sound 

and should be retained with limited modifications. 

See letters from ICI; ICI/IDC. 

133One joint comment letter noted that the 

Investment Company Act requires investment 

companies to obtain shareholder approval of 

contracts with the company’s investment adviser 

and distributor and to change from an open-end, 

closed-end, or diversified company; to borrow 

money; to issue senior securities; to underwrite 

securities issued by other persons; to purchase or 

sell real estate or commodities; to make loans to 

other persons, except in accordance with the policy 

in the company’s registration statement; to change 

the nature of its business so as to cease to be an 

investment company; or to deviate from a stated 

policy with respect to concentration of investments 

in an industry or industries, from any investment 

policy which is changeable only by shareholder 

vote, or from any stated fundamental policy. The 

commenters also noted that investment company 

shareholders have the right to bring an action 

against the company’s investment adviser for 

breach of fiduciary duty with respect to receipt of 

compensation. See letter from ICI/IDC. 

134See letters from ABA; Barclays; ICI; ICI/IDC; 

IDC; T. Rowe Price; S&C; Vanguard. However, we 

note that, in response to the 2003 Proposal, ABA 

and ICI indicated that there were no reasons to treat 

investment companies differently from noninvestment companies. See letter from Investment 

Company Institute (December 22, 2003) on File No. 

S7–19–03; letter from American Bar Association 

(January 7, 2004) on File No. S7–19–03. 

135See letter from ABA. See also letter from S&C 

(urging that at a minimum Rule 14a–11 should not 

apply to open-end investment companies, ‘‘which 

do not generally hold regular meetings and for 

which compliance would be particularly 

burdensome’’). An open-end management 

investment company is an investment company, 

other than a unit investment trust or face-amount 

certificate company, that offers for sale or has 

outstanding any redeemable security of which it is 

the issuer. See Sections 4 and 5(a)(1) of the 

Investment Company Act [15 U.S.C. 80a–4 and 80a– 

5(a)(1)]. 

136See letters from ABA; ICI; ICI/IDC; IDC; MFDF; 

S&C; T. Rowe Price; Vanguard. Commenters noted 

that a recent survey of fund complexes representing 

93% of the industry’s total net assets indicated that 

83% of fund complexes had a unitary board 

structure and 17% of fund complexes had a cluster 

board structure. See letters from ICI/IDC; IDC. 

However, one comment letter included materials 

noting that, while the average number of registered 

investment companies per fund complex is five, the 

median number of registered investment companies 

per fund complex is one. See letter from ICI/IDC. 

In cases where the fund complex consists of only 

one company, commenters’ concerns about the loss 

of the unitary board would not be present. 

Commenters also noted that among fund 

complexes that use unitary or cluster boards there 

are other aspects of board organization that vary 

from complex to complex. See letter from ICI/IDC. 

For example, one board may oversee all of the openend funds in the complex and all but three of its 

closed-end funds, while a second board oversees 

the other closed-end funds. Alternatively, one board 

may oversee the open-end and closed-end fixed 

income funds advised by one particular adviser, 

while a second board oversees the open-end and 

closed-end equity and international funds advised 

by a second adviser, etc. However, the commenters 

did not note any specific issues that would be 

raised by the use of different structures among fund 

complexes using unitary or cluster boards if the 

Proposal were to be adopted. 

investment companies registered under 

Section 8 of the Investment Company 

Act of 1940.122 The rule also will apply 

to controlled companies and those 

companies that choose to voluntarily 

register a class of securities under 

Section 12(g). Smaller reporting 

companies will be subject to the rule, 

but on a delayed basis. Consistent with 

the Proposal, we have excepted from the 

rule’s application companies that are 

subject to the proxy rules solely because 

they have a class of debt registered 

under Section 12 of the Exchange Act. 

In addition, foreign private issuers are 

exempt from the Commission’s proxy 

rules with respect to solicitations of 

their shareholders, so the rule will not 

apply to these issuers.123

b. Investment Companies 

Under the Proposal, Rule 14a–11 

would apply to registered investment 

companies. We sought comment on 

whether Rule 14a–11 should apply to 

these companies.124

Several commenters supported 

including registered investment 

companies in the rule.125 Commenters 

noted that investment company boards, 

like other boards, must be responsive 

and accountable to their 

shareholders; 126 that some investment 

company boards are ‘‘too cozy’’ with the 

company’s investment adviser; 127 and 

that the proposed rule will add 

competition to the board nomination 

process, which may create some traction 

in board negotiations with the 

company’s investment adviser.128 A 

number of commenters did not believe 

that the rule would result in 

unreasonable cost or an excessive 

number of contested elections.129 One 

commenter suggested that investment 

company shareholders would use the 

rule infrequently and then only if the 

investment company is experiencing a 

real governance or other failure.130

On the other hand, a number of 

commenters, largely from the 

investment company industry, opposed 

the inclusion of registered investment 

companies in the rule.131 Commenters 

asserted that the Commission had not 

presented any empirical evidence of 

governance problems with respect to 

investment companies that would 

support extending the rule to them and 

that the trend for investment company 

boards is to have strong governance 

practices.132 Commenters also argued 

that investment companies are subject 

to a unique regulatory regime under the 

Investment Company Act that provides 

additional protection to investors, such 

as the requirement to obtain shareholder 

approval to engage in certain 

transactions or activities,133 and that 

investment companies and their boards 

have very different functions from noninvestment companies and their 

boards.134 One commenter noted that 

the Proposal would be inappropriate 

and not particularly useful for most 

open-end management investment 

companies, because open-end 

management investment company 

shares are held on a short-term basis 

and open-end management investment 

companies are not typically required to 

hold annual meetings under State 

law.135

Commenters also were concerned 

about the costs of the Proposal, 

particularly for fund complexes that 

utilize a ‘‘unitary’’ board consisting of 

one group of individuals who serve on 

the board of every fund in the complex, 

or ‘‘cluster’’ boards consisting of two or 

more groups of individuals that each 

oversee a different set of funds in the 

complex.136 Commenters noted that if a 


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137Commenters noted that unitary and cluster 

boards can result in enhanced board efficiency and 

greater board knowledge of the many aspects of 

fund operations that are complex-wide in nature. 

See, e.g., letters from ABA; ICI; ICI/IDC; IDC; MFDF; 

S&C; T. Rowe Price; Vanguard. For instance, 

commenters noted that many of the same 

regulatory, valuation, compliance, disclosure, 

accounting, and business issues may arise for all of 

the funds that the unitary or cluster board oversees 

and that consistency among funds in the complex 

greatly enhances both board efficiency and 

shareholder protection. See, e.g., letter from ICI/ 

IDC. One joint comment letter also suggested that 

‘‘[b]ecause they are negotiating on behalf of multiple 

funds, unitary and cluster boards have a greater 

ability than single fund boards to negotiate with 

management over matters such as fund expenses; 

the level of resources devoted to technology; and 

compliance and audit functions.’’ See id. 

138See letter from S&C. 

139We note that ‘‘unitary’’ or ‘‘cluster’’ boards are 

not required by State law. 

140See Jones v. Harris Assocs., 130 S.Ct. 1418, 

1423, 176 L. Ed. 2d 265, 273–274 (2010). See also 

S. Rep. No. 91–184; 91st Congress 1st Session; S. 

2224 (1969) (‘‘This section is not intended to 

authorize a court to substitute its business judgment 

for that of the mutual fund’s board of directors in 

the area of management fees. * * * The directors 

of a mutual fund, like directors of any other 

corporation will continue to have * * * overall 

fiduciary duties as directors for the supervision of 

all of the affairs of the fund.’’); letter from ICI/IDC 

(‘‘The Investment Company Act of 1940 and the 

rules under it impose significant responsibilities on 

fund directors in addition to the duties of loyalty 

and care to which directors are typically bound 

under State law.’’). 

141 In the 1992 report cited by two comment 

letters in footnote 132 above, the Commission staff 

also observed that the Investment Company Act 

‘‘establishes a comprehensive regulatory framework 

predicated upon principles of corporate democracy’’ 

and was intended to provide an additional 

safeguard for investors by according ‘‘voting powers 

to investment company shareholders beyond those 

required by State corporate law.’’ Division of 

Investment Management, U.S. Securities and 

Exchange Commission, Protecting Investors: A Half 

Century of Investment Company Regulation, at pp. 

251–52, 260 (May 1992) (emphasis added). 

142See, e.g., Commission Guidance Regarding the 

Duties and Responsibilities of Investment Company 

Boards of Directors with Respect to Investment 

Adviser Portfolio Trading Practices, Release No. IC– 

28345 (July 30, 2008) [73 FR 45646, 45649 (August 

6, 2008)] (‘‘In addition to statutory and common law 

obligations, fund directors are also subject to 

specific fiduciary obligations relating to the special 

nature of funds under the Investment Company Act. 

* * * A fund board has the responsibility, among 

other duties, to monitor the conflicts of interest 

facing the fund’s investment adviser and determine 

how the conflicts should be managed to help ensure 

that the fund is being operated in the best interest 

of the fund’s shareholders.’’) (footnotes omitted); 

Interpretive Matters Concerning Independent 

Directors of Investment Companies, Release No. IC– 

24083 (October 14, 1999) [64 FR 59877, 59877–78 

(November 3, 1999)] (listing various duties and 

responsibilities of the independent directors of an 

investment company and noting that ‘‘Each of these 

duties and responsibilities is vital to the proper 

functioning of fund operations and, ultimately, the 

protection of fund shareholders.’’). 

143See letters from J. Reid; J. Taub. 

144See letters from AFSCME; J. Taub. 

shareholder-nominated director were to 

be elected to a unitary or cluster board, 

the investment companies in the fund 

complex would incur significant 

additional administrative costs and 

burdens (e.g., the shareholdernominated director would have to leave 

during discussions that pertain to the 

other investment companies in the 

complex, board materials would have to 

be customized for the director, and the 

fund complex would face challenges in 

preserving the status of privileged 

information) and the benefits of the 

unitary or cluster board that result in 

the increased effectiveness of such 

boards would be lost.137 One 

commenter also stated that if a 

shareholder nomination causes an 

election to be ‘‘contested’’ under rules of 

the New York Stock Exchange, brokers 

would not be able to vote client shares 

on a discretionary basis, making it 

difficult and more expensive for 

investment companies to achieve a 

quorum for a meeting.138

After considering these comments, we 

agree with the commenters who believe 

that Rule 14a–11 should apply to 

registered investment companies, as was 

proposed. The purpose of Rule 14a–11 

is to facilitate the exercise of 

shareholders’ traditional State law rights 

to nominate and elect directors to 

boards of directors and thereby enable 

shareholders to participate more 

meaningfully in the nomination and 

election of directors at the companies in 

which they invest. These State law 

rights apply to the shareholders of 

investment companies, including each 

investment company in a fund complex, 

regardless of whether or not the fund 

complex utilizes a unitary or cluster 

board.139 Moreover, although 

investment companies and their boards 

may have different functions from noninvestment companies and their boards, 

investment company boards, like the 

boards of other companies, have 

significant responsibilities in protecting 

shareholder interests, such as the 

approval of advisory contracts and 

fees.140 Therefore, we are not persuaded 

that exempting registered investment 

companies would be consistent with our 

goals. We also do not believe that the 

regulatory protections offered by the 

Investment Company Act (including 

requirements to obtain shareholder 

approval to engage in certain 

transactions and activities), the trend 

asserted by commenters for investment 

companies to have good governance 

practices, or the fact that open-end 

management investment companies are 

not required by State law to hold annual 

meetings serves to decrease the 

importance of the rights that are granted 

to shareholders under State law.141 In 

fact, the separate regulatory regime to 

which investment companies are subject 

emphasizes the importance of 

investment company directors in 

dealing with the conflicts of interest 

created by the external management 

structure of most investment 

companies.142 We also note that some 

commenters have raised governance 

concerns regarding the relationship 

between boards and investment 

advisers.143

We are cognizant of the fact that the 

rule will impose some costs on 

investment companies. We believe, 

however, that policy goals and the 

benefits of the rule justify these costs. 

As discussed above, we believe that 

facilitating the exercise of traditional 

State law rights to nominate and elect 

directors is as much of a concern for 

investment company shareholders as it 

is for shareholders of non-investment 

companies. We continue to believe that 

parts of the proxy process may frustrate 

the exercise of shareholders’ rights to 

nominate and elect directors arising 

under State law, and thereby fail to 

provide fair corporate suffrage. The new 

rules seek to facilitate shareholders’ 

effective exercise of their rights under 

State law to both nominate and elect 

directors. In this regard, we note that 

commenters have stated that interest in 

mutual fund governance has increased 

in recent years.144

We recognize that it may be more 

costly for investment companies to 

achieve a quorum at shareholder 

meetings if a shareholder director 

nomination causes an election to be 

‘‘contested’’ under rules of the New York 

Stock Exchange and brokers cannot vote 

customer shares on a discretionary 

basis. Furthermore, for fund complexes 

that utilize unitary or cluster boards, the 

election of a shareholder director 

nominee may, in some circumstances, 

increase costs and potentially decrease 

the efficiency of the boards. 

We note, however, that these costs are 

associated with the State law right to 

nominate and elect directors, and are 

not costs incurred for including 

shareholder nominees in the company’s 

proxy statement. With respect to fund 

complexes utilizing unitary or cluster 

boards, we note that any increased costs 

and decreased efficiency of an 

investment company’s board as a result 

of the fund complex no longer having a 

unitary or cluster board would occur, if 

at all, only in the event that investment 

company shareholders elect the 

shareholder nominee. Investment 

companies may include information in 

the proxy materials making investors 

aware of the company’s views on the 

perceived benefits of a unitary or cluster 

board and the potential for increased 


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145Two commenters argued in a joint comment 

letter that there are a number of practical and legal 

issues that prevent confidentiality agreements from 

being sufficient to address the issues that arise 

when a shareholder-nominated director is elected to 

the board of an investment company in a fund 

complex using a unitary or cluster board. See letter 

from ICI/IDC. We emphasize that entering into a 

confidentiality agreement is only one method of 

preserving the confidentiality of information 

revealed in board meetings attended by the 

shareholder-nominated director. The fund complex 

can have separate meetings and board materials for 

the board with the shareholder-nominated director, 

especially if particularly sensitive legal or other 

matters will be discussed or to protect attorneyclient privilege. For a further discussion of this 

comment, see Section IV.E.1. 

146See letters from ABA; MFDF. 

147See letter from J. Taub. 

148See letter from ABA. 

149See letter from J. Taub. 

150See letter from P. Neuhauser. 

151See letters from ABA; Duane Morris; Media 

General, Inc. (‘‘Media General’’); The New York 

Times Company (‘‘New York Times’’). 

152See letter from T. Rowe Price. 

153See letters from ABA; AllianceBernstein; 

Cleary; Seven Law Firms; Duane Morris LLP 

(‘‘Duane Morris’’); Sidley Austin. 

154See letters from ABA; AllianceBernstein; 

Cleary; Seven Law Firms; Duane Morris; Sidley 

Austin. 

155See letters from ABA; Seven Law Firms. 

156See letters from ABA; AllianceBernstein; 

Cleary; Seven Law Firms; Duane Morris; Sidley 

Austin. See, e.g., New York Stock Exchange Rule 

303A.00 and NASDAQ Stock Market LLC Rule 

5615(c) (defining ‘‘controlled companies’’ as a 

company of which more than 50% of the voting 

power for the election of directors is held by an 

individual, group or another company). 

157See letters from AllianceBernstein; Duane 

Morris. 

costs and decreased efficiency if the 

shareholder nominees are elected. 

Moreover, we note that a fund complex 

can take steps to minimize the cost and 

burden of a shareholder-nominated 

director by, for example, entering into a 

confidentiality agreement in order to 

preserve the status of confidential 

information regarding the fund 

complex.145

We believe that the costs imposed on 

investment companies will be less 

significant than the costs imposed on 

other companies for three reasons. First, 

to the extent investment companies do 

not hold annual meetings as permitted 

by State law, investment company 

shareholders will have less opportunity 

to use the rule.146 Second, even when 

investment company shareholders do 

have the opportunity to use the rule, the 

disproportionately large and generally 

passive retail shareholder base of 

investment companies will probably 

mean that the rule will be used less 

frequently than will be the case with 

non-investment companies.147 Third, 

because we have sought to limit the cost 

and burden on all companies, including 

investment companies, by limiting use 

of Rule 14a–11 to shareholders who 

have maintained significant continuous 

holdings in the company for at least 

three years, and because many funds, 

such as money market funds, are held 

by shareholders on a short-term basis,148

we believe that the situations where 

shareholders will meet the eligibility 

requirements will be limited. 

Although commenters argued that the 

election of a shareholder-nominated 

director to a unitary or cluster board 

will necessarily result in decreased 

effectiveness of the board, we disagree. 

In this regard, one commenter argued 

that competition in the board 

nomination process may improve 

efficiency by providing additional 

leverage for boards in negotiations with 

the investment adviser.149 In any event, 

we believe that investment company 

shareholders should have a more 

meaningful opportunity to exercise their 

traditional State law rights to elect a 

non-unitary or non-cluster board if they 

so choose. 

c. Controlled Companies 

As proposed, Rule 14a–11 would 

allow eligible shareholders to submit 

director nominees at all companies 

subject to the Exchange Act proxy rules 

other than companies that are subject to 

the proxy rules solely because they have 

a class of debt registered under Section 

12 of the Exchange Act. We sought 

comment on whether Rule 14a–11 also 

should provide an exception for 

controlled companies. 

In response to our request for 

comment, one commenter argued that 

controlled companies should not be 

excluded from Rule 14a–11,150

acknowledging that while there may be 

no mathematical possibility of a 

shareholder nominee submitted 

pursuant to Rule 14a–11 being elected at 

a controlled company, in a controlled 

company there could be an even greater 

need for non-controlling shareholders to 

express their concerns. The commenter 

noted that a large—even if not a 

majority—vote by non-controlling 

shareholders could send an important 

message to the board. Other commenters 

noted that controlled companies are 

commonly structured with dual classes 

of stock, which allows shareholders of 

the non-controlling class of stock to 

elect a set number of directors that is 

less than the full board.151 Another 

commenter noted that dual-class 

companies with supervoting stock often 

can benefit the most from having the 

interests of non-controlling shareholders 

better represented in the boardroom.152

This commenter encouraged the 

Commission to include some means by 

which minority shareholders of dualclass and parent-controlled companies 

could meaningfully avail themselves of 

the rule, even if a different set of 

eligibility or disclosure requirements is 

determined to be more appropriate in 

these cases. 

On the other hand, several 

commenters argued that controlled 

companies should be excluded from 

Rule 14a–11.153 According to these 

commenters, providing shareholders the 

ability to include nominees in company 

proxy materials in this context would be 

ineffective and needlessly disruptive 

and costly because there is no prospect 

that a shareholder nominee would be 

elected.154 Two of these commenters 

also noted that subjecting these 

companies to Rule 14a–11 would 

possibly cause investor confusion.155

These commenters remarked that 

shareholders would continue to have 

other avenues to express their views to 

the company, such as through the Rule 

14a–8 process. Commenters who 

supported an exclusion for controlled 

companies suggested that for purposes 

of the exclusion the definition of 

‘‘controlled company’’ should be similar 

to the definition used by the national 

securities exchanges in connection with 

director independence requirements.156

Some commenters suggested that if Rule 

14a–11 excluded controlled companies 

using the same definition as the national 

securities exchanges in connection with 

director independence requirements, 

then the rule should contain an 

instruction providing that whether more 

than 50% of the voting power of a 

company is held by an individual, 

group, or other company would be 

determined by any schedules filed 

under Section 13(d) of the Exchange 

Act.157

After considering the issue further, we 

are persuaded that Rule 14a–11 should 

apply to controlled companies, as we 

proposed. As commenters noted, it is 

common for companies structured with 

dual classes of stock to allow 

shareholders of the non-controlling 

class to elect a set number of directors 

that is less than the full board. In that 

situation, it may be useful for noncontrolling shareholders to be able to 

include shareholder nominations in 

company proxy materials with respect 

to the directors the non-controlling class 

is entitled to elect. In addition, though 

applying Rule 14a–11 to controlled 

companies would be unlikely to result 

in the election of shareholdernominated directors in cases in which 

these are not directors elected 

exclusively by the non-controlling 

shareholders, we appreciate that 

shareholders at controlled companies 


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158We note that controlled companies are not 

excluded from Rule 14a–8 despite the same 

improbability that a shareholder proposal will 

receive the approval of the majority of the votes cast 

at a controlled company. Shareholders may use 

Rule 14a–8 to submit a proposal to the board even 

though controlling shareholders may vote against 

the proposal and prevent it from being approved. 

159See letters from ABA; CII; Cleary; S&C. 

160See letters from ABA; Cleary; S&C. 

161See letter from S&C. This commenter also 

stated that Rule 14a–11 should not apply to those 

reporting companies who voluntarily continue to 

file Exchange Act reports while they are not 

required to do so under Exchange Act Section 13(a) 

or Section 15(d). It argued that these voluntary filers 

should be treated the same as companies with 

Exchange Act reporting obligations relating solely 

to debt securities. We note that Rule 14a–11 will 

not apply to a company filing Exchange Act reports 

when neither Exchange Act Section 13(a) nor 

Section 15(d) requires that it do so (for example, to 

comply with a covenant contained in an indenture 

relating to outstanding debt securities). 

162A company must register a class of equity 

securities under Section 12(g) if, on the last day of 

its fiscal year, the class of equity securities is held 

by 500 or more record holders and the company has 

total assets of more than $10 million. An issuer 

may, however, register any class of equity securities 

under Section 12(g) even if these thresholds have 

not been met. Reporting after this form of voluntary 

registration is distinguished from a company that 

continues to file Exchange Act reports when neither 

Exchange Act Section 13(a) nor Section 15(d) 

requires that it do so. See footnote 161 above. 

163See letters from ABA; CII; USPE. 

164See letter from USPE. 

165See letter from ABA. 

166The Commission has considered this issue on 

prior occasions. See, e.g., 2003 Proposal; Division 

of Corporation Finance, Briefing Paper for 

Roundtable Discussion on the Proposed Security 

Holder Director Nominations Rules, February 25, 

2004, available at http://www.sec.gov/spotlight/dirnominations/dir-nom-briefing.htm. 

167See letters from ABA; American Mailing; All 

Cast; Always N Bloom; American Carpets; J. 

Arquilla; B. Armburst; Artistic Land Designs; C. 

Atkins; Book Celler; K. Bostwick; Brighter Day 

Painting; Colletti; Commercial Concepts; Complete 

Home Inspection; D. Courtney; S. Crawford; 

Crespin; Don’s; T. Ebreo; M. Eng; eWareness; Evans; 

Fluharty; Flutterby; Fortuna Italian Restaurant; 

Future Form; Glaspell; C. Gregory; Healthcare 

Practice; B. Henderson; S. Henning; J. Herren; A. 

Iriarte; J. Jones; Juz Kidz; Kernan; LMS Wine; T. 

Luna; Mansfield Children’s Center; D. McDonald; 

Meister; Merchants Terminal; Middendorf; Mingo; 

Moore Brothers; Mouton; D. Mozack; Ms. Dee; G. 

Napolitano; NK; H. Olson; PESC; Pioneer Heating 

& Air Conditioning; RC; RTW; D. Sapp; SBB; SGIA; 

P. Sicilia; Slycers Sandwich Shop; Southern 

Services; Steele Group; Sylvron; Theragenics; E. 

Tremaine; Wagner; Wagner Industries; Wellness; 

West End; Y.M.; J. Young. 

168See letter from ABA. A large accelerated filer 

is an issuer that, as of the end of its fiscal year, had 

an aggregate worldwide market value of voting and 

non-voting common equity held by its non-affiliates 

of $700 million or more, as of the last business day 

of the issuer’s most recently completed second 

fiscal quarter; has been subject to the reporting 

requirements of Section 13(a) or 15(d) of the 

Exchange Act for at least 12 calendar months; has 

filed at least one annual report pursuant to Section 

13(a) or 15(d) of the Act; and is not eligible to use 

may have other reasons for nominating 

candidates for director.158

d. ‘‘Debt Only’’ Companies 

As proposed, Rule 14a–11 would 

allow eligible shareholders to submit 

director nominees at all companies 

subject to the Exchange Act proxy rules 

other than companies that are subject to 

the proxy rules solely because they have 

a class of debt securities registered 

under Section 12 of the Exchange Act. 

We sought comment on whether this 

exclusion from Rule 14a–11 was 

appropriate. 

Commenters that specifically 

addressed this question agreed with our 

approach and stated generally that Rule 

14a–11 should not apply to companies 

subject to the Federal proxy rules solely 

because they have a class of debt 

securities registered under Exchange 

Act Section 12.159 Most of these 

commenters stated that the ability to 

submit nominees for inclusion in a 

company’s proxy materials should be 

limited to holders of equity securities 

registered under the Exchange Act.160

One commenter warned that subjecting 

companies with a registered class of 

debt securities to Rule 14a–11 would 

deter private companies from accessing 

the public debt market and, in any case, 

private companies typically have 

shareholder agreements and other 

arrangements in place that address the 

election of directors.161

We are adopting this exclusion as 

proposed. We note that this approach 

was supported by investor and 

corporate commenters. We believe that 

Rule 14a–11 should not apply to 

companies that are subject to the 

Federal proxy rules solely because they 

have a class of debt securities registered 

under Section 12 of the Exchange Act. 

e. Application of Exchange Act Rule 

14a–11 to Companies That Voluntarily 

Register a Class of Securities Under 

Exchange Act Section 12(g) 

In the Proposing Release, we noted 

that Rule 14a–11 would apply to 

companies that have voluntarily 

registered a class of equity securities 

pursuant to Exchange Act Section 12(g); 

however, we solicited comment on 

whether Rule 14a–11 should apply to 

these companies.162 We also asked 

whether nominating shareholders of 

these companies should be subject to 

the same ownership eligibility 

thresholds as those shareholders of 

companies that were required to register 

a class of equity securities pursuant to 

Section 12, or whether we should adjust 

any other aspects of Rule 14a–11 for 

these companies. 

Three commenters stated that Rule 

14a–11 should apply to companies that 

voluntarily register a class of equity 

securities under Exchange Act Section 

12(g).163 One explained that investors in 

securities registered under Section 12 

should be provided some assurance that 

the company is subject to various rules 

safeguarding their interests, such as the 

proposed rule, and expressed concern 

that less than uniform application could 

lead to investor confusion.164 One 

commenter stated that nominating 

shareholders of voluntarily-registered 

companies should be subject to the 

same ownership thresholds as 

shareholders of companies that were 

required to register a class of securities 

under Exchange Act Section 12.165

We agree with the commenters that 

Rule 14a–11 generally should apply to 

those companies that choose to avail 

themselves of the obligations and 

benefits of Section 12(g) registration. As 

Section 12 registrants, these companies 

are subject to the full panoply of the 

Exchange Act, including Section 14(a), 

and their shareholders receive proxy 

materials in connection with annual and 

special meetings of shareholders in 

accordance with the proxy rules. We 

believe disparate treatment among these 

Section 12 registrants is unwarranted 

and shareholders of these companies 

should enjoy the same protections 

generally available to shareholders of 

other companies with a class of equity 

securities registered pursuant to Section 

12. Accordingly, Rule 14a–11 will apply 

to companies that have voluntarily 

registered a class of equity securities 

pursuant to Exchange Act Section 12(g), 

with the same ownership eligibility 

thresholds as those of companies that 

were required to register a class of 

equity securities pursuant to Section 12. 

f. Smaller Reporting Companies 

Under the Proposal, Rule 14a–11 

would apply to all companies subject to 

the proxy rules, other than companies 

that are subject to the proxy rules solely 

because they have a class of debt 

registered under Exchange Act Section 

12. Thus, Rule 14a–11, as proposed, 

would apply to smaller reporting 

companies. We sought comment in the 

Proposal on what effect, if any, the 

application of Rule 14a–11 would have 

on any particular group of companies, 

and in particular, smaller reporting 

companies.166

A number of commenters stated 

generally that Rule 14a–11 should not 

apply to small businesses.167 One 

commenter argued that Rule 14a–11 

should be limited to accelerated filers 

and that there should possibly be a 

transition period where the rule was 

only applicable to large accelerated 

filers.168 That commenter believed that 


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the requirements for smaller reporting companies 

for its annual and quarterly reports. See Exchange 

Act Rule 12b–2(2). 

169See letter from Theragenics. See also letter 

from Alston & Bird, recommending that we 

consider adopting a phase-in approach, whereby 

companies would be permitted to follow a phasein schedule for mandatory compliance based on 

their size, similar to the Commission’s rules 

regarding internal controls reporting and XBRL. See 

Management’s Report on Internal Control Over 

Financial Reporting and Certification of Disclosure 

in Exchange Act Periodic Reports, Release No. 33– 

8238; 34–47968 [69 FR 9722] (June 5, 2003) and 

Interactive Data to Improve Financial Reporting, 

Release No. 33–9002; 34–59324 [74 FR 6776] (Jan. 

30, 2009). 

170See letters from AFSCME; CII; D. Nappier. 

171See letter from CII. 

172See letters from AFSCME; D. Nappier. 

173See letter from USPE. 

174 Dodd-Frank Act §§ 971(a) and (b). 

175 Dodd-Frank Act § 971(c). A comment letter on 

July 28, 2010 from the Society of Corporate 

Secretaries & Governance Professionals invoked this 

new legislation in support of a request to re-open 

the period for comment on the Proposal as it relates 

to small companies. As noted, we did specifically 

request comment in the Proposal on the rule’s effect 

on smaller reporting companies, and we received 

and have considered numerous comments on this 

topic. Accordingly, we believe we have 

substantially achieved the objective stated in that 

letter, namely to identify and evaluate any ‘‘unique 

and significant challenges that access to the proxy 

will create for small and mid-sized companies.’’ 

Moreover, our determination to delay 

implementation of Rule 14a–11 in respect of 

smaller companies will further allow us to evaluate 

the implementation of Rule 14a–11 by larger 

companies and provide us with the additional 

opportunity to consider whether adjustments to the 

rule would be appropriate for smaller reporting 

companies. 

176See Exchange Act Rule 12b–2. A smaller 

reporting company is defined as ‘‘an issuer that is 

not an investment company, an asset-backed issuer, 

or a majority-owned subsidiary of a parent that is 

not a smaller reporting company and that: had a 

public float of less than $75 million as of the last 

business day of its most recently completed second 

fiscal quarter, computed by multiplying the 

aggregate worldwide number of shares of its voting 

and non-voting common equity held by nonaffiliates by the price at which the common equity 

was last sold, or the average of the bid and asked 

prices of common equity, in the principal market 

for the common equity; or in the case of an initial 

registration statement under the Securities Act or 

Exchange Act for shares of its common equity, had 

a public float of less than $75 million as of a date 

within 30 days of the date of the filing of the 

registration statement, computed by multiplying the 

aggregate worldwide number of such shares held by 

non-affiliates before the registration plus, in the 

case of a Securities Act registration statement, the 

number of such shares included in the registration 

statement by the estimated public offering price of 

the shares; or in the case of an issuer whose public 

float as calculated under paragraph (1) or (2) of this 

definition was zero, had annual revenues of less 

than $50 million during the most recently 

completed fiscal year for which audited financial 

statements are available.’’ Whether or not an issuer 

is a smaller reporting company is determined on an 

annual basis. 

smaller companies would have trouble 

recruiting directors because the pool of 

qualified directors is already small for 

smaller companies, and directors would 

not want to risk the exposure to a proxy 

contest. Another commenter argued that 

we should implement Rule 14a–11 on a 

pilot basis for large accelerated filers for 

two years and then revisit whether 

application of the rule would be 

appropriate for smaller companies.169

Other commenters stated that smaller 

reporting companies should not be 

excluded from the application of Rule 

14a–11.170 One commenter agreed with 

the Commission that exempting small 

entities would be inconsistent with the 

stated goals of the Proposal and the 

costs and burden for such entities 

would be minimal.171 Other 

commenters believed that small 

companies are ‘‘just as likely’’ to have 

poorly functioning boards as their larger 

counterparts.172 Another commenter 

argued that Rule 14a–11 would not 

impose a material burden on any 

company subject to the proxy rules 

because companies already have to 

distribute proxy cards and it would not 

be an imposition if they were required 

to add additional nominees to those 

cards.173

In the recently enacted Dodd-Frank 

Act, Congress confirmed our authority 

to require inclusion of shareholder 

nominees for director in company proxy 

materials.174 In addition, in Section 

971(c) of the Dodd-Frank Act Congress 

specifically provided the Commission 

with the authority to exempt an issuer 

or class of issuers from requirements 

adopted for the inclusion of shareholder 

director nominations in company proxy 

materials. In doing so, this provision 

instructs the Commission to take into 

account whether such requirement for 

the inclusion of shareholder nominees 

for director in company proxy materials 

disproportionately burdens small 

issuers.175

After considering the comments, 

amended Section 14(a), and Section 

971(c) of the Dodd-Frank Act, we 

continue to believe that Rule 14a–11 

should apply regardless of company 

size, as was proposed. As noted above, 

the purpose of Rule 14a–11 is to 

facilitate the exercise of shareholders’ 

traditional State law rights to nominate 

and elect directors to company boards of 

directors and thereby enable 

shareholders to participate more 

meaningfully in the nomination and 

election of directors at the companies in 

which they invest. We are not 

persuaded that exempting smaller 

reporting companies would be 

consistent with these goals. As stated 

above, we expect the rule changes will 

further investor protection by 

facilitating shareholder rights to 

nominate and elect directors and 

providing shareholders a greater voice 

in the governance of the companies in 

which they invest. We believe 

shareholders of smaller reporting 

companies should be afforded these 

same protections. 

Nonetheless, we recognize that 

smaller reporting companies may have 

had less experience with existing forms 

of shareholder involvement in the proxy 

process (e.g., Rule 14a–8 proposals), and 

thus may have less developed 

infrastructures for managing these 

matters. We believe that a delayed 

effective date for smaller reporting 

companies should allow those 

companies to observe how the rule 

operates for other companies and 

should allow them to better prepare for 

implementation of the rules. We also 

believe that delayed implementation for 

these companies will allow us to 

evaluate the implementation of Rule 

14a–11 by larger companies and provide 

us with the additional opportunity to 

consider whether adjustments to the 

rule would be appropriate for smaller 

reporting companies before the rule 

becomes applicable to them. Therefore, 

we are delaying implementation for 

companies that meet the definition of 

smaller reporting company in Exchange 

Act Rule 12b–2.176 New Rule 14a–11 

will become effective for these 

companies three years after the date that 

the rules become effective for 

companies other than smaller reporting 

companies. In addition, as discussed 

below, in an effort to limit the cost and 

burden on all companies subject to the 

rule, including smaller reporting 

companies, we have limited use of Rule 

14a–11 to nominations by shareholders 

who have maintained significant 

continuous holdings in the company for 

an extended period of time. As 

discussed further below, we have 

extended the required holding period to 

at least three years at the time the notice 

of nomination is filed with the 

Commission and transmitted to the 

company. In addition, we have made 

modifications to the ownership 

threshold that, in combination with the 

three-year holding period, we believe 

should facilitate shareholders’ ability to 

exercise their State law rights to 

nominate and elect directors without 

unduly burdening companies, including 

smaller reporting companies. We 

proposed a tiered ownership threshold 

that included a 5% ownership threshold 

for non-accelerated filers; however, we 

are adopting a 3% ownership threshold 

for all companies subject to the rule. In 

adopting the uniform 3% ownership 

threshold, we carefully considered, 

among other factors, the potential that 


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177 In some circumstances, the requirements of 

Rule 14a–11 applicable to a nominating shareholder 

group must be satisfied by each member of the 

group individually (e.g., no member of the group 

may be holding the company’s securities with the 

purpose of, or with the effect, of changing control 

of the company or to gain more than the maximum 

number of nominees that the registrant would be 

required to include under the rule). See also Section 

II.B.4. 

178Throughout this release, when we say ‘‘as of 

the date of the notice on Schedule 14N’’ we mean 

the date the nominating shareholder or group files 

the Schedule 14N with the Commission and 

transmits the notice to the company. See Section 

II.B.8.c.ii. below for a further discussion of the 

timing requirements for filing a Schedule 14N. 

179The manner in which a nominating 

shareholder or group would establish its eligibility 

to use new Rule 14a–11 is discussed further in 

Section II.B.4.b.iv. below. 

180See Instruction 3 to new Rule 14a–11(b)(1). 

181See new Rule 14a–11(b)(1). 

182See new Rule 14a–11(b)(2). The three-year 

holding period requirement applies only to the 

amount of securities that are used for purposes of 

determining the ownership threshold. 

183See new Rule 14a–11(b)(2). 

184See new Rule 14a–11(b)(6). 

185See new Rule 14a–11(b)(7). 

186See Section II.B.8. for a discussion of new 

Schedule 14N and the disclosures required to be 

filed. The Schedule 14N may be filed by an 

individual shareholder that meets the ownership 

threshold, an individual shareholder that is a 

member of a nominating shareholder group that is 

aggregating the individual members’ securities to 

meet the ownership threshold but is choosing to file 

the notice on Schedule 14N individually, or a 

nominating shareholder group through their 

authorized representative, as provided for in Rule 

14n–1(b)(1). 

187The dates would be calculated by determining 

the release date disclosed in the previous year’s 

proxy statement, increasing the year by one, and 

counting back 150 calendar days and 120 calendar 

days for the beginning and end of the window 

period, respectively. In this regard, we note that the 

deadline could fall on a Saturday, Sunday or 

holiday. In such cases, the deadline should be 

treated as the first business day following the 

Saturday, Sunday or holiday, similar to the 

treatment filing deadlines receive under Exchange 

Act Rule 0–3. See Instruction 1 to Rule 14a– 

11(b)(10). If the company did not hold an annual 

meeting during the prior year, or if the date of the 

meeting has changed by more than 30 days from the 

prior year, then the nominating shareholder or 

group must provide notice pursuant to new Item 

5.08 a reasonable time before the company mails its 

proxy materials, as specified by the company in a 

Form 8–K filed within four business days after the 

company determines the anticipated meeting date. 

See new Rule 14a–11(b)(10) and Instruction 2 to 

that paragraph. See further discussion in Section 

II.B.8.c.ii. 

188See new Rule 14a–11(b)(11) and Item 8 of new 

Schedule 14N. Pursuant to new Schedule 14N, the 

nominating shareholder or group would be required 

to include in its notice to the company a 

certification that the nominating shareholder or 

group satisfies the requirements in Rule 14a–11. 

the rule would have a disproportionate 

impact on small issuers. Despite 

identifying that concern in the Proposal, 

however, the comments we received did 

not substantiate that concern, and 

comments from companies 

overwhelmingly supported uniform 

ownership thresholds for all public 

companies. Moreover, the data we 

examined did not indicate any 

substantial difference in share 

ownership concentrations between large 

accelerated filers and non-accelerated 

filers. Thus, we expect that the 

eligibility requirements will help 

achieve the stated objectives of the rule 

without disproportionately burdening 

any particular group of companies. 

4. Who Can Use Exchange Act Rule 

14a–11 

a. General 

In an effort to facilitate fair corporate 

suffrage, we could have proposed and 

adopted a rule pursuant to which the 

ability to use Rule 14a–11 would be 

conditioned solely on whether the 

shareholder lawfully could nominate a 

director, and not include any ownership 

thresholds or holding period. However, 

we believe it is appropriate to take a 

measured approach that balances 

competing interests and seeks to ensure 

investor protection. Accordingly, Rule 

14a–11 will be available to shareholders 

that hold a significant, long-term 

interest in the company, have provided 

timely notice of their intent to include 

a nominee in the company’s proxy 

materials, and provide specified 

disclosure concerning themselves and 

their nominees. More specifically, as 

described in detail in this section, a 

company will be required to include a 

shareholder nominee or nominees if the 

nominating shareholder or group: 177

• Holds, as of the date of the 

shareholder notice on Schedule 14N,178

either individually or in the 

aggregate,179 at least 3% of the voting 

power (calculated as required under the 

rule) 180 of the company’s securities that 

are entitled to be voted on the election 

of directors at the annual meeting of 

shareholders (or, in lieu of such an 

annual meeting, a special meeting of 

shareholders) or on a written consent in 

lieu of a meeting; 181

• Has held the qualifying amount of 

securities used to satisfy the minimum 

ownership threshold continuously for at 

least three years as of the date of the 

shareholder notice on Schedule 14N (in 

the case of a shareholder group, each 

member of the group must have held the 

amount of securities that are used to 

satisfy the ownership threshold 

continuously for at least three years as 

of the date of the shareholder notice on 

Schedule 14N); 182

• Continues to hold the required 

amount of securities used to satisfy the 

ownership threshold through the date of 

the shareholder meeting; 183

• Is not holding any of the company’s 

securities with the purpose, or with the 

effect, of changing control of the 

company or to gain a number of seats on 

the board of directors that exceeds the 

maximum number of nominees that the 

company could be required to include 

under Rule 14a–11; 184

• Does not have an agreement with 

the company regarding the 

nomination; 185

• Provides a notice to the company 

on Schedule 14N, and files the notice 

with the Commission,186 of the 

nominating shareholder’s or group’s 

intent to require that the company 

include that nominating shareholder’s 

or group’s nominee in the company’s 

proxy materials no earlier than 150 

calendar days, 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; 187 and 

• Includes the certifications required 

in the shareholder notice on Schedule 

14N.188

b. Ownership Threshold 

As proposed, a nominating 

shareholder or group would have been 

required to beneficially own 1%, 3%, or 

5% of the company’s securities entitled 

to be voted on the election of directors 

at the shareholder meeting, depending 

on the company’s accelerated filer status 

or, in the case of registered investment 

companies, depending on the net assets 

of the company. We received significant 

comment on this topic, which we 

discuss further below, and have made 

alterations to the final rule to reflect the 

concerns expressed by commenters. 

As adopted, to rely on Rule 14a–11, 

a nominating shareholder or group will 

be required to hold, as of the date of the 

shareholder notice on Schedule 14N, 

either individually or in the aggregate, 

at least 3% of the voting power of the 

company’s securities that are entitled to 

be voted on the election of directors at 

the annual (or a special meeting in lieu 

of the annual) meeting of shareholders 

or on a written consent in lieu of a 

meeting. The nominating shareholder or 

group or member of a nominating 

shareholder group will be required to 

hold both the power to dispose of and 

the power to vote the securities, as 

discussed below. The nominating 

shareholder or member of a nominating 

shareholder group also will be required 

to have held the qualifying amount of 

securities for at least three years as of 

the date of the notice on Schedule 14N, 

and to hold that amount through the 

date of the election of directors. Each 

aspect of the ownership requirement is 

discussed further below. 


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189Similarly, we proposed tiered ownership 

thresholds for registered investment companies 

with the tiers based on net assets. 

190See letters from 26 Corporate Secretaries; 

ABA; Australian Council of Superannuation 

Investors (‘‘ACSI’’); ADP; Advance Auto Parts; 

Aetna; Alaska Air; Alcoa Inc. (‘‘Alcoa’’); Allstate; 

American Express; Anadarko; Applied Materials; 

Association of Corporate Counsel; AT&T; Avis 

Budget; Barclays; Best Buy; J. Blanchard; Boeing; 

BorgWarner; BRT; Burlington Northern; R. Burt; 

Calvert Group, Ltd. (‘‘Calvert’’); Caterpillar; CFA 

Institute; Chevron; J. Chico; Committee on 

Investment of Employee Benefit Assets (‘‘CIEBA’’); 

CIGNA; Peter Clapman (‘‘P. Clapman’’); Cleary; CNH 

Global; Comcast; Con Edison; Capital Research and 

Management Company (‘‘CRMC’’); CSX; Cummins; 

Darden Restaurants; Davis Polk; Deere; Dewey; W. 

Brinkley Dickerson, Jr. (‘‘W. B. Dickerson’’); J. 

Dillon; DTE Energy; DuPont; Craig Dwight (‘‘C. 

Dwight’’); Eaton; Edison Electric Institute; Eli Lilly; 

Emerson Electric; eWareness; ExxonMobil; FedEx; 

Financial Services Roundtable; FMC Corp.; FPL 

Group; GE; General Mills; A. Goolsby; Home Depot; 

Honeywell; IBM; ICI; Intel; ITT; JPMorgan Chase; J. 

Kilts; Koppers; E.J. Kullman; N. Lautenbach; 

Leggett; Lionbridge Technologies, Inc. (‘‘Lionbridge 

Technologies’’); Lorsch et al.; M. Metz; McDonald’s; 

MeadWestvaco; J. Miller; Motorola; Norfolk 

Southern; Northrop Grumman Corporation 

(‘‘Northrop’’); Office Depot; PepsiCo; Pfizer; P&G; 

Praxair, Inc. (‘‘Praxair’’); Protective; Stephen Lange 

Ranzini (‘‘S. Ranzini’’); Rosen; Ryder; Sara Lee; S&C; 

Seven Law Firms; Shearman & Sterling; SherwinWilliams; SIFMA; Society of Corporate Secretaries; 

Southern Company; Tenet; Tesoro; Textron; TI; 

TIAA–CREF; Tidewater Inc. (‘‘Tidewater’’); 

Tompkins Financial Corporation (‘‘Tompkins’’); G. 

Tooker; T. Rowe Price; tw telecom; L. Tyson; 

UnitedHealth; U.S. Bancorp; ValueAct Capital; 

Vanguard; Verizon Communications Inc. 

(‘‘Verizon’’); Bruno de la Villarmois (‘‘B. 

Villarmois’’); Wachtell; Wells Fargo; Weyerhaeuser; 

Xerox. 191See letters from ACSI; ADP; Advance Auto 

Parts; Allstate; American Express; Applied 

Materials; Association of Corporate Counsel; AT&T; 

Avis Budget; Barclays; Best Buy; J. Blanchard; 

Boeing; BRT; Burlington Northern; R. Burt; Calvert; 

Caterpillar; CFA Institute; J. Chico; CIGNA; CNH 

Global; Comcast; Con Edison; CSX; Darden 

Restaurants; Davis Polk; Deere; Dewey; W. B. 

Dickerson; J. Dillon; DTE Energy; DuPont; Eaton; 

Edison Electric Institute; Eli Lilly; Emerson Electric; 

ExxonMobil; FedEx; Financial Services Roundtable; 

FMC Corp.; FPL Group; General Mills; Home Depot; 

IBM; Intel; ITT; JPMorgan Chase; J. Kilts; E.J. 

Kullman; Lorsch et al.; McDonald’s; M. Metz; 

Motorola; N. Lautenbach; Office Depot; PepsiCo; 

Praxair; Protective; S. Ranzini; Sara Lee; S&C; Seven 

Law Firms; Shearman & Sterling; SherwinWilliams; Society of Corporate Secretaries; 

Southern Company; Tesoro; Textron; TI; TIAA– 

CREF; Tompkins; G. Tooker; T. Rowe Price; tw 

telecom; L. Tyson; UnitedHealth; U.S. Bancorp; 

ValueAct Capital; Vanguard; Verizon; 

Weyerhaeuser; Xerox. 

192See letters from ABA; ABA II; BRT; Business 

Roundtable (January 19, 2010) (‘‘BRT II’’); Cleary; 

Davis Polk; Honeywell; SIFMA. 

193Letter from BRT II. 

194Letter from California State Teachers’ 

Retirement System (Nov. 18, 2009)(‘‘CalSTRS II’’). 

195See letters from Committee of Concerned 

Shareholders (‘‘Concerned Shareholders’’); L. Dallas; 

USPE. 

196See letter from Shearman & Sterling. 

197See, e.g., letters from ICI; S&C; T. Rowe Price. 

198See letters from AFL–CIO; AFSCME; British 

Insurers; CalPERS; CalSTRS; COPERA; CRMC; 

Florida State Board of Administration; Glass Lewis; 

IAM; ICGN; LACERA; Marco Consulting; D. 

Nappier; Nathan Cummings Foundation; P. 

Neuhauser; Norges Bank; OPERS; Pax World; 

RiskMetrics; David E. Romine (‘‘D. Romine’’); 

Shamrock; Sodali; Teamsters; WSIB. 

199See letter from CII. 

200Letter from AFL–CIO. 

201See letter from Deere. 

202See letter from ADP. 

203See letters from CSI; Calvert; CFA Institute; 

Labour Union Co-operative Retirement Fund 

(‘‘LUCRF’’); S. Ranzini. 

204See letters from Advance Auto Parts; Alaska 

Air; American Express; Association of Corporate 

Counsel; Avis Budget; Best Buy; J. Blanchard; 

Boeing; BRT; Burlington Northern; Callaway; 

CIGNA; CNH Global; Comcast; Con Edison; Darden 

Restaurants; Dewey; J. Dillon; DTE Energy; DuPont; 

Eaton; Edison Electric Institute; Eli Lilly; Emerson 

Electric; ExxonMobil; FedEx; FMC Corp.; FPL 

Group; General Mills; Home Depot; Intel 

Corporation (‘‘Intel’’); JPMorgan Chase; E.J. Kullman; 

McDonald’s; N. Lautenbach; PepsiCo; Praxair; 

Protective (recommending this threshold if its 

proposed 35% withhold vote triggering event is not 

included; if included, it recommended a 3% 

threshold); Sara Lee; Seven Law Firms; SherwinWilliams; Society of Corporate Secretaries; Textron; 

Tompkins; G. Tooker; Weyerhaeuser; Xerox. 

205See letters from Applied Materials; R. Burt; 

CSX; Financial Services Roundtable; IBM 

(recommending 5% as one of the two acceptable 

thresholds); ITT; J. Kilts; Shearman & Sterling; 

Southern Company; Tesoro; TIAA–CREF; T. Rowe 

Price; tw telecom; UnitedHealth; U.S. Bancorp; 

Verizon. 

206See letters from Applied Materials; U.S. 

Bancorp. 

207See letters from S&C; TIAA–CREF. 

208See letters from Davis Polk; Lorsch et al. 

209See letters from Allstate; Caterpillar; J. Chico; 

W. B. Dickerson; IBM (recommending 10% as one 

of the two acceptable thresholds); ICI; M. Metz; 

Office Depot; L. Tyson; ValueAct Capital; Vanguard. 

210See letter from Motorola. 

211See letter from Barclays. 

i. Percentage of Securities 

We proposed tiered ownership 

thresholds for large accelerated, 

accelerated, and non-accelerated filers 

in an effort to address the possibility 

that certain companies could be affected 

disproportionately based on their 

size.189 Many commenters criticized the 

proposed ownership thresholds or 

recommended generally higher 

thresholds.190 Of these, most 

commenters criticized the tiered 

ownership thresholds and 

recommended a uniform ownership 

threshold generally higher than the 

proposed thresholds.191 Many of these 

commenters questioned whether the 

data on shareholdings discussed in the 

Proposal in relation to the proposed 

thresholds took into account the fact 

that shareholders could aggregate their 

holdings in order to use Rule 14a–11.192

One of these commenters described 

formation of a nominating group as ‘‘the 

most likely scenario’’ to qualify for use 

of Rule 14a–11,193 and another 

commenter submitted that with a 

significant ownership threshold an 

‘‘inability to aggregate shareholders to 

reach the ownership threshold is 

unreasonable.’’ 194

A few commenters criticized 

generally the proposed thresholds as too 

high and recommended lower 

thresholds.195 One commenter opposed 

the tiered ownership thresholds because 

a number of companies regularly move 

from one category of filer to another as 

the aggregate worldwide market value of 

their voting and non-voting common 

equity changes from fiscal year to fiscal 

year, which the commenter believed 

would lead to uncertainty under the 

Commission’s tiered approach.196

Commenters from the investment 

company industry noted that the 

proposed eligibility thresholds were 

based on data for non-investment 

companies and were not supported by 

empirical data analysis for investment 

companies.197

On the other hand, we also received 

comment generally supporting the 

proposed tiered ownership 

thresholds.198 One commenter 

expressed general support for the 

proposed thresholds and stated that the 

proposed thresholds would achieve the 

Commission’s and commenter’s shared 

objective of facilitating the exercise of 

shareholders’ nomination rights.199

Another commenter explained that the 

thresholds would ‘‘ensure[ ] that only 

those long-term shareholders who are 

seriously concerned about the 

governance of portfolio companies will 

have a seat at the table.’’ 200

With regard to an appropriate uniform 

ownership threshold, commenters 

recommended a number of different 

possibilities, including: 

• At least 1% of the company’s 

outstanding shares for an individual 

shareholder and 5% for a group of 

shareholders; 201

• At least 2% of a company’s voting 

securities; 202

• 3% of a company’s shares; 203

• 5% of the company’s voting 

securities for an individual shareholder 

and 10% for a group of shareholders; 204

• 5% of a company’s outstanding 

shares; 205

• 5% of a company’s outstanding 

shares for an individual shareholder and 

a higher but unspecified threshold for a 

group of shareholders; 206

• With regard to investment 

companies, a 5% threshold; 207

• From 5% to 10% of a company’s 

shares; 208

• 10% of the company’s shares; 209

• 10% of the company’s outstanding 

shares for an individual shareholder and 

15% of the outstanding shares for a 

group of shareholders; 210

• 5% to 15% of the company’s 

outstanding shares; 211


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56690 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

212See letter from TI. 

213See letter from AT&T. 

214See letters from Concerned Shareholders; 

USPE. 

215See letter from Concerned Shareholders. 

216See letter from L. Dallas. 

217See, e.g., Exchange Act Rule 14a–8(b) 

(requiring shareholders to have ‘‘continuously held 

at least $2,000 in market value, or 1%, of the 

company’s securities entitled to be voted on the 

proposal at the meeting for at least one year by the 

date’’ they submit a shareholder proposal); 

Exchange Act Rule 14a–6(g) (requiring a soliciting 

person that ‘‘owns beneficially securities of the class 

which is the subject of the solicitation with a 

market value of over $5 million’’ to file a notice 

with the Commission); Regulation S–K, Item 404(a) 

(requiring disclosure of transactions with related 

parties that exceed $120,000). 

218See letter from Shearman & Sterling. 

219See letters from General Mills; Tesoro; T. 

Rowe Price; ValueAct Capital; Verizon (explicitly 

opposing variation in percentage ownership 

requirement based on issuer size); and letters 

identified in footnotes 199–211 above (commenters 

supporting various uniform ownership thresholds). 

220As noted in Section II.B.3.f., we have adopted 

a three-year delay in implementation for smaller 

reporting companies. 

221The percentages in the table are derived from 

the data set described in the Proposing Release 

involving companies that have held meetings 

between January 1, 2008 and April 15, 2009 (the 

‘‘Proposing Release data’’). See Section III.B.3. of the 

Proposing Release. The percentages have been 

adjusted, however, because the Proposing Release 

data did not give effect to any holding period 

requirement, and we have attempted to estimate 

what those percentages would have been had they 

given effect to the three-year holding period we are 

adopting. By the calculation described below, we 

have estimated a reasonable adjustment to the 

reported percentages in the Proposing Release data 

by using the data presented in a November 24, 2009 

memorandum based on the analysis of Schedule 

13F filings, data which did give effect to holding 

period requirements. See Memorandum from the 

Division of Risk, Strategy, and Financial Innovation 

regarding the Share Ownership and Holding Period 

Patterns in 13F data (November 24, 2009), available 

at http://www.sec.gov/comments/s7-10-09/s71009- 

576.pdf (the ‘‘November 2009 Memorandum’’). The 

two data sets have overlapping statistics that can be 

used for comparison and adjustment: Both sets 

report percentages of a broad sample of public 

companies and identify percentages of companies 

having (i) at least one shareholder with holdings of 

3% of more, (ii) at least two shareholders with 

holdings of 3% or more, (iii) at least one 

shareholder with holdings of 1% or more, and (iv) 

at least two shareholders with holdings of 1% or 

more. Comparing the percentages reflected in the 

November 2009 Memorandum (giving effect to a 

three-year holding period requirement) with the 

percentages in the Proposing Release data (not 

reflecting any holding period requirement), we 

observe that the percentages reported in the 

Proposing Release data exceed the percentages 

reported in the November 2009 memorandum by 

amounts ranging from 56% to 69%. In order to 

derive the approximate percentages in the table, we 

adjusted downward by 62.5% the percentages 

reported in the Proposing Release data, to account 

at least approximately for the application of the 

three-year holding period requirement. 

• 15% of the company’s shares; 212

and 

• 20% of a company’s shares.213

Two of the commenters that criticized 

the proposed threshold as too high 

recommended that Rule 14a–11 have 

the same ownership threshold as Rule 

14a–8,214 with one of these commenters 

expressing the belief that the proposal, 

with its ownership thresholds, would 

enable only institutional shareholders to 

access the corporate ballot.215 Another 

of the commenters opposing the 

proposed thresholds asserted that the 

threshold for non-accelerated filers is 

too high and cited figures indicating 

that a significant number of such filers 

do not have any shareholders that 

would satisfy the proposed threshold.216

This commenter suggested that for an 

individual shareholder or a group of 

shareholders, the threshold should be 

based on the dollar value of the shares 

held (e.g., $250,000) or a lower 

percentage of shares (e.g., 0.25%). 

After considering the comments, we 

believe that it is appropriate to apply a 

uniform 3% ownership threshold to all 

companies subject to the rule, regardless 

of whether they are classified as large 

accelerated, accelerated, or nonaccelerated filers under the Federal 

securities laws. As an initial matter, as 

we did at the time we issued the 

Proposing Release, we considered 

whether and why Rule 14a–11 should 

include any ownership threshold. 

Because the Commission’s proxy rules 

seek to enable the corporate proxy 

process to function, as nearly as 

possible, as a replacement for in-person 

participation at a meeting of 

shareholders, some may argue that once 

a shareholder has satisfied any 

procedural requirements to a director 

nomination that a company is allowed 

to impose under State law, then that 

nomination should be included in the 

company’s proxy materials. Each time 

we consider and adopt amendments to 

our rules, however, we balance 

competing interests. 

Based on our consideration of these 

competing interests, including 

balancing and facilitating shareholders’ 

ability to participate more fully in the 

nomination and election process against 

the potential cost and disruption of the 

amendments, we have determined that 

requiring a significant ownership 

threshold is appropriate to use Rule 

14a–11. Indeed, we believe that the 3% 

ownership threshold—combined with 

the other requirements of the rule— 

properly addresses the potential 

practical difficulties of requiring 

inclusion of shareholder director 

nominations in a company’s proxy 

materials, and some concerns that both 

company management and other 

shareholders may have about the 

application of Rule 14a–11. Providing 

this balanced, practical, and measured 

limitation in Rule 14a–11 is consistent 

with the approach we have taken in 

many of our other proxy rules 217 and 

reflects our desire to proceed cautiously 

with these new amendments to our 

rules. 

We also considered whether the 

ownership threshold we adopt for Rule 

14a–11 should be tiered based on the 

size and related filing status (or net 

assets) of the company, or uniform for 

all companies, and what percentage of 

ownership would be most appropriate. 

We have decided to adopt a uniform 

standard for all companies for several 

reasons. First, we determined that a 

uniform standard would reduce the 

complexities of Rule 14a–11. As noted 

by one commenter,218 the potential for 

the filing status of a company to change 

would result in uncertainty about the 

availability of the provisions of Rule 

14a–11 as a result of market fluctuations 

in share prices, acquisitions, or 

divestitures. A uniform standard avoids 

that uncertainty and the resulting 

potential for the costs and burdens of 

disputes over the selection of the 

appropriate tier. Elimination of that 

uncertainty, moreover, would make the 

availability of Rule 14a–11 more 

predictable and therefore more useful 

for shareholders in planning 

nominations in reliance on the rule. A 

uniform standard also will avoid any 

ability on the part of management to 

structure corporate actions to modify 

the impact of Rule 14a–11 by placing 

the company in a different tier. The 

concern we expressed in the Proposal— 

that companies could be 

disproportionately affected by adoption 

of the rule based on their size—was not 

supported by comments of potentially 

affected companies; to the contrary, 

comments from companies 

overwhelmingly supported uniform 

ownership thresholds.219 In addition, as 

discussed below, we are deferring 

implementation of Rule 14a–11 for 

smaller reporting companies.220

A comparison of the share ownership 

concentrations in large accelerated filers 

and non-accelerated filers produced 

relatively minor observable difference. 

The results, adjusted to give effect to a 

three-year holding period requirement, 

are summarized in the table below: 221


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222See letter from P. Neuhauser (suggesting only 

two ownership eligibility tiers because data show 

‘‘almost no difference in ownership characteristics 

between smaller accelerated filers and nonaccelerated filers.’’). 

223As noted in Section II.C., we are adopting an 

amendment to Rule 14a–8(i)(8) to preclude 

companies from relying on that basis to exclude 

from their proxy materials shareholder proposals 

that seek to establish a procedure under a 

company’s governing documents for the inclusion 

of one or more shareholder director nominees in the 

company’s proxy materials. Such a shareholder 

proposal would, of course, have to satisfy the other 

requirements of the rule, like other Rule 14a–8 

shareholder proposals. 

224See letters from ACSI (advocating a uniform 

3% threshold); Calvert (same); LUCRF (same); S. 

Ranzini (same); TIAA–CREF (advocating a uniform 

5% threshold); T. Rowe Price (same). 

225Letter from TIAA–CREF. 

226Letter from T. Rowe Price. 

227Letters from SCSI and LUCRF. 

228Letter from CFA Institute. 

229See letters from CFA Institute; P. Neuhauser; 

RiskMetrics. 

230See letters from CSX; ITT; Southern Company; 

Tesoro; tw telecom; UnitedHealth; Verizon. 

231See letters from Advance Auto Parts; Alaska 

Air; American Express; Association of Corporate 

Counsel; Avis Budget; Best Buy; J. Blanchard; 

Boeing; BRT; Burlington Northern; Callaway; 

CIGNA; CNH Global; Comcast; Con Edison; Darden 

Restaurants; Dewey; J. Dillon; DTE Energy; DuPont; 

Eaton; Edison Electric Institute; Eli Lilly; Emerson 

Electric; ExxonMobil; FedEx; FMC Corp.; FPL 

Group; General Mills; Home Depot; Intel; JPMorgan 

Chase; E.J. Kullman; McDonald’s; N. Lautenbach; 

PepsiCo; Praxair; Protective (recommending this 

threshold if its proposed 35% withhold vote 

triggering event is not included; if included, it 

recommended a 3% threshold); Sara Lee; Seven 

Law Firms; Sherwin-Williams; Society of Corporate 

Secretaries; Textron; Tompkins; G. Tooker; 

Weyerhaeuser; Xerox. 

Non-accelerated 

filers 

(approximate 

percentages) 

Large accelerated 

filers 

(approximate 

percentages) 

Companies with at least one 1% shareholder ............................................................................................ 37 37 

Companies with at least one 3% shareholder ............................................................................................ 33 32 

Companies with at least one 5% shareholder ............................................................................................ 22 16 

Companies with at least two 1% shareholders ........................................................................................... 36 37 

Companies with at least two 1.5% shareholders ........................................................................................ 33 33 

Companies with at least two 2.5% shareholders ........................................................................................ 27 25 

Our further review of relevant data has 

persuaded us that applying different 

ownership thresholds to large 

accelerated filers and non-accelerated 

filers is not justified.222

As noted above, we have decided to 

adopt a uniform ownership threshold 

for all categories of public companies. 

We determined that a 3% ownership 

threshold is an appropriate standard for 

all such companies—not just 

accelerated filers. We believe that the 

3% threshold, while higher for many 

companies and lower for others than the 

thresholds advanced in the Proposal, 

properly balances our belief that Rule 

14a–11 should facilitate shareholders’ 

traditional State law rights to nominate 

and elect directors with the potential 

costs and impact of the amendments on 

companies. The ownership threshold 

we are establishing should not expose 

issuers to excessively frequent and 

costly election contests conducted 

through use of Rule 14a–11, but it is 

also not so high as to make use of the 

rule unduly inaccessible as a practical 

matter. 

We selected the uniform 3% 

threshold based upon comments 

received, our analysis of the data 

available to us, and the fact that the rule 

allows for shareholders to form groups 

to aggregate their holdings to meet the 

threshold. We also considered that our 

amendments to Rule 14a–8 remove 

barriers to the ability of shareholders to 

have proposals included in company 

proxy materials to establish a procedure 

under a company’s governing 

documents for the inclusion of one or 

more nominees in the company’s proxy 

materials. Because of these 

amendments, shareholders who believe 

the 3% threshold is too high can take 

steps to seek to establish a lower 

ownership threshold.223

We note that we considered a lower 

threshold, such as 1%, and a higher 

threshold, such as 5%, both of which 

were thresholds in the proposed tiers. 

Quite a few commenters, including a 

number who generally supported the 

adoption of Rule 14a–11, advocated for 

an ownership threshold higher than the 

1% level we proposed for large 

accelerated filers.224 One large 

institutional investor, for example, 

‘‘strongly urg[ed] the adoption of 

proposed Rule 14a–11’’ and argued that 

‘‘existing reforms are incomplete as long 

as boards retain the exclusive control of 

the proxy card and sole discretion over 

the mechanisms that govern their own 

elections,’’ but also stated the belief that 

‘‘in order to use company resources to 

nominate a director, a significant 

amount of capital must be represented 

and 5% is an acceptable threshold.’’ 225

Similarly, the manager of a large family 

of investment companies stated its 

‘‘support [for] the Commission’s intent 

to facilitate shareholders’ rights to 

participate in the governance process,’’ 

yet commented that ‘‘a 1% threshold is 

too low, in our opinion, to maintain the 

critical balance between serving the 

interests of eligible nominating 

shareholders and serving the interests of 

a company’s shareholder base at 

large.’’ 226 That commenter 

recommended a ‘‘flat 5% threshold for 

all companies’’ because it ‘‘represents 

significant economic stake.’’ Other 

commenters recommended a uniform 

3% ownership threshold in the interest 

of avoiding ‘‘frivolous or vexatious 

nominations,’’ 227 or because it ‘‘is not so 

small that it would allow a board 

nomination for only a de minimis 

investment in [a non-accelerated filer],’’ 

but ‘‘would not be so large as to prevent 

all but the largest institutional 

shareowners to submit nominees for 

[large accelerated filers].’’ 228

In light of such comments we have 

determined not to adopt the 1% 

threshold we had proposed with respect 

to large accelerated filers. We also have 

determined not to adopt, as the uniform 

standard, the 5% threshold we had 

proposed for non-accelerated filers. 

Several commenters from the investor 

community explicitly opposed a 5% 

uniform threshold, maintaining that it 

would as a practical matter exclude all 

but the largest institutional investors.229

On the other hand, although some 

companies supported a uniform 5% 

threshold,230 most other companies 

urged the adoption of a substantially 

higher threshold, either for individual 

shareholders or for shareholder groups, 

or both. For example, companies and 

their counsel generally believed a higher 

threshold should apply to group 

nominations and overwhelmingly 

recommended a 10% minimum 

ownership requirement for nominations 

by shareholder groups.231 We note, 

however, that at a 10% threshold for 

groups, the likelihood of forming a 

group sufficient to meet the minimum 

ownership requirement would likely be 

significantly reduced compared to a 3% 

threshold. Given a three-year holding 

period, the data in the November 2009 

Memorandum identify combinations 


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56692 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

232The data in the November 2009 Memorandum 

suggest that just 4% of companies would have at 

least one shareholder with 10%. 233See, e.g., letters from CSX; ITT; Shearman & 

Sterling; Tesoro; T. Rowe Price; tw telecom. 234See, e.g., Release No. 34–26598, Reporting of 

Beneficial Ownership in Publicly-Held Companies 

(March 6, 1989) (‘‘The beneficial ownership 

reporting requirements embodied in Sections 13(d) 

and 13(g) of the [Exchange Act] and the regulations 

adopted thereunder are intended to provide to 

investors and to the subject issuer information 

about accumulations of securities that may have the 

ability to change or influence control of the 

issuer.’’). See also Release No. 34–50699 (proposing 

to require disclosure of persons holding 5% of an 

ownership interest in a securities exchange because 

the principles underlying such disclosure were 

similar to those underlying other filing 

requirements: ‘‘The 5% reporting threshold and the 

information proposed to be required to be disclosed 

about such ownership is modeled on the beneficial 

ownership reporting requirements of the Williams 

Act, embodied in Sections 13(d) and 13(g) of the 

Exchange Act and the rules and regulations 

thereunder. These Exchange Act provisions are 

intended to provide information to the issuer and 

the marketplace about accumulations of securities 

that may have the potential to change or influence 

control of an issuer.’’ (footnotes omitted)). 

235Some commenters suggested that the data on 

share ownership dispersion referred to in the 

Proposing Release were insufficient because we did 

not focus on the possibility that shareholders could 

form groups to satisfy the minimum ownership 

requirement. See letters from American Bar 

Association (January 19, 2010) (‘‘ABA III’’); BRT II. 

236See letters from AFL–CIO (‘‘[I]t will be 

necessary to permit aggregation of holdings to 

prevent the Proposed Access Rule from being 

usable only by hedge funds.’’); Florida Board of 

Administration (‘‘Public funds would need to form 

a nominating group in order to meet the hurdle in 

nearly all cases.’’). 

237See letter from BRT II. 

238See, e.g., Rule 14a–2(b)(7). 

239We note that it is unlikely that the ownership 

test used in calculating the data tracks the 

definition that we are adopting for Rule 14a–11. As 

a result, the percentages in the data may be overor under-inclusive. 

240At the 10% threshold for groups urged by 

many commenters, for example, the likelihood of 

forming a group sufficient to meet the minimum 

ownership requirement would be more sharply 

constrained: the data in the November 2009 

Memorandum identify combinations totaling 10% 

or more but involving five or fewer shareholders as 

theoretically achievable in as little as 7% of public 

companies. 

241On the other hand, the data in the November 

2009 Memorandum may understate the number of 

large shareholdings, because the data may exclude 

smaller holdings in multiple institutions that are 

subject to common voting control, and in any event, 

do not include holdings of less than 1% at all, even 

though such holdings could contribute to the 

formation of a group eligible to use Rule 14a–11. 

Likewise, those data do not include securities held 

by institutions holding less than $100 million in 

securities because Exchange Act Section 13(f) does 

not require such institutions to report their 

holdings. See letters from ABA III; BRT II. 

totaling 10% or more but involving five 

or fewer shareholders as achievable in 

as little as 7% of public companies, 

compared to at least 21% of public 

companies at a 5% threshold and at 

least 31% of public companies at a 3% 

threshold. In addition, the data suggest 

that it would be even more unlikely that 

a company would have an individual 

shareholder that would meet a 10% 

ownership threshold.232 While some 

commenters suggested a 5% threshold 

was appropriate because that amount is 

consistent with other filing 

requirements such as Schedule 13D and 

13G,233 we ultimately were not 

persuaded because the underlying 

principles of such filing 

requirements 234 are quite different from 

those underlying the ownership 

condition to Rule 14a–11. After 

considering the comments and available 

data, we have decided that a 3% 

ownership threshold—including where 

shareholders form groups to satisfy the 

threshold—is an appropriate and 

workable approach for the rule. 

In adopting a uniform 3% threshold 

for all companies, as opposed to a lower 

ownership threshold for all companies, 

we are mindful that the rule will allow 

shareholders to form a group by 

aggregating their holdings to meet the 

ownership threshold.235 Indeed, as we 

assumed in the Proposing Release and 

as some commenters told us, in many 

cases shareholders will need to form 

groups to meet the ownership threshold 

for the purpose of submitting director 

nominations pursuant to Rule 14a– 

11.236 Commenters also pointed to 

instances of coordinated shareholder 

activity in recent ‘‘vote no’’ campaigns as 

support for the ability of shareholders to 

form groups.237 We have adopted a 

number of amendments to our rules that 

will facilitate the formation of groups 

for this purpose.238 We understand the 

result of our ownership threshold 

determination may be that shareholders 

will need to convince other 

shareholders to support their attempt to 

use Rule 14a–11. We believe this 

outcome reduces the potential for 

excessive costs to be incurred by 

companies and their shareholders. 

The data available to us also suggest 

that reaching the 3% ownership 

threshold we are adopting is possible for 

a significant number of shareholders 

either individually or by a number of 

shareholders aggregating their holdings 

in order to satisfy the ownership 

requirement. In particular, the data 

presented in the November 2009 

Memorandum indicate that a sizeable 

percentage (33%) of public companies 

have at least one institutional investor 

owning at least 3% of their securities for 

at least three years, and thus potentially 

qualified to meet the Rule 14a–11 

ownership threshold individually. As 

noted, however, the data are based on 

Form 13F filings, which include holders 

that are custodians and may not be 

likely users of the rule. The data in the 

November 2009 Memorandum also 

suggest that forming nominating 

shareholder groups with holdings 

aggregating 3% is achievable at many 

companies by a relatively small number 

of shareholders. Even factoring in the 

requirement of continuous ownership 

for three years, 31% of public 

companies have three or more holders 

with at least 1% share ownership each; 

and 29% have two or more holders with 

at least 2% share ownership each.239

Moreover, neither of these categories 

includes companies with one holder of 

2% and another holder of at least 1%, 

and none of these percentages includes 

companies having a relatively small 

number (e.g. four to ten) of holders 

whose aggregate holdings exceed 3% 

but whose individual holdings do not 

bring the company within any of the 

categories identified in the data. 

We are concerned, however, that use 

of Rule 14a–ndash;11 may not be 

consistently and realistically viable, 

even by shareholder groups, if the 

uniform ownership threshold were set 

at 5% or higher. At the 5% minimum 

ownership requirement for individuals 

as advocated by many of those same 

commenters, only 20% of public 

companies had even one shareholder 

satisfying that requirement. Finally, 

even applying a 5% threshold for 

shareholder groups, the data identify 

combinations involving five or fewer 

shareholders that add up to 5% or more 

as theoretically achievable in as few as 

21% of public companies—at least 25% 

fewer than with a 3% threshold.240

All of these data thus suggest that a 

uniform 5% ownership requirement 

would be substantially more difficult to 

satisfy than the 3% requirement we are 

adopting. Moreover, our resulting 

concern about the viability of a 5% 

ownership threshold is exacerbated by 

several limitations on the data reported 

in the November 2009 Memorandum. 

While those data do account for the 

application of a three-year holding 

period requirement, they may overstate 

in several ways the potential to meet the 

ownership threshold. First, they may 

include controlling shareholders that 

may be unlikely to rely on Rule 14a–11. 

Second, the data are based on filings on 

Form 13F, in which ownership is 

defined differently than under Rule 

14a–11, and thus may yield a higher 

number of larger shareholdings. Finally, 

the data include large shareholdings by 

institutions which report aggregated 

holdings of securities held for multiple 

beneficial owners.241

Nevertheless, and principally because 

they give effect to holding period 

requirements, we considered the data in 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56693 

242See ‘‘Report on Effects of Proposed SEC Rule 

14a–11 on Efficiency, Competitiveness and Capital 

Formation, in Support of Comments by Business 

Roundtable’’ by NERA Economic Consulting 

(‘‘NERA Report’’), Appendix Table 1, submitted 

with the letter from BRT. 

243 Id. at 13–14, Figure 2. 

244See letter from JPMorgan Chase. 

245See letters from AT&T (eight shareholders 

owning 1% or more, although holding periods not 

identified); AGL Resources (same); CIGNA (20 1%+ 

shareholders, although holding periods not 

identified); Cummins (36 1+% shareholders, 

although holding periods not identified); General 

Mills (one 5%+ shareholder holding for at least 6 

years, over 12 1%+ shareholders, and over 25 

0.5%+ shareholders, although holding periods not 

identified); ITT (14 1%+ shareholders, although 

holding periods not identified); McDonald’s (10 

holders owning 1% or more, one shareholder 

owning 5%, although holding periods not 

identified); UnitedHealth (four 3%+ shareholders, 

six 2%+ shareholders, nine 1%+ shareholders, 20 

0.5%+ shareholders, 32 0.25% shareholders, 

applying a 2-year holding period); Weyerhaeuser 

(three 5%+ shareholders, 20 1%+ shareholders, 

although holding periods not identified). 

246See letter from Council of Institutional 

Investors (January 14, 2010) (‘‘CII II’’). This comment 

refers to research indicating that in a small sample 

of accelerated and non-accelerated filers, the 

holdings of the ten largest public pension funds, if 

aggregated, would not exceed 5% and would also 

be unlikely to meet a 3% threshold, while a 1% 

threshold could be met. Apart from the sample size, 

however, this research itself appears limited in that 

it apparently does not include other types of 

shareholders and is not adjusted for any holding 

period. 

247See footnote 223 above. 

248See, e.g., letters from ICI; S&C; T. Rowe Price. 

249One joint comment letter provided data 

regarding the net assets of investment companies 

and the dollar value of the shares that would be 

necessary to meet the proposed 1%, 3%, or 5% 

thresholds. See letter from ICI/IDC. The data 

provided by the commenters suggest that there are 

a limited number of small investment companies 

with net assets ranging from $50,000 to $351,000, 

where the 3% threshold could be met by an 

investment ranging from $1,500 to $10,530. 

However, the data also indicate that the vast 

majority of funds are significantly larger, and would 

therefore require a significantly larger investment to 

meet the 3% threshold (e.g., 90% of long-term 

mutual funds, money market funds, and closed-end 

funds have total net assets greater than $19 million, 

$100 million, and $57 million, respectively; the 

median long-term mutual fund, money market fund, 

and closed-end fund have total net assets of $216 

million, $844 million, and $216 million, 

respectively). 

250See letters from S&C (recommending ‘‘with 

respect to the ownership thresholds applicable to 

shareholders of [registered investment companies], 

a minimum percentage of no less than the 5% 

threshold recommended in the Seven Law Firm 

Letter’’ (to which Sullivan & Cromwell was a party 

and which recommended that ownership 

thresholds of non-investment companies be 

adjusted upwards to 5% for individual shareholders 

and higher for groups of shareholders)); TIAA– 

CREF (recommending ‘‘that the Commission adopt 

a 5% ownership requirement across the board 

regardless of the company’s size’’ and ‘‘[w]ith 

respect to investment companies, * * * that the 5% 

requirement be applied at the fund complex level 

rather than at the individual fund level’’). 

251See letters from Barclays; T. Rowe Price; 

TIAA–CREF. 

the November 2009 Memorandum to be 

the most pertinent to our selection of a 

uniform minimum ownership 

percentage. We received additional data 

relating to large companies, however, 

that offer some additional indication 

about the number of shareholders 

potentially available to form a group to 

meet the 3% ownership threshold. One 

study indicated that in the top 50 

companies by market capitalization as 

of March 31, 2009, the five largest 

institutional investors held from 9.1% 

to 33.5% of the shares, and an average 

of 18.4% of the shares.242 That same 

study found that among a sample of 50 

large accelerated filers, the median 

number of shareholders holding at least 

1% of the shares for at least one year 

was 10.5, with 45 of the 50 companies 

in the sample having at least seven such 

shareholders.243 Another study that was 

reported to us 244 similarly suggests 

relatively high concentration of share 

ownership. According to that analysis of 

S&P 500 companies, 14 institutional 

investors could satisfy a 1% threshold at 

more than 100 companies, eight could 

meet that threshold at over 200 

companies, five could meet it at over 

300 companies, and three could meet it 

at 499 of the 500. Information from 

specific large issuers likewise suggests 

the achievability of shareholder groups 

aggregating 3%.245

We realize these data likely overstate 

the number of eligible shareholders or 

shareholders whose holdings could be 

grouped to meet the ownership 

threshold, as these data generally do not 

appear to reflect any continuous holding 

requirement. 

In any event, our assessment of the 

percentage of companies with various 

share ownership concentrations cannot 

be taken as an assurance that 

shareholder nominating groups will or 

will not be formed at any particular 

combination of percentage ownership 

and holding period requirements or of 

the likelihood that persons with large 

securities holdings would be inclined or 

disinclined to use Rule 14a–11.246

Taking all of this information into 

account, overall we believe that our 

selection of a 3% ownership threshold 

strikes an appropriate balance between 

the benefits of facilitating shareholder 

participation in the process of electing 

directors of public companies and the 

costs and disruption associated with 

contested elections of directors 

conducted pursuant to new Rule 14a– 

11. We also believe, and as noted, many 

commenters supported, that a threshold 

tied to a significant commitment to the 

company is an important feature of our 

amendments. Of course, to the extent 

that shareholders believe the 3% 

threshold is too high our amendments to 

Rule 14a–8 will facilitate their ability to 

adopt a lower ownership percentage.247

We proposed to apply the same 

thresholds for registered investment 

companies and business development 

companies as for non-investment 

companies, except that the applicability 

of the particular thresholds for 

registered investment companies would 

have depended on the net assets of the 

company, rather than the company’s 

accelerated filer status. No commenters 

recommended a higher threshold for 

investment companies than for noninvestment companies. While some 

commenters noted the absence of data 

specifically relating to the impact of 

various ownership thresholds on 

investment companies,248 no 

commenter supplied any data 

suggesting the need for an ownership 

threshold for investment companies 

different from that applicable to noninvestment companies.249 Although two 

commenters suggested a 5% ownership 

threshold for investment companies, 

both of these commenters also suggested 

a 5% threshold for non-investment 

companies.250

We believe that it is appropriate to 

apply to registered investment 

companies and business development 

companies the same 3% ownership 

threshold that we are applying to other 

companies. We also believe that, similar 

to non-investment companies, our 

selection of a 3% ownership threshold 

strikes an appropriate balance between 

the benefits of facilitating shareholder 

participation in the process of electing 

directors of investment companies and 

the costs and disruption associated with 

contested elections of directors 

conducted pursuant to Rule 14a–11. 

We are not adopting the suggestion of 

commenters that the eligibility 

thresholds for investment companies be 

based on the holdings for the fund 

complex in the case of unitary boards or 

the cluster in the case of cluster 

boards.251 We believe that eligibility 

should be based on holdings for the 

investment company, not the entire 

fund complex or cluster, because under 

State law, shareholder voting is 

determined based on the holdings in the 

investment company. Fund complexes 

have flexibility to organize their funds 

into one or more investment companies. 

Thereafter, State law governs which 

shareholders vote as a group for 

directors. Because Rule 14a–11 is 

intended to facilitate the exercise of 

traditional State law rights to nominate 

and elect directors, we believe that the 

rule should follow State law. 


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56694 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

252See letters from ABA; Duane Morris; Media 

General; P. Neuhauser; New York Times. These 

letters illustrated a scenario where one publiclyissued class of stock is entitled to one vote per 

share, while the privately-held controlling class of 

stock is entitled to 10 votes per share and both 

classes vote together on the election of directors. 

253See letters from ABA; P. Neuhauser; Duane 

Morris; Media General. 

254See, e.g., discussion in footnote 252 of 

common ten-to-one voting provisions of a structure 

with Class A and Class B securities. 

255See letter from ABA. 

256See letter from Duane Morris. 

257See Rule 14a–11(b)(1) and Instruction 3 and 

the discussion below. 258See Instruction 3 to Rule 14a–11(b)(1). 259See letters from 26 Corporate Secretaries; 

Advance Auto Parts; Aetna; Alaska Air; Alcoa; 

Alston & Bird; American Express; BorgWarner; 

BRT; Burlington Northern; CSX; L. Dallas; Dewey; 

DuPont; FPL Group; Florida State Board of 

Administration; GE; Honeywell; ICI; JPMorgan 

Chase; Kirkland & Ellis LLP (‘‘Kirkland & Ellis’’); 

Leggett; P. Neuhauser; PepsiCo; Protective; Seven 

Law Firms; SIFMA: Society of Corporate 

Secretaries; T. Rowe Price; tw telecom; 

UnitedHealth; ValueAct Capital; Xerox. 

260See letters from BRT; Devon; IBM; P. 

Neuhauser; Society of Corporate Secretaries. 

261See letter from ABA. 

262See letters from 26 Corporate Secretaries; 

ABA; Advance Auto Parts; Alaska Air; Allstate; 

Applied Materials; Association of Corporate 

Counsel; AT&T; J. Blanchard; Biogen; BRT; CIEBA; 

Cleary; Devon; Dewey; Headwaters; IBM; JPMorgan 

Chase; PepsiCo; Sara Lee; Seven Law Firms; 

Shearman & Sterling; Sidley Austin; Society of 

Corporate Secretaries; Verizon. 

263See letters from AFL–CIO; CalPERS; CII; 

COPERA; IAM, LIUNA; Marco Consulting; P. 

Neuhauser; D. Nappier; Sheet Metal Workers 

National Pension Fund (‘‘Sheet Metal Workers’’); 

SWIB. 

264See letters from AFL–CIO; Marco Consulting; 

Sheet Metal Workers; SWIB. 

265See letters from CalPERS; CII; COPERA; IAM; 

LIUNA; D. Nappier. 

266See letters from AFL–CIO; CalPERS; CII; IAM; 

D. Nappier. 

267See letters from CalPERS; CII; IAM; D. 

Nappier. 

268See letters from COPERA. 

269This would include securities registered 

pursuant to Section 12 of the Exchange Act or 

subject to Investment Company Act Rule 20a–1. 

ii. Voting Power 

We proposed that the ownership 

threshold be determined as a percentage 

of the securities entitled to be voted on 

the election of directors. Some 

commenters sought clarification of how 

the ownership threshold would be 

calculated where companies have 

multiple classes of stock with varying 

voting rights.252 These commenters 

observed that the proposed rule did not 

adequately address voting regimes 

where the voting rights have been 

separated from the economic rights of 

ownership.253 One commenter 

explained that in situations where 

ownership of securities does not 

correlate with voting power,254 shares 

will have voting rights disproportionate 

to the number of shares held, and that 

creates a disparity between the two 

classes in terms of the economic value 

of a single vote.255 One commenter 

advised that further clarification was 

needed for companies with two or more 

outstanding classes of voting securities 

with disparate voting rights, including 

those companies with classes of voting 

securities and non-voting securities, so 

that those companies would be treated 

in a manner consistent with companies 

that have one class of voting 

securities.256

In proposing that the ownership 

threshold be determined as a percentage 

of securities entitled to be voted on the 

election of directors, our goal was to 

have the requirement tie to the 

percentage of votes that could be cast for 

the director nominees. In response to 

these commenters, we have revised the 

rule text to clarify that the ownership 

threshold will be determined as a 

percentage of voting power of the 

securities entitled to be voted on the 

election of directors at the meeting, 

rather than as a percentage of securities 

entitled to be voted on the election of 

directors, as was proposed. Accordingly, 

where a company has multiple classes 

of stock with unequal voting rights and 

the classes vote together on the election 

of directors, then voting power would 

be calculated based on the collective 

voting power.257 If a company has 

multiple classes of stock that do not 

vote together in the election of all 

directors (where, for example, each class 

elects a subset of directors), then voting 

power would be determined only on the 

basis of the voting power of the class or 

classes of stock that would be voting 

together on the election of the person or 

persons sought to be nominated by the 

nominating shareholder or group, rather 

than the voting power of all classes of 

stock.258 We believe this approach 

properly bases the availability of Rule 

14a–11 on the right to vote for the 

nominees that may be included in the 

company’s proxy materials, which is 

both consistent with the intent of the 

provisions of a company’s governing 

documents and in accord with the 

principle that class directors are elected 

by the votes of the holders of the class. 

iii. Ownership Position 

In the Proposing Release, we solicited 

comment about whether beneficial 

ownership is the appropriate standard 

of ownership to use for purposes of the 

minimum ownership threshold in the 

rule or whether another standard would 

be more appropriate. In this regard, we 

requested comment about whether a net 

long requirement should be used and, if 

so, what other modifications would be 

required. We received a number of 

comments addressing the appropriate 

standard of ownership and supporting 

the inclusion of a net long 

requirement.259 Commenters suggested 

that we adopt an ‘‘ultimate’’ beneficial 

owner definition that included, among 

other things, a requirement that the 

nominating shareholder or group hold 

the entire bundle of voting and 

economic rights to any securities used 

to determine eligibility under the 

rule.260 At least one of these 

commenters thought the ownership 

definition should be adopted this way 

in order to remove the possibility that 

multiple parties may count the same 

securities toward their individual 

securities ownership totals.261

Moreover, many commenters were 

concerned that without requiring net 

long ownership, shareholders could 

engage in hedging strategies to obtain 

the requisite amount of ownership 

while eliminating or reducing their 

economic exposure.262 Some 

commenters expressed the view that 

shares loaned to a third party should be 

taken into account when determining 

whether the nominating shareholder or 

group satisfies the relevant ownership 

threshold.263 Commenters explained 

that institutional investors who hold 

shares for the long-term may lend their 

shares to others periodically while 

retaining the right to recall those shares 

to cast votes.264 Commenters suggested 

several conditions for counting these 

shares: the shareholder has a legal right 

to recall the shares and cast votes; 265

the shareholder discloses in the 

Schedule 14N an intention to vote the 

shares; 266 the shareholder holds the 

shares through the date of the 

meeting; 267 and the shares are held past 

the date of the election.268

After considering the comments, we 

have modified in several respects the 

ownership requirement of Rule 14a–11 

so that it is consistent with our intent 

to limit use of Rule 14a–11 to long-term 

shareholders with significant ownership 

interests. First, in order to satisfy the 

ownership requirement, the nominating 

shareholder or member of the 

nominating shareholder group must 

hold a class of securities subject to the 

proxy solicitation rules.269 Limiting 

Rule 14a–11 nominations to holders of 

securities that are subject to the proxy 

rules appropriately excludes from the 

calculation private classes of voting 

securities held by persons that would 

have no expectation that our proxy rules 

would be available to facilitate their 

State law nomination rights. Further, if 

we included securities not covered by 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56695 

270 17 CFR § 240.13d–3. Like the approach under 

Rule 13d–3, we are including and excluding certain 

securities from the determination of who has voting 

power for policy reasons. Those inclusions and 

exceptions and the policy reasons underlying them 

are discussed throughout this section. 

271See Instruction 3.c. to Rule 14a–11(b)(1). 

272The rule also clarifies that financial 

intermediaries, such as banks or brokers, that may 

hold securities on behalf of their clients could not 

use the provisions of Rule 14a–11. See Instruction 

3.c. to Rule 14a–11(b)(1). 

273See letters from AFL–CIO; CalPERS; CII; 

COPERA; IAM; LIUNA; Marco Consulting; P. 

Neuhauser; D. Nappier; Sheet Metal Workers; 

SWIB. 

274See letter from P. Neuhauser. 

275See Instruction 3.b.3 to Rule 14a–11(b)(1). We 

note that in a typical short sale the person selling 

the securities short would not have the power to 

vote the securities subject to the short sale. 

Nevertheless, the provisions of Rule 14a–11 require 

that the voting power of the securities subject to the 

short sale be deducted from the voting power held 

directly or on behalf of the nominating shareholder 

or member of the nominating shareholder group to 

address our concerns about limiting the application 

of Rule 14a–11 to shareholders that retain 

significant ownership interests in a company. 

Likewise, a person whose ownership of shares 

arises solely from borrowing them for purposes of 

short sale would be deemed to have no share 

ownership for purposes of the ownership 

requirement of Rule 14a–11(b)(1). 

276The ownership provisions related to short 

sales do not apply to securities that have been sold 

in a short sale where the nominating shareholder 

or member of the nominating shareholder group 

had no control over such transactions. See 

Instruction 3.b.3. to Rule 14a–11(b)(1) (covering 

short sales by ‘‘the nominating shareholder or any 

member of the nominating shareholder group, as 

the case may be, or any person acting on their 

behalf * * *’’). For example, a nominating 

shareholder would not be required to exclude 

securities that have been sold short by a pooled 

investment vehicle in which the nominating 

shareholder or member of a nominating shareholder 

group has invested as long as the shareholder does 

not have the ability to direct the investments held 

in the pooled investment vehicle. Similarly, 

securities held by the pooled investment vehicle 

with respect to which the shareholder does not 

have the ability to direct the investments held in 

the pooled investment vehicle would not be 

Continued 

the proxy rules in the calculation, those 

securities could dilute the relative 

holdings of shareholders holding 

securities that our rules are designed to 

protect. Second, the nominating 

shareholder or member of the 

nominating shareholder group must 

hold both investment and voting power, 

either directly or through any person 

acting on their behalf, of the securities. 

By requiring that a nominating 

shareholder or member of a nominating 

shareholder group hold investment and 

voting power of the securities that are 

used for purposes of determining 

whether the ownership requirement has 

been met, we are addressing the 

concerns raised by certain commenters 

that the provisions of Rule 14a–11 

should only be available to shareholders 

that possess ultimate ownership rights 

over the shares. 

Similar to the provisions in Exchange 

Act Rule 13d–3,270 the definition of 

voting power for purposes of Rule 14a– 

11 includes the power to vote, or to 

direct the voting of, such securities and 

investment power for purposes of Rule 

14a–11 includes the power to dispose, 

or to direct the disposition of, such 

securities.271 Unlike the provisions in 

Rule 13d–3, however, the ownership 

requirement of Rule 14a–11 includes 

both voting and investment power—as 

opposed to just one or the other—and 

voting and investment power for 

purposes of Rule 14a–11 does not exist 

over securities that a nominating 

shareholder or member of a nominating 

shareholder group merely has the right 

to acquire. For example, a nominating 

shareholder or member of a nominating 

shareholder group will not be able to 

count securities that could be acquired, 

such as securities underlying options 

that are currently exercisable but have 

not yet been exercised. 

For purposes of meeting the 

ownership threshold in Rule 14a–11, a 

nominating shareholder or group will 

include investment and voting power of 

the company’s securities that is held 

‘‘either directly or through any person 

acting on their behalf.’’ We are adopting 

the ownership provisions with this 

language to account for the common 

situation when financial intermediaries, 

such as banks or brokers, hold securities 

on behalf of their clients.272 This 

additional language also covers 

relationships, such as parent and 

subsidiary, when for organizational or 

tax reasons, among others, investment 

and voting power is held by an entity 

that is controlled by another entity. This 

provision, however, would not include 

securities that are held in a pooled 

investment vehicle in which the 

nominating shareholder or member of a 

nominating shareholder group does not 

have voting and investment power over 

the securities held in the pooled 

investment vehicle. 

Third, we have adopted a provision in 

the ownership requirement in Rule 14a– 

11 that, subject to specific conditions, 

allows for securities that have been 

loaned to a third party by or on behalf 

of the nominating shareholder or 

member of a nominating shareholder 

group to be considered in the 

calculation. We recognize that share 

lending is a common practice, and we 

believe that loaning securities to a third 

party is not inconsistent with a longterm investment in a company.273 To 

capture only securities where voting 

power can ultimately be exercised by 

the nominating shareholder or member 

of a nominating shareholder group in 

the election of directors, however, 

securities that have been loaned by or 

on behalf of the nominating shareholder 

or any member of the nominating 

shareholder group to another person 

may be counted toward the ownership 

requirement only if the nominating 

shareholder or member of the 

nominating shareholder group: 

• Has the right to recall the loaned 

securities; and 

• will recall the loaned securities 

upon being notified that any of the 

nominees will be included in the 

company’s proxy materials. 

Absent satisfaction of these 

conditions—in addition to holding the 

requisite investment power over the 

loaned securities—we believe it is 

appropriate to exclude securities that 

have been loaned to another person 

from the calculation of voting power 

because, generally, the person to whom 

the securities have been loaned has the 

ability to vote those securities.274 If the 

rule were to allow loaned securities that 

either will not or cannot be recalled to 

be included for purposes of the 

ownership calculation, then the voting 

power of a nominating shareholder or 

member of a nominating shareholder 

group may potentially be inflated 

because the calculation could include 

votes that the nominating shareholder or 

member of a nominating shareholder 

group cannot actually cast. 

In determining the total voting power 

of the company’s securities held by or 

on behalf of the nominating shareholder 

or any member of the nominating 

shareholder group, the voting power 

would be reduced by the voting power 

of any of the company’s securities that 

the nominating shareholder or any 

member of a nominating shareholder 

group has sold in a short sale during the 

relevant periods.275 In addition, the rule 

text explicitly excludes borrowed shares 

because the rule is intended to be used 

by holders with a significant long-term 

commitment to the company, and 

including shares that are merely 

borrowed is inconsistent with that 

purpose. The instruction makes clear 

that to the extent borrowed securities 

are not already excluded through the 

subtraction of securities sold short, 

borrowed securities would be subtracted 

in computing the relevant amount. We 

recognize that by requiring the voting 

power of securities sold short or 

borrowed for purposes other than a 

short sale to be subtracted from the 

ownership calculation, we are 

potentially reducing the eligibility of 

certain shareholders to rely on Rule 

14a–11.276 Nevertheless, as noted above, 


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included in the amount of holdings of the 

shareholder. 

277We recognize that selling a company’s 

securities short is only one of a number of ways that 

a shareholder can hedge the economic risk of its 

investment. Indeed, a number of commenters 

suggested that we adopt a beneficial ownership 

definition for purposes of Rule 14a–11 that netted 

all hedging arrangements (derivatives, swaps, etc.). 

We believe, however, that it is appropriate at this 

time to adopt the ownership threshold for Rule 

14a–11 with the provision only relating to short 

sales as it contributes significantly towards the goal 

of excluding votes from the ownership calculation 

securities where the voting and economic interests 

are separated and does not unduly complicate the 

rule. Further, by excluding securities that the 

holder merely has the right to acquire (such as 

securities underlying options) and securities that 

have been loaned and cannot be recalled, we have 

further narrowed the application of the rule to 

address concerns about separating economic 

interest and voting power. 

278See letters from 26 Corporate Secretaries; 

ABA; Advance Auto Parts; Alaska Air; Allstate; 

Applied Materials; Association of Corporate 

Counsel; AT&T; J. Blanchard; Biogen; BRT; CIEBA; 

Cleary; Devon; Dewey; Headwaters; IBM; JPMorgan 

Chase; PepsiCo; Sara Lee; Seven Law Firms; 

Shearman & Sterling; Sidley Austin; Society of 

Corporate Secretaries; Verizon. 

279 17 CFR 242.200(a). We note that certain of the 

provisions in Exchange Act Rule 200, including 

when a ‘‘person shall be deemed to own a security’’ 

as defined in Rule 200(b), differ from the provisions 

we have adopted for purposes of Rule 14a–11. For 

instance, Rule 200(b) extends ownership of a 

security to options that have been exercised. As 

noted above, however, we have not extended 

ownership for purposes of Rule 14a–11 to options. 

We believe that these different, but not conflicting, 

approaches are appropriate and reflect the policy 

objectives for adopting each rule. 

280See Instruction 1 to Rule 14a–11(b)(1). In the 

case of a registered investment company, in 

determining the total voting power of the securities 

that are entitled to be voted on the election of 

directors for purposes of establishing whether the 

3% voting power threshold has been met, the 

nominating shareholder or group may rely on 

information set forth in the following documents, 

unless the nominating shareholder or group knows 

or has reason to know that the information 

contained therein is inaccurate: (1) In the case of 

a series company, a Form 8–K that will be required 

to be filed in connection with the meeting where 

directors are to be elected; or (2) in the case of other 

registered investment companies, the company’s 

most recent annual or semi-annual report filed with 

the Commission on Form N–CSR. See Instruction 2 

to Rule 14a–11(b)(1). 

281See Item 5 of proposed Schedule 14N. 

282See the discussion below regarding the 

holding period we are adopting. 

283See letters from BorgWarner; Society of 

Corporate Secretaries. 

284See letter from CII. 

285See letter from P. Neuhauser. 

we believe that eligibility for Rule 14a– 

11 should be limited to those 

shareholders that have a significant 

interest in the company.277 We agree 

with commenters who suggested that 

selling a company’s securities short may 

divest that shareholder of the economic 

risks of ownership.278

For purposes of determining whether 

the nominating shareholder or any 

member of a nominating shareholder 

group has sold a company’s securities 

short, the term ‘‘short sale’’ will have the 

meaning provided in Exchange Act Rule 

200(a).279 Under that rule, a short sale 

is ‘‘any sale of a security which the 

seller does not own or any sale which 

is consummated by the delivery of a 

security borrowed by, or for the account 

of, the seller.’’ 

In calculating the voting power 

required to satisfy the 3% voting power 

eligibility requirement described above, 

nominating shareholders or members of 

a nominating shareholder group must 

first determine the total number of votes 

that can be derived from their holdings 

of securities that are subject to the proxy 

rules. This determination is made as of 

the date the Schedule 14N is filed. The 

total number of votes can be increased 

by the number of votes attributable to 

securities which have been loaned 

(subject to the conditions previously 

noted) and must be reduced by the 

number of votes attributable to any 

securities that have been sold in a short 

sale that is not closed out as of that date 

or borrowed for purposes other than a 

short sale. This adjusted number of 

votes is the qualifying number of votes 

eligible to be used as the numerator in 

calculating the percentage held of the 

company’s total voting power. The 

number of securities to which these 

qualifying votes are attributable is the 

amount of securities that must be used 

for evaluating compliance with the 

continuous holding period requirements 

specified in Rule 14a–11(b)(2), and 

discussed below. 

In determining the total voting power 

of the company’s securities, nominating 

shareholders and members of a 

nominating shareholder group will be 

entitled to rely on the most recent 

quarterly, annual or current report filed 

by the company unless the nominating 

shareholder or member of a nominating 

shareholder group knows or has reason 

to know that the information in the 

reports is inaccurate.280 We believe that 

a nominating shareholder or member of 

a nominating shareholder group should 

be able to rely on the filings made by the 

company in making the calculation of 

voting power for purposes of Rule 14a– 

11 even if the number of securities 

outstanding has changed since the last 

report so that a nominating shareholder 

or member of a nominating shareholder 

group can easily make a determination 

about the percentage of voting power 

that they hold. 

iv. Demonstrating Ownership 

Under the Proposal, a nominating 

shareholder or member of a nominating 

shareholder group would be able to 

demonstrate ownership in several 

ways.281 If the nominating shareholder 

or member of the nominating 

shareholder group is the registered 

holder of the shares, he or she could 

state as much. In this instance, the 

company would have the ability to 

independently verify the shareholder’s 

ownership. Where the nominating 

shareholder or member of the 

nominating shareholder group is not the 

registered holder of the securities, the 

nominating shareholder or member of 

the nominating shareholder group 

would be required to demonstrate 

ownership by attaching to the Schedule 

14N a written statement from the 

‘‘record’’ holder of the nominating 

shareholder’s shares (usually a broker or 

bank) verifying that, at the time of 

submitting the shareholder notice to the 

company on Schedule 14N, the 

nominating shareholder or member of 

the nominating shareholder group 

continuously held the securities being 

used to satisfy the applicable ownership 

threshold for a period of at least one 

year.282 In the alternative, if the 

nominating shareholder or member of 

the nominating shareholder group has 

filed a Schedule 13D, Schedule 13G, 

Form 3, Form 4, and/or Form 5, or 

amendments to those documents, the 

shareholder or group member may so 

state and attach a copy or incorporate 

that filing or amendment by reference. 

Commenters generally did not object 

to the proposed methods of 

demonstrating ownership; however, 

they did suggest some revisions to the 

rule. Two commenters believed that the 

nominating shareholder or group, if 

requested by the company, should be 

required to provide evidence from its 

broker-dealer or custodian certifying 

that its ownership position meets the 

requisite threshold through a date that 

is within five days of the shareholders’ 

meeting.283 Another commenter 

recommended a revision to the 

proposed rule to allow the written 

statement to be dated no more than 

seven days prior to the date of 

submission of the nomination to the 

company.284 The commenter explained 

that it may be difficult for a group of 

nominating shareholders to obtain 

letters from the ‘‘record’’ holders on the 

exact same date they submit the 

nomination to the company and file a 

Schedule 14N and cited similar 

problems in the context of the Rule 14a– 

8 process as an example. Another 

commenter recommended more 

generally that the written statement be 

dated a short period before the filing of 

the Schedule 14N.285 Other commenters 

submitted various suggestions as to who 


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286See letters from ABA; CII; ICI; P. Neuhauser; 

Schulte Roth & Zabel; Seven Law Firms; S&C. 

Litigation subsequent to the Proposal has 

underscored the utility of clarifying the source of 

verification of ownership by shareholders who are 

not themselves registered owners of the shares. See 

Apache Corp. v. Chevedden, 696 F.Supp.2d 723 

(S.D.Tex. Mar. 10, 2010) (interpreting the proof of 

ownership requirement in Rule 14a–8(b)(2)). 

287We note that a nominating shareholder may 

have changed brokers or banks during the time 

period in which it has held the shares it is using 

to meet the ownership threshold. In such cases, the 

nominating shareholder would need to obtain a 

written statement from each broker or bank with 

respect to the shares held and specify the time 

period in which the shares were held. 

288This form of written statement from a bank or 

broker is a modification to the Proposal, and is 

provided as a non-exclusive example of an 

acceptable method of satisfying the requirement in 

Rule 14a–11(b)(3). See Instruction to Item 4 of new 

Schedule 14N. We note that the written statements 

would not reflect all aspects of the ownership 

requirement, such as the percentage of voting power 

held, and thus, would not be dispositive with 

regard to whether the nominating shareholder or 

group satisfied the ownership threshold. For 

purposes of complying with Rule 14a–11(b)(3), 

loaned securities may be included in the amount of 

securities set forth in the written statements. 

Consistent with the Proposal, a nominating 

shareholder or group proving ownership by using 

a previously filed Schedule 13D or 13G or Form 3, 

4, or 5 could attach a copy of the filing to the 

Schedule 14N or incorporate it by reference into the 

Schedule. We note that the calculation of voting 

power of a company’s securities for purposes of 

Rule 14a–11 differs from the determination of 

beneficial ownership for purposes of those 

schedules and forms. In addition, as adopted, we 

are clarifying that the schedules or forms used to 

provide proof of ownership must reflect ownership 

of the securities as of or before the date on which 

the three-year eligibility period begins. 

289See the Instruction to Item 4 of new Schedule 

14N. 

290See letters from ADP; AFSCME; Callaway; 

CalPERS; CalSTRS; Calvert; CFA Institute; J. Chico; 

CII; Corporate Library; Dominican Sisters of Hope 

(‘‘Dominican Sisters of Hope’’); GovernanceMetrics 

International (‘‘GovernanceMetrics’’); ICGN; Lorsch 

et al.; LUCRF; Mercy Investment Program (‘‘Mercy 

Investment Program’’); Motorola; D. Nappier; 

Nathan Cummings Foundation; P. Neuhauser; 

Norges Bank; Pax World; RiskMetrics; Shamrock; 

Shearman & Sterling; Sisters of Mercy Regional 

Community of Detroit Charitable Trust (‘‘Sisters of 

Mercy’’); Social Investment Forum; Sodali; Tri-State 

Coalition for Responsible Investment (‘‘Tri-State 

Coalition’’); Trillium; T. Rowe Price; Ursuline 

Sisters of Tildonk (‘‘Ursuline Sisters of Tildonk’’); 

USPE; ValueAct Capital; Walden Asset 

Management (‘‘Walden’’). 

291See letters from 26 Corporate Secretaries; 

ABA; Advance Auto Parts; Aetna; AFL–CIO; Alaska 

Air; Alcoa; Allstate; Alston & Bird; Amalgamated 

Bank; American Express; Anadarko; Applied 

Materials; Association of Corporate Counsel; AT&T; 

Avis Budget; Biogen; J. Blanchard; Boeing; 

BorgWarner; BRT; Burlington Northern; Caterpillar; 

Chevron; CIEBA; CIGNA; CNH Global; P. Clapman; 

Comcast; Con Edison; CSX; CtW Investment Group; 

Cummins; L. Dallas; Darden Restaurants; E. Davis; 

Deere; Devon; Dewey; DTE Energy; DuPont; Eaton; 

Eli Lilly; ExxonMobil; FedEx; Fenwick; FMC Corp.; 

FPL Group; General Mills; Headwaters; Home 

Depot; Honeywell; IAM; IBM; ICI; Intel; ITT; 

JPMorgan Chase; Lionbridge Technologies; LIUNA; 

Marco Consulting; McDonald’s; M. Metz; J. Miller; 

NACD; D. Nappier (expressing a willingness to 

accept a two-year holding period instead of the 

proposed one-year holding period); Northrop; 

Office Depot; OPERS; Pfizer; P&G; Praxair; 

Protective; RiskMetrics (accepting a two-year 

holding period as alternative to the proposed oneyear holding period); Sara Lee; S&C; Sheet Metal 

Workers; Sidley Austin; SIFMA; Society of 

Corporate Secretaries; Southern Company; 

Teamsters; Tesoro; Textron; Theragenics; TI; TIAA– 

CREF; Tidewater; Time Warner Cable Inc. (‘‘Time 

Warner Cable’’); tw telecom; L. Tyson; 

UnitedHealth; U.S. Bancorp; Wells Fargo; 

Weyerhaeuser; Xerox; Vanguard; Verizon; B. 

Villiarmois. 

292See letters from BRT; CIEBA; IBM; 

McDonald’s; Society of Corporate Secretaries. 

293See letters from 13D Monitor; ACSI; British 

Insurers; Ironfire Capital LLC (‘‘Ironfire’’); LUCRF. 

294See letter from British Insurers. 

295See letter from 13D Monitor. 

296One commenter pointed to the Aspen 

Principles, available at http:// 

www.aspeninstitute.org/sites/default/files/content/ 

docs/pubs/Aspen_Principles_with_signers_

April_09.pdf, suggesting that companies that are 

often forced to react to short-term investors are 

constrained from creating valuable goods and 

services, investing in innovations, and creating jobs. 

See also letter from AFL–CIO. 

should provide the required written 

statement.286

While we are adopting the 

requirements to demonstrate ownership 

as proposed, we agree with the 

commenters that additional clarity is 

needed with regard to how far in 

advance of the notice date the statement 

of the broker or bank may be dated, as 

well as what type of bank or broker may 

provide the written statement on behalf 

of the shareholder. We believe the date 

should be as close as practicable to the 

notice date, and believe that seven 

calendar days should provide a 

workable time frame that is still close in 

time to the notice date. Accordingly, we 

have revised the rule to clarify that the 

statement from the registered holder, 

broker, or bank may be dated within 

seven calendar days prior to the date the 

nominating shareholder or group 

submits the notice on Schedule 14N.287

Also, to provide additional clarity 

about these requirements, the final rule 

includes an example of a form of written 

statement verifying share ownership 

that may be used if the nominating 

shareholder or any member of the 

nominating shareholder group (i) is not 

the registered holder of the shares, (ii) 

is not proving ownership by providing 

previously filed Schedules 13D or 13G 

or Forms 3, 4, or 5, and (iii) holds the 

shares in an account with a broker or 

bank that is a participant in the 

Depository Trust Company (‘‘DTC’’) or a 

similar clearing agency acting as a 

securities depository.288 An instruction 

to Schedule 14N describes more fully 

what information should be provided if 

a nominating shareholder or any 

member of the nominating shareholder 

group holds the securities through a 

broker or bank (e.g., in an omnibus 

account) that is not a participant in DTC 

or a similar clearing agency.289

We note that satisfying the 

requirement in Rule 14a–11(b)(3) to 

demonstrate ownership is different from 

satisfying the requirement in Rules 14a– 

11(b)(1) and 14a–11(b)(2) that a 

shareholder or shareholder group hold 

the requisite amount of the company’s 

securities that are entitled to be voted 

on the election of directors for three 

years, as calculated pursuant to the 

Instruction to paragraph (b)(2). It is 

possible for a shareholder to be able to 

demonstrate ownership pursuant to 

Rule 14a–11(b)(3), and yet not satisfy 

the total voting power and holding 

period requirements in Rules 14a– 

11(b)(1) and (b)(2). 

c. Holding Period 

With respect to duration of 

ownership, we proposed a one-year 

holding requirement for each 

nominating shareholder or member of a 

nominating shareholder group. 

Although many commenters supported 

the proposed one-year holding 

period,290 the majority of commenters 

suggested a holding period longer than 

the proposed one-year period, with 

many recommending alternative 

holding periods ranging from 18 months 

to four years.291 Some commenters, for 

example, expressed a belief that 

increasing the duration of the minimum 

holding period would ensure that use of 

Rule 14a–11 is limited to holders of a 

significant, long-term interest and 

would dissuade shareholders from using 

the rule to nominate and elect directors 

to make short-term gains at the expense 

of long-term shareholders.292 A small 

number of commenters believed that 

Rule 14a–11 should not include a 

holding period requirement.293 One 

commenter believed that all holders of 

the same securities should have the 

same rights under Rule 14a–11 

regardless of how long the securities 

have been held.294 Another commenter 

stated that a short-term shareholder has 

the same risk as long-term shareholders; 

thus their rights under Rule 14a–11 

should be equal.295

After considering the comments, we 

have decided to adopt a three-year 

holding requirement, rather than the 

proposed one-year requirement. This 

decision is based on our belief that 

holding securities for at least a threeyear period better demonstrates a 

shareholder’s long-term commitment 

and interest in the company.296 We also 

based our decision to have a holding 

period longer than one year on the 

strong support of a variety of 

commenters. For instance, we received 


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297Letter from Teamsters. 

298Letter from BRT. 

299Letter from Tesoro. 

300See letters from E. Davis; Fenwick. 

301As proposed, a nominating shareholder or 

group would have been required to hold ‘‘the 

securities that are used for purposes of determining 

the applicable ownership threshold’’ and intend to 

continue to hold ‘‘those securities’’ through the date 

of the meeting. See proposed Rule 14a–11(b)(2). The 

Proposal also would have required the nominating 

shareholder or group to provide a statement that the 

nominating shareholder or group intends to 

continue to own the ‘‘requisite shares’’ through the 

date of the meeting. See proposed Rule 14a–18(f). 

As adopted, we are modifying Rule 14a–11 to 

require the nominating shareholder or each member 

of the nominating shareholder group to have held 

the ‘‘amount of securities’’ that are used for 

satisfying the ownership requirement and to 

continue to hold that amount of securities through 

the date of the meeting, rather than referring to the 

‘‘requisite securities.’’ In addition, even though the 

ownership requirement is based on the percentage 

of voting power held, the requirement refers to 

‘‘amount’’ rather than ‘‘percentage’’ so that 

satisfaction of the ownership requirement can be 

accurately determined. We believe it would be 

unduly burdensome to require that a nominating 

shareholder or group determine whether its 

holdings exceeded 3% of the company’s voting 

power continuously for a three-year period prior to 

the filing of the Schedule 14N. 

302See the Instruction to Rule 14a–11(b)(2). For 

purposes of this calculation, the amount of the short 

position or borrowed securities at any point in time 

during the three year holding period would be 

deducted from the amount of securities otherwise 

held at that point in time. 

303 Id. 

304 Id. The recall provisions are discussed in 

Section II.B.4.b.iii. above. We note that at the time 

the nominating shareholder or group calculates its 

ownership and submits a nominee or nominees, it 

may not be certain that its nominee or nominees 

will be included in the company’s proxy materials. 

We do not believe it is necessary to require a 

nominating shareholder or group to recall loaned 

shares that it has the right to recall and vote prior 

to the time that the nominating shareholder or 

group is notified that its nominee or nominees will 

be included in the company’s proxy materials. 

305See the Instruction to Rule 14a–11(b)(2). 

306See letter from AFSCME. 

comments that advised that we should 

‘‘adopt a more reasonable holding period 

of at least two years,’’ 297 and ‘‘a 

minimum holding period of at least two 

years is appropriate’’ because a ‘‘shorter 

holding period would allow 

shareholders with a short-term focus to 

nominate directors who, if elected, 

would be responsible for dealing with a 

company’s long-term issues.’’ 298

Another commenter stated that ‘‘three 

years would be a more reasonable test 

with respect to longevity of stock 

ownership.’’ 299 Although two 

commenters suggested even longer 

holding periods,300 we believe that a 

three year holding period reflects our 

goal of limiting use of the rule to 

significant, long-term holders and 

appropriately responds to commenters’ 

suggestions regarding the length of the 

holding period. In this regard, as noted 

previously, some commenters suggested 

a two year holding period, but others 

stated it should be ‘‘at least’’ two years. 

Given the support expressed for a 

significant holding period, we believe a 

three year holding period, rather than 

one or two years, strikes the appropriate 

balance in providing shareholders with 

a significant, long-term interest with the 

ability to have their nominees included 

in a company’s proxy materials while 

limiting the possibility of shareholders 

attempting to use Rule 14a–11 

inappropriately, as discussed further 

below. 

We also factored our desire to limit 

the use of Rule 14a–11 to shareholders 

who do not possess a change in control 

intent with regard to the company into 

our decision to extend the holding 

period. Although we have, as noted 

below, adopted specific requirements in 

Rule 14a–11 to address the control 

issue, we believe that a longer holding 

period is another safeguard against 

shareholders that may attempt to 

inappropriately use Rule 14a–11 as a 

means to quickly gain control of a 

company. Finally, we note that if 

shareholders believe that the three-year 

period should be shorter, the 

amendment that we decided to adopt to 

Rule 14a–8 will remove barriers to 

proposals that seek to establish a 

different procedure with a lesser (or no) 

holding period condition. 

The requirement we are adopting is 

that shareholders seeking to use Rule 

14a–11 to have a nominee or nominees 

included in a company’s proxy 

materials must have held the minimum 

amount of securities used to satisfy the 

3% ownership threshold continuously 

for at least three years.301 Similar to the 

calculation of voting power discussed 

above, in order to satisfy the three-year 

holding requirement, the nominating 

shareholder or member of the 

nominating shareholder group must 

have investment and voting power over 

the amount of securities, and the 

amount of securities held during the 

period will have to be reduced by the 

amount of securities of the same class 

that are the subject of short positions or 

are borrowed for purposes other than a 

short sale during the period.302 The rule 

also allows securities loaned to a third 

party to be considered held during the 

period, provided that the nominating 

shareholder or group has the right to 

recall the loaned securities during the 

period.303 As discussed above, we do 

not believe that the common practice of 

lending securities is inconsistent with a 

long-term investment. While we believe 

it is important to include both of the 

recall provisions for purposes of 

allowing loaned securities to be used in 

the 3% ownership threshold calculation 

in Rule 14a–11(b)(1), we believe it is 

only necessary for the nominating 

shareholder or member of a nominating 

shareholder group to have the right to 

recall the loaned securities to satisfy the 

three-year holding period 

requirement.304 Finally, the rule 

requires the amount of securities to be 

adjusted for stock splits, 

reclassifications or other similar 

adjustments made by the company 

during the period.305

A commenter suggested that we 

clarify that a nominating shareholder or 

each member of the group must have 

continuously held only the minimum 

number of shares used to satisfy the 

ownership requirement.306 We agree 

that a nominating shareholder or 

member of a nominating shareholder 

group is not required to have 

continuously held shares in excess of 

the amount used to attain eligibility for 

purposes of Rule 14a–11. For example, 

under Rule 14a–11(b)(2), which requires 

continuous holding of ‘‘the amount of 

securities that are used for purposes of 

satisfying the minimum ownership 

required of paragraph (b)(1) * * *, ’’ if 

a nominating shareholder owns 400,000 

shares and those shares comprise 4% of 

the issuer’s voting power as of the date 

of filing of the Schedule 14N, that 

shareholder is not required to have held 

400,000 shares continuously during the 

preceding three years and through the 

date of election of directors. Rather, the 

nominating shareholder would be 

required to continuously hold the 

minimum amount of shares required to 

satisfy the 3% ownership threshold in 

paragraph (b)(1), assuming no 

adjustments (in this example, at least 

300,000 shares). 

We also believe that it is important 

that any shareholder or member of a 

nominating shareholder group that 

intends to submit a nominee to a 

company for inclusion in the company’s 

proxy materials continue to maintain 

the qualified minimum amount of 

securities in the company needed to 

satisfy the ownership provisions in the 

rule through the date of the meeting at 

which the shareholder’s or group’s 

nominee is presented to a vote of 

shareholders. To meet the eligibility 

criteria in proposed Rule 14a–11(b)(2), a 

nominating shareholder or member of a 

nominating shareholder group would 

have been required to ‘‘intend to 

continue to hold’’ the securities used to 

meet the ownership threshold through 

the date of the meeting. Commenters on 

the Proposing Release generally 

supported a holding requirement 


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307See letters from ABA; Advance Auto Parts; 

Alston & Bird; American Express; Association of 

Corporate Counsel; J. Blanchard; BorgWarner; 

CalPERS; CII; Cleary; Comcast; CSX; Dewey; W. B. 

Dickerson; Florida State Board of Administration; 

General Mills; Headwaters; JPMorgan Chase; 

Nathan Cummings Foundation; Protective; Schulte 

Roth & Zabel; Seven Law Firms; Shearman & 

Sterling; Society of Corporate Secretaries; tw 

telecom; ValueAct Capital. 

308See letter from ABA. 

309For purposes of determining whether the 

requirement to hold the specified amount of 

securities from the date of the filing of the Schedule 

14N through the date of the election of directors is 

satisfied, a nominating shareholder or group must 

hold (as determined pursuant to the instruction to 

the rule) the qualifying minimum amount of 

securities, which can include securities that are 

loaned to a third party if the nominating 

shareholder or group has the right to recall the 

securities, and will recall them upon being notified 

that any of the nominees will be included in the 

company’s proxy materials. Of course, between the 

date of the filing of the Schedule 14N and the date 

of the election of directors previously loaned 

securities may be returned. Likewise, the amount of 

securities held during the period from the filing of 

the Schedule 14N through the date of the election 

of directors must be reduced by the amount of 

securities of the same class that are sold in a short 

sale. 

310See new Rule 14a–11(b)(2) and Rule 14a– 

11(g). The company would be required to provide 

notice to the staff in accordance with Rule 14a– 

11(g) and could seek a no-action letter from the staff 

with regard to the determination to exclude the 

nominee at that time if the company so wished. In 

the event that the nominating shareholder’s or 

group’s failure to continue to hold the securities 

comes to light after the company has printed its 

proxy materials, the company would be permitted 

to exclude the nominee or nominees and send a 

revised proxy card to its shareholders. For 

additional information about a company’s 

obligations in the event a nominee withdraws or is 

disqualified, see Section II.B.7.b. below. 

311See new Rule 14a–11(b)(4) and proposed Rule 

14a–18(f). 

312See letters from Alston & Bird; Amalgamated 

Bank; Calvert; CII; Florida State Board of 

Administration; P. Neuhauser; Norges Bank; 

Schulte Roth & Zabel; TIAA–CREF; USPE; ValueAct 

Capital. 

313See letter from CII. 

314See letter from Cleary. 

315See letters from 26 Corporate Secretaries; 

ABA; Aetna; AGL; Alaska Air; Alcoa; Anadarko; 

Applied Materials; Association of Corporate 

Counsel; Avis Budget; BRT; Burlington Northern; 

Callaway; Caterpillar; Comcast; L. Dallas; Darden 

Restaurants; Devon; W. B. Dickerson; Dupont; Eli 

Lilly; FPL Group; General Mills; Home Depot; 

Honeywell; Intel; Lionbridge Technologies; Lorsch 

et al.; Keating Muething; Office Depot; PepsiCo; 

Pfizer; Protective; Sara Lee; SIFMA; Tesoro; 

Textron; TI; UnitedHealth; U.S. Bancorp; Verizon; 

Xerox. 

316See new Rule 14a–11(b)(5) and new Item 4(b) 

of Schedule 14N. 

317See Item 8 of proposed Schedule 14N. 

318See letters from ABA; Advance Auto Parts; 

American Bankers Association; American Express; 

Americans for Financial Reform (‘‘Americans for 

Financial Reform’’); BRT; CalSTRS; CII; Cleary; 

COPERA; Corporate Library; Dewey; Dominican 

Sisters of Hope; Eli Lilly; Emerson Electric; Florida 

State Board of Administration; A. Goolsby; 

GovernanceMetrics; ICI; JPMorgan Chase; Sen. Carl 

Levin (‘‘C. Levin’’); Mercy Investment Program; 

Metlife; Nathan Cummings Foundation; P. 

Neuhauser; Protective; RiskMetrics; Seven Law 

Firms; SIFMA; Sisters of Mercy; Social Investment 

Forum; Society of Corporate Secretaries; Sodali; 

SWIB; TIAA–CREF; Trillium; Tri-State Coalition; T. 

Rowe Price; tw telecom; Ursuline Sisters of 

Tildonk; Wachtell; Walden; B. Villiarmois. 

through the date of the meeting,307 and 

one commenter suggested that we 

clarify that shareholders would be 

required to hold the securities used for 

determining ownership through the 

election of directors.308 We agree with 

the suggestion and are modifying the 

language in Rule 14a–11(b)(2) to clarify 

that a nominating shareholder or 

member of a nominating shareholder 

group ‘‘must continue to hold’’ the 

requisite amount of securities through 

the date of the meeting.309 If a 

nominating shareholder or member of a 

nominating shareholder group fails to 

continue to hold the requisite amount of 

securities as required by the rule, a 

company could exclude the nominee or 

nominees submitted by the nominating 

shareholder or group.310

We also are adopting, as proposed, the 

requirement that a nominating 

shareholder or member of a nominating 

shareholder group provide a statement 

as to the nominating shareholder’s or 

group member’s intent to continue to 

hold the qualifying minimum amount of 

securities through the date of the 

meeting.311 In addition, we proposed 

that nominating shareholders or 

members of a nominating shareholder 

group disclose their intent with regard 

to continued ownership of their shares 

after the election (which may be 

contingent on the election’s outcome). 

As noted above, commenters generally 

supported the requirement for the 

nominating shareholder or group to 

hold the requisite amount of securities 

through the date of the meeting, 

although some commenters expressed 

opposition to the proposed disclosure 

requirement or any requirement for the 

nominating shareholder or group to 

disclose their intent to hold the 

company’s shares after the date of the 

election.312 One commenter explained 

that the nominating shareholder or 

group may not know its intent at the 

time the Schedule 14N is filed and, 

depending on the outcome of the 

director election, the nominating 

shareholder or group may, in fact, 

purchase more stock or sell some 

stock.313 Another commenter observed 

that it is impractical for shareholders to 

represent that they would hold their 

position beyond the election and 

instead favored disclosure in an 

amended Schedule 14N of any change 

in the ownership of more than 1% of the 

voting shares or net economic position 

during a period after the election (e.g., 

60 days).314 Other commenters 

supported the proposed disclosure 

requirement regarding the nominating 

shareholder’s or group’s intent to hold 

shares after the meeting, or 

recommended that the Commission 

require instead that the nominating 

shareholder or group hold the requisite 

amount of shares for a specific period 

after the date of the meeting.315

We believe that a requirement to hold 

the securities through the date of the 

election of directors is appropriate to 

demonstrate the nominating 

shareholder’s or group member’s 

commitment to the director nominee 

and the election process. In addition, we 

are adopting the disclosure requirement, 

as proposed, concerning the nominating 

shareholder’s or group member’s intent 

with respect to continued ownership of 

their shares after the election.316 We are 

not, however, adopting a requirement 

for a nominating shareholder or member 

of a nominating shareholder group to 

continue to hold their shares for a 

certain period of time after the date of 

the election. We believe that disclosure 

of a nominating shareholder’s or group 

member’s intent with respect to 

continued ownership in a Schedule 14N 

or amended Schedule 14N will provide 

investors with the information they 

need for this purpose. 

d. No Change in Control Intent 

Under the Proposal, to rely on Rule 

14a–11, a nominating shareholder or 

member of a nominating shareholder 

group would have been required to 

provide a certification in the filed 

Schedule 14N that it did not hold the 

securities with the purpose, or with the 

effect, of changing the control of the 

company or gaining more than a limited 

number of seats on the board.317 We 

noted that this certification, along with 

the other required disclosures, would 

assist shareholders in making an 

informed decision with regard to any 

nominee or nominees put forth by the 

nominating shareholder or group, in 

that the information would enable 

shareholders to gauge the nominating 

shareholder’s or group’s interest in the 

company, longevity of ownership, and 

intent with regard to continued 

ownership in the company. 

Most commenters on this aspect of the 

Proposal agreed generally that Rule 14a– 

11 should not be available to 

shareholders seeking to effect a change 

in control of a company (or to obtain 

more than a specified number of board 

seats) and supported a certification 

requirement regarding the lack of 

change in control intent.318 Some 


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319See letters from American Bankers 

Association; Dewey; Emerson Electric; A. Goolsby; 

Metlife; Protective; Seven Law Firms; SIFMA. 320See letter from Seven Law Firms. 321See letter from Protective. 

322See letter from P. Neuhauser. 

323Although Rule 14a–11 does not contain a 

requirement that the shareholder nominee or 

nominees do not have an intent to change the 

control of the company, a nominating shareholder’s 

or group’s ability to meet the requirement and 

certify that it does not have such an intent will be 

impacted by the intentions and actions of its 

nominee or nominees. For example, a nominating 

shareholder would not be able to certify that it does 

not hold the company’s securities for the purpose, 

or with the effect, of changing the control of the 

company if its nominee is engaged in its own proxy 

contest or tender offer while the Rule 14a–11 

nomination is pending. 

324See certifications in Item 8 of new Schedule 

14N. 

325See Rule 14a–11(b)(6). 

326A change in control includes, but is not 

limited to, an extraordinary corporate action, such 

as a merger or tender offer. 

327See new Instruction to Rule 14a–11(b). 

328See Section II.B.9.b. below for further 

discussion of determinations to exclude a nominee 

or nominees. 

329See Sections II.B.8. and II.B.9. for an 

explanation of the disclosure requirements 

applicable to a nomination made pursuant to Rule 

14a–11 and the process for excluding a nominee. 

330 In this regard, we also proposed to require a 

nominating shareholder or group to represent that 

no relationships or agreements between the 

nominee and the company and its management 

exist. This aspect of the rule is discussed in Section 

II.B.5.c. below. 

commenters, however, expressed 

concern about the lack of a remedy 

when a certification regarding control 

intent proves to be false or when a 

nominating shareholder or group 

changes its intent.319 Suggested 

remedies included excluding the 

nominee of any nominating shareholder 

or group that changes intent and barring 

the nominating shareholder or group 

from using the rule for the following 

two annual meetings,320 requiring 

disclosure of a change of intent and 

resignation of the Rule 14a–11 

director,321 and imposing liability under 

Rule 14a–9.322

We are adopting this requirement 

with some modifications from the 

Proposal. To rely on Rule 14a–11, the 

nominating shareholder (or where there 

is a nominating shareholder group, any 

member of the nominating shareholder 

group) must not be holding any of the 

company’s securities with the purpose, 

or with the effect, of changing control of 

the company 323 or to gain a number of 

seats on the board of directors that 

exceeds the maximum number of 

nominees that the registrant could be 

required to include under Rule 14a–11 

and must provide a certification to this 

effect in its filed Schedule 14N.324

The final requirement differs from the 

Proposal in three respects. First, in 

addition to requiring the certification to 

address the absence of change in control 

intent or intent to gain more than the 

maximum number of seats provided 

under the rule, we also have added this 

condition as an explicit requirement to 

the rule.325 We believe that this more 

directly achieves our intent—that the 

rule not be used by shareholders that 

have an intent to change the control of 

the company or gain more than the 

maximum number of seats specified in 

the rule. 

Second, we have clarified the 

language of the requirements so that it 

provides that the rule is available only 

if the nominating shareholder or group 

members do not have an intent to 

change control of the company 326 or 

gain more seats on the board than the 

maximum provided for under Rule 14a– 

11. We slightly revised the language of 

the requirement to clarify our intended 

meaning. The Proposal used the 

language ‘‘gain more than a limited 

number of seats on the board,’’ which 

was intended to refer to the limitations 

within the rule on the maximum 

number of nominees required to be 

included in the company’s proxy 

materials. The final rule states this more 

explicitly. 

Finally, we have added an instruction 

to clarify that in order to rely on Rule 

14a–11 to include a nominee or 

nominees in a company’s proxy 

materials, a nominating shareholder or a 

member of a nominating shareholder 

group may not be a member of any other 

group with persons engaged in 

solicitations or other nominating 

activities in connection with the subject 

election of directors; may not separately 

conduct a solicitation in connection 

with the subject election of directors 

other than a Rule 14a–2(b)(8) exempt 

solicitation in relation to those 

nominees it has nominated pursuant to 

Rule 14a–11 or for or against the 

company’s nominees; and may not act 

as a participant in another person’s 

solicitation in connection with the 

subject election of directors.327

We understand that companies have 

concerns that shareholders using Rule 

14a–11 may inaccurately assert that they 

do not have a change in control intent, 

and that this can be a difficult factual 

issue. If a company determines that it 

can exclude a nominee based on this 

eligibility condition, it will be required 

to notify the nominating shareholder, 

members of the nominating shareholder 

group, or, where applicable, the 

nominating shareholder group’s 

authorized representative, of a 

deficiency in its notice on Schedule 14N 

and provide the nominating shareholder 

or group the opportunity to respond. 

The company also would be required to 

submit a notice to the Commission 

stating its intent to exclude a nominee 

from its proxy materials (which would 

be required to include a description of 

the company’s basis for exclusion) and, 

if it wished to, it could seek the staff’s 

informal view with regard to its 

determination to exclude the nominee 

(commonly referred to as a ‘‘no-action’’ 

request).328 In addition, a nominating 

shareholder and each member of a 

nominating shareholder group will have 

liability under Rule 14a–9 for a 

materially false or misleading 

certification in the Schedule 14N. 

Questions concerning the nomination 

also may be resolved by the parties 

outside the staff process provided in 

Rule 14a–11(g), including through 

private litigation where necessary, 

similar to the way they resolve issues 

arising in traditional proxy contests.329

Finally, we note that the Commission 

also could take enforcement action with 

respect to companies that 

inappropriately exclude nominees 

under Rule 14a–11 or shareholders that 

provide false certifications in their 

Schedule 14N. We believe these 

measures should provide sufficient 

means to address situations in which a 

nominating shareholder or member of a 

nominating shareholder group provides 

a false certification regarding change in 

control intent. 

e. Agreements With the Company 

In the Proposing Release, we noted 

that a shareholder nomination process 

that includes limits on the number of 

nominees that a company is required to 

include in its proxy materials presents 

the potential risk of nominating 

shareholders or groups acting merely as 

a surrogate for the company or its 

management in order to block usage of 

the rule by another nominating 

shareholder or group. We proposed to 

address this concern by providing that 

a nominating shareholder or group 

using Rule 14a–11 would be required to 

represent that no agreement between the 

nominating shareholder or group and 

the company and its management 

exists.330 To avoid any uncertainty 

about the breadth of this requirement, 

the Proposal included an instruction 

noting that prohibited agreements 

would not include unsuccessful 

negotiations with the company to have 

the nominee included in the company’s 

proxy materials as a management 

nominee, or negotiations that are 

limited to whether the company is 

required to include the shareholder 


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331See letters from ADP; BRT; Calvert; CFA 

Institute; CII; Seven Law Firms; TIAA–CREF; USPE. 

332See letter from CII. 

333See letter from USPE. 

334See letters from BRT; Seven Law Firms; 

Society of Corporate Secretaries. 

335See letters from ABA; Steve Quinlivan (‘‘S. 

Quinlivan’’); Verizon. 

336See letter from S. Quinlivan. 

337We note that a nominating shareholder or 

members of a nominating shareholder group will be 

required to provide a certification in the Schedule 

14N that the requirements of Rule 14a–11 are 

satisfied, which will include the ‘‘no agreements’’ 

requirement. A nominating shareholder or member 

of a nominating shareholder group will be liable, 

pursuant to Rule 14a–9(c), for a false or misleading 

certification provided in Schedule 14N. 

338See Rule 14a–11(b)(7). See also Rule 14a– 

11(d)(7) which clarifies that if a nominee, 

nominating shareholder or any member of a 

nominating group has an agreement with the 

company or an affiliate of the company regarding 

the nomination of a candidate for election, other 

than as specified in Rule 14a–11(d)(5) or (6), any 

nominee or nominees from such shareholder or 

group shall not be counted in calculating the 

number of shareholder nominees for purposes of 

Rule 14a–11(d). 

339See letters from ABA; BRT. 

340See letter from ABA. 

341See letter from BRT. 

nominee in the company’s proxy 

materials under Rule 14a–11. 

Commenters generally supported the 

proposed requirement, including the 

clarifying instruction regarding certain 

negotiations with the company.331 One 

commenter specifically supported the 

portion of the proposed rule providing 

that unsuccessful negotiations or 

negotiations that were limited to 

whether the company is required to 

include a shareholder nominee under 

Rule 14a–11 would not be deemed to be 

a direct or indirect agreement.332 One 

commenter was concerned about 

possible manipulation by companies 

and supported a prohibition on 

agreements.333 According to that 

commenter, negotiations that resulted in 

a nomination being included in the 

proxy statement should be treated as a 

company nominee and not a 

shareholder nominee under Rule 

14a–11. 

Some commenters encouraged us to 

allow negotiations that resulted in 

inclusion of shareholder nominees as 

management nominees and cautioned 

that the proposal could discourage 

constructive dialogue between 

companies and shareholders.334 Three 

commenters opposed limits on some or 

all relationships between the company 

and the nominating shareholder, group, 

or shareholder nominee.335 These 

commenters believed that the 

Commission should not prohibit 

agreements between a company and a 

nominating shareholder or group. They 

warned that restricting the ability of 

companies to reach agreements with a 

nominating shareholder or group would 

limit the dialogue between companies 

and investors. One commenter 

suggested that proposed Rule 14a–18(d) 

be revised to permit a company to agree 

not to contest the eligibility of a 

shareholder nominee.336 The 

commenter also suggested that if a 

company settled a threatened election 

contest by placing a shareholder 

nominee on the board, additional 

shareholder nominees should not be 

permitted for a specified period of time. 

After careful review of the comments, 

we continue to believe that it is 

appropriate to provide that a 

nominating shareholder or group will 

not be eligible to have a nominee or 

nominees included in a company’s 

proxy materials under Rule 14a–11 if 

the nominating shareholder, group, or 

any member of the nominating 

shareholder group, has any agreement 

with the company with respect to the 

nomination. We have revised the rule to 

make it clearer that this is an eligibility 

condition by listing it as a condition in 

the rule, rather than only a 

representation required in Schedule 

14N.337 We have incorporated, as 

proposed, the instruction with respect 

to unsuccessful negotiations (i.e. 

negotiations that do not result in an 

agreement) regarding whether a 

company is required to include a 

nominee in order to make clear that 

those negotiations would not be 

disqualifying. 

As described above, a nominating 

shareholder or group will not be eligible 

to use Rule 14a–11 if there is an 

agreement with the company regarding 

the nomination of the nominee.338

When a nominating shareholder or 

group files its Schedule 14N, this 

requirement will apply, and the 

certification required by Schedule 14N 

will have the effect of confirming that 

there are no agreements. We believe this 

is an important safeguard to prevent 

actions that could undermine the 

purpose of the rule. If, after the 

Schedule 14N is filed, a nominating 

shareholder or group reached an 

agreement with the company for the 

nominee to be included in the 

company’s proxy materials as a 

management nominee, the nominating 

shareholder or group would no longer 

be proceeding under Rule 14a–11. 

Consequently, there is no need to revise 

the ‘‘no agreements’’ requirement in Rule 

14a–11 to address that fact pattern. 

Although we are adopting the ‘‘no 

agreements’’ requirement largely as 

proposed, we are persuaded by 

commenters that we should revise our 

final rules so that they do not 

unnecessarily discourage constructive 

dialogue between shareholders and 

companies. However, we believe this 

concern is more appropriately 

addressed in the method of calculation 

of the maximum number of permissible 

nominees, and the question of whether 

that number should include 

management nominees that were 

originally put forward as shareholder 

nominees under Rule 14a–11. Our 

revisions to that provision are discussed 

in Section II.B.6. below. 

f. No Requirement To Attend the 

Annual or Special Meeting 

Under Rule 14a–11 as proposed, a 

nominating shareholder or group would 

have no obligation to attend the annual 

or special meeting at which its nominee 

or nominees is being presented to 

shareholders for a vote. We received 

comment on the Proposal, however, 

suggesting that we require a nominating 

shareholder or group, or a qualified 

representative of the nominating 

shareholder or group, to attend the 

company’s shareholder meeting and 

nominate its director candidate(s) in 

person.339 One commenter explained 

that this requirement would be 

consistent with State law requirements 

for nominations and many companies’ 

advance notice bylaws.340 Another 

commenter suggested that, as required 

under Rule 14a–8(h)(3) for shareholder 

proposals, if the nominating shareholder 

or group (or its qualified representative) 

fails, without good cause, to appear and 

nominate the candidate, the company 

should be permitted to exclude from its 

proxy materials for the following two 

years all nominees submitted by that 

nominating shareholder or members of 

the nominating group.341

We have decided not to include a 

requirement that the nominating 

shareholder or qualified representative 

appear at the meeting and present the 

nominee because we believe that 

shareholders will have sufficient 

incentive to take steps to assure that 

their nominees are voted on at the 

meeting, whether through attending the 

meeting or sending a qualified 

representative, or through other 

arrangements with the company, and we 

do not want to add unnecessary 

complexities and burdens to the rule. 

We note that State law will control what 

happens if a candidate is not nominated 

at the meeting because the person 

supporting the candidate does not 


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342While state statutes are largely silent on the 

subject of presentation of nominations, motions or 

other business at meetings of shareholders, the 

chairman of the meeting typically has broad 

discretionary authority over its conduct (see, e.g., 

Model Business Corporation Act § 7.08(b)). As we 

understand, it is prevailing practice for the 

chairman to invite nominations of directors from 

the meeting floor. See David A. Drexler, et al., 

Delaware Corporation Law and Practice, ¶ 24.05[3] 

(2009 supp.); Carroll R. Wetzel, Conduct of a 

Stockholders’ Meeting, 22 Bus. Law. 303, 313–314 

(1967); American Bar Association Corporate Laws 

Committee and Corporate Governance Committee, 

Business Law Section, Handbook for the Conduct 

of Shareholders’ Meetings (2d ed. 2010) at 151. 

343See letters from 26 Corporate Secretaries; 

ABA; ADP; Advance Auto Parts; Aetna; Alcoa; 

AllianceBernstein; Anadarko; Applied Materials; 

Avis Budget; Boeing; BorgWarner; BRT; Burlington 

Northern; Caterpillar; Chevron; CIGNA; Cleary; 

Comcast; CSX; Darden Restaurants; Deere; Dewey; 

DTE Energy; Dupont; Eaton; FedEx; Florida State 

Board of Administration; FMC Corp.; FPL Group; 

General Mills; Headwaters; Intel; ITT; JPMorgan 

Chase; Kirkland & Ellis; E.J. Kullman; Leggett; P. 

Neuhauser; Northrop; PepsiCo; Pfizer; Protective; 

RiskMetrics; Sara Lee; Seven Law Firms; SIFMA; 

Society of Corporate Secretaries; Southern 

Company; T. Rowe Price; tw telecom; U.S. Bancorp; 

Wells Fargo; Weyerhaeuser; Whirlpool; Xerox. 

344See discussion in Section II.B.5.e. below with 

regard to resubmission of unsuccessful shareholder 

nominees. 

345See letter from Society of Corporate 

Secretaries. 

346See letters from CII; Norges Bank; Solutions; 

USPE; Walden. 

347See letter from CII. 

348 In the Proposing Release, we described an 

exception from the provision if the violation could 

be cured. We inadvertently did not include 

language for this provision in the proposed 

regulatory text. 

349See letters from 26 Corporate Secretaries; 

American Bankers Association; Association of 

Corporate Counsel; BRT; Dewey; Emerson Electric; 

Financial Services Roundtable; GE; Intel; JPMorgan 

Chase; O’Melveny & Myers; Protective; Sidley 

Austin; Tenet; Xerox. 

350See letters from American Bankers 

Association; BRT; Emerson Electric; GE; O’Melveny 

& Myers; Sidley Austin; Tenet. 351See letter from American Bankers Association. 

352See letter from CII. 

353See letter from USPE. 

354We note that this condition would not 

disqualify a nominee unless the violation could not 

be cured during the time period in which a 

nominating shareholder or group has to respond to 

a company’s notice of deficiency. 

355We are not aware of other exchange 

requirements related to director qualifications, but 

attend the meeting or make other 

arrangements.342

g. No Limit on Resubmission 

Under the Proposal, a nominating 

shareholder’s or group’s ability to use 

Rule 14a–11 would not be impacted by 

prior unsuccessful use of the rule. In 

response to our request for comment, a 

number of commenters supported a 

provision that would render a 

nominating shareholder or group 

ineligible to use Rule 14a–11 for a 

period of time (e.g., one, two, or three 

years) if the nominating shareholder or 

group presented a nominee who failed 

to receive significant shareholder 

support in a previous election (e.g., 

10%, 15%, 25%, or 30%).343 One 

commenter indicated that this 

resubmission threshold would have a 

dual purpose: (i) when the nominee 

failed to garner significant support from 

shareholders, it would be inappropriate 

to require the company to expend 

resources repeatedly to include the 

unsuccessful nominee; 344 and (ii) other 

shareholders would have an 

opportunity to submit their own 

nominations.345 On the other hand, 

some commenters opposed a provision 

that would render a nominating 

shareholder or group ineligible to use 

Rule 14a–11 for a period of time if the 

nominating shareholder or group 

presented a nominee who failed to 

receive a specified percentage of 

shareholder votes at a previous 

election.346 One commenter pointed out 

that management nominees are not 

subject to similar limits.347 After 

consideration of the comments we do 

not believe it is necessary or appropriate 

to include a limitation on use of Rule 

14a–11 by nominating shareholders or 

groups that have previously used the 

rule. We continue to believe that such 

a limitation would not facilitate 

shareholders’ traditional State law rights 

and would add unnecessary complexity 

to the rule’s operation. 

5. Nominee Eligibility Under Exchange 

Act Rule 14a–11 

a. Consistent With Applicable Law and 

Regulation 

Under the Proposal, a company would 

have been able to exclude a nominee 

where the nominee’s candidacy or, if 

elected, board membership would 

violate controlling State law, Federal 

law, or rules of a national securities 

exchange or national securities 

association (other than rules of a 

national securities exchange or national 

securities association that set forth 

requirements regarding the 

independence of directors, which the 

rule addresses separately) and such 

violation could not be cured.348

Commenters generally supported this 

requirement.349 These commenters 

suggested that the rule require the 

nominating shareholder or group to 

provide any information necessary to 

ensure compliance with these laws or 

regulations. Some of these commenters 

noted that there are various Federal and 

State laws that govern or affect the 

ability of a person to serve as a director, 

such as the Federal Power Act and 

related FERC regulations, Federal 

maritime laws and regulations, 

Department of Defense security 

clearance requirements, Department of 

State export licensing requirements, 

bank holding company laws, FCC 

licensing requirements, state gaming 

licensing requirements, Federal Reserve 

regulations, FDIC regulations, U.S. 

government procurement regulations, 

Section 8 of the Clayton Act, Section 1 

of the Sherman Act, and Section 5 of the 

Federal Trade Commission Act.350 One 

commenter, for example, explained that 

banking laws and regulations impose 

their own eligibility standards for 

directors.351 One commenter stated 

more generally that it does not oppose 

the proposed requirement that a 

company would not have to include a 

shareholder nominee in its proxy 

materials if the nominee’s candidacy or 

election would violate Federal law or 

State law and such violation could not 

be cured.352 It noted, however, that 

‘‘there is not a lot of law’’ that 

disqualifies a person from serving as a 

director and described concerns about 

State law barriers as a ‘‘red herring.’’ 

On the other hand, one commenter 

stated that a company should not be 

allowed to exclude a shareholder 

nominee from its proxy materials 

because the election of the nominee 

would result in the violation of State 

law or Federal law.353 The commenter 

explained that allowing such exclusion 

‘‘would make it prohibitively expensive 

for most shareowners to submit 

nominations under the proposed rule. It 

would lead to many shareowner 

nominees being disqualified based on 

technicalities or invented legal 

theories.’’ 

After considering the comments, we 

continue to believe that Rule 14a–11 

should address Federal law, State law, 

and applicable exchange requirements 

(other than the requirements related to 

objective independence standards, 

which are addressed separately under 

the rule). Requiring compliance with 

basic legal requirements regarding 

nominees should encourage nominating 

shareholders to bring forward 

candidates that may be more likely to be 

able to be elected and serve as directors, 

and should reduce disruption and 

expense for companies of opposing a 

candidate who could not serve on the 

board if elected because their service 

would violate law.354 Thus, under Rule 

14a–11, a nominee will not be eligible 

to be included in a company’s proxy 

materials if the nominee’s candidacy, or 

if elected, board membership will 

violate Federal law, State law, or 

applicable exchange requirements, if 

any,355 other than those related to 


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should an exchange adopt new requirements, this 

provision would apply. 

356As discussed in Section II.B.9.b., a company 

that intends to exclude a shareholder nominee or 

nominees will be required to notify the nominating 

shareholder or group of the basis on which the 

company plans to exclude the nominee or nominees 

and the nominating shareholder or group will have 

14 calendar days to cure the deficiency (where 

curable). 

357Pursuant to proposed Rule 14a–18(c), a 

nominating shareholder or group would include a 

representation in its notice to the company that the 

nominee satisfies the existing independence or 

‘‘interested person’’ standards. 

358See proposed Rule 14a–18(c) and the 

Instruction to paragraph (c). For example, the NYSE 

listing standards include both subjective and 

objective components in defining an ‘‘independent 

director.’’ As an example of a subjective 

determination, Section 303A.02(a) of the NYSE 

Listed Company Manual provides that no director 

will qualify as ‘‘independent’’ unless the board of 

directors ‘‘affirmatively determines that the director 

has no material relationship with the listed 

company (either directly or as a partner, 

shareholder or officer of an organization that has a 

relationship with the company).’’ On the other 

hand, Section 303A.02(b) provides that a director is 

not independent if he or she has any of several 

specified relationships with the company that can 

be determined by a ‘‘bright-line’’ objective test. For 

example, a director is not independent if ‘‘the 

director has received, or has an immediate family 

member who has received, during any twelvemonth period within the last three years, more than 

$120,000 in direct compensation from the listed 

company, other than director and committee fees 

and pension or other forms of deferred 

compensation for prior service (provided such 

compensation is not contingent in any way on 

continued service).’’ Similar to the NYSE rules, the 

NASDAQ Listing Rules require a company’s board 

to make an affirmative determination that 

individuals serving as independent directors do not 

have a relationship with the company that would 

impair their independence. The NASDAQ rules 

include certain objective criteria, similar to those 

provided in NYSE Section 303A.02(b), for making 

such a determination. See NASDAQ Rule 5605(a)(2) 

and IM–5605. 

359See letters from ABA; ACSI; Advance Auto 

Parts; Aetna; Alaska Air; Alcoa; Anadarko; Avis 

Budget; Biogen; The Board Institute (‘‘Board 

Institute’’); BorgWarner; BRT; Burlington Northern; 

Callaway; CalSTRS; Caterpillar; CIGNA; Cleary; 

Comcast; Con Edison; CII; COPERA; CSX; 

Cummins; Darden Restaurants; Deere; Dewey; DTE 

Energy; Eaton; Edison Electric Institute; Einstein 

Noah Restaurant Group, Inc. (‘‘Einstein Noah’’); 

Emerson Electric; ExxonMobil; FedEx; FMC Corp.; 

FPL Group; General Mills; A. Goolsby; Headwaters; 

Home Depot; Honeywell; Horizon Lines, Inc. 

(‘‘Horizon’’); C. Horner; IBM; Intel; JPMorgan Chase; 

Keating Muething; E.J. Kullman; LUCRF; 

McDonald’s; Merchants Terminal; Metlife; P. 

Neuhauser; Norfolk Southern; Northrop; Office 

Depot; O’Melveny & Myers; P&G; PepsiCo; Pfizer; 

Protective; S&C; Seven Law Firms; Sidley Austin; 

SIFMA; Society of Corporate Secretaries; Southern 

Company; Tenet; Tesoro; Theragenics; TI; TIAA– 

CREF; Tompkins; tw telecom; UnitedHealth; U.S. 

Bancorp; ValueAct Capital; Verizon; Wells Fargo; 

Weyerhaeuser. 

360See letters from ACSI; CalSTRS; CII; COPERA; 

LUCRF; P. Neuhauser; TIAA–CREF; ValueAct 

Capital. 

361See letter from CII. 

362See letters from ABA II; ICI. 

363See letter from ICI. One commenter stated that 

the application of the ‘‘interested person’’ standard 

of Section 2(a)(19) is unnecessary. See letter from 

Norges Bank. 

364See letters from ABA; Advance Auto Parts; 

Aetna; Alaska Air; Alcoa; Anadarko; Avis Budget; 

Biogen; Board Institute; BorgWarner; BRT; 

Burlington Northern; Callaway; Caterpillar; CIGNA; 

Cleary; Comcast; Con Edison; CSX; Cummins; 

Darden Restaurants; Deere; Dewey; DTE Energy; 

Eaton; Edison Electric Institute; Einstein Noah; 

Emerson Electric; ExxonMobil; FedEx; FMC Corp.; 

FPL Group; General Mills; A. Goolsby; Headwaters; 

Home Depot; Honeywell; Horizon; C. Horner; IBM; 

Intel; JPMorgan Chase; Keating Muething; E.J. 

Kullman; McDonald’s; Merchants Terminal; 

Metlife; Norfolk Southern; Northrop; Office Depot; 

O’Melveny & Myers; P&G; PepsiCo; Pfizer; 

Protective; S&C; Seven Law Firms; Sidley Austin; 

SIFMA; Society of Corporate Secretaries; Southern 

Company; Tenet; Tesoro; Theragenics; TI; 

Tompkins; tw telecom; UnitedHealth; U.S. Bancorp; 

Verizon; Wells Fargo; Weyerhaeuser. 

365See letters from Board Institute; BRT; Con 

Edison; C. Horner; TI; Verizon. 

independence standards, and such 

violation could not be cured during the 

time period provided in the rule.356

b. Independence Requirements and 

Other Director Qualifications 

Under the Proposal, the nominating 

shareholder or each member of the 

nominating shareholder group would 

have been required to provide a 

representation that the shareholder 

nominee meets the objective criteria for 

‘‘independence’’ of the national 

securities exchange or national 

securities association rules applicable to 

the company, if any, or, in the case of 

a registrant that is an investment 

company, a representation that the 

nominee is not an ‘‘interested person’’ of 

the registrant, as defined in Section 

2(a)(19) of the Investment Company 

Act.357 For registrants other than 

investment companies, the 

representation would not have been 

required in instances where a company 

is not subject to the requirements of a 

national securities exchange or a 

national securities association. We also 

noted that exchange rules regarding 

director independence generally include 

some standards that depend on an 

objective determination of facts and 

other standards that depend on 

subjective determinations.358 Under our 

Proposal, the representation would not 

cover subjective determinations. Also, 

the representation would not cover 

additional independence or director 

qualification requirements imposed by a 

board on its independent members, 

although we requested comment on 

whether it should. 

Commenters generally supported the 

requirement regarding the objective 

independence standards.359

Institutional and other investors agreed 

that nominating shareholders should 

not be required to represent that 

nominees satisfy the subjective 

independence standards of the relevant 

exchange or national securities 

association, and also agreed that they 

should not be subject to any director 

independence or qualification standards 

set by the board or the nominating 

committee.360 One of these commenters 

expressed agreement with the Proposal 

that where a company is not subject to 

the independence standards of an 

exchange or national securities 

association, the nominating shareholder 

or group should not be required to 

provide disclosure concerning whether 

nominees would be independent.361 To 

the extent that a company has 

independence standards that are more 

stringent than those of an exchange, 

then the commenter would not oppose 

the application of those standards to the 

shareholder nominee as long as the 

standards are objective. Two 

commenters expressed the view that the 

Section 2(a)(19) test is more appropriate 

for investment company directors than 

the independence standard applied to 

non-investment company directors,362

with one noting that the Section 2(a)(19) 

test is tailored to the types of conflicts 

of interest faced by investment company 

directors and that the Section 2(a)(19) 

provision is critical given that 

investment companies must have a 

specified percentage of independent 

directors to be able to comply with 

certain statutory and regulatory 

requirements.363

A significant number of commenters 

from the corporate community stated 

generally that shareholder nominees 

should satisfy not just the objective 

director independence standards of the 

relevant exchange or national securities 

associations, but all of the company’s 

director qualifications and 

independence standards (including, if 

applicable, more stringent objective 

independence standards imposed by the 

board, subjective director independence 

standards, director qualification 

standards, board service guidelines, and 

code of conduct in the company’s 

governance principles and committee 

charters) applicable to all directors and 

director nominees.364 Many commenters 

warned that exempting shareholder 

nominees from a company’s director 

independence and qualification 

standards could cause the company to 

be exposed to legal issues, lower the 

quality and diversity of the board, and 

create difficulties in recruiting qualified 

directors.365 Other commenters also 

believed that exempting shareholder 

nominees from the subjective director 

independence standards of the relevant 

exchange or national securities 

association would put companies at risk 

of noncompliance with the exchange’s 


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366See letters from Metlife; O’Melveny & Myers; 

Seven Law Firms; Wells Fargo. 

367See Rule 14a–11(b)(9). 

368See Item 5(f) of new Schedule 14N. 

369See new instruction to paragraph (b)(9) in Rule 

14a–11. 

370The rule addresses only the requirements 

under Rule 14a–11 to be included in a company’s 

proxy materials—it would not preclude a nominee 

from ultimately being subject to the subjective 

determination test of independence for board 

committee positions. A company could include 

disclosure in its proxy materials advising 

shareholders that the shareholder nominee for 

director would not meet the company’s subjective 

criteria, as appropriate. If a shareholder nominee is 

elected and the board determines that the nominee 

is not independent, the board member presumably 

would be included in the group of non-independent 

directors for purposes of applicable listing 

standards. 

371 If a shareholder nominee did not meet the 

independence requirements of a listed market, that 

listed market may provide for a cure period during 

which time the company may resolve this 

deficiency. See, e.g., NASDAQ Rule 5810(c)(3)(E) 

(‘‘If a Company fails to meet the majority board 

independence requirement in Rule 5605(b)(1) due 

to one vacancy, or because one director ceases to 

be independent for reasons beyond his/her 

reasonable control, the Listing Qualifications 

Department will promptly notify the Company and 

inform it has until the earlier of its next annual 

shareholders meeting or one year from the event 

that caused the deficiency to cure the deficiency.’’). 

372See letter from ICI. 

373See new Rule 14a–11(b)(9). 

374See, e.g., Triplex Shoe Co. v. Rice & Hutchins, 

Inc., 152 A. 342, 375 (Del. 1930). See also 1–13 

David A. Drexler et al., Delaware Corporation Law 

and Practice § 13.01 n. 42 (citing Triplex for the 

proposition that ‘‘a bylaw requiring a director to be 

a stockholder required a director to own stock prior 

to entering into the office of director, not prior to 

election’’). 

375See letters from 26 Corporate Secretaries; 

Advance Auto Parts; Alaska Air; Anadarko; Aetna; 

American Express; Association of Corporate 

Counsel; BorgWarner; BRT; Callaway; Caterpillar; 

Dewey; DTE Energy; Dupont; Emerson Electric; 

eWareness; ExxonMobil; Financial Services 

Roundtable; IBM; ICI; McDonald’s; O’Melveny & 

or association’s rules regarding 

independent directors, burden the 

remaining independent directors with 

additional duties by forcing them to 

serve on more board committees, make 

it more difficult for companies to recruit 

the independent directors needed for 

the board committees, and force 

companies to increase the size of the 

board and conduct additional searches 

for directors qualifying as 

independent.366

After carefully considering the 

comments, we are adopting the 

requirement largely as proposed. We 

believe that the Rule 14a–11 process 

should be limited to nominations of 

board candidates who meet any 

objective independence standards of the 

relevant securities exchange. While we 

understand the concerns expressed by 

many commenters from the corporate 

community, particularly with respect to 

the risk of noncompliance with listing 

standards, we continue to believe that 

the rule should not extend to subjective 

independence standards. We note that 

Rule 14a–11 only addresses when a 

company must include a nominee in its 

proxy materials—it does not preclude a 

nominee from ultimately being subject 

to any subjective determination of 

independence for board committee 

positions. We believe the concerns 

regarding independent directors being 

forced to take on additional duties, 

companies needing to increase the size 

of the board or conducting additional 

searches for independent directors are 

best addressed through disclosure. A 

company could include disclosure in its 

proxy materials advising shareholders 

that the shareholder nominee would not 

meet the company’s subjective criteria, 

as appropriate. This would provide 

shareholders with the opportunity to 

make an informed choice with regard to 

the candidates for director. 

We believe that it is in both the 

company’s and shareholders’ interest for 

the company to continue to meet any 

applicable listing standards, and 

requiring that Rule 14a–11 nominees 

meet the objective independence 

standards will further that interest. It 

also should help reduce disruption and 

expense for companies opposing a 

candidate it believes would cause it to 

violate applicable listing standards. To 

clarify that this is an affirmative 

requirement for Rule 14a–11 nominees, 

we have revised the rule to include this 

provision as an eligibility requirement 

rather than a representation.367

A nominating shareholder or group 

also will be required to provide a 

statement in Schedule 14N that the 

nominee or nominees meets the 

objective independence standards of the 

applicable exchange rules.368 For this 

purpose, the nominee would be 

required to meet the definition of 

‘‘independent’’ that is applicable to 

directors of the company generally and 

not any particular definition of 

independence applicable to members of 

the audit committee of the company’s 

board of directors.369 To the extent a 

rule imposes a standard regarding 

independence that requires a subjective 

determination by the board or a group 

or committee of the board (for example, 

requiring that the board of directors or 

any group or committee of the board of 

directors make a determination that the 

nominee has no material relationship 

with the listed company), this element 

of an independence standard would not 

have to be satisfied.370 Where a 

company (other than an investment 

company) is not subject to the standards 

of a national securities exchange or 

national securities association, the 

requirement would not apply. 

While we acknowledge commenters’ 

concerns about nominees not being 

subject to subjective independence 

requirements, we believe that including 

such requirements would create undue 

uncertainty for shareholders seeking to 

nominate directors and make it difficult 

to evaluate the board’s conclusion 

regarding independence. In addition, if 

a board believes a nominee would not 

be considered independent under its 

subjective independence evaluation, it 

could describe its reasons for that view 

in its proxy statement. In this regard, we 

note that in a traditional proxy contest 

an insurgent’s nominee or nominees do 

not have to comply with any 

requirements, including the 

independence requirements applicable 

to the company.371 We also agree with 

the commenter who noted that the 

‘‘interested person’’ test under Section 

2(a)(19) is tailored to the types of 

conflicts of interest faced by investment 

company directors and that the Section 

2(a)(19) provision is critical given that 

investment companies must have a 

specified percentage of independent 

directors to be able to comply with 

certain statutory and regulatory 

requirements.372 Accordingly, under the 

final rule, a company will be required 

to include a shareholder nominee in its 

proxy materials if the shareholder 

nominee meets the objective criteria for 

‘‘independence’’ of the national 

securities exchange or national 

securities association rules applicable to 

the company, if any, or, in the case of 

a company that is an investment 

company, the nominee is not an 

‘‘interested person’’ of the registrant, as 

defined in Section 2(a)(19) of the 

Investment Company Act.373

As noted above, we did not propose 

to require a shareholder nominee 

submitted pursuant to Rule 14a–11 to be 

subject to the company’s director 

qualification standards. With regard to 

these standards, we believe that a 

nominee’s compliance with a 

company’s director qualifications is best 

addressed through disclosure. Under 

State law, shareholders generally are 

free to nominate and elect any person to 

the board of directors, regardless of 

whether the candidate satisfies a 

company’s qualification requirement at 

the time of nomination and election.374

Many commenters recommended a 

requirement that the shareholder 

nominee complete the company’s 

standard director questionnaire or 

otherwise provide information required 

of other nominees.375 While we do not 


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Myers; PepsiCo; Praxair; Seven Law Firms; Society 

of Corporate Secretaries; Theragenics; 

UnitedHealth; U.S. Bancorp; Xerox. 

376See Item 5(e) of new Schedule 14N. 

377See the discussion in Section II.B.4.e. above 

regarding relationships or agreements between the 

nominating shareholder or group and the company 

and its management. 

378 In this regard, we also proposed to require a 

nominating shareholder or group to represent that 

no relationships or agreements between the 

nominee and the company and its management 

exist. This aspect of the rule is discussed in Section 

II.B.5.d. below. 

379See instruction to proposed Rule 14a–18(d). 

380See letters from ADP; BRT; Calvert; CFA 

Institute; CII; Seven Law Firms; TIAA–CREF; USPE. 

381See Section II.B.4.e. above for a further 

discussion of the comments. 

382The 2003 Proposal included such a 

requirement. For a discussion of this aspect of the 

2003 Proposal and the comments received, see the 

Proposing Release. 

383See letters from ABA; Advance Auto Parts; 

Aetna; Alaska Air; Association of Corporate 

Counsel; Avis Budget; Biogen; Boeing; BorgWarner; 

Brink’s; BRT; Callaway; Caterpillar; CIGNA; 

Comcast; Cummins; Darden Restaurants; Deere; 

Dewey; Dupont; Eaton; Eli Lilly; ExxonMobil; 

FedEx; Financial Services Roundtable; FMC Corp.; 

FPL Group; General Mills; Headwaters; Honeywell; 

JPMorgan Chase; E.J. Kullman; Leggett; Norfolk 

Southern; Office Depot; O’Melveny & Myers; Pax 

World; Protective; Sara Lee; Seven Law Firms; 

SIFMA; Society of Corporate Secretaries; Southern 

Company; Tenet; U.S. Bancorp; Vinson & Elkins 

LLP (‘‘Vinson & Elkins’’); Wells Fargo; 

Weyerhaeuser. 

384See letters from ABA; Alaska Air; Eli Lilly; 

Leggett. 

385See letters from Advance Auto Parts; Aetna; 

Association of Corporate Counsel; Avis Budget; 

Boeing; Brink’s; CIGNA; Cummins; Deere; Eaton; 

FedEx; FMC Corp.; FPL Group; General Mills; E.J. 

Kullman; Pax World; Protective; Sara Lee. 

386See letters from Alaska Air; BorgWarner; 

Caterpillar; JPMorgan Chase; O’Melveny & Myers; 

Society of Corporate Secretaries. 

387See letters from BRT; Intel. 

388Letter from BRT. 

believe nominees submitted pursuant to 

Rule 14a–11 should be required to 

complete a company’s director 

questionnaire, we are persuaded that 

information should be provided 

regarding whether the nominee meets 

the company’s director qualifications, if 

any. Accordingly, although we have not 

revised the rule to allow exclusion of 

nominees who do not meet any director 

qualification requirements, we have 

adopted a requirement that a 

nominating shareholder or group 

disclose under Item 5 of Schedule 14N 

whether, to the best of their knowledge, 

the nominating shareholder’s or group’s 

nominee meets the company’s director 

qualifications, if any, as set forth in the 

company’s governing documents.376

The company also may choose to 

provide disclosure in its proxy 

statement about whether it believes a 

nominee satisfies the company’s 

director qualifications, as is currently 

done in a traditional proxy contest. 

Where a company’s governing 

documents establish certain 

qualifications for director nominees 

that, consistent with State law, would 

preclude the company from seating a 

director who does not meet these 

qualifications, we believe this would be 

important disclosure for shareholders. 

c. Agreements With the Company 

As discussed above with regard to the 

eligibility requirements for a nominating 

shareholder or group, we recognize that 

certain limitations of the rule create the 

potential risk of nominating 

shareholders or groups acting merely as 

a surrogate for the company or its 

management in order to block usage of 

the rule by another nominating 

shareholder or group.377 Under the 

Proposal as it relates to nominee 

eligibility, a nominating shareholder or 

group would have been required to 

represent that no agreements between 

the nominee and the company and its 

management exist regarding the 

nomination of the nominee.378 The 

Proposal included an instruction 

clarifying that negotiations between a 

nominating shareholder or group, 

nominee, and nominating committee or 

board of a company to have the nominee 

included in the company’s proxy 

materials, where the negotiations were 

unsuccessful or were limited to whether 

the company was required to include 

the nominee in accordance with Rule 

14a–11, would not represent a direct or 

indirect agreement with the 

company.379

Commenters generally supported this 

proposed requirement.380 Most of the 

comments addressed negotiations or 

agreements between the nominating 

shareholder or group and the company 

rather than the relationship or 

agreements between a nominee and the 

company.381

Consistent with our approach to 

agreements with nominating 

shareholders, we are adopting the 

requirement that there not be any 

agreements between the nominee and 

the company and its management 

regarding the nomination of the 

nominee largely as proposed. In this 

regard, we believe it would undermine 

the purpose of the rule to allow 

nominees under Rule 14a–11 to have 

such agreements with the company 

because of the potential risk of a 

nominating shareholder or group acting 

merely as a surrogate for a company. In 

order to clarify that this is an affirmative 

requirement of Rule 14a–11, we have 

revised the rule to make clear that this 

is an eligibility condition by listing it as 

a condition in the rule, rather than only 

in a representation required in Schedule 

14N. 

d. Relationship Between the Nominating 

Shareholder or Group and the Nominee 

We did not propose a requirement 

that the nominee must be independent 

or unaffiliated with the nominating 

shareholder or group, but we requested 

comment on whether we should include 

such a requirement.382 A large number 

of commenters supported generally an 

independence requirement that would 

limit some or all relationships between 

the nominating shareholder or group 

and its nominee.383 Commenters 

explained that an independence 

requirement would reduce the risk that 

a successful shareholder nominee 

would represent only the nominating 

shareholder or group, avoid potential 

disruptions and divisiveness from 

having ‘‘special interest’’ directors, 

ameliorate the issue of preserving 

confidentiality within the boardroom 

and avoiding misuse of material nonpublic information, and lessen the 

likelihood that Rule 14a–11 would be 

used for change in control attempts.384

With regard to the degree of 

independence needed and types of 

relationships that should be prohibited, 

numerous commenters recommended a 

prohibition on any affiliation between 

the nominating shareholder or group 

and the shareholder nominee.385 Some 

commenters recommended that Rule 

14a–11 prohibit a shareholder nominee 

from being (1) a nominating 

shareholder, (2) a member of the 

immediate family of any nominating 

shareholder, or (3) a partner, officer, 

director or employee of a nominating 

shareholder or any of its affiliates.386

They noted that a similar limitation was 

included in the 2003 Proposal. Two 

commenters recommended that the 

Commission impose the same 

restrictions and disclosure requirements 

that were included in the 2003 

Proposal.387

One commenter noted the 

Commission’s assertion in the Proposing 

Release that ‘‘such limitations may not 

be appropriate or necessary’’ because, if 

elected, a director would be subject to 

State law fiduciary duties owed to the 

company.388 The commenter, however, 

expressed skepticism that fiduciary 

obligations would adequately resolve 

the issue of ‘‘special interest’’ directors. 

One commenter would not require 

independence between the nominating 

shareholder or group and the nominee 

if the nominating shareholder or group 

could use Rule 14a–11 to nominate only 

one candidate; however, if the 

nominating shareholder or group is 

allowed to nominate more than one 


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389See letter from Seven Law Firms. 

390 Id. The recommended disclosures included: 

familial relationships with a nominating 

shareholder or group member; ownership interests 

(or other participation) in a nominating 

shareholder, group member, or affiliates; 

employment history with a nominating shareholder, 

group member, or affiliates; prior advisory, 

consulting or other compensatory relationships 

with a nominating shareholder, group member, or 

affiliates; and agreements with a nominating 

shareholder, group member, or affiliates (other than 

relating to the nomination). 

391See letters from O’Melveny & Myers; SIFMA; 

UnitedHealth. See also letter from CII. 

392Letter from IBM. 

393See letters from Amalgamated Bank; CalSTRS; 

CFA Institute; CII; COPERA; Nathan Cummings 

Foundation; P. Neuhauser; Norges Bank; Pershing 

Square; Relational; RiskMetrics; Solutions by 

Design (‘‘Solutions’’); TIAA–CREF; USPE; B. 

Villiarmois. 

394See letters from CFA Institute; CII; COPERA; 

P. Neuhauser; Pershing Square; Relational; USPE; B. 

Villiarmois. 

395See letter from CII. 

396See letter from Relational. 

397See letters from CII; Nathan Cummings 

Foundation. 

398See letter from TIAA–CREF. 

399See E. Norman Veasey & Christine T. 

DiGuglielmo, How Many Masters Can a Director 

Serve? A Look at the Tensions Facing Constituency 

Directors, 63 Bus. Law. 761 (2008). 

400See letters from 26 Corporate Secretaries; 

ABA; Aetna; Anadarko; BorgWarner; BRT; 

Burlington Northern; Caterpillar; Cummins; Dewey; 

Headwaters; JPMorgan Chase; Kirkland & Ellis; 

Leggett; P. Neuhauser; Northrop; PepsiCo; Pfizer; 

Protective; Sara Lee; SIFMA; Society of Corporate 

Secretaries; TIAA–CREF; T. Rowe Price; Xerox. 

401Letter from Northrop. 402See letters from CII; Corporate Library; 

Dominican Sisters of Hope; First Affirmative 

Financial Network LLC (‘‘First Affirmative’’); Mercy 

Investment Program; Sisters of Mercy; Social 

Investment Forum; Tri-State Coalition; Trillium; 

Ursuline Sisters of Tildonk; USPE. 

403Letter from CII. 404See proposed Rule 14a–11(d)(1). According to 

information from RiskMetrics, based on a sample of 

1,431 public companies, in 2007, the median board 

size was 9, with boards ranging in size from 4 to 

23 members. Approximately 40% of the boards in 

the sample had 8 or fewer directors, approximately 

60% had between 9 and 19 directors, and less than 

1% had 20 or more directors. 

candidate using Rule 14a–11, then the 

commenter believed independence 

between the nominating shareholder or 

group and the nominees is needed.389

The commenter asserted that a lack of 

an independence requirement between 

multiple nominees and the nominating 

shareholder could give rise to control 

issues because the nominees, if elected, 

could be beholden to a single 

nominating shareholder or group. In 

addition, the commenter claimed that a 

lack of independence could give rise to 

‘‘single issue’’ or ‘‘special interest’’ 

directors, thereby causing balkanization 

of boards. According to this commenter, 

if independence is not required, then 

Schedule 14N should require detailed 

disclosure about the nature of 

relationships between the nominating 

shareholder or group and the 

nominees.390

A few commenters recommended 

requiring disclosure in the Schedule 

14N of any direct or indirect 

relationships between the nominating 

shareholder or group and the nominee, 

including family or employment 

relationships, ownership interests, 

commercial relationships and any other 

arrangements or agreements.391 One 

commenter recommended that a 

nominating shareholder or group 

provide ‘‘[d]isclosure about any 

agreements or relationships with the 

Rule 14a–11 nominee other than those 

relating to the nomination of the 

nominee.’’ 392

Other commenters opposed generally 

any requirement that the nominating 

shareholder or group be independent 

from the shareholder nominee.393 Of 

these, some commenters recommended 

the Commission require full disclosure 

of any affiliations and business 

relationships instead of an outright 

prohibition.394 One commenter noted 

that no such restriction or prohibition 

applies to current director candidates, 

some of whom have various personal 

and professional links to the company 

and its executives.395 Another 

commenter noted that the NYSE 

recognized the issue of share ownership 

when crafting its director independence 

rules and determined that even 

significant share ownership should not 

be dispositive as to a determination of 

a director’s independence.396 Two 

commenters opposed a prohibition on 

any affiliation between the nominating 

shareholder and its nominee because 

they believed that fears regarding the 

election of ‘‘special interest’’ directors 

are unfounded or exaggerated, as any 

nominee would have to gain the support 

of a broad array of shareholders to be 

elected.397 One commenter asserted that 

existing fiduciary duties are an adequate 

safeguard against ‘‘special interest’’ 

directors.398

We continue to believe that such 

limitations are not appropriate or 

necessary. Rather, we believe that Rule 

14a–11 should facilitate the exercise of 

shareholders’ traditional State law rights 

and afford a shareholder or group 

meeting the requirements of the rule the 

ability to propose a nominee for director 

that, in the nominating shareholder’s 

view, better represents the interests of 

shareholders than those put forward by 

the nominating committee or board. We 

note that once a nominee is elected to 

the board of directors, that director will 

be subject to State law fiduciary duties 

and owe the same duty to the 

corporation as any other director on the 

board.399 To the extent a company board 

is concerned that a director nominee 

will not represent the views of 

shareholders, the board could address 

those points in the company’s proxy 

materials opposing the candidate’s 

election. In addition, we believe the 

disclosure requirements about the 

relationships between a nominating 

shareholder or group and the nominee 

that we are adopting, combined with the 

fact that any nominee elected will be 

subject to fiduciary duties, should help 

address any ‘‘special interest’’ concerns. 

e. No Limit on Resubmission of 

Shareholder Director Nominees 

Under the Proposal, an individual 

would not be limited in their ability to 

stand as a nominee under the rule based 

on prior unsuccessful nominations 

under the rule. A number of 

commenters supported a provision 

under which a shareholder nominee 

who failed to receive a specified 

threshold (e.g., 10%, 15%, 25%, or 

30%) of support at a previous election 

would be ineligible to be nominated 

again pursuant to Rule 14a–11 for a 

specified period (e.g., one, two, or three 

years).400 One commenter reasoned that 

‘‘[t]his would allow more shareholders 

to participate in the process and would 

motivate them to propose high quality 

candidates.’’ 401 On the other hand, 

other commenters opposed a provision 

under which a shareholder nominee 

who failed to receive significant support 

at a previous election would be 

ineligible to be nominated again 

pursuant to Rule 14a–11 for a specified 

period.402 One commenter reasoned that 

‘‘[s]imilar resubmission requirements 

aren’t applicable to management’s 

candidates, so they shouldn’t apply to 

candidates suggested by 

shareowners.’’ 403 We agree with those 

commenters who opposed a provision 

that would limit the ability of a 

shareholder nominee to be nominated 

based on the level of support received 

in a prior election. We do not believe 

that such a limitation would facilitate 

shareholders’ traditional State law rights 

and would add undue complexity to the 

rule’s operation. 

6. Maximum Number of Shareholder 

Nominees To Be Included in Company 

Proxy Materials 

a. General 

Under the Proposal, a company would 

be required to include no more than one 

shareholder nominee or the number of 

nominees that represents 25% of the 

company’s board of directors, 

whichever is greater.404 Where the term 

of a director that was nominated 


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405The final rule clarifies the second part of this 

requirement by specifying that a nominating 

shareholder or group may not be seeking to gain a 

number of seats on the board of directors that 

exceeds the maximum number of nominees that the 

registrant could be required to include under Rule 

14a–11. 

406See, e.g., Exchange Act Rule 14a–12(c). 

407 In this regard, we anticipate that shareholders 

seeking election of nominees included in the 

company’s proxy materials may need to engage in 

solicitation efforts for which they will incur 

expenses. 

408See letters from CalPERS; CalSTRS; CFA 

Institute; ICGN; Nathan Cummings Foundation; P. 

Neuhauser; Norges Bank; Protective; RiskMetrics; 

TIAA–CREF; T. Rowe Price; WSIB. 

409See letter from CalPERS. 

410See letters from 13D Monitor; ABA; ACSI; 

Advance Auto Parts; Aetna; Alcoa; Allstate; 

American Express; Americans for Financial Reform; 

Association of Corporate Counsel; Avis Budget; Best 

Buy; J. Blanchard; Boeing; BorgWarner; BRT; 

Burlington Northern; R. Burt; Callaway; CalPERS; 

Caterpillar; CIGNA; CII; Cleary; CNH Global; 

Comcast; Concerned Shareholders; COPERA; 

Cummins; L. Dallas; Darden Restaurants; Deere; 

Dupont; Eaton; Eli Lilly; Dale C. Eshelman (‘‘D. 

Eshelman’’); ExxonMobil; FedEx; FMC Corp.; FPL 

Group; Frontier; GE; General Mills; Headwaters; C. 

Holliday; Honeywell; IBM; ICI; ITT; JPMorgan 

Chase; J. Kilts; E. J. Kullman; N. Lautenbach; 

Leggett; C. Levin; Lionbridge Technologies; LUCRF; 

McDonald’s; Motorola; Office Depot; O’Melveny & 

Myers; OPERS; P&G; Nathan Cummings 

Foundation; Northrop; Pax World; PepsiCo; Sara 

Lee; S&C; Schulte Roth & Zabel; Sherwin-Williams; 

Sidley Austin; SIFMA; Society of Corporate 

Secretaries; Solutions; SWIB; Teamsters; TI; G. 

Tooker; tw telecom; Universities Superannuation; 

U.S. Bancorp; Verizon; USPE; B. Villiarmois; 

Wachtell; Wells Fargo; Weyerhaeuser; WSIB. 

411See letters from BRT (citing a July 2009 survey 

showing many companies would have to integrate 

multiple new directors); CII; Eaton; N. Lautenbach; 

McDonald’s; Sherwin-Williams; Sidley Austin; 

Society of Corporate Secretaries; G. Tooker; WSIB. 

412See letters from CII; L. Dallas; C. Levin; 

Nathan Cummings Foundation; Universities 

Superannuation. 

413See letters from Advance Auto Parts; Avis 

Budget; BRT; Caterpillar; CIGNA; CNH Global; 

Comcast; Cummins; Darden Restaurants; Deere; 

Eaton; Eli Lilly; FedEx; FMC Corp.; FPL Group; 

Frontier; General Mills; ICI; ITT; E. J. Kullman; N. 

Lautenbach; Leggett; McDonald’s; Office Depot; 

O’Melveny & Myers; PepsiCo; Sherwin-Williams; 

TI; G. Tooker; tw telecom; Verizon; Wachtell; 

Weyerhaeuser. 

414See letters from ACSI; Americans for Financial 

Reform; CalPERS; CII (stating that while it supports 

the Commission’s proposed limit, shareholders 

should be allowed to nominate two candidates in 

all cases); COPERA; C. Levin; LUCRF; Nathan 

Cummings Foundation; SWIB; Teamsters. 

415See, e.g., Aetna; Association of Corporate 

Counsel; Barclays; J. Blanchard; BorgWarner; 

Dewey; ExxonMobil; Headwaters; Honeywell; 

Lionbridge Technologies; Northrop; Sidley Austin; 

Society of Corporate Secretaries; U.S. Bancorp. 416See new Rule 14a–11(d)(1). 

pursuant to Rule 14a–11 continues past 

the meeting date, that director would 

continue to count for purposes of the 

25% maximum. 

As noted in the Proposing Release, we 

do not intend for Rule 14a–11 to be 

available for any shareholder or group 

that is seeking to change the control of 

the company or to gain more than a 

limited number of seats on the board.405

The existing procedures regarding 

contested elections of directors are 

intended to continue to fulfill that 

purpose.406 We also noted that by 

allowing shareholder nominees to be 

included in a company’s proxy 

materials, part of the cost of the 

solicitation is essentially shifted from 

the individual shareholder or group to 

the company and thus, all of the 

shareholders.407 We do not believe that 

we should require that an election 

contest conducted by a shareholder to 

change the control of the company or to 

gain a number of seats on the board of 

directors that exceeds the maximum 

number of nominees that the registrant 

could be required to include under Rule 

14a–11 be funded out of corporate 

assets. 

Some commenters supported 

generally the proposed limit on the 

number of shareholder nominees.408

While agreeing that the Commission’s 

proposed limit on the number of 

shareholder nominees is needed to 

ensure a more measured approach 

towards inclusion of shareholder 

nominees in company proxy materials, 

one commenter supported the general 

principle that shareholders should be 

entitled to nominate as many directors 

as necessary to focus the board’s 

attention on optimizing company 

performance, profitability and 

sustainable returns.409 On the other 

hand, many commenters disagreed with 

the proposed limit or recommended 

different limits.410 Some commenters 

expressed a general concern that the 

proposed limit would affect a significant 

portion of the board, disrupt the board, 

facilitate a change in control of the 

company, and possibly require 

companies to integrate numerous new 

directors into their boards each year.411

Other commenters wanted more 

shareholder nominees to be allowed 

because they feared that a single 

shareholder-nominated director would 

be ineffective due to the lack of a second 

for motions at board meetings, hostile 

board members, possible exclusion from 

key committees, and being effectively 

cut out of key discussions.412

Commenters’ suggestions as to the 

appropriate limitation on the number of 

shareholder nominees ranged from a 

limit of one shareholder nominee, 

regardless of the size of the board,413 to 

at least two nominees, but less than a 

majority of the board.414 Other 

commenters recommended various 

limits ranging from 10% to 15% of the 

board.415

We carefully considered commenters’ 

concerns regarding the limitation on the 

number of Rule 14a–11 nominees; 

however, we are adopting the limitation 

largely as proposed. We believe the rule 

we are adopting strikes the appropriate 

balance in allowing shareholders to 

more effectively exercise their rights to 

nominate and elect directors, but does 

not provide nominating shareholders or 

groups using the rule with the ability to 

change control of the company. The 

limitation on the number of Rule 14a– 

11 nominees that a company is required 

to include should also limit costs and 

disruption as compared to a rule 

without such a limit. We also believe 

that a lower threshold, such as 10% or 

15%, may result in only one 

shareholder-nominated director at many 

companies. In addition, we note that our 

rule only addresses the inclusion of 

nominees in the company’s proxy 

materials. After reviewing all of the 

disclosures provided by the company 

and the nominating shareholder or 

group, shareholders will be able to make 

an informed decision as to whether to 

vote for and elect a shareholder 

nominee. We believe that the 

modifications we are making to the rule, 

as described below, help to alleviate 

concerns that the election of 

shareholder nominees would unduly 

disrupt the board. As to concerns about 

the possibility that a single shareholdernominated director would be ineffective 

due to actions of other members of the 

board, the rule is not intended to 

address the interactions of board 

members after the election of directors. 

In this respect, we note that any 

shareholder-nominated directors and 

board-nominated directors would be 

subject to fiduciary duties under State 

law. 

As adopted, Rule 14a–11(d) will not 

require a company to include more than 

one shareholder nominee or the number 

of nominees that represents 25% of the 

company’s board of directors, 

whichever is greater.416 Consistent with 

the Proposal, where a company has a 

director (or directors) currently serving 

on its board of directors who was 

elected as a shareholder nominee 

pursuant to Rule 14a–11, and the term 

of that director extends past the date of 

the meeting of shareholders for which 

the company is soliciting proxies for the 

election of directors, the company will 

not be required to include in its proxy 

materials more shareholder nominees 

than could result in the total number of 

directors serving on the board that were 

elected as shareholder nominees being 

greater than one shareholder nominee or 

25% of the company’s board of 


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417See new Rule 14a–11(d)(2). This requirement 

is adopted as it was proposed in Rule 14a–11(d)(2). 

Depending on board size, 25% of the board may not 

result in a whole number. In those instances, the 

maximum number of shareholder nominees for 

director that a registrant will be required to include 

in its proxy materials will be the closest whole 

number below 25%. See the Instruction to 

paragraph (d)(1). 

418See letter from ABA. 

419See Rule 14a–11(d)(2). 

420Comments on the 2003 Proposal provided a 

range of views regarding the appropriate number of 

shareholder nominees. Commenters that supported 

the use of a percentage, or combination of a set 

number and a percentage, to determine the number 

of shareholder nominees suggested percentages 

ranging from 20% to 35%. See Comment File No. 

S7–19–03, available at http://www.sec.gov/rules/ 

proposed/s71903.shtml. 

421See letters from CII; L. Dallas; C. Levin; 

Nathan Cummins Foundation; Universities 

Superannuation. 

422See letters from BRT (citing a July 2009 survey 

showing many companies would have to integrate 

multiple new directors); CII; Eaton; N. Lautenbach; 

McDonald’s; Sherwin-Williams; Sidley Austin; 

Society of Corporate Secretaries; G. Tooker; WSIB. 

423See letters from ABA; Duane Morris; Media 

General; New York Times. 

424See letters from Media General; New York 

Times. 

425See letter from Sidley Austin. 

426See letter from BRT. 

427See letter from Media General. 

428See letters from CII; P. Neuhauser. 

429 Id. 

430See letter from P. Neuhauser. 

431See letters from Seven Law Firms; Sidley 

Austin; ValueAct Capital. 

directors, whichever is greater.417 We 

believe this limitation is appropriate to 

reduce the possibility of a nominating 

shareholder or group using Rule 14a–11 

as a means to gain a number of seats on 

the board of directors that exceeds the 

maximum number of nominees that the 

company could be required to include 

under Rule 14a–11 or to effect a change 

in control of the company by repeatedly 

nominating additional candidates for 

director. One commenter requested that 

we explain how Rule 14a–11 would 

apply to different board structures, and 

in particular, classified boards.418 In the 

case of a staggered board, the rule 

provides that the 25% limit will be 

calculated based on the total number of 

board seats,419 not the lesser number 

that are being voted on because it is the 

size of the full board, not the number up 

for election, that would be relevant for 

considering the effect on control. 

We note that in the 2003 Proposal, the 

Commission proposed to require 

companies to include a set number of 

nominees, rather than a percentage of 

the board.420 We believe that using a 

percentage in the rule will promote ease 

of use and alleviate any concerns that a 

company may increase its board size in 

an effort to reduce the effect of a 

shareholder nominee elected to the 

board. 

We understand the concerns 

addressed by some commenters that this 

limitation could result in shareholdernominated directors being less 

influential,421 as well as the concerns of 

other commenters that the possibility of 

25% of the board changing through the 

Rule 14a–11 process could present 

significant changes to the board.422 For 

the reasons discussed above, we believe 

the limitation as adopted strikes an 

appropriate balance and is an 

appropriate safeguard to assure that the 

Rule 14a–11 process is not used as a 

means to effect a change in control. 

Though we are adopting this 

requirement largely as proposed, we 

have added certain clarifications, which 

are described below, to address 

situations at companies where 

shareholders are able to elect only a 

subset of the board, revised the standard 

for determining which nominating 

shareholder or group will have their 

nominee or nominees included in the 

company’s proxy materials where there 

is more than one eligible nominating 

shareholder or group, and made other 

modifications designed to facilitate 

negotiations between companies and 

nominating shareholders. 

b. Different Voting Rights With Regard 

to Election of Directors 

Several commenters responded to the 

Commission’s request for comment 

about how to calculate the maximum 

number of candidates a nominating 

shareholder or group could nominate 

under Rule 14a–11 when certain 

directors are not elected by all 

shareholders. Some commenters noted 

that controlled companies are 

commonly structured with dual classes 

of stock which allow shareholders of the 

non-controlling class of stock to elect a 

set number of directors that is less than 

the full board.423

In the context of a company where 

shareholders are only entitled to elect a 

subset of the total number of directors, 

the rule as proposed potentially would 

have allowed shareholders to nominate 

more candidates than may be elected by 

the nominating shareholders. Two 

commenters argued that Rule 14a–11 

should be modified so that the 

maximum number of shareholder 

nominees is based on the number of 

directors that may be elected by the 

class of securities held by the 

shareholders making the nomination, as 

opposed to the number of total 

directors.424 Another commenter urged 

us to revise Rule 14a–11 so that it would 

be limited to a percentage of the number 

of directors that are elected by the 

public shareholders (rather than a 

percentage of all directors) and would 

not apply to directors that are elected by 

shareholders of a class of stock having 

a right to nominate and elect a specified 

number or percentage of directors, or 

preferred shareholders having such right 

as a result of the company’s failure to 

pay dividends.425 Another commenter 

argued that, as proposed, Rule 14a–11 

would not allow companies with 

multiple classes of voting shares the 

ability to make choices about how to 

best implement access to the company’s 

proxy to fit their capital structure.426

One commenter suggested that Rule 

14a–11 address how it would apply to 

companies with multiple classes of 

stock to prevent shareholders from 

using the rule to change control of the 

class of directors those shareholders 

have the right to elect.427 Other 

commenters, by contrast, believed that 

the maximum number of nominees that 

companies should be required to 

include should be based on the total 

number of director seats, regardless of 

whether a class of shares only gets to 

elect a subset of the board.428

We also sought comment on how to 

calculate the maximum number of 

nominees where the company is 

contractually obligated to permit a 

certain shareholder or group to elect a 

set number of directors to the board. 

Commenters’ views differed on how to 

calculate the maximum number of 

nominees a shareholder or shareholder 

group may nominate in that case. Some 

commenters believed that the maximum 

number of nominees should be based on 

the total board size, regardless of 

whether a company has granted rights to 

nominate.429 One such commenter 

noted that if Rule 14a–11 contained an 

exception for board seats subject to 

contractual rights, companies would 

have an incentive to enter into 

contractual agreements in order to evade 

its application.430 Other commenters, 

however, asserted that the maximum 

number of nominees that shareholders 

should be permitted to nominate under 

Rule 14a–11 should be limited to 25% 

of the ‘‘free’’ seats on the board—that is, 

only those board seats that are not 

subject to a contractual nomination right 

that existed as of the date of the 

submission and filing of a Schedule 

14N.431 These commenters suggested 

taking board seats subject to contractual 

nomination rights ‘‘off the table’’ and 

basing the 25% calculation on the 

number of nominees that the 

nominating committee is free to name. 

One such commenter remarked that 

unless board seats subject to contractual 

nomination rights are excluded, 


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432See letter from Seven Law Firms. 

433See Section II.B.4.b. above. 

434See new Rule 14a–11(d)(3). 

435See new Rule 14a–11(d)(3). 

436See letters from BRT; Seven Law Firms; 

Society of Corporate Secretaries. 

437See new Rule 14a–11(d)(4). In this regard, we 

note that we would view such an agreement as a 

termination of a Rule 14a–11 nomination. Thus, the 

nominating shareholder or group would be required 

to file an amendment to Schedule 14N to disclose 

the termination of the nomination as a result of the 

agreement with the company regarding the 

inclusion of the nominee or nominees. See Item 7 

of Schedule 14N and Rule 14n–2. 

438See letter from Florida State Board of 

Administration. 

439See letters from ABA; Aetna; American 

Express; BorgWarner; BRT; Chevron; Cleary; Davis 

Polk; DTE Energy; Dupont; Edison Electric Institute; 

Eli Lilly; ExxonMobil; FPL Group; Home Depot; ICI; 

JPMorgan Chase; Metlife; P. Neuhauser; Pfizer; 

Protective; RiskMetrics; S&C; Seven Law Firms; 

Sidley Austin; SIFMA; Society of Corporate 

Secretaries; Verizon; Vinson & Elkins; Wells Fargo. 

440See letters from P. Neuhauser; RiskMetrics. 

441See letters from ABA; BRT; Seven Law Firms. 

442See letters from Davis Polk; Society of 

Corporate Secretaries. 

companies may be limited in their 

ability to offer contractual nominating 

rights to shareholders without running a 

heightened risk of change of control, 

which could result in increased costs of 

capital and a decrease in the number of 

strategic alternatives.432

We believe that the maximum number 

of candidates a shareholder can 

nominate using Rule 14a–11 at 

companies with multiple classes of 

stock should be based on the total board 

size, as is the case at other companies. 

Thus, we are adopting this requirement 

as proposed. We believe the changes we 

are adopting with regard to calculating 

ownership and voting power, as 

discussed above, should address 

concerns about the possibility that the 

rule could be used to change control of 

the company or to affect the rights of 

shareholders as established by a 

particular company’s capital 

structure.433 Where shareholders have 

the right to elect a subset of the full 

board, however, we believe it is 

appropriate to provide that the 

maximum number of nominees a 

company may be required to include 

under Rule 14a–11 may not exceed the 

number of director seats the class of 

shares held by the nominating 

shareholder is entitled to elect.434 We 

believe the right to nominate is an 

integral part of the right to elect, 

therefore we are linking the ability 

under Rule 14a–11 for a shareholder to 

nominate directors to instances in 

which the shareholder can elect 

directors. Limiting the number of 

nominations to the number of director 

seats the class of shares held by the 

nominating shareholder is entitled to 

elect presumably would allow to be 

fully expressed the views of the 

shareholder about who should sit in the 

director seats in respect of which the 

shareholder has nomination rights. 

The shareholder nomination 

provisions in Rule 14a–11 are available 

only for holders of classes of securities 

that are subject to the Exchange Act 

proxy rules, provided that a company is 

otherwise subject to the rule. If a 

company subject to Rule 14a–11 has 

multiple classes of eligible securities, 

however, the maximum number of 

candidates a shareholder can nominate 

will be determined based on the number 

of director seats the class of shares held 

by the nominating shareholder is 

entitled to elect.435

c. Inclusion of Shareholder Nominees in 

Company Proxy Materials as Company 

Nominees 

As discussed in Section II.B.4.e. 

above, commenters expressed concern 

that the rule, as proposed, might 

discourage constructive dialogue 

between shareholders and 

companies.436 These commenters noted 

that companies would be discouraged 

from discussing potential board 

candidates with shareholders planning 

to use Rule 14a–11 and including them 

as management nominees because such 

nominees would not reduce the 

maximum number of shareholder 

nominees that the company would be 

required to include under Rule 14a–11. 

Subject to certain safeguards, we believe 

our rule should not discourage dialogue 

between nominating shareholders and 

companies and agree that the rule, as 

proposed, could have the effect of 

discouraging constructive dialogue if 

shareholder nominees nominated by a 

company as a result of that dialogue do 

not count toward the maximum number 

of shareholder nominees a company is 

required to include in its proxy 

materials. Consequently, under our final 

rule, where a company negotiates with 

the nominating shareholder or group 

that has filed a Schedule 14N before 

beginning any discussion with the 

company about the nomination and that 

otherwise would be eligible to have its 

nominees included in the company’s 

proxy materials, and the company 

agrees to include the nominating 

shareholder’s or group’s nominees on 

the company’s proxy card as company 

nominees, those nominees will count 

toward the 25% maximum set forth in 

the rule.437 As noted, this would only 

apply where the nominating 

shareholder or group has filed its notice 

on Schedule 14N before beginning 

discussions with the company. 

Although this limitation may reduce 

somewhat the utility of this provision, 

we believe limiting the treatment to 

situations in which the nominating 

shareholder or group has filed a 

Schedule 14N will reduce the 

possibility that this exception is used by 

a company to avoid having to include 

shareholder director nominees 

submitted by shareholders or groups of 

shareholders that are not affiliated with 

or not working on behalf of the 

company. 

In the Proposing Release, we 

requested comment as to whether it 

would be appropriate for the rule to take 

into account incumbent directors who 

were nominated pursuant to Rule 14a– 

11 for purposes of determining the 

maximum number of shareholder 

nominees, or whether there should be a 

different means to account for such 

incumbent directors. One commenter 

argued that incumbent Rule 14a–11 

directors should not count towards the 

25% limit.438 It reasoned that, once 

elected, the Rule 14a–11 director 

represents all shareholders and that 

future use of 

Rule 14a–11 by other shareholders 

should not be restricted. A number of 

commenters stated that incumbent Rule 

14a–11 directors should count towards 

the maximum number of shareholder 

nominees allowed under the rule,439

with some suggesting that this should be 

the case in limited circumstances, such 

as when a Rule 14a–11 director is renominated by the board or as long as the 

director continues on the board.440

Commenters expressed concerns that 

the method of calculating the maximum 

number of directors subject to Rule 14a– 

11 nominations—which as proposed 

would not include directors previously 

elected following a Rule 14a–11 

nomination unless they are nominated 

again by a shareholder using Rule 14a– 

11—would not encourage boards to 

integrate these directors.441 Some 

commenters asserted that failing to 

count such a director toward the 25% 

limit would cause boards to be 

disinclined to include these directors as 

company nominees in future 

elections.442 They viewed this as 

counterproductive to efficient board 

integration and functioning. 

While we appreciate commenters’ 

views, we are not persuaded that it is 

appropriate to provide an exception to 

the general method of calculating the 

maximum number of Rule 14a–11 

nominees in the case of a shareholdernominated incumbent director that is renominated by the company. As noted 


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443See letters from 13D Monitor; 26 Corporate 

Secretaries; ABA; ACSI; Advance Auto Parts; Aetna; 

AFL–CIO; AFSCME; Allstate; Alston & Bird; 

Amalgamated Bank; American Bankers Association; 

Anadarko; Applied Materials; Avis Budget; Blue 

Collar Investment Advisors (‘‘BCIA’’); Best Buy; 

Boeing; BorgWarner; Brink’s; BRT; Burlington 

Northern; CalPERS; CalSTRS; Caterpillar; CFA 

Institute; Chevron; CIGNA; CII; Cleary; Con Edison; 

COPERA; Corporate Library; CSX; Cummins; 

Darden Restaurants; Deere; Devon; Dewey; T. 

DiNapoli; Dominican Sisters of Hope; DuPont; 

Eaton; Emerson Electric; ExxonMobil; FedEx; 

Financial Services Roundtable; First Affirmative; 

Florida State Board of Administration; FMC Corp.; 

FPL Group; Frontier; General Mills; A. Goolsby; 

Honeywell; IAM; IBM; ICI; Intel; JPMorgan Chase; 

Kirkland & Ellis; C. Levin; Leggett; LIUNA; LUCRF; 

Marco Consulting; J. McCoy; McDonald’s; Joel M. 

McTague (‘‘J. McTague’’); MeadWestvaco; Mercy 

Investment Program; Metlife; Motorola; D. Nappier; 

Nathan Cummings Foundation; P. Neuhauser; 

Norfolk Southern; Norges Bank; Office Depot; 

OPERS; PACCAR Inc. (‘‘PACCAR’’); Pershing 

Square; PepsiCo; Pfizer; S. Quinlivan; 

RacetotheBottom; RiskMetrics; Ryder; Sara Lee; 

Social Investment Forum; Seven Law Firms; 

Shearman & Sterling; Sheet Metal Workers; Sidley 

Austin; SIFMA; Sisters of Mercy; Society of 

Corporate Secretaries; Sodali; Southern Company; 

SWIB; Teamsters; Tenet; TI; TIAA–CREF; Tri-State 

Coalition; Trillium; T. Rowe Price; Textron; tw 

telecom; Universities Superannuation; Ursuline 

Sisters of Tildonk; U.S. Bancorp; USPE; ValueAct 

Capital; Verizon; Wachtell; Walden; Wells Fargo; 

Weyerhaeuser; Whirlpool; WSIB; Xerox. 

444See letters from ABA; BRT; Con Edison; First 

Affirmative; C. Levin; Verizon. 

445Letter from ABA. 

446See letter from BRT. 

447See letter from Con Edison. 

448See letters from IBM; S. Quinlivan; USPE; 

Verizon; Xerox. 

449See letters from IBM; Verizon. 

450See letter from USPE. 

451See letters from 13D Monitor; 26 Corporate 

Secretaries; ABA (recommending this approach as 

one of several recommendations); ACSI; Advance 

Auto Parts; Aetna; AFL–CIO; AFSCME; Allstate; 

Amalgamated Bank; Anadarko; Applied Materials; 

Avis Budget; BCIA; Best Buy; Boeing; BorgWarner; 

Burlington Northern; CalPERS; CalSTRS; 

Caterpillar; CFA Institute; Chevron; CIGNA 

(recommending this approach as an alternative to 

another recommendation that the shareholder that 

held the shares the longest be given priority); CII; 

Cleary; Con Edison; COPERA; Corporate Library; 

Cummins; Darden Restaurants; Deere; Devon; 

Dominican Sisters of Hope; DuPont; Eaton; Emerson 

Electric; ExxonMobil; FedEx; Financial Services 

Roundtable; First Affirmative; Florida State Board 

of Administration (supporting this approach as an 

alternative to the first-in approach); FMC Corp.; 

Frontier; A. Goolsby; IAM; ICI; JPMorgan Chase; 

Kirkland & Ellis; C. Levin; Leggett; LIUNA; LUCRF; 

Marco Consulting; J. McCoy; McDonald’s; J. 

McTague; Mercy Investment Program; Metlife; D. 

Nappier; Nathan Cummings Foundation; P. 

Neuhauser; Norfolk Southern; Office Depot; 

PACCAR; Pershing Square; PepsiCo; Pfizer; 

RiskMetrics; Ryder; Sara Lee; Shamrock; Social 

Investment Forum; Sodali; Seven Law Firms; 

Shearman & Sterling; Sheet Metal Workers; Sidley 

Austin; SIFMA; Sisters of Mercy; Society of 

Corporate Secretaries; Southern Company; SWIB; 

Teamsters; Tenet; TI; TIAA–CREF; Tri-State 

Coalition; Trillium; T. Rowe Price; Textron; tw 

telecom; Universities Superannuation; Ursuline 

Sisters of Tildonk; U.S. Bancorp; Verizon; Wachtell; 

Walden; Wells Fargo; Whirlpool; WSIB. 

452Letter from CII. 

453See letters from CII; Society of Corporate 

Secretaries. 

previously, by adopting Rule 14a–11 we 

are seeking to facilitate shareholders’ 

ability under State law to nominate and 

elect directors, not necessarily to 

enhance shareholder representation on 

the board. We do not believe that a 

Commission rule is needed to facilitate 

the working relationship between the 

shareholder-nominated director and the 

company-nominated directors, or to 

provide an incentive for the board to 

integrate the shareholder-nominated 

director into its activities. To the extent 

that a shareholder nominee is elected to 

the board, the company-nominated 

directors and the shareholdernominated director will have a fiduciary 

duty to act in the best interests of the 

company and its shareholders. 

7. Priority of Nominations Received by 

a Company 

a. Priority When Multiple Shareholders 

Submit Nominees 

Proposed Rule 14a–11(d)(3) addressed 

situations where more than one 

shareholder or group would be eligible 

to have its nominees included in the 

company’s form of proxy and disclosed 

in its proxy statement pursuant to the 

proposed rule. In those situations, the 

company would have been required to 

include in its proxy materials the 

nominee or nominees of the first 

nominating shareholder or group from 

which it receives timely notice of intent 

to nominate a director pursuant to the 

rule, up to and including the total 

number of shareholder nominees 

required to be included by the company. 

We proposed this standard because we 

believed that there would be a benefit to 

enabling companies to begin preparing 

their proxy materials and coordinating 

with the nominating shareholder or 

group immediately upon receiving an 

eligible nomination rather than 

requiring companies to wait to see 

whether another nomination from a 

larger nominating shareholder or group 

was submitted before the notice 

deadline. 

Commenters were almost uniformly 

opposed to the proposed ‘‘first-in’’ 

standard. A large number of 

commenters expressed general 

opposition to the proposed first-in 

approach, with many presenting their 

own recommendations.443 Commenters 

expressed concern that the first-in 

approach would rush shareholders to 

submit nominations.444 One commenter 

worried that even if the Commission 

included a window period for 

submission of shareholder nominees in 

the final rule, the first-in approach 

would encourage a race to file, 

discourage constructive dialogue 

between shareholders and management, 

and encourage a ‘‘gamesmanship’’ 

attitude among possible nominating 

shareholders or groups.445 Another 

commenter argued that the first-in 

approach would undercut the 

Commission’s stated objectives in 

proposing Rule 14a–11.446 One 

commenter worried that the ‘‘first in’’ 

approach would favor large 

shareholders, who have greater 

resources to prepare their submission 

materials, over small shareholders who 

must aggregate to reach the ownership 

threshold and need to pool resources to 

prepare their submission materials.447

Some commenters expressed general 

concern about how companies should 

handle multiple nominations received 

on the same date.448 Two commenters 

worried that it would be difficult for 

companies to determine which 

nomination was received first because 

nominations could be submitted by 

various methods (e.g., fax transmission, 

mail, hand delivery) or arrive on the 

same date.449 Another commenter 

feared that a company that receives 

several nominations on the same date 

could choose the nomination submitted 

by shareholders friendly to 

management.450

Many commenters that opposed the 

first-in approach suggested alternatives. 

Of these, the majority preferred to give 

priority to the largest shareholder or 

group that submits a nomination.451

Noting that the 2003 Proposal included 

this standard and that it received the 

most support, one commenter argued 

that what matters most is not who is the 

fastest to nominate but which 

shareholder or group has the ‘‘greatest 

stake in the director election and, 

ultimately, the long-term performance of 

the company’’ (with the added benefits 

of avoiding ‘‘gamesmanship’’ and 

‘‘administrative challenges’’).452 Further, 

commenters believed that an approach 

based on the largest holdings would 

provide sufficient certainty because the 

number of shares of the largest 

shareholder or group could be 

determined from the Schedule 14N 

filing.453

Commenters presented a wide range 

of views or recommendations for 

determining priority. Some commenters 

suggested that when the largest 

shareholder or group nominates fewer 

than the maximum number of nominees 

allowed under Rule 14a–11, then the 

second largest shareholder or group 

should have the right to have its 

nominees included (up to the maximum 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56711 

454See letters from Amalgamated Bank; CII; 

COPERA; P. Neuhauser; Protective; T. Rowe Price. 

455See letters from Amalgamated Bank; CFA 

Institute; CII; COPERA; P. Neuhauser; Protective; T. 

Rowe Price. 

456See letters from Allstate; Boeing; Pfizer. 

457See letters from Honeywell; Sara Lee. 

458See letter from ABA. 

459See letter from Kirkland & Ellis. 

460See letter from Seven Law Firms. 

461See letters from BRT; CIGNA (recommending 

this approach as an alternative to its 

recommendation that the largest shareholder be 

given priority); Cummins; Darden Restaurants; FPL 

Group; General Mills; IBM (recommending this 

approach as an alternative to its recommendation 

that the largest shareholder be given priority); 

Motorola; TIAA–CREF; Xerox. 

462See letters from L. Dallas; T. DiNapoli; Nathan 

Cummings Foundation; OPERS; Southern 

Company. 

463See letters from Alston & Bird; CSX; Textron. 

464See letters from Calvert; Florida State Board of 

Administration; Hermes Equity Ownership Services 

Ltd. (‘‘Hermes’’); Protective. 

465Letter from Calvert. 

466See letter from Hermes. 

467See letter from Florida State Board of 

Administration. 

468See Rule 14a–11(e). Rule 14a–11(e)(4) 

prescribes a limited variation on this principle 

where the company has more than one class of 

voting shares subject to the proxy rules and eligible 

nominating shareholders or shareholder groups 

from more than one of those classes submit 

nominations that exceed the 25% maximum. In this 

circumstance, priority of nominations will be 

determined by reference to the relative voting 

power of the classes in question. 

number allowable), and so on.454

Commenters also suggested that a 

nominating shareholder or group be 

required to ‘‘rank’’ their nominees in the 

order of preference to facilitate any 

necessary ‘‘cutbacks.’’ 455

A few commenters stated that in the 

case of competing nominations 

submitted by shareholders with equallysized holdings, the shareholder that 

held the shares for the longest period of 

time should be allowed to include its 

nominees.456 Two commenters 

recommended that when determining 

the order of priority, an individual 

shareholder should have priority over a 

nominating group.457

One commenter recommended that 

nominees be ordered in accordance with 

the largest qualifying shareholdings, but 

subject to the qualification that the 

Commission impose a cap on either the 

permitted number of members in a 

nominating group or on the aggregate 

holdings of a nominating group and 

limit each nominating shareholder or 

group to only one Rule 14a–11 

nomination at an annual meeting.458 If 

shareholders are not limited to one 

nomination, then companies should be 

allowed to order the nominees based on 

the largest holdings. Alternatively, the 

commenter recommended awarding 

Rule 14a–11 nomination slots first to the 

nominating shareholder or group with 

the largest holdings, next to the 

nominating shareholder or group with 

the longest holding period, then to the 

next largest holder, and so on. 

One commenter stated that priority 

should be given to the largest 

nominating shareholder or group based 

on the number of voting securities over 

which such shareholder or group has 

voting control (as opposed to beneficial 

ownership).459 Another commenter 

stated that in the case of nominating 

groups, the determination of the largest 

holder should be based on the largest 

shareholder within the nominating 

group.460

Other commenters recommended that 

the shareholder or group holding a 

company’s shares for the longest period 

be permitted to submit nominees under 

Rule 14a–11.461 These commenters 

argued that this approach would be 

more consistent with the Commission’s 

stated goal of making Rule 14a–11 

available to shareholders with a longterm interest. 

Some commenters preferred to give 

priority based on a combination of 

factors, such as length of ownership and 

size of ownership stake.462 Several 

commenters preferred to let companies 

(e.g., the nominating committee) choose 

either the shareholder nominees or the 

method for deciding which shareholder 

nominees are included in the proxy 

materials when there are multiple 

nominations.463 Under this approach, 

companies would disclose the method 

in the previous year’s proxy statement 

or in a Form 8–K. 

A small number of commenters 

supported the proposed first-in 

approach.464 While understanding the 

concern about ‘‘a rush to the 

courthouse,’’ one commenter indicated 

that this concern may not necessarily be 

justified because the ‘‘ ‘first’ proponent 

may have sufficiently prepared 

beforehand for the nomination 

process.’’ 465 Further, the commenter 

believed that ‘‘[a]llowing the largest 

shareholder group to essentially trump 

the first smaller, but no less committed 

or relevant, shareholder submission is 

not good governance.’’ Another 

commenter believed that the first-in 

approach would best give effect to the 

proposed rule.466 If the standard was 

based on the amount of securities held 

instead, the commenter would be 

concerned that long-term owners of 

companies with index-tracking 

portfolios might be frozen out of the 

process. One commenter believed the 

first-in approach would provide 

certainty, but companies should be 

required to set the dates in calendar 

form and announce the dates in Form 8– 

K filings at least 30 days prior to the 

date of effectiveness.467

After considering the comments, we 

have revised the manner in which the 

rule addresses multiple qualifying 

nominations. Rather than a first-in 

standard, as was proposed, a company 

will be required to include in its proxy 

materials the nominee or nominees of 

the nominating shareholder or group 

with the highest qualifying voting 

power percentage.468 In this regard, in 

light of the comments received, we are 

concerned that a first-in standard would 

result in shareholders rushing to submit 

nominations, discourage constructive 

dialogue between shareholders and 

management, and encourage 

gamesmanship among possible 

nominating shareholders or groups. 

When there are multiple qualifying 

nominations, giving priority to the 

shareholder or group with the highest 

voting power percentage is consistent 

with our overall approach to facilitate 

director nominations by shareholders 

with significant commitments to 

companies. Finally, we seek to avoid the 

confusion that could result if multiple 

nominating shareholders or groups 

submitted their notices on the same day. 

We believe that the standard we are 

adopting, under which the nominating 

shareholder or group with the highest 

qualifying voting power percentage will 

have its nominees included in the 

company’s proxy materials, up to the 

maximum of 25% of the board, 

addresses these concerns. We are 

persuaded that this standard is more 

consistent with the other limitations of 

Rule 14a–11 that seek to balance 

facilitating shareholder rights to 

nominate directors with practical 

considerations. 

As adopted, Rule 14a–11 addresses 

situations where more than one 

shareholder or group would be eligible 

to have its nominees included on the 

company’s proxy card and disclosed in 

its proxy statement pursuant to the rule. 

Given that we are adopting a highest 

qualifying voting power percentage 

standard rather than a first-in standard, 

the company will determine which 

shareholders’ nominees it must include 

in its proxy statement and on its proxy 

card by considering which eligible 

nominating shareholder or group has 

the highest qualifying voting power 

percentage, as opposed to which eligible 

nominating shareholder or group 

submitted a timely notice first. A 

company will be required to include in 

its proxy statement and on its proxy 

card the nominee or nominees of the 

nominating shareholder or group with 


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56712 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

469See new Rule 14a–11(e) and proposed Rule 

14a–11(d)(3). 

470See Instruction 2 to new Rule 14a–11(e). 

471See letter from Best Buy. 

472See letter from ABA. 

473See letters from CFA Institute; Verizon. 

474See letter from CII. 

475See Instruction 2 to Rule 14a–11(g) and 

proposed Rule 14a–11(f)(6). 

476 In this regard, we note that if a member of a 

nominating shareholder group withdraws, the 

nominating shareholder group and its nominee or 

nominees would continue to be eligible so long as 

the group continues to meet the requirements of the 

rule. If the withdrawal of a member of the 

nominating shareholder group would result in the 

group failing to meet the ownership threshold, a 

company would no longer be required to include 

any nominees submitted by the nominating 

shareholder group. As another example, if after a 

nominating shareholder or group submits one 

nominee for inclusion in a company’s proxy 

materials and the nominee subsequently withdraws 

or is disqualified, a company will not be required 

to include a substitute nominee from that 

nominating shareholder or group. 

477See letters from BorgWarner; Society of 

Corporate Secretaries. 

478See letters from 26 Corporate Secretaries; 

ABA; Allstate; American Express; BorgWarner; DTE 

Energy; Dupont; FPL Group; Honeywell; IBM; 

Pfizer; RiskMetrics; Seven Law Firms; Society of 

Corporate Secretaries; Xerox. 

479See letters from AFL–CIO; P. Neuhauser; 

USPE. 

480See letter from P. Neuhauser. 

481See letter from Universities Superannuation. 

482See letter from CFA Institute. 

483 If one member of a group becomes ineligible 

to use the rule but the group continues to qualify 

to use the rule without that member, the group 

would remain eligible overall. 

the highest qualifying voting power 

percentage in the company’s securities 

as of the date of filing the Schedule 14N, 

up to and including the total number of 

shareholder nominees required to be 

included by the company.469 Where the 

nominating shareholder or group with 

highest qualifying voting power 

percentage that is otherwise eligible to 

use the rule and that filed a timely 

notice does not nominate the maximum 

number of directors allowed under the 

rule, the nominee or nominees of the 

nominating shareholder or group with 

the next highest qualifying voting power 

percentage that is otherwise eligible to 

use the rule and that filed a timely 

notice of intent to nominate a director 

pursuant to the rule would be included 

in the company’s proxy materials, up to 

and including the total number of 

shareholder nominees required to be 

included by the company. This process 

would continue until the company 

included the maximum number of 

nominees it is required to include in its 

proxy statement and on its proxy card 

or the company exhausts the list of 

eligible nominees. If the number of 

eligible nominees exceeds the maximum 

number required under Rule 14a–11 and 

the shareholder or group with the next 

highest qualifying voting power 

percentage submitted more nominees 

than there are remaining available 

director slots, the nominating 

shareholder would have the option to 

specify which of its nominees are to be 

included in the company’s proxy 

materials.470

b. Priority When a Nominating 

Shareholder or Group or a Nominee 

Withdraws or Is Disqualified 

Under the Proposal, we did not 

address what would be expected of a 

company if a nominating shareholder or 

group or nominee withdraws or is 

disqualified after the company has 

provided notice to the nominating 

shareholder or group of its intent to 

include the nominee in the company’s 

proxy materials. One commenter asked 

for guidance on how to handle such 

situations.471 Another commenter stated 

that it opposed allowing a nominating 

shareholder group to change its 

composition to correct an identified 

deficiency, such as a failure of the group 

to meet the requisite ownership 

threshold.472 Two commenters believed 

that if any member of a nominating 

shareholder group becomes ineligible 

due to a failure to own the requisite 

number of shares, then the entire group 

and its nominee also should be 

ineligible to use Rule 14a–11.473 On the 

other hand, one commenter 

recommended that a nominating 

shareholder group should be allowed to 

change its composition to correct an 

identified deficiency, such as the failure 

of the group to meet the requisite 

threshold.474 The commenter also 

addressed a situation in which a 

nominating shareholder group qualifies 

to use Rule 14a–11, provides the 

necessary notice, submits its nominees, 

but then becomes disqualified before the 

meeting at which its nominees would 

have been put to a shareholder vote. The 

commenter stated that while it 

‘‘generally believe[s] that the nominating 

shareowner should have a short window 

within which to add a shareowner who 

would meet all eligibility requirements, 

a lapse that cannot be cured in that 

fashion should be remedied by going to 

the ‘second’ candidate(s).’’ 

Consistent with the Proposal, under 

our final rules, neither the composition 

of the nominating shareholder group nor 

the shareholder nominee may be 

changed as a means to correct a 

deficiency identified in the company’s 

notice to the nominating shareholder or 

nominating shareholder group—those 

matters must remain as they were 

described in the notice to the 

company.475 We believe that to allow 

otherwise could serve to undermine the 

purpose of the notice deadline provided 

for in the rule. Thus, a nominating 

shareholder or group should be sure that 

it and its nominees meet the 

requirements of the rule—including the 

ownership and holding period 

requirements—before it files its 

Schedule 14N, as a nominating 

shareholder or group will not be 

permitted to add or substitute another 

shareholder or nominee in order to 

satisfy the requirements.476

In the Proposing Release, we solicited 

comment on how we should address 

situations where a nomination is 

submitted and the nominating 

shareholder subsequently becomes 

ineligible under the rule. We also sought 

comment as to the circumstances under 

which a second shareholder or group 

should be able to have its nominees 

included in a company’s proxy 

materials. Some commenters stated that 

if a nominating shareholder or group 

does not remain eligible, the company 

should be allowed to withdraw the 

nominating shareholder’s or group’s 

candidate from its proxy materials.477

Some commenters believed that a 

company should not be required to 

include a substitute shareholder 

nominee if the original shareholder 

nominee is excluded by a company after 

receiving a no-action letter from the 

Commission staff regarding the 

nomination, is withdrawn by the 

nominating shareholder or group, or 

otherwise becomes ineligible.478 These 

commenters generally argued that a 

company would not have enough time 

to seek the exclusion of such a 

substitute nominee. Still other 

commenters argued that a nominating 

shareholder or group should be allowed 

to submit a new nominee if its original 

nominee is determined to be 

ineligible,479 especially if the company 

sought and obtained a no-action letter 

from the staff concerning the company’s 

determination to exclude the 

nominee.480 One commenter worried 

that a prohibition on substitute 

shareholder nominees would encourage 

an unduly adversarial approach by both 

sides.481 Another commenter 

recommended that if the first 

nominating shareholder or group 

becomes ineligible, then the nominating 

shareholder or group with the secondlargest holdings should be allowed to 

submit their own nominees.482

Our final rule provides that if a 

nominating shareholder or group 

withdraws or is disqualified (e.g., 

because the nominating shareholder or 

a member of the group 483 failed to 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56713 

484See new Rule 14a–11(e)(2). 

485See new Rule 14a–11(e)(3). 

486We note that pursuant to Exchange Act Rule 

14a–4(c)(5) a completed proxy card containing a 

disqualified or withdrawn nominee or nominees 

could, under certain circumstances, confer 

discretionary authority to vote on the election of a 

substitute director or directors. 

487See proposed Rule 14a–11(c), Rule 14a–18 and 

Rule 14n–1. 

488See proposed Instruction 2 to Rule 14a–11(a) 

and proposed Rule 14a–18. 

489See proposed Rule 14a–18(a). Proposed Rule 

14a–11 also included this provision as a direct 

requirement. Thus, a company would not be 

required to include a shareholder nominee in its 

proxy materials if the nominee’s candidacy or, if 

elected, board membership would violate 

controlling State law, Federal law, or rules of a 

national securities exchange or national securities 

association (other than rules of a national securities 

exchange or national securities association that set 

forth requirements regarding the independence of 

directors). 

490See proposed Rule 14a–18(b) (which referred 

to the requirements in proposed Rule 14a–11(b)). 

491See proposed Rule 14a–18(c). 

492See proposed Rule 14a–18(d). 

continue to hold the qualifying amount 

of securities) after the company 

provides notice to the nominating 

shareholder or group of the company’s 

intent to include the nominee or 

nominees in its proxy materials, the 

company will be required to include in 

its proxy statement and form of proxy 

the nominee or nominees of the 

nominating shareholder or group with 

the next highest voting power 

percentage that is otherwise eligible to 

use the rule and that filed a timely 

notice in accordance with the rule, if 

any.484 This process would continue 

until the company included the 

maximum number of nominees it is 

required to include in its proxy 

materials or the company exhausts the 

list of eligible nominees. 

If a nominee withdraws or is 

disqualified after the company provides 

notice to the nominating shareholder or 

group of the company’s intent to 

include the nominee in its proxy 

materials, the company will be required 

to include in its proxy materials any 

other eligible nominee submitted by that 

nominating shareholder or group.485 If 

that nominating shareholder or group 

did not include any other nominees in 

its notice filed on Schedule 14N, then 

the company will be required to include 

the nominee or nominees of the 

nominating shareholder or group with 

the next highest voting power 

percentage that is otherwise eligible to 

use the rule and that filed a timely 

notice in accordance with the rule, if 

any, until the maximum number of 

nominees is included in the company’s 

proxy materials or the list of eligible 

nominees is exhausted. 

We believe that these requirements 

are appropriate in order to give effect to 

the intent of our rule—to facilitate 

shareholders’ ability to nominate and 

elect directors. If the nominating 

shareholder or group with the highest 

voting power percentage used all 

available Rule 14a–11 nominations in a 

company’s proxy materials and the 

nominating shareholder or group with 

the second highest voting power 

percentage had its nominees excluded 

even after one or more nominees from 

the nominating shareholder or group 

with the highest voting power 

percentage withdrew or was 

disqualified, we believe the purpose of 

our rule would be undermined. 

However, in order to address practical 

considerations, Rule 14a–11(e)(2) 

provides that once a company has 

commenced printing its proxy materials 

it will not be required to include a 

substitute nominee or nominees. We 

believe that at that point in the process 

it would be too difficult and costly for 

a company to change course to include 

a new nominee or nominees. If a 

nominating shareholder or group or 

nominee withdraws or is disqualified 

after the company has commenced 

printing its proxy materials, the 

company may determine whether it 

wishes to print (and furnish) additional 

materials and a proxy card, delete the 

disqualified or withdrawn nominee, or 

instead provide disclosure through 

additional soliciting materials informing 

shareholders about the change.486

8. Notice on Schedule 14N 

a. Proposed Notice Requirements 

As proposed, in order to submit a 

nominee for inclusion in the company’s 

proxy statement and form of proxy, Rule 

14a–11 would require that the 

nominating shareholder or group 

provide a notice on Schedule 14N to the 

company of its intent to require that the 

company include that shareholder’s or 

group’s nominee or nominees in the 

company’s proxy materials.487 The 

shareholder notice on Schedule 14N 

also would be required to be filed with 

the Commission on the date it is first 

sent to the company. 

We proposed to require the notice to 

be provided to the company and filed 

with the Commission by the date 

specified in the company’s advance 

notice bylaw provision, or where no 

such provision is in place, no later than 

120 calendar days before the date 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 changes by more 

than 30 calendar days from the prior 

year, the nominating shareholder must 

provide notice a reasonable time before 

the company mails its proxy materials. 

The company would be required to 

disclose the date by which the 

shareholder must submit the required 

notice in a Form 8–K filed pursuant to 

proposed Item 5.07 within four business 

days after the company determines the 

anticipated meeting date.488

As proposed, the notice on Schedule 

14N would include disclosures relating 

to the nominating shareholder’s or 

group’s interest in the company, length 

of ownership, and eligibility to use Rule 

14a–11. The notice on Schedule 14N 

also would include disclosure required 

by proposed Rule 14a–18 about the 

nominating shareholder or group and 

the nominee for director, as well as 

disclosure regarding the nature and 

extent of relationships between the 

nominating shareholder or group and 

nominee or nominees and the company. 

The disclosure provided by the 

nominating shareholder or group would 

be similar to the disclosure currently 

required in a contested election and 

would be included by the company in 

its proxy materials. 

In addition, as proposed, the notice 

on Schedule 14N also would include 

the following representations by the 

nominating shareholder or group: 

• The nominee’s candidacy or, if 

elected, board membership, would not 

violate controlling State or Federal law, 

or rules of a national securities 

exchange or national securities 

association other than rules relating to 

director independence; 489

• The nominating shareholder or 

group satisfies the eligibility conditions 

in Rule 14a–11; 490

• In the case of a company other than 

an investment company, the nominee 

meets the objective criteria for 

‘‘independence’’ of the national 

securities exchange or national 

securities association rules applicable to 

the company, if any, or, in the case of 

a company that is an investment 

company, the nominee is not an 

‘‘interested person’’ of the company as 

defined in Section 2(a)(19) of the 

Investment Company Act of 1940; 491

and 

• Neither the nominee nor the 

nominating shareholder (or any member 

of a nominating shareholder group) has 

an agreement with the company 

regarding the nomination of the 

nominee.492

Proposed Item 8 of Schedule 14N 

would have required a certification from 

the nominating shareholder or each 

member of the nominating shareholder 


emcdonald on DSK2BSOYB1PROD with RULES2
56714 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

493See letters from ABA; Alston & Bird; 

Americans for Financial Reform; CalSTRS; CFA 

Institute; CII; Corporate Library; Dominican Sisters 

of Hope; Florida State Board of Administration; 

GovernanceMetrics; ICI; Mercy Investment Program; 

Protective; RiskMetrics; Sisters of Mercy; Tri-State 

Coalition; Ursuline Sisters of Tildonk; USPE; 

Walden. 

494See letters from CII; USPE. 495See letters from ABA; Alaska Air; Robert A. 

Bassett (‘‘R. Bassett’’); BorgWarner; Eli Lilly; NACD; 

O’Melveny & Myers; Pfizer; Society of Corporate 

Secretaries; UnitedHealth. 

496See letters from ABA; Chevron; Sidley Austin; 

SIFMA. 

497See letter from Cleary. 

498See letter from ABA. 

499 Id. 

500See letter from IBM. 

501See letter from CII. 

502See letter from ABA. 

503See letter from USPE. 

504The disclosure requirements proposed in Rule 

14a–18(e)–(l) are now contained in new Item 4(b) 

and new Item 5 of Schedule 14N. 

505See Item 3 of new Schedule 14N. 

506See Item 4(a) of new Schedule 14N. A 

nominating shareholder would not be required to 

provide this statement if the nominating 

shareholder is the registered holder of the shares or 

is attaching or incorporating by reference a 

previously filed Schedule 13D, Schedule 13G, Form 

3, Form 4, and/or Form 5, or amendments to those 

documents to prove ownership. 

507See Item 4(b) of new Schedule 14N. These 

requirements were proposed in Rule 14a–18(f) and 

Item 5(b) of Schedule 14N. 

508See Item 5(a) of new Schedule 14N and 

proposed Rule 14a–18(e). 

509See Item 5(b) of new Schedule 14N and 

proposed Rule 14a–18(g). 

group that the securities used for 

purposes of meeting the ownership 

threshold in Rule 14a–11 are not held 

for the purpose, or with the effect, of 

changing control of the company or to 

gain more than a limited number of 

seats on the board. 

b. Comments on the Proposed Notice 

Requirements 

Commenters generally supported the 

proposed content requirements of 

Schedule 14N on the general principle 

that the Commission should impose 

disclosure requirements on nominating 

shareholders and their nominees.493

Two of these commenters also stated 

that additional disclosures or 

representations are not needed.494 In 

addition, some commenters 

recommended that all nominees be 

subject to any new disclosure rules 

adopted by the Commission as part of 

its proxy disclosure and solicitation 

enhancements rulemaking.495 Four 

commenters asked that companies be 

allowed to require additional disclosure 

from a nominating shareholder or group 

through, for example, the advance 

notice bylaws, as long as such 

requirements are consistent with State 

law.496 One commenter argued that the 

nominating shareholder, group, or 

nominee should provide any disclosure 

required under a company’s governing 

documents as long as such disclosure is 

required of all nominees.497 One 

commenter asked that all content 

requirements be set forth in Schedule 

14N itself, as it found the structure of 

the Schedule and the references to 

disclosure requirements to be 

unnecessarily complicated.498 The 

commenter recommended that we 

include a requirement that the 

nominating shareholder or group 

disclose information about the nature 

and extent of the relationships between 

the nominating shareholder, group and 

the nominee and the company or its 

affiliates.499 Another commenter 

recommended the rules include a 

representation that the nominee is not 

controlled by the nominating 

shareholder or group.500

We also sought comment on the 

proposed representations to be provided 

by the nominating shareholder or group 

in Schedule 14N. One commenter stated 

that the proposed representations are 

appropriate and no additional 

representations are needed.501 This 

commenter opposed a requirement for a 

shareholder nominee to make any 

representation either in addition to, or 

instead of, those made by the 

nominating shareholder or group. One 

commenter stated simply that none of 

the proposed representations in 

Schedule 14N should be eliminated.502

It also observed generally that the 

shareholder nominee should be required 

to make the representations (e.g., 

regarding independence) because he or 

she would know the facts relating to the 

representations and therefore should 

accept responsibility. One commenter 

opposed the requirement for a 

representation that a shareholder 

nomination (or election of the 

shareholder nominee) would not violate 

State law, Federal law, or listing 

standards.503 The commenter also 

believed it would be inappropriate to 

require a representation that the 

nomination complies with any 

independence requirement under 

Federal law, State law, or listing 

standards. 

c. Adopted Notice Requirements 

We are adopting the notice 

requirements substantially as proposed, 

with differences noted below. In 

addition, we agree that the rules as 

proposed could be streamlined to 

reduce complexity. As adopted, 

Schedule 14N will contain the 

disclosure items that were included in 

the Schedule as proposed, as well as the 

disclosures proposed in Rule 14a–11, 

Rule 14a–18 and Rule 14a–19. We 

believe that the disclosure requirements 

we are adopting will provide 

transparency and facilitate shareholders’ 

ability to make an informed voting 

decision on a shareholder director 

nominee or nominees without being 

unnecessarily burdensome on 

nominating shareholders or groups. 

i. Disclosure 

Schedule 14N will require a 

nominating shareholder or group to 

provide the following information about 

the nominating shareholder or group 

and the nominee: 504

• The name and address of the 

nominating shareholder or each member 

of the nominating shareholder group; 

• Information regarding the amount 

and percentage of securities held and 

entitled to vote on the election of 

directors at the meeting and the voting 

power derived from securities that have 

been loaned or sold in a short sale that 

remains open, as specified in 

Instruction 3 to Rule 14a–11(b)(1); 505

• A written statement from the 

registered holder of the shares held by 

the nominating shareholder or each 

member of the nominating shareholder 

group, or the brokers or banks through 

which such shares are held, verifying 

that, within seven calendar days prior to 

submitting the notice on Schedule 14N 

to the company, the shareholder 

continuously held the qualifying 

amount of securities for at least three 

years; 506

• A written statement of the 

nominating shareholder’s or group’s 

intent to continue to hold the qualifying 

amount of securities through the 

shareholder meeting at which directors 

are elected. Additionally, the 

nominating shareholder or group would 

provide a written statement regarding 

the nominating shareholder’s or group’s 

intent with respect to continued 

ownership after the election; 507

• A statement that the nominee 

consents to be named in the company’s 

proxy statement and form of proxy and, 

if elected, to serve on the board of 

directors;508

• Disclosure about the nominee as 

would be provided in response to the 

disclosure requirements of Items 4(b), 

5(b), 7(a), (b), and (c) and, for 

investment companies, Item 22(b) of 

Schedule 14A, as applicable; 509

• Disclosure about the nominating 

shareholder or each member of a 

nominating shareholder group as would 

be required in response to the disclosure 


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510See Item 5(c) of new Schedule 14N and 

proposed Rule 14a–18(h). If a nominating 

shareholder is organized in a form other than a 

corporation or partnership, comparable disclosure 

with respect to persons in similar capacities would 

be required. 

511See Item 5(d) of new Schedule 14N and 

proposed Rule 14a–18(i). As proposed, the rule 

would have required disclosure regarding a 

nominating shareholder’s involvement in any legal 

proceedings during the past five years. Recently, the 

Commission amended Item 401(f) of Regulation S– 

K to require disclosure regarding involvement in 

legal proceedings for the prior ten years. See Proxy 

Disclosure Enhancements, Release No. 33–9089; 

34–61175 (Dec. 16, 2009) [74 FR 68334] (‘‘Proxy 

Disclosure Enhancements Adopting Release’’). 

Accordingly, as adopted, Item 5(d) will require 

disclosure about a nominating shareholder’s 

involvement in legal proceedings during the past 

ten years. 

512See Item 5(e) of new Schedule 14N. 

513See Item 5(f) of new Schedule 14N. 

514We note that this disclosure requirement 

would apply to relationships between the 

nominating shareholder or group and the nominee, 

as well as the relationships between the nominating 

shareholder or group or the nominee and the 

company or its affiliates. See Item 5(g) of new 

Schedule 14N. 

515See Item 5(g) of new Schedule 14N and 

proposed Rule 14a–18(j). 516See Item 5(h) of new Schedule 14N and 

proposed Rule 14a–18(k). 517See Item 5(i) of new Schedule 14N and 

proposed Rule 14a–18(l). This requirement is 

discussed in more detail in this section. If a 

nominating shareholder or group submits a 

statement in support that exceeds 500 words per 

nominee, a company will be required to include the 

nominee or nominees, provided that the eligibility 

requirements are met, but may exclude the 

statement in support from its proxy materials 

pursuant to Rule 14a–11(g). In this instance, the 

company would provide notice to the staff and 

could, if desired, seek a no-action letter from the 

staff. See new Rule 14a–11(c) and Rule 14a–11(g). 

The 500 words would be counted in the same 

manner as words are counted under Rule 14a–8. 

Any statements that are, in effect, arguments in 

support of the nomination would constitute part of 

the supporting statement. Accordingly, any ‘‘title’’ 

or ‘‘heading’’ that meets this test would be counted 

toward the 500-word limitation. Inclusion of a Web 

site address in the supporting statement would not 

violate the 500-word limitation; rather, the Web site 

address would be counted as one word for purposes 

of the 500-word limitation. 

518See Item 7(e) of Schedule 14A. Similarly, if a 

company receives a nominee for inclusion in its 

proxy materials pursuant to a procedure set forth 

under applicable state or foreign law, or the 

company’s governing documents providing for the 

inclusion of shareholder director nominees in the 

company’s proxy materials, the disclosure provided 

by the nominating shareholder or group in response 

to Item 6 of Schedule 14N would be included in 

the company’s proxy materials. See Item 7(f) of 

Schedule 14A. 

519 Instruction 3 to Rule 14a–12(c) clarifies that 

though inclusion of a nominee pursuant to Rule 

14a–11 or solicitations by a nominating shareholder 

or nominating shareholder group that are made in 

connection with that nomination would constitute 

solicitations in opposition subject to Rule 14a– 

12(c), they would not be treated as such for 

purposes of Exchange Act Rule 14a–6(a). 

520See letters from CII; IBM; O’Melveny & Myers; 

SIFMA; UnitedHealth. 

521See Item 5(e) of new Schedule 14N. 

requirements of Items 4(b) and 5(b) of 

Schedule 14A, as applicable; 510

• Disclosure about whether the 

nominating shareholder or any member 

of a nominating shareholder group has 

been involved in any legal proceeding 

during the past ten years, as specified in 

Item 401(f) of Regulation S–K;511

• Disclosure about whether, to the 

best of the nominating shareholder’s or 

group’s knowledge, the nominee meets 

the director qualifications set forth in 

the company’s governing documents, if 

any; 512

• A statement that, to the best of the 

nominating shareholder’s or group’s 

knowledge, in the case of a company 

other than an investment company, the 

nominee meets the objective criteria for 

‘‘independence’’ of the national 

securities exchange or national 

securities association rules applicable to 

the company, if any, or, in the case of 

a company that is an investment 

company, the nominee is not an 

‘‘interested person’’ of the company as 

defined in Section 2(a)(19) of the 

Investment Company Act of 1940; 513

• Disclosure about the nature and 

extent of the relationships between the 

nominating shareholder or group, the 

nominee, and/or the company or any 

affiliate of the company,514 such as: 

• Any direct or indirect material 

interest in any contract or agreement 

between the nominating shareholder or 

any member of the nominating 

shareholder group, the nominee, and/or 

the company or any affiliate of the 

company (including any employment 

agreement, collective bargaining 

agreement, or consulting agreement); 

• Any material pending or threatened 

litigation in which the nominating 

shareholder or any member of the 

nominating shareholder group and/or 

the nominee is a party or a material 

participant, and that involves the 

company, any of its officers or directors, 

or any affiliate of the company; and 

• Any other material relationship 

between the nominating shareholder or 

any member of the nominating 

shareholder group, the nominee, and/or 

the company or any affiliate of the 

company not otherwise disclosed; 515

• Disclosure of any Web site address 

on which the nominating shareholder or 

group may publish soliciting 

materials; 516 and 

• If desired to be included in the 

company’s proxy statement, a statement 

in support of the shareholder nominee 

or nominees, which may not exceed 500 

words per nominee.517

The disclosure provided by the 

nominating shareholder or group in 

Item 5 of Schedule 14N would be 

included by the company in its proxy 

materials,518 along with the company’s 

disclosure in response to Items 4(b) and 

5(b) of Schedule 14A.519

In a traditional proxy contest, 

shareholders receive the disclosure 

required by Items 4(b), 5(b), 7, and 22, 

as applicable, of Schedule 14A from 

both the company and the insurgent 

when the contest relates to an annual 

election of directors. The new Schedule 

14N disclosure requirements are 

somewhat more expansive in that they 

also include the disclosures concerning 

ownership amount, length of 

ownership, intent to continue to hold 

the shares through the date of the 

meeting and with respect to continued 

ownership after the meeting, and 

disclosure regarding the nature and 

extent of the relationships between the 

nominating shareholder or group and 

nominee and the company or any 

affiliate of the company. We believe that 

these disclosures will assist 

shareholders in making an informed 

voting decision with regard to any 

nominee or nominees put forth by the 

nominating shareholder or group using 

Rule 14a–11, in that the disclosures will 

enable shareholders to gauge the 

nominating shareholder’s or group’s 

interest in the company, longevity of 

ownership, and intent with regard to 

continued ownership in the company. 

These disclosures also will be important 

to the company in determining whether 

the nominating shareholder or group is 

eligible to rely on Rule 14a–11 to 

require the company to include a 

nominee or nominees in the company’s 

proxy materials. 

In some cases, the requirements in 

new Schedule 14N are slightly different 

than we proposed. We have clarified 

that the nominating shareholder or 

group will be required to include 

disclosure in the Schedule 14N 

concerning specified relationships 

between the nominating shareholder or 

group and the nominee or nominees. As 

discussed in Section II.B.5.d. above, we 

received comment suggesting that, in 

the absence of a limitation on 

relationships between the nominating 

shareholder or group and their nominee 

or nominees, we should adopt a 

disclosure requirement concerning 

relationships between the parties.520

Similarly, and as discussed in Section 

II.B.5.b., we have added a requirement 

that a nominating shareholder or group 

disclose whether, to the best of their 

knowledge, the nominating 

shareholder’s or group’s nominee meets 

the company’s director qualifications, if 

any, as set forth in the company’s 

governing documents.521 We added this 

requirement because we believe that 

this information will be useful to 

shareholders in making a voting 


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56716 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

522See the Instruction to Item 4 of new Schedule 

14N. 

523 In this regard, we note that providing proper 

proof of ownership has proved to be an area of 

confusion for some shareholder proponents using 

Rule 14a–8 who must obtain a written statement 

from the ‘‘record’’ holder of the proponent’s 

securities. Thus, we believe that providing a form 

of written statement that may be used to provide 

proof of ownership for purposes of Rule 14a– 

11(b)(3) will alleviate any potential confusion that 

could arise in this context. 

524See letters from CII; Florida State Board of 

Administration. 

525See letters from ACSI; AFSCME; Hermes; Pax 

World; USPE. 

526See letters from AFSCME; L. Dallas; P. 

Neuhauser; USPE. 

527We are adopting this modification in Item 5(i) 

of Schedule 14N. 

528See new Rule 14a–11(c) and Rule 14a–11(g). 

529See also Section II.B.4. and Section II.B.5. 

above, regarding nominating shareholder and 

nominee eligibility. 

530See new Rule 14a–11(b)(11) and Item 8(a) of 

new Schedule 14N. We note that in some cases, an 

authorized representative may file a Schedule 14N 

for each member of a nominating shareholder group 

and would provide the required disclosures and 

certifications. In such cases, each member of the 

nominating shareholder group represented by the 

authorized representative will be deemed to have 

provided the certifications. 

531See proposed Rule 14a–11(a)(5). 

532See Section II.B.9. below for a discussion of 

the requirements for a company receiving a 

nomination submitted pursuant to Rule 14a–11 and 

the process for seeking a staff no-action letter with 

respect to a company’s decision to exclude a 

nominee. As noted below, assertions that a 

certification or disclosure provided by a nominating 

shareholder or group is false or misleading will not 

be a basis for excluding a nominee or nominees. A 

company seeking a no-action letter from the staff 

with regard to a determination to exclude a 

nominee or nominees would need to assert that a 

requirement of the rule has not been met. 

decision by enabling them to consider 

whether shareholder nominees would 

meet a company’s director 

qualifications. Shareholders will 

provide this disclosure ‘‘to the best of 

their knowledge’’ to address the fact that 

the standards will be company 

standards and thus could be subject to 

interpretation. 

We also have added an instruction to 

Item 4 of Schedule 14N to provide a 

form of written statement that may be 

used for verifying the amount of 

securities held by the nominating 

shareholder, and that the qualifying 

amount of securities has been held 

continuously for at least three years.522

A statement will be required from a 

nominating shareholder that is not the 

registered holder of the securities and is 

not proving ownership by providing 

previously filed Schedules 13D or 13G, 

or Forms 3, 4, or 5. We believe that 

providing a form of written statement 

will make it easier for nominating 

shareholders and the persons through 

which they hold their securities to 

comply with the requirement and 

reduce complexity for shareholders and 

companies in determining whether 

satisfactory proof of ownership has been 

provided.523 In addition, as noted 

above, Item 5(d) will require disclosure 

about each nominating shareholder’s 

involvement in legal proceedings during 

the past ten years rather than the past 

five years as proposed, consistent with 

the changes recently adopted by the 

Commission for board nominees in 

general. 

In connection with our revisions to 

the rule concerning calculation of 

ownership, we also have added new 

Items 3(c) and (d) to the Schedule 14N 

to require disclosure of the voting power 

attributable to securities that have been 

loaned or sold in a short sale that is not 

closed out, or that have been borrowed 

for purposes other than a short sale, as 

specified in Instruction 3 to Rule 14a– 

11(b)(1). 

Finally, as proposed, a nominating 

shareholder or group could provide a 

statement in support of a shareholder 

nominee or nominees, which could not 

exceed 500 words if the nominating 

shareholder or group elects to have such 

a statement included in the company’s 

proxy materials. Two commenters stated 

that a limit of 500 words would be 

appropriate,524 five commenters 

recommended that a nominating 

shareholder or group be permitted to 

include a supporting statement of more 

than 500 words,525 and four 

commenters proposed a limit of either 

750 or 1000 words.526 We believe it is 

appropriate to allow a nominating 

shareholder or group to provide a 

statement in support of the shareholder 

nominee or nominees which may not 

exceed 500 words for each nominee, 

rather than 500 words for all nominees 

in total,527 if the nominating 

shareholder or group elects to have such 

a statement included in the company’s 

proxy materials. We believe that a 

limitation of 500 words per nominee is 

sufficient for a nominating shareholder 

or group to express their support for a 

nominee. In this regard, we note that 

shareholders and companies are familiar 

with the 500 word limitation, as it is the 

limit on the number of words that may 

be used to support a shareholder 

proposal submitted under Rule 14a–8. 

While we believe it is appropriate to 

limit the length of the supporting 

statement that the company is required 

to include, we note that if a nominating 

shareholder or group wishes to provide 

additional information, it is free to do so 

in supplemental materials, provided it 

complies with the requirements of Rule 

14a–2(b)(8). If a nominating shareholder 

or group submits a statement in support 

that exceeds 500 words per nominee, a 

company will be required to include the 

nominee or nominees, provided that the 

eligibility requirements are met, but the 

company may exclude the statement in 

support from its proxy materials 

provided it provides notice to the staff 

of its intent to do so.528

As noted above, we proposed to 

require certain representations to be 

provided in the Schedule 14N, either in 

the form of representations or as 

certifications. As adopted, we are 

including the proposed representations 

and certifications as direct requirements 

in Rule 14a–11.529 Consequently, we 

have simplified the requirements so that 

under the final rules a nominating 

shareholder or group will be required to 

certify, in its notice on Schedule 14N 

filed with the Commission, that it does 

not have a change in control intent or 

an intent to gain more than the 

maximum number of board seats 

provided for under Rule 14a–11 and 

that the nominating shareholder and the 

nominee satisfies the applicable 

requirements of Rule 14a–11.530 We 

have retained the certification with 

regard to no change in control intent or 

intent to gain more than the maximum 

number of board seats provided for 

under Rule 14a–11, even though this is 

also a direct requirement in Rule 14a– 

11 as adopted, because we believe it is 

important to highlight this requirement 

for nominating shareholders or groups 

signing the certification. As was 

proposed, the nominating shareholder 

or each member of the nominating 

shareholder group (or authorized 

representative) will be required to 

certify when signing the Schedule 14N 

that, ‘‘after reasonable inquiry and to the 

best of my knowledge and belief,’’ the 

information in the statement is ‘‘true, 

complete and correct.’’ Though all 

disclosure in the Schedule 14N would 

be covered by this representation, we 

have specifically included it in the 

certifications concerning compliance 

with the requirements of Rule 14a–11 as 

well. 

We have revised the rule to delete the 

provision that had the effect of allowing 

exclusion of a nominee if any required 

representation or certification was 

materially false or misleading.531 Rather 

than allowing companies to exclude 

Rule 14a–11 nominees on that basis, we 

believe companies should address any 

concerns regarding false or misleading 

disclosures through their own 

disclosures, as in traditional proxy 

contests. This change will limit the 

bases on which a company may exclude 

a nominee,532 but we emphasize that the 

nominating shareholder or group will 


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533See letters from 26 Corporate Secretaries; 

ABA; Alaska Air; American Express; Anadarko; 

Boeing; BorgWarner; BRT; Caterpillar; CIGNA; CII; 

Dewey; Florida State Board of Administration; FPL 

Group; Honeywell; JPMorgan Chase; Keating 

Muething; P. Neuhauser; PepsiCo; Pfizer; Praxair; 

Schulte Roth & Zabel; Seven Law Firms; Shearman 

& Sterling; Sidley Austin; Society of Corporate 

Securities; Thompson Hine LLP (‘‘Thompson 

Hine’’); TI; USPE; Wells Fargo; Xerox. 

534See letters from ABA; Alaska Air; BRT; 

Caterpillar; CIGNA; Dewey; Honeywell; JPMorgan 

Chase; Keating Muething; PepsiCo; Sidley Austin; 

Society of Corporate Securities; Thompson Hine; TI; 

Wells Fargo. 535See letters from Alaska Air; Boeing; 

BorgWarner; CII; Dewey; JPMorgan Chase; P. 

Neuhauser; O’Melveny & Myers; PepsiCo; Praxair; 

Seven Law Firms; Shearman & Sterling; Society of 

Corporate Secretaries; Thompson Hine; USPE. 

536See letters from 26 Corporate Secretaries; 

ABA; Alcoa; Allstate; American Express; Boeing; 

BRT; Con Edison; Davis Polk; FPL Group; JPMorgan 

Chase; McDonald’s; P. Neuhauser; Pfizer; 

Protective; RiskMetrics; Seven Law Firms; TI; 

Xerox. 

537See letters from ABA; BRT; Con Edison; TI. 

538See new Rule 14a–11(b)(10). The Schedule 

14N would, of course, have to contain all required 

disclosure as of the date of filing. 

539We note that as with Rule 14a–8, Rule 14a– 

11 requires a company to provide notice to the 

Commission if it intends to exclude a nominee. 

Also as with Rule 14a–8, if a company determines 

that it may exclude a nominee, the rule does not 

require the company to seek a no-action letter from 

the staff with regard to the determination to exclude 

the nominee. In this regard, we note that the 120- 

day deadline in Rule 14a–8 appears to provide 

companies with sufficient time in which to 

consider complex matters. For example, companies 

routinely consider whether a proposal submitted 

pursuant to Rule 14a–8 would cause the company 

to violate Federal or State law and submit requests 

for no-action letters, along with detailed legal 

opinions, with respect to those proposals. We 

believe that a company will consider nominees 

submitted pursuant to Rule 14a–11 in a similar 

manner. Thus, we believe a deadline of 120 

calendar days before the date that the company 

mailed its proxy materials the prior year is 

sufficient. 

540See letters from 26 Corporate Secretaries; 

Aetna; Allstate; Boeing; BorgWarner; L. Dallas; 

DuPont; Florida State Board of Administration; FPL 

Group; Kirkland & Ellis; Leggett; P. Neuhauser; 

PepsiCo; Pfizer; S. Quinlivan; RiskMetrics; Schulte 

Roth & Zabel; Shearman & Sterling; SIFMA; Society 

of Corporate Secretaries; Southern Company; TI; 

USPE; Wells Fargo; Xerox. 

541The commenters generally mentioned various 

30-day ranges that we requested comment on (e.g., 

no earlier than 180 days and no later than 150 days 

before the date that the company mailed its proxy 

materials for the prior year’s annual meeting; no 

earlier than 150 calendar days and no later than 120 

calendar days before the date that the company 

mailed its proxy materials for the prior year’s 

annual meeting; no earlier than 120 calendar days 

and no later than 90 calendar days prior to the 

anniversary of the company’s last annual meeting). 

One commenter suggested that the Commission 

limit the nomination process to a 45-day window 

period commencing four months after the 

company’s annual shareholder meeting. See letter 

from Aetna. Another commenter suggested that 

nominations be submitted within a 30-day period 

commencing five months after the company’s 

annual meeting. See letter from SIFMA. We believe 

that starting the period for nominations earlier than 

150 calendar days before the anniversary of the date 

the company mailed its proxy materials for the 

prior year’s annual meeting would not provide the 

current board with sufficient opportunity to 

perform its duties and demonstrate its performance, 

nor would it provide shareholders with enough 

time to evaluate the board’s performance, to make 

an informed decision with respect to a potential 

nomination. 

542 In addition, if a company is holding a special 

meeting in lieu of an annual meeting, the 

nominating shareholder must provide notice a 

reasonable time before the company mails its proxy 

materials. 

have Rule 14a–9 liability for any 

statement included in the Schedule 14N 

or which it causes to be included in a 

company’s proxy materials which, at the 

time and in light of the circumstances 

under which it is made, is false or 

misleading with respect to any material 

fact or that omits to state any material 

fact necessary to make the statements 

therein not false or misleading. In 

addition, as discussed in Section II.E. 

below, we have provided in the final 

rules that the company is not 

responsible for the information 

provided by the nominating shareholder 

or group in its Schedule 14N and 

included by the company in its proxy 

materials. 

ii. Schedule 14N Filing Requirements 

We proposed to require the notice to 

be provided to the company and filed 

with the Commission by the date 

specified in the company’s advance 

notice bylaw provision, or where no 

such provision is in place, no later than 

120 calendar days before the date the 

company mailed its proxy materials for 

the prior year’s annual meeting. A 

significant number of commenters 

suggested using a uniform deadline for 

all companies, as is the case in Rule 

14a–8.533 Many of these commenters 

believed that the proposed timing 

requirement would create difficulties for 

companies with advance notice bylaws 

providing a later deadline and, thus, 

would preclude those companies from 

engaging in the proposed staff 

process.534 Some commenters supported 

the proposed default 120 calendar day 

deadline,535 while others argued that 

the 120 calendar day deadline would 

provide too little time for companies.536

Some commenters worried that the 

proposed deadline would not give 

sufficient time for companies to resolve 

any eligibility issues presented by 

potential nominees, including 

resolution through the Rule 14a–11 noaction process, Commission appeals, 

and litigation.537

We are adopting a uniform deadline 

of 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 for all 

companies subject to the rule.538 We 

believe that a uniform deadline will 

benefit shareholders by providing them 

with one standard to comply with at all 

companies and should address concerns 

of companies that an advance notice 

bylaw deadline would provide too little 

time. We also believe that a deadline of 

120 calendar days will provide adequate 

time for companies to take the steps 

necessary to include or, where 

appropriate, to exclude a shareholder 

nominee for director that is submitted 

pursuant to Rule 14a–11.539

In the Proposing Release, we solicited 

comment as to whether a window 

period should be provided for the 

submission of the notice on Schedule 

14N and the appropriate time period for 

the window. A number of commenters 

recommended a window period during 

which a nominating shareholder or 

group could submit its Rule 14a–11 

nomination.540 These commenters 

believed that including such a 

requirement would prevent a race to file 

among shareholders that could 

discourage dialogue with the board and 

force the board to address nominations 

throughout the year.541 We agree and 

are adopting a window period for the 

submission of the notice to the 

company. Limiting the time period 

during which Rule 14a–11 nominations 

could be made should help reduce 

disruptions that might occur when a 

company receives shareholder 

nominations for director submitted 

pursuant to Rule 14a–11. In this regard, 

as noted above, commenters generally 

supported a 30-day window period. We 

believe that a window of 30 days is 

sufficient for the submission of the 

notice on Schedule 14N because it 

provides shareholders with an 

opportunity to submit a nomination, as 

well as the opportunity to consider any 

nominations that have been submitted 

and whether the shareholder would like 

to submit a nomination, either 

individually or as a group. Therefore, 

we are adopting a requirement that the 

notice on Schedule 14N be transmitted 

to the company and filed with the 

Commission no earlier than 150 

calendar days, 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. As proposed, we are 

adopting a requirement that if the 

company did not hold an annual 

meeting during the prior year, or if the 

date of the meeting has changed by 

more than 30 calendar days from the 

prior year, then the nominating 

shareholder must provide notice a 

reasonable time before the company 

mails its proxy materials.542 In that case, 


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56718 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

543See new Rule 14a–11(b)(10). See also 

proposed Instruction 2 to Rule 14a–11(a) and Rule 

14a–18. This would be similar to the requirement 

currently included in Rule 14a–5(f), which specifies 

that, where the date of the next annual meeting is 

advanced or delayed by more than 30 calendar days 

from the date of the annual meeting to which the 

proxy statement relates, the company must disclose 

the new meeting date in the company’s earliest 

possible quarterly report on Form 10–Q. Although 

registered investment companies generally are not 

required to file Form 8–K, we are requiring them 

to file a Form 8–K disclosing the date by which the 

shareholder notice must be provided if the 

company did not hold an annual meeting during 

the prior year, or if the date of the meeting has 

changed by more than 30 calendar days from the 

prior year. For a further discussion of the Form 8– 

K filing requirement for registered investment 

companies, see Section II.D.1. 

544Rule 14n–3 specifies that the Schedule 14N 

must be transmitted to the company at its principal 

executive office. 

545See new Rule 14n–1. In this regard, we are 

adopting an amendment to Rule 13(a)(4) of 

Regulation S–T, as proposed, to provide that a 

Schedule 14N will be deemed to be filed on the 

same business day if it is filed on or before 10 p.m. 

Eastern Standard Time or Eastern Daylight Saving 

Time, whichever is currently in effect. This will 

allow nominating shareholders additional time to 

file the notice on Schedule 14N and transmit the 

notice to the company. 

546To file the Schedule 14N on EDGAR, a 

nominating shareholder or group and any nominee 

that does not already have EDGAR filing codes, and 

to which the Commission has not previously 

assigned a user identification number, which we 

call a ‘‘Central Index Key (CIK)’’ code, will need to 

obtain the codes by filing electronically a Form ID 

(17 CFR 293.63; 249.446; and 274.402) at https:// 

www.filermanagement.edgarfiling.sec.gov. The 

applicant also will be required to submit a 

notarized authenticating document. If the 

authenticating document is prepared before the 

applicant makes the Form ID filing, the 

authenticating document may be uploaded as a 

Portable Document Format (PDF) attachment to the 

electronic filing. An applicant also may submit the 

authenticating document by faxing it to the 

Commission within two business days before or 

after electronically filing the Form ID. The 

authenticating document would need to be 

manually signed by the applicant over the 

applicant’s typed signature, include the information 

contained in the Form ID, and confirm the 

authenticity of the Form ID. If the authenticating 

document is filed after electronically filing the 

Form ID, it would need to include the accession 

number assigned to the electronically filed Form ID 

as a result of its filing. See 17 CFR 232.10(b)(2). 

547The Schedule 14N also would be used for 

disclosure concerning the inclusion of shareholder 

nominees in company proxy materials when made 

pursuant to an applicable state or foreign law 

provision or a company’s governing documents. See 

new Rule 14a–18 and proposed Rule 14a–19, as 

discussed in Section II.C.5. below. 

548See new Rule 14n–2(a). 

549We note that if this occurs, the nominee would 

no longer be a Rule 14a–11 nominee. See Section 

II.B.6.c. for a discussion of how this would affect 

the calculation of the maximum number of Rule 

14a–11 nominees. 

550See new Rule 14n–2(b). 

551See Item 4(b) of new Schedule 14N. 

552While the proposed Schedule 14N included 

the instruction regarding the signing of the 

Schedule by an authorized representative, we did 

not discuss this aspect of the proposed rule text in 

the narrative portion of the release. 

553For further discussion, see Section II.E. 

the company will be required to 

disclose the date by which the 

shareholder must submit the required 

notice in a Form 8–K filed pursuant to 

new Item 5.08 within four business days 

after the company determines the 

anticipated meeting date.543

As noted, the notice on Schedule 14N 

must be transmitted to the company 544

and filed with the Commission on the 

same day.545 Consistent with the 

Proposal, the Schedule 14N must be 

filed with the Commission on EDGAR. 

To file the Schedule 14N on EDGAR, a 

nominating shareholder or group and 

any nominee will need to have or obtain 

EDGAR filing codes and user 

identification numbers, which may be 

obtained by filing electronically a Form 

ID in advance of filing the Schedule 

14N.546 We encourage nominating 

shareholders and groups to take the 

steps necessary to obtain an EDGAR 

filing code and CIK code well in 

advance of the deadline for filing a 

notice on Schedule 14N. 

The Schedule 14N will: 

• Include a cover page in the form set 

forth in Schedule 14N with the 

appropriate box on the cover page 

marked to specify that the filing relates 

to a Rule 14a–11 nomination; 547

• Be made under the subject 

company’s Exchange Act file number (or 

in the case of a registered investment 

company, under the subject company’s 

Investment Company Act file number); 

and 

• Be made on the date the notice is 

first transmitted to the company. 

We are adopting, as proposed, a 

requirement that the Schedule 14N be 

amended promptly for any material 

change to the disclosure and 

certifications provided in the originallyfiled Schedule 14N.548 In this regard, we 

would view withdrawal of a nominating 

shareholder or group (or any member of 

the group), or of a director nominee, and 

the reasons for any such withdrawal, as 

a material change. For example, such a 

withdrawal could be material because it 

may result in a group no longer meeting 

the required ownership threshold under 

Rule 14a–11. We also would view as 

material entering into an agreement 

between the company and the 

nominating shareholder or group for the 

company to include a nominee in the 

company’s proxy materials as a 

company nominee.549 The nominating 

shareholder or group also will be 

required, as proposed, to file a final 

amendment to the Schedule 14N 

disclosing within 10 days of the final 

results of the election being announced 

by the company the nominating 

shareholder’s or group’s intention with 

regard to continued ownership of its 

shares.550 As discussed above, the 

nominating shareholder or group would 

be required to disclose its intent with 

regard to continued ownership of the 

company’s securities in its original 

notice on Schedule 14N.551 Filing an 

amendment to the Schedule 14N within 

10 days after the announcement of the 

final results of the election will provide 

shareholders with information as to 

whether the outcome of the election 

may have altered the intent of the 

nominating shareholder or group and 

what further plans the nominating 

shareholder or group may have with 

regard to the company. 

As was proposed,552 the Schedule 

14N may be signed either by each 

person on whose behalf the statement is 

filed or his or her authorized 

representative. We assume that in many 

cases group members will choose to 

appoint an authorized representative 

from among the group. If the statement 

is signed on behalf of a person by his 

authorized representative other than an 

executive officer or general partner of 

the filing person, evidence of the 

representative’s authority to sign on 

behalf of such person must be filed with 

the statement, provided, however, that a 

power of attorney for this purpose 

which is already on file with the 

Commission may be incorporated by 

reference. 

The Schedule 14N, as filed with the 

Commission, as well as any 

amendments to the Schedule 14N, will 

be subject to the liability provisions of 

Exchange Act Rule 14a–9 pursuant to 

new paragraph (c) to the rule.553

9. Requirements for a Company That 

Receives a Notice From a Nominating 

Shareholder or Group 

a. Procedure if Company Plans To 

Include Rule 14a–11 Nominee 

In the Proposing Release, we 

proposed a process for a company to 

follow once it received a nomination 

submitted pursuant to Rule 14a–11. 

Upon receipt of a shareholder’s or 

group’s notice of its intent to require the 

company to include in its proxy 

materials a shareholder nominee or 

nominees pursuant to Rule 14a–11, the 

company would determine whether it 

would include the nominee or whether 

it believed it would be desirable to, and 

that the company had a basis upon 

which it could rely to, exclude a 

nominee. If a company determined it 

would include the nominee, the 

company would notify in writing the 

nominating shareholder or group no 

later than 30 calendar days before the 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56719 

554See proposed Rule 14a–11(f)(2). 

555See new Rule 14a–11(g)(1) and Instruction 1 

to Rule 14a–11(g). 

556This 30-day deadline for this notice should 

provide a nominating shareholder or group with 

sufficient time to engage in soliciting activities with 

respect to its nominee or nominees, if it has not 

done so already, or pursue any legal remedies that 

may be available if the company determines it will 

exclude the nominating shareholder’s or group’s 

nominee or nominees. 

557The process was modeled after the staff noaction process used in connection with shareholder 

proposals under Rule 14a–8. 

558See proposed Rule 14a–11(a). More 

specifically, under the proposal a company would 

not be required to include a nominee where (1) 

applicable State law or the company’s governing 

documents prohibit the company’s shareholders 

from nominating a candidate for director; (2) the 

nominee’s candidacy, or if elected, board 

membership, would violate controlling State law, 

Federal law or rules of a national securities 

exchange or national securities association; (3) the 

nominating shareholder or group does not meet the 

rule’s eligibility requirements; (4) the nominating 

shareholder’s or group’s notice is deficient; (5) any 

representation in the nominating shareholder’s or 

group’s notice is false in any material respect; or (6) 

the nominee is not required to be included in the 

company’s proxy materials due to the proposed 

limitation on the number of nominees required to 

be included. 

559See proposed Rule 14a–11(f). 

560See proposed Rule 14a–11(f)(7)–(14). 

561See proposed Rule 14a–11(f)(3)–(6). 

562We considered the timing requirements and 

deadlines in Rule 14a–8 when crafting the proposed 

requirements and deadlines for Rule 14a–11; 

however, due to the potential complexity of the 

nomination process, we determined in the proposal 

that it would be appropriate to provide additional 

time for the process. 

563See proposed Rule 14a–11(f)(3). 

564See proposed Rule 14a–11(f)(4). 

565See proposed Rule 14a–11(f)(5). 

company files its definitive proxy 

statement and form of proxy with the 

Commission that it will include the 

nominee or nominees.554 The company 

would be required to provide this notice 

in a manner that provides evidence of 

timely receipt by the nominating 

shareholder or group. 

We are adopting this requirement as 

proposed, with a clarification regarding 

the timing of the company’s 

transmission of the notice and receipt 

by the nominating shareholder or 

group.555 As adopted, if a company will 

include a shareholder nominee, a 

company will be required to notify the 

nominating shareholder or group (or 

their authorized representative). Rather 

than including the proposed 

requirement that the company must 

provide the notice in a manner that 

evidences timely receipt by the 

shareholder, we are adopting a 

requirement that the notification must 

be postmarked or transmitted 

electronically no later than 30 calendar 

days before it files its definitive proxy 

materials with the Commission.556 We 

believe this will provide for ease of use 

and administration because it should be 

clear when the notice was transmitted. 

We also note that it is consistent with 

the transmission standard we are 

adopting for submitting a notice of 

intent with respect to a nomination 

pursuant to Rule 14a–11(b)(10). We note 

that while we are not adopting a 

requirement regarding the evidence of 

timely receipt by the nominating 

shareholder or group, we believe it is in 

a company’s interest to send the notice 

to the nominating shareholder or group 

in a manner that will allow the 

company to demonstrate that the 

nominating shareholder or group 

received the notice, as doing so may 

avoid potential disputes. 

b. Procedure if Company Plans To 

Exclude Rule 14a–11 Nominee 

The Proposal also included a process 

for a company to follow if it determined 

that it could exclude a nominee 

submitted pursuant to Rule 14a–11.557

As proposed, a company could 

determine that it is not required under 

Rule 14a–11 to include a nominee from 

a nominating shareholder or group in its 

proxy materials if: 

• Proposed Rule 14a–11 is not 

applicable to the company; 

• The nominating shareholder or 

group has not complied with the 

requirements of Rule 14a–11; 

• The nominee does not meet the 

requirements of Rule 14a–11; 

• Any representation required to be 

included in the notice to the company 

is false or misleading in any material 

respect; or 

• The company has received more 

nominees than it is required to include 

by proposed Rule 14a–11 and the 

nominating shareholder or group is not 

entitled to have its nominee included 

under the criteria proposed in Rule 14a– 

11(d)(3).558

Under the Proposal, the nominating 

shareholder or group would need to be 

notified of the company’s determination 

not to include the shareholder nominee 

in sufficient time to consider the 

validity of any determination to exclude 

the nominee and respond to such a 

notice.559 In this regard, we noted the 

time-sensitive nature of Rule 14a–11 

and the interpretive issues that may 

arise in applying the new rule. After the 

company provided such a notice to a 

nominating shareholder or group and 

afforded the nominating shareholder or 

group the opportunity to respond, the 

company would be required to provide 

a notice to the Commission regarding its 

intent not to include a shareholder 

nominee in its proxy materials. The 

company could seek a no-action letter 

from the staff with respect to its 

decision to exclude the nominee.560

The proposed process would have 

afforded a nominating shareholder or 

group the opportunity to remedy certain 

eligibility or procedural deficiencies in 

a nomination.561 The various time 

deadlines set out in the proposed 

process were determined by considering 

the appropriate balance between 

companies’ needs in meeting printing 

and filing deadlines for their 

shareholder meetings with shareholders’ 

need for adequate time to satisfy the 

requirements of the rule.562 Specifically, 

as proposed, a company determining 

that the nominating shareholder or 

group or nominee or nominees has not 

satisfied the eligibility requirements 

could exclude the shareholder nominee 

or nominees, subject to the following 

requirements: 

• The company would notify in 

writing the nominating shareholder or 

group of its determination. The notice 

would be required to be postmarked or 

transmitted electronically no later than 

14 calendar days after the company 

receives the shareholder notice of intent 

to nominate. The company would have 

to provide the notice in a manner that 

provides evidence of receipt by the 

nominating shareholder or group; 563

• The company’s notice to the 

nominating shareholder or group that it 

determined that the company may 

exclude a shareholder nominee or 

nominees would be required to include 

an explanation of the company’s basis 

for determining that it may exclude the 

nominee or nominees; 564

• The nominating shareholder or 

group would have 14 calendar days after 

receipt of the written notice of 

deficiency to respond to the notice and 

correct any eligibility or procedural 

deficiencies identified in the notice. The 

nominating shareholder or group would 

have to provide the response in a 

manner that provides evidence of its 

receipt by the company; 565

• If, upon review of the nominating 

shareholder’s or group’s response, the 

company determines that the company 

still may exclude the shareholder 

nominee or nominees, after providing 

the requisite notice of and time for the 

nominating shareholder or group to 

remedy any eligibility or procedural 

deficiencies in the nomination, the 

company would be required to provide 

notice of the basis for its determination 

to the Commission no later than 80 

calendar days before it files its 

definitive proxy statement and form of 

proxy with the Commission. The 

Commission staff could permit the 

company to make its submission later 


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56720 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

566See proposed Rule 14a–11(f)(7). 

567See proposed Rule 14a–11(f)(8). 

568See proposed Rule 14a–11(f)(10). 

569See proposed Rule 14a–11(f)(11). 

570See proposed Rule 14a–11(f)(12). 

571See proposed Rule 14a–11(f)(13). 

572See letters from CFA Institute; CII; P. 

Neuhauser; Schulte Roth & Zabel; Universities 

Superannuation. 

573See letters from ABA; Anadarko; BRT; Cleary; 

Davis Polk; Delaware Bar; ExxonMobil; E.J. 

Kullman; Protective; S. Quinlivan; Seven Law 

Firms; Weyerhaeuser. 

574See letters from CFA Institute; CII. 

575See letters from 26 Corporate Secretaries; 

Boeing; Con Edison; Honeywell; Kirkland & Ellis; 

Pfizer; Protective; UnitedHealth; USPE; Wells 

Fargo; Whirlpool. 

576See letters from Boeing; Honeywell. 

577See letters from CFA Institute; CII. 

578See letters from Protective; USPE. 

579See letter from BRT. 

580 Id. 

581See letters from ABA; BRT. 

582See letter from ABA. 

583See letters from ABA; Delaware Bar. 

584 In this regard, we note that the staff process 

for aiding in the resolution of disputes related to 

nominations made pursuant to Rule 14a–11 is nonexclusive. As discussed throughout this release, a 

company can seek the staff’s view with regard to its 

determination to exclude a nominee from its proxy 

materials, but it is not required to do so. A company 

could engage in negotiations with a nominating 

shareholder or group and ultimately reach a 

resolution outside of the staff process, or the parties 

could avail themselves of other alternatives, such as 

litigation. 

585Other than the modifications to the standards 

relating to transmission and receipt of notices and 

responses, which are described below, we are 

adopting the process as proposed. 

586We encourage companies and shareholders to 

attempt to resolve disputes independently. To the 

extent that a company and nominating shareholder 

or group are able to resolve an issue at any point 

during the staff process, the company should 

withdraw its request for a no-action letter from the 

staff. 

587The final rule does not include the proposed 

30-calendar day notice requirement when a 

company determines to exclude a nominee. We 

believe this requirement is rendered unnecessary by 

the requirement in paragraph (g)(3) of Rule 14a–11 

that the company provide notice to the Commission 

staff and nominating shareholder or group no later 

than 80 calendar days before the company files its 

definitive proxy statement and form of proxy. In 

addition, if a company seeks the staff’s informal 

view with respect to the company’s determination 

to exclude a nominee, promptly following receipt 

than 80 calendar days before the 

company files its definitive proxy 

statement and form of proxy if the 

company demonstrates good cause for 

missing the deadline; 566

• The company’s notice to the 

Commission would be required to 

include: 

• Identification of the nominating 

shareholder or each member of the 

nominating shareholder group, as 

applicable; 

• The name of the nominee or 

nominees; 

• An explanation of the company’s 

basis for determining that it may 

exclude the nominee or nominees; and 

• A supporting opinion of counsel 

when the company’s basis for excluding 

a nominee or nominees relies on a 

matter of State law; 567

• The company would be required to 

file its notice of intent to exclude with 

the Commission and simultaneously 

provide a copy to the nominating 

shareholder or each member of the 

nominating shareholder or group; 568

• The nominating shareholder or 

group could submit a response to the 

company’s notice to the Commission. 

The response would be required to be 

postmarked or transmitted 

electronically no later than 14 calendar 

days after the nominating shareholder’s 

or group’s receipt of the company’s 

notice to the Commission. The 

nominating shareholder or group would 

be required to provide a copy of its 

response to the Commission 

simultaneously to the company; 569

• If requested by the company, the 

Commission staff would, at its 

discretion, provide an informal 

statement of its views (commonly 

known as a no-action letter) to the 

company and the nominating 

shareholder or group; 570

• The company would provide the 

nominating shareholder or group with 

notice, no later than 30 calendar days 

before it files its definitive proxy 

statement and form of proxy with the 

Commission, of whether it will include 

or exclude the shareholder nominee or 

nominees.571

Some commenters supported the 

proposed staff review process for 

handling disputes regarding a 

company’s determination to exclude a 

shareholder nominee.572 Other 

commenters expressed concerns about 

the staff’s expertise and ability to handle 

disputes in a timely manner.573 With 

respect to the timing requirements in 

the proposed process, two commenters 

supported the proposed 14-day time 

period for the company to respond to a 

nominating shareholder’s or group’s 

notice.574 A number of commenters 

criticized the proposed 14-day time 

period as too short or requested a longer 

time period for the company to 

respond.575 Commenters explained that 

boards would need time to consider 

various issues, such as if the election of 

a shareholder nominee would trigger 

issues under the laws and regulations 

relevant to the company’s business (e.g., 

antitrust laws, government 

procurement, security clearances and 

export control) as well as under listing 

standards and State law.576 Two 

commenters supported the proposed 14- 

day time period for a nominating 

shareholder or group to respond to a 

company’s notice of deficiency.577 Two 

commenters worried the 14-day time 

period would give too little time for a 

response and recommended instead a 

21-day time period.578 One commenter 

warned that the Commission is 

underestimating the number of boards 

that would challenge shareholder 

nominees and the level of intensity of 

these challenges.579 This commenter 

suggested that such challenges and 

possible litigation would demand 

significant time and resources from the 

Commission’s staff.580 Commenters also 

argued that challenges to Rule 14a–11 

nominations likely would raise highly 

complex issues that fall outside the 

scope of the staff’s expertise (e.g., 

whether a candidacy would violate 

State law).581 One commenter pointed 

to difficulties arising from the ‘‘dueling’’ 

legal opinions situation in the Rule 14a– 

8 no-action process.582 A couple 

commenters believed that courts, rather 

than the staff, would be better able to 

resolve disputes regarding shareholder 

director nominations.583

After considering the comments, we 

believe that it is in shareholders’ and 

companies’ interest to have a process 

available for seeking to resolve certain 

disputes regarding nominations 

submitted pursuant to Rule 14a–11.584

Therefore, the rules we are adopting set 

out the process by which a company 

would determine whether to include a 

shareholder nominee and notify the 

nominating shareholder or group (or 

their authorized representative) of its 

determination.585 The rules also include 

a process by which a company would 

notify a nominating shareholder or 

group (or their authorized 

representative) of a deficiency in its 

notice on Schedule 14N, the nominating 

shareholder or group would have the 

opportunity to respond, and the 

company would send a notice to the 

Commission if the company intends to 

exclude a shareholder nominee from its 

proxy materials. Consistent with the 

Proposal, a company making the 

determination to exclude a shareholder 

nominee will be required to submit a 

notice to the Commission regarding its 

determination, and it may also choose to 

avail itself of the process to seek a noaction letter from the staff with respect 

to its decision.586 While we understand 

the concerns raised by commenters 

regarding the rule’s timing 

requirements, we believe the 

requirements are appropriate in light of 

the need to facilitate the process 

between a company and its shareholders 

in time for an annual meeting.587 In 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56721 

of the staff’s response a company would be required 

to provide a notice to the nominating shareholder 

or group stating whether it will include or exclude 

the nominee. 

588For example, suppose a company decided it 

did not have a reason to exclude a nominee 

submitted by a nominating shareholder during the 

first week of the window period. If we were to 

require that a company must respond to a 

nomination no later than 14 days after it was 

transmitted, the company would be required to 

respond to the nominating shareholder or group 

before the window period closed, and the company 

would inform the nominating shareholder that it 

intends to include the nominee. If, subsequent to 

the company sending a notice to the nominating 

shareholder of its intent to include the nominee, a 

nominating shareholder with a higher qualifying 

ownership percentage submits a nomination for the 

maximum number of nominees the company would 

be required to include under the rule, the company 

would be required to include those nominees 

assuming that the company determined that it did 

not have a reason to exclude the nominees. In that 

situation, confusion could result because, under the 

rule, the company would no longer be required to 

include the nominee submitted by the nominating 

shareholder during the first week of the window 

period, even though the company had informed the 

nominating shareholder it would include its 

nominee. 

589Specifically, the final rule provides that a 

company could exclude a shareholder nominee 

because the nominating shareholder or group, or the 

nominee, fails to satisfy the applicable eligibility 

requirements in Rule 14a–11(b). In this regard, we 

note that the nominating shareholder or each 

member of the nominating shareholder group (or 

authorized representative) would be required to 

certify that, after reasonable inquiry and to the best 

of its knowledge and belief, the nominating 

shareholder or member of the nominating 

shareholder or group and the nominee satisfied the 

applicable requirements of Rule 14a–11(b). 

590See new Rule 14a–11(d). 

591See new Rule 14a–11(c). 

592 In this regard, we note that this is consistent 

with Rule 14a–8, which specifies that a company 

may exclude a proposal if the proposal, including 

any accompanying supporting statement, exceeds 

500 words. 

593See new Rule 14a–9(c) and Rule 14a–11(f). 

addition, the staff is committed to 

timely addressing these matters. 

We are changing and clarifying the 

requirements related to the timing of 

sending and receiving notifications. As 

proposed, if a company determined that 

it could exclude a shareholder nominee, 

it would be required to notify the 

nominating shareholder or group and 

the notification would be required to be 

postmarked or transmitted 

electronically no later than 14 calendar 

days after the company received the 

notice on Schedule 14N. The proposed 

rule stated that the company would be 

responsible for providing the notice in 

a manner that evidences timely receipt 

by the nominating shareholder or group. 

The proposed rule also included similar 

requirements for a response to the 

notice by the nominating shareholder or 

group. As adopted, the rules will keep 

the deadlines as they were proposed but 

will use a transmission standard in 

determining the deadlines, similar to 

the standard discussed above for new 

Rule 14a–11(g)(1). We believe using 

such a uniform standard for all 

notification aspects of the rule will 

provide clarity and ease of use. Under 

the final rule, a company’s notification 

must be postmarked or transmitted 

electronically no later than 14 calendar 

days after the close of the window 

period for submission of nominations 

pursuant to Rule 14a–11. We believe 

this change from the Proposal is 

appropriate because it will allow 

shareholders to submit their 

nominations, and companies to receive 

all the nominations, before requiring a 

company to send a notice to the 

nominating shareholder or group (or 

their authorized representative) as to 

whether it will include or exclude a 

nominee. Thus, a company will be able 

to make an informed decision with 

respect to individual nominations 

because it will be able to evaluate and 

respond to all the nominations it has 

received at one time, rather than 

evaluating and responding to the 

nominations as they are received. This 

approach should help reduce the 

possibility of any confusion that could 

result from requiring a company to 

respond to each nomination no later 

than 14 days after it is transmitted.588 A 

nominating shareholder’s or group’s 

response to the company’s notice must 

be postmarked or transmitted 

electronically no later than 14 calendar 

days after receipt of the company’s 

notification. We note that a timely 

transmission standard applies in both 

instances; however, we urge companies 

to send the notification, and nominating 

shareholders or groups to send a 

response, in a manner that will allow 

them to demonstrate when the 

communication is received, as doing so 

may avoid potential disputes. 

Under new Rule 14a–11(g), a 

company may exclude a shareholder 

nominee because: 

• Rule 14a–11 is not applicable to the 

company; 

• The nominating shareholder or 

group or nominee failed to satisfy the 

eligibility requirements in Rule 14a– 

11(b);) 589 or 

• Including the nominee or nominees 

would result in the company exceeding 

the maximum number of nominees it is 

required to include in its proxy 

statement and form of proxy.590

In addition, a company would be 

permitted to exclude a statement in 

support of a nominee or nominees if the 

statement in support exceeds 500 words 

for each nominee.591 In such cases, a 

company would be required to include 

the nominee or nominees, provided the 

eligibility requirements were satisfied, 

but would be permitted to exclude the 

statement in support. Although we did 

not propose to allow for exclusion of a 

supporting statement that exceeds the 

length specified in the rule, we believe 

that it is appropriate to provide the 

ability to do so in the final rule.592

We note that, in a change from the 

Proposal, under the final rule a 

company may not exclude a nominee or 

a statement in support on the basis that, 

in the company’s view, the Schedule 

14N (which will include the statement 

in support) contains materially false or 

misleading statements. Nominating 

shareholders and groups will have 

liability for any materially false or 

misleading information or for making a 

false or misleading certification in the 

notice filed on Schedule 14N, and 

companies will not be responsible for 

this information.593 We believe that 

such disputes concerning whether 

information is false or misleading 

should be handled through disclosure, 

and if necessary, through private 

litigation, rather than through exclusion 

of the nominee under our rule. A 

company and the nominating 

shareholder or group will be in 

possession of the facts and 

circumstances regarding any disputes 

that arise about the truthfulness or 

accuracy of information or 

representations made by a nominating 

shareholder or group; thus, they will be 

in a better position than the staff to 

resolve those disputes. In addition, we 

note that in traditional proxy contests, 

companies and insurgents regularly use 

disclosure to communicate with a 

company’s shareholders about an 

insurgent’s nominee(s) and provide 

related information, including 

disclosure disputing the information 

provided by the other party. We believe 

that it is appropriate for companies and 

nominating shareholders engaged in the 

Rule 14a–11 nomination process to 

work together to resolve these types of 

issues. While we encourage private 

parties to resolve disputes under this 

provision, the Commission could, of 

course, bring enforcement actions in 

appropriate instances. All filings 

associated with a nomination included 

in the company’s proxy materials 

pursuant to Rule 14a–11, including the 

Schedule 14N, the company’s proxy 

statement and any additional soliciting 

materials provided by the company or 

the nominating shareholder, will be 

subject to the staff’s proxy contest 

review procedures and, as noted, will be 

subject to the Rule 14a–9 prohibition 


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594See letters from CII; Universities 

Superannuation. 

595 In the Proposal, we noted that the exclusion 

of a nominee or nominees where the exclusion was 

not permissible would result in a violation of the 

rule. We are adopting that provision as proposed. 

596Refer to Section II.B.8. for a discussion of 

comments received on the proposed disclosure and 

changes made in response to these comments. We 

did not receive comment specifically on new Items 

7(e) or 22(b)(18) of Schedule 14A. 

597See new Rule 14a–11(f). 

against materially false or misleading 

statements. 

In the Proposing Release, we noted 

that: 

• Unless otherwise provided in Rule 

14a–11 (e.g., the nominating 

shareholder’s or group’s obligation to 

demonstrate that it responded to a 

company’s notice of deficiency, where 

applicable, within 14 calendar days 

after receipt of the notice of deficiency), 

the burden would be on the company to 

demonstrate that it may exclude a 

nominee or nominees; and 

• All materials submitted to the 

Commission in relation to proposed 

Rule 14a–11(g) would be publicly 

available upon submission. 

We are adopting these aspects of the 

rules as proposed. We did not receive 

significant comment on these aspects of 

the proposed rules, although two 

commenters requested that companies 

bear the burden of proof when objecting 

to a nominee.594 The rule, as adopted 

and proposed, specifies that the burden 

is on the company to demonstrate that 

it may exclude a nominee or statement 

of support, unless otherwise 

specified.595 In addition, as we 

discussed in the Proposing Release, the 

staff’s responses to the submissions 

made pursuant to new Rule 14a–11(g) 

would reflect only informal views. The 

staff determinations reached in these 

responses would not, and cannot, 

adjudicate the merits of a company’s 

position with respect to exclusion of a 

shareholder nominee under Rule 14a– 

11. Accordingly, a discretionary staff 

determination would not preclude an 

interested person from pursuing a 

judicial determination regarding the 

application of Rule 14a–11. 

As noted above, if a nominee 

withdraws or is disqualified, a company 

will be required to include an otherwise 

eligible nominee submitted by the 

shareholder or group with the next 

highest qualifying ownership 

percentage, if any. The company would 

be required to continue replacing 

withdrawn or disqualified nominees 

until it included the maximum number 

of nominees it is required to include in 

its proxy materials or the list of 

shareholder nominees is exhausted. As 

described above, a company will be 

required to give notice that it plans to 

exclude a nominee for any nominee that 

it intends to exclude, and the notice 

must include the reasons for the 

exclusion. If a company anticipates that 

it would seek a no-action letter from the 

staff with respect to its decision to 

exclude any Rule 14a–11 nominee or 

nominees, it should seek a no-action 

letter with regard to all nominees that it 

wishes to exclude at the outset and 

should assert all available bases for 

exclusion at that time. For example, if 

a company receives more nominees than 

it is required to include, its reasons for 

exclusion would note that basis. In 

addition, if the company believes it has 

other bases to exclude the nominee, it 

should note those other bases in its 

notice and include the other bases in its 

request for a no-action letter. 

c. Timing of Process 

The process generally would operate 

as follows: 

Due date Action required 

No earlier than 150 calendar days, 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.

Nominating shareholder or group must provide notice on Schedule 14N 

to the company and file the Schedule 14N with the Commission. 

No later than 14 calendar days after the close of the window period for 

submission of nominations.

Company must notify the nominating shareholder or group (or its authorized representative) of any determination not to include the nominee or nominees. 

No later than 14 calendar days after the nominating shareholder’s or 

group’s receipt of the company’s deficiency notice.

Nominating shareholder or group must respond to the company’s deficiency notice and, where applicable, cure any defects in the nomination. 

No later than 80 calendar days before the company files its definitive 

proxy statement and form of proxy with the Commission.

Company must provide notice of its intent to exclude the nominating 

shareholder’s or group’s nominee or nominees and the basis for its 

determination to the Commission and, if desired, seek a no-action 

letter from the staff with regard to its determination. 

No later than 14 calendar days after the nominating shareholder’s or 

group’s receipt of the company’s notice to the Commission.

Nominating shareholder or group may submit a response to the company’s notice to the Commission staff. 

As soon as practicable ............................................................................. If requested by the company, Commission staff would, at its discretion, 

provide an informal statement of its views to the company and the 

nominating shareholder or group. 

Promptly following receipt of the staff’s informal statement of its views Company must provide notice to the nominating shareholder or group 

stating whether it will include or exclude the nominee. 

d. Information Required in Company 

Proxy Materials 

i. Proxy Statement 

As discussed in Section II.B.8. above, 

we proposed and are adopting a 

requirement that a company that is 

including a shareholder director 

nominee in its proxy statement and 

form of proxy pursuant to Rule 14a–11 

include certain disclosure about the 

nominating shareholder or group and 

the nominee in the company proxy 

statement. This disclosure will be 

provided by the nominating shareholder 

or group in its notice on Schedule 14N 

in response to Item 5 of that Schedule 

and will be included in the company’s 

proxy statement pursuant to Item 7(e) 

(and, in the case of investment 

companies, Item 22(b)(18)) of Schedule 

14A.596 As we proposed, the company 

will not be responsible for the 

disclosure; rather, the nominating 

shareholder or group will have liability 

for any materially false or misleading 

statements.597

As discussed in Section II.B.8., the 

disclosures to be included in the 

company’s proxy statement include: 

• A statement that the nominee 

consents to be named in the company’s 

proxy statement and form of proxy and, 

if elected, to serve on the company’s 

board of directors; 

• Disclosure about the nominee as 

would be provided in response to the 

disclosure requirements of Items 4(b), 


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598We have clarified in new Instruction 3 to Rule 

14a–12 that inclusion of a shareholder director 

nominee pursuant to Rule 14a–11, an applicable 

state or foreign law provision, or a company’s 

governing documents as they relate to the inclusion 

of shareholder director nominees in the company’s 

proxy materials, or solicitations that are made in 

connection with that nomination, constitute 

solicitations subject to Rule 14a–12(c), except for 

purposes of the requirement for the company to file 

their proxy statement in preliminary form pursuant 

to Rule 14a–6(a). 

599 In the Proxy Disclosure Enhancements 

Adopting Release, we amended our rules to require 

disclosure about directors that will provide 

investors with more meaningful disclosure to 

enable them to determine whether and why a 

director or nominee is an appropriate choice for a 

particular company. The information is required in 

the company’s proxy statement for each director 

nominee and each director who will continue to 

serve after the shareholder meeting. Under revised 

Item 401 of Regulation S–K, a nominating 

shareholder or group will be required to discuss the 

particular experience, qualifications, attributes or 

skills of the nominee or nominees that led the 

nominating shareholder or group to conclude that 

the person should be put forward as a candidate for 

director on the company’s board of directors. 

5(b), 7(a), (b) and (c) and, for investment 

companies, Item 22(b) of Schedule 14A, 

as applicable; 

• Disclosure about the nominating 

shareholder or each member of a 

nominating shareholder group as would 

be required of a participant in response 

to the disclosure requirements of Items 

4(b) and 5(b) of Schedule 14A, as 

applicable; 

• Disclosure about whether the 

nominating shareholder or any member 

of a nominating shareholder group has 

been involved in any legal proceeding 

during the past ten years, as specified in 

Item 401(f) of Regulation S–K; 

• Disclosure about whether, to the 

best of the nominating shareholder’s or 

group’s knowledge, the nominee meets 

the director qualifications set forth in 

the company’s governing documents, if 

any; 

• A statement that, to the best of the 

nominating shareholder’s or group’s 

knowledge, in the case of a registrant 

other than an investment company, the 

nominee meets the objective criteria for 

‘‘independence’’ of the national 

securities exchange or national 

securities association rules applicable to 

the company, if any, or, in the case of 

a registrant that is an investment 

company, the nominee is not an 

‘‘interested person’’ of the registrant as 

defined in Section 2(a)(19) of the 

Investment Company Act of 1940; 

• The following information 

regarding the nature and extent of the 

relationships between the nominating 

shareholder or group, the nominee, and/ 

or the company or any affiliate of the 

company: 

• Any direct or indirect material 

interest in any contract or agreement 

between the nominating shareholder or 

any member of the nominating 

shareholder group, the nominee, and/or 

the company or any affiliate of the 

company (including any employment 

agreement, collective bargaining 

agreement, or consulting agreement); 

• Any material pending or threatened 

litigation in which the nominating 

shareholder or any member of the 

nominating shareholder group and/or 

the nominee is a party or a material 

participant, and that involves the 

company, any of its officers or directors, 

or any affiliate of the company; 

• Any other material relationship 

between the nominating shareholder or 

any member of the nominating 

shareholder group, the nominee, and/or 

the company or any affiliate of the 

company not otherwise disclosed; and 

• The Web site address on which the 

nominating shareholder or nominating 

shareholder group may publish 

soliciting materials, if any. 

The disclosures set out in Items 4(b) 

and 5(b) of Schedule 14A are 

specifically tailored to contested 

elections and currently are provided by 

both companies and insurgents in 

traditional proxy contests. The 

disclosures required pursuant to Item 

4(b) include: 

• Who is making the solicitation and 

the methods of solicitation; 

• If employees of the soliciting party 

are engaged in the solicitation, what 

types of employees are engaged in the 

solicitation and the manner and nature 

of their employment; 

• If specially engaged employees are 

engaged in the solicitation, the material 

features of the engagement, the cost, and 

the number of employees; 

• The total amount estimated to be 

spent and the total expenditures to date 

for the solicitation; 

• Who will bear the cost of the 

solicitation; and 

• The terms of any settlement 

between the company and the soliciting 

parties, including the cost to the 

company. 

The disclosures included pursuant to 

Item 5(b) include: 

• Any substantial interest of the 

soliciting party in the matter to be voted 

on; 

• Certain biographical information 

about the soliciting party, such as name 

and business address, principal 

occupation, and any criminal 

convictions in the past 10 years; 

• The amount of company securities 

beneficially owned and owned of 

record; 

• Dates and amounts of any securities 

purchased or sold within the past two 

years and the amount of funds borrowed 

and owed to purchase the securities; 

• Whether the soliciting person is or 

was within the past year a party to any 

contracts, arrangements or 

understandings with respect to the 

company’s securities and the terms of 

the contract, arrangement or 

understanding; 

• Beneficial ownership of company 

securities by any associate of the 

soliciting person; 

• Beneficial ownership by the 

soliciting person of any parent or 

subsidiary of the company; 

• Disclosure responsive to Item 404(a) 

of Regulation S–K with regard to the 

soliciting person and any associate; 

• Disclosure of any arrangements 

concerning future employment or 

transactions with the company; and 

• Any substantial interest in the vote, 

either by security holdings or otherwise, 

held by a party to an arrangement or 

understanding related to a director 

nominee. 

The company also will include in its 

proxy statement disclosure about the 

management nominees responsive to 

Items 4(b), 5(b), 7(a), (b) and (c) and, for 

investment companies, Item 22(b) of 

Schedule 14A, as applicable, as well as 

disclosure concerning the persons 

making the solicitation for the 

management nominees responsive to 

Items 4(b) and 5(b) of Schedule 14A, as 

applicable. We did not amend the 

disclosure requirements in this regard, 

as companies are already required to 

make these disclosures in the context of 

a ‘‘solicitation in opposition,’’ under 

Rule 14a–12(c).598

In addition, as discussed in Section 

II.B.8., we proposed and adopted a 

requirement that the company include 

in its proxy statement the nominating 

shareholder’s or group’s statement in 

support of the shareholder nominee or 

nominees, if the nominating shareholder 

or group elects to have such statement 

included in the company’s proxy 

materials. As discussed in Section 

II.B.8., we had proposed that this 

statement not exceed 500 words total, 

but in response to commenters’ 

concerns, we have revised this 

provision in the final rule to enable a 

nominating shareholder or group to 

include up to 500 words for each 

nominee. The company also would have 

the option to include a statement of 

support for the management 

nominees.599

ii. Form of Proxy 

Under the Proposal, a company that is 

required to include a shareholder 

nominee or nominees on its form of 

proxy could identify the shareholder 

nominees as such and recommend 


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56724 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

600This would be similar to the current practice 

with regard to shareholder proposals submitted 

pursuant to Rule 14a–8 where companies identify 

the shareholder proposals and provide a 

recommendation to shareholders as to how they 

should vote on each of those proposals. 

601See letters from CII; COPERA; P. Neuhauser; 

RiskMetrics; USPE. 

602Letter from CII. 

603See letter from RiskMetrics. 

604See letters from 26 Corporate Secretaries; 

ABA; Aetna; Alcoa; American Express; Anadarko; 

Boeing; BorgWarner; BRT; ExxonMobil; Fenwick; 

Honeywell; ICI; Intel; JPMorgan Chase; Pfizer; 

Seven Law Firms; Society of Corporate Secretaries; 

Tenet; U.S. Bancorp. 

605See letters from Aetna; American Express; 

Boeing; BorgWarner; JPMorgan Chase; Seven Law 

Firms; Society of Corporate Secretaries; U.S. 

Bancorp. 

606See letters from BorgWarner; Pfizer; Society of 

Corporate Secretaries; Tenet. 

607See letter from ABA. 

608See letter from ICI. 

609See new Rule 14a–4(b)(2)(iv). We anticipate 

that companies would continue to be able to solicit 

discretionary authority to vote a shareholder’s 

shares for the company nominees, as well as to 

cumulate votes for the company nominees in 

accordance with applicable State law, where such 

State law or the company’s governing documents 

provide for cumulative voting. 

610See proposed revisions to Rule 14a–6(a)(4) and 

Note 3 to that rule. 

whether shareholders should vote for, 

against, or withhold votes on those 

nominees and management nominees 

on the form of proxy.600 In addition, the 

company could determine the order in 

which its nominees and any shareholder 

nominees are listed in the form of 

proxy. The company would otherwise 

be required to present the nominees in 

an impartial manner in accordance with 

Rule 14a–4. 

Under the current rules, a company 

may provide shareholders with the 

option to vote for or withhold authority 

to vote for the company’s nominees as 

a group, provided that shareholders also 

are given a means to withhold authority 

for specific nominees in the group. In 

our view, as we stated in the Proposal, 

this option would not be appropriate 

where the company’s form of proxy 

includes shareholder nominees, as 

grouping the company’s nominees may 

make it easier to vote for all of the 

company’s nominees than to vote for the 

shareholder nominees in addition to 

some of the company nominees. 

Accordingly, when a shareholder 

nominee is included (either pursuant to 

Rule 14a–11, an applicable State law 

provision, or a company’s governing 

documents), we proposed an 

amendment to Rule 14a–4 to provide 

that a company may not give 

shareholders the option of voting for or 

withholding authority to vote for the 

company nominees as a group, but 

instead must require that shareholders 

vote on each nominee separately. 

Commenters were mixed on the 

appropriate presentation of nominees on 

the form of proxy. Several commenters 

supported the proposed amendments to 

Rule 14a–4 to prohibit the option of 

voting for management’s slate as a 

whole,601 with one of these commenters 

characterizing the current option of 

‘‘elect all directors’’ as ‘‘a convenience in 

uncontested director elections’’ but 

warning that providing that option in 

contested elections ‘‘tilts the scales 

unduly in favor of management.’’ 602 The 

commenter believed that shareholders 

would not have any difficulty in 

identifying the management nominees 

and disagreed with the argument that a 

form of proxy listing all nominees 

would be confusing. As a possible 

solution, the commenter suggested a 

legend such as ‘‘There are six 

candidates. Vote for no more than five.’’ 

Another commenter argued that the 

advantage of voting for each individual 

nominee is the de facto plurality voting 

standard that would result.603

Numerous commenters opposed the 

proposed amendments to Rule 14a–4 

and argued that the form of proxy 

should allow shareholders to vote for 

the entire slate of management 

nominees.604 Many of these commenters 

believed that such an option is needed 

to minimize shareholder confusion,605

with several commenters justifying such 

an option on the basis that boards 

expend considerable efforts in selecting 

the complete slate of management 

nominees (e.g., considering issues as the 

independence of the board as whole).606

One commenter stated that individual 

shareholders (unlike large institutional 

investors who have outsourced the 

actual proxy voting process for their 

portfolio) would be discouraged from 

voting if the proxy voting process 

becomes overly tedious as a result of the 

inability to vote for (or withhold votes 

for) a group of nominees.607 The 

commenter analogized to the 

shareholders’ voting options for 

shareholder proposals, where 

shareholders are allowed to vote on all 

matters as recommended by 

management through the exercise of 

discretionary voting authority. It noted 

that, under the existing proxy rules, 

companies often allow shareholders to 

vote ‘‘For All, except’’ and then allow 

them to identify the specific nominees 

for whom the proxy is not authorized to 

vote. The commenter recommended that 

companies be permitted to have this 

same option when there are shareholder 

nominees included in the proxy 

materials (with a clear statement in the 

form of proxy that the shareholder 

should indicate a vote for the 

shareholder nominee in the space 

provided for that nominee). One 

commenter argued that the ability to 

vote on the entire slate is essential in 

the event that the proposed rules are 

applied to investment companies, as 

such entities have a far higher 

proportion of retail shareholders than 

most operating companies and 

consequently have more difficulty in 

achieving a quorum.608

We are adopting this aspect of the 

Proposal largely as proposed,609 because 

we continue to believe that grouping the 

company’s nominees and permitting 

them to be voted on as a group would 

make it easier to vote for all of the 

company’s nominees than to vote for the 

shareholder nominees in addition to 

some of the company nominees. This 

would result in an advantage to the 

management nominees and would be 

inconsistent with an impartial approach 

and the goals of Rule 14a–11. The final 

rule clarifies that the change would 

apply not only when a nominee is 

included pursuant to Rule 14a–11, 

applicable State law, or a company’s 

governing documents, but also where a 

nominee is included pursuant to a 

provision in foreign law. 

We believe that potential confusion 

that may result from not providing the 

option to vote for the company’s slate 

can be mitigated to the extent that 

companies provide clear voting 

instructions, particularly with respect to 

the number of candidates for which a 

shareholder can vote. In addition, we do 

not believe that requiring shareholders 

to vote for candidates individually, 

rather than as a group, creates a burden 

that will result in discouraging 

shareholders from voting at all in 

director elections. In this regard, we 

note that a company could clearly 

designate the nominees on its form of 

proxy as company nominees or 

shareholder nominees. 

e. No Preliminary Proxy Statement 

Under the Proposal, inclusion of a 

shareholder nominee in the company’s 

proxy materials would not require the 

company to file a preliminary proxy 

statement provided that the company 

was otherwise qualified to file directly 

in definitive form. In this regard, the 

Proposal made clear that inclusion of a 

shareholder nominee would not be 

deemed a solicitation in opposition.610

We did not receive a significant amount 

of comment on this aspect of the rule, 

although two commenters agreed that 

inclusion of a Rule 14a–11 shareholder 

nominee should not require the 

company to file preliminary proxy 


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611See letters from ABA; CII. 612See also discussion in footnote 598 above. 613Under the Proposal, the exemption would not 

apply to solicitations made when seeking to have 

a nominee included in a company’s proxy materials 

pursuant to a procedure specified in the company’s 

governing documents or pursuant to applicable 

State law (as opposed to pursuant to Rule 14a–11). 

614See proposed Rule 14a–2(b)(7)(i). 615See letters from Group of 80 Professors of Law, 

Business, Economics and Finance (‘‘Bebchuk, et 

al.’’); CalSTRS; CII; P. Neuhauser; RiskMetrics; 

Schulte Roth & Zabel; USPE. 

616Letter from Bebchuk, et al. 

617See letter from CII. 618See letter from P. Neuhauser. 619See letter from RiskMetrics. 620See letters from ABA; Anadarko; BRT; Seven 

Law Firms. 621See letters from ABA; Seven Law Firms. 622See letter from ABA. 623 Id. 

624See letters from ABA; Seven Law Firms. 

625 Id. 

626See letter from ABA. 

627See letters from ABA; Seven Law Firms. 

628Letter from Biogen. 

629See letters from ABA; Seven Law Firms. 

630See letter from Seven Law Firms. 

631See letters from CII; Cleary; P. Neuhauser; 

Schulte Roth & Zabel; USPE. 

632See letters from CII; USPE. 

materials.611 We are adopting this 

provision largely as proposed. As 

adopted, a company would not be 

required to file a preliminary proxy 

statement in connection with a 

nomination made pursuant to Rule 14a– 

11, an applicable state or foreign law 

provision, or a company’s governing 

documents.612

10. Application of the Other Proxy 

Rules to Solicitations by the Nominating 

Shareholder or Group 

a. Rule 14a–2(b)(7) 

As noted in the Proposing Release, we 

anticipate that shareholders may engage 

in communications with other 

shareholders in an effort to form a 

nominating shareholder group to 

aggregate their holdings to meet the 

applicable minimum ownership 

threshold to nominate a director. While 

consistent with the purpose of Rule 

14a–11, such communications would be 

deemed solicitations under the proxy 

rules. Accordingly, we proposed an 

exemption from the proxy rules for 

written communications made in 

connection with using proposed Rule 

14a–11 613 that are limited in content 

and filed with the Commission.614 As 

noted in the Proposal, we believed this 

limited exemption would facilitate 

shareholders’ use of proposed Rule 14a– 

11 and remove concerns shareholders 

seeking to use the rule may have 

regarding certain communications with 

other shareholders regarding their intent 

to submit a nomination pursuant to the 

rule. 

Some commenters supported the 

proposed exemption for soliciting 

activities by shareholders seeking to 

form a group for purposes of Rule 14a– 

11.615 One of these commenters stated 

that because ‘‘many institutional 

investors lack incentives to invest 

actively in seeking governance benefits 

that would be shared by their fellow 

shareholders,’’ the rule should avoid 

imposing unnecessary hurdles or costs 

on shareholders organizing or joining a 

nominating group.616 Another supporter 

of the exemption stated that soliciting 

activities to form a group for the 

purpose of submitting nominations 

under Rule 14a–11, State law, or a 

company’s governing documents 

generally should be exempt, with no 

filing requirement prior to giving the 

company notice and filing a Schedule 

14N.617 Another commenter also 

recommended that any exemption also 

cover solicitations for nominations 

submitted under State law or a 

company’s governing documents.618

Finally, one commenter expressed 

support for the proposed exemption so 

shareholders could communicate with 

other investors to explain their 

nominee’s qualifications and the 

rationale for submitting their 

nominations as long as they file all 

materials with the Commission and do 

not solicit proxies on behalf of their 

nominees.619

On the other hand, several 

commenters opposed the creation of a 

new exemption for soliciting activities 

to form a nominating group.620 Two of 

these commenters stated that the 

proposed exemption in Rule 14a–2(b)(7) 

is unnecessary, given the existing 

exemptions available to nominating 

shareholders (e.g., Rule 14a–2(b)(2) 

exemption for communications with up 

to 10 shareholders and Rule 14a–2(b)(6) 

for communications in an electronic 

shareholder forum).621 One commenter 

indicated that a solicitation to form a 

‘‘control’’ group could have significant 

implications affecting control of a 

company if there are no limits on the 

number of shareholders or aggregated 

holdings of a nominating group.622 The 

commenter asserted that, absent these 

limits, a shareholder could build a 

nominating group with hundreds of 

shareholders owning far in excess of the 

ownership threshold needed to use Rule 

14a–11. The commenter warned that the 

proposed exemption could facilitate 

avoidance of the proposed requirements 

of Rule 14a–11 because the exempt 

solicitations could be the first stage of 

a campaign against incumbent directors 

and in favor of shareholder nominees. 

This commenter also believed that the 

exemption should not apply to 

solicitations undertaken by shareholders 

to form a nominating shareholder group 

in order to submit nominees pursuant to 

State law or a company’s governing 

documents.623

Commenters also suggested the 

following changes to the proposed 

exemption: 

• The exemption should not be 

available if the shareholder or any 

member of the nominating group uses 

another available exemption for a 

nomination to be presented at the same 

shareholder meeting;624

• The exemption should not be 

available for a ‘‘data gathering strategy’’ 

in which a shareholder is ‘‘testing the 

waters’’ for other purposes, such as for 

a traditional proxy contest;625

• The shareholder should certify that 

it has a bona fide intent to present a 

Rule 14a–11 nomination and the 

shareholder should be prohibited from 

nominating directors at the same 

meeting through means other than Rule 

14a–11;626 and 

• The exemption should not be 

available if the company or another 

shareholder has publicly announced 

that the company would be facing a 

traditional proxy contest.627

One commenter stated generally that 

allowing the ‘‘permitted activity among 

shareholders wishing to nominate a 

director’’ would ‘‘increase the need for 

the Commission to police group activity 

that may be undertaken with an 

undisclosed control intent.’’ 628

Two commenters agreed with the 

Commission that the Rule 14a–2(b)(7) 

exemption should not be available for 

solicitations conducted through oral 

communications.629 These commenters 

warned that there would be no way to 

ensure that orally-communicated 

information is being provided to 

shareholders in a consistent manner and 

in accordance with the rule’s 

requirements. One commenter 

recommended specific changes to the 

rule to clarify that the exemption is not 

available for oral communications.630

On the other hand, several commenters 

believed that oral communications 

should be exempt.631 Some commenters 

pointed out that such communications 

are exempt in other contexts and are 

difficult to monitor in any case.632 To 

mitigate the risk of inappropriate 

communications, one commenter 

suggested that the Commission require 

that oral communications made in 

reliance on the exemption not be 

inconsistent with any communications 


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56726 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

633See letter from Cleary. 

634See letters from ABA; CII. 

635See letter from Schulte Roth & Zabel. 

636See letter from ABA. 

637See letters from CalSTRS; COPERA; P. 

Neuhauser. 

638See letter from P. Neuhauser. 

639See letter from COPERA. 

640See letter from CalSTRS. 

641See letters from ABA; CII; USPE. 

642See letter from ABA. 

643See letters from ABA; Seven Law Firms. 

644See letter from ABA. 

645See letter from Schulte Roth & Zabel. 

646Shareholders also would have the option to 

structure their solicitations in connection with the 

formation of a nominating shareholder group, 

whether written or oral, to comply with an existing 

exemption from the proxy rules, including the 

exemption for solicitations of no more than 10 

shareholders (Exchange Act Rule 14a–2(b)(2)) and 

the exemption for certain communications that take 

place in an electronic shareholder forum (Exchange 

Act Rule 14a–2(b)(6)). For example, a shareholder 

could rely on Rule 14a–2(b)(2) to solicit no more 

than 10 shareholders in an effort to form a 

nominating shareholder group. If the shareholder’s 

efforts did not result in the formation of a group 

large enough to meet the ownership thresholds, the 

shareholder could then rely on Rule 14a–2(b)(7) to 

continue its efforts to form a nominating 

shareholder group for the purpose of submitting a 

nomination pursuant to Rule 14a–11. 

647Materials filed in connection with the new 

solicitation exemptions will be filed under a cover 

page of Schedule 14N and will appear as a 

Schedule 14N–S on EDGAR. See new Rule 14a– 

2(b)(7)(ii). We note that written communications 

include electronic communications, such as e-mails 

and Web site postings, and scripts used in 

connection with oral solicitations. 

previously filed by the shareholder in 

connection with the nomination.633

Two commenters expressed general 

support for the proposal requiring that 

a nominating shareholder or group file 

any soliciting materials published, sent 

or given to shareholders pursuant to the 

exemption no later than the date that 

the material is first published, sent, or 

given.634 One commenter argued that if 

the Commission retains the requirement 

that solicitations be in writing, then it 

should relax the ‘‘date of first use’’ filing 

deadline (with a three business day 

deadline being its preference).635 One 

commenter supported the filing 

requirement ofRule 14a–2(b)(7)(ii) for 

soliciting materials published, sent or 

given to shareholders solicited to 

become part of a nominating group,636

while three commenters opposed the 

filing requirement.637 Of those opposing 

the requirement, one commenter noted 

that under the Williams Act, persons 

contemplating an actual change in 

control are not required to publicly 

disclose their activities until a group 

owning 5% of the company’s shares has 

been formed.638 One commenter stated 

that it is possible that a group of 

shareholders ultimately may decide not 

to submit a shareholder nominee.639

Therefore, this commenter believed, any 

requirement for filings before the group 

submits a nominee would place an 

unfair disadvantage on the process of 

first determining if a nomination is the 

right course of action, and if so, who the 

nominee should be. Another commenter 

suggested that the filing requirement be 

triggered on the date the shareholder 

proposes a nominee, not on the date of 

solicitation.640 The commenter believed 

that a shareholder should not be 

burdened with the filing requirement at 

the initial stages of determining the 

feasibility of forming a group. 

Three commenters recommended that 

communications made for the purpose 

of forming a nominating shareholder 

group should be permitted to identify 

possible or proposed nominees,641 with 

one commenter adding the condition 

that the nominee first agree to being 

named.642 Two commenters 

recommended the following additional 

disclosure in any written soliciting 

materials used in reliance on the Rule 

14a–2(b)(7) exemption: 

• The period that the soliciting 

shareholder held the specified number 

of shares; 

• A description of any short positions 

or other hedging arrangements through 

which the soliciting shareholder 

reduced or otherwise altered its 

economic stake in the company; 

• A description of any contracts, 

arrangements, understandings or 

relationships between the soliciting 

shareholder and any other person with 

respect to any securities of the 

company; and 

• A description of any plans or 

proposals of the shareholder or group 

with respect to the organization, 

business or operations of the 

company.643

One commenter added that the required 

disclosure should be consistent with 

that required by Items 4 and 6 of 

Schedule 13D,644 while another 

commenter stated that shareholders 

should be permitted to include a brief 

statement of the reasons for the 

formation of the nominating group.645

After considering the comments, we 

are adopting the proposed exemption 

with certain modifications, including 

modifications to enable shareholders to 

communicate orally, to require the filing 

of a cover page in the form set forth in 

Schedule 14N (with the appropriate box 

on the cover page marked) no later than 

when the solicitation commences, and 

to clarify the circumstances under 

which the exemption will be 

available.646 We believe that this limited 

exemption will facilitate shareholders’ 

use of Rule 14a–11 and remove 

concerns shareholders seeking to use 

the rule may have regarding certain 

communications with other 

shareholders regarding their intent to 

submit a nomination pursuant to the 

rule. 

New Rule 14a–2(b)(7) provides an 

exemption from the generally applicable 

disclosure, filing, and other 

requirements of the proxy rules for 

solicitations by or on behalf of any 

shareholder in connection with the 

formation of a nominating shareholder 

group, provided that the shareholder is 

not holding the company’s securities 

with the purpose, or with the effect, of 

changing control of the company or to 

gain a number of seats on the board of 

directors that exceeds the maximum 

number of nominees that the registrant 

could be required to include under Rule 

14a–11(d). In addition, any written 

communication may include no more 

than: 

• A statement of the shareholder’s 

intent to form a nominating shareholder 

group in order to nominate a director 

under Rule 14a–11; 

• Identification of, and a brief 

statement regarding, the potential 

nominee or nominees or, where no 

nominee or nominees have been 

identified, the characteristics of the 

nominee or nominees that the 

shareholder intends to nominate, if any; 

• The percentage of voting power of 

the company’s securities that are 

entitled to be voted on the election of 

directors that each soliciting 

shareholder holds or the aggregate 

percentage held by any group to which 

the shareholder belongs; and 

• The means by which shareholders 

may contact the soliciting party. 

Any written soliciting material 

published, sent or given to shareholders 

in accordance with the terms of this 

provision must be filed with the 

Commission by the nominating 

shareholder or group, under the 

company’s Exchange Act file number (or 

in the case of a registered investment 

company, under the company’s 

Investment Company Act file number), 

no later than the date the material is 

first published, sent or given to 

shareholders. The soliciting material 

would be required to be filed with a 

cover page in the form set forth in 

Schedule 14N, with the appropriate box 

on the cover page marked to identify the 

filing as soliciting material pursuant to 

Rule 14a–2(b)(7).647 This requirement is 

largely consistent with the Proposal; 

however, under the final rule, the 

solicitation will be filed on Schedule 

14N rather than as definitive additional 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56727 

648See new Instruction to Rule 14a–2(b)(7). 

649Similarly, the exemption would not be 

available for solicitations in connection with 

nominations made pursuant to foreign law 

provisions. 

650See Exchange Act Rule 14a–12. 

soliciting materials on Schedule 14A, as 

was proposed. We have made this 

change to avoid confusion between 

soliciting materials filed in connection 

with the formation of a nominating 

shareholder group under Rule 14a–11 

(or in connection with a Rule 14a–11 

nomination), as discussed further 

below, and other proxy materials that 

may be filed by companies or by 

participants in a traditional proxy 

contest. 

We also have expanded the 

exemption to cover oral solicitations. As 

noted in the Proposal, we originally 

proposed to limit the exclusion to 

written communications to address our 

concern that oral communications could 

not easily satisfy the filing requirement 

(which would make it more difficult to 

monitor use of the exemption). 

However, after further consideration, we 

agree with commenters that oral 

communications should be included 

within the exemption because it is 

likely that shareholders will need to 

speak to each other in order to 

effectively form a nominating 

shareholder group. Oral 

communications will not be limited in 

content in the way that written 

communications are limited. In an effort 

to better monitor and avoid abuse under 

the exemption, however, a shareholder 

seeking to form a nominating 

shareholder group in reliance on the 

exemption in Rule 14a–2(b)(7) will be 

required to file a Schedule 14N notice 

of commencement of the oral 

solicitation. Because there are no limits 

on the number of holders that can be 

solicited in reliance on the new rule, or 

the contents of the oral 

communications, we believe it is 

important for our staff and the markets 

to be aware of the commencement of 

these activities. 

The Schedule 14N filing for oral 

solicitations will consist of a cover page 

in the form set forth in Schedule 14N, 

with the appropriate box on the cover 

page marked to identify the filing as a 

notice of solicitation pursuant to Rule 

14a–2(b)(7). This filing would be made 

under the company’s Exchange Act file 

number (or in the case of a registered 

investment company, under the 

company’s Investment Company Act file 

number), no later than the date of the 

first communication made in reliance 

on the rule. 

As noted above, some commenters 

were opposed to the filing requirement 

for solicitations for various reasons. We 

have decided to adopt the filing 

requirement because we believe it is 

important to provide companies and 

shareholders with information about 

potential nominations under Rule 14a– 

11 when the new solicitation exemption 

is used to pursue such a nomination. 

We do not believe that the filing 

requirement is burdensome, particularly 

in light of the fact that we are providing 

shareholders with the opportunity to 

engage in activities for which they 

would otherwise need to file a proxy 

statement or have another exemption 

available. 

More generally, we understand 

commenters’ concerns regarding the 

solicitation exemptions, including the 

exemption for oral communications 

when seeking to form a group, being 

used as a means to engage in a contest 

for control, but we believe that requiring 

a nominating shareholder or group to 

file a Schedule 14N to provide notice of 

such communications, along with the 

other limitations in the rule we are 

adopting, should mitigate these 

concerns. In response to commenters’ 

concerns, we have clarified in the rule 

that a shareholder or group that chooses 

to rely on new Rule 14a–2(b)(7) would 

lose that exemption if they subsequently 

engaged in a non-Rule 14a–11 

nomination or solicitation in connection 

with the subject election of directors 

other than solicitations exempt under 

Rule 14a–2(b)(8), or if they become a 

member of a group, as determined under 

Section 13(d)(3) of the Exchange Act 

and Rule 13d–5(b)(1), or otherwise, with 

persons engaged in soliciting or other 

nominating activities in connection 

with the subject election of directors.648

This could result in the shareholder or 

group being deemed to have engaged in 

a non-exempt solicitation in violation of 

the proxy rules. In addition, we have 

clarified that, consistent with Rule 14a– 

11, the exemption is available only 

where the shareholder is not holding the 

company’s securities with the purpose, 

or with the effect, of changing control of 

the company or to gain a number of 

seats on the board of directors that 

exceeds the maximum number of 

nominees that the registrant could be 

required to include under Rule 14a– 

11(d). Thus, we do not believe that it is 

likely that a shareholder or group will 

use the exemption as a means to engage 

in a contest for control. 

Consistent with the Proposal, neither 

this exemption nor the exemption set 

forth in Rule 14a–2(b)(8) (discussed 

below) will apply to solicitations made 

when seeking to have a nominee 

included in a company’s proxy 

materials pursuant to a procedure 

specified in the company’s governing 

documents (as opposed to pursuant to 

Rule 14a–11). As we noted in the 

Proposal, in this instance, companies 

and/or shareholders would have 

determined the parameters of the 

shareholder’s or group’s access to the 

company’s proxy materials. Given the 

range of possible criteria companies 

and/or shareholders could establish for 

nominations, we continue to believe it 

would not be appropriate to extend the 

exemption to those circumstances. Also 

consistent with the Proposal, we have 

not extended the exemption to 

nominations made pursuant to 

applicable State law provisions,649 again 

because State law could establish any 

number of possible criteria for 

nominations. A shareholder would need 

to determine whether one of the existing 

exemptions applies to their solicitation 

conducted in connection with a 

nomination made pursuant to a 

company’s governing documents or 

State law. 

b. Rule 14a–2(b)(8) 

Both the nominating shareholder or 

group and the company may wish to 

solicit in favor of their nominees for 

director by various means, including 

orally, by U.S. mail, electronic mail, and 

Web site postings. While the company 

ultimately would file a proxy statement 

and therefore could rely on the existing 

proxy rules to solicit outside the proxy 

statement,650 shareholders could be 

limited in their soliciting activities 

under the current proxy rules. 

Accordingly, our Proposal included a 

new exemption to the proxy rules for 

solicitations by or on behalf of a 

nominating shareholder or group in 

support of its nominee who is included 

in the company’s proxy statement and 

form of proxy. 

As proposed, the exemption would be 

available only where the shareholder is 

not seeking proxy authority. In addition, 

any written communications would be 

required to include specified 

disclosures, including: 

• The identity of the nominating 

shareholder or group; 

• A description of his or her direct or 

indirect interests, by security holdings 

or otherwise; and 

• A legend advising shareholders that 

a shareholder nominee is or will be 

included in the company’s proxy 

statement and that they should read the 

company’s proxy statement when 

available and that the proxy statement, 

other soliciting material, and any other 

relevant documents are or will be 

available at no charge on the 

Commission’s Web site. 


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56728 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

651For a registered investment company, the 

filing would be made under the company’s 

Investment Company Act file number. 652See proposed Rule 14a–2(b)(8)(iii). 653See letters from CII; COPERA; P. Neuhauser. 654See letters from COPERA; P. Neuhauser. 655See letter from CII. 656See letter from ABA. 

657The recommended disclosures included: the 

period that the soliciting shareholder held the 

specified number of shares; a description of any 

short positions or other hedging arrangements 

through which the soliciting shareholder reduced or 

otherwise altered its economic stake in the 

company; a description of any contracts, 

arrangements, understandings or relationships 

between the soliciting shareholder and any other 

person with respect to any securities of the 

company; and a description of any plans or 

proposals of the shareholder or group with respect 

to the organization, business or operations of the 

company. 

658See letter from Seven Law Firms. 

659See new Rule 14a–2(b)(8)(i). The language in 

this provision generally follows the language in 

Rule 14a–2(b)(1) and, therefore, we interpret both 

provisions in the same manner. In this regard, we 

note the discussion in the Proxy Disclosure and 

Solicitation Enhancements proposing release of our 

view of the scope of the term ‘‘form of revocation’’ 

within the meaning of Rule 14a–2(b)(1) and the 

proposed amendment to that rule to clarify that the 

term does not include an unmarked copy of the 

company’s proxy card that is requested to be 

returned directly to management. See Securities Act 

Release No. 33–9052; 34–60280 (July 10, 2009) [74 

FR 35076]. If we act on the proposed amendments 

to Rule 14a–2(b)(1), we would expect to make 

conforming changes to Rule 14a–2(b)(8). 

660See new Rule 14a–2(b)(8)(ii). 661See new Rule 14a–2(b)(8)(iii). 662As noted above, the soliciting material will be 

filed under cover of Schedule 14N and will appear 

as Schedule 14N–S on EDGAR. 

Under the Proposal, written soliciting 

materials also would be required to be 

filed with the Commission under the 

company’s Exchange Act file number no 

later than the date the material is first 

published, sent or given to 

shareholders.651 The soliciting material 

would be required to include a cover 

page in the form set forth in Schedule 

14A, with the appropriate box on the 

cover page marked.652

Three commenters supported the 

proposed Rule 14a–2(b)(8) exemption 

for soliciting activities by or on behalf 

of a nominating shareholder or group in 

support of the shareholder nominees 

included in a company’s proxy 

materials, with soliciting materials filed 

no later than the date that the materials 

are first used.653 Two of these 

commenters explained that because 

management would solicit votes against 

the shareholder nominees and for their 

own nominees, the nominating 

shareholder, group, and shareholder 

nominees should have the same ability 

to solicit, so long as they do not request 

proxy authority.654 Another commenter 

stated that the exemption should apply 

to solicitations for nominations made 

pursuant to Rule 14a–11, State law, or 

a company’s governing documents.655

The commenter opposed any limitations 

on the soliciting activities by a 

nominating shareholder or group and 

viewed such soliciting activities as the 

same as a company’s disclosure 

opposing a shareholder proposal. One 

commenter supported the Rule 14a– 

2(b)(8) exemption for solicitations by a 

nominating shareholder or group in 

favor of a shareholder nominee who is 

included in a company’s proxy 

materials (or against a management 

nominee), but recommended that the 

rule specify that the exemption only 

applies to solicitations in favor of a 

shareholder nominee (or against a board 

nominee) that occur after the 

distribution of the company’s proxy 

materials—this would help avoid 

confusion and misunderstandings about 

whether solicitation may occur before 

the company’s proxy materials are 

available.656 This commenter also 

recommended that the exemption not be 

available if the company or another 

shareholder has publicly announced 

that the company would be facing a 

traditional proxy contest, even from an 

unrelated shareholder. The commenter 

also believed that the exemption should 

be available for any written solicitation 

by or on behalf of a nominating 

shareholder or group in support of a 

nominee included in a company’s proxy 

materials pursuant to State law or the 

company’s governing documents, as 

long as the nominating shareholder or 

group does not use a form of proxy that 

differs from that of the company, does 

not furnish or otherwise request a form 

of revocation, abstention, consent or 

authorization, and files its solicitation 

material for its nominees (or against the 

management nominees) with the 

Commission on the date of first use. 

To the extent that it is not included 

in either the company’s proxy materials 

or Schedule 14N, the commenter also 

recommended that additional disclosure 

be required to be included in 

solicitations made pursuant to Rule 

14a–2(b)(8).657 Another commenter also 

stated that Rule 14a–2(b)(8) should 

apply only to solicitations in favor of a 

shareholder nominee that occur after the 

mailing of a company’s proxy 

materials.658 Further, the commenter 

explained that solicitations should not 

occur at a time when shareholders do 

not have access to the more complete 

and balanced disclosure about all of the 

nominees in a company’s proxy 

materials. 

As adopted, Rule 14a–2(b)(8) provides 

an exemption from the generally 

applicable disclosure, filing, and other 

requirements of the proxy rules for 

solicitations by or on behalf of a 

nominating shareholder or group, 

provided that: 

• The soliciting party does not, at any 

time during such solicitation, seek 

directly or indirectly, either on its 

own or another’s behalf, the power to 

act as proxy for a shareholder and 

does not furnish or otherwise request, 

or act on behalf of a person who 

furnishes or requests, a form of 

revocation, abstention, consent or 

authorization;659

• Each written communication 

includes:660

• The identity of the nominating 

shareholder or group and a 

description of his or her direct or 

indirect interests, by security 

holdings or otherwise; 

• A prominent legend in clear, plain 

language advising shareholders that 

a shareholder nominee is or will be 

included in the company’s proxy 

statement and that they should read 

the company’s proxy statement 

when available because it includes 

important information. The legend 

also must explain to shareholders 

that they can find the proxy 

statement, other soliciting material, 

and any other relevant documents 

at no charge on the Commission’s 

Web site; and 

• Any soliciting material published, 

sent or given to shareholders in 

accordance with this exemption must 

be filed by the nominating 

shareholder or group with the 

Commission on Schedule 14N, under 

the company’s Exchange Act file 

number or, in the case of an 

investment company registered under 

the Investment Company Act of 1940, 

under the company’s Investment 

Company Act file number, no later 

than the date the material is first 

published, sent or given to 

shareholders. Three copies of the 

material would at the same time be 

filed with, or mailed for filing to, each 

national securities exchange upon 

which any class of securities of the 

company is listed and registered. The 

soliciting material would be required 

to include a cover page in the form set 

forth in Schedule 14N, with the 

appropriate box on the cover page 

marked.661

We are adopting certain modifications 

to Rule 14a–2(b)(8) from the Proposal to 

clarify when a party may begin to rely 

on the exemption and to require that all 

soliciting material be filed on new 

Schedule 14N.662 The exemption is 

otherwise consistent with the Proposal. 

We have added a new instruction to 

the exemption clarifying that a 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56729 

663See Instruction 1 to Rule 14a–2(b)(8). 

664See letter from ABA. 

665See letter from CII. 

666See Exchange Act Rule 14a–12(a). 

667See letters from CII; COPERA; P. Neuhauser. 

668See Instruction 3 to Rule 14a–2(b)(8). 669See Instruction 2 to Rule 14a–2(b)(8). 

nominating shareholder or group may 

rely on the exemption provided in Rule 

14a–2(b)(8) after receiving notice from 

the company in accordance with Rule 

14a–11(g)(1) or (g)(3)(iv) that the 

company will include the nominating 

shareholder’s or group’s nominee or 

nominees.663 As proposed, a nominating 

shareholder or group would not have 

been able to rely on the exemption until 

their nominee or nominees are actually 

included in the company’s proxy 

materials. We received little comment 

on the appropriate timing for 

commencement of soliciting activities 

under the proposed exemption, with 

one commenter suggesting that Rule 

14a–2(b)(8) apply only to solicitations 

that occur after the mailing of a 

company’s proxy materials,664 and 

another suggesting generally that there 

should be no limitations on soliciting 

activities by nominating shareholders or 

groups.665

After further consideration, we have 

determined that a nominating 

shareholder or group should be able to 

begin soliciting once there is certainty 

as to whether their nominees will be 

included in the company’s proxy 

materials rather than being required to 

wait for the company to furnish its 

proxy materials. In this regard, we note 

that the exemption is consistent with 

the treatment of insurgent soliciting 

materials in a traditional proxy contest, 

as an insurgent may rely on Rule 14a– 

12(a) to engage in soliciting activities 

before furnishing shareholders with a 

proxy statement provided that the 

soliciting party provides certain 

disclosure and files a definitive proxy 

statement before or at the same time as 

the forms of proxy, consent or 

authorization are furnished to or 

requested from shareholders.666 We 

have included the requirement that the 

nominating shareholder or group have 

received notice that their nominee or 

nominees will be included in the 

company’s proxy materials before 

commencing solicitations to avoid 

confusion and potential abuse of the 

exemption. 

We also have modified the filing 

requirements for written soliciting 

materials. Similar to the filing 

requirements for relying on Rule 14a– 

2(b)(7), any written soliciting material 

published, sent or given to shareholders 

in accordance with the terms of Rule 

14a–2(b)(8) must be filed with the 

Commission on a Schedule 14N, under 

the company’s Exchange Act file 

number (or in the case of a registered 

investment company, under the 

company’s Investment Company Act file 

number), no later than the date the 

material is first published, sent or given 

to shareholders. The soliciting material 

would be required to be filed with a 

cover page in the form set forth in 

Schedule 14N, with the appropriate box 

on the cover page marked to identify the 

filing as soliciting material pursuant to 

Rule 14a–2(b)(8). This requirement is 

largely consistent with the Proposal, 

however, under the final rule, the 

solicitation will be filed on Schedule 

14N rather than as definitive additional 

soliciting materials on Schedule 14A, as 

was proposed. As noted above, we 

received comment supporting the filing 

of soliciting materials,667 however, the 

commenters did not specifically address 

whether the filing should be made 

under cover of Schedule 14N or 

Schedule 14A. As discussed above with 

respect to filings made pursuant to Rule 

14a–2(b)(7),we have made the change to 

Schedule 14N to avoid confusion 

between soliciting materials filed in 

connection with the formation of a 

nominating shareholder group under 

Rule 14a–11 (or in connection with a 

Rule 14a–11 nomination) and other 

proxy materials that may be filed by 

companies or by participants in a 

traditional proxy contest. 

As described in Section II.B.2.e. 

above, the rules we are adopting today 

will not prohibit shareholders from 

submitting Rule 14a–11 nominations for 

inclusion in company proxy materials 

when a proxy contest is being 

conducted by another person 

concurrently. We are, however, adding 

a clarification to new Rule 14a–2(b)(8), 

similar to Rule 14a–2(b)(7), in response 

to commenters’ concern that the 

exemptions could be used as the first 

stage of a contest for control. As 

adopted, the exemption will be lost if a 

shareholder or group subsequently 

engages in a non-Rule 14a–11 

nomination or solicitation in connection 

with the subject election of directors or 

if they become a member of a group, as 

determined under Section 13(d)(3) of 

the Exchange Act and Rule 13d–5(b)(1), 

or otherwise, with persons engaged in 

soliciting or other nominating activities 

in connection with the subject election 

of directors. The risk of losing the Rule 

14a–2(b)(8) exemption and potential 

liability for engaging in non-exempt 

solicitations should prevent nominating 

shareholders or groups from soliciting 

in relation to any other person’s 

nominees.668 Further, as discussed in 

Sections II.B.2.e. and II.B.10.a. above, 

under Rule 14a–11 a company will not 

be required to include a nominee or 

nominees if the nominating shareholder 

or group is a member of any other group 

with persons engaged in solicitations in 

connection with the subject election of 

directors or other nominating activities; 

separately conducts a solicitation in 

connection with the subject election of 

directors other than a Rule 14a–2(b)(8) 

exempt solicitation in relation to those 

nominees it has nominated pursuant to 

Rule 14a–11 or for or against the 

company’s nominees; or is acting as a 

participant in another person’s 

solicitation in connection with the 

subject election of directors. All of these 

restrictions are designed to address 

commenters’ concerns about collusion 

and potential abuse of the process. We 

also believe these restrictions are 

consistent with the desire to limit Rule 

14a–11 to those shareholders or groups 

that do not have an intent to change the 

control of the company or to gain a 

number of seats on the board of 

directors that exceeds the maximum 

number of nominees that the registrant 

could be required to include under Rule 

14a–11. Finally, we have clarified in an 

instruction to Rule 14a–2(b)(8)669 that 

Rule 14a–2(b)(8) is the only exemption 

upon which Rule 14a–11 nominating 

shareholders or groups may rely for 

their soliciting activities in support of 

nominees that are or will be included in 

the company’s proxy materials or for or 

against company nominees. This will 

help ensure that these persons will not 

seek proxy authority and will file 

written communications in connection 

with their soliciting efforts and, we 

believe, will help to address some of 

commenters’ concerns with regard to 

confusion and potential abuse of the 

exemption. 

Consistent with the Proposal and as 

discussed above with regard to Rule 

14a–2(b)(7), the exemption will not 

apply to solicitations made when 

seeking to have a nominee included in 

a company’s proxy materials pursuant 

to a procedure specified in the 

company’s governing documents (as 

opposed to pursuant to Rule 14a–11). As 

we noted in the Proposal, in this 

instance, companies and/or 

shareholders would have determined 

the parameters of the shareholder’s or 

group’s access to the company’s proxy 

materials. Given the range of possible 

criteria that companies and/or 

shareholders could establish for 

nominations, we continue to believe it 

would not be appropriate to extend the 

exemption to those circumstances. Also 


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56730 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

670Similarly, the exemption would not be 

available for solicitations in connection with 

nominations made pursuant to foreign law 

provisions. 

671See Rule 14a–11(b)(10) and discussion in 

Section II.B.8.c.ii. above. 

672See Election of Directors Adopting Release. 

673See Election of Directors Adopting Release. 

674Under the Proposal, Rule 14a–8(i)(8) would 

allow shareholders to propose additional means, 

other than Rule 14a–11, for inclusion of shareholder 

nominees in company proxy materials. Therefore, 

under the Proposal, a shareholder proposal that 

sought to provide an additional means for including 

shareholder nominees in the company’s proxy 

materials pursuant to the company’s governing 

documents would not be deemed to conflict with 

Rule 14a–11 simply because it would establish 

different eligibility thresholds or require more 

extensive disclosures about a nominee or 

nominating shareholder than would be required 

under Rule 14a–11. A shareholder proposal would 

conflict with proposed Rule 14a–11, however, to 

the extent that the proposal would purport to 

prevent a shareholder or shareholder group that met 

the requirements of proposed Rule 14a–11 from 

having their nominee for director included in the 

company’s proxy materials. 

675Currently, Rule 14a–8 requires that a 

shareholder proponent have continuously held at 

least $2,000 in market value, or 1%, of the 

company’s securities entitled to be voted on the 

proposal at the meeting for a period of at least one 

year by the date the proponent submits the 

proposal. See Rule 14a–8(b). These requirements 

would remain the same. 

676 In this regard, the proposed revision to Rule 

14a–8(i)(8) would not make a distinction between 

binding and non-binding proposals. 

consistent with the Proposal, we have 

not extended the exemption to 

nominations made pursuant to 

applicable State law provisions, again 

because State law could establish any 

number of possible criteria for 

nominations.670 A shareholder would 

need to determine whether one of the 

existing exemptions applies to their 

solicitation conducted in connection 

with a nomination made pursuant to a 

company’s governing documents or 

State law. 

11. 2011 Proxy Season Transition Issues 

Rule 14a–11 contains a window 

period for submission of shareholder 

nominees for inclusion in company 

proxy materials of no earlier than 150 

calendar days, 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.671 Shareholders 

seeking to use new Rule 14a–11 would 

be able to do so if the window period 

for submitting nominees for a particular 

company is open after the effective date 

of the rules. For some companies, the 

window period may open and close 

before the effective date of the new 

rules. In those cases, shareholders 

would not be permitted to submit 

nominees pursuant to Rule 14a–11 for 

inclusion in the company’s proxy 

materials for the 2011 proxy season. For 

other companies, the window period 

may open before the effective date of the 

rules, but close after the effective date. 

In those cases, shareholders would be 

able to submit a nominee between the 

effective date and the close of the 

window period. 

C. Exchange Act Rule 14a–8(i)(8) 

1. Background 

Currently, Rule 14a–8(i)(8) allows a 

company to exclude from its proxy 

statement a shareholder proposal that 

relates to a nomination or an election for 

membership on the company’s board of 

directors or a procedure for such 

nomination or election. This provision 

currently permits the exclusion of a 

proposal that would result in an 

immediate election contest or would set 

up a process for shareholders to conduct 

an election contest in the future by 

requiring the company to include 

shareholders’ director nominees in the 

company’s proxy materials for 

subsequent meetings. 

When the Commission adopted the 

current language of Rule 14a–8(i)(8) in 

December 2007,672 it noted that many 

disclosures are required for election 

contests that are not provided for in 

Rule 14a–8.673 In this regard, several 

Commission rules, including Exchange 

Act Rule 14a–12, regulate contested 

proxy solicitations to assure that 

investors receive disclosure to enable 

them to make informed voting decisions 

in elections. The requirements to 

provide these disclosures to 

shareholders from whom proxy 

authority is sought are grounded in Rule 

14a–3, which requires that any party 

conducting a proxy solicitation file with 

the Commission, and furnish to each 

person solicited, a proxy statement 

containing the information in Schedule 

14A. Items 4(b) and 5(b) of Schedule 

14A require numerous specified 

disclosures if the solicitation is subject 

to Rule 14a–12(c), and Item 7 of 

Schedule 14A also requires important 

specified disclosures for any director 

nominee. Finally, all of these 

disclosures are covered by the 

prohibition on making a solicitation 

containing materially false or 

misleading statements or omissions that 

is found in Rule 14a–9. 

2. Proposed Amendment 

In the Proposal, we proposed an 

amendment to Rule 14a–8(i)(8), the 

election exclusion, to enable 

shareholders, under certain 

circumstances, to require companies to 

include in their proxy materials 

shareholder proposals that would 

amend, or that request an amendment 

to, a company’s governing documents 

regarding nomination procedures or 

disclosures related to shareholder 

nominations, provided the proposal 

does not conflict with proposed Rule 

14a–11.674 The purpose of the proposed 

amendment was to further facilitate 

shareholders’ rights to nominate 

directors and promote fair corporate 

suffrage, while still providing 

appropriate disclosure and liability 

protections. 

Under the proposed amendment, the 

shareholder proposal would have to 

meet the procedural requirements of 

Rule 14a–8 (e.g., the proposal could be 

excluded if the shareholder proponent 

did not meet the ownership threshold 

under Rule 14a–8) and not be subject to 

one of the other substantive bases for 

exclusion in the rule.675 The proposed 

revision of Rule 14a–8(i)(8) would not 

restrict the types of amendments that a 

shareholder could propose to a 

company’s governing documents to 

address the company’s provisions 

regarding nomination procedures or 

disclosures related to shareholder 

nominations, although any such 

proposals that conflict with proposed 

Rule 14a–11 or State law could be 

excluded.676

In the Proposal, we stated that we 

continued to believe that, under certain 

circumstances, companies should have 

the right to exclude proposals related to 

particular elections and nominations for 

director from company proxy materials 

where those proposals could result in an 

election contest between company and 

shareholder nominees without the 

important protections provided for in 

the proxy rules. Therefore, while 

proposing the revision to Rule 14a– 

8(i)(8) as discussed above, we also 

proposed to codify certain prior staff 

interpretations with respect to the types 

of proposals that would continue to be 

excludable pursuant to Rule 14a–8(i)(8). 

As proposed, a company would be 

permitted to exclude a proposal under 

Rule 14a–8(i)(8) if it: 

• Would disqualify a nominee who is 

standing for election; 

• Would remove a director from 

office before his or her term expired; 

• Questions the competence, business 

judgment, or character of one or more 

nominees or directors; 

• Nominates a specific individual for 

election to the board of directors, other 

than pursuant to Rule 14a–11, an 

applicable State law provision, or a 

company’s governing documents; or 

• Otherwise could affect the outcome 

of the upcoming election of directors. 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56731 

677See letters from 13D Monitor; ACSI; AFL–CIO; 

AFSCME; Joseph Ahearn (‘‘J. Ahearn’’); Rahim Ali 

(‘‘R. Ali’’); AllianceBernstein; Amalgamated Bank; 

Americans for Financial Reform; Australian Reward 

Investment Alliance (‘‘ARIA’’); AUST(Q) 

Superannuation (‘‘AUST(Q)’’); W. Baker; Barclays; 

BCIA; Bebchuk, et al.; R. Blake; William B. Bledsoe 

(‘‘W. Bledsoe’’); Brigham and Associates, LLC 

(‘‘Brigham’’); British Insurers; Ethan S. Burger (‘‘E. 

Burger’’); J. Burke; CalPERS; CalSTRS; Calvert; Cbus 

(‘‘Cbus’’); CFA Institute; John P. Chaney (‘‘J. 

Chaney’’); The Christopher Reynolds Foundation of 

New York (‘‘Christopher Reynolds Foundation’’); 

CII; COPERA; Corporate Library; Central Pension 

Fund of the International Union of Operating 

Engineers (‘‘CPF’’); CRMC; L. Dallas; Mike G. Dill 

(‘‘M. Dill’’); T. DiNapoli; Dominican Sisters of Hope; 

Andrew H. Dral (‘‘A. Dral’’); D. Eshelman; First 

Affirmative; Florida State Board of Administration; 

Martin Fox (‘‘M. Fox’’); Raymond E. Frechette (‘‘R. 

Frechette’’); Glass Lewis; James J. Givens (‘‘J. 

Givens’’); Governance for Owners (‘‘Governance for 

Owners’’); GovernanceMetrics; Michael D. 

Grabowski (‘‘M. Grabowski’’); Greenlining Institute 

(‘‘Greenlining’’); Hermes; HESTA Super Fund 

(‘‘HESTA’’); Sheryl Hogan (‘‘S. Hogan’’); David G. 

Hood (‘‘D. Hood’’); IAM; ICGN; Frank Coleman 

Inman (‘‘F. Inman’’); Ironfire; Melinda Katz (‘‘M. 

Katz’’); Michael E. Kelley (‘‘M. Kelley’’); Peter C. 

Kelly (‘‘P. Kelly’’); Key Equity Investors, Inc. (‘‘Key 

Equity Investors’’); Victor Kimball (‘‘V. Kimball’’); 

Jeffery Kondracki (‘‘J. Kondracki’’); A. Krakovsky; 

Paul E. Kritzer (‘‘P. Kritzer’’); LACERA; C. Levin; 

Lanny D. Levin (‘‘L. Levin’’); LIUNA; LUCRF; Marco 

Consulting; Maine Securities Corporation (‘‘Maine 

Securities’’); B. McDonnell; James McRitchie (‘‘J. 

McRitchie’’); Mercy Investment Program; M. Metz; 

David B. Moore (‘‘D. Moore’’); Karen L. Morris (‘‘K. 

Morris’’); Robert Moulton-Ely (‘‘R. Moulton-Ely’’); 

Motor Trades Association of Australia 

Superannuation Fund Pty Limited (‘‘MTAA’’); 

Murray & Murray & Co., LPA (‘‘Murray & Murray’’); 

William J. Nassif (‘‘W. Nassif’’); Tom Nappi (‘‘T. 

Nappi’’); D. Nappier; Nathan Cummings 

Foundation; P. Neuhauser; Nine Law Firms; New 

Jersey State Investment Council (‘‘NJSIC’’); Norges 

Bank; Non-Government School Superannuation 

Fund (‘‘Non-Government’’); Ontario Teachers’ 

Pension Plan Board (‘‘Ontario Teachers’’); OPERS; 

Thomas Paine (‘‘T. Paine’’); Pax World; Pershing 

Square; Karl Putnam (‘‘K. Putnam’’); S. Ranzini; 

RacetotheBottom; Joan Reekie (‘‘J. Reekie’’); 

Relational; RiskMetrics; D. Roberts; D. Romine; 

Joseph Rozbicki (‘‘J. Rozbicki’’); Schulte Roth & 

Zabel; Shamrock; Shareowners.org; Sheet Metal 

Workers; Sisters of Mercy; Social Investment 

Forum; Sodali; Solutions; Laszlo Sterbinszky (‘‘L. 

Sterbinszky’’); Stringer Photography (‘‘Stringer’’); 

SWIB; J. Taub; Teamsters; Aleta Thielmeyer (‘‘A. 

Thielmeyer’’); TIAA–CREF; Trillium; TriState 

Coalition; T. Rowe Price; L. Tyson; Ursuline Sisters 

of Tildonk; Universities Supernnuation; USPE; 

ValueAct Capital; The Value Alliance and 

Corporate Governance Alliance (‘‘Value Alliance’’); 

R. VanEngelenhoven; Walden; B. Wilson; Leslie 

Wolfe (‘‘L. Wolfe’’); Steve Wolfe (‘‘S. Wolfe’’); Neil 

Wollman (‘‘N. Wollman’’); WSIB; Marcelo Zinn (‘‘M. 

Zinn’’). 

678See letters from 26 Corporate Secretaries; 3M; 

ABA; Advance Auto Parts; Aetna; AGL; Alcoa; 

Allstate; Alston & Bird; Ameriprise; American 

Bankers Association; American Express; Anadarko; 

Applied Materials; Association of Corporate 

Counsel; Avis Budget; Best Buy; Boeing; Boston 

Scientific; Brink’s; BRT; Burlington Northern; 

California Bar; Callaway; Caterpillar; Chevron; P. 

Clapman; Comcast; CSX; Cummins; Davis Polk; 

Deere; Devon; DTE Energy; DuPont; Eaton; Einstein 

Noah; Eli Lilly; ExxonMobil; FedEx; Financial 

Services Roundtable; FMC Corp.; FPL Group; 

Frontier; GE; General Mills; A. Goolsby; C. 

Holliday; Home Depot; Honeywell; IBM; ICI; Intel; 

JPMorgan Chase; E. J. Kullman; N. Lautenbach; 

MetLife; Microsoft; J. Miller; Motorola; NACD; NIRI; 

O’Melveny & Myers; Office Depot; P&G; PepsiCo; 

Pfizer; Piedmont; Praxair; Protective; Ryder; S&C; 

Safeway; Seven Law Firms; Shearman & Sterling; 

Sherwin-Williams; SIFMA; Simpson Thacher; 

Society of Corporate Secretaries; Southern 

Company; Tenet; Tesoro; Textron; Theragenics; 

Tidewater; Tompkins; G. Tooker; tw telecom; 

United Brotherhood of Carpenters; U.S. Bancorp; 

The Valspar Corporation (‘‘Valspar’’); Wachtell; 

Wells Fargo; Xerox. 

679See letters from AFL–CIO; CFA Institute; CII; 

Governance for Owners; C. Levin; Marco 

Consulting; SWIB. 

680See letters from CII; USPE. 

681See letters from American Express; Brink’s; 

BRT; CSX; Davis Polk; DuPont; C. Holliday; GE; 

General Mills; MetLife; Safeway; Tenet; Verizon. 

682See letters from ABA; BorgWarner; CII; J. 

McRitchie; P. Neuhauser; O’Melveny & Myers; 

Seven Law Firms. 

683See letters from ABA; Seven Law Firms. 

684See letter from ABA. 

685As we stated in the Proposing Release, a 

proposal would continue to be subject to exclusion 

under other provisions of Rule 14a–8. For example, 

a proposal would be excludable under Rule 14a– 

8(i)(2) if its implementation would cause the 

company to violate any State, Federal, or foreign 

law to which it is subject, or under Rule 14a–8(i)(3), 

Continued 

The proposed codification was not 

intended to change the staff’s prior 

interpretations or limit the application 

of the exclusion; it was intended to 

provide more clarity to companies and 

shareholders regarding the application 

of the exclusion. 

3. Comments on the Proposal 

The proposal to amend Rule 14a–8 to 

revise the election exclusion received 

widespread support. Numerous 

commenters expressed general support 

for the proposed amendments to Rule 

14a–8(i)(8), with many of the 

commenters supporting the 

Commission’s proposal as a whole 677

and other commenters supporting the 

amendments while opposing Rule 14a– 

11.678 Some commenters expressly 

supported the adoption of both Rule 

14a–11 and amendments to Rule 14a– 

8(i)(8).679 Some commenters indicated 

that the adoption of only the proposed 

amendments to Rule 14a–8(i)(8), 

without Rule 14a–11, would not address 

current shortcomings in corporate 

governance and achieve the 

Commission’s stated objectives.680 Of 

the commenters that supported the Rule 

14a–8 amendments but opposed Rule 

14a–11, many believed the amendments 

to Rule 14a–8 would allow procedures 

for the inclusion of shareholder 

nominees in company proxy materials 

to evolve and private ordering under 

State law to continue, unfettered by the 

complexities of a Federal standard that 

would apply uniformly to differently 

situated companies operating under 

diverse State law regimes.681

While supporting the amendments to 

Rule 14a–8(i)(8), some commenters 

expressed concerns about certain 

aspects of the amendments or 

recommended certain changes.682 Two 

commenters expressed concerns about 

the codification of staff policies and 

interpretations under the current 

version of Rule 14a–8(i)(8).683 One 

commenter expressed concerns that the 

proposed amendments to Rule 14a– 

8(i)(8) are broader than necessary to 

allow proposals seeking to establish 

access to a company’s proxy materials 

and have the potential of significantly 

changing the administration of Rule 

14a–8(i)(8) with respect to other types of 

proposals.684 The commenter also noted 

that the fact that only four types of 

proposals have been addressed by the 

staff in the Rule 14a–8 process could be 

attributed to the fact that the current 

standard under Rule 14a–8(i)(8) 

operated to avoid other impermissible 

proposals from being presented in the 

first place. If the current standard is 

repealed, this commenter worried that 

the staff would have no basis upon 

which to assess proposals that attempt 

to circumvent or supplement the 

Commission’s proxy solicitation rules. 

The commenter believed that 

eliminating the current standard would 

go beyond what is needed to permit 

shareholders to submit proposals 

seeking to amend, or request an 

amendment to, a company’s governing 

documents to establish a procedure for 

including shareholder-nominated 

candidates for director in a company’s 

proxy materials. The commenter 

suggested retaining the current standard 

in Rule 14a–8(i)(8) and amending the 

language only to specifically authorize 

proposals seeking to establish access to 

a company’s proxy materials and 

require the disclosure provided in 

proposed Rule 14a–19. 

4. Final Rule Amendment 

As noted above in Section I.A., we do 

not believe that adopting changes to 

Rule 14a–8(i)(8) alone, without adopting 

Rule 14a–11, will achieve our goal of 

facilitating shareholders’ ability to 

exercise their traditional State law rights 

to nominate directors. We believe that 

revising Rule 14a–8 will provide an 

additional avenue for shareholders to 

indirectly exercise those rights; 

therefore, the final rules include a 

revision to Rule 14a–8(i)(8). As adopted, 

companies will no longer be able to rely 

on Rule 14a–8(i)(8) to exclude a 

proposal seeking to establish a 

procedure in a company’s governing 

documents for the inclusion of one or 

more shareholder nominees for director 

in the company’s proxy materials.685


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56732 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

if the proposal or supporting statement was 

contrary to any of the Commission’s proxy rules. 

686We note that the rule text adopted differs 

slightly from the proposed rule text as a result of 

technical modifications we made to better reflect 

our intent with respect to the rule. We are adopting 

amended Rule 14a–8(i)(8) with the language ‘‘seeks 

to include a specific individual in the company’s 

proxy materials for election to the board of 

directors’’ rather than ‘‘nominates a specific 

individual for election to the board of directors, 

other than pursuant to Rule 14a–11, an applicable 

State law provision, or a company’s governing 

documents.’’ The change in the language from 

‘‘nominates’’ to ‘‘seeks to include’’ more accurately 

reflects the fact that Rule 14a–8 cannot be used as 

a means to nominate a candidate for election to the 

board of directors. We also deleted the language 

regarding Rule 14a–11, an applicable State law 

provision, or a company’s governing documents 

because we believe it is unnecessary. 687See letter from ICI. 

688Shareholders submitting a proposal that seeks 

to establish a procedure under a company’s 

governing documents for the inclusion of one or 

more shareholder director nominees in the 

company’s proxy materials would be subject to Rule 

14a–8’s current requirements. See footnote 685 

above. 

689See letters from CII; Florida State Board of 

Administration; United Brotherhood of Carpenters. 

690See letters from ICI; Keating Muething; 

O’Melveny & Myers. 

691This approach is different from the disclosure 

requirements the Commission proposed in the 

Shareholder Proposals Release in 2007; however, it 

is consistent with the overall requirements relating 

to the submission of shareholder proposals— 

In addition, we are adopting the 

proposed amendment to codify the prior 

staff interpretations largely as proposed. 

As adopted, companies will be 

permitted to exclude a shareholder 

proposal pursuant to Rule 14a–8(i)(8) if 

it: 

• Would disqualify a nominee who is 

standing for election; 

• Would remove a director from 

office before his or her term expired; 

• Questions the competence, business 

judgment, or character of one or more 

nominees or directors; 

• Seeks to include a specific 

individual in the company’s proxy 

materials for election to the board of 

directors; or 

• Otherwise could affect the outcome 

of the upcoming election of directors.686

We believe that shareholders and 

companies will benefit from the 

enhanced clarity that the amended rule 

will provide concerning the application 

of the rule. We do not believe that the 

amendments will result in confusion 

with regard to the rule’s application 

because the amendments do not change 

the manner in which Rule 14a–8(i)(8) 

has been, and will continue to be, 

interpreted by the staff with respect to 

other types of proposals. 

The amendments to Rule 14a–8(i)(8) 

could result in shareholders proposing 

amendments to a company’s governing 

documents that would establish 

procedures under a company’s 

governing documents for the inclusion 

of one or more shareholder nominees for 

director in company proxy materials. 

These proposals could seek to include a 

number of provisions relating to 

nominating directors for inclusion in 

company proxy materials, and 

disclosures related to such nominations, 

that require a different ownership 

threshold, holding period, or other 

qualifications or representations than 

those contained in Rule 14a–11. To the 

extent that shareholders are successful 

in adopting amendments to a company’s 

governing documents to establish 

procedures for the inclusion of one or 

more shareholder nominees for director 

in the company’s proxy materials, we 

note that the provision would be an 

additional avenue for shareholders to 

submit nominees for inclusion in 

company proxy materials, not a 

substitute for, or restriction on, Rule 

14a–11. While such amendments 

proposed by shareholders through Rule 

14a–8 would not be excludable under 

Rule 14a–8(i)(8) as amended, a company 

may seek to exclude such a proposal on 

another basis. For example, to the extent 

a proposal sought to limit the 

application of Rule 14a–11, a company 

could seek to exclude the proposal 

pursuant to Rule 14a–8(i)(3) on the basis 

that it is contrary to the proxy rules. We 

considered whether permitting 

proposals to allow additional means for 

shareholder director nominees to be 

included in company proxy materials 

would create confusion or lack of 

certainty for companies and their 

shareholders in light of the final 

provisions of Rule 14a–11. In the end, 

however, we have concluded that this 

possibility of confusion can be 

addressed through disclosure and is 

more than offset by the benefits of 

facilitating shareholders’ ability to 

determine that their companies should 

have additional provisions allowing for 

inclusion of shareholder nominees in 

company proxy materials. 

One commenter opposed the 

application of proposed Rule 14a–8(i)(8) 

to investment companies for the same 

reasons that it opposed the application 

of proposed Rule 14a–11 to investment 

companies.687 We have decided to make 

amended Rule 14a–8(i)(8) applicable to 

investment companies for the same 

reasons that we are making Rule 14a–11 

applicable to investment companies. 

Rule 14a–8(i)(8) is intended to further 

facilitate shareholders’ traditional State 

law rights to nominate directors, which 

apply to the shareholders of investment 

companies. As discussed above, we do 

not believe that the regulatory 

protections offered by the Investment 

Company Act or the fact that open-end 

management investment companies are 

not required by State law to hold annual 

meetings serves to decrease the 

importance of the rights that are granted 

to shareholders under State law. For 

further discussion of our reasons for 

applying the rule to investment 

companies, see Section II.B.3.b. 

5. Disclosure Requirements 

We did not propose any new 

disclosure requirements for a 

shareholder that submits a proposal that 

would amend, or that requests an 

amendment to, a company’s governing 

documents to address the company’s 

nomination procedures for inclusion of 

shareholder nominees in company 

proxy materials or disclosures related to 

those shareholder provisions.688 We 

solicited comment on whether 

additional disclosure from a shareholder 

submitting such a proposal would be 

appropriate. Three commenters opposed 

requiring disclosure from shareholders 

who submit such a proposal pursuant to 

Rule 14a–8 that differs from disclosure 

required of shareholders who submit 

other types of Rule 14a–8 proposals.689

Three commenters recommended 

generally that a shareholder who 

submits a Rule 14a–8 proposal regarding 

a procedure to include shareholder 

nominees for director in a company’s 

proxy materials should be required to 

provide additional disclosure (e.g., 

disclosure about its long-term interest in 

the company and intentions regarding 

the shareholder proposal) so that other 

shareholders could make a fullyinformed voting decision.690 They 

argued that disclosure at the time of a 

nomination pursuant to such a 

procedure would relate only to the 

election of specific nominees; it would 

not provide shareholders with enough 

information to make a voting decision 

on the proposed procedure and its 

effect. 

As we stated in the Proposing Release, 

it is our view that disclosure at the time 

a nominee is submitted and an actual 

vote is taken on a shareholder nominee 

is sufficient. Therefore, we are not 

adopting any new disclosure 

requirements for a shareholder simply 

submitting such a proposal because we 

believe that a shareholder may simply 

want to amend the company’s 

procedures for including shareholder 

nominees in company proxy materials, 

but may not intend to nominate any 

particular individual.691


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56733 

generally, shareholder proponents are not required 

to provide any specific type of disclosure along 

with their proposal. 

692See North Dakota Publicly Traded 

Corporations Act, N.D. Cent. Code § 10–35–08 

(2009). In 2007, North Dakota amended its 

corporate code to permit five percent shareholders 

to provide a company notice of intent to nominate 

directors and require the company to include each 

such shareholder nominee in its proxy statement 

and form of proxy. See N.D. Cent. Code § 10–35 et 

al. (2007). 

693See proposed Rule 14a–19. 

694See proposed Rule 14a–19. 

695See proposed Rule 14a–19(a). 

696See proposed Rule 14a–19(b). This 

information would identify the nominee, describe 

certain legal proceedings, if any, related to the 

nominee, and describe certain of the nominee’s 

transactions and relationships with the company. 

See Items 7(a), (b), and (c) of Schedule 14A. This 

information also would include biographical 

information and information concerning interests of 

the nominee. See Item 5(b) of Schedule 14A. With 

respect to a nominee for director of an investment 

company, the disclosure would include certain 

basic information about the nominee and any 

arrangement or understanding between the nominee 

and any other person pursuant to which he was 

selected as a nominee; information about the 

positions, interests, and transactions and 

relationships of the nominee and his immediate 

family members with the company and persons 

related to the company; information about the 

amount of equity securities of funds in a fund 

complex owned by the nominee; and information 

describing certain legal proceedings related to the 

nominee, including legal proceedings in which the 

nominee is a party adverse to, or has a material 

interest adverse to, the company or any of its 

affiliated persons. See paragraph (b) of Item 22 of 

Schedule 14A. 

697See proposed Rule 14a–19(c). 

698See proposed Rule 14a–19(d). 

699See proposed Rule 14a–19(e). 

700See proposed Rule 14a–19(f). 

701See letter from P. Neuhauser. 

702See letter from Cleary. 

In proposing amendments to Rule 

14a–8(i)(8), we noted that the 

amendments could result in shareholder 

proposals that would establish 

procedures for nominating directors and 

disclosures related to such nominations 

that require a different ownership 

threshold, holding period, or other 

qualifications or representations than 

those proposed in Rule 14a–11. In 

addition, a state could set forth in its 

corporate code,692 or a company may 

choose to amend its governing 

documents, to establish nomination or 

disclosure provisions in addition to 

those provided pursuant to Rule 14a–11 

(e.g., a company could choose to allow 

shareholders to have their nominees 

included in the company’s proxy 

materials regardless of ownership—in 

that instance, the company’s provision 

would apply for certain shareholders 

who otherwise could not have their 

nominees included in the company’s 

proxy materials pursuant to Rule 14a– 

11). Accordingly, we proposed 

amendments to our proxy rules to 

address the disclosure requirements 

when a nomination is made pursuant to 

such a provision.693

As proposed, Rule 14a–19 would 

apply to a shareholder nomination for 

director for inclusion in the company’s 

proxy materials made pursuant to 

procedures established pursuant to State 

law or by a company’s governing 

documents. The proposed rule would 

require a nominating shareholder or 

group to include in its shareholder 

notice on Schedule 14N (which, under 

the Proposal, also would be filed with 

the Commission on the date provided to 

the company) disclosures about the 

nominating shareholder or group and 

their nominee that are similar to what 

would be required in an election 

contest.694

Specifically, the notice on Schedule 

14N, as proposed, would be required to 

include: 

• A statement that the nominee 

consents to be named in the 

company’s proxy statement and to 

serve on the board if elected, for 

inclusion in the company’s proxy 

statement; 695

• Disclosure about the nominee 

complying with the requirements of 

Item 4(b), Item 5(b), and Items 7(a), (b) 

and (c) and, for investment 

companies, Item 22(b) of Exchange 

Act Schedule 14A, as applicable, for 

inclusion in the company’s proxy 

statement; 696

• Disclosure about the nominating 

shareholder or members of a 

nominating shareholder group 

consistent with the disclosure 

currently required pursuant to Item 

4(b) and Item 5(b) of Schedule 

14A; 697

• Disclosure about whether the 

nominating shareholder or any 

member of a nominating shareholder 

group has been involved in any legal 

proceeding during the past five years, 

as specified in Item 401(f) of 

Regulation S–K. Disclosure pursuant 

to this section need not be provided 

if provided in response to Items 4(b) 

and 5(b) of Schedule 14A; 698

• The following disclosure regarding 

the nature and extent of the 

relationships between the nominating 

shareholder or group and nominee 

and the company or any affiliate of 

the company: 

• Any direct or indirect material 

interest in any contract or 

agreement between the nominating 

shareholder or group or the 

nominee and the company or any 

affiliate of the company (including 

any employment agreement, 

collective bargaining agreement, or 

consulting agreement); 

• Any material pending or threatened 

litigation in which the nominating 

shareholder or group or nominee is 

a party or a material participant, 

and that involves the company, any 

of its officers or directors, or any 

affiliate of the company; and 

• Any other material relationship 

between the nominating 

shareholder or group or the 

nominee and the company or any 

affiliate of the company not 

otherwise disclosed; 699 and 

• Disclosure of any Web site address on 

which the nominating shareholder or 

group may publish soliciting 

materials.700

These disclosures would be included in 

the company’s proxy materials pursuant 

to proposed new Item 7(f) of Schedule 

14A, or in the case of investment 

companies, proposed Item 22(b)(19) of 

Schedule 14A. 

In addition, under the Proposal, the 

nominating shareholder or group would 

be required to identify the shareholder 

or group making the nomination and the 

amount of their ownership in the 

company on Schedule 14N. The filing 

would be required to include, among 

other disclosures: 

• The name and address of the 

nominating shareholder or each member 

of the nominating shareholder group; 

and 

• Information regarding the aggregate 

number and percentage of the securities 

entitled to be voted, including the 

amount beneficially owned and the 

number of shares over which the 

nominating shareholder or each member 

of the nominating shareholder group has 

or shares voting or disposition power. 

We did not receive a significant 

amount of comment specifically 

addressing proposed Rule 14a–19. One 

commenter believed that the disclosure 

requirements of Rules 14a–18 and 14a– 

19 should be virtually identical.701 The 

commenter highlighted certain 

discrepancies, such as the intent to 

retain the requisite shares through, and 

subsequent to, the date of election. 

Another commenter saw no need for a 

separate rule to deal with nominations 

submitted under State law or a 

company’s governing documents and 

therefore urged the Commission not to 

adopt Rule 14a–19.702 The commenter 

believed there are no policy grounds to 

justify disparate treatment of 

nominations submitted under State law 

or a company’s governing documents. It 

warned that a separate rule would only 

create confusion. Another commenter 


emcdonald on DSK2BSOYB1PROD with RULES2
56734 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

703See letter from Curtis. 704As noted in footnote 511 above, the applicable 

disclosure requirement in Item 401(f) of Regulation 

S–K was amended in the Proxy Disclosure 

Enhancements Adopting Release to require 

disclosure regarding legal proceedings for the past 

10 years as opposed to past five years. Thus, 

disclosure would be required about a nominee’s or 

nominating shareholder’s participation in legal 

proceedings during the past 10 years. We also are 

making clarifying changes to the disclosure 

required regarding the nature and extent of 

relationships between the nominating shareholder 

or group and/or nominee and/or the company or its 

affiliates. See footnote 514 and accompanying text 

in Section II.B.8.c.i. above. 

705See proposed Rule 14a–9(c). 

706As adopted, Item 6(d) of Schedule 14N will 

require disclosure about a nominating shareholder’s 

involvement in legal proceedings during the past 

ten years, rather than five years as was proposed. 

This is due to the Commission’s recent amendment 

of Item 401(f) of Regulation S–K. See footnotes 511 

and 704 above. 

707 If a company did not hold an annual meeting 

during the prior year, or if the date of the meeting 

has changed by more than 30 calendar days from 

the prior year, then the nominating shareholder or 

group must provide notice a reasonable time before 

the registrant mails its proxy materials. 

708See proposed Item 5.07 to Form 8–K. 

709See letter from ICI. 

710See letter from ABA. 

suggested that we extend the disclosure 

requirement to nominations submitted 

pursuant to a provision under foreign 

law.703

As we stated in the Proposing Release, 

we believe the proposed additional 

disclosure requirements are necessary to 

provide shareholders with full and fair 

disclosure of information that is 

material when a choice among directors 

to be elected is presented; thus, we are 

adopting the disclosure requirement 

largely as proposed.704 As noted above, 

one commenter suggested that the 

disclosure standard should apply to 

nominations made pursuant to foreign 

law. We agree that the disclosure is 

necessary regardless of the source of the 

ability to nominate candidates for 

director. We therefore have clarified that 

the disclosure requirement extends not 

only to nominations made pursuant to 

State law or a company’s governing 

documents, but also pursuant to foreign 

law (in the case of a non-U.S. domiciled 

company that does not qualify as a 

foreign private issuer). We continue to 

believe that these disclosures will assist 

shareholders in making an informed 

voting decision with regard to any 

nominee or nominees put forth by the 

nominating shareholder or group, in 

that the disclosures would enable 

shareholders to gauge the nominating 

shareholder’s or group’s interest in the 

company. We understand the concern 

that a separate disclosure rule for 

nominations made pursuant to State or 

foreign law provisions, or a company’s 

governing documents could create 

confusion. We note, however, that 

certain disclosure provisions or 

certifications applicable to Rule 14a–11 

nominations may not be applicable to 

nominations made pursuant to other 

provisions. For example, State or foreign 

law provisions, or the company’s 

governing documents may require 

different ownership thresholds or 

holding periods. Therefore, we believe it 

is necessary to have separate disclosure 

requirements for nominations made 

pursuant to State or foreign law, or a 

company’s governing documents. As 

with disclosures made in connection 

with a Rule 14a–11 nomination, the 

nominating shareholder or group would 

be liable for any materially false or 

misleading statements in these 

disclosures pursuant to new paragraph 

(c) of Rule 14a–9.705

As noted above, we have restructured 

Rule 14a–11, Rule 14a–18, and 

Schedule 14N. Similarly, while we are 

adopting the disclosure requirements 

largely as proposed in Rule 14a–19,706

they are now included in Item 6 of 

Schedule 14N. In addition, because we 

moved the disclosure requirements for 

Rule 14a–11 from proposed Rule 14a–18 

into Schedule 14N, the requirements for 

shareholders submitting nominations 

pursuant to a provision in State law or 

a company’s governing documents are 

being adopted as new Rule 14a–18. 

Under the Proposal, a shareholder 

submitting a nomination pursuant to a 

State law provision or a provision in a 

company’s governing documents would 

be required to file a Schedule 14N (with 

the disclosures required by that 

Schedule) by the date specified in the 

advance notice provision, or where no 

such provision is in place, no later than 

120 calendar days before the date the 

company mailed its proxy materials for 

the prior year’s annual meeting.707 We 

are adopting this requirement as 

proposed. We note that it is likely that 

a State or foreign law provision or a 

provision in a company’s governing 

documents will provide a deadline for 

submission of nominations made 

pursuant to those provisions. While we 

believe that shareholders submitting 

nominations pursuant to those 

provisions should provide the 

disclosure required by Schedule 14N, 

we believe it is appropriate to defer to 

the deadline, if any, set forth in those 

provisions. In this regard, we note that 

timing concerns present in the Rule 

14a–11 nomination context (e.g., timing 

requirements for engaging in the staff 

no-action process) are not present in 

this context. 

D. Other Rule Changes 

1. Disclosure of Dates and Voting 

Information 

As proposed, if a company did not 

hold an annual meeting during the prior 

year, or if the date of the meeting has 

changed by more than 30 days from the 

prior year, within four business days of 

determining the anticipated meeting 

date a company would be required to 

file a Form 8–K to disclose the date by 

which a nominating shareholder or 

group must submit notice to include a 

nominee in the company’s proxy 

materials pursuant to Rule 14a–11.708

The date disclosed as the deadline for 

such shareholder nominations for 

director would be required to be a 

reasonable time before the company 

mails its proxy materials for the 

meeting. We also proposed to require a 

registered investment company that is a 

series company to file a Form 8–K 

disclosing the company’s net assets as of 

June 30 of the calendar year 

immediately preceding the calendar 

year of the meeting and the total number 

of the company’s shares that are 

outstanding and entitled to vote for the 

election of directors (or if votes are to 

be cast on a basis other than one vote 

per share, then the total number of votes 

entitled to be voted and the basis for 

allocating votes) at the annual meeting 

of shareholders (or, in lieu of such an 

annual meeting, a special meeting of 

shareholders) as of the end of the most 

recent calendar quarter. 

We did not receive much comment on 

this aspect of the rule. One commenter 

urged the Commission not to require the 

Form 8–K filing for investment 

companies, which generally are not 

required to file Form 8–K.709 The 

commenter favored instead a 

requirement for investment companies 

to inform shareholders through another 

method (or combination of methods) of 

disclosure reasonably designed to 

provide notice of the date, including via 

a press release or posting information on 

the company’s Web site. One 

commenter supported the proposed 

instruction to Item 5.07 of Form 8–K.710

We are adopting this requirement 

substantially as proposed, although the 

requirement will be in new Item 5.08 of 

Form 8–K. A company will be required 

to file a Form 8–K, within four business 

days of determining the anticipated date 

of the meeting, disclosing the date by 

which a nominating shareholder or 

group must submit notice to include a 

nominee in the company’s proxy 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56735 

711See new Item 5.08 of Form 8–K and new 

General Instruction B.1. to Form 8–K. A late filing 

of such form would result in the registrant not being 

current or timely for purposes of rules and 

regulations related to form eligibility and the resale 

of securities. The company would be deemed 

current once the Form 8–K is filed. 

712See General Instruction B.1 and Item 5.08(b) 

of Form 8–K; Rules 13a–11(b)(3) and 15d–11(b)(3); 

and Instruction 2 to Rule 14a–11(b)(1). In the case 

of registered investment companies, nominating 

shareholders may rely on the information contained 

in the Form 8–K filed in connection with the 

meeting, unless the nominating shareholder or 

group knows or has reason to know that the 

information contained therein is inaccurate. See 

discussion in footnote 280. 

713We are not adopting the proposed requirement 

that a registered investment company that is a series 

company file a Form 8–K disclosing the company’s 

net assets as of June 30 of the calendar year 

immediately preceding the calendar year of the 

meeting. We proposed this requirement in 

connection with our proposal to use tiered 

thresholds based on net assets to determine 

eligibility under Rule 14a–11. Since the rule we are 

adopting does not use tiered thresholds, the 

proposed requirement is no longer necessary. 

714See new Rule 14a–5(e)(3). 

715The term equity security also includes any 

equity security of any insurance company which 

would have been required to be registered pursuant 

to Section 12 of the Exchange Act except for the 

exemption contained in Section 12(g)(2)(G) of the 

Act or any equity security issued by a closed-end 

investment company registered under the 

Investment Company Act of 1940. See Exchange 

Act Rule 13d–1(i). 

716See Exchange Act Rule 13d–1. 

717See Exchange Act Rule 13d–1(b). 

718See Exchange Act Rule 13d–1(c). 

materials pursuant to Rule 14a–11, 

which date shall be a reasonable time 

before the registrant mails its proxy 

materials for the meeting.711 We also 

have clarified that where a company is 

required to include shareholder director 

nominees in the company’s proxy 

materials pursuant to an applicable state 

or foreign law provision, or a provision 

in the company’s governing documents 

then the company is required to disclose 

the date by which a nominating 

shareholder or nominating shareholder 

group must submit the Schedule 14N 

required pursuant to Rule 14a–18. 

A registered investment company that 

is a series company also must disclose 

the total number of the company’s 

shares that are outstanding and entitled 

to vote for the election of directors (or 

if votes are to be cast on a basis other 

than one vote per share, then the total 

number of votes entitled to be voted and 

the basis for allocating such votes) at the 

shareholder meeting as of the end of the 

most recent calendar quarter.712 We 

believe it is important to provide 

shareholders with information regarding 

the deadline for submitting such 

nominations in the event that the date 

of the meeting at which the election of 

directors will take place changes 

significantly. Moreover, we have 

decided to require registered investment 

companies to make the disclosures on 

Form 8–K, as proposed, rather than 

through another method or combination 

of methods because we believe that the 

information that we are requiring is 

important information that should be 

filed with the Commission and 

accessible on EDGAR rather than merely 

disclosed on a Web site or in a press 

release.713

Exchange Act Rule 14a–5 requires 

registrants to disclose in a proxy 

statement the deadlines for submitting 

shareholder proposals and matters 

submitted pursuant to advance notice 

bylaws. We are amending Rule 14a–5 to 

also require companies to disclose the 

deadline for submitting nominees for 

inclusion in the company’s proxy 

materials for the company’s next annual 

meeting of shareholders. This provision 

will apply with respect to inclusion of 

nominations in a company’s proxy 

materials pursuant to Rule 14a–11, an 

applicable state or foreign law 

provision, or a company’s governing 

documents.714 We believe that it is 

necessary to conform the existing 

requirements in Rule 14a–5, consistent 

with the proposal to give adequate 

notice to shareholders about their ability 

to submit a nominee or nominees for 

inclusion in a company’s proxy 

materials pursuant to Rule 14a–11. The 

change should help to avoid any 

potential confusion regarding the date 

by which shareholders seeking to have 

a nominee included in a company’s 

proxy materials would need to submit a 

Schedule 14N pursuant to Rule 14a–11 

or Rule 14a–18. 

2. Beneficial Ownership Reporting 

Requirements 

As adopted, Rule 14a–11 requires that 

a nominating shareholder or group hold 

at least 3% of the voting power of the 

company’s securities entitled to be 

voted on the election of directors. 

Although unnecessary to be able to use 

the rule, it is possible that in aggregating 

shares to meet the ownership 

requirement, a nominating shareholder 

or group will trigger the reporting 

requirements of Regulation 13D–G, 

which requires that a shareholder or 

group that beneficially owns more than 

5% of a voting class of any equity 

security registered pursuant to Section 

12 file beneficial ownership reports.715

Therefore, nominating shareholders will 

need to consider whether they have 

formed a group under Exchange Act 

Section 13(d)(3) and Rule 13d–5(b)(1) 

that is required to file beneficial 

ownership reports. Any person (which 

includes a group as defined in Rule 

13d–5(b)(1)) who is directly or 

indirectly the beneficial owner of more 

than 5% of a class of equity securities 

registered under Exchange Act Section 

12 must report that ownership by filing 

an Exchange Act Schedule 13D with the 

Commission.716 There are exceptions to 

this requirement, however, that permit 

such a person to report that ownership 

on Schedule 13G rather than Schedule 

13D. One exception permits filings on 

Schedule 13G for a specified list of 

qualified institutional investors who 

have acquired the securities in the 

ordinary course of their business and 

with neither the purpose nor the effect 

of changing or influencing control of the 

company.717 A second exception 

applies to persons who beneficially own 

more than 5% of a subject class of 

securities if they acquired the securities 

with neither the purpose nor the effect 

of changing or influencing control of the 

company and they are not directly or 

indirectly the beneficial owner of 20% 

or more of the subject class of 

securities.718

Central to Schedule 13G eligibility 

under the exceptions discussed above is 

that the shareholder be a passive 

investor that has acquired the securities 

without the purpose, or the effect, of 

changing or influencing control of the 

company. In addition, shareholders who 

are filing as qualified institutional 

investors must have acquired the 

securities in the ordinary course of their 

business. Typically, persons who seek 

to nominate candidates for a company’s 

board of directors would be unable to 

meet these eligibility requirements to 

file on Schedule 13G. As we stated in 

the Proposing Release, however, we 

believe that the formation of a 

shareholder group solely for the purpose 

of nominating one or more directors 

pursuant to proposed Rule 14a–11, the 

nomination of one or more directors 

pursuant to proposed Rule 14a–11, or 

soliciting activities in connection with 

such a nomination (including soliciting 

in opposition to a company’s nominees) 

should not result in a nominating 

shareholder or nominating shareholder 

group losing its eligibility to file on 

Schedule 13G. As a result, we proposed 

to revise the requirement that the first 

and second categories of persons who 

may report their ownership on Schedule 

13G must have acquired the securities 

without the purpose or effect of 

changing or influencing control of the 

company and, in the case of Rule 13d– 

1(b), in the ordinary course of business, 

to provide an exception for activities 

solely in connection with a nomination 

under Rule 14a–11. 


emcdonald on DSK2BSOYB1PROD with RULES2
56736 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

719See letters from CalSTRS; CFA Institute; CII; 

Florida State Board of Administration; ICI; Schulte 

Roth & Zabel. Another commenter, ICGN, did not 

expressly address the proposed amendment but 

asked the Commission to clarify the definition of 

‘‘group’’ so that shareholders would not be 

dissuaded from acting collectively to use Rule 14a– 

11 out of concern that a Schedule 13D filing 

obligation would arise. 

720See letter from CII. In contrast, two 

commenters stated that the proposed exceptions 

should not be extended outside the context of Rule 

14a–11, and agreed that it would not be possible to 

address the eligibility standards in provisions of 

State law or a company’s governing documents or 

ensure that there is no change in control attempt. 

See letters from ABA; Alston & Bird. 

721See letter from Schulte Roth & Zabel. 

722See letter from P. Neuhauser. 

723See letters from ABA; Alston & Bird; BRT; 

Cleary; Microsoft; Seven Law Firms; Shearman & 

Sterling; Society of Corporate Secretaries; Vinson & 

Elkins. 

724See letters from ABA; Cleary; Microsoft; Seven 

Law Firm; Shearman & Sterling. 

725See letter from ABA. 

726See letter from Seven Law Firms. 

727See letter from ABA. 

728See letters from ABA; Alston & Bird; BRT; 

Seven Law Firms; Society of Corporate Secretaries; 

Vinson & Elkins. 

729See letter from ABA. 

730 Id 

731We did not propose the change to the 

certifications in Schedule 13G; however, we believe 

this conforming change is necessary to reflect the 

intent of the exception. 

Comments on the proposal were 

mixed. Some commenters generally 

supported the proposed exceptions from 

the Schedule 13D filing obligation for a 

nominating shareholder or group 

conducting activities solely in 

connection with a Rule 14a–11 

nomination so that it would be eligible 

to report on Schedule 13G rather than 

Schedule 13D.719 One such commenter 

added that the exceptions also should 

be available to a nominating shareholder 

or group submitting nominees pursuant 

to State law or a company’s governing 

documents.720 One commenter 

predicted the amendment would 

encourage use of Rule 14a–11 by large 

shareholders who are knowledgeable 

about the company but may be reluctant 

to take action that may jeopardize their 

Schedule 13G filer status.721 One 

commenter observed more generally 

that a Schedule 13D filing is 

unnecessary if the filing requirement of 

Rule 14a–2(b)(7) is retained because 

such filings would provide sufficient 

notice to the market.722 Even if such 

filing requirement is not retained, the 

commenter believed that a Schedule 

13D is unnecessary because the 

underlying assumption of Rule 14a–11 

is that there is no control intent. 

On the other hand, other commenters 

opposed generally the proposed 

exceptions from the Schedule 13D filing 

obligation.723 Some of these 

commenters expressed reservations 

about creating a broad exemption or 

carve-out from Exchange Act Section 

13(d) ‘‘control’’ concepts.724 One 

commenter noted that Rules 13d–1(b), 

(c) and (e) track the use of the phrase 

‘‘changing or influencing control of the 

issuer’’ from Exchange Act Section 

13(d)(5).725 This commenter did not 

believe there is a persuasive basis for 

the Commission to provide that, under 

all circumstances, a shareholder or 

group seeking to nominate a director, in 

opposition to the election of incumbent 

directors, is not seeking to ‘‘influence’’ 

control of the company. One commenter 

stated that most election contests would 

fall within the concept of ‘‘influencing 

the control of the issuer’’ because they 

focus on the governance, strategic 

direction and policy initiatives of the 

company.726 Another commenter noted 

that the Schedule 14N certifications 

require only that a nominating 

shareholder has no intention of 

‘‘changing control’’ of the company, but 

does not require the nominating 

shareholder to certify that it has no 

intention of ‘‘influencing control.’’ 727

Several commenters expressed concerns 

about inadequate disclosures that would 

result from the proposed exceptions or 

pointed to the useful disclosure 

required by Schedule 13D.728 One 

commenter observed that if a 

nominating shareholder or group has no 

plans regarding significant changes in 

the company or relationships with other 

parties regarding securities of the 

company, a Schedule 13D filing would 

not require significant information from 

a nominating shareholder or group 

beyond that required by Schedule 

14N.729 This commenter noted that if a 

nominating shareholder or group, 

however, has more complicated 

relationships or intentions relating to 

the company or its securities, the 

Schedule 13D filing would provide 

additional information that shareholders 

would find useful.730

We continue to believe that it is 

appropriate to provide an exception for 

activities solely in connection with a 

nomination pursuant to Rule 14a–11 to 

allow a nominating shareholder or 

group to report on Schedule 13G. 

Accordingly, we are adopting, as 

proposed, the exception from the 

requirement to file a Schedule 13D (and 

therefore permitting filing on Schedule 

13G) for activities undertaken solely in 

connection with a nomination under 

Rule 14a–11. In addition, we are 

adopting a change to the certifications 

in Schedule 13G to reflect this 

exception.731

It is important to note that any 

activity other than those provided for 

under Rule 14a–11 would make the 

exception inapplicable. For example, 

approaching a company’s board and 

urging them to consider strategic 

alternatives (e.g., sale of non-core assets 

or a leveraged recapitalization) would 

constitute activities outside of the Rule 

14a–11 nomination, and any nominating 

shareholder or group engaging in such 

activities most likely would be 

ineligible to file on Schedule 13G. The 

rule changes will not apply to 

nominating shareholders or groups that 

submit a nomination pursuant to an 

applicable state or foreign law 

provision, or a company’s governing 

documents because in those instances 

the applicable provisions may not limit 

the number of board seats for which a 

shareholder or group could nominate 

candidates or include a requirement that 

the nominating shareholder or group 

lack intent to change the control of the 

issuer or to gain a number of seats on 

the board of directors that exceeds the 

maximum number of nominees that the 

registrant could be required to include 

under Rule 14a–11 (as is the case under 

Rule 14a–11). Accordingly, we do not 

believe it would be appropriate to make 

a general determination by rule as to 

whether a nominating shareholder or 

group under an applicable state or 

foreign law provision, or a company’s 

governing documents would be eligible 

to file on Schedule 13G. Instead, this 

would be a fact-specific inquiry. 

We believe that the disclosures about 

the nominating shareholder or group 

required by Rule 14a–11 and Schedule 

14N are adequate to allow shareholders 

to make an informed decision and to 

keep the market apprised of 

developments regarding board 

nomination activities, and do not 

believe that requiring the additional 

disclosures in Schedule 13D is 

necessary for activities solely in 

connection with a nomination under 

Rule 14a–11. Because this exception is 

only available for purposes of the 

nomination, a nominating shareholder 

or group would need to reassess its 

eligibility to continue to report on 

Schedule 13G as a passive or qualified 

institutional investor after the election. 

For example, if a nominating 

shareholder is also the nominee and is 

successfully elected to the board, then 

the shareholder would likely be 

ineligible to continue filing on Schedule 

13G due to its ability as a director to 

directly or indirectly influence the 

management and policies of the 

company. We believe the limited scope 

of the exemption addresses commenters’ 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56737 

732 15 U.S.C. 78p. 

733As discussed in the Proposing Release, the 

Commission had previously proposed, in 2003, that 

a group formed solely for the purpose of nominating 

a director pursuant to Rule 14a–11, soliciting in 

connection with the election of that nominee, or 

having that nominee elected as a director be 

exempted from Exchange Act Section 16 reporting. 

734See Exchange Act Rule 13d–5(b) [17 CFR 

240.13d–5(b)]. 

735See Exchange Act Rule 16a–1(a)(1) [17 CFR 

240.16a–1(a)(1)]. 

736See Feder v. Martin Marietta Corp., 406 F.2d 

260 (2d Cir. 1969), cert. denied, 396 U.S. 1036 

(1970); Blau v. Lehman, 368 U.S. 403 (1962); and 

Rattner v. Lehman, 193 F.2d 564 (2d Cir. 1952). The 

judicial decisions in which this theory was applied 

do not establish precise standards for determining 

when ‘‘deputization’’ may exist. However, the 

express purpose of Section 16(b) is to prevent the 

unfair use of information by insiders through their 

relationships to the issuer. Accordingly, one factor 

that courts may consider in determining if Section 

16(b) liability applies is whether, by virtue of the 

‘‘deputization’’ relationship, the ‘‘deputizing’’ 

entity’s transactions in issuer securities may benefit 

from the deputized director’s access to inside 

information. 

737See letters from ICI; Schulte Roth & Zabel; 

ValueAct Capital. 

738See letters from ICI; Schulte Roth & Zabel. 

739See letters from ABA; Alston & Bird; CII; 

Seven Law Firms. 

740See letters from ABA; CII; Seven Law Firms. 

741This safe harbor was set forth in Instruction 

1 to proposed Rule 14a–11(a). The safe harbor was 

intended to operate such that the determination of 

whether a shareholder or group is an ‘‘affiliate’’ of 

the company would continue to be made based 

upon all of the facts and circumstances regarding 

the relationship of the shareholder or group to the 

company, but a shareholder or group would not be 

deemed an affiliate ‘‘solely’’ by virtue of having 

nominated that director. 

742See letters from CII; Protective; Schulte Roth 

& Zabel. 

743See letter from CII. 

744See letter from Protective. 

concerns about nominating shareholders 

or groups influencing control of the 

issuer while reporting on Schedule 13G. 

3. Exchange Act Section 16 

Section 16 732 applies to every person 

who is the beneficial owner of more 

than 10% of any class of equity security 

registered under Exchange Act Section 

12 (‘‘10% owners’’), and each officer and 

director (collectively with 10% owners, 

‘‘insiders’’) of the issuer of such security. 

We did not propose an exemption from 

Section 16 for groups formed solely for 

the purpose of nominating a director 

pursuant to Rule 14a–11.733 In the 

Proposal, we explained that we believed 

the existing analysis of whether a group 

has formed 734 and whether Section 16 

applies 735 should continue to apply. We 

also explained that because the 

proposed ownership thresholds for Rule 

14a–11 were significantly lower than 

10%, we did not believe that the lack of 

an exclusion would have a deterrent 

effect on the formation of groups, and 

therefore did not believe it was 

necessary to propose an exclusion from 

Section 16. 

We also noted in the Proposal that 

some shareholders, particularly 

institutions and other entities, may be 

concerned that successful use of Rule 

14a–11 to include a director nominee in 

company proxy materials may result in 

the nominating person also being 

deemed a director under the 

‘‘deputization’’ theory developed by 

courts in Section 16(b) short-swing 

profit recovery cases.736 Under this 

theory it is possible for a person to be 

deemed a director subject to Section 16, 

even though the issuer has not formally 

elected or otherwise named that person 

a director. We did not propose 

standards for establishing the 

independence of the nominee from the 

nominating shareholder, or members of 

the nominating shareholder group. 

Although we did not propose an 

exemption from Section 16, we 

requested comment on, among other 

things, whether a nominating 

shareholder group should be excluded 

from Section 16 and whether subjecting 

such groups to Section 16 would be a 

disincentive to using Rule 14a–11. A 

few commenters recommended that the 

Commission create an exemption from 

Section 16 for a group of shareholders 

that aggregated their holdings in order 

to submit a nominee pursuant to Rule 

14a–11.737 Commenters reasoned that 

members of a nominating group that 

owns more than 10% of the shares 

could not reasonably be considered 

company ‘‘insiders.’’ 738 These 

commenters noted that the group would 

exist for the sole purpose of nominating 

a candidate and, absent special facts, 

would have no access to inside 

information about the company. Thus, 

these commenters argued that the 

statutory purpose of Section 16—the 

prevention of insider trading—would 

not be relevant to such groups. Other 

commenters did not support an 

exemption from Section 16.739 Some of 

these commenters further agreed that no 

standard should be adopted regarding 

application of the judicial doctrine 

concerning ‘‘deputized directors.’’ 740

After considering the comments, we 

continue to believe that an exclusion 

from Section 16 is not appropriate for 

groups formed solely for the purpose of 

nominating a director pursuant to Rule 

14a–11, soliciting in connection with 

the election of that nominee, or having 

that nominee elected as director. We 

also believe that it is not necessary to 

change the existing analysis of whether 

a group has formed and whether Section 

16 applies. Because the ownership 

threshold we are adopting for Rule 14a– 

11 eligibility is significantly less than 

10%, shareholders will be able to form 

groups with holdings sufficient to meet 

the Rule 14a–11 threshold without 

reaching the 10% threshold in Section 

16. Thus, we do not believe that Section 

16 commonly will be a deterrent to use 

of Rule 14a–11. As such, we believe that 

shareholders forming a group to submit 

a nominee for director pursuant to Rule 

14a–11 should be analyzed in the same 

way as any other group for purposes of 

determining whether group members 

are 10% owners subject to Section 16. 

Similarly, we are not adopting standards 

regarding application of the ‘‘deputized 

director’’ doctrine, which will be left to 

existing case law and courts. 

4. Nominating Shareholder or Group 

Status as Affiliates of the Company 

We proposed that Rule 14a–11(a) 

contain a safe harbor providing that a 

nominating shareholder would not be 

deemed an ‘‘affiliate’’ of the company 

under the Securities Act or the 

Exchange Act solely as a result of using 

Rule 14a–11.741 Under the Proposal, this 

safe harbor would apply not only to the 

nomination of a candidate, but also 

where that candidate is elected, 

provided that the nominating 

shareholder or group does not have an 

agreement or relationship with that 

director otherwise than relating to the 

nomination. We were concerned that, 

without such a safe harbor, some 

nominating shareholders may be 

deterred from using Rule 14a–11. 

We solicited comment on the 

appropriateness of the proposed safe 

harbor and posed some specific 

questions concerning its application. 

We also asked whether we should 

include a similar safe harbor provision 

for nominating shareholders that submit 

a nominee for inclusion in a company’s 

proxy materials pursuant to an 

applicable State law provision or a 

company’s governing documents rather 

than using the proposed rule. 

Three commenters provided 

statements of general support for the 

proposed safe harbor.742 One 

commenter believed that a safe harbor 

also would be warranted for 

shareholders submitting nominees 

pursuant to State law or a company’s 

governing documents.743 Another 

commenter believed the safe harbor 

should not be available once the 

shareholder nominee is elected.744 One 

commenter recommended that 

Instruction 1 to Rule 14a–11(a) clarify 

that the presence of agreements, other 

than those relating only to the 

nomination, between a nominating 

shareholder and a candidate or director 


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745See letter from Schulte Roth & Zabel. The 

commenter explained that nominees often request 

agreements, such as indemnification agreements, 

that clearly relate only to their nomination. In other 

situations, however, nominees and nominating 

shareholders enter into other agreements, including 

compensation agreements, which may not relate 

exclusively to the nomination. 

746See letters from ABA; Seven Law Firms. 

747See letter from ABA. 

748See letters from ABA; Seven Law Firms. 

749See letter from CII. 

750See letter from Protective. 

751See letter from Verizon. 

would not necessarily confer affiliate 

status on the nominating shareholder, 

and that Rule 14a–11 is not intended to 

change the current law regarding 

affiliate status.745

Two commenters opposed the safe 

harbor.746 One commenter believed that 

we should not adopt such a safe harbor 

without addressing the issue of affiliate 

status more broadly.747 It argued that as 

long as the Commission follows the 

historical, facts-and-circumstances 

analysis for the determination of 

affiliate status in other contexts, it also 

should follow this practice in the 

context of Rule 14a–11. Both 

commenters opposing the safe harbor 

also did not believe that proposed 

Instruction 1 to Rule 14a–11(a) would 

significantly reduce the interpretive 

analysis needed to determine whether a 

nominating shareholder is an 

‘‘affiliate.’’ 748 They argued that it rarely 

would be clear whether a nominating 

shareholder’s relationship with the 

company would consist ‘‘solely’’ of its 

nominating and soliciting activities, no 

matter how a safe harbor may be 

worded. They also expressed concern 

that the safe harbor would discourage 

nominating shareholders from 

participating in potentially fruitful 

discussions with the company, for fear 

that such participation would go beyond 

‘‘solely’’ nominating and soliciting for a 

director candidate. 

After considering the comments, we 

do not believe that the proposed safe 

harbor would provide a level of 

certainty to nominating shareholders 

concerning their potential ‘‘affiliate’’ 

status sufficient to warrant a departure 

from the current application of the term. 

We believe it is more appropriate to 

conduct a facts-and-circumstances 

analysis in this regard, as would 

currently be the case in other situations. 

We agree with commenters’ views on 

the limited utility of the safe harbor’s 

application in practice, acknowledging 

that a nominating shareholder would be 

obligated to conduct a facts-andcircumstance analysis to determine 

affiliate status even if we were to adopt 

the safe harbor as proposed. We also 

recognize that some nominating 

shareholders or members of nominating 

shareholder groups may be reluctant to 

engage in certain activities that would 

further the general purpose of Rule 14a– 

11 due to concerns that such activities 

would jeopardize their ability to use the 

safe harbor. 

In this light, it does not appear that 

the proposed safe harbor would 

meaningfully facilitate use of Rule 14a– 

11, if at all, and may, in fact, deter it 

because some nominating shareholders 

or members of nominating shareholder 

groups may limit their activities out of 

concern that their activities would 

jeopardize reliance on the safe harbor. 

Accordingly, we have decided neither to 

adopt a safe harbor under the rule nor 

to adopt a similar safe harbor for 

shareholders submitting nominees 

pursuant to State law or a company’s 

governing instruments. Instead, as is 

currently the case in other contests, 

those who use the rule will need to 

analyze affiliate status on a case-by-case 

basis, taking into consideration all 

relevant facts and circumstances, 

including the circumstances 

surrounding a nomination and election 

of a shareholder nominee. 

E. Application of the Liability Provisions 

in the Federal Securities Laws to 

Statements Made by a Nominating 

Shareholder or Nominating Shareholder 

Group 

It is our intent that a nominating 

shareholder or group relying on Rule 

14a–11, an applicable state or foreign 

law provision, or a company’s governing 

documents to include a nominee in 

company proxy materials be liable for 

any statement included in the Schedule 

14N or other related communications, or 

which it causes to be included in a 

company’s proxy materials, which, at 

the time and in light of the 

circumstances under which it is made, 

is false or misleading with respect to 

any material fact or omits to state any 

material fact necessary to make the 

statements therein not false or 

misleading. To this end, we proposed to 

add a new paragraph (c) to Rule 14a–9 

to specifically address a nominating 

shareholder’s or group’s liability when 

providing information on a Schedule 

14N to be included in a company’s 

proxy materials pursuant to Rule 14a– 

11. 

As proposed, new paragraph (c) stated 

that ‘‘no nominee, nominating 

shareholder or nominating shareholder 

group, or any member thereof, shall 

cause to be included in a registrant’s 

proxy materials, either pursuant to the 

Federal proxy rules, an applicable State 

law provision, or a registrant’s 

governing documents as they relate to 

including shareholder nominees for 

director in registrant proxy materials, 

any statement which, at the time and in 

the light of the circumstances under 

which it is made, is false or misleading 

with respect to any material fact, or 

which omits to state any material fact 

necessary in order to make the 

statements therein not false or 

misleading or necessary to correct any 

statement in any earlier communication 

with respect to a solicitation for the 

same meeting or subject matter which 

has become false or misleading.’’ 

Commenters generally supported the 

proposal to impose Rule 14a–9 liability 

on nominating shareholders or groups 

that caused false or misleading 

statements to be included in a 

company’s proxy materials. One 

commenter supported the use of Rule 

14a–9 as the standard for assigning 

liability, as the standards under that 

rule are well known and therefore 

would promote uniformity.749 The 

commenter further stated that Rule 14a– 

9(c) makes sufficiently clear that a 

nominating shareholder or group would 

be liable for statements included in its 

Schedule 14N or notice to the company 

that is included in the company’s proxy 

materials. As for the consequences of 

providing materially false information 

or representations in a Schedule 14N, 

the commenter stated that such a 

situation should be handled in the same 

way as materially false statements or 

omissions in a Schedule 14A or other 

soliciting material filed in connection 

with a proxy contest. Another 

commenter suggested that the disclosure 

provided to the company by the 

nominating shareholder or group and 

included in the company’s proxy 

materials be treated as the shareholder’s 

or group’s soliciting materials.750 The 

commenter did not believe that Rule 

14a–9(c) makes clear that the 

nominating shareholder or group would 

be liable for any information included 

in its Schedule 14N or notice to the 

company that is included in the 

company’s proxy materials. One 

commenter stated that members of a 

nominating group should be jointly and 

severally liable to the company for 

material misstatements or omissions 

provided to the company about the 

group or its members.751 Another 

commenter, noting investors’ concerns 

about exposure to joint liability from 

participating with other investors to 

nominate a candidate, requested that the 

Commission add additional 

commentary about the limits of joint 

liability for unapproved statements of 

other members of a nominating 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56739 

752See letter from Universities Superannuation. 

753See letter from Verizon. 

754See proposed Rule 14a–11(e). 

755See Note to proposed Rule 14a–19. 

756See letters from ABA; Alaska Air; American 

Bankers Association; Ameriprise; BorgWarner; BRT; 

Caterpillar; Cleary; DTE Energy; ExxonMobil; 

Honeywell; ICI; Protective; S. Quinlivan; Seven Law 

Firms; Sidley Austin; Society of Corporate 

Secretaries; Southern Company; UnitedHealth; 

Verizon. 

757See letters from American Bankers 

Association; Ameriprise; BorgWarner; BRT; 

Caterpillar; ExxonMobil; Honeywell; S. Quinlivan; 

UnitedHealth; Verizon. 

758See letters from Alaska Air; BorgWarner; BRT; 

DTE Energy; Protective; Seven Law Firms; Society 

of Corporate Secretaries. 

759See letters from Alaska Air; BorgWarner; BRT; 

DTE Energy; Protective; Seven Law Firms; Sidley 

Austin; Society of Corporate Secretaries; Southern 

Company; United Health; Verizon. 

760See letter from ABA. 

761See letters from ABA; BorgWarner; BRT; 

Caterpillar; Society of Corporate Secretaries; 

Southern Company. 

762See letters from Alaska Air; BorgWarner; BRT; 

ICI; Protective. 

763See letter from BRT. 

764See letters from ABA; Sidley Austin. 

765See letter from ABA. 

766Letter from Sidley Austin. 

767See letter from Ameriprise. 

group.752 One commenter suggested that 

a nominating shareholder or group 

should be required to indemnify the 

company for any costs incurred in 

connection with any misstatements or 

omissions in the information provided 

to the company for inclusion in the 

company’s proxy materials.753

We are adopting Rule 14a–9(c) largely 

as proposed, but with specific 

references to statements made in the 

Schedule 14N and other related 

communications and a clarification that 

the rule would apply where a nominee 

is submitted pursuant to a foreign law 

provision in addition to a State law 

provision or the company’s governing 

documents. New Rule 14a–9(c) provides 

that ‘‘no nominee, nominating 

shareholder or nominating shareholder 

group, or any member thereof, shall 

cause to be included in a registrant’s 

proxy materials, either pursuant to the 

Federal proxy rules, an applicable state 

or foreign law provision, or a registrant’s 

governing documents as they relate to 

including shareholder nominees for 

director in registrant proxy materials, 

include in a notice on Schedule 14N, or 

include in any other related 

communication, any statement which, 

at the time and in the light of the 

circumstances under which it is made, 

is false or misleading with respect to 

any material fact, or which omits to 

state any material fact necessary in 

order to make the statements therein not 

false or misleading or necessary to 

correct any statement in any earlier 

communication with respect to a 

solicitation for the same meeting or 

subject matter which has become false 

or misleading.’’ The changes to the rule 

text are intended to clarify that a 

nominating shareholder or group would 

be liable for statements it makes 

regarding the nomination, regardless of 

whether those statements ultimately 

appear in the company’s proxy 

statement, as we consider any 

statements that are made in the 

Schedule 14N or in other 

communications to be part of the 

solicitation by the nominating 

shareholder or group. Consistent with 

this view, the Schedule 14N filing (as 

well as any other related 

communications) would be considering 

soliciting materials for purposes of 

Section 14(a) liability. 

Under the Proposal, the rule also 

included express language providing 

that the company would not be 

responsible for information that is 

provided by the nominating shareholder 

or group under Rule 14a–11 and then 

repeated by the company in its proxy 

statement, except where the company 

knows or has reason to know that the 

information is false or misleading.754 A 

similar provision was proposed in Rule 

14a–19 with regard to information 

provided by the nominating shareholder 

or group in connection with a 

nomination made pursuant to an 

applicable State law provision or a 

company’s governing documents.755

A number of commenters opposed the 

‘‘knows or has reason to know’’ 

standard.756 Many commenters argued 

generally that because the Commission’s 

Proposal would eliminate the board’s 

involvement in selecting the 

shareholder nominees and prevent a 

company from excluding any 

information from its proxy materials, 

the company should not be liable for 

information provided by the nominating 

shareholder, group, or nominee.757

Commenters further noted that 

companies would not have adequate 

time or sufficient means to investigate 

the statements made by the nominating 

shareholder, group, or nominee.758

Therefore, these commenters argued 

that it would be inappropriate to shift 

onto companies any liability for 

statements made by a nominating 

shareholder, group, or nominee or 

impose a duty to investigate or 

otherwise confirm the accuracy of the 

information provided by a nominating 

shareholder, group, or nominee.759 One 

commenter predicted that if a company 

is liable for information provided by a 

nominating shareholder or group and 

included in a company’s proxy 

materials pursuant to Rule 14a–11, an 

applicable State law provision, or a 

provision in a company’s governing 

documents, it would challenge in court 

any information provided by a 

nominating shareholder, group, or 

nominee that it suspects is materially 

false or misleading.760 The commenter 

asserted that this type of expensive and 

time-consuming litigation likely would 

undermine the Commission’s goals for 

the rule. Some commenters believed 

that the appropriate standard would be 

the standard in Rule 14a–8(l)(2) and 

Rule 14a–7(a)(2)(i): ‘‘the company is not 

responsible for the contents of [the 

shareholder proponent’s] proposal or 

supporting statement.’’761 Other 

commenters recommended generally 

that the Commission allow companies 

to provide certain disclaimers in their 

proxy materials regarding the statements 

provided by the nominating shareholder 

or group,762 with one commenter 

suggesting that companies also should 

be able to set the nominating 

shareholder’s or group’s statements 

apart from their own statements by 

using different fonts, colors, graphics or 

other visual devices.763

Two commenters addressed the issue 

of a company’s liability for disclosure 

provided by a nominating shareholder 

or group that is determined to be 

materially false or misleading after the 

proxy materials have been sent.764 One 

commenter stated that companies 

should not have liability for failing to 

correct or recirculate proxy materials if, 

after the company mails its proxy 

materials, it is notified (or learns) that 

the information provided by a 

nominating shareholder or group is (or 

has become) materially false or 

misleading.765 The commenter noted 

that the burden of updating and 

correcting information provided by a 

nominating shareholder or group should 

be solely the obligation of that 

shareholder or group. Another 

commenter provided similar views, 

noting that ‘‘[i]n situations where the 

registrant’s changes have not been 

permitted, and certainly after the proxy 

materials have been published, we think 

the burden [of correcting or 

recirculating proxy materials] should be 

on the nominating shareholder and that 

the exception imposing liability on the 

registrant should not apply.’’ 766 One 

commenter recommended that if Rule 

14a–11 is adopted, the rule should state 

that liability is only attached when ‘‘the 

company knows or is grossly negligent 

in not knowing that the information is 

false or misleading.’’ 767 Another 

commenter asked that the company be 

liable for false and misleading 


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56740 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

768See letter from ICI. 

769See Rule 14a–11(f). 

770See Instruction to new Rule 14a–18. See also 

Note to proposed Rule 14a–19. 

771See the Instruction to proposed Item 7(e) of 

Schedule 14A; Instruction to proposed Item 

22(b)(18) of Schedule 14A. 772See the Instruction to proposed Item 7(f) of 

Schedule 14A; Instruction to proposed Item 

22(b)(19) of Schedule 14A. 773See letters from ABA; CII; Protective. 774See letters from ABA; Protective. 775See the Instruction to Item 7(e) of Schedule 

14A and Instruction to Item 22(b)(18) of Schedule 

14A with regard to information provided in 

connection with a Rule 14a–11 nomination. See the 

Instruction to Item 7(f) of Schedule 14A and 

Instruction to Item 22(b)(19) of Schedule 14A with 

regard to information provided in connection with 

a nomination made pursuant to applicable State law 

or a company’s governing documents. 

776 44 U.S.C. 3501 et seq. 

777 44 U.S.C. 3507(d) and 5 CFR 1320.11. 

778The proxy rules apply only to domestic 

companies with securities registered under Section 

12 of the Exchange Act and to investment 

companies registered under the Investment 

Company Act. The number of annual reports by 

reporting companies may differ from the number of 

proxy and information statements filed with the 

Commission in any given year. This is because 

some companies are subject to reporting 

requirements by virtue of Section 15(d) of the 

Exchange Act, and therefore are not covered by the 

proxy rules. Also, some companies are subject to 

the proxy rules only because they have a class of 

debt registered under Section 12. These companies 

generally are not required to hold annual meetings 

for the election of directors. In addition, companies 

that are not listed on a national securities exchange 

or national securities association may not hold 

annual meetings and therefore would not be 

required to file a proxy or information statement. 

information provided by a nominating 

shareholder or group only if it knew the 

information was false or misleading.768

After considering the comments, we 

are adopting the proposed provision 

stating that companies will not be 

responsible for information that is 

provided by the nominating shareholder 

or group under Rule 14a–11 and then 

repeated by the company in its proxy 

statement. This is the same standard 

used in Rule 14a–8. We modified the 

proposed provision in response to 

commenters to remove the reference to 

information that the company knows or 

has reason to know is false or 

misleading. We believe that the 

standard that currently is used in Rule 

14a–8 is well understood and that it 

would add unnecessary confusion and 

create significant uncertainty for 

companies to alter the standard in the 

context of Rule 14a–11. Using the Rule 

14a–8 standard also is consistent with 

our revision to Rule 14a–11 to remove 

as a basis for exclusion of a nominee 

that information in the Schedule 14N is 

false or misleading. Accordingly, the 

final rule contains express language 

providing that the company will not be 

responsible for information that is 

provided by the nominating shareholder 

or group under Rule 14a–11 and then 

reproduced by the company in its proxy 

statement.769 A similar provision is 

included in an instruction to new Rule 

14a–18 with regard to information that 

is provided by the nominating 

shareholder or group in connection with 

a nomination made pursuant to an 

applicable state or foreign law 

provision, or the company’s governing 

documents.770

As noted above, commenters raised 

concerns about correcting or 

recirculating proxy materials and 

potential liability for failing to correct or 

recirculate proxy materials after 

learning that material a nominating 

shareholder or group provided is false 

or misleading. As discussed above, 

under the rules as adopted, a company 

will not be responsible for any 

information that is provided by the 

nominating shareholder or group under 

Rule 14a–11 and then reproduced by the 

company in its proxy statement—the 

nominating shareholder or group will 

have liability for that information. 

Accordingly, a company will not be 

required to recirculate or correct proxy 

materials if it learns that the materials 

provided to shareholders included false 

or misleading information from the 

nominating shareholder or group. 

Under the Proposal, any information 

provided to the company in the notice 

from the nominating shareholder or 

group under Rule 14a–11 (and, as 

required, filed with the Commission by 

the nominating shareholder or group) 

and then included in the company’s 

proxy materials would not be 

incorporated by reference into any filing 

under the Securities Act, the Exchange 

Act, or the Investment Company Act 

unless the company determines to 

incorporate that information by 

reference specifically into that filing.771

A similar provision was proposed 

regarding information provided by the 

nominating shareholder or group in 

connection with a nomination made 

pursuant to an applicable State law 

provision or a company’s governing 

documents.772

Those commenting on this provision 

stated that information provided by a 

nominating shareholder, group, or 

nominee should not be deemed to be 

incorporated by reference into 

Securities Act, Exchange Act or 

Investment Company Act filings,773 but 

if it is, it should be treated as the 

responsibility of the nominating 

shareholder, group, or nominee rather 

than the company.774

We are adopting this provision as 

proposed.775 To the extent the company 

does specifically incorporate the 

information by reference or otherwise 

adopt the information as its own, 

however, we will consider the 

company’s disclosure of that 

information as the company’s own 

statements for purposes of the anti-fraud 

and civil liability provisions of the 

Securities Act, the Exchange Act, or the 

Investment Company Act, as applicable. 

III. Paperwork Reduction Act 

A. Background 

Certain provisions of the final rules 

contain ‘‘collection of information’’ 

requirements within the meaning of the 

Paperwork Reduction Act of 1995.776

We published a notice requesting 

comment on the collection of 

information requirements in the 

Proposing Release for the rules, and we 

submitted these requirements to the 

Office of Management and Budget for 

review in accordance with the PRA.777

The titles for the collections of 

information are: 

(1) ‘‘Proxy Statements—Regulation 

14A and Schedule 14A’’ (OMB Control 

No. 3235–0059); 

(2) ‘‘Information Statements— 

Regulation 14C and Schedule 14C’’ 

(OMB Control No. 3235–0057); 

(3) ‘‘Form ID’’ (OMB Control No. 

3235–0328); 

(4) ‘‘Schedule 14N’’; 

(5) ‘‘Securities Ownership— 

Regulation 13D and 13G (Commission 

Rules 13d–1 through 13d–7 and 

Schedules 13D and 13G)’’ (OMB Control 

No. 3235–0145); 

(6) ‘‘Form 8–K’’ (OMB Control No. 

3235–0060); and 

(7) ‘‘Rule 20a–1 under the Investment 

Company Act of 1940, Solicitations of 

Proxies, Consents, and Authorizations’’ 

(OMB Control No. 3235–0158). 

These regulations, rules and forms 

were adopted pursuant to the Exchange 

Act and the Investment Company Act, 

among other statutes, and set forth the 

disclosure requirements for securities 

ownership reports filed by investors, 

proxy and information statements,778

and current reports filed by companies 

to provide investors with the 

information they need to make informed 

voting or investing decisions. The hours 

and costs associated with preparing, 

filing, and sending these schedules and 

forms constitute reporting and cost 

burdens imposed by each collection of 

information. An agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless it displays a 

currently valid OMB control number. 

Compliance with the rules is 

mandatory. Responses to the 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56741 

779For an additional discussion of the Rule 14a– 

11 eligibility requirements, see Section II.B.4 above. 

780Exchange Act Rule 14a–8 requires a company 

to include a shareholder proposal in its Schedule 

14A unless the shareholder has not complied with 

the procedural requirements in Rule 14a–8 or the 

proposal falls within one of the 13 substantive bases 

for exclusion in Rule 14a–8, including Rule 14a– 

8(i)(8). 

781 In this regard, we note that to the extent that 

a shareholder proposal seeks to establish a 

procedure for the inclusion of shareholder 

nominees for director in a company’s proxy 

materials, generally any such proposal adopted by 

shareholders would not affect the availability of 

Rule 14a–11. To the extent that a proposal seeks to 

restrict shareholder reliance on Rule 14a–11, the 

proposal would be subject to exclusion pursuant to 

Rule 14a–8(i)(2) because it would cause the 

company to violate Federal law or pursuant to Rule 

14a–8(i)(3) because the proposal would be contrary 

to the proxy rules. 

782See Sections II.B.8 and II.C.5 above. 

783Schedule 14A prescribes the information that 

a company with a class of securities registered 

under Exchange Act Section 12, or a person 

soliciting shareholders of such a company, must 

include in its proxy statement to provide 

shareholders with material information relating to 

voting decisions. 

Schedule 14C prescribes the information that a 

company with a class of securities registered under 

Exchange Act Section 12 must include in its 

information statement in advance of a shareholders’ 

meeting when it is not soliciting proxies from its 

shareholders, including when it takes corporate 

action by written authorization or consent of 

shareholders. 

Investment Company Act Rule 20a1 requires 

registered investment companies to comply with 

Exchange Act Regulation 14A or 14C, as applicable. 

The annual responses to Investment Company Act 

Rule 20a–1 reflect the number of proxy and 

information statements that are filed by registered 

investment companies. 

784See Item 5 of Schedule 14N. 

785See Item 6 of Schedule 14N. 

information collection will not be kept 

confidential and there is no mandatory 

retention period for the information 

disclosed. 

B. Summary of the Final Rules and 

Amendments 

As discussed above in more detail, the 

final rules provide shareholders with 

two ways to more fully exercise their 

traditional State law rights to nominate 

and elect directors. First, new Exchange 

Act Rule 14a–11 will, under certain 

circumstances, require companies to 

include in their proxy materials 

shareholder nominees for director 

submitted by long-term shareholders or 

groups of shareholders with significant 

holdings. Rule 14a–11 will apply to all 

reporting companies subject to the 

Exchange Act proxy rules, with a few 

exceptions. Rule 14a–11 will apply only 

when applicable state or foreign law or 

a company’s governing documents do 

not prohibit shareholders from 

nominating a candidate for election as a 

director. Further, Rule 14a–11 will not 

apply to companies subject to the proxy 

rules solely because they have a class of 

debt securities registered under Section 

12 of the Exchange Act. Rule 14a–11 

will apply to smaller reporting 

companies, but on a delayed basis. 

Consistent with the Proposal, 

companies are not able to ‘‘opt out’’ of 

the rule in favor of a different 

framework for including shareholder 

director nominees in company proxy 

materials. In addition, as was proposed, 

the rule will apply regardless of whether 

any specified event has occurred to 

trigger the rule and regardless of 

whether the company is subject to a 

concurrent proxy contest. 

A nominating shareholder or group 

seeking to use Rule 14a–11 to require a 

company to include a nominee or 

nominees in the company’s proxy 

materials will be required to meet 

certain conditions, including an 

ownership threshold and holding period 

and filing a Schedule 14N to provide 

required disclosures and certifications. 

Under the rule, a company will not be 

required to include a shareholder 

nominee or nominees for director in the 

company’s proxy materials where the 

nominating shareholder or group holds 

the securities with the purpose, or with 

the effect, of changing control of the 

company or to gain a number of seats on 

the board of directors that exceeds the 

maximum number of nominees that the 

company could be required to include 

under Rule 14a–11. A company also 

will not be required to include a 

nominee submitted pursuant to Rule 

14a–11 who does not meet the 

requirements of the rule. For example, 

a company would not be required to 

include a nominee if that nominee’s 

candidacy, or if elected, board 

membership, would violate applicable 

Federal law, State law, foreign law, or 

the rules of a national securities 

exchange or a national securities 

association (other than the rules related 

to director independence) and such 

violation could not be cured during the 

time period provided in the rule.779

Second, the new amendment to 

Exchange Act Rule 14a–8(i)(8) 780 will 

preclude a company from relying on 

Rule 14a–8(i)(8) to exclude from its 

proxy materials shareholder proposals 

by qualifying shareholders seeking to 

establish procedures under a company’s 

governing documents for the inclusion 

of one or more shareholder nominees in 

a company’s proxy materials including, 

for example, proposals to allow lower 

ownership thresholds or higher 

numbers of shareholder director 

nominees.781

In connection with Rule 14a–11 and 

the amendment to Rule 14a–8(i)(8), we 

also are adopting new rules that will 

require a notice to be filed with the 

Commission on new Schedule 14N, and 

transmitted to the company, when a 

shareholder seeks to submit a 

nomination to a company pursuant to 

Rule 14a–11 or pursuant to applicable 

state or foreign law provision or the 

company’s governing documents.782

The Schedule 14N will require a 

nominating shareholder or group to 

provide disclosure similar to the 

disclosure currently required in a 

contested election. The company will be 

required to include the disclosure 

provided by the nominating shareholder 

or group in its proxy materials. Thus, 

the new rules will require a company to 

provide additional disclosure on 

Schedules 14A and 14C,783 as well as 

Form 8–K, and a nominating 

shareholder or group to provide 

disclosure on new Schedule 14N. 

When filed in connection with Rule 

14a–11, Schedule 14N requires 

disclosure about the amount and 

percentage of securities entitled to be 

voted on the election of directors by the 

nominating shareholder or group and 

the length of ownership of such 

securities. Schedule 14N also requires 

disclosure similar to the disclosure 

currently required for a contested 

election and disclosure of whether the 

nominee satisfies the company’s 

director qualifications.784 Schedule 14N 

also requires a certification that the 

nominating shareholder or group is not 

holding any of the company’s securities 

with the purpose, or with the effect, of 

changing control of the company or to 

gain a number of seats on the board of 

directors that exceeds the maximum 

number of nominees that the company 

could be required to include under Rule 

14a–11. A nominating shareholder or 

group also will be required to certify 

that the nominating shareholder or 

group and the nominee satisfy the 

applicable requirements of Rule 14a–11. 

When a Schedule 14N is filed in 

connection with a nomination pursuant 

to an applicable state or foreign law 

provision or a company’s governing 

documents providing for the inclusion 

of one or more shareholder director 

nominees in company proxy materials, 

the Schedule 14N requires similar, but 

more limited, disclosures than a 

Schedule 14N filed in connection with 

a nomination pursuant to Rule 14a– 

11.785 In addition, a nominating 

shareholder or group filing a Schedule 

14N in connection with a nomination 

submitted for inclusion in a company’s 

proxy materials pursuant to applicable 

state or foreign law or a company’s 

governing documents will be required to 

provide a more limited certification 


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786See Item 8(b) of Schedule 14N. 

787For further discussion of these exemptions, 

see Section II.B.10 above. 

788See new Rule 14a–2(b)(7). 

789See new Rule 14a–2(b)(8). 

790See letters from BRT; S&C; Society of 

Corporate Secretaries. In response to these 

comments, we have increased some of our burden 

estimates. See footnotes 815 and 817 below. 

791See letters from BRT; Society of Corporate 

Secretaries. 

792See letter from S&C. 

793 Id. 

794See letter from BRT. 

795See letter from Altman. The survey had 47 

participants that were primarily issuers. The 

median forecast of this survey was 10%. The survey 

was based on the eligibility criteria contained in the 

Proposing Release. 

796See Item 5(e) of Schedule 14N. 

797For convenience, the estimated PRA hour 

burdens have been rounded to the nearest whole 

number. We estimate an hourly cost of $400 for the 

service of outside professionals based on our 

consultations with several registrants and law firms 

and other persons who regularly assist registrants 

in preparing and filing proxy statements and related 

disclosures with the Commission. 

than is required for a nomination 

pursuant to Rule 14a–11.786

We also are adopting two new 

exemptions from the proxy rules for 

solicitations by a shareholder or group 

in connection with a nomination 

pursuant to Rule 14a–11.787 The first 

exemption addresses written and oral 

solicitations by shareholders that are 

seeking to form a nominating 

shareholder group, provided that certain 

requirements are met.788 The second 

new exemption will apply to written 

and oral solicitations by or on behalf of 

a nominating shareholder or group that 

has met the requirements of Rule 14a– 

11 in favor of shareholder nominees or 

for or against company nominees.789

Each of these new exemptions requires 

the shareholder or group soliciting in 

connection with a nomination pursuant 

to Rule 14a–11 to file under cover of 

Schedule 14N any written materials 

published, sent or given to shareholders 

no later than the date such materials are 

first published, sent or given to 

shareholders. In addition, persons 

relying on Rule 14a–2(b)(7) to 

commence oral solicitations must file a 

notice of such solicitation under cover 

of Schedule 14N. 

C. Summary of Comment Letters and 

Revisions to Proposal 

We requested comment on the PRA 

analysis in the Proposing Release. Three 

commenters addressed our estimate of 

30 burden hours for a company that is 

associated with including a nominee in 

its proxy materials.790 According to a 

survey that BRT conducted, two 

commenters noted that if a company 

determines that it will include a 

shareholder nominee, the costs of 

preparing a written notice to the 

nominating shareholder or group, as 

well as including in the company’s 

proxy materials the name of, and other 

disclosures concerning, the nominee, 

and preparing the company’s own 

statement regarding the shareholder 

nominee would require a total of an 

average of 99 hours of company 

personnel time and outside costs of 

$1,159,073 per company for each 

shareholder nominee.791 One 

commenter asserted that we 

underestimated the burden associated 

with these three actions because our 

estimate did not account for the fact that 

a company or its corporate governance 

committee is likely to undertake a 

lengthy process before determining 

whether to support the candidate.792

This commenter asserted that our 

estimate began only once a company has 

already determined to include the 

nominee, and did not account for the 

amount of time necessary for a company 

to fully and completely evaluate 

shareholder nominees. This would 

include, for example, determinations 

about the nominee’s eligibility, 

investigation and verification of 

information provided by the nominee, 

research into the nominee’s background, 

analysis of the relative merits of the 

shareholder nominee as compared to 

management’s own nominees, multiple 

meetings of the relevant board 

committees, and analysis of whether a 

nomination would conflict with any 

Federal law, State law or director 

qualification standards. 

The commenter asserted that our 

burden estimate of 65 hours for a 

company that determines not to include 

a nominee in its proxy materials does 

not account for ‘‘significant’’ costs and 

the ‘‘enormous’’ amount of time that 

management and the board will likely 

spend on the proxy contest itself.793 The 

commenter also indicated that our 

estimates did not account for the 

burdens on registered investment 

companies as a result of their unique 

circumstances. The commenter noted 

that subjecting registered investment 

companies to Rule 14a–11 will result in 

significant administrative burdens on 

open-end funds and fund complexes, 

and increased costs. This commenter, 

however, did not provide alternative 

cost estimates. Another commenter 

questioned our assumption that the cost 

of submitting a no-action request 

pursuant to Rule 14a–11 is comparable 

to that of a no-action request submitted 

pursuant to Rule 14a–8.794 This 

commenter argued that due to the 

fundamental issues at stake, boards will 

likely expend significantly more 

resources to challenge shareholder 

nominees and elect their own nominees 

than they will to oppose a shareholder 

proposal submitted pursuant to Rule 

14a–8. 

One commenter submitted the results 

of a survey it conducted in which the 

participants predicted that, on average, 

15% of companies listed on U.S. 

exchanges could expect to face a 

shareholder director nomination under 

Rule 14a–11 in 2011.795 As explained in 

greater detail below, we believe the 

actual number of shareholders or groups 

of shareholders that will seek to use 

Rule 14a–11 may be much smaller. 

While we note that there are inherent 

uncertainties involved in providing this 

estimate, we estimate for purposes of 

the PRA requirements, based on 

available data on the number of 

contested elections, that 45 companies 

other than registered investment 

companies and six registered 

investment companies with 

shareholders eligible to submit 

nominees pursuant to Rule 14a–11 will 

receive such a nomination each year. 

D. Revisions to PRA Reporting and Cost 

Burden Estimates 

As discussed above, the rules we are 

adopting include several substantive 

modifications to the Proposal; however, 

the Schedule 14N disclosure 

requirements we are adopting are 

substantially similar to the proposed 

disclosure requirements. In addition to 

the disclosure we proposed to be 

included in Schedule 14N, the schedule 

also will require disclosure of whether 

the shareholder nominee satisfies the 

company’s director qualifications.796 As 

discussed more fully below, we are 

revising our estimates in response to 

commenters’ suggestions and the 

modifications to the Proposal that we 

are adopting in the final rules. The 

burden estimates discussed below relate 

to the hours and costs associated with 

preparing, filing and sending the above 

schedules and forms, and constitute 

estimates of reporting and cost burdens 

imposed by each collection of 

information. 

For purposes of the PRA, we estimate 

the total annual incremental paperwork 

burden resulting from new Rule 14a–11 

and the related rule changes for 

reporting companies (other than 

registered investment companies) and 

registered investment companies to be 

approximately 4,113 hours of internal 

company or management time and a 

cost of approximately $548,200 for the 

services of outside professionals.797 For 

purposes of the PRA, we estimate the 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56743 

798See new Rules 14a–2(b)(7) and 14a–2(b)(8). 

799This corresponds to 6,510 hours of 

shareholder time and $868,000 for the shareholders’ 

use of outside professionals and 11,484 hours of 

company time and $1,531,200 for the company’s 

use of outside professionals. 

800The burdens associated with Schedule 14N are 

discussed below. 

801See Section II.B.4.b. above for a discussion of 

how voting power is determined. 

802The eligibility requirements are provided in 

Rule 14a–11(b). As discussed in more detail in 

Section II.B.4., a nominating shareholder or group 

must not be holding the securities used to meet the 

ownership threshold with the purpose, or with the 

effect, of changing the control of the company or 

to gain a number of seats on the board of directors 

that exceeds the maximum number of nominees 

that the company could be required to include 

under Rule 14a–11. A nominating shareholder or 

group also must provide certain statements and 

disclosure regarding its ownership and the nominee 

or nominees must meet the applicable eligibility 

requirements. 

803 If we used the same data for estimating the 

number of nominees that would be submitted 

pursuant to the final rules as adopted, there would 

be approximately 2,117 companies with at least one 

shareholder eligible to submit a nomination. If we 

were to assume that 5% of those companies with 

at least one shareholder eligible to submit a 

nomination would receive a nomination, then we 

would estimate that 106 companies would receive 

a nomination each year. 

804 In this regard, we note that it is estimated that 

there were 57 contested solicitations in 2009. See 

Georgeson, 2009 Annual Corporate Governance 

Review Executive Summary (available at http:// 

www.georgeson.com/usa/acgr09.php) and footnote 

828 below. In addition, approximately 118 Rule 

14a–8 shareholder proposals related to board issues 

were submitted to shareholders for a vote in the 

2008–2009 proxy season. Board related proposals 

include proposals to have an independent chairman 

of the board, proposals to allow for cumulative 

voting and proposals to require a majority vote to 

elect directors. See RiskMetrics 2009 Proxy Season 

Scorecard, May 15, 2009. We believe these actions 

related to contested solicitations or board issues, 

175 in total, provide useful information about the 

degree of interest in using Rule 14a–11. 

total annual incremental paperwork 

burden to nominating shareholders and 

groups from Schedule 14N to be 

approximately 7,870 hours of 

shareholder personnel time, and 

$1,049,300 for services of outside 

professionals. As discussed further 

below, these total costs include all 

additional disclosure burdens 

associated with the final rules, 

including burdens related to the notice 

and disclosure requirements. The total 

costs described above also include the 

burden hours resulting from the new 

exemptions for solicitations by 

nominating shareholders or groups in 

connection with a nomination pursuant 

to Rule 14a–11.798 As noted above, 

smaller reporting companies will not be 

subject to Rule 14a–11 until three years 

after the effective date of the rule. For 

purposes of the PRA, we have 

calculated the burden estimates as if the 

rule has been fully phased in for all 

companies. 

As amended, Rule 14a–8(i)(8) will no 

longer permit companies to exclude, 

under that basis, shareholder proposals 

that seek to establish a procedure under 

a company’s governing documents for 

the inclusion of one or more 

shareholder director nominees in the 

company’s proxy materials. For 

purposes of the PRA, we estimate the 

total annual incremental paperwork 

burden resulting from the amendment to 

Rule 14a–8(i)(8) and the related rule 

changes for reporting companies (other 

than registered investment companies), 

registered investment companies, and 

shareholders to be approximately 17,994 

hours of internal company or 

shareholder time and a cost of 

approximately $2,399,200 for the 

services of outside professionals.799

1. Rule 14a–11 

New Rule 14a–11 will require any 

company subject to the rule to include 

disclosure about a nominating 

shareholder’s or group’s nominee or 

nominees for election as director in the 

company’s proxy statement, and the 

name of the nominee or nominees on 

the company’s proxy card, when the 

conditions of the rule are met. The rule 

will not apply if the company is subject 

to the proxy rules solely as a result of 

having a class of debt registered under 

Section 12 of the Exchange Act or if 

State law, foreign law or a company’s 

governing documents prohibit 

shareholders from nominating a 

candidate or candidates for election as 

director. A nominating shareholder or 

group will be required to file Schedule 

14N to disclose information about the 

nominating shareholder or group and 

the nominee or nominees, and the 

company will be required to include 

certain information regarding the 

nominating shareholder or group and 

nominee or nominees in the company’s 

proxy statement unless the company 

determines that it is not required to 

include the nominee or nominees in its 

proxy materials.800 A nominating 

shareholder or group also will be 

afforded the opportunity to include in 

the company’s proxy statement a 

statement of support for its nominee or 

nominees not to exceed 500 words per 

nominee. The nominee or nominees also 

will be included on the company’s form 

of proxy in accordance with Exchange 

Act Rule 14a–4. 

Under the final rule, shareholders or 

groups owning at least 3% of the voting 

power of a company’s securities entitled 

to be voted on the election of directors 

for at least three years as of the date of 

filing their notice on Schedule 14N with 

the Commission, and transmitting the 

notice to the company, will be eligible 

to submit a nominee for election as 

director to be included in the company’s 

proxy materials,801 provided certain 

other eligibility requirements are met 802

and subject to certain limitations on the 

overall number of shareholder nominees 

for director. 

In the Proposing Release, we 

estimated that 208 companies with 

eligible shareholders would receive 

nominations pursuant to Rule 14a–11. 

That number was based in part on data, 

which we used to estimate that 

approximately 4,163 reporting 

companies (other than registered 

investment companies) would have at 

least one shareholder who met the 

eligibility criteria set forth in the 

Proposing Release. We then estimated 

that 5% of those companies would 

receive a nomination from an eligible 

shareholder or group of shareholders, 

resulting in 208 companies receiving 

nominations pursuant to Rule 14a–11 

annually.803 In the Proposing Release, 

we also estimated that 61, or 5%, of 

1,225 registered investment companies 

responding to Rule 20a–1 each year 

would receive shareholder nominations 

for inclusion in their proxy materials. 

After further consideration, we believe 

that a better indicator of how many 

shareholders might submit a nomination 

is the number of contested elections and 

board-related shareholder proposals that 

have been submitted to companies.804

We believe starting with this number is 

better because it indicates shareholders 

or groups of shareholders who have 

shown an interest in using currently 

available means under our rules to 

influence governance matters. The 

number of contested elections and 

board-related shareholder proposals, 

however, does not reflect the additional 

eligibility requirements that are being 

adopted in new Rule 14a–11. For 

example, Rule 14a–11 requires that a 

shareholder or group of shareholders 

satisfy an ownership threshold of at 

least 3% of the company’s voting power; 

that amount of securities must have 

been held continuously for at least three 

years as of the date the nominating 

shareholder or group submits notice of 

its intent to use Rule 14a–11; and the 

nominating shareholder or group must 

execute a certification that it is not 

holding the securities with the purpose, 

or with the effect, of changing control of 

the company or to gain a number of 

board seats that exceeds the maximum 

number of nominees that the company 

could be required to include under Rule 

14a–11. As a result of the additional 

eligibility requirements and 

certifications required by Rule 14a–11, 

we believe it is reasonable to 


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56744 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

805We further estimate that 75% of the 45 

submissions, or 34, will be made by groups of 

shareholders, and the remaining 11 will be made by 

individuals. See the discussion below regarding the 

estimated increase in Schedule 13G filings. 

806For the reasons noted above, we discounted 

the 175 contested elections and board-related 

shareholder proposals by approximately 75% to 

reflect the much more stringent eligibility 

requirements under new Rule 14a–11 as compared 

to Rule 14a–8. The 45 filings that we estimate for 

purposes of the PRA are equal to 2.1% of the 2,117 

companies we estimate to have at least one eligible 

shareholder meeting the ownership requirements of 

the rule. 

807 In this regard, we estimate that there were 11 

contested elections in 2009, based on the number 

of EDGAR filings on form-type PREC14A with 

respect to unique investment companies in 2009. In 

addition, the average number of no-action letters 

issued by the staff regarding proposals seeking to 

amend a registered investment company’s bylaws to 

provide for shareholder director nominations 

received in calendar years 2007, 2008 and 2009, 

rounded to the nearest whole number greater than 

zero, is one. We estimate that investment 

companies currently receive as many proposals 

regarding nomination procedures or disclosures as 

there are contested elections and no-action letters 

issued by the staff, resulting in a total of 24 

contested elections and board-related shareholder 

proposals per year. For reasons similar to those 

articulated above for non-investment companies, 

we believe these actions related to contested 

solicitation or board issues, 24 in total, provide 

useful information about the degree of interest in 

using Rule 14a–11. However, as discussed above, 

Rule 14a–11 contains different eligibility 

requirements than our current rules that will likely 

result in fewer companies receiving nominations 

submitted pursuant to the rule. Similar to noninvestment companies, we believe it is reasonable 

to discount the 24 contested elections and boardrelated shareholder proposals by approximately 

75%, resulting in six investment companies 

receiving nominations pursuant to Rule 14a–11. We 

further estimate that 75% of the submissions, or 

five, will be made by groups of shareholders and 

the remaining one will be made by an individual. 

See the discussion below regarding the estimated 

increase in Schedule 13G filings. 

808According to information from RiskMetrics, 

based on a sample of 1,431 public companies the 

median board size in 2007 was 9, with boards 

ranging in size from 4 to 23 members. 

Approximately 40% of the boards in the sample 

had 8 or fewer directors, approximately 60% had 

between 9 and 19 directors, and less than 1% had 

20 or more directors. 

809See Investment Company Institute and 

Independent Directors Council, Overview of Fund 

Governance Practices 1994–2006, at 6–7 (November 

2007), available at http://www.ici.org/pdf/ 

rpt_07_fund_gov_practices.pdf (noting that the 

median number of independent directors per fund 

complex in 2006 was six and that independent 

directors held 75% or more of board seats in 88% 

of fund complexes). 

810The requirement is in amended Rule 14a–4. 

811As discussed below, for companies that 

exclude a nominee but do not request no-action 

relief, we estimate this burden to be 100 hours. 

812The calculations for these numbers are: 410 

burden hours × 0.75 = 308 burden hours of 

company time and 410 burden hours × 0.25 × $400 

= $41,000 for services of outside professionals. 813The calculations for these numbers are: 50 

burden hours × 0.75 = 38 hours of company time 

and 50 burden hours × 0.25 × $400 = $5,000 for 

services of outside professionals. 814We assume that each company that includes 

a shareholder nominee in its proxy materials would 

include such a statement. 

significantly reduce the number of 

contested elections and board-related 

shareholder proposals for purposes of 

estimating the number of shareholders 

or groups of shareholders who may 

submit a nomination pursuant to Rule 

14a–11. For purposes of this analysis, 

we estimate that 45 companies other 

than registered investment companies 

will receive nominees from 

shareholders 805 for inclusion in their 

proxy materials.806 We further estimate 

that six registered investment 

companies will receive nominees from 

shareholders pursuant to Rule 14a–11 

annually.807

We estimate for PRA purposes that 

each company that receives nominees 

pursuant to Rule 14a–11 will receive 

two nominees from one shareholder or 

group. The median board size based on 

a 2007 sample of public companies was 

nine.808 Approximately 60% of the 

boards sampled had between nine and 

19 directors. In the case of registered 

investment companies, we estimate that 

the median board size is eight.809 Thus, 

although some shareholders or groups 

could seek to include fewer than two 

nominees and others would be 

permitted to include more than two 

nominees, depending on the size of the 

board, we assume for purposes of the 

PRA that each shareholder or group 

would submit two nominees. As a 

result, for reporting companies, we 

estimate up to 211 total company 

burden hours per company (which is 

the sum of the bullets below doubled 

where appropriate to reflect two 

nominees) which corresponds to 158 

hours (211 × 0.75) of company time, and 

a cost of approximately $21,100 (211 × 

0.25 × $400) for the services of outside 

professionals. In each case, this estimate 

includes: 

• If the company determines that it 

will include a shareholder nominee, the 

company’s preparation of a written 

notice to the nominating shareholder or 

group (five burden hours per notice); 

• The company’s inclusion in its 

proxy statement and form of proxy of 

the name of, and other related 

disclosures concerning, a person or 

persons nominated by a shareholder or 

shareholder group (five burden hours 

per nominee); 810

• The company’s preparation of its 

own statement regarding the 

shareholder nominee or nominees (40 

burden hours per nominee); and 

• If a company determines that it may 

exclude a shareholder nominee 

submitted pursuant to the new rule, the 

company’s preparation of a written 

notice to the nominating shareholder or 

group followed by written notice of the 

basis for its determination to exclude 

the nominee to the Commission staff 

(116 burden hours per notice).811

For purposes of this PRA analysis, we 

assume that approximately 41 (or 90% 

of 45) reporting companies (other than 

registered investment companies) and 5 

(or 90% of 6) registered investment 

companies that receive a shareholder 

nominee for director will be required to 

include the nominee in their proxy 

materials. In the other 10% of cases, we 

assume that the company will be able to 

exclude the shareholder nominee (after 

providing notice of its reasons to the 

Commission). If a company determines 

to include a shareholder nominee, it 

must provide written notice to the 

nominating shareholder or group. We 

estimate the burden associated with 

preparing this notice to be five hours. 

For reporting companies (other than 

registered investment companies), this 

will result in 205 aggregate burden 

hours (41 companies × 5 hours/ 

company), which corresponds to 154 

burden hours of company time (41 

companies × 5 hours/company × 0.75) 

and $20,500 in services of outside 

professionals (41 companies × 5 hours/ 

company × 0.25 × $400). For registered 

investment companies, this will result 

in 25 aggregate burden hours (5 

companies × 5 hours/company), which 

corresponds to 19 burden hours of 

company time (5 companies × 5 hours/ 

company × 0.75), and $2,500 for 

services of outside professionals (5 

companies × 5 hours/company × 0.25 × 

$400). 

We estimate the annual disclosure 

burden for companies to include 

nominees and related disclosure in their 

proxy statements and on their form of 

proxy to be 5 burden hours per 

nominee, for a total of 410 aggregate 

burden hours (41 responses × 5 hours/ 

response times; 2 nominees) for 

reporting companies (other than 

registered investment companies), and 

50 aggregate burden hours (5 responses 

× 5 hours/response × 2 nominees) for 

registered investment companies. For 

reporting companies (other than 

registered investment companies), this 

corresponds to 308 burden hours of 

company time, and $41,000 for services 

of outside professionals.812 For 

registered investment companies, this 

corresponds to 38 hours of company 

time, and $5,000 for services of outside 

professionals.813

We estimate that 41 reporting 

companies (other than registered 

investment companies) and 5 registered 

investment companies will include a 

statement with regard to the shareholder 

nominees.814 We anticipate that the 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56745 

815 In its comment letter and based on its survey 

of its members, BRT estimated that the preparation 

of a notice to the nominating shareholder, inclusion 

of related disclosure in the company’s proxy 

materials, and preparation of its own statement 

regarding the shareholder nominee will require an 

average of 99 hours of personnel time. In the 

Proposing Release, we estimated the burden for 

these three actions to be 30 hours. We note that the 

survey conducted by the BRT provides useful 

information regarding the amount of personnel time 

that a company will spend responding to a Rule 

14a–11 nomination; however, the survey represents 

a limited number of companies. While we are 

persuaded that the burden to companies of 

preparing a statement with regard to the 

shareholder nominee may require more than the 20 

hours we estimated in the Proposing Release, we 

believe that 99 hours may represent the high end 

of the range. In light of this information, we believe 

it is appropriate to increase our estimate and we 

believe it is adequate to double our estimate of this 

component from 20 to 40 hours to reflect the 

average burden across all companies. Thus, we 

estimate that the internal burden associated with 

these three actions would be 50 hours. 

816With respect to companies other than 

registered investment companies, we assume that 6 

of these submissions ultimately would be 

excludable under the rule. 

817This estimate is based on data provided by the 

BRT in its comment letter dated August 17, 2009. 

In its letter, the BRT provided data from a survey 

of its own members indicating that the average 

burden associated with preparing and submitting a 

single no-action request to the Commission staff in 

connection with a shareholder proposal is 

approximately 47 hours and associated costs of 

$47,784. Although the letter did not specify as 

much, assuming these costs correspond to legal 

fees, which we estimate at an hourly cost of $400, 

we estimate that this cost is equivalent to 

approximately 120 hours ($47,784/$400). We note 

that this estimate is higher than the 65 hours we 

estimated in the Proposing Release, where we relied 

on 2003 data provided by the American Society of 

Corporate Secretaries indicating 30 hours and 

associated costs of $13,896, or 35 hours ($13,896/ 

$400). The BRT survey also indicated that if a 

company opposes a shareholder nominee, it would 

incur an additional average of 302 hours of 

company time. This would be in addition to its 

estimate of 99 hours for the actions described 

above. As noted above, the survey conducted by the 

BRT provides useful estimates for us to consider, 

but the survey represents a limited number of 

companies. In addition, it is unclear whether the 

302 hours is inclusive of the no-action process. We 

believe this estimate is high and believe the revised 

number discussed below is a better estimate 

because it attempts to reflect the burden across all 

companies. For purposes of the PRA, we assume 

that submitting the notice and reasons for excluding 

a shareholder nominee to the staff will be 

comparable to preparing a no-action request to 

exclude a proposal under Rule 14a–8. While it 

appears, based on commenters’ estimates, that 

associated costs may have increased since 2003, 

based on estimates provided by other commenters 

on the costs of preparing and submitting a no-action 

request (see, e.g., letter from S&C), we believe an 

average of the two estimates provides a more 

representative estimate of the spectrum of reporting 

companies, as opposed to those who participated in 

the BRT survey. Thus, we estimate that the burden 

to submit the notice and reasons for excluding a 

shareholder nominee and request no-action relief, 

would be approximately 116 hours ([167 hrs + 65 

hrs]/2). 

818We believe that even if a company is not 

seeking no-action relief the company will still 

spend significant time preparing its notice to 

exclude the nominee. Because the notice will be 

required to include the reasons that the nominee is 

being excluded, we believe that the burden will be 

similar to, though not quite as extensive as, 

preparing a request for no-action relief. 

819See letter from BRT. 

burden to include a statement will 

include time spent to research the 

nominee’s background, determinations 

about the nominee’s eligibility, 

investigation and verification of 

information provided by the nominee, 

analysis of the relative merits of the 

shareholder nominee as compared to 

management’s own nominees, multiple 

meetings of the relevant board 

committees, analysis of whether a 

nomination will conflict with any 

Federal law, State law or director 

qualification standards, preparation of 

the statement, and company time for 

review of the statement by, among 

others, the nominating committee and 

legal counsel. In the Proposing Release 

we estimated that this burden will be 

approximately 20 hours per nominee. 

Based on comments received, however, 

we believe it is appropriate to increase 

this estimate to 40 hours per 

nominee.815 For reporting companies 

(other than registered investment 

companies), this will result in 3,280 

aggregate burden hours (41 statements × 

40 hours/statement × 2 nominees). This 

corresponds to 2,460 hours of company 

time (41 statements × 40 hours/ 

statement × 2 nominees × 0.75) and 

$328,000 for services of outside 

professionals (41 statements × 40 hours/ 

statement × 2 nominees × 0.25 × $400) 

for reporting companies (other than 

registered investment companies). For 

registered investment companies, this 

will result in 400 aggregate burden 

hours (5 statements × 40 hours/ 

statement × 2 nominees). This 

corresponds to 300 hours of company 

time (5 statements × 40 hours/statement 

× 2 nominees × 0.75) and $40,000 for 

services of outside professionals (5 

statements × 40 hours/statement × 2 

nominees × 0.25 × $400). 

Further, for purposes of this analysis, 

we assume that approximately 9 (or 

20% of 45) reporting companies (other 

than registered investment companies) 

and 1 (or 20% of 6) registered 

investment companies that receive a 

shareholder nominee for director for 

inclusion in their proxy materials will 

make a determination that they are not 

required to include a nominee in their 

proxy materials because the 

requirements of Rule 14a–11 are not met 

and will file a notice of intent to 

exclude that nominee.816 We further 

estimate that 3 (or 33% of 9) of those 

reporting companies (other than 

registered investment companies) will 

not seek no-action relief from the 

Commission and will only provide the 

required notice to the nominating 

shareholder or group and the 

Commission. We estimate that the 

remaining 6 reporting companies other 

than registered investment companies 

and the one registered investment 

company that makes a determination 

that it is not required to include a 

nominee in its proxy materials will seek 

no-action relief in order to exclude the 

nomination. We estimate that the 

burden hours associated with preparing 

and submitting the company’s notice to 

the nominating shareholder or group 

and the Commission regarding its intent 

to exclude a shareholder nominee that 

includes a request for no-action relief 

would be 116 hours per notice.817 We 

estimate that the burden hours 

associated with preparing and 

submitting the company’s notice to the 

nominating shareholder or group and 

the Commission regarding its intent to 

exclude a shareholder nominee and its 

reasons for doing so would be 100 

hours.818 One commenter questioned 

our assumption that submitting a 

request to the staff to exclude a 

shareholder nominee will be 

comparable to preparing a no-action 

request to exclude a proposal under 

Rule 14a–8.819 This commenter argued 

that due to the fundamental issues at 

stake, boards are likely to expend 

significant resources to challenge 

shareholder nominees and elect their 

own nominees. We recognize the 

possibility that companies might 

expend greater resources in opposing a 

shareholder nominee than a shareholder 

proposal. We believe, however, that 

some of the resources to oppose a 

shareholder nominee will be allocated 

to the use of other means outside of the 

required disclosure in the proxy 

statement (e.g., ‘‘fight letters’’) so we 

have not factored that into our 

collection of information estimate. We 

believe that a portion of the burden 

associated with this will be reflected in 

the company’s preparation of its own 

statement regarding the shareholder 

nominee, rather than in the preparation 

of a no-action request, and accordingly, 

as discussed above, we have increased 

our estimate of the associated burden 

from 20 to 40 hours. Although we have 

increased the burden to the company 

associated with preparing its own 

statement, we are not persuaded that 

also increasing the burden associated 

with preparing a request to exclude the 

nominee will be an accurate estimate. 

We are, however, as discussed above, 

increasing to 116 hours our estimate for 

preparing a notice of intent to exclude 


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820Our prior estimate of 65 hours in the 

Proposing Release was based on 2003 data. 

821As discussed above, we estimate that only one 

registered investment company will make a 

determination that it is not required to include a 

nominee in its proxy material and that this 

company will seek no-action relief. 

822There is no corresponding burden for 

shareholders or groups whose nomination is 

excluded by the company, and the company does 

not seek no-action relief. If the shareholder objects 

to the exclusion, there is no requirement that the 

shareholder seek redress from the staff or the 

Commission. As a result, we have not provided an 

estimated burden. 

823As noted in footnote 817, we estimate that the 

average burden to a company associated with 

preparing and submitting a no-action request to the 

staff is approximately 116 burden hours. We believe 

that the average burden for a shareholder proponent 

to respond to a company’s no-action request is 

likely to be less than a company’s burden to prepare 

the request; therefore, we estimate it will take 

approximately half the time (or 60 burden hours) 

for a nominating shareholder or group to respond 

to a company’s notice to the Commission of its 

intent to exclude. 

824See new Rule 14a–2(b)(7). 825See new Rule 14a–2(b)(8). 

the nominee and request no-action relief 

based on 2009 data received from 

commenters.820

In the case of reporting companies 

(other than registered investment 

companies) that have determined they 

may exclude a nominee and seek noaction relief from the staff, we estimate 

that this will result in an aggregate 

burden of 696 hours (6 notices × 116 

hours/notice), corresponding to 522 

hours of company time (6 notices × 116 

hours/notice × 0.75) and $69,600 for the 

services of outside professionals (6 

notices × 116 hours/notice × 0.25 × 

$400). In the case of registered 

investment companies that have 

determined they may exclude a 

nominee and seeking no-action relief 

from the staff, we estimate that this will 

result in 116 aggregate burden hours (1 

notice × 116 hours/notice), which will 

correspond to 87 hours of company time 

(1 notice × 116 hours/notice × 0.75) and 

$11,600 for the services of outside 

professionals (1 notice × 116 hours/ 

notice × 0.25 × $400). For companies 

(other than registered investment 

companies) that have determined they 

may exclude a nomination but not to 

seek no-action relief from the staff, we 

estimate that this will result in an 

aggregate burden of 300 hours (3 notices 

× 100 hours/notice), corresponding to 

225 hours of company time (3 notices × 

100 hours/notice × 0.75) and $30,000 for 

the services of outside professionals (3 

notices × 100 hours/notice × 0.25 × 

$400).821 These burdens would be 

added to the PRA burdens of Schedules 

14A and 14C or, in the case of registered 

investment companies, Rule 20a–1. 

We also estimate that the annual 

burden for the nominating shareholder’s 

or group’s participation in the no-action 

process822 available pursuant to Rule 

14a–11 would average 60 hours per 

nomination.823 For nominating 

shareholders or groups of reporting 

companies (other than registered 

investment companies), this will result 

in 360 total burden hours (6 responses 

× 60 hours/response). This will 

correspond to 270 hours of shareholder 

time (6 responses × 60 hours/response × 

0.75) and $36,000 for services of outside 

professionals (6 responses x 60 hours/ 

response × 0.25 × $400). For nominating 

shareholders or groups of registered 

investment companies, this will result 

in 60 total burden hours (1 response × 

60 hours/response). This will 

correspond to 45 hours of shareholder 

time (1 response × 60 hours/response × 

0.75) and $6,000 for services of outside 

professionals (1 response × 60 hours/ 

response × 0.25 × $400). This burden 

would be added to the PRA burden of 

Schedule 14N. 

We also are adopting two new 

exemptions from the proxy rules for 

solicitations by shareholders or groups 

in connection with a nomination 

pursuant to Rule 14a–11. The first 

exemption addresses written and oral 

solicitations by shareholders that are 

seeking to form a nominating 

shareholder group, provided that certain 

requirements are met.824 Solicitations 

made in reliance on this exemption 

would be required to be filed under 

cover of Schedule 14N with the 

appropriate box marked on the cover 

page. As discussed above, we estimate 

that 34 of the submissions made to 

companies (other than registered 

investment companies) pursuant to Rule 

14a–11 will be by groups of 

shareholders formed for purposes of 

satisfying the eligibility requirements of 

the rule. We estimate that 31 (90% of 

34) of these groups will avail themselves 

of Rule 14a–2(b)(7). In the case of 

reporting companies (other than 

registered investment companies), this 

will result in an aggregate burden of 31 

hours (31 solicitations × 1 hour/ 

solicitation), which corresponds to 23 

hours of shareholder time (31 

solicitations × 1 hour/solicitation × 0.75) 

and $3,100 for the services of outside 

professionals (31 solicitations × 1 hour/ 

solicitation × 0.25 × $400). In the case 

of registered investment companies, we 

estimate that five of the submissions 

made pursuant to Rule 14a–11 will be 

by groups of shareholders formed for 

purposes of satisfying the eligibility 

requirements of the rule. We estimate 

that all of these groups will avail 

themselves of Rule 14a–2(b)(7) (90% of 

5 rounds up to 5). This will result in an 

aggregate burden of 5 hours (5 

solicitations × 1 hour/solicitation), 

which corresponds to 4 hours of 

shareholder time (5 solicitations × 1 

hour/solicitation × 0.75) and $500 for 

the services of outside professionals (5 

solicitations × 1 hour/solicitation × 0.25 

× $400). These burden hours would be 

added to the PRA burden of Schedule 

14N. 

The second new exemption will apply 

to written and oral solicitations by or on 

behalf of a nominating shareholder or 

group that has met the requirements of 

Rule 14a–11 in favor of shareholder 

nominees or for or against company 

nominees.825 Although nominating 

shareholders or groups will not be 

required to engage in written 

solicitations, if the nominating 

shareholder or group does so, the 

exemption will require inclusion in any 

written soliciting materials filed under 

cover of Schedule 14N of a legend 

advising shareholders to look at the 

company’s proxy statement when 

available and advising shareholders 

how to find the company’s proxy 

statement. For purposes of this analysis, 

we assume that 50% of nominating 

shareholders or groups ultimately 

included in a company’s proxy 

statement will solicit in favor of their 

nominee or nominees outside the 

company’s proxy statement. In the case 

of reporting companies (other than 

registered investment companies), this 

will result in an aggregate burden of 20 

hours (20 solicitations × 1 hour/ 

solicitation), which corresponds to 15 

hours of shareholder time (20 

solicitations × 1 hour/solicitation × 0.75) 

and $2,000 for services of outside 

professionals (20 solicitations × 1 hour/ 

solicitation × 0.25 × $400). These 

burden hours would be added to the 

PRA burden of Schedule 14N. In the 

case of registered investment 

companies, this will result in an 

aggregate burden of 3 hours (3 

solicitations × 1 hour/solicitation), 

which corresponds to 2 hours of 

shareholder time (3 solicitations × 1 

hour/solicitation × 0.75) and $300 for 

services of outside professionals (3 

solicitations × 1 hour/solicitation × 0.25 

× $400). These burden hours would be 

added to the PRA burden of Schedule 

14N. 

2. Amendment to Rule 14a–8(i)(8) 

Under our amendment to Rule 14a– 

8(i)(8), the election exclusion, a 

company will no longer be able to rely 

on this basis to exclude a shareholder 

proposal that seeks to establish a 

procedure under a company’s governing 


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826See North Dakota Publicly Traded 

Corporations Act, N.D. Cent. Code § 10–35–08 

(2009). 

827See Lucian A. Bebchuk, The Myth of the 

Shareholder Franchise, 93 Va. L. Rev. 675, 683 

(2007) (‘‘Bebchuk (2007)’’) (citing data from proxy 

solicitation firm Georgeson Shareholder). See 

footnote 314 in the Proposing Release. 

828See Georgeson, 2009 Annual Corporate 

Governance Review (stating that as of the end of 

September 2009 it had tracked 57 formal proxy 

contests); see also RiskMetrics Group, 2009 

Postseason Report Summary, A New Voice in 

Governance: Global Policymakers Shape the Road 

to Reform, October 2009, available at http:// 

www.riskmetrics.com/docs/2009-postseason-report 

(noting that during the 2009 proxy season there 

were at least 39 proxy contests, and 36 negotiated 

settlements prior to a shareholder vote). 

829See letter from BRT (citing data from 

Georgeson, ‘‘2008 Annual Corporate Governance 

Review’’). See also RiskMetrics Group, 2008 

Postseason Report Summary, Weathering the Storm: 

Investors Respond to the Global Credit Crisis, 

October 2008, available at http:// 

www.riskmetrics.com/docs/ 

2008postseason_review_summary. 

830See footnote 804 above. 

831We note that we used this estimate in the 

Proposing Release and did not receive comment on 

it. See Section IV.C.2. of the Proposing Release. We 

acknowledge the possibility that the number of Rule 

14a–8 proposals relating to director nomination 

procedures may decrease with shareholders’ ability 

to submit a nominee for inclusion in company 

proxy materials pursuant to Rule 14a–11, but we 

believe that any decrease may be countered by an 

increase in shareholder proposals to establish 

company-specific requirements that are different 

than Rule 14a–11. 

832The increase is calculated by adding the 

number of proxy contests in 2009 (57) plus the 

number of no-action requests received in 2009 

regarding proposals seeking to amend a company’s 

bylaws to provide for shareholder director 

nominations (seven). We have not included an 

estimated 59 proposals in this increase because we 

believe they will be submitted in lieu of other types 

Continued 

documents for the inclusion of one or 

more shareholder director nominees in 

the company’s proxy materials. The 

shareholder proposal will have to meet 

the procedural requirements of Rule 

14a–8 and not be subject to one of the 

substantive exclusions other than the 

election exclusion (e.g., the proposal 

could be excluded if the shareholder 

proponent did not meet the ownership 

threshold under Rule 14a–8). 

Historically, shareholders have made 

relatively few proposals relating to 

shareholder access to a company’s 

proxy materials. The staff received 368 

no-action requests from companies 

seeking to exclude shareholder 

proposals during the 2006–2007 fiscal 

year. Of these requests, only three (or 

approximately one percent) related to 

proposals for bylaw amendments 

providing for shareholder nominees to 

appear in the company’s proxy 

materials. During the 2007–2008 fiscal 

year, the staff received 423 no-action 

requests to exclude shareholder 

proposals pursuant to Rule 14a–8. Of 

these no-action requests, six (or 

approximately two percent) related to 

proposals for bylaw amendments 

providing for shareholder nominees to 

appear in the company’s proxy 

materials. During the 2008–2009 fiscal 

year, the staff received 365 no-action 

requests to exclude shareholder 

proposals pursuant to Rule 14a–8. Of 

these requests, seven related to 

shareholders’ ability to have their 

nominee included in a company’s proxy 

materials. One such request sought to 

exclude a proposal to directly amend a 

company’s governing documents to 

permit shareholder director 

nominations; the remaining six noaction requests related to proposals 

requesting that the company 

reincorporate in North Dakota where the 

relevant state corporate law gives 

qualified shareholders the right to 

submit director nominees for inclusion 

in the company’s proxy materials.826

Although these reincorporation 

proposals did not seek to amend the 

companies’ bylaws, by seeking 

reincorporation into North Dakota it 

appears they sought the ability for 

shareholders to have nominees included 

in a company’s proxy materials. As of 

July 23, 2010, during the 2009–2010 

fiscal year, the staff has received 353 noaction requests to exclude shareholder 

proposals pursuant to Rule 14a–8, none 

of which related to shareholders’ ability 

to have their nominee included in a 

company’s proxy materials. While we 

believe that these proposals are helpful 

in gauging the level of shareholder 

interest in nominating directors, 

because our amendment to Rule 14a– 

8(i)(8) narrows the scope of the 

exclusion and no longer permits 

companies to exclude certain proposals 

that are excludable under current Rule 

14a–8(i)(8), and Rule 14a–11 as adopted 

includes meaningful eligibility 

standards, we believe there may be an 

increase in the number of shareholder 

proposals seeking to establish 

procedures under a company’s 

governing documents for the inclusion 

of one or more shareholder nominees in 

a company’s proxy materials to allow, 

for example, lower ownership 

thresholds or higher numbers of 

shareholder director nominees. 

While the number of no-action 

requests the staff has received in the 

past is a useful starting point for the 

PRA analysis, other data also is helpful 

to gauge shareholder interest in 

nominating directors and to predict the 

anticipated impact on the number of 

proposals submitted pursuant to Rule 

14a–8 that seek to establish procedures 

under a company’s governing 

documents for the inclusion of one or 

more shareholder nominees in a 

company’s proxy materials that 

otherwise would be excludable under 

current Rule 14a–8(i)(8). For example, 

based on publicly available information, 

from 2001 to 2005, there were, on 

average, 14 contested elections per 

year.827 It is estimated that in 2009 there 

were at least 57 contested elections,828

and in 2008 it is estimated that there 

were at least 50 contested elections.829

For purposes of the PRA, we believe 

that as a result of the amendment to 

Rule 14a–8(i)(8), shareholders may 

submit at least as many shareholder 

proposals to establish procedures under 

a company’s governing documents for 

the inclusion of shareholder nominees 

for director in company proxy materials 

as there are contested elections. We 

believe that if shareholders are willing 

under the current proxy rules to put 

forth the expense and effort to wage a 

contest to put forth their own nominees 

in 57 instances, there may be a similar 

number of proposals submitted to 

companies pursuant to Rule 14a–8, as 

amended, because companies will no 

longer be permitted to exclude some 

proposals that currently are excludable 

under Rule 14a–8(i)(8). We also believe 

that some shareholders that have 

submitted proposals in the past with 

regard to other board issues will submit 

proposals seeking to establish 

procedures under a company’s 

governing documents for the inclusion 

of shareholder nominees for director in 

company proxy materials. As noted in 

the Proposing Release, according to 

information from RiskMetrics, 

approximately 118 Rule 14a–8 

shareholder proposals regarding board 

issues were submitted to shareholders 

for a vote in the 2008–2009 proxy 

season.830 For purposes of the PRA, we 

estimate that approximately half of 

these shareholders may submit a 

proposal regarding procedures for the 

inclusion of shareholder nominees for 

director in company proxy materials, 

resulting in up to 59 proposals in lieu 

of proposals related to other board 

issues.831

In the case of reporting companies 

(other than registered investment 

companies), we believe that the 

amendment to Rule 14a–8(i)(8) may 

result in an increase of up to 64 (57 + 

7 2009 shareholder proposals) proposals 

annually from 2009, and a total of 123 

proposals (59 proposals + 57 + 7) to 

companies per year regarding 

procedures for the inclusion of 

shareholder nominees for director in 

company proxy materials.832 We 


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of proposals (a shareholder is limited to submitting 

one shareholder proposal to each company). 

833We note that this calculation is for 

incremental, not total, costs. One commenter 

estimated that the average approximate total cost for 

shareholders to include a Rule 14a–8 proposal was 

$30,000. See letter from CalPERS. Assuming these 

costs correspond to legal fees, which we estimate 

at an hourly cost of $400, we estimate that this cost 

will be equivalent to approximately 75 hours. 

834As noted in footnote 817 above, we estimate 

that the average burden to a company associated 

with preparing and submitting a no-action request 

to the staff was approximately 116 burden hours. 

As noted above in footnote 823, we estimate 60 

burden hours for a shareholder proponent to 

respond to a company’s notice of intent to exclude 

and request for no-action relief to the Commission. 

In this regard, we also estimate that the average 

incremental burden for a shareholder proponent to 

submit a shareholder proposal would be 10 hours. 

We note that one commenter estimated that the 

average approximate cost to shareholders of 

submitting a proposal is $30,000. See letter from 

CalPERS. We note that this commenter’s estimate 

corresponds to the burden to shareholders of 

submitting a proposal, whereas our estimate of 60 

burden hours corresponds to the burden to 

shareholders in responding to a company’s noaction request. 

835The increase is estimated based on the number 

of registered investment company proxy contests in 

calendar year 2009 (11) plus the average number of 

no-action letters issued by the staff regarding 

proposals seeking to amend a registered investment 

company’s bylaws to provide for shareholder 

director nominations received in calendar years 

2007, 2008, and 2009 rounded to the nearest whole 

number greater than zero (1). In addition, we 

estimate that investment companies currently 

receive as many proposals regarding nomination 

procedures or disclosures as there are contested 

elections and no-action letters issued by the staff, 

resulting in a total of an estimated 24 proposals 

regarding nomination procedures or disclosures 

related to director nominations to companies per 

year. 

estimate the annual incremental burden 

for the shareholder to prepare the 

proposal to be 10 burden hours per 

proposal, for a total of 640 burden hours 

(64 proposals × 10 hours/proposal). This 

will correspond to 480 hours of 

shareholder time (64 proposals × 10 

hours/proposal × 0.75) and $64,000 for 

the services of outside professionals (64 

proposals × 10 hours/proposal × 0.25 × 

$400).833

We recognize that a company that 

receives a shareholder proposal has no 

obligation to submit a no-action request 

to the staff under Rule 14a–8. We 

anticipate that because the proposals 

that would be submitted pursuant to 

amended Rule 14a–8 could affect the 

composition of the company’s board of 

directors, nearly all companies receiving 

such proposals would submit a written 

statement of its reasons for excluding 

the proposal to the staff. We estimate 

that there will be a total of 123 

proposals per year regarding procedures 

for the inclusion of shareholder 

nominees in the company’s proxy 

statement. This number includes the 64 

(57 + 7) new proposals plus the 59 

proposals submitted in lieu of other 

proposals. Thus, we estimate that 90% 

of the estimated 123 companies 

receiving proposals seeking to establish 

procedures under a company’s 

governing documents for the inclusion 

of one or more shareholder nominees in 

a company’s proxy materials will 

submit a written statement of their 

reasons for excluding the proposal to 

the staff and would seek no-action 

relief. 

We estimate that companies would 

determine that they could exclude, and 

would seek staff concurrence through 

the no-action letter process for, 110 

proposals (123 proposals × 90%) per 

proxy season. We estimate that the 

annual burden for the company’s 

submission of a notice of its intent to 

exclude the proposal and its reasons for 

doing so would average 116 hours per 

proposal, for a total of 12,760 burden 

hours (110 proposals × 116 hours/ 

proposal) for reporting companies (other 

than registered investment companies). 

This will correspond to 9,570 hours of 

company time (110 proposals × 116 

hours/proposal × 0.75) and $1,276,000 

for the services of outside professionals 

(110 proposals × 116 hours/proposal × 

0.25 × $400). 

We also estimate that the annual 

burden for the proponent’s participation 

in the Rule 14a–8 no-action process 

would average 60 hours per proposal, 

for a total of 6,600 burden hours (110 

proposals × 60 hours/proposal).834 This 

will correspond to 4,950 hours of 

shareholder time (110 proposals × 60 

hours/proposal × 0.75) and $660,000 for 

services of outside professionals (110 

proposals × 60 hours/proposal × 0.25 × 

$400). These burdens would be added to 

the PRA burden of Schedules 14A and 

14C. 

In the case of registered investment 

companies, we anticipate that the 

amendment to Rule 14a–8(i)(8) will 

result in an increase of 12 proposals 

annually, and a total of 24 proposals 

regarding procedures for the inclusion 

of shareholder nominees for director in 

company proxy materials to companies 

per year.835 We estimate the annual 

incremental burden for the shareholder 

proponent to prepare the proposal to be 

10 hours per proposal, for a total of 120 

burden hours (12 proposals × 10 hours/ 

proposal). This would correspond to 90 

hours of shareholder time (12 proposals 

× 10 hours/proposal × 0.75) and $12,000 

for the services of outside professionals 

(12 proposals × 10 hours/proposal × 

0.25 × $400). 

Similar to reporting companies other 

than investment companies, we assume 

that 90% of registered investment 

companies that receive a shareholder 

proposal seeking to establish procedures 

under a company’s governing 

documents for the inclusion of one or 

more shareholder nominees in a 

company’s proxy materials will 

determine that they may exclude the 

proposal from their proxy materials and 

request concurrence through the noaction letter process (so registered 

investment companies will seek to 

exclude 22 such proposals per proxy 

season). Also similar to reporting 

companies other than registered 

investment companies, we assume that 

the annual burden for the company’s 

submission of a notice of its intent to 

exclude the proposal and its reasons for 

doing so would average 116 hours per 

proposal, for a total of 2,552 burden 

hours for registered investment 

companies (22 proposals × 116 hours/ 

proposal). This corresponds to 1,914 

hours of company time (22 proposals × 

116 hours/proposal × 0.75) and 

$255,200 for the services of outside 

professionals (22 proposals × 116 hours/ 

proposal × 0.25 × $400). We also 

estimate that the annual burden for the 

proponent’s participation in the Rule 

14a–8 no-action process would average 

60 hours per proposal, for a total of 

1,320 burden hours (22 proposals × 60 

hours/proposal). This corresponds to 

990 hours of shareholder time (22 

proposals × 60 hours/proposal × 0.75) 

and $132,000 for the services of outside 

professionals (22 proposals × 60 hours/ 

proposal × 0.25 × $400). These burdens 

would be added to the PRA burden of 

Rule 20a–1. 

3. Schedule 14N and Exchange Act Rule 

14a–18 

Rule 14n–1 establishes a new filing 

requirement for the nominating 

shareholder or group, under which the 

nominating shareholder or group will be 

required to file notice of its intent to 

include a shareholder nominee or 

nominees for director pursuant to Rule 

14a–11, applicable State law provisions, 

or a company’s governing documents, as 

well as disclosure about the nominating 

shareholder or group and nominee or 

nominees on new Schedule 14N. New 

Schedule 14N was modeled after 

Schedule 13G, but with more extensive 

disclosure requirements than Schedule 

13G. Schedule 14N will require, among 

other items, disclosure about the 

amount and percentage of securities 

owned by the nominating shareholder 

or group, the length of ownership of 

such amount, and a written statement 

that the nominating shareholder or 

group will continue to hold the 

securities through the date of the 

meeting. 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56749 

836We currently estimate the burden per response 

for preparing a Schedule 13G filing to be 12.4 

hours. 

837We currently estimate the burden per response 

for preparing a Schedule 14A filing to be 101.5 

hours and a Schedule 14C to be 102.62 hours. 

838We estimate that the burden of preparing the 

information in Schedule 14N for a nominating 

shareholder or group would be 1⁄3 of the disclosures 

typically required by a Schedule 14A filing, which 

results in approximately 34 burden hours. For 

purposes of this analysis, we estimate that the 34 

burden hours will be added to the 12.4 hours 

associated with filing a Schedule 13G, resulting in 

a total of approximately 47 burden hours. We 

estimate that 75% of the burden of preparation of 

Schedule 14N will be borne internally by the 

nominating shareholder or group, and that 25% will 

be carried by outside professionals. We believe the 

nominating shareholder or group will work with 

their nominee to prepare the disclosure and then 

have it reviewed by outside professionals. 

839This figure represents the aggregate burden 

hours attributed to Schedule 14N and is the sum of 

the burden associated with Schedules 14N 

submitted pursuant to Rule 14a–11, applicable state 

or foreign law provisions, and a company’s 

governing documents. 

In addition, Schedule 14N will 

contain the disclosure required to be 

included in the nominating 

shareholder’s or group’s notice to the 

company of its intent to require that the 

company include the shareholder’s or 

group’s nominee in the company’s 

proxy materials pursuant to Rule 14a–11 

or pursuant to applicable state or foreign 

law provisions or a company’s 

governing documents. With regard to 

the latter, we are seeking to assure that 

nominating shareholders or groups that 

submit a shareholder nomination for 

inclusion in a company’s proxy 

materials pursuant to applicable state or 

foreign law provisions or the company’s 

governing documents also provide 

disclosure similar to the disclosure 

required in a contested election to give 

shareholders the information needed to 

make an informed voting decision. 

Schedule 14N will require disclosures 

regarding the nature and extent of the 

relationships between the nominating 

shareholder or group, the nominee and 

the company or any affiliate of the 

company. Pursuant to Items 7(e)–(f) of 

Schedule 14A and, in the case of an 

investment company, Items 22(b)(18)– 

(19) of Schedule 14A, the company will 

be required to include certain 

information set forth in the 

shareholder’s notice on Schedule 14N in 

its proxy materials. A nominating 

shareholder or group filing a Schedule 

14N to provide disclosure when 

submitting a nominee for inclusion in a 

company’s proxy materials pursuant to 

applicable state or foreign law 

provisions or the company’s governing 

documents will not be required to 

provide certain statements and 

certifications required for nominating 

shareholders or groups using Rule 14a– 

11. 

We estimate that compliance with the 

Schedule 14N requirements will result 

in a burden greater than Schedule 

13G 836 but less than a Schedule 14A.837

Therefore, we estimate that compliance 

with Schedule 14N will result in 47 

hours per response per nominee 

submitted pursuant to Rule 14a–11.838

We also note that the burden associated 

with filing a Schedule 14N in 

connection with a nomination made 

pursuant to an applicable state or 

foreign law provision or the company’s 

governing documents may be slightly 

less than a nomination made pursuant 

to Rule 14a–11 because certain 

disclosures, statements, and 

certifications will not be required 

(including a statement that the 

nominating shareholder will continue to 

own the amount of securities through 

the date of the meeting, disclosure about 

the nominating shareholder’s or group’s 

intent with respect to continued 

ownership of the securities after the 

election, the certifications that will be 

required to use Rule 14a–11 (such as the 

certification concerning lack of intent to 

change control or to gain a number of 

seats on the board that exceeds the 

maximum number of nominees that the 

company could be required to include 

under Rule 14a–11, or the certifications 

that the nominating shareholder or 

group and the nominee satisfy the 

requirements of Rule 14a–11), and a 

supporting statement from the 

nominating shareholder or group. 

Therefore, we estimate that compliance 

with Schedule 14N when a shareholder 

or group submits a nominee or 

nominees to a company pursuant to an 

applicable state or foreign law provision 

or the company’s governing documents 

will result in 40 hours per response per 

nominee. 

For purposes of the PRA, we estimate 

the total annual incremental burden for 

nominating shareholders or groups to 

prepare the disclosure that will be 

required under this portion of the final 

rules to be approximately 7,870 hours of 

shareholder time, and $1,049,300 for the 

services of outside professionals.839

This estimate includes the nominating 

shareholder’s or group’s preparation and 

filing of the notice and required 

disclosure and, as applicable, 

certifications on Schedule 14N and 

filings related to new Rules 14a–2(b)(7) 

and 14a–2(b)(8). 

We do not expect that every 

shareholder that meets the eligibility 

threshold to submit a nominee for 

inclusion in a company’s proxy 

materials pursuant to Rule 14a–11, an 

applicable state or foreign law 

provision, or a company’s governing 

documents will do so. As discussed 

above, we estimate that 45 reporting 

companies (other than registered 

investment companies) and 6 registered 

investment companies will receive 

notices of intent to submit nominees 

pursuant to Rule 14a–11. We anticipate 

that some companies will receive 

nominees from more than one 

shareholder or group, though, as 

discussed above, for purposes of PRA 

estimates, we assume companies with 

an eligible shareholder would receive 

two nominees from only one 

shareholder or group. 

We estimate that compliance with the 

requirements of Schedule 14N 

submitted pursuant to Rule 14a–11 will 

require 4,230 burden hours (45 notices 

× 47 hours/notice × 2 nominees/ 

shareholder) in aggregate each year for 

nominating shareholders or groups of 

reporting companies (other than 

registered investment companies), 

which corresponds to 3,173 hours of 

shareholder time (45 notices × 47 hours/ 

notice × 2 nominees/shareholder × 0.75) 

and costs of $423,000 (45 notices × 47 

hours/notice × 2 nominees/shareholder 

× 0.25 × $400) for the services of outside 

professionals. In the case of registered 

investment companies, we estimate that 

a nominating shareholder’s or group’s 

compliance with the requirements of 

Schedule 14N will require 564 burden 

hours (6 responses × 47 hours/response 

× 2 nominees) in aggregate each year, 

which corresponds to 423 hours of 

shareholder time (6 responses × 47 

hours/response × 2 nominees × 0.75) 

and costs of $56,400 for the services of 

outside professionals (6 responses × 47 

hours/response × 2 nominees × 0.25 × 

$400). Therefore, we estimate a total of 

4,794 burden hours for all reporting 

companies, including investment 

companies, broken down into 3,596 

hours of shareholder time and $479,400 

for services of outside professionals. 

We assume that all nominating 

shareholders or groups will prepare a 

statement of support for the nominee or 

nominees, and we estimate the 

disclosure burden for the nominating 

shareholder or group to prepare a 

statement of support for its nominee or 

nominees to be approximately 10 

burden hours per nominee. In the case 

of companies other than registered 

investment companies, this results in an 

aggregate burden of 900 (45 statements 

× 10 hours/statement × 2 nominees/ 

shareholder), which corresponds to 675 

hours of shareholder time (45 

statements × 10 hours/statement × 2 

nominees/shareholder × 0.75) and 

$90,000 for services of outside 

professionals (45 statements × 10 hours/ 


emcdonald on DSK2BSOYB1PROD with RULES2
56750 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

840As discussed above, according to information 

from RiskMetrics, approximately 118 Rule 14a–8 

shareholder proposals regarding board issues were 

submitted to shareholders for a vote in the 2008– 

2009 proxy season. See footnote 804. We believe 

this data is a useful starting point for estimating the 

number of shareholders who may avail themselves 

of our new rules, including the use of Schedule 

14N. Also as discussed above, we estimate that 

approximately half of these shareholders may 

submit a proposal pursuant to Rule 14a–8 regarding 

procedures for the inclusion of shareholder 

nominees for director in company proxy materials, 

resulting in 59 proposals. We believe the number 

of shareholders submitting nominees pursuant to a 

state or foreign law provision will be lower than the 

number of shareholders submitting proposals 

pursuant to Rule 14a–8. As a result, we estimate 

that approximately 30 shareholder proponents will 

submit nominations pursuant to applicable state or 

foreign law provisions or a company’s governing 

documents. 

841We estimate that approximately half of the 24 

shareholders submitting proposals to registered 

investment companies regarding the inclusion of 

one or more shareholder nominees for director in 

company proxy materials will make submissions 

pursuant to applicable state or foreign law 

provisions or a company’s governing documents. As 

a result, we estimate that approximately 12 

shareholder proponents will submit to registered 

investment companies nominations pursuant to 

applicable state or foreign law provisions or a 

company’s governing documents. 

842We are assuming for PRA purposes that any 

applicable state or foreign law provision or 

company’s governing documents will allow for 

inclusion of such a statement by the nominating 

shareholder or group. 

statement × 2 nominees/shareholder × 

0.25 × $400) for shareholders of 

reporting companies (other than 

registered investment companies). For 

registered investment companies, this 

will result in an aggregate burden of 120 

(6 statements × 10 hours/statement × 2 

nominees/shareholder), which 

corresponds to 90 hours of shareholder 

time (6 statements × 10 hours/statement 

× 2 nominees/shareholder × 0.75) and 

$12,000 for services of outside 

professionals (6 statements × 10 hours/ 

statement × 2 nominees/shareholder × 

0.25 × $400). Therefore, we estimate a 

total of 1,020 burden hours for all 

reporting companies, including 

investment companies, broken down 

into 765 hours of shareholder time and 

$102,000 for services of outside 

professionals. 

When a nominating shareholder or 

group submits a nominee or nominees 

to a company pursuant to an applicable 

state or foreign law provision or the 

company’s governing documents, the 

nominating shareholder or group will be 

required to file a Schedule 14N to 

provide disclosure about the nominating 

shareholder or group and the nominee 

or nominees. As discussed, a company 

will be required to include certain 

disclosures about the nominating 

shareholder or group and the nominee 

or nominees in its proxy statement. As 

noted above, we estimate that the 

burden associated with filing a 

Schedule 14N in connection with a 

nomination made pursuant to an 

applicable state or foreign law provision 

or a company’s governing documents is 

40 hours per nominee. We also estimate 

that approximately 30 nominating 

shareholders or groups of reporting 

companies (other than registered 

investment companies) will submit a 

nomination pursuant to an applicable 

state or foreign law provision or a 

company’s governing documents.840

Thus, we estimate compliance with the 

requirements of Schedule 14N for 

nominating shareholders or groups 

submitting nominations pursuant to an 

applicable state or foreign law provision 

or the company’s governing documents 

would result in 2,400 aggregate burden 

hours (30 notices × 40 hours/notice × 2 

nominees/shareholder) each year for 

nominating shareholders or groups of 

reporting companies (other than 

registered investment companies), 

broken down into 1,800 hours of 

shareholder time (30 notices × 40 hours/ 

notice × 2 nominees/shareholder × 0.75) 

and costs of $240,000 for the services of 

outside professionals (30 notices × 40 

hours/notice × 2 nominees/shareholder 

× 0.25 × $400). In the case of registered 

investment companies, we estimate that 

approximately 12 nominating 

shareholders or groups will submit a 

nomination pursuant to an applicable 

state or foreign law provision or a 

company’s governing documents.841 We 

estimate that a nominating shareholder’s 

or group’s compliance with the 

requirements of Schedule 14N would 

result in 960 aggregate burden hours (12 

notices × 40 hours/notice × 2 nominees/ 

shareholder) each year, which 

corresponds to 720 hours of shareholder 

time (12 notices × 40 hours/notice × 2 

nominees/shareholder × 0.75) and costs 

of $96,000 for the services of outside 

professionals (12 notices × 40 hours/ 

notice × 2 nominees/shareholder × 0.25 

× $400). Therefore, we estimate that the 

total burden hours would be 3,360 for 

all reporting companies, including 

investment companies, broken down 

into 2,520 hours of shareholder time 

and $336,000 for services of outside 

professionals. 

We assume that all nominating 

shareholders or groups that submit a 

nominee or nominees pursuant to an 

applicable state or foreign law provision 

or a company’s governing documents 

will prepare a statement of support for 

the nominee or nominees,842 and we 

estimate the disclosure burden for the 

nominating shareholder or group to 

prepare a statement of support for its 

nominee or nominees to be 

approximately 10 burden hours per 

nominee. This results in an aggregate 

burden of 600 hours (30 statements × 10 

hours/statement × 2 nominees/ 

shareholder) for shareholders of 

reporting companies (other than 

registered investment companies), 

which corresponds to 450 hours of 

shareholder time (30 statements × 10 

hours/statement × 2 nominees/ 

shareholder × 0.75) and $60,000 for 

services of outside professionals (30 

statements × 10 hours/statement × 2 

nominees/shareholder × 0.25 × $400). 

For registered investment companies, 

this results in an aggregate burden of 

240 hours (12 statements × 10 hours/ 

statement × 2 nominees/shareholder), 

which corresponds to 180 hours of 

shareholder time (12 statements × 10 

hours/statement × 2 nominees/ 

shareholder × 0.75) and $24,000 for 

services of outside professionals (12 

statements × 10 hours/statement × 2 

nominees/shareholder × 0.25 × $400). 

This results in a total of 840 burden 

hours, broken down into 630 hours of 

shareholder time and $84,000 for the 

services of outside professionals. 

4. Amendments to Exchange Act Form 

8–K 

Under Rule 14a–11, a nominating 

shareholder or group will be required to 

file with the Commission, and transmit 

to the company, a notice on Schedule 

14N of its intent to require the company 

to include the nominating shareholder’s 

or group’s nominee in the company’s 

proxy materials. The nominating 

shareholder or group 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 or group 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. The final rules also require 

a registered investment company that is 

a series company to file a Form 8–K 

disclosing the total number of the 

company’s shares that are entitled to 

vote for the election of directors at the 

annual meeting of shareholders (or, in 

lieu of such an annual meeting, a 

special meeting of shareholders) as of 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56751 

843The amendment to Rule 14a–8(i)(8) is not 

expected to impact Form 8–K, so the burden 

estimates solely reflect the burden changes resulting 

from new Item 5.08, including when a nomination 

is submitted pursuant to a company’s governing 

documents or pursuant to applicable State law. 

844Based on information obtained in 2003 from 

the Investor Responsibility Research Center, 3.75% 

of companies (other than registered investment 

companies) did not hold an annual meeting during 

the prior year or the date of the meeting changed 

by more than 30 days from the prior year. See also 

footnote 195 in the 2003 Proposal. 

845We believe that the percentage for registered 

closed-end investment companies will be similar to 

other reporting companies because such investment 

companies are traded on an exchange and are 

required to hold annual meetings of shareholders. 

846We estimate that 1,225 registered investment 

companies hold annual meetings each year based 

on the number of responses to Rule 20a–1. Based 

on data provided by Lipper, the Commission 

estimates that approximately 625 registered closedend management investment companies are traded 

on an exchange. 

847Consistent with the current estimates for Form 

8–K, we estimate that that 75% of the burden of 

preparation of Form 8–K is carried by the company 

and that 25% of the burden of preparation of Form 

8–K is carried by outside professionals at an average 

cost of $400 per hour. The burden includes 

disclosure of the date by which a nominating 

shareholder or group must submit the notice 

required by Rule 14a–11(c) as well as disclosure of 

net assets, outstanding shares, and voting. 

848We recognize that each shareholder group will 

need to analyze its own facts and circumstances in 

order to determine whether it is required to file a 

Schedule 13G; however, we expect that most groups 

will file a Schedule 13G. 

849Under Section 13(d) of the Exchange Act, only 

holders of equity securities of closed-end funds are 

required to file beneficial ownership reports with 

the Commission. Holders of open-end funds are not 

subject to this requirement. Previously, we 

estimated that approximately 625 (or slightly over 

50%) of the 1,225 registered investment companies 

responding to Investment Company Act Rule 20a– 

1 are closed-end funds that are traded on an 

exchange. We estimate that the percentage of the 

shareholder nominees that will be submitted by 

shareholders of closed-end funds will be 

approximately equal to the percentage of closed-end 

funds that are traded on an exchange. 

the end of the most recent calendar 

quarter.843

For purposes of the PRA, we estimate 

that approximately 4% of reporting 

companies (other than registered 

investment companies) will be required 

to file a Form 8–K because the company 

did not hold an annual meeting during 

the prior year, or the date of the meeting 

has changed by more than 30 days from 

the prior year.844 Based on our estimate 

that there are approximately 11,000 

reporting companies (other than 

registered investment companies), this 

corresponds to 440 companies that will 

be required to file a Form 8–K. In 

accordance with our current estimate of 

the burden of preparing a Form 8–K, we 

estimate 5 burden hours to prepare, 

review and file the Form 8–K, for a total 

burden of 2,200 hours (440 filings × 5 

hours/filing). This total burden 

corresponds to 1,650 hours of company 

time (440 filings × 5 hours/filing × 0.75) 

and $220,000 for services of outside 

professionals (440 filings × 5 hours/ 

filing × 0.25 × $400). 

In the case of registered investment 

companies, we estimate that, similar to 

reporting companies other than 

registered investment companies, 4% of 

registered closed-end management 

investment companies subject to Rule 

14a–11 that are traded on an exchange 

would be required to file a Form 8–K 

because the company did not hold an 

annual meeting during the prior year or 

the date of the meeting has changed by 

more than 30 days from the prior 

year.845 We estimate that approximately 

625 of the 1,225 registered investment 

companies responding to Investment 

Company Act Rule 20a–1 are closed-end 

funds that are traded on an exchange, 

resulting in 25 closed-end funds that 

will be required to file Form 8–K for 

these purposes (625 registered closedend management investment companies 

× 0.04).846 However, we estimate that 

few, if any, registered open-end 

management investment companies 

regularly hold annual meetings. 

Therefore, we estimate that 600 

registered investment companies are not 

closed-end investment companies and 

will be required to file Form 8–K. This 

results in a total of 625 registered 

investment companies required to file 

Form 8–K (25 closed-end management 

investment companies + 600 other 

registered investment companies) and 

3,125 burden hours (625 filings × 5 

hours/filing). This total burden 

corresponds to 2,344 hours of company 

time (625 filings × 5 hours/filing × 0.75) 

and $312,500 for services of outside 

professionals (625 filings × 5 hours/ 

filing × 0.25 × $400).847 Adding the 

totals for reporting companies (other 

than registered investment companies) 

and registered investment companies 

results in a total burden of 5,325, which 

corresponds to 3,994 hours of company 

time and $532,500 for services of 

outside professionals. This includes the 

requirement for a registered investment 

company that is a series company to file 

a Form 8–K disclosing the total number 

of the company’s shares that are entitled 

to vote for the election of directors at the 

annual meeting of shareholders (or, in 

lieu of such an annual meeting, a 

special meeting of shareholders) as of 

the end of the most recent calendar 

quarter. 

5. Schedule 13G Filings 

Shareholders will be permitted to 

aggregate holdings for purposes of 

meeting the eligibility threshold in Rule 

14a–11 and therefore we anticipate that 

some groups of shareholders may 

beneficially own in the aggregate more 

than 5% of a voting class of an equity 

security registered pursuant to Section 

12. In these circumstances, nominating 

shareholders will need to consider 

whether they have formed a group 

under Exchange Act Section 13(d)(3) 

and Rule 13d–5(b)(1) that is required to 

file beneficial ownership reports.848 To 

the extent nominating shareholder 

groups exceed the 5% threshold and file 

a Schedule 13G, this will result in an 

increased number of Schedule 13G 

filings. With respect to reporting 

companies other than registered 

investment companies, we estimate that 

25% (11) of the nominees submitted 

pursuant to Rule 14a–11 will be from 

shareholders who individually meet the 

eligibility thresholds (25% of 45), and 

75% (34) will be from shareholder 

groups (75% of 45). We estimate that 

75% of the 34 groups formed will 

exceed the 5% threshold and will file a 

Schedule 13G. As a result, we estimate 

that an additional 26 Schedule 13G 

filings will be made annually. The total 

burden associated with this increase in 

the number of filings is 322 burden 

hours (26 additional Schedule 13Gs × 

12.4 hours/schedule). This burden 

corresponds to 81 hours of shareholder 

time (26 additional Schedule 13Gs × 

12.4 hours/Schedule × 0.25) and 

$96,720 for services of outside 

professionals (26 additional Schedule 

13Gs × 12.4 hours/Schedule × 0.75 × 

$400). 

With respect to registered investment 

companies, we estimate that 

approximately 3 (50% of 6) of the 

shareholder nominees will be submitted 

by shareholders of closed-end funds 

whose shareholders are required to file 

beneficial ownership reports under the 

Exchange Act.849 We estimate that 25% 

(1) of the nominees for director of 

closed-end funds submitted pursuant to 

Rule 14a–11 will be from shareholders 

who individually meet the eligibility 

thresholds (25% of 3), and 75% (2) will 

be from shareholder groups (75% of 3). 

We estimate that 75% of the two groups 

formed to nominate directors of closedend funds will exceed the 5% threshold 

and file a Schedule 13G. As a result, we 

estimate that an additional 2 Schedule 

13G filings will be made annually (75% 

of two groups rounds up to two). The 

total burden associated with this 

increase in the number of filings is 

approximately 25 burden hours (2 

additional Schedule 13Gs × 12.4 hours/ 

schedule). This burden corresponds to 6 

hours of shareholder time (2 additional 

Schedule 13Gs × 12.4 hours/schedule × 

0.25) and $7,440 for services of outside 


emcdonald on DSK2BSOYB1PROD with RULES2
56752 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

850We currently estimate the burden associated 

with Form ID is 0.15 hours per response. 

professionals (2 additional Schedule 

13Gs × 12.4 hours/schedule × 0.75 × 

$400). 

Adding the totals for reporting 

companies (other than registered 

investment companies) and registered 

investment companies results in a total 

burden of 347 hours, which corresponds 

to 87 hours of shareholder time and 

$104,160 for services of outside 

professionals. 

6. Form ID Filings 

Under Rule 14n–1 and Rule 14a–11, 

a shareholder who submits a nominee or 

nominees for inclusion in the 

company’s proxy statement must 

provide notice on Schedule 14N to the 

company of its intent to require that the 

company include the nominee or 

nominees in the company’s proxy 

materials. The notice on Schedule 14N 

must be filed with the Commission on 

the date the notice is transmitted to the 

company. We anticipate that some 

shareholders who submit a nominee or 

nominees for inclusion in a company’s 

proxy materials will not previously have 

filed an electronic submission with the 

Commission and will file a Form ID. 

Form ID is the application form for 

access codes to permit filing on EDGAR. 

The final rules are not changing the 

form itself, but we anticipate that the 

number of Form ID filings may increase 

due to shareholders filing Schedule 14N 

when submitting a nominee or 

nominees to a company for inclusion in 

its proxy materials pursuant to Rule 

14a–11, applicable state or foreign law 

provisions, or a company’s governing 

documents. We estimate that 90% of the 

shareholders who submit a nominee or 

nominees for inclusion in a company’s 

proxy materials will not have filed 

previously an electronic submission 

with the Commission and will be 

required to file a Form ID. As noted 

above, we estimate that approximately 

45 reporting companies (other than 

registered investment companies) and 6 

registered investment companies will 

receive shareholder nominations 

submitted pursuant to Rule 14a–11. 

This corresponds to 46 additional Form 

ID filings (90% of 51). In addition, as 

noted above, we estimate that 

approximately 30 reporting companies 

(other than registered investment 

companies) and 12 registered 

investment companies will receive 

shareholder nominations submitted 

pursuant to an applicable state or 

foreign law provision or a company’s 

governing documents. This corresponds 

to an additional 38 Form ID filings (90% 

of 42). As a result, the additional annual 

burden would be 13 hours (84 filings × 

0.15 hours/filing).850 For purposes of 

the PRA, we estimate that the additional 

burden cost resulting from the new rules 

will be zero because we estimate that 

100% of the burden will be borne 

internally by the nominating 

shareholder or group. 

E. Revisions to PRA Reporting and Cost 

Burden Estimates 

Table 1 below illustrates the 

incremental annual compliance burden 

of the collection of information in hours 

and in cost for securities ownership 

reports filed by investors, proxy and 

information statements, and current 

reports under the Exchange Act. The 

burden was calculated by multiplying 

the estimated number of responses by 

the estimated average number of hours 

each entity spends completing the form. 

We estimate that 75% of the burden of 

preparation of the proxy and 

information statement and current 

reports is carried by the company 

internally, while 25% of the burden of 

preparation is carried by outside 

professionals at an average cost of $400 

per hour. We estimate that 75% of the 

burden of preparation of Schedule 14N, 

any soliciting materials with regard to 

formation of a nominating shareholder 

group, and any soliciting materials 

regarding the nomination will be carried 

by the nominating shareholder or group 

internally and that 25% of the burden 

of preparation will be carried by outside 

professionals retained by the 

nominating shareholder or group. We 

estimate that 25% of the burden of 

preparation of Schedule 13G (for 

nominating shareholder groups that 

beneficially own more than 5% of a 

voting class of any equity security 

registered pursuant to Section 12) will 

be carried by the nominating 

shareholder or group internally and that 

75% of the burden of preparation will 

be carried by outside professionals 

retained by the nominating shareholder 

or group. The portion of the burden 

carried by outside professionals is 

reflected as a cost, while the portion of 

the burden carried internally by the 

company and nominating shareholder 

or group is reflected in hours. 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56753 

851See Rules 14a–2(b)(7) and 14a–2(b)(8). 

TABLE 1—CALCULATION OF INCREMENTAL PRA BURDEN ESTIMATES* 

Current annual responses Proposed 

annual responses 

Current burden hours 

Increase in 

burden 

hours 

Proposed 

burden 

hours 

Current professional 

costs 

Increase in 

professional 

costs 

Proposed 

professional 

costs 

(A) (B) (C) (D) (E) = 

C 

+ 

D 

(F) (G) = 

F 

+ 

G 

Sch 14A ............................................................. 7,300 7,300 671,970 16,370 688,340 79,214,887 2,182,590 81,397,477 

Sch 14C ............................................................ 680 680 631,152 1,819 632,971 7,393,639 242,510 7,636,149 

Sch 14N ............................................................ 0 162 0 7,870 7,870 0 1,049,300 1,049,300 

Form 8–K .......................................................... 115,795 116,860 493,436 3,994 497,430 65,791,500 532,500 66,324,000 

Form ID ............................................................. 65,700 65,784 9,855 13 9,868 0 0 0 

Sch 13G ............................................................ 12,500 12,528 35,577 87 35,664 42,694,200 104,160 42,798,360

Rule 20a–1 ........................................................ 1,225 1,225 142,958 3,438 146,396 20,090,000 458,300 20,548,300 

Total ........................................................... .................... .................... .................... 33,591 .................... .................... 4,569,360 ....................

* The incremental burden estimate for Rule 20a–1 includes the disclosure that would be required on Schedule 14A and 14C, discussed above, with respect to 

funds. 

IV. Cost-Benefit Analysis 

A. Background 

The Commission is adopting new 

rules that, under certain circumstances, 

will require companies to include in 

their proxy materials shareholder 

nominees for director, as well as other 

disclosure regarding those nominees 

and the nominating shareholder or 

group. In addition, the new rules will 

require companies, under certain 

circumstances, to include in their proxy 

materials a shareholder proposal that 

seeks to establish a procedure in the 

company’s governing documents for the 

inclusion of shareholder director 

nominees in the company’s proxy 

materials. As a result, a company’s 

proxy materials may be required, under 

certain circumstances, to provide 

shareholders with information about, 

and the ability to vote for, a shareholder 

nominee for director. The new rules will 

therefore facilitate shareholders’ ability 

to exercise their traditional State law 

rights to nominate and elect directors by 

improving the disclosure provided in 

connection with corporate proxy 

solicitations and communication 

between shareholders in the proxy 

process. 

We requested comment on all aspects 

of the cost-benefit analysis contained in 

the Proposing Release, including 

identification of any additional costs 

and benefits. We have considered these 

comments carefully and made 

responsive changes to the rules in order 

to minimize the potential costs. Below 

we consider the benefits and costs of the 

economic effects of the new rules and 

discuss the comments we received, as 

applicable. 

B. Summary of Rules 

Rule 14a–11 will require companies 

to include shareholder nominations for 

director and disclosure about the 

nominating shareholder or group and 

the nominee in a company’s proxy 

materials if, among other things, the 

nominating shareholder or group held, 

as of the date of the shareholder notice 

on Schedule 14N, either individually or 

in the aggregate, at least 3% of the 

voting power of the company’s 

securities that are entitled to be voted 

on the election of directors at the annual 

meeting of shareholders (or, in lieu of 

such an annual meeting, a special 

meeting of shareholders) or on a written 

consent in lieu of such meeting and has 

held the qualifying amount of securities 

used to satisfy the ownership threshold 

continuously for at least three years as 

of the date of the shareholder notice on 

Schedule 14N (in the case of a 

shareholder group, each member of the 

group must have held the amount of 

securities that are used to satisfy the 

ownership threshold for at least three 

years as of the date of the shareholder 

notice on Schedule 14N). The 

nominating shareholder or group also 

will be required to hold the shares 

through the date of the meeting. A 

nominating shareholder or group that 

includes a nominee or nominees in a 

company’s proxy materials pursuant to 

Rule 14a–11 will be required to provide 

in its notice on Schedule 14N filed with 

the Commission and transmitted to the 

company disclosures similar to the 

disclosures required in a traditional 

contested election. Pursuant to Item 7(e) 

of Schedule 14A (and, in the case of 

registered investment companies and 

business development companies, Item 

22(b)(18) of Schedule 14A), the 

company will be required to include in 

its proxy materials certain disclosure 

provided by the nominating shareholder 

or group in its notice on Schedule 14N. 

In addition, the new rules will enable 

shareholders to engage in limited 

solicitations to form nominating 

shareholder groups and engage in 

solicitations in support of their nominee 

or nominees without disseminating a 

proxy statement.851

The Commission also is adopting an 

amendment to Rule 14a–8 to narrow the 

exclusion in paragraph (i)(8) of the rule, 

which addresses director elections. 

Under the amendment, a company will 

not be permitted to rely on Rule 14a– 

8(i)(8) to omit from its proxy materials 

a shareholder proposal that seeks to 

establish a procedure in the company’s 

governing documents for the inclusion 

of shareholder nominees for director in 

the company’s proxy materials. The 

current procedural requirements for 

submitting a shareholder proposal 

pursuant to Rule 14a–8 will remain the 

same. No additional disclosures will be 

required from any shareholder that 

submits such a proposal; however, a 

nominating shareholder or group that 

includes a nominee or nominees in a 

company’s proxy materials pursuant to 

an applicable state or foreign law 

provision or the company’s governing 

documents will be required to file with 

the Commission and transmit to the 

company, in its notice on Schedule 14N, 

disclosures similar to the disclosures 

required in a traditional contested 

election. Pursuant to Item 7(f) of 

Schedule 14A (and, in the case of 

registered investment companies and 

business development companies, Item 

22(b)(19) of Schedule 14A), the 

company will be required to include in 

its proxy materials certain disclosures 

provided by the nominating shareholder 

or group in its notice on Schedule 14N. 

C. Factors Affecting Scope of the New 

Rules 

Our discussion of the economic 

effects of the new rules takes into 

account various factors, such as the 


emcdonald on DSK2BSOYB1PROD with RULES2
56754 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

852As noted above, we are not aware of any states 

that currently prohibit shareholder nominations for 

director. 

853Several commenters also stated that they were 

unaware of any law in any state or in the District 

of Columbia that prohibits shareholders from 

nominating directors. See letters from ABA; BRT; 

CII; Eaton. 

854As an example, a board of eight directors, with 

two new shareholder-nominated directors, may 

expand to up to 11 directors. Such an expansion 

would dilute the influence of the shareholdernominated directors without increasing the number 

of director slots for shareholder nominees for 

director in the proxy materials because Rule 14a– 

11 includes a provision allowing companies to 

round down the number of nominees that must be 

included when calculating the 25% maximum. 

855Although Rule 14a–11 does not contain a 

requirement that the shareholder nominee or 

nominees do not have an intent to change the 

control of the company, a nominating shareholder’s 

or group’s ability to meet the requirement and 

certify that it does not have such an intent will be 

impacted by the intentions and actions of its 

nominee or nominees. For example, a nominating 

shareholder will not be able to certify that it does 

not hold the company’s securities for the purpose, 

or with the effect, of changing the control of the 

company if its nominee launches its own proxy 

contest or tender offer. For further discussion, see 

Section II.B.4.d. above. 

856See certifications in Item 8 of new Schedule 

14N. 

857Prior to the time a company has commenced 

printing its proxy statement and a form of proxy, 

if a nominating shareholder or group withdraws its 

shareholder director nominee or the nominee 

becomes disqualified, the company will be required 

to include in its proxy materials the director 

nominee or nominees of the nominating 

shareholder or group with the next highest voting 

power percentage that is otherwise eligible to use 

the rule and that filed a timely notice in accordance 

with the rule, if any. This process will continue 

until the company includes the maximum number 

of nominees that it is required to include in its 

proxy materials or the company exhausts the list of 

eligible nominees. For further discussion, see 

Section II.B.7.b above. 

858This could be the case when shareholdernominated candidates for director are elected at a 

company with a classified board or when a 

company decides to nominate previously-elected 

shareholder-nominated directors after their first 

term in office. 

859The first step of this two-step process would 

be the submission of a shareholder proposal 

pursuant to Rule 14a–8 seeking to establish a 

procedure in a company’s governing documents for 

the inclusion of shareholder nominees for director 

in the company’s proxy materials and shareholder 

approval of the proposal. The second step would be 

the submission and inclusion of shareholder 

director nominees in the company’s proxy materials 

pursuant to the nomination procedures adopted by 

shareholders. 

incentives and actions of certain parties, 

that will affect the rules’ scope and 

influence. 

Any future actions of the states and 

their legislatures could affect the 

applicability of the new rules. Rule 14a– 

11, for instance, will not apply to 

companies incorporated in states or 

other jurisdictions that prohibit 

nominations of directors by 

shareholders or permit companies to 

prohibit such nominations and where 

the company’s governing documents do 

so.852 Under Rule 14a–8, shareholder 

proposals must be proper subjects for 

action by shareholders under the laws of 

the jurisdiction of the company’s 

organization. To the extent that states or 

other jurisdictions change their laws, for 

example, to prohibit the nomination of 

directors by shareholders, Rule 14a–11 

and Rule 14a–8 would apply less 

broadly. 

Future actions of boards may affect 

the applicability of the new rules. In the 

case of Rule 14a–11, we believe that the 

applicability of the rule is not likely to 

be affected by future actions of a board 

because companies generally may not 

prohibit shareholders from nominating 

directors under existing State law.853 In 

addition, a company will not be 

permitted to exclude pursuant to 

amended Rule 14a–8(i)(8) a shareholder 

proposal that would establish a 

procedure under a company’s governing 

documents for the inclusion of one or 

more shareholder nominees for director 

in the company’s proxy materials. It is 

reasonable to expect that some 

shareholders will submit this type of 

proposal, particularly shareholders who 

perceive that the current board does not 

represent, or possibly may come to not 

represent, their interests and are not 

otherwise able to use Rule 14a–11 (such 

as if the shareholder does not qualify to 

submit a nominee or if larger 

shareholders have exhausted the 

nomination slots available pursuant to 

Rule 14a–11). Finally, boards seeking to 

limit the effect of shareholdernominated candidates submitted 

pursuant to Rule 14a–11 and elected as 

directors may, in some instances, 

choose to expand the board size to 

dilute, to an extent, the influence of 

those directors.854

The actions and intentions of 

shareholders also may affect the 

applicability of the new rules. To rely 

on Rule 14a–11, the nominating 

shareholder (or where there is a 

nominating shareholder group, each 

member of the nominating shareholder 

group) must not be holding any of the 

company’s securities with the purpose, 

or with the effect, of changing control of 

the company 855 or to gain a number of 

seats on the board of directors that 

exceeds the maximum number of 

nominees that the company could be 

required to include under Rule 14a–11 

and must provide a certification to this 

effect in its filed Schedule 14N.856 The 

effect of the rule also is affected by the 

limitation on the number of shareholder 

director nominees that a company is 

required to include in its proxy 

materials. Under Rule 14a–11, a 

company will not be required to include 

shareholder nominations for more than 

a maximum of one director or 25% of 

the existing board, whichever is greater. 

If one shareholder or group that is 

eligible to use Rule 14a–11 nominates 

the maximum allowable number of 

candidates, a company will be 

permitted to exclude any other 

shareholder’s or group’s nominees from 

the company’s proxy materials.857

Further, if the maximum allowable 

number of existing shareholder director 

nominees is currently in place on the 

board, additional shareholder director 

nominees are not required to be 

disclosed in the proxy materials 

pursuant to the rule.858

Shareholders seeking to establish a 

procedure in a company’s governing 

documents and submit nominees for 

director using such a provision will 

need to initiate a two-step process to 

have their nominees included in a 

company’s proxy materials.859 Unlike 

the use of Rule 14a–11, this two-step 

process depends on both the likelihood 

that a shareholder will initiate such a 

process and on its success at each step 

of the process (e.g., the successful 

inclusion of the shareholder proposal in 

the company’s proxy materials and 

adoption of the proposal by the 

appropriate shareholder vote). The 

likelihood that a shareholder will 

initiate the two-step process could be 

limited by the costs arising from the 

time needed to complete the process 

(e.g., including opportunity costs of 

holding securities where the 

shareholder may consider the 

company’s board composition to be suboptimal) and the added risk of failure 

due to the need to complete two 

separate steps to include its director 

nominees in the proxy materials. The 

likelihood that a shareholder will 

initiate this process is also affected by 

the existence of Rule 14a–11, which 

some eligible shareholders may seek to 

use instead. 

Lastly, the scope of the effects of Rule 

14a–11, including the expected benefits 

and costs described below, is affected by 

the size of the eligible population of 

shareholder groups and companies. 

Consequently, the scope of the direct 

effects of Rule 14a–11 will narrow to the 

extent that the rule’s eligibility criteria 

reduce the number of shareholders 

eligible to take advantage of the rule. 

According to the data from Form 13F 

filings, 33% of the 6,416 public issuers 

included in the sample would have one 

or more shareholders that, on its own, 

satisfies the 3% ownership threshold 

and three-year holding period 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56755 

860November 2009 Memorandum. See Section 

II.B.4.b. above for a discussion of the data, 

including its limitations. 

861As adopted, Rule 14a–11 requires the 

nominating shareholder individually, or the 

nominating group in the aggregate, to hold at least 

3% of the total voting power of the company’s 

securities that are entitled to be voted on the 

election of directors at the annual (or a special 

meeting in lieu of the annual) meeting of 

shareholders, or on a written consent in lieu of such 

meeting, on the date the nominating shareholder or 

nominating group provides notice to the company 

on Schedule 14N. 

862As amended, companies will no longer be able 

to rely on Rule 14a–8(i)(8) to exclude a shareholder 

proposal that seeks to establish a procedure in the 

company’s governing documents for the inclusion 

of shareholder nominees for director in the 

company’s proxy materials. 

863See letters from AFSCME; Sodali; Universities 

Superannuation (citing a June 2009 survey 

conducted by ShareOwners.org showing that 82% 

of the respondents believed that shareholders 

should be able to ‘‘nominate and elect directors of 

their own choosing to the boards of the companies 

they own,’’ while 16% of the respondents stated 

that ‘‘shareholders should not be able to propose 

directors to sit on the boards of the companies they 

own.’’). 

864Proxy contests waged in connection with 

efforts to obtain control may involve costs related 

to not only preparing proxy materials and engaging 

in solicitation efforts, but to the purchase or lockup of a significant amount of the voting securities 

of the target company. Such costs could be high. 

865See letters from Americans for Financial 

Reform; CalPERS; CII; Florida State Board of 

Administration; M. Katz; J. McRitchie; S. Ranzini; 

Teamsters. 

requirement of Rule 14a–11.860 Our 

extension of the holding period from a 

one-year period, as proposed, to the 

three-year period in the final rule, as 

well as the increase in the ownership 

threshold from that proposed for large 

accelerated filers, limit the number of 

shareholders eligible to use the rule and 

the number of companies directly 

affected by the rule. For non-accelerated 

filers, the uniform 3% ownership 

threshold is lower than the 5% 

ownership threshold that we proposed 

for that class of filers. This may result 

in an increase in the number of 

shareholders eligible to use Rule 14a–11 

and the number of companies directly 

affected by the rule as compared to 

those shareholders and companies 

affected under the proposed one year 

and 5% minimum standards; however, 

we believe that the extension of the 

holding period from one to three years 

may limit any increase in the number of 

shareholders eligible to use the rule at 

smaller reporting companies. The 

comments we received on the Proposal 

did not substantiate the concern that the 

rule would have a disproportionate 

impact on small issuers, and comments 

from companies overwhelmingly 

supported uniform ownership 

thresholds for all public companies. 

D. Benefits 

We believe that Rule 14a–11 and the 

amendment to Rule 14a–8(i)(8), where 

applicable, will (1) facilitate 

shareholders’ ability to exercise their 

traditional State law rights to nominate 

and elect directors; (2) establish a 

minimum uniform procedure pursuant 

to which shareholders will be able to 

include their director nominees in a 

company’s proxy materials and enhance 

shareholders’ ability to propose 

alternative procedures that further 

shareholders’ rights to nominate and 

elect directors; (3) potentially improve 

overall board and company 

performance; and (4) result in more 

informed voting decisions in director 

elections due to improved disclosure of 

shareholder director nominations and 

enhanced communications between 

shareholders regarding director 

nominations. 

1. Facilitating Shareholders’ Ability to 

Exercise Their State Law Rights to 

Nominate and Elect Directors 

Facilitating shareholders’ ability to 

exercise their traditional State law rights 

to nominate and elect directors is a 

direct benefit of the new rules for 

shareholders. The new rules do so by 

requiring the company proxy materials 

to include shareholder nominees under 

certain conditions and, as a result, 

providing alternative means for 

shareholders to nominate and elect 

director candidates other than through a 

traditional proxy contest. Some eligible 

shareholders may view the new rules as 

more advantageous than traditional 

proxy contests and, hence, the new 

rules may influence their behavior. In 

addition, eligible shareholders who 

would have considered launching a 

proxy contest for purposes other than to 

change control of the company may 

prefer to use the new rules instead. The 

availability of the new rules also may 

encourage shareholders who would not 

have previously considered conducting 

a proxy contest to take a greater role in 

the governance of their company by 

using the new rules to have their 

nominees for director included in a 

company’s proxy materials. 

The precise level of the direct benefits 

to shareholders will depend on a 

number of other factors. The benefits 

may be enhanced to the extent that 

companies’ governing documents are 

modified to require inclusion of 

shareholder nominees for director in the 

company’s proxy materials from a 

broader spectrum of shareholders (for 

example, by lowering the ownership 

threshold required to have a nominee 

included in the company’s proxy 

materials or shortening the holding 

period).861 The instances of such 

changes to provisions in governing 

documents may increase as a result of 

the amendment to Rule 14a–8(i)(8).862

We also recognize the possibility that 

certain quantifiable benefits for 

shareholders, such as a nominating 

shareholder’s or group’s savings in the 

direct costs of printing and mailing 

proxy materials, may be less than the 

quantifiable costs for a company subject 

to the new rules. We note, however, that 

the benefits of the new rules are not 

limited to those that are quantifiable 

(such as the direct savings in printing 

and mailing costs) and instead include 

benefits that are not as easily 

quantifiable (such as the possibility of 

greater shareholder participation and 

communication in the director 

nomination process), as discussed 

below. We believe that these benefits, 

collectively, justify the costs of the new 

rules. 

We discuss below the ways in which 

the new rules will facilitate 

shareholders’ exercise of their 

traditional State law rights and the 

benefits for shareholders (particularly as 

compared to a traditional proxy 

contest). We discuss specific monetary 

cost savings, both direct and indirect, as 

well as other changes and the resulting 

benefits for shareholders. 

Shareholders generally have the right 

under State law to nominate and elect 

their own director candidates—a right 

that many shareholders believe they 

should be able to exercise.863 Currently, 

however, a shareholder or group that 

wishes to present its director 

nominations for a shareholder vote must 

generally conduct a proxy contest, 

which is a costly endeavor. The 

nominating shareholder or group would 

have to incur costs involved with 

preparing proxy materials with the 

required disclosures regarding the 

director nominations and mailing the 

proxy materials to each shareholder 

solicited.864 Several commenters stated 

that the costs of traditional proxy 

contests have made them prohibitively 

expensive for shareholders wishing to 

exercise their traditional State law rights 

to nominate and elect directors.865

Further, the concern about the costs of 

conducting a traditional proxy contest is 

not limited to the fact that the 

nominating shareholder or group must 

incur these costs directly. A collective 

action problem also exists. The time and 

effort spent by a shareholder in 

nominating and advocating for new 

directors are not shared by other 

shareholders. This unequal cost sharing 

may serve to discourage any one 


emcdonald on DSK2BSOYB1PROD with RULES2
56756 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

866See, e.g., letters from Bebchuk, et al. (‘‘In 

evaluating eligibility and procedural requirements, 

the SEC should also keep in mind that many 

institutional investors lack incentives to invest 

actively in seeking governance benefits that would 

be shared by their fellow shareholders.’’); Lucian A. 

Bebchuk and Scott Hirst (‘‘Bebchuk/Hirst’’) 

(submitting the article by Lucian A. Bebchuk and 

Scott Hirst, Private Ordering and the Proxy Access 

Debate, 65 Bus. Law. 329 (2010) (‘‘Bebchuk and 

Hirst (2010)’’), in which the authors state: ‘‘Thus, 

challengers who might be able to improve the 

management of the company may be discouraged 

from running because they will bear all of the costs 

but capture only a fraction of the benefits from any 

improvement in governance.’’ See also Lynn A. 

Stout, The Mythical Benefit of Shareholder Control, 

93 Va. L. Rev. 789, 789 (2007) (‘‘Stout (2007)’’) (‘‘In 

a public company with widely dispersed share 

ownership, it is difficult and expensive for 

shareholders to overcome obstacles to collective 

action and wage a proxy battle to oust an incumbent 

board.’’) (cited in the Proposing Release, Section 

V.B.1.). 

867See letters from CII; Key Equity Investors; 

Pershing Square. The benefit of a reduction in the 

cost of a proxy solicitation exists only to the extent 

that the nominating shareholder or group views 

Rule 14a–11 as a substitute for a traditional proxy 

contest. Even with the adoption of Rule 14a–11, 

some shareholders may prefer to conduct a 

traditional proxy contest due to the various 

restrictions on the use of the rule. For example, the 

rule restricts the number of shareholder director 

nominees that a company will be required to 

include in its proxy materials. The rule also will be 

available only to shareholders that do not hold the 

securities in the company with the purpose, or with 

the effect, of changing control of the company. 

These elements of Rule 14a–11 impose restrictions 

that are not present in a traditional proxy contest. 

Some shareholders also may prefer a traditional 

proxy contest over Rule 14a–11 for reasons related 

to their strategy for the conduct of the election 

contest, such as having greater control over the 

mailing schedule and contents of their proxy 

materials. See, e.g., letter from Carl T. Hagberg (‘‘C. 

Hagberg’’) (stating that ‘‘most truly serious 

nominators of director candidates will surely 

produce their own proxy materials, and take control 

of their own ‘electioneering’ with materials and 

proxy cards of their own, if they want to stand a 

reasonable chance to win.’’). Therefore, while Rule 

14a–11 may encourage some shareholders seeking 

to nominate and elect their candidates to use the 

rule instead of conducting a traditional proxy 

contest, other shareholders may continue to prefer 

a traditional contest. For such shareholders, the 

expected reduction in a shareholder’s proxy 

solicitation costs will not materialize. 

868According to a study of proxy contests 

conducted during 2003, 2004, and 2005, the average 

cost of a proxy contest to a soliciting shareholder 

was $368,000. See letter from Automatic Data 

Processing, Inc. (April 20, 2006) regarding Internet 

Availability of Proxy Materials, Exchange Act 

Release No. 34–52926 (December 8, 2005) (File No. 

S7–10–05). The costs included those associated 

with proxy advisors and solicitors, processing fees, 

legal fees, public relations, advertising, and printing 

and mailing of proxy materials. Approximately 95% 

of the costs were unrelated to printing and postage. 

The cost of printing and postage averaged 

approximately $18,000. 

869See letters from 26 Corporate Secretaries; 3M; 

Ameriprise; Association of Corporate Counsel; BRT; 

Cummins; DuPont; ExxonMobil; FMC Corp.; 

Frontier; GE; General Mills; Honeywell; IBM; 

Keating Muething; Motorola; Schneider; Sidley 

Austin; Simpson Thacher; Time Warner Cable; 

Wachtell; Wells Fargo; Xerox. 

870See letter from BRT. 

871We recognize that other factors may have 

similarly frustrated the effective exercise of this 

State law right. We discuss below these factors and 

how the new rules will reduce or eliminate these 

factors. 

872See, e.g., letters from Altman (stating that 

participants in its survey predicted that, on average, 

15% of companies listed on U.S. exchanges could 

expect to face a shareholder director nomination 

submitted under Rule 14a–11 in 2011, based on the 

eligibility criteria of the Proposal); BRT (stating that 

the new rules ‘‘will increase the frequency of 

contested elections * * *’’); Chamber of Commerce/ 

CCMC (noting that if the new rules are adopted, ‘‘it 

is likely that proxy contests (in which the company 

is required to solicit proxies on behalf of 

shareholders) will increase greatly and may become 

customary.’’). 

shareholder from assuming the costs of 

running a traditional proxy contest on 

its own, even though a successful 

contest could result in a greater 

aggregate benefit for all shareholders.866

As a result, there is the added economic 

cost of foregone opportunities where a 

qualified director candidate fails to be 

nominated because no one shareholder 

or group wishes to bear alone the costs 

of an election contest for the benefit of 

all shareholders. 

We believe Rule 14a–11 will further 

our stated goal of facilitating 

shareholders’ ability to nominate and 

elect their own director candidates by 

allowing shareholders to avoid certain 

direct costs of conducting a traditional 

proxy contest and reducing the overall 

costs to shareholders for nominating 

and electing directors—a belief shared 

by several commenters.867 The new 

rules also will mitigate collective action 

and free-rider concerns that may have 

otherwise deterred many shareholders 

from exercising their rights under State 

law to nominate directors. 

Direct cost savings, particularly as 

compared to the cost of a traditional 

proxy contest, come from two sources. 

First, a nominating shareholder or group 

may see direct cost savings due to 

reduced printing and postage costs. 

Based on the information available,868

we calculate that a shareholder using 

Rule 14a–11 to submit a director 

nominee or nominees to be included in 

a company’s proxy materials will save at 

least $18,000 on average in printing and 

postage costs. 

Second, and significantly, a 

nominating shareholder or group may 

see direct cost savings related to 

reduced expenditures for advertising 

and promotion of its candidates as a 

result of its ability to use the company’s 

proxy materials to directly solicit other 

shareholders. To the extent that the 

nominating shareholder or group 

decides to reduce its public relations 

and advertising expenditures to promote 

its candidates, or to engage proxy 

solicitors, the cost savings will be 

greater. These reductions in costs may 

remove a disincentive for shareholders 

to submit their own director 

nominations, mitigate the collective 

action concern, and serve the goal of 

facilitating shareholders’ ability to 

exercise their traditional State law rights 

to nominate and elect directors. 

We received significant comment 

questioning the need for the new rules 

to reduce the costs described above or 

the degree to which the reduction in 

costs will actually facilitate shareholder 

director nominations.869 One 

commenter characterized the direct 

printing and mailing cost savings as the 

sole benefit of the new rules for 

shareholders and one that is not 

justified by the costs and disruption that 

would result from the rules.870 The 

commenter observed that the average of 

$18,000 in estimated savings identified 

in the Proposing Release represented 

less than 5% of the cost of a traditional 

proxy contest and did not include costs 

that would be incurred by a shareholder 

actively seeking the election of its 

nominee, such as costs related to legal 

counsel, proxy solicitors, public 

relations advisers and advertising. 

We recognize that the adoption of the 

new rules may not relieve a nominating 

shareholder or group of all expenditures 

that could be incurred for an active 

campaign that may be more successful 

to support the election of its candidate 

to the company’s board of directors. The 

new rules, however, are not intended to 

serve that purpose. Instead, the new 

rules’ goal is to facilitate shareholders’ 

ability to present their own director 

nominees for a vote at a shareholder 

meeting by eliminating or reducing 

barriers in the proxy solicitation 

process—one of which is the direct cost 

of printing and mailing proxy 

materials—that have contributed to 

frustrating shareholder director 

nominations.871

We also recognize that the direct 

printing and mailing cost savings of 

$18,000, on their own, may not be 

viewed by some to be significant enough 

to drive the behavior of large 

shareholders of public companies. The 

comments that we received regarding 

the likely increase in the number of 

election contests resulting from the new 

rules, however, seem to undercut this 

view and suggest instead that 

shareholders’ behavior may indeed be 

influenced by the rules.872 The extent to 

which election contests are predicted to 

increase as a result of shareholders 

nominating their own director 

candidates for inclusion in the 

company’s proxy materials strongly 

indicates that the benefits of the new 

rules cannot be fairly characterized as a 


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873See letter from BRT. 

874See letter from ABA. We recognized this 

possibility in the Proposing Release as well, noting 

that the rule ‘‘may result in a decrease in costs to 

shareholders that would have to conduct proxy 

contests in the absence of [proposed] Rule 14a–11, 

but may increase the costs for companies.’’ See 

Proposing Release, Section V.C.3. 

875One commenter on the 2003 Proposal 

estimated that a Rule 14a–11 contest would cost a 

company approximately one-third what a full proxy 

contest costs. See letter from Stephen M. Bainbridge 

submitted in connection with the 2003 Proposal 

(File No. S7–19–03)(‘‘Bainbridge 2003 Letter’’). 

Based on this assumption and relying on data from 

a late 1980s survey, this commenter estimated that 

the costs of such a contest to a public company 

would be $500,000. This commenter also cited data 

estimating companies’ annual expenditures on Rule 

14a–8 shareholder proposals to be $90 million. 

While this commenter noted the belief that it is 

unlikely that there will be as many Rule 14a–11 

election contests as Rule 14a–8 shareholder 

proposals, the commenter asserted that incumbent 

boards are likely to spend considerably more on 

opposing each Rule 14a–11 contest than on 

opposing a Rule 14a–8 shareholder proposal. This 

commenter estimated that $100 million may be an 

appropriate estimate for the lower boundary of the 

range within which Rule 14a–11’s direct costs will 

fall. Commenters did not provide any data during 

the comment period for the Proposal that compared 

these costs for a company. 

876See, e.g., letters from 26 Corporate Secretaries; 

Ameriprise; BRT. 

877See letters from 26 Corporate Secretaries; 3M; 

Ameriprise; Association of Corporate Counsel; BRT; 

Cummins; DuPont; ExxonMobil; FMC Corp.; 

Frontier; GE; General Mills; Honeywell; IBM; 

Keating Muething; Motorola; Schneider; Sidley 

Austin; Simpson Thacher; Time Warner Cable; 

Wachtell; Wells Fargo; Xerox. 

878Exchange Act Rule 14a–16(l)(2). A soliciting 

person other than the company could limit the cost 

of a solicitation by soliciting proxies only from a 

select group of shareholders, such as those with 

large holdings, without furnishing other 

shareholders with any information. This flexibility 

would allow a soliciting person other than the 

company to reduce even further its printing and 

mailing costs by soliciting only those persons who 

have not previously requested paper copies of the 

proxy materials. Certain practical reasons, however, 

may deter a soliciting person other than the 

company from taking full advantage of this 

flexibility, such as the fact that institutional 

investors may prefer receiving paper copies of 

proxy materials. See Jeffrey N. Gordon, Proxy 

Contests in an Era of Increasing Shareholder Power: 

Forget Issuer Proxy Access and Focus on E-Proxy, 

61 Vand. L. Rev. 476, 488 (2008) (noting that 

institutional investors ‘‘generally may request paper 

delivery to minimize their own printing costs.’’) 

(cited in the letters from BRT and Simpson 

Thacher). 

879See Internet Availability of Proxy Materials, 

Release No. 34–55146 (January 22, 2007) (‘‘Internet 

Proxy Availability Release’’) (noting that ‘‘to the 

extent that some shareholders request paper copies 

of the proxy materials, the benefits of the 

amendments in terms of savings in printing and 

mailing costs will be reduced.’’). 

880Exchange Act Rule 14a–7 sets forth the 

obligation of companies either to provide a 

shareholder list to a requesting shareholder or to 

send the shareholder’s proxy materials on the 

shareholder’s behalf. The rule provides that the 

company has the option to provide the list or send 

the shareholder’s materials, except when the 

company is soliciting proxies in connection with a 

going-private transaction or a roll-up transaction. 

Under Rule 14a–7(e), the shareholder must 

reimburse the company for ‘‘reasonable expenses’’ 

incurred by the company in providing the 

shareholder list or sending the shareholder’s proxy 

materials. 

881Exchange Act Rule 14a–6 requires that 

preliminary copies of the proxy statement and form 

of proxy be filed with the Commission at least ten 

calendar days prior to the date that definitive copies 

of such materials are first sent or given to security 

holders, except if the solicitation relates to certain 

matters to be acted upon at the meeting of security 

holders. Accordingly, the proxy statement and form 

of proxy for a traditional proxy contest must be 

filed in preliminary form. By contrast, under the 

amendments to Rule 14a–6 that we are adopting 

today, the inclusion of a shareholder director 

nominee in the company’s proxy materials will not 

require the company to file preliminary proxy 

materials, provided that the company is otherwise 

qualified to file directly in definitive form. In this 

regard, the inclusion of a shareholder director 

nominee will not be deemed a solicitation in 

opposition for purposes of the exclusion from filing 

preliminary proxy materials. 

‘‘mere $18,000 in estimated savings’’ 873

—a characterization that we believe 

obfuscates the significance of this 

benefit of our new rules. 

We received comment that while 

certain shareholders may be relieved of 

certain costs to run a traditional proxy 

contest as a result of the new rules, the 

rules may simply shift those costs onto 

the company and, indirectly, all 

shareholders.874 Therefore, while the 

rules may reduce the direct costs of 

solicitation by a particular shareholder 

for its director nominees, it may result 

in an increase in the overall cost of a 

company’s proxy solicitation for a 

director election (e.g., additional 

printing and mailing costs arising from 

the disclosure of the shareholder 

director nominations) and indirectly the 

cost to all shareholders, particularly if 

the new rules lead to an increase in the 

number of shareholder director 

nominations. We have some reason to 

believe, however, that the increased 

costs for the company may not be as 

much as would otherwise result if that 

shareholder engaged in a traditional 

proxy contest.875 We also note that, to 

the extent that the new rules help to 

address the collective action concern, it 

could remove disincentives that 

previously deterred shareholders from 

submitting director nominations that 

may have ultimately benefited all 

shareholders. 

Other commenters observed that 

savings in printing and mailing costs 

could be obtained through our notice 

and access model for electronic delivery 

of proxy materials 876 or stated that the 

notice and access model has already 

reduced the costs for shareholders to 

effect changes in the membership of a 

board.877 We note that this observation 

applies only to the direct printing and 

mailing costs, rather than all of the other 

monetary cost savings discussed 

throughout this section. We agree that 

the notice and access model may 

decrease significantly the printing and 

mailing costs associated with a proxy 

solicitation. To the extent that a 

shareholder chooses to nominate and 

elect its director candidates through a 

traditional proxy contest using the 

notice and access model, the expected 

benefit of a reduction in printing and 

mailing costs will be somewhat lower. 

The notice and access model, however, 

may not necessarily provide a soliciting 

shareholder with the same cost savings 

possible under Rule 14a–11. Under the 

model, a soliciting shareholder will still 

incur the costs of printing and mailing 

notices of availability of proxy materials 

to shareholders from whom the person 

is soliciting proxy authority.878 Further, 

as we recognized at the time we created 

the notice and access model, additional 

printing and mailing costs will be 

incurred to the extent that a solicited 

shareholder requests paper copies of the 

proxy materials.879 A soliciting 

shareholder also may prefer using the 

new rules over a traditional proxy 

contest conducted through the notice 

and access model for reasons related to 

its strategy for the conduct of the 

election contest, such as avoiding the 

need and cost to use Exchange Act Rule 

14a–7 to obtain a shareholder list from 

the company (or have the company send 

proxy materials on its behalf) 880 as well 

as the requirement to file preliminary 

proxy materials at least ten calendar 

days before definitive materials are first 

sent to shareholders.881

The new rules will do more than 

reduce the direct monetary costs 

described above. We recognize that 

shareholders today are widely dispersed 

and the corporate proxy is the principal 

means through which State law voting 

rights are exercised. The dispersed 

nature of ownership creates certain 

intangible disincentives to the effective 

exercise of shareholders’ ability to 

nominate and elect their own director 

candidates, as discussed below. As we 

stated in the Proposing Release, the 

proxy process provides the only 

practical means for shareholders to 

solicit votes from other shareholders in 

favor of the election of their nominees. 

The current inability of many 

shareholders to utilize the proxy process 

for this purpose means that shareholder 

director nominees do not have a 

realistic prospect of being elected 

because most, if not all, shareholders 

would have cast their votes well in 

advance of the shareholder meeting. 

Shareholders are deprived of not only 

the ability to exercise a traditional State 

law right, but the opportunity to assess 


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882See letters from Bebchuk/Hirst (submitting the 

Bebchuk and Hirst (2010) study, which noted the 

ability of shareholders to include their nominees in 

the company’s proxy materials would ‘‘avoid 

intangible disadvantages that may result from being 

on a separate card.’’); Pershing Square (stating that 

‘‘the absence of universal ballots, on which 

shareholders can vote from among all nominees 

regardless of who proposed them, is glaring and 

clearly anti-choice’’ and that ‘‘[o]ur hope is that, 

outside the control context, selection of the best 

nominees in a contest will be based more on 

character, competency, and relevancy of their 

experience rather than the identity of the person 

nominating the candidate.’’). 

At the October 7, 2009 ‘‘Proxy Access 

Roundtable’’ held by the Harvard Law School 

Program on Corporate Governance (the transcript of 

which was submitted as part of a comment letter 

from S. Hirst), Roy Katzovicz, the Chief Legal 

Officer of Pershing Square Capital Management, 

L.P. explained: 

As a cultural matter, there are two sub-points. 

First and foremost, having the decision of choosing 

two people, one next to the other, invites, we think, 

a more intelligent analysis on the part of 

shareholders generally. In particular, we think that 

if the basis for election for a nominee is their merit 

as an individual, a fund or an investor of any type 

that can identify the deadweight on the board, and 

in place of that deadweight find ideal candidates 

from a skills perspective to round out the board, 

they’re going to have an easier time getting 

shareholder support for their nominee. Their ability 

to vote among all the nominees and from all 

proponents, I think, facilitates that kind of personby-person analysis, versus slate-by-slate analysis. 

883As discussed in Section II.B.9.d.ii. above, we 

have adopted the proposed amendments to 

Exchange Act Rule 14a–4 out of a similar desire to 

avoid giving management’s director nominees an 

advantage over those of a nominating shareholder 

or group and to create an impartial presentation of 

the nominees for whom a shareholder may vote. 

884One commenter stated that if enabling 

shareholders to evaluate a board more efficiently 

and make more informed voting decisions is the 

goal of the Proposal, then enhancing proxy 

disclosure, rather than facilitating proxy contests, 

will better achieve that goal. See letter from Davis 

Polk. We recognize the importance of enhancing the 

disclosure provided in connection with proxy 

solicitations and recently adopted new rules to 

better enable shareholders to evaluate the 

leadership of public companies. See Proxy 

Disclosure Enhancements Adopting Release. These 

rules, however, do not dispense with the need for 

Rule 14a–11 and the amendment to Rule 14a– 

8(i)(8). The new rules we are adopting will 

complement the recently-adopted proxy disclosure 

enhancement rules by enabling shareholders to 

submit their own director nominees if, after 

evaluating a company’s public disclosures and 

performance, they are displeased with that 

company’s current leadership or direction. 

885As discussed in Section IV.D.4. below, the 

new disclosure requirements that we are adopting 

for shareholder director nominations submitted 

pursuant to Rule 14a–11, a state or foreign law 

provision, or a provision in the company’s 

governing documents also will facilitate more 

informed voting decisions by providing 

shareholders with important disclosures and 

enhancing their ability to communicate with each 

other regarding director nominations. 

886For a discussion of the companies that are 

subject to Rule 14a–11, see Section II.B.3. above. As 

discussed in that section, foreign private issuers 

and companies that are subject to the Federal proxy 

rules solely because they have a class of debt 

securities registered under Exchange Act Section 12 

will not be subject to Rule 14a–11. For smaller 

reporting companies, Rule 14a–11 will become 

effective three years after the date that the rule 

becomes effective for all other companies. 

887As previously discussed, a shareholder 

proposal seeking to establish such a procedure will 

continue to be subject to exclusion under other 

provisions of Rule 14a–8. 

888As discussed in Section II.C. above, a 

provision in a company’s governing documents 

establishing a procedure for the inclusion of 

shareholder director nominees in a company’s 

proxy materials will not affect the operation of Rule 

14a–11, regardless of whether the company’s 

shareholders have approved the provision. 

889For further discussion of the comments 

regarding the uniform applicability of Rule 14a–11 

and the amendment to Rule 14a–8(i)(8), see 

Sections II.B.2. and II.C. above. 

and vote on qualified candidates who 

could have been presented for a vote if 

the proxy process functioned as 

intended. As with the direct monetary 

costs, reducing the costs arising from 

the dispersed nature of ownership 

discussed below will help address any 

related collective action concerns. 

Some commenters observed that a 

shareholder seeking to nominate and 

elect its own director candidates 

through a traditional proxy contest is 

disadvantaged by the fact that its 

candidates are presented to 

shareholders through a separate set of 

proxy materials.882 A nominating 

shareholder or group may encounter 

difficulties in having its nominees 

evaluated in the same manner as those 

of management by shareholders who are 

used to receiving only the company’s 

proxy materials and who may react 

differently, and perhaps negatively, to 

the shareholder’s nominees simply 

because the nominees are presented in 

a separate, unfamiliar set of proxy 

materials. 

As we stated throughout this release, 

the Federal proxy rules should not 

frustrate the exercise of a shareholder’s 

traditional State law right to present its 

own director candidates for a 

shareholder vote. To the extent that the 

exercise of this right is hindered simply 

because of a nominating shareholder’s 

or group’s need to deliver a separate set 

of proxy materials and potentially 

negative reaction by shareholders to the 

appearance of this set of materials, we 

believe that our new rules will help 

address that concern. With the new 

rules, a shareholder will have the ability 

to include its director nominees in the 

company’s proxy materials, provided 

that the rules’ requirements are met. The 

fact that a nominating shareholder or 

group could have its director nominees 

included in a company’s proxy 

materials—as opposed to being included 

in its own proxy materials—pursuant to 

the new rules may be viewed by the 

shareholder or group as a significant 

improvement in its ability to have its 

nominees evaluated by shareholders in 

the same manner as they evaluate 

management’s nominees. Shareholders 

who are interested in effecting a change 

in the company’s leadership or direction 

may be less likely to be deterred by the 

prospect that their director nominees 

will not be assessed on their merit. 

Nominating shareholders also may see 

less need for additional soliciting 

efforts, such as the hiring of proxy 

solicitors, public relations advisors, or 

advertising, if their director nominees 

are presented alongside those of 

management in a set of company proxy 

materials with which the company’s 

shareholders are familiar.883

Shareholders also may be hindered in 

making their voting decisions in a 

traditional proxy contest due to the fact 

that they have to evaluate more than one 

set of proxy materials—one sent by a 

company and another sent by an 

insurgent shareholder—when evaluating 

whether and how to grant authority to 

vote their shares by proxy.884 Presenting 

the competing director nominees on one 

proxy card, with the related disclosure 

contained in one proxy statement, may 

simplify the shareholder’s decisionmaking process and reduce the potential 

for any confusion on the part of 

shareholders.885 The result may be a 

greater degree of participation by 

shareholders through the proxy process 

in the governance of their companies. 

2. Minimum Uniform Procedure for 

Inclusion of Shareholder Director 

Nominations and Enhanced Ability for 

Shareholders To Adopt Director 

Nomination Procedures 

Rule 14a–11, as adopted, will provide 

shareholders of companies subject to the 

Federal proxy rules the ability to 

include their director nominees in the 

company’s proxy materials, provided 

that the rule’s requirements are met.886

Further, with our adoption of the 

amendment to Rule 14a–8(i)(8), 

shareholders will be able to present in 

the company’s proxy materials a 

proposal that would seek to establish a 

procedure in the company’s governing 

documents for the inclusion of 

shareholder nominees for director in the 

company’s proxy materials.887

Shareholders will have a greater ability 

to present for a shareholder vote a 

director nomination procedure with 

requirements, such as the requisite 

ownership threshold or holding period, 

that differ from those of Rule 14a–11.888

We received significant comment 

regarding the uniform applicability of 

Rule 14a–11 and the amendment to Rule 

14a–8(i)(8).889 While there was 

widespread support for the amendment 

to Rule 14a–8(i)(8), commenters were 


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890See letters from American Express; 

BorgWarner; Brink’s; BRT; CIGNA; P. Clapman; Con 

Edison; CSX; Davis Polk; DTE Energy; DuPont; GE; 

General Mills; C. Holliday; JPMorgan Chase; 

Metlife; P&G; Pfizer; Safeway; Seven Law Firms; 

Society of Corporate Secretaries; Southern 

Company; Tenet; U.S. Bancorp; Verizon. 

891See letters from DTE Energy; JPMorgan Chase; 

P&G; Seven Law Firms; Society of Corporate 

Secretaries; U.S. Bancorp. 

892See, e.g., letters from ABA; BRT; Society of 

Corporate Secretaries. 

893See letters from CII; Governance for Owners; 

D. Nappier. 

894See letters from AFL–CIO; Amalgamated Bank; 

W. Baker; Florida State Board of Administration; 

IAM; Marco Consulting; P. Neuhauser; Nine Law 

Firms; Norges Bank; Relational; Shamrock; TIAA– 

CREF; USPE; ValueAct Capital. 

895See letters from AFSCME; CalPERS; CalSTRS; 

CII; COPERA; Florida State Board of 

Administration; John C. Liu (‘‘J. Liu’’); D. Nappier; 

Nathan Cummings Foundation; Phil Nicholas (‘‘P. 

Nicholas’’); OPERS; State Universities Retirement 

System of Illinois (‘‘SURSI’’); SWIB; WSIB. 

896See B. Young, footnote 52, above (‘‘Data on 

bylaw amendment limitations show that at between 

38 and 43% of companies, depending on the index, 

shareholders are either unable to amend the bylaws 

or face significant challenges in the form of 

supermajority vote requirements.’’); see also letters 

from AFSCME; Bebchuk/Hirst; Florida State Board 

of Administration; J. Liu. 

897See letters from Bebchuk/Hirst; CII; Florida 

State Board of Administration. 

898See letters from AFSCME; Florida State Board 

of Administration; Nathan Cummings Foundation; 

SWIB. 

899See letters from AFSCME; Corporate Library; 

Sodali. See also Michael E. Murphy, The 

Nominating Process for Corporate Boards of 

Directors: A Decision-Making Analysis, 5 Berkeley 

Bus. L.J. 131, 144 (2008) (discussing how a 

company’s management defeated a shareholder 

proposal regarding shareholder director 

nominations through the use of a bylaw requiring 

a super-majority shareholder vote in favor of such 

a shareholder proposal and noting that ‘‘[t]he supermajority requirement was one of several potential 

defenses that management might have employed; it 

might also have imposed inconvenient notice 

requirements, stringent shareholder qualification 

rules, or restrictions mirroring the conditions of 

SEC rule 14a–8. If these barriers proved insufficient, 

management might have considered counterinitiatives; it is an open question in Delaware and 

certain other states whether the board of directors 

has the power to repeal a shareholder-initiated 

bylaw by adopting a superseding bylaw 

amendment.’’) 

900See letters from Florida State Board of 

Administration; P. Neuhauser; Shamrock. 901See letters from AT&T; ABA; BRT; J. 

Grundfest; Keller Group; Lemonjuice.biz 

(‘‘Lemonjuice’’); Seven Law Firms. 902See Section II.B.2. above, for additional 

discussion of our consideration of a private 

ordering approach. 903See letters from CalPERS; Florida State Board 

of Administration; D. Nappier; P. Neuhauser. One 

of these commenters estimated that the approximate 

cost for shareholders of ‘‘running a proposal’’ is 

$30,000. See letter from CalPERS. The commenter 

estimated that it would cost $351,000,000 to 

attempt to establish the right of shareholders of 

Russell 3000 companies to include their director 

nominees in a company’s proxy materials. 

904The reluctance of companies to support the 

establishment of a shareholder director nomination 

procedure was noted in an article submitted by a 

commenter. See letter from Bebchuk/Hirst (referring 

to Bebchuk and Hirst (2010)). In their article, the 

authors observed that while the establishment of 

such a procedure is permissible under the existing 

laws of some states, including Delaware, only three 

companies have in fact established a shareholder 

director nomination procedure. 

divided on the extent to which 

companies and shareholders should be 

permitted to use Rule 14a–8 to propose 

alternative requirements for shareholder 

director nominations and on the related 

issue of whether shareholders and 

companies should be able to opt out of 

Rule 14a–11 entirely. Some commenters 

believed that the amendment to Rule 

14a–8(i)(8) should facilitate private 

ordering under State law by enabling 

shareholders to include in the 

company’s proxy materials a Rule 14a– 

8 proposal that would impose more 

restrictive eligibility criteria than those 

of Rule 14a–11.890 A number of 

commenters also believed that 

shareholders should be able to elect to 

have their companies opt out of Rule 

14a–11, including through the 

submission of a Rule 14a–8 proposal.891

To facilitate private ordering, a 

significant number of commenters 

supported the adoption of the 

amendment to Rule 14a–8(i)(8) while 

opposing adoption of Rule 14a–11.892

By contrast, other commenters 

supported an amendment enabling 

shareholders to include in a company’s 

proxy materials a Rule 14a–8 proposal 

that establishes a shareholder director 

nomination procedure but only if the 

procedure would provide shareholders 

with a greater ability to include their 

director nominees in the company’s 

proxy materials.893 A number of 

commenters also opposed any provision 

that would permit companies to opt out 

of Rule 14a–11 894 and preferred the 

uniform applicability of Rule 14a–11 to 

all companies.895

We considered these comments 

carefully. As discussed above, and 

noted in the Proposal, the purpose of 

the rules is to facilitate shareholders’ 

traditional State law rights to nominate 

and elect their own director candidates. 

As such, we believe that a uniform 

application of Rule 14a–11 to 

companies subject to the Federal proxy 

rules is the best way to enable 

shareholders of these companies to do 

so without having to incur the types of 

costs and other disadvantages that 

shareholders traditionally have 

encountered. A single, uniform rule will 

provide shareholders of any company 

subject to the rule with the ability to 

meaningfully exercise their traditional 

State law rights to present their own 

director candidates for a vote at a 

shareholder meeting may be invoked 

through the proxy process. With the 

adoption of the amendment to Rule 

14a–8(i)(8), shareholders will be able to 

establish procedures that can further 

facilitate this ability, if they wish. 

By contrast, we believe that exclusive 

reliance on private ordering under State 

law would not be as effective and 

efficient in facilitating the exercise of 

these rights. Commenters identified 

procedural and legal difficulties that 

they believe would hinder the 

establishment of a shareholder director 

nomination procedure under private 

ordering, including: A supermajority 

voting standard for approval of the 

proposal; 896 the constraints imposed by 

the 500-word limit for a Rule 14a–8 

proposal; 897 the significant percentage 

of companies that restrict shareholders’ 

ability to amend or propose bylaws; 898

and the potential ability of a board to 

repeal or amend a shareholder-adopted 

bylaw procedure.899 Some commenters 

also expressed a general concern that 

under private ordering, the provisions 

in a company’s governing documents 

regarding shareholder director 

nominations may be so restrictive that it 

would be impossible for shareholders to 

have candidates included in company 

proxy materials.900 Other commenters, 

however, disagreed that these 

difficulties would actually interfere 

with the establishment of a procedure 

under a private ordering approach.901

As previously discussed, we believe 

that our rules should provide 

shareholders with the ability to include 

director nominees in a company’s proxy 

materials without the need for 

shareholders to bear the burdens of 

overcoming substantial obstacles to 

creating that ability on a company-bycompany basis.902 Private ordering 

based on an opt-in approach would 

require shareholders to incur significant 

costs, regardless of the presence of the 

difficulties described above. 

Shareholders would need to expend 

both time and funds to draft and submit 

a proposal, such as a Rule 14a–8 

proposal, establishing a shareholder 

director nomination procedure on a 

company-by-company basis.903 These 

costs may be higher if the company 

opposes and solicits against adoption of 

the proposal—a possibility that is very 

likely at companies where 

disagreements between incumbent 

directors and a nominating shareholder 

or group already exist.904 Further, 

shareholders may be disinclined to 

undergo a two-step process to submit 

their own nominees—first, to establish a 

nomination procedure through a Rule 

14a–8 shareholder proposal and, 

second, to submit their director 

candidates for inclusion in the 

company’s proxy materials—given the 


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905 In this regard, we note that a survey that one 

commenter conducted showed that, if available, a 

large majority of its member companies— 

approximately two-thirds—would seek to 

implement an opt-out from Rule 14a–11. See letter 

from Society of Corporate Secretaries. This survey 

suggests that shareholders of many companies may, 

once again, be limited in their ability to have their 

director candidates included in the companies’ 

proxy materials. 

906See letters from CFA Institute; CII; COPERA; 

D. Nappier; OPERS. One commenter countered that 

most long-term institutional shareholders are 

unlikely to submit director candidates at a large 

number of companies simultaneously and predicted 

that private ordering will lead to ‘‘some degree of 

standardization’’ in the types of shareholder director 

nomination procedures. See letter from Society of 

Corporate Secretaries. While we appreciate these 

points, we believe that adoption of Rule 14a–11, in 

fact, provides such ‘‘standardization.’’ The 

amendment to Rule 14a–8(i)(8) complements Rule 

14a–11 by enabling shareholders to consider and 

vote on proposals that provide shareholders with an 

even greater ability to present their own director 

candidates for a shareholder vote. Lastly, we 

recognize that the amendment to Rule 14a–8(i)(8) 

could result in some complexity as well, in that 

shareholders could establish director nomination 

procedures that require, for example, a different 

ownership threshold or holding period than those 

contained in Rule 14a–11. We believe, however, 

that such complexity is justified because it furthers 

our goal of facilitating, as much as possible, the 

effective exercise of shareholders’ traditional State 

law right of shareholders to nominate their own 

director candidates for a vote at a shareholder 

meeting. 

907See Proposing Release, Section V.B.3. 

908See letters from AFSCME; Bebchuk, et al.; 

Brigham; CalPERS; CII; L. Dallas; T. DiNapoli; A. 

Dral; GovernanceMetrics; Governance for Owners; 

Hermes; M. Katz; LUCRF; J. McRitchie; R. MoultonEly; D. Nappier; P. Neuhauser; NJSIC; OPERS; Pax 

World; Pershing Square; Relational; RiskMetrics; D. 

Romine; Shareowners.org; Social Investment 

Forum; Teamsters; TIAA–CREF; Universities 

Superannuation; USPE; Walden. One commenter 

added that the benefits of the right to include 

shareholder director nominees in the company’s 

proxy materials, including enhanced shareholder 

value from hybrid boards and directors becoming 

‘‘more alert to their duties,’’ are ‘‘less easy to 

quantify.’’ See letter from P. Neuhauser. 

909See, e.g., letters from Alaska Air; Ameriprise; 

Brink’s; Comcast; CSX; General Mills; Piedmont; 

Praxair; William H. Steinbrink (‘‘W. Steinbrink’’); 

Time Warner Cable; United Brotherhood of 

Carpenters. 

910See letters from ABA; Atlas; AT&T; Book 

Celler; Carlson; Carolina Mills; Chamber of 

Commerce/CCMC; Chevron; Crespin; M. Eng; 

Erickson; ExxonMobil; Fenwick; GE; General Mills; 

Glass Lewis; Glaspell; Intelect; R. Clark King; 

Koppers; MCO; MeadWestvaco; MedFaxx; Medical 

Insurance; Merchants Terminal; D. Merilatt; NAM; 

NIRI; NK; O3 Strategies; Roppe; Rosen; Safeway; 

Sara Lee; Schneider; Southland; Style Crest; Tenet; 

TI; tw telecom; R. VanEngelenhoven; Wachtell; 

Wells Fargo; Weyerhaeuser; Yahoo. 

911See, e.g., letters from IBM; Simpson Thacher. 

These commenters questioned the conclusions of 

the study by Chris Cernich, et al., ‘‘Effectiveness of 

Hybrid Boards,’’ IRRC Institute for Corporate 

Responsibility (May 2009) (‘‘Cernich (2009)’’), 

available at http://www.irrcinstitute.org/pdf/ 

IRRC_05_09_EffectiveHybridBoards.pdf (cited in 

the Proposing Release, Section V.B.3.). For example, 

one of these commenters stated that the study 

‘‘demonstrates that the objectives of successful 

dissidents were often short-term in nature’’ and 

‘‘suggests that companies with dissidents on their 

board perform better than their peers over a oneyear period, but that they perform worse over a 

three-year period.’’ See letter from Simpson 

Thacher. The other commenter stated that ‘‘the only 

conclusion that could fairly be drawn from the data 

is that some companies perform better, and many 

perform worse, under such circumstances’’ and ‘‘of 

the companies with dissident directors studied for 

three years after the contest period, share 

performance averaged just 0.7%, which is 6.6% less 

than peer companies.’’ 

We recognize the limitations of the Cernich 

(2009) study as well. While it provides useful 

documentation of patterns of behavior of activist 

investors, its long-term findings on shareholder 

value creation are difficult to interpret. Return 

estimates are presented without standard errors. For 

long-term returns in particular, this shortcoming 

makes it difficult to infer whether results arise 

because returns are different than peers in 

expectation, or because of random chance. Other 

studies cited in this release do use standard 

statistical inference techniques to approach similar 

questions. See, e.g., J. Harold Mulherin and Annette 

B. Poulsen, Proxy Contests and Corporate Change: 

Implications For Shareholder Wealth, J. Fin. Econ. 

(March 1998) (‘‘Mulherin and Poulsen (1998)’’) 

(cited in the NERA Report submitted as part of the 

letter from BRT). 

912See letters from 3M; ACE; Ameriprise; 

American Bankers Association; BRT; Devon; 

Dewey; GE; A. Goolsby; C. Holliday; Honeywell; 

IBM; Jones Day; Norfolk Southern; Pfizer; Sidley 

Austin; Simpson Thacher; TI; tw telecom; Unitrin; 

Wachtell. See also letters from BRT (submitting the 

study by Andrea Beltratti and Rene ́ M. Stulz, Why 

Did Some Banks Perform Better During the Credit 

Crisis? A Cross-Country Study of the Impact of 

Governance and Regulation (July 2009) (‘‘Beltratti 

and Stulz (2009)’’), in which the authors found ‘‘no 

consistent evidence that better governance led to 

better performance during the crisis’’ but found 

‘‘strong evidence that banks with more shareholderfriendly boards performed worse.’’); Chamber of 

Commerce/CCMC (submitting an article by Brian R. 

Cheffins, Did Corporate Governance ‘‘Fail’’ During 

the 2008 Stock Market Meltdown? The Case of the 

S&P 500 (‘‘Cheffins (2010)’’), which stated that 

because ‘‘corporate governance functioned tolerably 

well in companies removed from the S&P 500 and 

that a combination of regulation and market forces 

will likely prompt financial firms to scale back the 

free-wheeling business activities that arguably 

helped to precipitate the stock market meltdown, 

the case is not yet made for fundamental reform of 

current corporate governance arrangements.’’). 

length of time that they will have to 

hold the requisite amount of securities 

and, perhaps more importantly, the risk 

of failure at each step of the process. 

Different but equally significant issues 

would arise under an opt-out approach. 

Shareholders who wish to retain their 

ability to include their director 

nominees in the company’s proxy 

materials pursuant to Rule 14a–11 may 

find it difficult to successfully oppose 

an opt-out proposal due to 

management’s ability to draw on the 

company’s resources to promote the 

adoption of the proposal.905 We also 

believe that if we were to allow an optout approach, even one in which only 

shareholders could approve an opt out, 

there is a high likelihood that the effort 

to procure such approval could be 

supported by management and funded 

by company assets, while opposing 

views could not be advanced effectively. 

Shareholders of these companies would 

find themselves, once again, left without 

an effective or efficient ability to 

nominate and elect their own director 

candidates. Further, as some 

commenters observed, both the opt-in 

and opt-out approaches may impose 

unnecessary complexity and 

administrative burdens for shareholders 

with diversified holdings in numerous 

companies and may hinder their 

exercise of a traditional State law 

right.906

3. Potential Improved Board 

Performance and Company Performance 

As discussed throughout this release, 

we are adopting the new rules with the 

goal of facilitating shareholders’ ability 

under State law to nominate and elect 

directors for election to the board. 

Because State law provides shareholders 

with the right to nominate and elect 

directors to ensure that boards remain 

accountable to shareholders and to 

mitigate the agency problems associated 

with the separation of ownership from 

control, facilitating shareholders’ 

exercise of these rights may have the 

potential of improviing board 

accountability and efficiency and 

increasing shareholder value. In the 

Proposing Release, we requested 

comment on the assertion that the 

Proposal could improve board 

performance and, hence, company 

performance—both for boards that 

include shareholder-nominated 

directors elected pursuant to the new 

rules and for boards that may be more 

attentive and responsive to shareholder 

concerns to avoid the submission of 

shareholder director nominations 

pursuant to the new rules.907

We received significant comment 

regarding this assertion. Many 

commenters agreed that the new rules 

may result in the benefit of more 

accountable, more responsive, and 

generally better-performing boards.908

Other commenters, however, questioned 

whether the new rules would in fact 

promote board accountability,909

warned of the costs of distracting and 

expensive election contests,910 and 

disputed the conclusions of a study 

regarding the benefits enjoyed by 

companies with ‘‘hybrid boards’’ that 

was cited in the Proposing Release.911

Commenters also challenged the basis 

for any suggestions in the Proposing 

Release that the recent economic crisis 

was somehow linked to the inability of 

shareholders to include their director 

nominees in the company’s proxy 

materials, pointing out that we have 

contemplated similar regulatory efforts 

several times before the recent crisis 

occurred.912


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913The Supreme Court’s recent opinion in 

Citizens United v. FEC, 130 S.Ct. 876 (2010) 

underscores the importance of board 

responsiveness to shareholder concerns. In Citizens 

United, the government asserted an interest in 

limiting independent expenditures by corporations 

in political campaigns in order to prevent 

dissenting shareholders from being compelled to 

fund corporate political speech with which they 

disagreed. Citizens United, 130 S.Ct. at 911. The 

Court, however, stated that any such coercion could 

be addressed ‘‘through the procedures of corporate 

democracy.’’ Id., quotation omitted. 

914See letter from L. Bebchuk (noting the article 

by Lucian A. Bebchuk and Alma Cohen, The Costs 

of Entrenched Boards, J. Fin. Econ. (November 

2005) (‘‘Bebchuk and Cohen (2005)’’), in which the 

authors stated: ‘‘Staggered boards are associated 

with an economically meaningful reduction in firm 

value * * * [w]e also provide suggestive evidence 

that staggered boards bring about, and not merely 

reflect, an economically significant reduction in 

firm value * * * [f]inally, the correlation with 

reduced firm value is stronger for staggered boards 

that are established in the corporate charter (which 

shareholders cannot amend) than for staggered 

boards established in the company’s bylaws (which 

shareholders can amend).’’). 

Commenters also submitted empirical studies 

indicating that facilitating shareholders’ rights and 

voice may result in better company performance. 

See letters from L. Bebchuk; CalSTRS; Nathan 

Cummings Foundation (noting the study by Paul 

Gompers, Joy Ishii and Andrew Metrick, Corporate 

Governance and Equity Prices, 118 Q.J. Econ. 107 

(2003), in which the authors found that ‘‘firms with 

stronger shareholder rights had higher firm value, 

higher profits, higher sales growth, lower capital 

expenditures, and made fewer corporate 

acquisitions.’’); letters from CalSTRS; Nathan 

Cummings Foundation (noting the study by B. 

Lawrence Brown and Marcus Caylor, The 

Correlation Between Corporate Governance and 

Company Performance, Research Commissioned 

Institutional Shareholder Services (2004), in which 

the authors found that ‘‘firms with weaker 

governance perform more poorly, are less profitable, 

more risky, and have lower dividends than firms 

with better governance.’’). See also letter from T. 

Yang (noting the study by Bonnie Buchanan, Jeffry 

M. Netter, and Tina Yang, Proxy Rules and Proxy 

Practice: An Empirical Study of US and UK 

Shareholder Proposals (September 2009) 

(‘‘Buchanan, Netter, and Yang (2009)’’), in which the 

authors found that ‘‘after receiving a shareholder 

proposal, [U.S.] firms exhibit higher stock returns 

and the improvement is greater [ ] when the 

proposal is likely to be wealth maximizing or 

sponsored by a shareholder owning a relatively 

large equity stake in the target firm.’’). 915As we noted in the Proposing Release, 

economists have put forth theory and evidence on 

the link between incentives that are associated with 

accountability and performance. See, e.g., Benjamin 

E. Hermalin and Michael S. Weisbach, 

Endogenously Chosen Board of Directors and Their 

Monitoring of the Board, 88 Am. Econ. Rev. 96 

(1998) (cited in the Proposing Release, Section 

V.B.3); Milton Harris and Artur Raviv, Control of 

Corporate Decisions: Shareholders vs. Management 

(May 29, 2008), available at http://papers.ssrn.com/ 

sol3/papers.cfm?abstract_id=965559 (cited in the 

Proposing Release, Section V.B.3.). 

916See Bebchuk and Hirst (2010) (noting the 

‘‘substantial empirical evidence indicating that 

director insulation from removal is associated with 

lower firm value and worse performance.’’). See also 

letter from L. Bebchuk (noting the following 

articles: Lucian A. Bebchuk, Alma Cohen and Allen 

Ferrell, What Matters in Corporate Governance?, 22 

Rev. Fin. Studs. 783 (2009) (‘‘Bebchuk, Cohen, and 

Ferrell (2009)’’) (‘‘We put forward an entrenchment 

index based on six provisions: staggered boards, 

limits to shareholder bylaw amendments, poison 

pills, golden parachutes, and supermajority 

requirements for mergers and charter amendments 

* * * [w]e find that increases in the index level are 

monotonically associated with economically 

significant reductions in firm valuation as well as 

large negative abnormal returns during the 1990– 

2003 period.’’); Re-Jin Guo, Timothy A. Kruse and 

Tom Nohel, Undoing the Powerful Anti-Takeover 

Force of Staggered Boards, J. Corp. Fin. (June 2008) 

(‘‘Guo, Kruse and Nohel (2008)’’) (‘‘We find that destaggering the board creates wealth and that 

shareholder activism is an important catalyst for 

pushing through this change.’’); Olubunmi Faleye, 

Classified Boards, Firm Value, and Managerial 

Entrenchment, J. Fin. Econ. (February 2007) 

(‘‘Faleye (2007)’’) (noting that ‘‘classified boards 

significantly insulate management from market 

discipline, thus suggesting that the observed 

reduction in value is due to managerial 

entrenchment and diminished board 

accountability.’’)). 

917See Bebchuk and Hirst (2010); Bebchuk and 

Cohen (2005). 

918See Proposing Release, Section V.B.3. (citing 

Cernich (2009)). Moreover, as we noted in the same 

section of the Proposing Release, empirical 

evidence has indicated that the ability of significant 

shareholders to hold corporate managers 

Continued 

The comments reflect the sharp 

divide on the question of whether 

facilitating shareholders’ ability to 

exercise their rights to nominate and 

elect directors would lead to the benefit 

of improved board and company 

performance. We have considered these 

comments carefully and appreciate both 

the fact that the empirical evidence may 

appear mixed and the potential for 

negative effects due to management 

distraction and discord on the board 

that some commenters identified. After 

assessing the costs and benefits 

identified by commenters, and for 

reasons discussed below, we believe 

that the totality of the evidence and 

economic theory supports the view that 

facilitating shareholders’ ability to 

include their director nominees in a 

company’s proxy materials has the 

potential of creating the benefit of 

improved board performance and 

enhanced shareholder value—both in 

companies with the actual election of 

shareholder-nominated directors and in 

companies that react to shareholders’ 

concerns because of the possibility of 

such directors being elected. Thus, as 

discussed below, it is our conclusion 

that the potential benefits of improved 

board and company performance and 

shareholder value justify the potential 

costs. 

By facilitating shareholders’ exercise 

of their traditional State law rights to 

nominate and elect directors, we believe 

that eligible shareholders may prefer to 

use the new rules over a costly 

traditional proxy contest, making 

election contests a more plausible 

avenue for shareholders to participate in 

the governance of their company. This 

may have two beneficial effects on the 

governance of a company. First, the 

board and management of a company 

may be increasingly responsive to 

shareholders’ concerns, even when 

contested elections do not occur, 

because of shareholders’ ability to 

present their director nominees more 

easily. Second, new shareholdernominated directors may be more 

inclined to exercise judgment 

independent of the company’s 

incumbent directors and management. 

The new rules will remove or reduce 

some of the current disincentives to 

shareholders’ exercise of their 

traditional State law rights to nominate 

director candidates. Once the rules 

become effective, boards’ 

responsiveness to concerns expressed 

by shareholders may increase because 

shareholders could more easily 

nominate their own directors to run 

against incumbent directors.913 In 

response to the Proposal, commenters 

submitted studies regarding the effects 

of reducing incumbent directors’ 

insulation from removal, which showed 

measures that make incumbent directors 

more vulnerable to replacement by 

shareholder action have salutary 

deterrent effects against board 

complacency and improve corporate 

governance and shareholder value.914

Further, by creating a new threat of 

removal, the new rules could lead to 

greater accountability on the part of 

incumbent directors to the extent they 

see a close link between their 

performance and the prospect of 

removal.915 In response to the Proposal, 

one commenter also submitted studies 

that showed that anti-takeover 

provisions protecting incumbent 

management are associated with 

economically significant reductions in 

firm valuation, returns and 

performance, and share prices increase 

when activists prompt elimination of 

provisions such as staggered boards.916

Conversely, the creation of a staggered 

board structure was found to be 

associated with a reduction in firm 

value.917 Because our new rules may 

make director elections more 

competitive by facilitating shareholders’ 

ability to nominate and elect their own 

director candidates and, hence, also 

make some incumbent directors less 

secure in their positions, we believe that 

the rules may have analogous salutary 

effects. 

As we noted in the Proposing Release, 

the presence of directors nominated by 

shareholders may have an effect on 

company performance and shareholder 

value.918 We also noted in the Proposing 


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56762 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

accountable for activity that does not benefit 

investors may reduce agency costs and increase 

shareholder value. See, e.g., Brad M. Barber, 

‘‘Monitoring the Monitor: Evaluating CalPERS’ 

Activism’’ (November 2006), available at http:// 

papers.ssrn.com/sol3/ 

papers.cfm?abstract_id=890321 (cited in the 

Proposing Release, Section V.B.3.). See also 

Deutsche Bank, Global Equity Research, ‘‘Beyond 

the Numbers: Corporate Governance in Europe,’’ 

(March 5, 2005) (cited in the Proposing Release, 

Section V.B.3). 

919See Proposing Release, Section V.B.3. (citing 

Fitch Ratings, ‘‘Evaluating Corporate Governance’’ 

(December 12, 2007), available at http:// 

www.fitchratings.com/corporate/reports/ 

report_frame.cfm?rpt_id=363502). 

920See, e.g., letters from CII (noting that ‘‘some 

boards are dominated by the chief executive officer, 

who often plays the key role in selecting and 

nominating directors’’ and quoting a view expressed 

by a prominent investor that ‘‘[t]hese people [chief 

executive officers] aren’t looking for Dobermans. 

* * * They’re looking for cocker spaniels.’’); J. 

McRitchie (‘‘It is well known that until recently the 

vast majority of board vacancies were filled via 

recommendations from CEOs who also are typically 

chairmen of the boards * * * Recent requirements 

for an ‘independent’ nominating committee provide 

little assurance against continued management 

domination. These ‘independent’ board members 

serve at the pleasure of the CEOs and the other 

board members; they have no independent base of 

power.’’). 

921Cernich (2009). See also letters from D. 

Romine; GovernanceMetrics; P. Neuhauser; Social 

Investment Forum; TIAA–CREF; Universities 

Superannuation. 

As we previously noted, the Cernich (2009) study 

cites long-term return results, relative to peers, 

which are positive over the subsequent year but 

negative over the subsequent three years. However, 

these results are not reported with standard errors, 

making it difficult to determine whether the 

expected returns following contests are different 

from peers, or whether the realized long-term 

returns during the sample period are merely the 

result of random chance. Other research, such as 

Mulherin and Poulsen (1998), is consistent with 

these findings, but investigates the impact of proxy 

contests generally, rather than hybrid boards. 

922Cernich (2009). 

923See letters from D. Romine; 

GovernanceMetrics; P. Neuhauser; Social 

Investment Forum; TIAA–CREF; Universities 

Superannuation. See also Mulherin and Poulsen 

(1998); James F. Cotter, Anil Shivdasani, and Marc 

Zenner, Do Independent Directors Enhance Target 

Shareholder Wealth During Tender Offers?, J. Fin. 

Econ. (February 1997) (finding, after examining a 

sample of 169 tender offers conducted from 1989 

through 1992, that target shareholder gains from 

tender offers were approximately 20% greater when 

the board was independent). 

924See letter from BRT (referring to the ‘‘Report 

on Effects of Proposed SEC Rule 14a–11 on 

Efficiency, Competitiveness and Capital Formation, 

in Support of Comments by Business Roundtable’’ 

by NERA Economic Consulting (‘‘NERA Report’’)); 

David Ikenberry and Joself Lakonishok, Corporate 

Governance Through the Proxy Contest: Evidence 

and Implications, 66 J. Bus. 420 (1993) (‘‘Ikenberry 

and Lakonishok (1993)) (claiming that ‘‘companies 

with dissident board members substantially 

underperform compared to their peers.’’) (cited in 

the NERA Report); Lisa Borstadt and Thomas 

Zwirlein, The Efficient Monitoring Role of Proxy 

Contests: An Empirical Analysis of Post-Contest 

Control Changes and Firm Performance, Fin. Mgm’t 

(1992) (‘‘Borstadt and Zwirlein (1992)’’) (asserting 

that, in the long run, proxy contests destroy 

shareholder value) (cited in NERA Report); Beltratti 

and Stulz (2009) (submitted as part of the letter 

from BRT and cited in letters from AT&T, BRT, and 

Seven Law Firms); Cheffins (2010) (examining 

thirty-seven companies removed from the S&P 500 

index during 2008 and concluding that corporate 

governance functioned ‘‘tolerably well’’ in these 

companies to negate the need for fundamental 

reform of the current corporate governance 

arrangements) (submitted as part of the letter from 

Chamber of Commerce/CCMC); Ali C. Akyol, Wei 

Fen Lim and Patrick Verwijmeren, Shareholders in 

the Boardroom: Wealth Effects of the SEC’s Rule to 

Facilitate Director Nominations (December 14, 

2009) (‘‘Akyol, Lim, and Verwijmeren (2009)’’) 

(documenting negative stock price reactions to the 

announcements of regulatory activities related to 

shareholders’ right to include director nominees in 

the company’s proxy materials, including the 

Proposal) (submitted as part of the letter from J. 

Grundfest); David F. Larcker, Gaizka Ormazabal and 

Daniel J. Taylor, The Regulation of Corporate 

Governance (January 16, 2010)) (‘‘Larcker, 

Ormazabal, and Taylor (2010)’’) (submitted as part 

of the letter from David F. Larcker (‘‘D. Larcker’’)). 

925See letters from ABA; Atlas; AT&T; Book 

Celler; Carlson; Carolina Mills; Chamber of 

Commerce/CCMC; Chevron; Crespin; M. Eng; 

Erickson; ExxonMobil; Fenwick; GE; General Mills; 

Glass Lewis; Glaspell; Intelect; R. Clark King; 

Koppers; MCO; MeadWestvaco; MedFaxx; Medical 

Insurance; Merchants Terminal; D. Merilatt; NAM; 

NIRI; NK; O3 Strategies; Roppe; Rosen; Safeway; 

Sara Lee; Schneider; Southland; Style Crest; Tenet; 

TI; tw telecom; R. VanEngelenhoven; Wachtell; 

Wells Fargo; Weyerhaeuser; Yahoo. 

926For example, we note that a study highlighted 

a methodological flaw in the Ikenberry and 

Lakonishok (1993) study. Mulherin and Poulsen 

(1998) noted that this study had required that 

companies exist as the same entity in the 

COMPUSTAT database subsequent to the contest, 

eliminating some of the most favorable outcomes of 

proxy contests from consideration and biasing the 

estimate of long-term returns downward. After 

making corrections for this statistical bias and 

examining a sample of 270 proxy contests for board 

seats conducted from 1979 to 1994, the authors 

found that the market had a favorable response to 

the initiation of the proxy contest with an average 

abnormal return of 8.04% in the initiation period, 

followed by long-run returns statistically 

indistinguishable from those of comparable stocks. 

Their analysis showed that the wealth gains during 

proxy contests stemmed mainly from firms that 

were acquired. Overall, the authors concluded that 

proxy contests generally create value, and for 

companies that were not acquired, ‘‘the occurrence 

of management turnover [had] a significant, positive 

effect on shareholder wealth relative to the firms 

that do not replace senior management.’’ In the 

Borstadt and Zwirlein (1992) study, the finding of 

a negative risk-adjusted return, conditional on 

dissidents winning, was based on a sample of 32 

firms. Borstadt and Zwirlein note that, overall, 

‘‘dissident activity leads to gains for shareholders 

and is often followed by corporate reforms * * * 

such that the realized gains over the contest period 

appear to be permanent.’’ A survey article on 

corporate governance confirmed that this is the 

current academic consensus, stating that ‘‘[t]he 

latest evidence suggests that proxy fights provide a 

degree of managerial disciplining and enhance 

shareholder value.’’ See Marco Becht, Patrick Bolton 

and Ailsa Roell, Corporate Governance and Control, 

Handbook of the Economics of Finance (2003) 

(‘‘Becht, Bolton and Roell (2003)’’). 

Release that academic literature 

indicates the benefit to shareholders of 

having an independent, active and 

committed board of directors.919

Directors are charged under State law to 

act as disinterested fiduciaries on behalf 

of all shareholders, but it has been 

recognized that the difficult agency 

problem created by the separation in 

public companies of ownership from 

control creates conflicts not completely 

addressed by State law. We received 

comment expressing concern regarding 

the close relationships between 

directors and a company’s management 

and the degree to which the nomination 

process is dominated by 

management.920 Directors nominated by 

shareholders pursuant to the new rules 

will owe their presence on the board to 

their nomination by one or more 

significant shareholders and therefore 

may be independent in a way that is 

fundamentally different from directors 

nominated by the incumbent directors. 

We found to be relevant the empirical 

evidence cited in our Proposing Release 

and by commenters regarding the effect 

on shareholder value of so-called 

‘‘hybrid boards’’ (i.e., boards composed 

of a majority of incumbent directors and 

a minority of dissident directors).921

Such boards are a close, but not perfect, 

analog to the results from an election in 

which shareholder nominees submitted 

pursuant to the new rules are elected 

and typically result when the 

shareholder’s nominees join the board 

through an actual or threatened proxy 

contest, but without a change of control. 

In the study cited in the Proposing 

Release, ongoing businesses with a 

minority of dissident directors posted 

increases in shareholder value of 9.1%, 

relative to peers, during the contest 

period, indicating that the market 

viewed the contest as having a positive 

effect on shareholder value.922 Other 

commenters adduce evidence that 

boards with a minority of dissident 

directors produce positive changes in 

corporate governance structures and 

strategy and result in increased 

shareholder value measured in both 

absolute returns and relative to peers.923

Amending our proxy rules to facilitate 

the operation of State laws permitting 

shareholder nominations of directors 

may allow shareholders to elect 

directors who, without obtaining 

control, can exercise similar influence 

over decisions critical to shareholder 

value. 

We recognize the existence of studies 

that reached conclusions contrary to 

those discussed above.924 Other 

commenters warn that the new rules 

will lead to election contests that will be 

distracting, time-consuming, and 

inefficient for companies, boards, and 

management.925

We have reviewed these studies and 

have reason to question some of their 

conclusions either because of questions 

raised by subsequent studies,926


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927For example, we believe that attempts to draw 

sharp inferences from the Beltratti and Stulz (2009) 

study may not be warranted because, as the authors 

themselves noted, the evidence leaves much to 

interpretation. The authors concluded that negative 

conclusions about board effectiveness may be 

unwarranted because it is unfair to evaluate ex-ante 

decisions using hind-sight. In particular, they 

explained that: 

Such a result does not mean that good governance 

is bad. Rather it is consistent with the view that 

banks that were pushed by their boards to maximize 

shareholder wealth before the crisis took risks that 

were understood to create shareholder wealth, but 

were costly ex post because of outcomes that were 

not expected when the risks were taken. 

Beltratti and Stulz (2009) at 3. 

928For example, the relatively short timeframe 

and small number of companies examined in 

Cheffins (2010) study alone justify some caution in 

attempting to draw any sharp inferences from the 

study. As for the Akyol, Lim, and Verwijmeren 

(2009) and Larcker, Ormazabal, and Taylor (2010) 

studies, we note that, even if facilitating 

shareholders’ ability to include their nominees in 

a company’s proxy materials enhances shareholder 

value, it may be possible to observe negative stock 

price reactions for a particular set of public 

announcement dates. The problem lies in 

ascertaining the first time investors learned about 

the regulatory efforts to facilitate this shareholder 

right. On that initial date, investors may have 

adjusted share prices for both the capitalized value 

of the benefits (or costs) associated with the 

regulatory effort and the probability of the effort’s 

success. Subsequent public announcements may 

simply cause investors to update these initial 

assessments of the valuation impact and the 

probability of success. Consequently, it is difficult 

to infer whether the price reactions are independent 

of past announcements or simply a revision of the 

investors’ prior expectations. It is important, 

therefore, to disentangle investor expectations about 

the probability of the success of the regulatory effort 

from the associated valuation implications. It 

appears that the Akyol, Lim, and Verwijmeren 

(2009) and Larcker, Ormazabal, and Taylor (2010) 

studies did not focus on this distinction. 

929See NERA Report. 

930 Id. 

931See, e.g., letters from BRT; GE; General Mills; 

IBM; Metlife; Office Depot; Safeway; Wachtell. 

932See Mulherin and Poulsen (1998) and 

discussion in footnote 926 above. 

933See, e.g., letters from ABA; ICI; ICI/IDC; IDC; 

MFDF; S&C; T. Rowe Price; Vanguard. 

934See letters from ICI; ICI/IDC; S&C; T. Rowe 

Price. 

935See letters from ABA; Barclays; ICI; ICI/IDC; 

IDC; T. Rowe Price; S&C; Vanguard. 

936See letters from J. Reid; J. Taub. 

937See Jones v. Harris Assocs., 130 S.Ct. 1418, 

1423, 176 L. Ed. 2d 265, 273–274 (2010). See also 

S. Rep. No. 91–184; 91st Congress 1st Session; S. 

2224 (1969) (‘‘This section is not intended to 

authorize a court to substitute its business judgment 

for that of the mutual fund’s board of directors in 

the area of management fees. * * * The directors 

of a mutual fund, like directors of any other 

corporation will continue to have * * * overall 

fiduciary duties as directors for the supervision of 

all of the affairs of the fund.’’). 

limitations acknowledged by the 

studies’ authors,927 or our own concerns 

about the studies’ methodology or 

scope.928 While we recognize that there 

are strongly-held views on every side of 

this debate, we believe that, as 

discussed throughout this release and 

supported by commenters’ views and 

empirical data, we have a reasonable 

basis for expecting the benefits 

described above. 

We are aware, of course, that the new 

rules are additive to many existing 

means of monitoring and ‘‘disciplining’’ 

a company’s board and management,929

which include: Hostile takeovers; 

stockholders ‘‘voting with their feet’’ by 

selling their shares; board members 

being replaced by other means when the 

company’s stock performance is poor; 

and management turnover following 

poor performance or wrongdoing.930

We acknowledge these alternatives, 

but believe that, for the reasons noted 

above, directors nominated pursuant to 

the new rules will have a degree of 

independence that is not present in the 

existing means of ‘‘disciplining’’ a 

company’s board and management. 

Moreover, the ability of shareholders to 

‘‘vote with their feet’’ or submit to a 

takeover bid may be unattractive from a 

shareholder’s perspective if those 

transactions occur after a period of weak 

management that has depressed the 

company’s share price. Further, 

shareholders who invest in indices may 

not be readily able to sell securities of 

a particular company that is part of the 

index, making it difficult for them to 

‘‘vote with their feet.’’ The high costs 

involved with other existing 

mechanisms for ‘‘management 

discipline,’’ such as a traditional proxy 

contest, often mean that the prospect of 

replacing incumbent directors is remote 

unless the company’s performance falls 

below a very low threshold. By that 

time, a significant amount of 

shareholder value will have, by 

hypothesis, already been lost and will 

require additional time to recoup. We 

believe that the new rules will help 

shareholders exert ‘‘management 

discipline’’ by reducing the cost of, and 

otherwise making more plausible, 

shareholder nominations. 

We also acknowledge concerns 

expressed by commenters that the 

Proposal would encourage boards to 

make decisions to improve results in the 

short-term at the expense of long-term 

shareholder value creation.931 For the 

reasons described above, we believe the 

new rules have the potential to lead to 

improved company performance and 

enhanced shareholder value for both 

short-term and long-term shareholders. 

Evidence suggests that, historically, 

proxy contests have created value in 

both the short-run and long-run for 

shareholders.932 The possible inclusion 

and potential election of shareholder 

director nominees in company proxy 

materials would not negate the board’s 

fiduciary obligations, which are to all 

shareholders. Finally, shareholder 

director nominees are subject to election 

by both long-term and short-term 

shareholders, who will express their 

interest through their vote. In sum, we 

do not expect that the prospect that 

such holders would nominate directors 

should lead boards to take short-term 

actions that would detract from longterm value in order to avoid 

nominations. 

A number of commenters expressed 

special concerns with respect to the 

Proposal’s effect on investment 

companies, asserting that the election of 

a shareholder director nominee may, in 

some circumstances, increase costs and 

potentially decrease the effectiveness 

and efficiency of a unitary or cluster 

board utilized by a fund complex.933

Some of these commenters noted their 

belief that investment company 

governance presents a special case, 

arguing that the rules should not be 

extended to them absent empirical 

evidence specifically related to boards 

in this industry.934 Commenters also 

argued that investment companies are 

subject to a unique regulatory regime 

under the Investment Company Act that 

provides additional protection to 

investors, such as the requirement to 

obtain shareholder approval to engage 

in certain transactions or activities, and 

that investment companies and their 

boards have very different functions 

from non-investment companies and 

their boards.935 We understand these 

concerns, but we also note that some 

commenters have raised governance 

concerns regarding the relationship 

between boards and investment 

advisers.936 Moreover, although 

investment companies and their boards 

may have different functions from noninvestment companies and their boards, 

investment company boards, like the 

boards of other companies, have 

significant responsibilities in protecting 

shareholder interests, such as the 

approval of advisory contracts and 

fees.937 We also do not believe that the 

regulatory protections offered by the 

Investment Company Act (including 

requirements to obtain shareholder 

approval to engage in certain 

transactions and activities) serve to 

decrease the importance of the rights 

that are granted to shareholders under 

State law. In fact, the separate regulatory 

regime to which investment companies 

are subject emphasizes the importance 

of investment company directors in 

dealing with the conflicts of interest 

created by the external management 


emcdonald on DSK2BSOYB1PROD with RULES2
56764 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

938See footnote 142 above. 

939See Proposing Release, Section V.B.3. 

940For a more detailed discussion, see Section 

IV.E.1. below. 

941See letters from ABA; Alston & Bird; 

Americans for Financial Reform; CalSTRS; CFA 

Institute; CII; Corporate Library; Dominican Sisters 

of Hope; Florida State Board of Administration; 

GovernanceMetrics; ICI; Mercy Investment Program; 

Protective; RiskMetrics; Sisters of Mercy; Tri-State 

Coalition; Ursuline Sisters of Tildonk; USPE; 

Walden. 

942Among the information included in Schedule 

14N is the disclosure required by Items 4(b), 5(b), 

7 and, for investment companies, Item 22(b) of 

Schedule 14A. This disclosure is the same 

disclosure required for a solicitation subject to 

Exchange Act Rule 14a–12(c). 

943 Item 8 of Schedule 14N. These certifications 

include: A certification that the nominating 

shareholder (or where there is a nominating 

shareholder group, each member of the nominating 

shareholder group) is not holding any of the 

company’s securities with the purpose, or with the 

effect, of changing control of the company or to gain 

a number of seats on the board that exceeds the 

maximum number of nominees that the company 

could be required to include under Rule 14a–11; a 

certification that the nominating shareholder or 

group satisfies the applicable eligibility 

requirements of Rule 14a–11; a certification that the 

shareholder director nominee satisfies the 

applicable eligibility requirements of Rule 14a–11; 

and a certification that the information set forth in 

the notice on Schedule 14N is true, complete, and 

correct. 

944See Shareholder Proposal Proposing Release 

(proposing amendments to Rule 14a–8 to ‘‘make 

clear that director nominations made pursuant to 

[bylaw amendments concerning shareholder 

nominations of directors] would be subject to the 

disclosure requirements currently applicable to 

proxy contests’’ and noting that such disclosure is 

of ‘‘great importance’’ to an informed voting 

decision by shareholders). 

945See Rule 14a–18, Rule 14n–1, and Schedule 

14N. 

946See Item 7(e) of Schedule 14A and Item 5(i) 

of Schedule 14N. 

947See Rules 14a–2(b)(7) and 14a–2(b)(8). 

948See Rule 14a–2(b)(7). 

949See Rule 14a–2(b)(8). 

structure of most investment 

companies.938

Lastly, improved board performance 

may result from the possible increase in 

the pool of qualified director 

candidates. When a company does not 

include shareholder nominees for 

director in its proxy materials, it loses 

the opportunity to increase the pool of 

qualified nominees. Further, it deprives 

shareholders of the opportunity to 

consider and assess all qualified 

candidates if asked to make an informed 

voting decision in director elections. As 

we stated in the Proposing Release, 

facilitating shareholders’ ability to 

include director nominations in a 

company’s proxy materials may result 

in a larger pool of qualified director 

nominees from which to choose.939 By 

allowing shareholders to submit their 

own director nominees for inclusion in 

the company’s proxy materials, the 

demand for qualified individuals who 

may be willing to serve as shareholdernominated directors also may increase. 

This increased demand may, in turn, 

encourage more individuals to present 

themselves as potential shareholder 

director nominees, resulting in a large 

pool of potential candidates. We 

recognize, however, this benefit may be 

offset by the possibility that some 

qualified individuals may be less 

willing to be nominated to serve on a 

board if faced with a contested 

election.940

4. More Informed Voting Decisions in 

Director Elections Due to Improved 

Disclosure of Shareholder Director 

Nominations and Enhanced Shareholder 

Communications 

There was widespread support among 

commenters for the principle that the 

Commission should require disclosures 

regarding nominating shareholders and 

their nominees.941 The new 

requirements in Rule 14a–11, Rule 14n– 

1, and Schedule 14N will require certain 

disclosures and certifications to be 

provided on Schedule 14N by 

shareholders who submit a nominee 

under Rule 14a–11. A nominating 

shareholder or group will be required to 

provide disclosure of the information 

similar to that currently required in a 

proxy contest regarding the nominating 

shareholder and nominee 942 as well as 

certain certifications required for use of 

Rule 14a–11.943 Rule 14a–18, Rule 14n– 

1 and Schedule 14N will require similar 

disclosures when a shareholder or group 

uses an applicable state or foreign law 

provision or company’s governing 

documents to include shareholder 

nominees for director in the company’s 

proxy materials. The information 

provided by the disclosures and 

certifications will help provide 

transparency to shareholders when 

voting on shareholder nominees for 

director and therefore may lead to better 

informed voting decisions. 

With respect to Rule 14a–8(i)(8), 

companies previously have been 

permitted to exclude shareholder 

proposals to establish procedures for 

including shareholder director 

nominees in the company’s proxy 

materials. This exclusion arose out of 

the concern that allowing such 

proposals would result in the 

occurrence of contested elections 

without the disclosure that otherwise 

would be required in a traditional proxy 

contest.944 The new disclosure 

requirements applicable to nominations 

made pursuant to state or foreign law or 

a company’s governing documents 

address that concern by mandating 

disclosure that is similar to that 

required in a traditional proxy 

contest.945

In addition to improved disclosure, 

our new rules will enhance 

shareholders’ ability to communicate 

with each other regarding director 

nominations and elections through the 

proxy process. Shareholders eligible to 

use Rule 14a–11 will be able to utilize 

the company’s proxy materials to 

present their own director nominees for 

a vote by other shareholders. They will 

be able to include in the company’s 

proxy materials a statement supporting 

their director nominees.946 Shareholders 

who are dissatisfied with the company’s 

existing board or the company’s director 

nominees will be able to communicate 

this view and their preference for 

alternative candidates through the votes 

they cast under the proxy process. 

The new solicitation exemptions also 

will facilitate communications between 

shareholders.947 Shareholders interested 

in forming a nominating group to use 

Rule 14a–11 can contact other 

shareholders—through both oral and 

written communications—for that 

purpose without fear that their 

communications would be viewed as 

solicitations under the proxy rules, as 

long as the exemption’s conditions are 

satisfied.948 If its director nominees are 

included in the company’s proxy 

materials pursuant to Rule 14a–11, the 

nominating shareholder or group can 

solicit other shareholders to vote in 

favor of its nominees, or against the 

company’s own nominees, as long as the 

exemption’s conditions are satisfied.949

With the new amendment to Rule 

14a–8(i)(8), shareholders will benefit 

from a greater ability to present a 

proposal to establish an alternative 

procedure under a company’s governing 

documents for the inclusion of one or 

more shareholder director nominees in 

the company’s proxy materials. Thus, 

shareholders will be able to present for 

consideration by other shareholders a 

director nomination procedure that they 

believe is appropriate for their 

company. Through their votes on the 

proposal, shareholders will then have 

an opportunity to communicate their 

views on this proposal to other 

shareholders and the company’s 

management. 

E. Costs 

We anticipate that the new rules, 

where applicable, may result in costs 

related to (1) potential adverse effects on 

company and board performance; (2) 

additional complexity in the proxy 

process; and (3) preparing the required 

disclosures, printing and mailing, and 

costs of additional solicitations. 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56765 

950See letters from ABA; Atlas; AT&T; Book 

Celler; BRT; Carlson; Carolina Mills; Chamber of 

Commerce/CCMC; Chevron; Crespin; M. Eng; 

Erickson; ExxonMobil; Fenwick; GE; General Mills; 

Glass Lewis; Glaspell; Intelect; R. Clark King; 

Koppers; MCO; MeadWestvaco; MedFaxx; Medical 

Insurance; Merchants Terminal; D. Merilatt; NAM; 

NIRI; NK; O3 Strategies; Roppe; Rosen; Safeway; 

Sara Lee; Schneider; Southland; Style Crest; Tenet; 

TI; tw telecom; R. VanEngelenhoven; Wachtell; 

Wells Fargo; Weyerhaeuser; Yahoo. 

951See, e.g., Akyol, Lim, and Verwijmeren (2009) 

(finding that, based on the market response of a 

sample of 1,315 firms, ‘‘the proposed rule is 

perceived as costly by shareholders,’’ ‘‘that 

increasing shareholder rights, specifically by 

facilitating director nominations by shareholders, 

may actually be detrimental to shareholder wealth,’’ 

and that ‘‘empowering shareholders is not 

necessarily perceived as a good thing by most 

shareholders.’’); Stout (2007) (‘‘Perhaps the most 

obvious [economic function of board governance] is 

promoting more efficient and informed business 

decisionmaking. It is difficult and expensive to 

arrange for thousands of dispersed shareholders to 

express their often-differing views on the best way 

to run the firm.’’); see generally Stephen M. 

Bainbridge, Response to Increasing Shareholder 

Power: Director Primacy and Shareholder 

Disempowerment, 119 Harv. L. Rev. 1735 (2006) 

(discussing how concern for accountability may 

undermine decision-making discretion and 

authority) (cited in the Proposing Release, Section 

V.C.1.). But see Lucian Arye Bebchuk, The Case for 

Increasing Shareholder Power, 118 Harv. L. Rev. 

833, 883 (2005) (‘‘[M]ere recognition that back-seat 

driving might sometimes be counter-productive is 

hardly sufficient to mandate general deference to 

management. Such mandated deference would 

follow only if one assumes that shareholders are so 

irrational or undisciplined that they cannot be 

trusted to decide for themselves whether deference 

would best serve their interests.’’) (cited in the 

Proposing Release, Section V.C.1.). 

952See new Rule 14a–11(d) (5). For a discussion 

of this modification, see Section II.B.6.c. above. 

953See, e.g., letters from Biogen; GE. 

954See letters from 3M; ABA; American Electric 

Power; Atlantic Bingo; AT&T; Avis Budget; Biogen; 

Boeing; BRT; Burlington Northern; Callaway; 

Carlson; Chamber of Commerce/CCMC; CIGNA; 

Columbine; Cummins; CSX; J. Dillon; Emerson 

Electric; Erickson; ExxonMobil; FedEx; Headwaters; 

C. Holliday; IBM; Intelect; R. Clark King; Lange; 

Louisiana Agencies; Metlife; NIRI; O3 Strategies; V. 

Pelson; PepsiCo; Pfizer; Roppe; Rosen; Ryder; Sara 

Lee; Sidley Austin; tw telecom; Wachtell; Wells 

Fargo; Weyerhaeuser; Yahoo. See also Stephen M. 

Bainbridge, A Comment on the SEC Shareholder 

Access Proposal (November 14, 2003) at 17, 

available at http://ssrn.com/abstract=470121 (‘‘The 

likely effects of electing a shareholder 

representative therefore will not be better 

governance. It will be an increase in affectional 

conflict . * * * It will be a reduction in the trustbased relationships that causes horizontal 

monitoring within the board to provide effective 

constraints on agency costs.’’) (cited in the 

Proposing Release, Section V.C.1.). 

955See letters from AGL; Air Tite, Inc. (‘‘Air 

Tite’’); All Cast; John C. Astle (‘‘J. Astle’’); Astrum 

Solar (‘‘Astrum’’); Atlantic Bingo; Burlington 

Northern; Glen Burton (‘‘G. Burton’’); R. Chicko; 

Columbine; Darden Restaurants; Erickson; Fluharty; 

Horizon; Lange; Mama’s; Massey Services; NIRI; O3 

Strategies; P&G; PepsiCo; W. Steinbrink; Stringer; 

Theragenics; VCG; Wachtell; and Wells Fargo. 

956See letters from AGL; Astrum; Boeing; R. Burt; 

G. Burton; S. Campbell; Carolina Mills; Columbine; 

W. Cornwell; Erickson; Fenwick; FPL Group; 

Intelect; Little; McDonald’s; MedFaxx; Norfolk 

Southern; P&G, Rosen; UnitedHealth; VCG; Wells 

Fargo; Xerox; Yahoo. 

957See Rules 14a–11, 14a–18 and 14n–1, and 

Schedule 14N. 958See letters from BCI; Bebchuk, et al.; CII; T. 

DiNapoli; Florida State Board of Administration; 

Continued 

1. Costs Related to Potential Adverse 

Effects on Company and Board 

Performance 

Rule 14a–11 and the amendment to 

Rule 14a–8(i)(8) may result in potential 

adverse effects on the performance of a 

company and its board of directors. 

First, we received significant 

comment stating that election contests 

are distracting and time-consuming for 

companies, boards, and management.950

Further, to the extent that a more 

competitive nomination and election 

process motivates incumbent directors 

to be more responsive to shareholders’ 

concerns, the board may incur costs in 

attempting to institute policies and 

procedures it believes will address 

shareholder concerns. It is possible that 

the time a board spends on shareholder 

relations could reduce the time that it 

otherwise would spend on strategic and 

long-term thinking and overseeing 

management, which, in turn, may 

negatively affect shareholder value.951

We considered these comments and 

appreciate commenters’ concerns 

regarding these costs. We believe it is 

important to note that these costs are 

associated with the traditional State law 

right to nominate and elect directors, 

and are not costs incurred for including 

shareholder nominees for director in the 

company’s proxy materials. Further, the 

ownership threshold and holding period 

that we adopted in response to 

commenters’ concerns should limit the 

use of Rule 14a–11 to only holders who 

demonstrate a long-term, significant 

commitment to the company. To 

encourage constructive dialogue 

between a company and a nominating 

shareholder or group regarding the 

director nominees to be presented to 

shareholders for a vote, we revised the 

rule so that if a company negotiates with 

the nominating shareholder or group 

that otherwise would be eligible to have 

its nominees included in the company’s 

proxy materials after the nominating 

shareholder or group has submitted its 

nomination on Schedule 14N, and the 

company agrees to include the 

nominating shareholder’s or group’s 

nominees on the company’s proxy card 

as company nominees, those nominees 

will count toward the 25% maximum 

set forth in the rule.952 We believe that 

the cost described above may be offset 

by other factors as well. The additional 

communication between a board and 

the company’s shareholders may lead to 

enhanced transparency into the board’s 

decision-making process, more effective 

monitoring of this process by 

shareholders, and, ultimately, a better 

decision-making process by the board. 

The cost also may be offset to the extent 

that shareholders understand that the 

board’s time and other resources are in 

scarce supply and will take these 

considerations into account in deciding 

to nominate directors, recognizing that 

the cost of a distracted board may not 

justify pursuing their own specific 

concerns. 

Second, the new rules may lead some 

companies to re-examine their current 

procedures for shareholders to submit 

their own director nominees for 

consideration by either the company’s 

board or nominating committee, 

especially if the company is subject to, 

or thinks it likely will be subject to, 

shareholder-nominated director 

candidates submitted pursuant to Rule 

14a–11. These companies may incur 

costs associated with such a reexamination and any resulting 

adjustments to their procedures.953

These costs may be limited, however, to 

the extent that the new rules improve 

the overall efficiency of the director 

nomination process and lead to 

improvements in the existing 

procedures for director nominations. 

Third, the new rules could, in some 

cases, result in lower quality boards.954

The quality of a company’s board may 

decrease if, as some commenters 

predicted, unqualified individuals are 

elected to the board.955 Commenters 

worried, in particular, that a 

shareholder director nominee will be 

elected without undergoing the same 

extensive vetting process or having to 

comply with the same independence or 

director qualification standards 

applicable to other director 

nominees.956 The presence of directors 

who lack the proper qualifications may 

result in a lower quality board and 

represent a cost to companies and 

shareholders. It is important to 

recognize that Rule 14a–11 provides for 

only the inclusion of a shareholder 

director nominee in the company’s 

proxy materials, not the election of that 

nominee. Further, the new disclosure 

requirements contained in the Proposal 

will provide shareholders with 

information for them to assess whether 

a shareholder nominee possesses the 

necessary qualifications and experience 

to serve as a director.957 Accordingly, as 

other commenters have noted, an 

unqualified individual, even if 

nominated, will still need to receive the 

support of a significant number of 

shareholders in order to be elected to 

the board.958 Therefore, the cost arising 


emcdonald on DSK2BSOYB1PROD with RULES2
56766 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

Governance for Owners; A. Krakovsky; P. 

Neuhauser; NJSIC; Relational; Shamrock; Social 

Investment Forum. 

959See Rule 14a–11(d)(1). 

960See letters from 3M; ABA; American Electric 

Power; Atlantic Bingo; AT&T; Avis Budget; Biogen; 

Boeing; BRT; Burlington Northern; Callaway; 

Carlson; Chamber of Commerce/CCMC; CIGNA; 

Columbine; Cummins; CSX; J. Dillon; Emerson 

Electric; Erickson; ExxonMobil; FedEx; Headwaters; 

C. Holliday; IBM; Intelect; R. Clark King; Lange; 

Louisiana Agencies; Metlife; NIRI; O3 Strategies; V. 

Pelson; PepsiCo; Pfizer; Roppe; Rosen; Ryder; Sara 

Lee; Sidley Austin; tw telecom; Wachtell; Wells 

Fargo; Weyerhaeuser; Yahoo. 

961See, e.g., letters from Ameriprise; BRT; 

Chamber of Commerce/CCMC. 

962See letters from Florida State Board of 

Administration; Pershing Square. 

963See letter from Pershing Square. 

964See letters from L. Dallas (citing Jerry 

Goodstein et al., The Effects of Board Size and 

Diversity on Strategic Change, 15 Strategic Mgmt. J. 

241 (1994) and Lynne L. Dallas, The New 

Managerialism and Diversity on Corporate Boards 

of Directors, 76 Tulane L. Rev. 1363 (2002)); 

LIUNA; RiskMetrics (noting that it tracked over a 

four-year period the returns of a portfolio of 

companies where activists gained board seats in 

2005, found that the portfolio outperformed the S&P 

500 index even during the recent market turmoil, 

and saw no indication that the presence of dissident 

directors on boards had a detrimental impact on 

shareholder value); Teamsters. 

965See Proposing Release, Section V.C.1. 

966See, e.g., letters from Association of Corporate 

Counsel; BRT; Chamber of Commerce/CCMC; GE; 

IBM; McDonald’s; O’Melveny & Myers; P&G; 

PepsiCo; Seven Law Firms; Society of Corporate 

Secretaries (also presenting data that the average 

hedge fund ownership is 7.15%, the number of S&P 

500 companies with hedge fund ownership at or 

above 5% is 273, and the number of S&P 500 

companies with hedge fund ownership at or above 

10% is 104); Vinson & Elkins; Wachtell; Xerox; 

Yahoo. See also Larcker, Ormazabal, and Taylor 

(2010)(stating that ‘‘the evidence suggests 

shareholders react negatively to regulation of proxy 

access, and that the reaction is decreasing in the 

number of large blockholders and increasing in the 

number of small institutional investors,’’ and that 

‘‘the market perceives that shareholders of firms 

with many large blockholders are harmed by proxy 

access and is consistent with critics’ claims that 

large blockholders will use the privileges afforded 

them by proxy access regulation to manipulate the 

governance process to make themselves better off at 

the expense of other shareholders.’’). 

967See Section IV.D.3. above. 

968See, e.g., letters from BRT; Eaton; IBM; 

McDonald’s; Seven Law Firms; Society of Corporate 

Secretaries; UnitedHealth. See also Stout (2007) at 

794 (‘‘[B]y making it easier for large shareholders in 

public firms to threaten directors, a more effective 

shareholder franchise might increase the risk of 

intershareholder ‘rent-seeking’ in public 

companies.’’). 

969See letters from BCIA; Bebchuk, et al.; CII; T. 

DiNapoli; Florida State Board of Administration; 

Governance for Owners; A. Krakovsky; P. 

Neuhauser; NJSIC; Relational; Shamrock; Social 

Investment Forum. 

970See Rule 14a–11, Rule 14a–18, Rule 14n–1, 

and Schedule 14N. 

971See letter from CII. See also Veasey & 

DiGuglielmo, above. 

from unqualified directors may be 

limited to the extent that shareholders 

understand that experience and 

competence are important director 

qualifications and cast their votes for 

the most-qualified candidates. 

Moreover, as adopted, the rule will 

require a company to include in its 

proxy materials no more than one 

shareholder director nominee or a 

number of nominees that represent 25% 

of the company’s board, whichever is 

greater.959 We believe that this 

provision will limit the effect of any 

potential decrease in the overall quality 

of a board. Lastly, to the extent that 

there is a risk of unqualified individuals 

being elected as directors, it is a risk 

that arises because shareholders are 

given the right under state or foreign 

law to determine who sits on the board 

of directors. 

The quality of a board also may 

decrease if, as some commenters 

warned, the increased likelihood of a 

contested election discourages 

experienced and capable individuals 

from serving on boards, making it more 

difficult for companies to recruit 

qualified directors or create a board 

with the proper mix of experience, 

skills, and characteristics.960 Some 

commenters noted that it is already 

difficult to recruit qualified 

independent directors.961 Other 

commenters, however, did not believe 

that Rule 14a–11 will discourage 

experienced, capable directors from 

serving,962 with one commenter stating 

that it encountered no difficulty in 

finding executives willing to serve on a 

shareholder-nominated slate.963 To the 

extent that the prospect of a contested 

election deters an otherwise qualified 

individual from considering a board 

seat, this will represent a cost to both 

the company and its shareholders. This 

cost may be mitigated, however, by the 

ability of other individuals—those who 

would not have been considered or 

nominated by the incumbent directors— 

to be nominated and presented for a 

shareholder vote pursuant to Rule 14a– 

11 or a procedure in the company’s 

governing documents established 

through Rule 14a–8. The cost may be 

further mitigated to the extent that the 

new rules lead to the election of 

individuals who will present a greater 

diversity of views for the board’s 

consideration, thereby leading to a 

better decision-making process, and, 

ultimately, greater shareholder value.964

Lastly, as we stated in the Proposing 

Release,965 the possibility of qualified 

candidates being discouraged from 

running for a board seat may be limited 

by shareholders’ understanding that 

board dynamics can be important, and 

that changing them may not always be 

beneficial. 

Fourth, potential disruptions in 

boardroom deliberations represent 

another possible cost to shareholders 

and companies. If a shareholder director 

nominee is elected and disruptions or 

polarization in boardroom dynamics 

occur as a result, the disruptions may 

delay or impair the board’s decisionmaking process. Such boardroom 

disruption may occur when one or more 

directors seek to promote an agenda that 

conflicts with that of the rest of the 

board. We received significant comment 

that the presence of shareholdernominated directors could disrupt the 

collegiality and efficiency of boards.966

We recognize the view that for 

companies whose boards are already 

well-functioning, such disruption could 

be counterproductive and could delay 

the board’s decision-making process and 

a delay or impairment in the decisionmaking process could constitute an 

indirect economic cost to shareholder 

value. For the reasons discussed above, 

however, we believe that boards with 

directors who were not nominated by 

the incumbent directors would, on 

balance, improve company performance 

and increase shareholder value.967

In addition, it may be possible for an 

investor to submit director nominees 

through the new rules with the 

intention of having the nominees, if 

elected, advocate for board decisions 

that maximize the investor’s private 

gains but at the expense of other 

shareholders.968 In the case of Rule 14a– 

11, the cost may be limited to the extent 

that the ownership threshold and 

holding requirement allow the use of 

the rule by only holders who 

demonstrated a significant, long-term 

commitment to the company. This cost 

may be limited to the extent that a 

director nominee with narrow interests 

must still gain the support of a 

significant number of shareholders to be 

elected.969 The disclosure requirements 

that we are adopting also may alert 

shareholders to the narrow interests of 

the nominating shareholder or group in 

advance of the election so that they can 

cast their votes in favor of the candidate 

who will best serve the interests of all 

shareholders.970 The cost may be further 

limited to the extent that a shareholder 

director nominee, once elected to the 

board, will be subject to the same 

fiduciary duties applicable to all other 

directors.971 The possibility of a director 

seeking to promote private gain at the 

expense of shareholders generally—and 

the related costs to the board’s overall 

performance and dynamics—should be 

limited to the extent that such a director 

recognizes these duties and strives to 

fulfill these legal obligations. The cost 

also may be limited to the extent that 

shareholders recognize the potential 


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972See letter from BRT. 973See letters from Altman (stating that its survey 

of 36 public companies showed that 80.85% of 

respondents believe the new rules ‘‘will deter some 

U.S. private companies from going public and some 

foreign companies from listing on U.S. exchanges.’’); 

BRT; Richard Tullo (‘‘R. Tullo’’). 

974See letters from ACSI; CalPERS; ICGN; 

LUCRF; Pax World; RiskMetrics; Social Investment 

Forum; SWIB. 

975See, e.g., letters from ABA; ICI; ICI/IDC; IDC; 

MFDF; S&C; T. Rowe Price; Vanguard. 

976See, e.g., letters from ICI; ICI/IDC; IDC; MFDF; 

Vanguard. 

977See letter from ICI/IDC (including attached 

legal memorandum). 

978See letter from J. Taub. 

979See, e.g., letters from ABA (‘‘Workability 

requires that the rule or bylaw be easily 

understandable, be able to be readily administered, 

address all relevant issues, operate in a time frame 

that permits proper conduct of shareholder 

meetings and action by a fully informed 

shareholder body, recognize the role and fiduciary 

responsibility of the board of directors, comply with 

the requirements of the Commission’s rules and 

other applicable law and allow the company and its 

shareholders sufficient flexibility to respond to 

changed circumstances in a timely manner.’’); Keller 

Group; Wachtell. 

harm from misuse of the board’s 

decision-making process and therefore 

do not vote for the nominee if they view 

the cost as sufficiently high. 

Fifth, to the extent that the need to 

comply with the new rules makes the 

U.S. public equity markets less 

attractive,972 discourages private 

companies from conducting public 

offerings in the U.S.,973 or encourages 

U.S. reporting companies to become 

non-reporting companies, this would be 

a cost of the new rules because 

investors’ investment opportunities 

could be limited. This cost may be 

mitigated to the extent that the new 

rules help improve board accountability 

and corporate governance, generate 

stronger company performance, and 

increase shareholder value. Investors 

may be more willing to invest or 

continue to invest in companies in 

which they have the ability to present 

their own shareholder director 

nominees in the company’s proxy 

materials if they are displeased with the 

company’s performance. We also note 

that shareholders in many foreign 

countries already have the ability to 

include their director nominees in the 

company’s proxy materials.974 We 

therefore believe that the new rules may 

bring the U.S. capital markets closer in 

line with international practice by 

giving shareholders of U.S. companies 

an ability that may already be enjoyed 

by shareholders of many non-U.S. 

companies. 

Lastly, with respect to investment 

companies, a number of commenters 

expressed concern that the election of a 

shareholder director nominee may, in 

some circumstances, increase costs and 

burdens (e.g., the shareholdernominated director would have to leave 

during discussions that pertain to the 

other investment companies in the 

complex, board materials would have to 

be customized for the director, and the 

fund complex would face challenges in 

preserving the status of privileged 

information) and potentially decrease 

the efficiency of a unitary or cluster 

board utilized by a fund complex.975 We 

recognize that for fund complexes that 

utilize unitary or cluster boards, the 

election of a shareholder director 

nominee may, in some circumstances, 

increase costs and potentially decrease 

the efficiency of the boards.976 We note, 

however, that these costs are associated 

with the traditional State law right to 

nominate and elect directors, and are 

not costs incurred for including 

shareholder nominees in the company’s 

proxy materials. We also note that any 

increased costs and decreased efficiency 

of an investment company’s board as a 

result of the fund complex no longer 

having a unitary or cluster board would 

occur, if at all, only in the event that the 

investment company shareholders elect 

the shareholder nominee. Investment 

companies may include information in 

the proxy materials making investors 

aware of the company’s views on the 

perceived benefits of a unitary or cluster 

board and the potential for increased 

costs and decreased efficiency if the 

shareholder nominees are elected. 

Moreover, we note that a fund complex 

can take steps to minimize the cost and 

burden of a shareholder-nominated 

director who is elected by, for example, 

entering into a confidentiality 

agreement in order to preserve the status 

of confidential information regarding 

the fund complex. 

Two commenters in a joint comment 

letter argued that there are a number of 

practical and legal issues that prevent 

confidentiality agreements from being 

sufficient to protect the interests of fund 

shareholders, and included a 

memorandum from a law firm 

discussing concerns about Regulation 

FD, enforceability of confidentiality 

agreements, whether shareholdernominated directors would sign 

confidentiality agreements, compliance, 

and loss of attorney-client privilege.977

We considered the issues raised by the 

joint comment letter. To the extent that 

material non-public information is 

discussed by boards in a fund complex, 

we emphasize that entering into a 

confidentiality agreement is only one 

method of preserving the confidentiality 

of information revealed in board 

meetings attended by the shareholdernominated director. The fund complex 

can have separate meetings and board 

materials for the board with the 

shareholder-nominated director, 

especially if particularly sensitive legal 

or other matters will be discussed or to 

protect attorney-client privilege. Finally, 

we believe the concerns expressed in 

the memorandum about confidentiality 

agreements were either not compelling 

or speculative in nature. 

Although commenters argued that the 

election of a shareholder-nominated 

director to a unitary or cluster board 

will necessarily result in decreased 

effectiveness of the board, we disagree. 

In this regard, one commenter argued 

that competition in the board 

nomination process may improve 

efficiency by providing additional 

leverage for boards in negotiations with 

the investment adviser.978 In any event, 

we believe that investment company 

shareholders should have the 

opportunity to exercise their traditional 

State law rights to elect a non-unitary or 

non-cluster board if they so choose. 

2. Costs Related to Additional 

Complexity of Proxy Process 

The new rules that we are adopting 

will, for the first time, require that 

company proxy materials include 

information about, and the ability to 

vote for, director nominees submitted by 

shareholders. The rules will facilitate 

shareholders’ ability to exercise their 

traditional State law rights to nominate 

and elect their own director candidates. 

One of the costs of this newly-enhanced 

ability, however, is the additional 

complexity in the proxy process as both 

companies and shareholders may have 

to consider and address the issue of 

shareholder director nominations more 

frequently than in the past. 

Several commenters expressed 

concern that the inability of companies 

and shareholders to opt out of Rule 14a– 

11, or establish a shareholder director 

nomination procedure with criteria 

different than those of Rule 14a–11, may 

create workability and implementation 

issues for companies, as they struggle to 

comply with a rule that does not fit their 

specific capital and governance 

structures.979 One commenter, for 

example, identified several of these 

issues, such as: the operation of the rule 

in a company with multiple classes of 

stock, a cumulative voting standard, or 

a majority voting standard; the 

treatment of derivatives and other 

synthetic ownership under the rule; the 

need for adequate protection against use 

of the rule for change of control 

attempts; and the consequences of false 


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980See letter from Wachtell. 

981See letter from Shearman & Sterling (opposing 

the tiered ownership thresholds because a number 

of companies regularly move from one category of 

filer to another as the aggregate worldwide market 

value of their voting and non-voting common equity 

changes from fiscal year to fiscal year, which it 

believed would lead to uncertainty). 

982See Section II.B.2.e. above. 

983See Section II.B.7.b. above. 

984See Sections II.B.4.b. and II.B.6.a. above. 

985See Section II.B.8.c.ii. above. 

986See letter from CII. 

987For example, we are adopting, as proposed, a 

procedure by which companies could send a notice 

to the Commission where the company intends not 

to include a shareholder director nominee in its 

proxy materials and could seek informal staff 

views—through a no-action request—with respect 

to that determination. 

988See Section IV.D.1. above. 

989We note that these increased costs may be less 

for companies using the notice and access model. 

See Internet Proxy Availability Release. 

990For purposes of the PRA analysis, we estimate 

these disclosure requirements would result in 225 

burden hours of company time, and $30,000 for the 

services of outside professionals. 

991For purposes of the PRA analysis, we estimate 

the total burden for Schedule 14N for shareholders 

submitting nominees pursuant to Rule 14a–11 

would result in a total of 7,870 hours of shareholder 

time and $1,049,300 for the services of outside 

professionals. 

certifications by a nominating 

shareholder or group.980 We recognize 

the possibility that attempting to 

comply with a highly-complex rule 

without the necessary flexibility to 

adapt the rule to a company’s specific 

situation may create certain costs for 

companies, such as the cost of legal 

advice and possible litigation if 

uncertainties must be resolved in courts. 

We also recognize the possibility that 

shareholders may have to incur similar 

costs if they attempt to use a highlycomplex and unclear rule. 

The requirements of Rule 14a–11, 

such as the eligibility criteria, may add 

a certain degree of complexity in the 

proxy process. For example, the process 

of determining which shareholder 

director nominee will be in the 

company’s proxy materials and the 

limitations on the number of 

shareholder nominees for director that a 

company is required to include in its 

proxy materials may add complexity. If 

several shareholders or groups desire 

(and qualify) to nominate the maximum 

number of directors they are allowed to 

place in the company’s proxy materials, 

only the shareholder or group holding 

the largest qualifying ownership interest 

will succeed. Another potential source 

of complexity under Rule 14a–11 is the 

number of shareholder director 

nominees that a nominating shareholder 

or group may submit to a company 

during a particular proxy season. For 

example, if the maximum allowable 

number of shareholder director 

nominees currently serves on the board, 

a company will not be required to 

include additional shareholder director 

nominees in the company’s proxy 

materials. These sources of complexity 

and any uncertainty that may arise in 

implementing the new rules could 

result in costs to companies, 

shareholders seeking to have their 

nominees included in the companies’ 

proxy materials, and shareholder 

director nominees. For example, both 

companies and shareholders could 

incur costs to seek legal advice in 

connection with shareholder 

nominations submitted pursuant to Rule 

14a–11, the inclusion of shareholder 

director nominees in a company’s proxy 

materials, submission of a notice of 

intent to exclude a nominee or 

nominees, and the process set forth in 

the rule for seeking an informal 

statement of the staff’s views with 

respect to the company’s determination 

to exclude a shareholder director 

nominee. Companies and shareholders 

also could incur costs to seek legal 

advice in connection with shareholder 

proposals submitted pursuant to Rule 

14a–8 and the process for submission of 

a no-action request to exclude the 

proposal. To the extent disputes on 

whether to include particular nominees 

or proposals are not resolved between 

the company and shareholders, 

companies and/or shareholders may 

seek recourse in courts, which will 

increase costs. 

As discussed throughout the release, 

the rules we are adopting include 

modifications to the proposed rules. We 

believe that the modifications will help 

minimize the complexity of the new 

rules and clarify uncertainties as much 

as possible. For example, our decision 

to adopt a uniform ownership threshold 

instead of the proposed tiered approach 

simplifies this particular eligibility 

requirement and should reduce some of 

the uncertainties identified by a 

commenter.981 We also clarified the 

availability of Rule 14a–11 when there 

is a concurrent proxy contest,982

provided standards for the order of 

priority of shareholder director 

nominees upon the withdrawal or 

disqualification of another shareholder 

director nominee,983 addressed issues 

regarding the application of Rule 14a–11 

to certain corporate structures (such as 

staggered boards and different classes of 

voting securities),984 and adopted a 

uniform deadline for the submission of 

shareholder director nominations 

pursuant to Rule 14a–11 that is 

generally applicable to companies 

subject to the rule.985 The costs arising 

from any complexity or uncertainty 

arising from the new rules may be 

mitigated to the extent that companies 

and shareholders gain greater familiarity 

with the new rules over time,986

additional guidance is provided by the 

Commission or its staff,987 and, if 

necessary, uncertain legal issues are 

resolved by courts. 

Lastly, as discussed above, we believe 

the overall proxy solicitation process for 

contested director elections may be less 

confusing for shareholders as a result of 

our new rules.988 Presenting the 

competing director nominees on one 

proxy card, with the related disclosure 

contained in one proxy statement, may 

simplify the shareholder’s decisionmaking process, reduce the potential for 

any confusion on the part of 

shareholders, and address any 

reluctance on the part of shareholders to 

consider an insurgent shareholder’s 

nominee solely because the nominee 

was not presented in the company’s 

proxy materials. 

3. Costs Related To Preparing 

Disclosure, Printing and Mailing and 

Costs of Additional Solicitations and 

Shareholder Proposals 

The new rules will impose additional 

direct costs on companies and 

shareholders related to the preparation 

of required disclosure, printing and 

mailing costs, and costs of additional 

solicitations that may be undertaken as 

a result of including one or more 

shareholder nominees for director in the 

company’s proxy materials pursuant to 

Rule 14a–11, a company’s governing 

documents, or an applicable state or 

foreign law provision.989

First, the new rules will impose direct 

costs onto companies and shareholders 

due to the rules’ disclosure and 

procedural requirements. For example, 

companies that determine that they may 

exclude a shareholder director nominee 

pursuant to Rule 14a–11 will be 

required to provide a notice to the 

nominating shareholder or group 

regarding any eligibility or procedural 

deficiencies in the nomination and 

provide to the Commission notice of the 

basis for its determination.990

Companies also may incur costs in 

preparing any statements regarding the 

shareholder director nominees that they 

wish to include in their proxy materials. 

Nominating shareholders or groups and 

the nominees also will be required to 

disclose information about themselves, 

which may be costly.991 Most of this 

disclosure will be provided by the 

nominating shareholder or group in the 

notice to the company, which would be 

filed on new Schedule 14N. The 

Schedule 14N also will include 


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992See, e.g., letter from S&C. 

993See letters from BRT; Society of Corporate 

Secretaries. 

994See Section III.C. above, for discussion of the 

estimates included in the letters from BRT and 

Society of Corporate Secretaries. 

995See letter from BRT. 

996See letter from Vanguard. The commenter did 

not elaborate on the nature of these ‘‘tabulation 

expenses.’’ It also noted that this figure does not 

include ‘‘incremental printing and mailing costs 

because the proposal was included in the proxy 

statement and did not require a separate mailing.’’ 

997See letter from CII. 

998This estimate is based on the assumption that 

shareholders of reporting companies (other than 

registered investment companies) will submit 

approximately 123 proposals per year regarding 

procedures for inclusion of shareholder nominees 

for director in company’s proxy materials, and that 

90% of companies that receive such a shareholder 

proposal will seek to exclude the proposal from 

their proxy materials. Thus, we estimate that 

companies will seek to exclude 110 such proposals 

(123 proposals × 90%) per proxy season. We 

estimate that the annual burden for the company’s 

submission of a notice of its intent to exclude the 

proposal and its reasons for doing so would average 

116 hours per proposal, for a total of 12,760 burden 

hours (110 proposals × 116 hours/proposal) for 

reporting companies (other than registered 

investment companies). This will correspond to 

9,570 hours of company time (110 proposals × 116 

hours/proposal × 0.75) and $1,276,000 for the 

services of outside professionals (110 proposals × 

116 hours/proposal × 0.25 × $400). For registered 

investment companies, we estimate for purposes of 

the PRA that the total burden hours will be 2,552 

hours, which corresponds to 1,914 hours of 

company time and $255,200 for the services of 

outside professionals. See Section III.D.2. above. 

999As discussed in Section II.B.3. above, Rule 

14a–11 will not apply to certain types of 

companies. 

1000However, as explained in footnote 875 above, 

the increased costs for the company may not be as 

much as would otherwise result if the shareholders 

engaged in a traditional proxy contest. 

1001See letter from BRT. This cost is in addition 

to the estimated 47 hours and associated costs of 

$47,784 that companies spend to prepare and 

submit a notice of intent to exclude a shareholder 

proposal. 

1002 In the adopting release for the amendments 

to Rule 14a–8 in 1998, we noted that responses to 

a questionnaire we made available in February 1997 

suggested the average cost spent on printing costs 

(plus any directly related costs, such as additional 

postage and tabulation expenses) to include 

shareholder proposals in company proxy materials 

was approximately $50,000. The responses received 

may have accounted for the printing of more than 

one proposal. 

information regarding the length of 

ownership, certifications, and other 

information. Companies could incur 

additional costs to investigate or verify 

the information regarding shareholder 

director nominees provided by 

nominating shareholders or groups, 

determine whether nominations will 

conflict with any laws, and analyze the 

relative merits of the shareholder 

director nominees and the companies’ 

own director nominees.992 For purposes 

of the PRA analysis, we estimate that 

the disclosure burden of Rule 14a–11 on 

reporting companies (other than 

registered investment companies) and 

registered investment companies is 

4,113 hours of personnel time and 

$548,200 for the services of outside 

professionals. We also estimate for 

purposes of the PRA analysis that the 

disclosure burden to shareholders of 

Schedule 14N will be 7,870 hours of 

shareholder time and $1,049,300 for the 

services of outside professionals. We 

also received estimates from 

commenters regarding the costs 

described above.993 These estimates are 

described in the PRA analysis above.994

Companies also could incur costs due 

to the potential increase in the number 

of shareholder proposals submitted to 

companies as a result of the expansion 

in the types of proposals permitted 

under Rule 14a–8. Under the 

amendment to Rule 14a–8(i)(8), 

companies will no longer be able to rely 

on this basis to exclude from their proxy 

materials shareholder proposals that 

seek to establish a procedure in the 

company’s governing documents for the 

inclusion of shareholder nominees for 

director in the company’s proxy 

materials. This will likely result in 

increased costs to companies related to 

reviewing and processing such 

proposals to determine matters such as 

shareholder eligibility and whether 

there is another basis for excluding 

these proposals under Rule 14a–8. If a 

company decides to exclude the 

shareholder proposal, it will have to 

incur the costs, such as legal fees, 

needed to prepare and submit a notice 

to the Commission regarding its basis 

for excluding the proposal. In this 

regard, we received several estimates 

from commenters regarding the costs 

related to a Rule 14a–8 shareholder 

proposal. Based on its July 2009 survey 

of its member companies, one 

commenter stated that companies spend 

an estimated 47 hours and associated 

costs of $47,784 to prepare and submit 

a notice of intent to exclude a 

shareholder proposal.995 An investment 

company estimated that its costs for 

including a shareholder proposal in its 

complex-wide proxy materials exceeded 

$3 million in ‘‘tabulation expenses.’’ 996

One commenter, however, described the 

costs to companies resulting from the 

amendment to Rule 14a–8(i)(8) as 

‘‘negligible’’ (with such costs confined to 

any additional costs of printing and 

distributing the proposal in the 

company’s proxy materials).997 For 

purposes of the PRA analysis, we 

estimate that shareholders will submit a 

total of 147 proposals regarding 

procedures for the inclusion of 

shareholder nominees in company 

proxy materials per year to reporting 

companies, including registered 

investment companies. Assuming that 

90% of reporting companies (including 

registered investment companies), or 

132 companies, prepare and submit a 

notice of intent to exclude these 

proposals, the resulting costs to 

companies will result in approximately 

11,484 hours and $1,531,200 for the 

services of outside professionals.998

These costs could decrease to the extent 

that the Rule 14a–8 no-action process 

provides guidance from the staff on 

which types of proposals are 

excludable. Further, because a company 

that receives a shareholder proposal has 

no obligation to make a submission 

under Rule 14a–8 unless it intends to 

exclude the proposal from its proxy 

materials, these costs also may decrease 

to the extent that the company does not 

seek to exclude the proposal. Lastly, the 

costs may be limited to the extent that 

shareholders do not submit proposals 

related to director nomination 

procedures due to the uniform 

applicability of Rule 14a–11 to all 

companies subject to the rule and 

availability of the rule for eligible 

shareholders.999

Second, the new rules may increase 

the incremental costs of printing and 

mailing a company’s proxy materials 

due to the need to include additional 

names and background information of 

shareholder director nominees in the 

proxy materials and the increased 

weight of these materials. These costs 

may increase as the number of 

shareholder director nominees to be 

included in the company’s proxy 

materials increases. Thus, this may 

result in a decrease in the costs to 

shareholders that would have had to 

conduct traditional proxy contests in 

the absence of Rule 14a–11, but may 

increase the costs for companies.1000

Companies also will incur additional 

printing and mailing costs with respect 

to the inclusion of a shareholder 

proposal related to changes to a 

company’s governing documents 

regarding inclusion of shareholder 

director nominees in the company’s 

proxy materials. We have two sources of 

information estimating such costs. 

Based on its July 2009 survey of its 

member companies, one commenter 

stated that companies spend an 

estimated 20 hours and associated costs 

of $18,982 to print and mail one 

shareholder proposal.1001 The responses 

to a questionnaire that the Commission 

made available in 1997 relating to 1998 

amendments to Rule 14a–8 suggest such 

costs to the responding companies 

averaged $50,000.1002 As noted above, 


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56770 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

1003See letter from Chamber of Commerce/CCMC. 

1004See letter from BRT. 

1005See letter from Ryder. 

1006See letter from Biogen. 

1007See Hall v. Trans-Lux Daylight Picture Screen 

Corp., 171 A. 226, 228 (Del. Ch. 1934) (‘‘where 

reasonable expenditures are in the interest of an 

intelligent exercise of judgment on the part of the 

stockholders upon policies to be pursued, the 

expenditures are proper; but where the 

expenditures are solely in the personal interest of 

the directors to maintain themselves in office, 

expenditures made in their campaign for proxies 

are not proper.’’). 

1008See letters from CalSTRS; CII; Florida State 

Board of Administration. 

1009See letters from ABA; BRT. 

1010The Commission is not expressing a view as 

to the scope of directors’ State law fiduciary duties 

in responding to shareholder director nominations 

or expressing a view as to what conduct would be 

consistent with these duties. 1011For example, the costs that are incurred only 

if the incumbent directors choose to challenge or 

solicit against a shareholder director nominee (e.g., 

the legal fees arising from the company’s efforts to 

exclude the nominee from its proxy materials) are 

distinguishable from the costs that must be incurred 

irrespective of whether the directors oppose the 

shareholder director nomination (e.g., the increased 

printing costs caused by the inclusion of the 

shareholder director nominees and related 

disclosures in the company’s proxy materials). 

1012See letter from S&C. NYSE Rule 452 provides 

that, with respect to registered investment 

companies, brokers may not vote uninstructed 

shares in contested elections. 

1013See letters from ABA; MFDF. 

for purposes of the PRA, we estimate 

that the amendment to Rule 14a–8(i)(8) 

could result in the annual submission of 

147 shareholder proposals regarding 

procedures for the inclusion of 

shareholder director nominees in 

company proxy materials. Based on this 

information, for purposes of our 

analysis, we assume printing and 

mailing costs of one shareholder 

proposal in a company’s proxy materials 

could be in the range of approximately 

$18,000 to $50,000. Assuming each of 

these proposals were included in 

company proxy materials, it could result 

in a total cost of approximately 

$2,646,000 to $7,350,000 for the affected 

companies. 

Finally, the new rules may lead to an 

increase in soliciting activities by both 

companies and shareholders. 

Companies may increase solicitations to 

vote for their slate of directors, to vote 

against shareholder director nominees, 

or to vote against shareholder proposals. 

Shareholders may increase solicitations 

to vote for shareholder proposals, to 

withhold votes for a company’s 

nominees for director, or to vote for the 

shareholder director nominees. This 

increase in soliciting activities by both 

companies and shareholders will result 

in an increase in costs as well. These 

solicitation costs are not, however, 

required under our rules. 

We received a significant amount of 

comment regarding the extent to which 

companies will solicit against the 

election of a shareholder director 

nominee. One commenter predicted that 

boards will take ‘‘extraordinary efforts’’ 

to campaign against the shareholder 

director nominees, including significant 

media and public relations efforts, 

advertising in a number of forums, mass 

mailings, and other communication 

efforts, as well as the hiring of outside 

advisors and the expenditure of 

significant time and effort by the 

company’s employees.1003 As examples 

of these costs, the commenter pointed to 

the costs of recent proxy contests, which 

ranged from $14 million to $4 million, 

as well as the costs of contests at smaller 

companies, which ranged from $3 

million to $800,000. Another 

commenter conducted a survey of its 

member companies and indicated that 

an average total of 302 hours of 

company personnel and director time 

will be needed if a company opposes a 

shareholder director nominee.1004 One 

commenter estimated its own annual 

costs for defending against a 

shareholder director nominee to be 

approximately $330,000 and 275 hours 

of management’s time.1005 Another 

commenter noted that it had direct costs 

of approximately $11 million in 2008 

and more than $9 million in 2009—in 

addition to the substantial indirect costs 

in management time and attention—as a 

result of the proxy contests that it 

faced.1006

We understand that company boards 

may be motivated by the issues at stake 

to expend significant resources to 

challenge shareholder director 

nominees, elect their own nominees, or 

solicit votes against a shareholder 

proposal. We therefore recognize that, as 

a practical matter, it can reasonably be 

expected that the boards of some 

companies likely would oppose the 

election of shareholder director 

nominees. If the incumbent board 

members incur large expenditures to 

defeat shareholder director nominees, 

those expenditures will represent a cost 

to the company and, indirectly, all 

shareholders. It is also possible that 

some shareholders may perceive the use 

of corporate funds to oppose the 

election of nominees submitted by 

shareholders as having a negative effect 

on the value of their investments. 

These costs, however, may be limited 

by two factors. They may be limited to 

the extent that the directors’ fiduciary 

duties prevent them from using 

corporate funds to resist shareholder 

director nominations for no good-faith 

corporate purpose.1007 Some 

commenters, in fact, characterized the 

costs incurred by incumbent directors to 

defeat shareholder director nominees as 

discretionary because Rule 14a–11 itself 

does not require such efforts.1008 Other 

commenters disagreed with this 

characterization, asserting that the 

directors’ fiduciary duties may compel 

them to expend company resources to 

oppose a shareholder director 

nominee.1009 We recognize that, under 

certain circumstances, company 

directors likely would oppose a 

particular shareholder director nominee 

and expend company resources in that 

effort, which would increase the costs to 

the company resulting from Rule 14a– 

11.1010 However, the costs for 

companies may be less to the extent that 

directors determine not to expend such 

resources to oppose the election of the 

shareholder director nominees and 

simply include the shareholder director 

nominees and the related disclosure in 

the company’s proxy materials.1011 The 

requisite ownership threshold and 

holding period of Rule 14a–11 may also 

limit the number of shareholder director 

nominations that a board may receive, 

consider, and possibly contest. 

4. Other Costs 

The new rules may result in 

additional costs, as described below. 

With respect to investment 

companies, one commenter stated that if 

a shareholder nomination causes an 

election to be ‘‘contested’’ under rules of 

the New York Stock Exchange, brokers 

would not be able to vote client shares 

on a discretionary basis, making it 

difficult and more expensive for 

investment companies to achieve a 

quorum for a meeting.1012 We recognize 

that it may be more costly for 

investment companies to achieve a 

quorum at shareholder meetings if a 

shareholder director nomination causes 

an election to be ‘‘contested’’ under the 

rules of the New York Stock Exchange 

and brokers cannot vote shares on a 

discretionary basis. We believe, 

however, that the costs imposed on 

investment companies will be limited 

for three reasons. First, to the extent 

investment companies do not hold 

annual meetings as permitted by State 

law, investment company shareholders 

will have less opportunity to take 

advantage of the new rules.1013 Second, 

even when investment company 

shareholders do have the opportunity to 

take advantage of the new rules, the 

disproportionately large and generally 

passive retail shareholder base of 

investment companies suggests that the 

new rules will be used less frequently 

than will be the case with nonVerDate Mar<15>2010 19:51 Sep 15, 2010 Jkt 220001 PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 E:\FR\FM\16SER2.SGM 16SER2

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1014See letter from J. Taub. 1015See letter from ABA. 1016The revisions make clear that inclusion of a 

shareholder director nominee would not be deemed 

a solicitation in opposition for purposes of the 

exclusion from filing preliminary proxy materials. 1017See Shareholder Approval of Executive 

Compensation of TARP Recipients, Exchange Act 

Release No. 34–61335 (Jan. 12, 2010) (adopting an 

amendment to Exchange Act Rule 14a–6(a) to add 

the shareholder advisory vote on executive 

compensation required for participants in the 

Troubled Asset Relief Program (‘‘TARP’’) to the list 

of items that do not trigger a preliminary filing 

requirement). 

1018 15 U.S.C. 78w(a)(2). 

1019 15 U.S.C. 78c(f). 

1020 15 U.S.C. 80a–2(c). 

1021We are not aware of any law in any state or 

in the District of Columbia that prohibits 

shareholders from nominating directors. For further 

discussion, see Section II.B.2.a. above. 

1022One notable exception exists under the North 

Dakota Publicly Traded Corporations Act, which 

permits holders of at least five percent of the 

outstanding shares of a company subject to the 

statute to submit a notice of intent to nominate 

directors and requires the company to include each 

such shareholder nominee in its proxy statement 

and form of proxy. See North Dakota Publicly 

Traded Corporations Act, N.D. Cent. Code § 10–35– 

08 (2009). 

1023Many commenters noted the general 

ineffectiveness or prohibitive cost of the existing 

means to effect a change in the membership of a 

board, such as a traditional proxy contest, Rule 

14a–8 shareholder proposals, and communications 

with a company’s nominating committee or board. 

See letters from Americans for Financial Reform; 

Brigham; CalPERS; CII; Florida State Board of 

Administration; Ironfire; M. Katz; J. McRitchie; 

Nathan Cummings Foundation; P. Neuhauser; Pax 

World; S. Ranzini; Teamsters; TIAA–CREF; USPE. 

Moreover, only a traditional proxy contest was 

viewed by some commenters to be a realistic 

method of effecting change in the board’s 

membership. See letters from Americans for 

Financial Reform; CalPERS; CII; Florida State Board 

of Administration; M. Katz; J. McRitchie; S. 

Ranzini; Teamsters. Yet, according to these 

commenters, the high costs of such a proxy contest 

hinder shareholders’ ability to nominate and elect 

directors. For further discussion of these costs, see 

Section IV.C.1. above. 

investment companies.1014 Third, 

because we have sought to limit the cost 

and burden on all companies, including 

investment companies, by limiting Rule 

14a–11 to nominations by shareholders 

who have maintained significant 

continuous holdings in the company for 

at least three years, and because, as 

suggested by one commenter, many 

funds, such as money market funds, are 

held by shareholders on a short-term 

basis,1015 we believe that the situations 

where shareholders will meet the 

eligibility requirements will be limited. 

Our decision to adopt, as proposed, 

the revisions to Rule 14a–6(a)(4) and 

Note 3 to the rule 1016 means that the 

inclusion of a shareholder director 

nominee in the company’s proxy 

materials will not require the company 

to file preliminary proxy materials, 

provided that the company was 

otherwise qualified to file directly in 

definitive form. Because the proxy 

materials will not be filed in 

preliminary form, the Commission staff 

may not have the opportunity to review 

these proxy materials before companies 

make definitive copies available to 

shareholders. Staff review of 

preliminary materials can benefit 

shareholders by helping to assure that 

companies comply with the Federal 

proxy rules and provide appropriate 

disclosure to shareholders. We believe, 

however, that any cost related to the 

staff’s inability to review preliminary 

proxy materials is mitigated by the 

staff’s ability to review the disclosure 

contained in the Schedule 14N as well 

as in any additional soliciting materials 

filed by either the company or the 

nominating shareholder or group. 

Further, as we recently stated, the staff 

retains the right to comment on proxy 

materials filed in definitive form if the 

staff deems that to be appropriate under 

the circumstances.1017

V. Consideration of Burden on 

Competition and Promotion of 

Efficiency, Competition and Capital 

Formation 

Section 23(a)(2) of the Exchange 

Act 1018 requires us, when adopting 

rules under the Exchange Act, to 

consider the impact that any new rule 

would have on competition. In addition, 

Section 23(a)(2) prohibits us from 

adopting any rule that would impose a 

burden on competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act. Section 

3(f) of the Exchange Act 1019 and Section 

2(c) of the Investment Company Act 1020

require us, when engaging in 

rulemaking that requires us to consider 

or determine whether an action is 

necessary or appropriate in the public 

interest, to consider, in addition to the 

protection of investors, whether the 

action will promote efficiency, 

competition and capital formation. 

We are adopting new rules that will, 

under certain circumstances, require 

that company proxy materials include 

information about, and the ability to 

vote for, director nominees submitted by 

shareholders. The rules will facilitate 

the exercise of shareholders’ rights to 

nominate and elect directors and 

provide shareholders with information 

about a nominating shareholder or 

group and its nominees for director. 

Rule 14a–11 will provide for the 

inclusion of shareholder nominees for 

director in the company’s proxy 

materials under certain circumstances 

and disclosure regarding the nominating 

shareholder or group and nominees 

submitted pursuant to the rule. The 

amendment to Rule 14a–8(i)(8) will 

provide an avenue for shareholders to 

submit proposals that would seek to 

establish a procedure under a 

company’s governing documents for the 

inclusion of one or more shareholder 

director nominees in the company’s 

proxy materials. No longer permitting 

companies to exclude these types of 

proposals pursuant to Rule 14a–8(i)(8) 

should enable shareholders to better 

reflect their preferences for director 

nomination procedures that would 

further facilitate their ability to 

nominate and elect their own director 

candidates. In addition, the new rules 

require disclosure of information 

regarding nominating shareholders or 

groups and any nominees submitted 

pursuant to an applicable state or 

foreign law provision or a company’s 

governing documents, which provides 

shareholders a more informed basis for 

deciding how to vote for nominees for 

election to the board of directors. 

We requested comment on whether 

the new rules will promote efficiency, 

competition and capital formation or 

have an impact or burden on 

competition. We received a number of 

comments that addressed this section. 

The comments we received, and our 

consideration of those comments, are 

discussed below. 

The analysis below is based on our 

understanding that while no state 

currently prohibits shareholders from 

nominating candidates for the board of 

directors,1021 shareholders generally do 

not have a right under existing State law 

to require a company to include their 

director nominees in the company’s 

proxy materials.1022

We expect that the new rules will 

promote efficiency in the capital 

markets in a number of ways. First, we 

have already considered extensively the 

expected costs and benefits of the new 

rules in the Cost-Benefit Analysis and 

throughout the release. As we believe 

the benefits (including the possible 

benefit of improved board 

accountability and company 

performance) justify the costs, we 

expect the new rules to promote 

efficiency of the economy on the whole. 

We believe the new rules will 

promote efficiency by reducing several 

different types of costs that previously 

discouraged potentially beneficial 

actions. The new rules will reduce the 

cost of shareholders’ exercise of their 

rights to nominate and elect 

directors.1023 To the extent that 

facilitating shareholders’ ability to 

nominate and elect directors of their 

own choosing is expected to produce 

the economic benefits for investors 

described elsewhere in this release, the 


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1024See letter from ABA. 

1025See Bainbridge 2003 Letter. 

1026See Section IV.D.1. above. 

1027 It is assumed here that the private cost of 

making the required disclosure and the cost to the 

company for including the disclosure in the 

company’s proxy materials is lower than the total 

information cost for voting shareholders. 

1028As discussed in footnote 884 above, we do 

not believe that our recent adoption of rules 

enhancing proxy solicitation disclosure dispenses 

with the need for Rule 14a–11 and the amendment 

to Rule 14a–8(i)(8). 

1029See Section IV.D.1. above. 

1030See letters from AFSCME; Bebchuk, et al.; 

Brigham; CalPERS; CII; L. Dallas; T. DiNapoli; A. 

Dral; GovernanceMetrics; Governance for Owners; 

Hermes; M. Katz; LUCRF; J. McRitchie; R. MoultonEly; D. Nappier; P. Neuhauser; NJSIC; OPERS; Pax 

World; Pershing Square; Relational; RiskMetrics; D. 

Romine; Shareowners.org; Social Investment 

Forum; Teamsters; TIAA–CREF; Universities 

Superannuation; USPE; Walden. According to these 

commenters, the prospect of an election contest 

may create greater incentives for incumbent 

directors to communicate with shareholders, 

address their concerns, and consider shareholders’ 

preferences regarding nominations for director. 

1031We have changed certain provisions of Rule 

14a–11 from their proposed form to further 

encourage communication between boards and 

shareholders. See, e.g., Rule 14a–11(d)(5). 

1032See, e.g., letters from ABA; Atlas; AT&T; 

Book Celler; Carlson; Carolina Mills; Chamber of 

Commerce/CCMC; Chevron; Crespin; M. Eng; 

Erickson; ExxonMobil; Fenwick; GE; General Mills; 

Glass Lewis; Glaspell; Intelect; R. Clark King; 

Koppers; MCO; MeadWestvaco; MedFaxx; Medical 

Insurance; Merchants Terminal; D. Merilatt; NAM; 

NIRI; NK; O3 Strategies; Roppe; Rosen; Safeway; 

Sara Lee; Schneider; Southland; Style Crest; Tenet; 

TI; tw telecom; R. VanEngelenhoven; Wachtell; 

Wells Fargo; Weyerhaeuser; Yahoo. 

1033See Proposing Release, Section V.C.1. 

1034See, e.g., letters from 3M; ACE; AGL; Alaska 

Air; Alcoa; Allstate; American Bankers Association; 

American Business Conference; American Express; 

Ameriprise; Artistic Land Designs; Association of 

Corporate Counsel; J. Astle; Astrum; Atlantic Bingo; 

Avis Budget; J. Blanchard, Board Institute; Boeing; 

Boston Scientific; Brink’s; BRT; Burlington 

Northern; Callaway; S. Campbell; Cargill; Carpet 

and Tile (‘‘Carpet and Tile’’); Caterpillar; Chamber 

of Commerce/CCMC; Kevin F. Clune (‘‘K. Clune’’); 

P. Clapman; Chevron; J. Chico; CIGNA; CNH Global; 

Columbine; Competitive Enterprise Institute; A. 

Conte; W. Cornwell; Crown Battery; Cummins; 

Darden Restaurants; Data Forms, Inc. (‘‘Data 

Forms’’); Deere; T. Dermody; Dewey; A. Dickerson; 

W. B. Dickerson; J. Dillon; Eaton; Emerson Electric; 

A. England; Engledow; Mike Emis (‘‘M. Emis’’); 

FedEx; FMC Corp.; FPL Group; Frontier; GE; 

General Mills; Healthcare Practice; Home Depot; 

Honeywell; Horizon; Karen L. Hubbard (‘‘K. 

Hubbard’’); IBM; ICI; Instrument Piping Tech; 

Theodore S. Jablonski (‘‘T. Jablonski’’); Keating 

Muething; Koppers; C. Leadbetter; Leggett; Little; 

Louisiana Agencies; ITT; Leggett; Brittany D. 

Lunceford (‘‘B. Lunceford’’); Melvin Maltz (‘‘M. 

Maltz’’); Massey Services; J. McCoy; McDonald’s; D. 

McDonald; MCO; McTague; MeadWestvaco; 

MedFaxx; D. Merilatt; Metlife; M. Metz; J. Miller; 

E. Mitchell; Moore Brothers; Motorola; MT Glass; 

NAM; NIRI; Norfolk Southern; O’Melveny & Myers; 

Office Depot; Omaha Door; P&G; V. Pelson; 

PepsiCo; Pinch a Penny (‘‘Pinch a Penny’’); 

Protective; Realogy; J. Rosen; RTW; Ryder; S&C; 

Safeway; Sara Lee; R. Saul; Schneider; Seven Law 

Firms; Sidley Austin; Southern Company; Southern 

Services; M. Sposato; Ralph Strangis (‘‘R. Strangis’’); 

Tenet; Tesoro; E. Tremaine; tw telecom; L. Tyson; 

UnitedHealth; U.S. Bancorp; VCG; Vinson & Elkins; 

Wachtell; Wagner Industries; Wells Fargo; 

Weyerhaeuser; Xerox; Yahoo. One commenter 

added that many recent election contests were 

directed towards achieving short-term financial 

objectives, including proposals to sell the company 

or effect a buyback or special dividend. See letter 

from Simpson Thacher. 1035See Rule 14a–11, Rule 14a–18, Rule 14n–1, 

and Schedule 14N. 

1036 Veasey & DiGuglielmo, at 774 (‘‘Directors will 

generally be responsible for protecting the best 

interests of the corporation and all its stockholders, 

despite the directors’ designation by some 

particular constituency, because fiduciary duties 

new rules will bring about these benefits 

at a reduced cost and thereby promote 

efficiency. Some commenters asserted 

that although the new rules may relieve 

certain shareholders of costs that they 

are unwilling to incur to run a 

traditional short-slate election contest, 

those costs will simply be shifted onto 

the company and indirectly borne by all 

shareholders.1024 This burden may be 

justified, however, because these costs 

may not be as much as would otherwise 

result if that shareholder engaged in a 

traditional proxy contest,1025 resulting 

in a reduction in the overall cost of 

changing a limited percentage of a 

board’s membership. The burden may 

be further justified because the new 

rules may mitigate any collective action 

concerns.1026

The new rules also will promote 

efficiency by reducing the cost of 

administering informed shareholder 

voting—to the extent that a shareholder 

director nominee is submitted for 

inclusion in a company’s proxy 

materials pursuant to Rule 14a–11, a 

company’s governing documents, or a 

state or foreign law provision—by 

providing for director nominees to be 

included on one proxy card with clear 

disclosure 1027 for shareholders to 

evaluate when deciding whether and 

how to grant authority to vote their 

shares by proxy, as opposed to having 

to evaluate more than one set of proxy 

materials sent by a company and an 

insurgent shareholder.1028 Presenting 

the competing director nominees on one 

proxy card, with the related disclosure 

contained in one proxy statement, may 

simplify the shareholder’s decisionmaking process, reduce the potential for 

any confusion on the part of 

shareholders, and address any 

reluctance on the part of shareholders to 

consider an insurgent shareholder’s 

nominee solely because the nominee 

was not presented in the company’s 

proxy materials.1029

The new rules could promote 

efficiency by reducing the cost of 

effective communication between 

shareholders and directors, potentially 

resulting in enhanced board 

responsiveness and accountability as 

described elsewhere in the release.1030

Such communications may, in some 

cases, address the concerns that 

prompted the shareholders to submit 

their own director nominations and 

help avert any distracting election 

contests.1031 Enhanced communication 

with shareholders also may result in 

better decision-making by the board as 

shareholders may provide the board 

with new ideas or information that the 

board has not considered. 

We considered potential negative 

effects of the new rules on the efficiency 

of U.S. public companies, as discussed 

below. 

As discussed elsewhere in the release, 

if the number of election contests 

increases as a result of the new rules, 

boards may end up devoting less time 

to overseeing their companies’ business 

operations. Election contests have been 

described by many commenters as 

distracting, time-consuming, and 

inefficient for companies, boards, and 

management.1032 To the extent that a 

board’s attention is drawn away by the 

demands of election contests or 

shareholders, the new rules may impair 

companies’ ability to compete 

efficiently. To limit the use of Rule 14a– 

11 to only holders who demonstrate a 

significant, long-term commitment to 

the company, we adopted a uniform 3% 

ownership threshold and 3-year holding 

period. We also continue to believe that 

this concern may be mitigated to the 

extent that shareholders, while voicing 

their concerns and seeking the board’s 

attention, understand the board’s time 

may be in scarce supply and take this 

factor into consideration when deciding 

to nominate director candidates.1033

The efficiency of U.S. public 

companies could be negatively affected 

if shareholders use the new rules to 

promote their narrow interests at the 

expense of other shareholders.1034 If the 

new rules facilitate the ability of 

shareholders with narrow interests to 

place directors on the board, the new 

rules may impair efficiency by 

increasing the cost of board 

deliberations and resulting in 

companies taking actions that benefit 

only a few shareholders. This negative 

effect, however, could be limited to the 

extent that the disclosure requirements 

related to Rule 14a–11 alert 

shareholders to the narrow interests of 

the nominating shareholder or group in 

advance of the election so that they can 

cast their votes in favor of the candidate 

who will best serve the interests of all 

shareholders.1035 Directors with 

potentially narrow interests also will be 

subject to the same fiduciary duties as 

directors nominated by the 

company.1036


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generally will trump contractual expectations in the 

corporate context.’’). See also letters from ACSI; 

LUCRF (indicating that they are unaware of any 

breaches of fiduciary or statutory duties, including 

Regulation FD, by shareholder-nominated directors 

in jurisdictions that allow shareholder director 

nominations in the company’s proxy materials). 

1037See letters from 3M; ABA; American Electric 

Power; Atlantic Bingo; AT&T; Avis Budget; Biogen; 

Boeing; BRT; Burlington Northern; Callaway; 

Carlson; Chamber of Commerce/CCMC; CIGNA; 

Columbine; Cummins; CSX; J. Dillon; Emerson 

Electric; Erickson; ExxonMobil; FedEx; Headwaters; 

C. Holliday; IBM; Intelect; R. Clark King; Lange; 

Louisiana Agencies; Metlife; NIRI; O3 Strategies; V. 

Pelson; PepsiCo; Pfizer; Roppe; Rosen; Ryder; Sara 

Lee; Sidley Austin; tw telecom; Wachtell; Wells 

Fargo; Weyerhaeuser; Yahoo. 

1038See Section IV.D.3. above. 

1039For a discussion of these costs, see Section 

IV.E.3. above. 

1040See, e.g., letters from ABA; Wachtell. 

1041See letters from ABA; Alaska Air; American 

Bankers Association; Ameriprise; BorgWarner; BRT; 

Caterpillar; Cleary; DTE Energy; ExxonMobil; 

Honeywell; ICI; Protective; S. Quinlivan; Seven Law 

Firms; Sidley Austin; Society of Corporate 

Secretaries; Southern Company; UnitedHealth; 

Verizon. 

As originally proposed, under Rule 14a–11(e) and 

Note to Rule 14a–19, a company would not be 

responsible for information that is provided by the 

nominating shareholder or group under Rule 14a– 

11, an applicable State law provision, or the 

company’s governing documents and then repeated 

by the company in its proxy statement, except 

where the company ‘‘knows or has reason to know 

that the information is false or misleading.’’ 

1042For further discussion, see Section II.E. 

above. 

1043See, e.g., letters from ABA; ICI; ICI/IDC; IDC; 

MFDF; S&C; T. Rowe Price; Vanguard. 

1044See letter from ICI. 

1045See, e.g., letters from ICI; ICI/IDC; IDC; 

MFDF; Vanguard. 

1046For a specific discussion of the impact of the 

rule on small companies and the alternatives we 

considered in lieu of applying the rule to such 

entities, see Section VI. below. 1047See letter from J. Taub. 1048See letters from Altman (stating that its 

survey of 36 public companies showed that 80.85% 

of respondents believe the new rules ‘‘will deter 

some U.S. private companies from going public and 

some foreign companies from listing on U.S. 

exchanges.’’); BRT; R. Tullo. 

The increased likelihood of a 

contested election may discourage some 

qualified candidates from running for a 

board seat, making it more difficult for 

companies to recruit qualified directors 

and negatively affecting the efficiency of 

U.S. public companies.1037

Nevertheless, as discussed elsewhere in 

the release, a countervailing effect that 

the new rules may have is the impact on 

the labor market for director candidates 

and potential increase in the demand for 

individuals who can serve as 

shareholder director nominees.1038

Finally, compliance with the new 

rules may impose additional financial 

costs on companies, such as for legal 

services, printing and mailing of proxy 

materials, and additional proxy 

solicitation efforts.1039 The workability 

and implementation issues identified by 

commenters, in particular, may force 

companies to incur significant time and 

funds to resolve.1040 Increased litigation 

costs also represent a possible negative 

effect of the new rules, as companies 

and nominating shareholders or groups 

expend resources to resolve legal 

disputes in Federal and state courts. 

Incurring such costs could negatively 

affect the efficiency of the capital 

markets. As discussed throughout the 

release, we have modified several 

aspects of the rules we proposed to 

clarify any uncertainties identified by 

commenters and to address workability 

issues. We also have taken steps to 

address commenters’ concerns regarding 

a company’s liability for 

misrepresentations or omissions in the 

nominating shareholder’s or group’s 

information that is repeated in the 

company’s proxy materials.1041 As 

described above, we have made 

modifications to clarify that a company 

will not be liable for materially false or 

misleading information provided by the 

nominating shareholder or group.1042

Finally, additional guidance from the 

Commission, its staff, or courts should 

further resolve any uncertainties 

regarding the new rules’ 

implementation and may reduce the 

need for parties to resort to litigation. 

With respect to investment 

companies, a number of commenters 

expressed concern that the election of a 

shareholder director nominee may, in 

some circumstances, decrease the 

effectiveness and efficiency of a unitary 

or cluster board utilized by a fund 

complex.1043 In addition, one 

commenter noted that small investment 

companies are likely to be particularly 

affected by the Proposal and its 

attendant costs, including the loss of the 

benefits of a cluster or unitary board.1044

According to the commenter, ‘‘the 

expected smaller rate of return on 

capital may dissuade some 

entrepreneurs from entering the 

investment company industry, and force 

the exit of some fund advisers with thin 

profit margins,’’ negatively affecting 

both efficiency and competition. 

We recognize that for fund complexes 

that utilize unitary or cluster boards, the 

election of a shareholder director 

nominee may, in some circumstances, 

increase costs and potentially decrease 

the efficiency of the boards.1045 We 

note, however, that any decrease in 

efficiency and competition is associated 

with the State law right to nominate and 

elect directors, and not from including 

shareholder nominees in the company’s 

proxy materials. We also note that any 

decreased efficiency of an investment 

company’s board, or any decrease in 

competition, as a result of the fund 

complex no longer having a unitary or 

cluster board would occur, if at all, only 

in the event that investment company 

shareholders elect the shareholder 

nominee. Investment companies may 

include information in the proxy 

materials making investors aware of the 

company’s views on the perceived 

benefits of a unitary or cluster board and 

the potential for increased costs and 

decreased efficiency if the shareholder 

nominees are elected. Furthermore, we 

believe that exempting small investment 

companies from the new rules would 

not be appropriate because doing so 

would interfere with achieving the goal 

of facilitating shareholders’ ability to 

participate more meaningfully in the 

nomination and election of directors 

and to promote the exercise of 

shareholders’ traditional State law rights 

to nominate and elect directors.1046

Although commenters argued that the 

election of a shareholder-nominated 

director to a unitary or cluster board 

will necessarily result in decreased 

effectiveness of the board, we disagree. 

In this regard, one commenter argued 

that competition in the board 

nomination process may improve 

efficiency by providing additional 

leverage for boards in negotiations with 

the investment adviser.1047 In any event, 

we believe that investment company 

shareholders should have the 

opportunity to exercise their traditional 

State law rights to elect a non-unitary or 

non-cluster board if they so choose. 

We considered the possible effects 

that the new rules may have on 

competition, as discussed below. 

With the possible effect of improved 

board accountability and corporate 

governance, the new rules may 

ultimately increase shareholder value, 

generate stronger company performance, 

and increase competition. Investors also 

may be more willing to invest in 

companies in which they have the 

ability to present their own shareholder 

director nominees in the company’s 

proxy materials if they become 

displeased with the company’s 

performance. Nevertheless, it is possible 

that some companies may be more 

reluctant to conduct public offerings in 

the U.S. or may wish to avoid being a 

reporting company due to the need to 

comply with new rules, making the U.S. 

public equity markets less attractive.1048

Companies may instead attempt to raise 

capital through private placements or in 

foreign equity markets instead of 

through public offerings in the U.S. 

equity markets. We note that 

shareholders in many foreign countries 


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1049See letters from ACSI; CalPERS; ICGN; 

LUCRF; Pax World; RiskMetrics; Social Investment 

Forum; SWIB. 

1050Exchange Act Rule 3a12–3 exempts securities 

of certain foreign issuers from Section 14(a) of the 

Exchange Act. 

1051See Instruction 4 to new Schedule 14N. 1052See Section IV.D.3. above. 

1053See, e.g., letters from AFSCME and Sodali 

(noting a June 2009 survey of investors conducted 

by ShareOwners.org that indicated 57% of the 

respondents feel strong Federal action would 

‘‘restore their lost confidence in the fairness of the 

markets’’ and 81% of the respondents identified 

‘‘overpaid CEOs and/or unresponsive management 

and boards’’ as the top reason for the loss of investor 

confidence in the markets); letter from Universities 

Superannuation (noting that ‘‘Governance Metrics 

International now ranks the United States behind 

Britain, Australia, Canada, and Ireland in corporate 

governance quality’’ and that ‘‘the CFA Institute 

2009 Financial Market Integrity Index survey of 

investment professionals found a marked decline 

over the past year in global sentiment of investment 

professionals toward the United States, with only 

43 percent of non-U.S. respondents reporting they 

would recommend investing in the United States 

(based solely on ethical behavior and regulation of 

capital market systems), down from 67 percent a 

year earlier.’’). 

1054See letter from Universities Superannuation. 

1055See letters from 26 Corporate Secretaries; 3M; 

Advance Auto Parts; Allstate; Avis Budget; 

American Express; Anadarko; Association of 

Corporate Counsel; AT&T; L. Behr; Best Buy; 

Boeing; BRT; R. Burt; California Bar; S. Campbell; 

Carlson; Caterpillar; Chamber of Commerce/CCMC; 

Chevron; CIGNA; W. Cornwell; CSX; Cummins; 

Davis Polk; Dewey; DuPont; Eaton; M. Eng; FedEx; 

FMC Corp.; FPL Group; Frontier; GE; General Mills; 

C. Holliday; Honeywell; C. Horner; IBM; Jones Day; 

Keating Muething; J. Kilts; R. Clark King; N. 

Lautenbach; MeadWestvaco; Metlife; Motorola; 

O’Melveny & Myers; Office Depot; Pfizer; 

Protective; S&C; Safeway; Sara Lee; Shearman & 

Sterling; Sherwin-Williams; Sidley Austin; 

Simpson Thacher; Tesoro; Textron; TI; G. Tooker; 

UnitedHealth; Unitrin; U.S. Bancorp; Wachtell; 

Wells Fargo; West Chicago Chamber; Weyerhaeuser; 

Xerox; Yahoo. 

already have the ability to include their 

director nominees in the company’s 

proxy materials.1049 We therefore 

believe that the new rules may bring the 

U.S. capital markets closer in line with 

international practice by giving 

shareholders of U.S. companies an 

ability that may already be enjoyed by 

shareholders of many non-U.S. 

companies. Lastly, we note that the new 

rules will not apply to foreign private 

issuers because they are exempt from 

the Commission’s proxy rules.1050

Therefore, we do not believe that the 

new rules will affect the willingness of 

such issuers to raise capital in the U.S. 

capital markets. 

We also believe that directors 

nominated by shareholders pursuant to 

the new rules and elected to the board 

may be more inclined to exercise 

independent judgment in the boardroom 

due to the fact that they were nominated 

by shareholders, not the incumbent 

directors. The impact of these 

shareholder-nominated directors may 

lead to greater competition when the 

board considers strategic alternatives, 

including in the market for corporate 

control. Board members play a key role 

in evaluating corporate control 

transactions and, while the new rules 

are not intended to facilitate a change in 

control, shareholder-nominated 

directors may not share the same bias as 

incumbent directors regarding a 

transaction that may be contrary to their 

interests but beneficial for shareholders. 

The presence of these directors, 

therefore, may lead to increased 

competition in the market for corporate 

control. We recognize that since the 

number of shareholder director 

nominees that a company is required to 

include in its proxy materials pursuant 

to Rule 14a–11 is limited, the potential 

effect on competition for corporate 

control may also be limited. 

Lastly, the requirement that a 

nominating shareholder or member of 

the nominating shareholder group using 

Rule 14a–11 provide proof of ownership 

in the form of written statements with 

respect to securities held on deposit 

with a clearing agency acting as a 

securities depository may affect the 

competitive position of brokers or banks 

that are not securities depository 

participants.1051 Due to the need for a 

nominating shareholder or member of a 

nominating shareholder group to obtain 

a separate written statement from a 

broker or bank that is not a clearing 

agency participant (e.g., when a broker 

or bank of the nominating shareholder 

or member of the nominating 

shareholder group holds shares of the 

shareholder or member in an omnibus 

account at another broker or bank), it is 

possible that some shareholders may 

prefer to hold their securities directly 

through a clearing agency participant to 

avoid having to obtain more than one 

written statement to prove their 

ownership of the requisite amount of 

securities. If so, the competitive 

positions of clearing agency participants 

and clearing agencies themselves in the 

marketplace may be enhanced. Their 

competitive position also may be 

enhanced if a nominating shareholder is 

reluctant to change its broker or bank 

because it would need to obtain a 

written statement from each broker or 

bank with respect to the shares that it 

is using to meet the ownership 

threshold and specify the time period 

during which the shares were held. 

We considered the possible effects 

that the new rules may have on capital 

formation, as discussed below. 

We expect that potential investors 

may be more willing to invest in a 

company if they have greater confidence 

in the abilities of the company’s board 

members. The new rules allow for a 

more competitive election process—one 

in which shareholders will have the 

opportunity to evaluate qualified 

alternatives to the board’s own 

nominees and select the person that 

they feel is most qualified. To the extent 

that the overall quality of a company’s 

board increases as a result of a more 

competitive election, the company’s 

ability to attract the necessary capital in 

the marketplace may be enhanced as 

well. 

Further, potential investors may be 

more willing to invest in a company if 

they know that they have a meaningful 

way to nominate directors for election. 

The new rules will facilitate investors’ 

ability to nominate and elect director 

candidates, and may thereby have the 

effect of holding boards more 

accountable. Investors may also be 

attracted to the potential increase in 

shareholder value that may result from 

an increased ability to replace directors 

and enhancement of shareholders’ 

rights.1052 Lastly, potential investors 

could prefer to invest in companies with 

boards that they feel are more open and 

responsive to their views. 

By enabling greater board 

accountability to shareholders, the new 

rules also may contribute to restoring 

investor confidence in the U.S. markets 

and address any reluctance to invest in 

U.S. companies.1053 Companies 

attempting to raise capital in the U.S. 

markets may therefore encounter greater 

willingness on the part of potential 

investors to participate in their 

securities offerings.1054

As part of our rulemaking process, we 

considered possible alternatives to the 

new rules that may serve the same 

function—and to the same degree—of 

promoting efficiency, competition, and 

capital formation. In this regard, we 

received significant comment that the 

rules are unnecessary in light of recent 

corporate governance reforms that 

already increased the accountability of 

boards to shareholders.1055 While each 

of these reforms may enhance to some 

degree the boards’ accountability and 

responsiveness to shareholders or 

shareholders’ ability to effect change in 

the board’s membership, we believe 

they may not be as efficient, effective, or 

optimal as the new rules. Our 

consideration of recent corporate 

governance reforms and suggested 

alternatives are discussed throughout 

the release. 

We recognize the passage of recent 

amendments to state corporation laws to 

enable companies to provide in their 

governing documents an ability for 

shareholders to include their director 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56775 

1056For example, Delaware recently amended the 

Delaware General Corporation Law to add new 

Section 112 clarifying that the bylaws of a Delaware 

corporation may provide that, if the corporation 

solicits proxies with respect to an election of 

directors, the corporation may be required to 

include in its solicitation materials one or more 

individuals nominated by a shareholder in addition 

to the individuals nominated by the board of 

directors. The obligation of the corporation to 

include such shareholder nominees will be subject 

to the procedures and conditions set forth in the 

bylaw adopted under Section 112. In addition, the 

American Bar Association’s Committee on 

Corporate Laws has adopted similar changes to the 

Model Business Corporation Act. See American Bar 

Association, Section of Business Law, Committee 

on Corporate Laws Amendments to The Model 

Business Corporation Act Approved on Third 

Reading at the Committee’s Meeting on December 

12, 2009 (available at http://www.abanet.org/ 

media/docs/Amendments_to_MCBA_121709.pdf). 

1057See Sections II.B.2. and IV.D.2. above. 

1058See letters from CalPERS; D. Nappier; P. 

Neuhauser; Pershing Square; Schulte Roth & Zabel. 

1059See letter from TIAA–CREF. Further, based 

on its survey of its member companies, one 

commenter stated that a large majority— 

approximately two-thirds—would seek to opt out of 

Rule 14a–11, if possible. See letter from Society of 

Corporate Secretaries. 

1060See letters from CalPERS; D. Nappier; P. 

Neuhauser. 

1061See letter from CII. 

1062 Id. 

1063See letter from CII (stating that, based on a 

November 2009 white paper commissioned by the 

CII and ShareOwners.org, many companies have 

supermajority voting requirements to amend the 

bylaws, thereby ‘‘making shareholder-proposed 

bylaw amendments nearly impossible to 

implement’’). 

1064 Delaware also added new Section 113 of the 

Delaware General Corporation Law, which allows a 

Delaware corporation’s bylaws to include a 

provision that the corporation, under certain 

circumstances, will reimburse a shareholder for the 

expenses incurred in soliciting proxies in 

connection with an election of directors. 

1065See letter from Florida State Board of 

Administration. 

1066See letters from CalPERS (noting that the 

standard has ‘‘only been adopted by 294 companies 

in the S&P 500 and just 734 companies out of the 

3,369 companies according to the Corporate Library 

Board Analyst database.’’); TIAA–CREF (noting that 

‘‘[o]nly about half of S&P 500 companies and a 

small minority of Russell 3000 companies have 

adopted this reform.’’). 

1067See letters from CalPERS; RiskMetrics; TIAA– 

CREF (noting that ‘‘[t]here are currently over 40 

directors at U.S. companies who continue to serve 

without having received majority support.’’). See 

also City of Westland Police & Fire Ret. Sys. v. 

Axcelis Technologies, Inc., 2009 Del. Ch. LEXIS 173 

(September 28, 2009), aff’d, 2010 Del. LEXIS 382 

(Del., August 11, 2010) (finding ‘‘no credible basis’’ 

to infer wrongdoing by directors who refused to 

accept resignations by other directors who failed to 

achieve the majority vote required by board policy). 

1068See J.W. Verret, Pandora’s Ballot Box, Or a 

Proxy with Moxie? Majority Voting, Corporate Ballot 

Access, and the Legend of Martin Lipton ReExamined, 62 Bus. Law. 1007, 1014 (2007) 

(reporting on one replacement of a board chairman 

following a withhold campaign resulting in a 43% 

withhold vote). 

1069See letter from AFSCME. 

1070See Section IV.D.1. above. 

1071 Id. 

1072See letter from BRT (referring to the NERA 

Report). 

nominees in the company’s proxy 

materials, and that private ordering is an 

alternative to our new rules.1056

However, as discussed throughout the 

release, we have reason to believe that 

reliance on private ordering under State 

law would be insufficient to meet our 

goal of facilitating the exercise of 

shareholders’ traditional State law rights 

to nominate and elect directors.1057 For 

example, companies, particularly those 

that have performed poorly or have 

activist shareholders, may be reluctant 

to amend their governing documents to 

provide for an ability of shareholders to 

include director nominees in the 

company’s proxy materials, even if 

permitted by state corporation law.1058

In that regard, one commenter observed 

that most of the companies currently 

able to provide such an ability in their 

governing documents under State law 

have, in fact, not done so.1059 Further, 

as previously discussed, establishing 

such an ability on a company-bycompany basis may be more costly and 

inefficient than under our new rules.1060

For shareholders with a diverse 

portfolio of securities, the 

administrative burden of tracking each 

company’s requirements for including a 

director nominee in the company’s 

proxy materials may add another degree 

of inefficiency.1061 Some commenters 

also expressed concerns about the 

ability of shareholders to adopt a 

provision in a company’s governing 

documents for the inclusion of 

shareholder director nominees through 

the Rule 14a–8 process due to the rule’s 

requirements (such as the 500-word 

limit on shareholder proposals) 1062 or 

procedural requirements for 

shareholder-proposed bylaw 

amendments, such as a super-majority 

voting requirement for adoption of 

amendments.1063

We considered the recent 

amendments to state corporation laws to 

enable a company to include in its 

governing documents a provision for 

reimbursement of a shareholder’s proxy 

solicitation costs.1064 We note, however, 

that poorly performing companies may 

be reluctant to include such a provision, 

forcing shareholders to undergo the 

potentially costly and time-consuming 

process of establishing such a provision 

themselves (for example, through a Rule 

14a–8 shareholder proposal). Even if 

reimbursement arrangements were to 

exist at all public companies, we believe 

that the ability of shareholders to be 

reimbursed for their proxy solicitation 

costs may be less efficient in facilitating 

changes in the board or increasing board 

accountability or responsiveness 

because shareholders would still need 

funds to maintain an election 

contest.1065 This may create a disparity 

among shareholders as shareholders 

with greater resources are able to take 

advantage of the right and conduct a 

proxy contest (with the knowledge they 

will be reimbursed) while those who 

lack such resources are unable to do so. 

We also considered the trend towards 

adopting a majority voting standard in 

director elections, which gives 

shareholders a greater voice in director 

elections and the company’s corporate 

governance. It is important to note, 

however, that a majority voting standard 

in director elections, while increasingly 

common, is not yet used by all 

companies.1066 Further, commenters 

pointed out that even with a majority 

voting standard, some boards have 

disregarded the outcome of the elections 

by, for example, refusing to accept the 

resignations of directors who failed to 

receive a majority vote.1067 Further, 

while a majority voting standard 

facilitates shareholders’ ability to elect 

candidates put forth by a company’s 

management, it does not facilitate 

shareholders’ ability to exercise their 

right to nominate candidates for 

director. 

We considered the growing 

effectiveness of ‘‘withhold’’ or ‘‘vote no’’ 

campaigns in director elections, 

particularly at companies with a 

majority voting standard for director 

elections. ‘‘Withhold’’ or ‘‘vote no’’ 

campaigns have long been available but 

appear only occasionally to have 

resulted in a change in composition of 

the board or senior management.1068 By 

definition, however, such campaigns 

lack what Rule 14a–11 facilitates, 

namely a direct means to include 

shareholder-nominated candidates for 

election as directors, rather than merely 

express disapproval of incumbent 

directors.1069

We considered the effect of adoption 

of our notice and access model for 

electronic delivery of proxy materials, 

which reduces the printing and mailing 

costs for shareholders’ proxy 

solicitations. As discussed above, the 

notice and access model, while reducing 

the printing and mailing costs, does not 

necessarily provide the same cost 

savings as Rule 14a–11.1070 Further, a 

shareholder may find the use of the 

model to be unattractive for the reasons 

related to its strategy for the conduct of 

the election contest.1071

Lastly, one commenter pointed out 

that the market already provides 

multiple means of ‘‘management 

discipline.’’ 1072 Shareholders could 

express their displeasure with current 

management by selling their securities 


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1073ABA; Barclays; ICI; IDC; T. Rowe Price; S&C; 

Vanguard. 

1074See footnote 142 above. 

1075 5 U.S.C. 601. 

1076For purposes of this FRFA, we are required 

to consider the impact of our rules on small entities, 

including ‘‘small business.’’ See footnote 1088 and 

the related discussion. The new rules will have a 

delayed effective date for smaller reporting 

companies as defined in Exchange Act Rule 12b– 

2. Whether a company is a small business is 

determined based on a company’s assets while the 

determination of whether a company is a smaller 

reporting company is generally based on a 

company’s public float. We expect that most small 

businesses that would be subject to the new rules 

also would qualify as smaller reporting companies. 

1077As discussed in Section II.B.3. above, the 

recent Dodd-Frank Wall Street Reform and 

Consumer Protection Act provided the Commission 

with exemptive authority with respect to rules 

permitting the inclusion of shareholder director 

nominations in company proxy materials. In doing 

so, Congress noted that the Commission shall take 

into account whether any such requirement to 

permit inclusion of shareholder nominees for 

in the company, board members could 

be replaced, and managers could be 

removed for wrongdoing. In addition, 

the commenter stated that the threat of 

takeover attempts that management 

faces and higher levels of board 

independence suggest the success of 

existing means of ‘‘management 

discipline.’’ 

While we are aware of these means of 

‘‘management discipline,’’ we believe 

the relevant issue is whether investors 

will benefit from our new rules. 

Shareholders’ ability to express their 

displeasure with current management 

through the sale of securities may be 

limited if the market for the securities 

is illiquid or the shareholder is 

constrained by its policies to invest in 

all companies within a given index. 

Replacing board members or removing 

managers under the current regulatory 

scheme is expensive and often requires 

considerable time during which 

significant shareholder value may be 

lost. By providing a more efficient 

means for shareholders with a 

significant, long-term stake to nominate 

directors, the new rules will promote 

competition and enable shareholders to 

nominate and elect directors. 

Commenters also argued that it was 

not necessary to make investment 

companies subject to the new rules 

because they are subject to a unique 

regulatory regime under the Investment 

Company Act that provides additional 

protection to investors, such as the 

requirement to obtain shareholder 

approval to engage in certain 

transactions or activities.1073 However, 

we do not believe that the regulatory 

protections offered by the Investment 

Company Act (including requirements 

to obtain shareholder approval to engage 

in certain transactions and activities) 

serve to decrease the importance of the 

rights that are granted to shareholders 

under State law. In fact, the separate 

regulatory regime to which investment 

companies are subject emphasizes the 

importance of investment company 

directors in dealing with the conflicts of 

interest created by the external 

management structure of most 

investment companies.1074

VI. Final Regulatory Flexibility 

Analysis 

This Final Regulatory Flexibility 

Analysis (‘‘FRFA’’) has been prepared in 

accordance with the Regulatory 

Flexibility Act.1075 It relates to 

amendments to the rules and forms 

under the Exchange Act and the 

Investment Company Act that would, 

under certain limited circumstances, 

require companies to include in their 

proxy materials shareholder nominees 

for election as director. It also relates to 

the amendments to the rules that will 

prohibit companies from excluding 

shareholder proposals pursuant to Rule 

14a–8(i)(8) that seek to establish a 

procedure under a company’s governing 

documents for the inclusion of one or 

more shareholder director nominees in 

the company’s proxy materials. The 

amendments will require, under certain 

circumstances, a company’s proxy 

materials to provide shareholders with 

information about, and the ability to 

vote for, a shareholder’s, or group of 

shareholders’, nominees for director. 

The amendments will facilitate the 

exercise of shareholders’ traditional 

State law rights to nominate and elect 

directors to boards of directors and 

thereby enable shareholders to 

participate more meaningfully in the 

nomination and election of directors at 

the companies in which they invest. 

A. Need for the Amendments 

As described in this release and the 

Proposing Release, the final rules 

include features from the proposals on 

this topic in 2003 and 2007, and reflect 

much of what we learned through the 

public comment that the Commission 

has received concerning this topic over 

the past seven years. The final rules are 

intended to facilitate shareholders’ 

ability to participate more meaningfully 

in the nomination and election of 

directors, to promote the exercise of 

shareholders’ traditional State law rights 

to nominate and elect directors, to open 

up communication between a company 

and its shareholders, and to provide 

shareholders with more information to 

make an informed voting decision by 

requiring disclosure about a nominating 

shareholder or group and its nominee or 

nominees. In particular, the final rules 

will enable long-term shareholders, or 

groups of long-term shareholders, with 

significant holdings to have their 

nominees for director included in 

company proxy materials. In addition, 

the amendment to Rule 14a–8(i)(8) will 

narrow the exclusion and will not 

permit companies to exclude, under 

Rule 14a–8(i)(8), shareholder proposals 

that seek to establish a procedure under 

a company’s governing documents for 

the inclusion of one or more 

shareholder director nominees in the 

company’s proxy materials. 

The final rules are intended to 

achieve the stated objectives without 

unduly burdening companies. We 

sought to limit the cost and burden on 

companies by limiting Rule 14a–11 to 

nominations by shareholders who have 

maintained a significant continuous 

ownership interest in the company for 

at least three years at the time the notice 

of nomination is submitted, and by 

limiting the number of nominees a 

company is required to include in its 

proxy materials under Rule 14a–11. 

These aspects of the final rules will 

limit the number of nominees a 

company will be required to consider 

for inclusion in its proxy materials and 

thus will lower the cost to companies 

while facilitating the exercise of 

shareholders’ traditional State law rights 

to nominate and elect directors to 

boards of directors, thereby enabling 

shareholders to participate more 

meaningfully in the nomination and 

election of directors at the companies in 

which they invest. We believe the new 

rules will benefit shareholders by 

improving corporate suffrage, the 

disclosure provided in connection with 

proxy solicitations, and communication 

between shareholders through the proxy 

process. 

The final rules include a phase-in 

period that delays the compliance date 

for Rule 14a–11 for smaller reporting 

companies, which include most small 

entities, for three years from the 

effective date of the rule for other 

companies.1076 We believe the delayed 

compliance date will allow those 

companies to observe how the rule 

operates for other companies and may 

allow them to better prepare for the 

implementation of the rules. We also 

believe that delayed implementation for 

these companies will provide us with 

the opportunity to evaluate the 

implementation of Rule 14a–11 by 

larger companies and to consider 

whether adjustments to the rule would 

be appropriate for smaller reporting 

companies before the rule becomes 

applicable to them.1077 In addition, in 


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director in company proxy materials would 

disproportionately burden small issuers. 

1078See letters from ABA; American Mailing; All 

Cast; Always N Bloom; American Carpets; J. 

Arquilla; B. Armburst; Artistic Land Designs; C. 

Atkins; Book Celler; K. Bostwick; Brighter Day 

Painting; Colletti; Commercial Concepts; Complete 

Home Inspection; D. Courtney; S. Crawford; 

Crespin; Don’s; T. Ebreo; M. Eng; eWareness; Evans; 

Fluharty; Flutterby; Fortuna Italian Restaurant; 

Future Form; Glaspell; C. Gregory; Healthcare 

Practice; B. Henderson; S. Henning; J. Herren; A. 

Iriarte; J. Jones; Juz Kidz; Kernan; LMS Wine; T. 

Luna; Mansfield Children’s Center; D. McDonald; 

Meister; Merchants Terminal; Middendorf; Mingo; 

Moore Brothers; Mouton; D. Mozack; Ms. Dee; G. 

Napolitano; NK; H. Olson; PESC; Pioneer Heating 

& Air Conditioning; RC; RTW; D. Sapp; SBB; SGIA; 

P. Sicilia; Slycers Sandwich Shop; Southern 

Services; Steele Group; Sylvron; Theragenics; E. 

Tremaine; Wagner; Wagner Industries; Wellness; 

West End; Y.M.; J. Young. 

1079See letters from Always N Bloom; Brighter 

Day Painting; Caswells; Complete Home Inspection; 

Darrell’s Automotive; Data Forms; Fluharty; E. 

Garcia; S. Henning; T. Luna; Magnolia; American 

Mailing; H. Olson; T. Roper; Solar Systems; E. 

Sprenkle; Steele Group; R. Trummel; T. Trummel; 

V. Trummel; Wagner; T. White. 

1080See letters from ABA; Theragenics. 

1081 In this regard, one commenter suggested that 

our estimate of the burden to companies of 

evaluating a shareholder nominee’s background to 

determine eligibility, investigation and verification 

of information provided by the nominee, research 

into the nominee’s background, analysis of the 

relative merits of the shareholder nominee as 

compared to management’s own nominee, meetings 

of the relevant board committees, and analysis of 

whether a nomination would conflict with any 

Federal or State law, or director qualification 

standards was too low. This commenter estimated 

that the burden hours associated with the above 

actions would be 99 hours of company personnel 

time. See letter from S&C (citing results of a survey 

conducted by BRT). For a discussion of burden 

estimates, see Section III. above. 

1082See letter from ICI. 

1083See letters from AFSCME; CII; D. Nappier. 

1084See letter from USPE. 

1085See letter from CII. 

1086See letters from AFSCME; D. Nappier. 

1087See letter from CII. 

1088 5 U.S.C. 601(6). 

an effort to limit the cost and burden on 

all companies subject to the rule, 

including smaller reporting companies, 

we have limited use of Rule 14a–11 to 

nominations by shareholders who have 

maintained significant continuous 

holdings in the company, and we have 

extended the required holding period to 

at least three years at the time the notice 

of nomination is filed with the 

Commission and transmitted to the 

company. We expect that these 

eligibility requirements will help 

achieve the stated objective without 

unduly burdening any particular group 

of companies. 

B. Significant Issues Raised by Public 

Comments 

In the Proposing Release, we 

requested comment on any aspect of the 

Initial Regulatory Flexibility Act 

Analysis (‘‘IRFA’’), including the 

number of small entities that would be 

affected by the proposed rules, the 

nature of the impact, how to quantify 

the number of small entities that would 

be affected, and how to quantify the 

impact of the proposed rules. We also 

considered, and sought comment on, 

excluding from operation of the rule 

smaller reporting companies either 

permanently or on a temporary basis 

through staggered compliance dates 

based on company size. We did not 

receive comments specifically 

addressing the IRFA. Several 

commenters, however, addressed 

aspects of the proposed rules that could 

potentially affect small entities. 

In particular, many commenters 

stated generally that Rule 14a–11 should 

not apply to small businesses.1078 Some 

commenters argued that the Proposal, if 

adopted, would hurt their larger 

corporate suppliers which would, in 

turn, increase their own costs of doing 

business.1079 Two commenters 

recommended that Rule 14a–11 exclude 

companies that are not at least 

accelerated filers and be limited, at least 

initially, to large accelerated filers.1080

These commenters expressed concern 

about the burden Rule 14a–11 would 

place on smaller companies, including 

difficulty in recruiting qualified 

directors and costs of conducting due 

diligence on shareholder nominees.1081

One commenter noted that small 

investment companies, which may 

operate with thin profit margins, would 

be particularly affected by the Proposal 

and its attendant costs, including the 

loss of the benefits of a cluster or 

unitary board.1082 By contrast, some 

commenters stated that Rule 14a–11 

should apply to small businesses.1083 At 

least one commenter argued that Rule 

14a–11 would not impose a material 

burden on any company subject to the 

proxy rules because companies already 

have to distribute proxy cards and it 

would not be an imposition if they were 

required to add additional nominees to 

those cards.1084 Another commenter 

argued that exempting small entities 

would be inconsistent with the stated 

goals of the Proposal and the costs and 

burden to such entities would be 

minimal.1085

We believe that exempting small 

companies, including small investment 

companies, from the new rules would 

not be appropriate because doing so 

would interfere with achieving the goal 

of facilitating shareholders’ ability to 

participate more meaningfully in the 

nomination and election of directors, to 

promote the exercise of shareholders’ 

rights to nominate and elect directors, to 

open up communication between a 

company and its shareholders and to 

provide shareholders with better 

information from which to make an 

informed voting decision. Some 

commenters noted that small companies 

are ‘‘just as likely’’ to have dysfunctional 

boards as their larger counterparts.1086

Also, one commenter agreed that 

exempting small entities would be 

inconsistent with the stated goals of the 

Proposal and the costs and burdens to 

these entities would be minimal.1087

However, we are cognizant of the fact 

that the new rules will increase the 

burden on all companies and therefore 

the potential burden on smaller 

reporting companies as defined in Rule 

12b–2 under the Exchange Act. To 

address concerns about the potential 

impact on smaller reporting companies, 

the final rule delays the compliance 

date for Rule 14a–11 for smaller 

reporting companies for a period of 

three years from the effective date of the 

rule for other companies so that smaller 

reporting companies can observe how 

the rule operates and allow them to 

better prepare for the implementation of 

the rules. We also believe that delayed 

implementation for these companies 

will allow us to evaluate the 

implementation of Rule 14a–11 by 

larger companies and provide us with 

the additional opportunity to consider 

whether adjustments to the rule would 

be appropriate for smaller reporting 

companies before the rule becomes 

applicable to them. In addition, in an 

effort to limit the cost and burden on all 

companies subject to the rule, including 

smaller reporting companies, we have 

limited use of Rule 14a–11 to 

nominations by shareholders who have 

maintained significant continuous 

holdings in the company, and we have 

extended the required holding period to 

at least three years at the time the notice 

of nomination is filed with the 

Commission and transmitted to the 

company. We expect that these 

eligibility requirements will help 

achieve the stated objective without 

unduly burdening any particular group 

of companies. 

C. Small Entities Subject to the Rules 

The final rules will affect some 

companies that are small entities. The 

Regulatory Flexibility Act defines ‘‘small 

entity’’ to mean ‘‘small business,’’ ‘‘small 

organization,’’ or ‘‘small governmental 

jurisdiction.’’ 1088 The Commission’s 

rules define ‘‘small business’’ and ‘‘small 

organization’’ for purposes of the 

Regulatory Flexibility Act for each of 

the types of entities regulated by the 

Commission. Securities Act Rule 


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56778 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

1089 17 CFR 230.157. 

1090 17 CFR 240.0–10(a). 

1091The estimated number of reporting small 

entities is based on 2009 data, including the 

Commission’s EDGAR database and Standard & 

Poor’s. 

1092 17 CFR 270.0–10(a). 

1093See, e.g., Bebchuk (2007). 

1094See letter from ICI. 

1095See letters from ADP; Alaska Air; Allstate; 

American Electric Power; Anadarko; AT&T; Avis 

Budget; Barclays; Biogen; Boeing; BRT; Burlington 

Northern; R. Burt; Callaway; Chevron; CIGNA; CNH 

Global; Comcast; Cummins; Deere; Eaton; 

ExxonMobil; FedEx; FMC Corp.; FPL Group; 

Frontier; General Mills; C. Holliday; IBM; ITT; J. 

Kilts; E.J. Kullman; N. Lautenbach; McDonald’s; J. 

Miller; Motorola; Office Depot; O’Melveny & Myers; 

P&G; PepsiCo; Pfizer; Protective; Ryder; Sara Lee; 

Sherwin Williams; Theragenics; TI; TW Telecom; G. 

Tooker; UnitedHealth; Xerox. 

1096See letters from ABA; AFSCME; CalSTRS; 

CFA Institute; CII; COPERA; T. DiNapoli; Florida 

State Board of Administration; ICGN; N. 

Lautenbach; LIUNA; D. Nappier; Nathan Cummings 

Foundation; OPERS; Pax World; Relational; Sodali; 

SWIB; TIAA–CREF; G. Tooker; USPE; ValueAct 

Capital. 

157 1089 and Exchange Act Rule 0– 

10(a) 1090 define a company, other than 

an investment company, to be a ‘‘small 

business’’ or ‘‘small organization’’ if it 

had total assets of $5 million or less on 

the last day of its most recent fiscal year. 

We estimate that there are 

approximately 1,209 issuers that may be 

considered small entities.1091

For purposes of the Regulatory 

Flexibility Act, an investment company 

is a small entity if it, together with other 

investment companies in the same 

group of related investment companies, 

has net assets of $50 million or less as 

of the end of its most recent fiscal 

year.1092 We estimate that 

approximately 168 registered 

investment companies and 33 business 

development companies meet this 

definition. The new rules may affect 

each of the approximately 201 issuers 

that may be considered small entities, to 

the extent companies and shareholders 

take advantage of the rules. 

D. Reporting, Recordkeeping and Other 

Compliance Requirements 

The final rules are designed to 

require, under certain circumstances, 

Exchange Act reporting companies 

(other than debt-only companies and 

companies whose applicable state or 

foreign law provisions or governing 

documents prohibit shareholder 

nominations) subject to the Federal 

proxy rules, including small entities, to 

include shareholder nominees for 

director in the company’s proxy 

materials. Nominating shareholders or 

groups, including nominating 

shareholders that are small entities, will 

be required to meet certain eligibility 

requirements and to provide disclosure 

in Schedule 14N about the nominating 

shareholders and the nominee, and 

companies will be required to include 

the disclosure provided by the 

nominating shareholder or group in the 

company’s proxy materials. 

The final rules also will enable 

shareholders to include proposals in the 

company’s proxy materials that seek to 

establish a procedure under a 

company’s governing documents for the 

inclusion of one or more shareholder 

director nominees in the company’s 

proxy materials. A nominating 

shareholder or group, including a 

nominating shareholder or group that is 

a small entity, using an applicable state 

or foreign law provision or a provision 

in the company’s governing documents 

to submit a nomination for director to be 

included in a company’s proxy 

materials will be required to provide 

disclosure in new Schedule 14N about 

the nominating shareholder or group 

and the nominee. Companies also will 

be required to include disclosure about 

the nominating shareholder or group 

and the nominee in the company’s 

proxy materials when a shareholder 

submits a nomination for director for 

inclusion in the company’s proxy 

materials pursuant to an applicable state 

or foreign law provision or a company’s 

governing documents. 

We have no reason to expect that the 

amendment to Rule 14a–8(i)(8) will 

substantially increase the number of 

shareholder proposals to smaller 

companies and likely will have little 

impact on small entities. With respect to 

Rule 14a–11, there is some data 

indicating that smaller companies are 

subject to more proxy contests as a 

group than larger companies,1093 but the 

data do not demonstrate that the 

frequency is disproportionately larger at 

smaller companies relative to other 

companies. In addition, we did not 

receive data substantiating a 

disproportionate impact on smaller 

companies. 

With respect to investment 

companies, we assume that small 

investment companies, which may 

operate with thin profit margins, would 

be particularly affected by the rules and 

the attendant costs, including the loss of 

the benefits of a cluster or unitary 

board.1094 However, the costs resulting 

from the loss of the benefits of a cluster 

or unitary board are costs associated 

with the traditional State law rights to 

nominate and elect directors, and are 

not costs incurred for including 

shareholder nominees in the company’s 

proxy materials. We also note that any 

increased costs and decreased efficiency 

of an investment company’s board as a 

result of the fund complex no longer 

having a unitary or cluster board would 

occur, if at all, only in the event that 

investment company shareholders elect 

the shareholder nominee. Investment 

companies may include information in 

the proxy materials making investors 

aware of the company’s views on the 

perceived benefits of a unitary or cluster 

board and the potential for increased 

costs and decreased efficiency if the 

shareholder nominees are elected. 

E. Agency Action To Minimize Effect on 

Small Entities 

The Regulatory Flexibility Act directs 

us to consider significant alternatives 

that would accomplish the stated 

objective, while minimizing any 

significant adverse impact on small 

entities. In connection with the new 

rules, we considered the following 

alternatives: 

• The establishment of differing 

compliance or reporting requirements or 

timetables that take into account the 

resources available to small entities; 

• The clarification, consolidation or 

simplification of the rule’s compliance 

and reporting requirements for small 

entities; 

• The use of performance rather than 

design standards; and 

• An exemption for small entities 

from coverage under the proposals. 

As noted in the Proposing Release, the 

Commission has considered a variety of 

reforms to achieve its regulatory 

objectives while minimizing the impact 

on small entities. As one possible 

approach, we considered in 2003 

requiring companies to include 

shareholder nominees for director in a 

company’s proxy materials only upon 

the occurrence of certain events so that 

the rule would apply only in situations 

where there was a demonstrated failure 

in the proxy process related to director 

nominations and elections. We sought 

comment in the Proposing Release on 

this approach, with commenters arguing 

both for 1095 and against 1096 the 

approach. We have not taken this 

approach in the final rules because we 

do not believe it is appropriate to limit 

the rule to companies where specified 

events have occurred. Moreover, we are 

not aware of data suggesting that such 

specified events are less likely to occur 

at smaller companies than at larger 

companies. 

We considered changes to Rule 14a– 

8(i)(8) in 2007 that would enable 

shareholders to have their proposals for 

bylaw amendments regarding the 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56779 

1097For further discussion, see Section II.B.4. 

above. 1098See Section II.B.3.f. above. 

procedures for nominating directors 

included in the company’s proxy 

materials provided the shareholder 

submitting the proposal made certain 

disclosures and beneficially owned 

more than 5% of the company’s shares. 

Although this approach could 

potentially reduce the number of 

shareholder proposals submitted to 

smaller entities by establishing a 

minimum threshold for having such 

proposals included in the company’s 

proxy statement, we have not taken this 

approach because, as noted above, we 

do not expect the final rule to 

substantially increase the number of 

shareholder proposals to smaller 

companies. In addition, we have not 

relied exclusively on an amendment to 

Rule 14a–8(i)(8) to achieve our 

regulatory goals because we seek to 

provide shareholders with a more 

immediate and direct means of effecting 

change in the boards of directors of the 

companies in which they invest. For 

these reasons, as well as the reasons 

discussed throughout the release, we 

believe that these final rules may better 

achieve the Commission’s objectives. 

We also sought comment on whether 

the proposed tiered approach—under 

which shareholders or shareholder 

groups at larger companies would have 

to satisfy a lower ownership threshold 

than shareholders or shareholder groups 

at smaller companies in order to rely on 

Rule 14a–11—is appropriate and 

workable. We considered whether the 

effect of the tiered approach may make 

it less likely that shareholders at smaller 

companies will nominate directors 

under Rule 14a–11, but determined not 

to adopt this approach because the data 

available to us did not indicate a 

meaningful difference between small 

entities and entities generally in regard 

to concentration of long-term share 

ownership.1097

We considered whether a delayed 

compliance date for Rule 14a–11 for 

smaller reporting companies, which 

would include most small entities, 

would reduce the burden on these 

entities. After considering the comments 

discussed above, we have determined to 

delay the compliance date of Rule 14a– 

11 for smaller reporting companies for 

a period of three years from the effective 

date for other companies. We believe 

that a delayed compliance date for 

smaller reporting companies will allow 

those companies to observe how Rule 

14a–11 operates for other companies 

and may allow them to better prepare 

for the implementation of the rules and, 

as noted, will give us a further 

opportunity to consider adjustments for 

smaller reporting companies. In 

addition, in an effort to limit the cost 

and burden on all companies subject to 

the rule, including smaller reporting 

companies, we have limited use of Rule 

14a–11 to nominations by shareholders 

who have maintained significant 

continuous holdings in the company, 

and we have extended the required 

holding period to at least three years at 

the time the notice of nomination is 

filed with the Commission and 

transmitted to the company. We expect 

that these eligibility requirements will 

help achieve the stated objective 

without unduly burdening any 

particular group of companies. 

We are not adopting different 

disclosure standards based on the size 

of the issuer. We believe uniform 

disclosure will be helpful to voting 

decisions on shareholder-nominated 

directors at companies of all sizes. 

Because we are delaying the compliance 

date of Rule 14a–11 for smaller 

reporting companies, we believe this 

will allow them additional time to 

prepare to comply with the new rule 

and observe the rule’s impact on larger 

companies, which should allow smaller 

reporting companies to be able to 

comply with the same disclosure 

standards when the rule becomes 

applicable to them. 

We considered the use of performance 

standards rather than design standards 

in the final rules. The final rule contains 

both performance standards and design 

standards. We proposed design 

standards to the extent that we believe 

compliance with particular 

requirements are necessary. However, to 

the extent possible, our rules impose 

performance standards. For example, 

under Rule 14a–11, a nominating 

shareholder or group can provide a 500- 

word statement of support concerning 

each of its nominee or nominees for 

director, but we do not specify the 

content. Similarly, shareholders can 

submit a proposal that seeks to establish 

a procedure under a company’s 

governing documents for the inclusion 

of one or more shareholder director 

nominees in the company’s proxy 

materials. By allowing shareholders to 

submit such proposals, we seek to 

provide shareholders and companies 

with a measure of flexibility to tailor the 

means through which they can comply 

with the standards. Even though Rule 

14a–11 provides a procedure from 

which companies may not opt out, 

companies and shareholders are not 

prohibited from adopting nominating 

procedures that could further facilitate 

shareholders’ ability to include their 

own director nominees in company 

proxy materials. Amended Rule 14a– 

8(i)(8) facilitates this process. In that 

respect, the rules provide both design 

and performance standards, as 

appropriate. 

Lastly, as discussed above, we believe 

that the final rules should apply 

regardless of company size, as was 

proposed.1098 The purpose of the rules 

is to facilitate the exercise of 

shareholders’ traditional State law rights 

to nominate and elect directors to 

company boards of directors and 

thereby enable shareholders to 

participate more meaningfully in the 

nomination and election of directors at 

the companies in which they invest. We 

believe that shareholders of smaller 

reporting companies should be able to 

exercise these rights to the same extent 

as shareholders of larger reporting 

companies. Therefore, we are not 

persuaded that exempting smaller 

reporting companies from the final rules 

would be consistent with this goal. 

Nonetheless, as discussed above, we 

recognize that smaller reporting 

companies may have had less 

experience with existing forms of 

shareholder involvement in the proxy 

process and may have less-developed 

infrastructures for managing these 

matters. The final rules therefore 

include a phase-in period that delays 

the compliance date of Rule 14a–11 for 

smaller reporting companies for three 

years from the effective date of the rule. 

VII. Statutory Authority and Text of the 

Amendments 

The amendments are made pursuant 

to Sections 3(b), 13, 14, 15, 23(a) and 36 

of the Securities Exchange Act of 1934, 

as amended, Sections 10, 20(a) and 38 

of the Investment Company Act of 1940, 

as amended, and Sections 971(a) and (b) 

of the Dodd-Frank Act. 

List of Subjects 

17 CFR Parts 200 

Freedom of information, Reporting 

and recordkeeping requirements, 

Securities. 

17 CFR Parts 232, 240, and 249 

Reporting and recordkeeping 

requirements, Securities. 

■ In accordance with the foregoing, the 

Securities and Exchange Commission is 

amending Title 17, chapter II of the 

Code of Federal Regulations as follows: 


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56780 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

PART 200—ORGANIZATION; 

CONDUCT AND ETHICS; AND 

INFORMATION AND REQUESTS 

Subpart D—Information and Requests 

■ 1. The authority citation for Part 200, 

Subpart D, continues to read, in part, as 

follows: 

Authority: 5 U.S.C. 552, as amended, 15 

U.S.C. 77f(d), 77s, 77ggg(a), 77sss, 78m(F)(3), 

78w, 80a–37, 80a–44(a), 80a–44(b), 80b– 

10(a), and 80b–11. 

* * * * * 

■ 2. Add § 200.82a to read as follows: 

§ 200.82a Public availability of materials 

filed pursuant to § 240.14a–11(g) and related 

materials. 

Materials filed with the Commission 

pursuant to Rule 14a–11(g) under the 

Securities Exchange Act of 1934 (17 

CFR 240.14a–11(g)), written 

communications related thereto 

received from interested persons, and 

each related no-action letter or other 

written communication issued by the 

staff of the Commission, shall be made 

available to any person upon request for 

inspection or copying. 

PART 232—REGULATION S–T— 

GENERAL RULES AND REGULATIONS 

FOR ELECTRONIC FILINGS 

■ 3. The authority citation for Part 232 

continues to read, in part, as follows: 

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 

77s(a), 77z–3, 77sss(a), 78c(b), 78l, 78m, 78n, 

78o(d), 78w(a), 78ll, 80a–6(c), 80a–8, 80a–29, 

80a–30, 80a–37, and 7201 et seq.; and 18 

U.S.C. 1350. 

* * * * * 

■ 4. Amend § 232.13 by revising 

paragraph (a)(4) (the note remains 

unchanged) to read as follows: 

§ 232.13 Date of filing; adjustment of filing 

date. 

(a) * * * 

(4) Notwithstanding paragraph (a)(2) 

of this section, a Form 3, 4 or 5 

(§§ 249.103, 249.104, and 249.105 of 

this chapter) or a Schedule 14N 

(§ 240.14n–101 of this chapter) 

submitted by direct transmission on or 

before 10 p.m. Eastern Standard Time or 

Eastern Daylight Saving Time, 

whichever is currently in effect, shall be 

deemed filed on the same business day. 

* * * * * 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 5. The authority citation for Part 240 

continues to read, in part, as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 

78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 

78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a– 

20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4, 

80b–11, and 7201, et seq.; and 18 U.S.C. 1350 

and 12 U.S.C. 5221(e)(3), unless otherwise 

noted. 

* * * * * 

■ 6. Amend § 240.13a–11 by revising 

paragraph (b) to read as follows: 

§ 240.13a–11 Current reports on Form 8–K 

(§ 249.308 of this chapter). 

* * * * * 

(b) This section shall not apply to 

foreign governments, foreign private 

issuers required to make reports on 

Form 6–K (17 CFR 249.306) pursuant to 

§ 240.13a–16, issuers of American 

Depositary Receipts for securities of any 

foreign issuer, or investment companies 

required to file reports pursuant to 

§ 270.30b1–1 of this chapter under the 

Investment Company Act of 1940, 

except where such an investment 

company is required to file: 

(1) Notice of a blackout period 

pursuant to § 245.104 of this chapter; 

(2) Disclosure pursuant to Instruction 

2 to § 240.14a–11(b)(1) of information 

concerning outstanding shares and 

voting; or 

(3) Disclosure pursuant to Instruction 

2 to § 240.14a–11(b)(10) of the date by 

which a nominating shareholder or 

nominating shareholder group must 

submit the notice required pursuant to 

§ 240.14a–11(b)(10). 

* * * * * 

■ 7. Amend § 240.13d–1 by revising 

paragraphs (b)(1)(i) and (c)(1) and 

adding Instruction 1 to paragraph (b)(1) 

to read as follows: 

§ 240.13d–1 Filing of Schedules 13D and 

13G. 

* * * * * 

(b)(1) * * * 

(i) Such person has acquired such 

securities in the ordinary course of his 

business and not with the purpose nor 

with the effect of changing or 

influencing the control of the issuer, nor 

in connection with or as a participant in 

any transaction having such purpose or 

effect, including any transaction subject 

to § 240.13d–3(b), other than activities 

solely in connection with a nomination 

under § 240.14a–11; and 

* * * * * 

Instruction 1 to paragraph (b)(1). For 

purposes of paragraph (b)(1)(i) of this 

section, the exception for activities 

solely in connection with a nomination 

under § 240.14a–11 will not be available 

after the election of directors. 

* * * * * 

(c) * * * 

(1) Has not acquired the securities 

with any purpose, or with the effect, of 

changing or influencing the control of 

the issuer, or in connection with or as 

a participant in any transaction having 

that purpose or effect, including any 

transaction subject to § 240.13d–3(b), 

other than activities solely in 

connection with a nomination under 

§ 240.14a–11; 

* * * * * 

Instruction 1 to paragraph (c)(1). For 

purposes of paragraph (c)(1) of this 

section, the exception for activities 

solely in connection with a nomination 

under § 240.14a–11 will not be available 

after the election of directors. 

* * * * * 

■ 8. Amend § 240.13d–102 by revising 

the sentences following the introductory 

text in Items 10(a) and (c) as follows: 

§ 240.13d–102 Schedule 13G—Information 

to be included in statements filed pursuant 

to § 240.13d–1(b), (c), and (d) and 

amendments thereto filed pursuant to 

§ 240.13d–2. 

* * * * * 

Item 10. Certifications 

(a) * * * 

By signing below I certify that, to the best 

of my knowledge and belief, the securities 

referred to above were acquired and are held 

in the ordinary course of business and were 

not acquired and are not held for the purpose 

of or with the effect of changing or 

influencing the control of the issuer of the 

securities and were not acquired and are not 

held in connection with or as a participant 

in any transaction having that purpose or 

effect, other than activities solely in 

connection with a nomination under 

§ 240.14a–11. 

* * * * * 

(c) * * * 

By signing below I certify that, to the 

best of my knowledge and belief, the 

securities referred to above were not 

acquired and are not held for the 

purpose of or with the effect of changing 

or influencing the control of the issuer 

of the securities and were not acquired 

and are not held in connection with or 

as a participant in any transaction 

having that purpose or effect, other than 

activities solely in connection with a 

nomination under § 240.14a–11. 

* * * * * 

■ 9. Amend § 240.14a–2 by: 

■ a. Revising paragraph (b) introductory 

text; and 

■ b. Adding paragraphs (b)(7) and (b)(8). 

The revision and additions read as 

follows: 

§ 240.14a–2 Solicitations to which 

§ 240.14a–3 to § 240.14a–15 apply. 

* * * * * 

(b) Sections 240.14a–3 to 240.14a–6 

(other than paragraphs 14a–6(g) and 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56781 

14a–6(p)), § 240.14a–8, § 240.14a–10, 

and §§ 240.14a–12 to 240.14a–15 do not 

apply to the following: 

* * * * * 

(7) Any solicitation by or on behalf of 

any shareholder in connection with the 

formation of a nominating shareholder 

group pursuant to § 240.14a–11, 

provided that: 

(i) The soliciting shareholder is not 

holding the registrant’s securities with 

the purpose, or with the effect, of 

changing control of the registrant or to 

gain a number of seats on the board of 

directors that exceeds the maximum 

number of nominees that the registrant 

could be required to include under 

§ 240.14a–11(d); 

(ii) Each written communication 

includes no more than: 

(A) A statement of each soliciting 

shareholder’s intent to form a 

nominating shareholder group in order 

to nominate one or more directors under 

§ 240.14a–11; 

(B) Identification of, and a brief 

statement regarding, the potential 

nominee or nominees or, where no 

nominee or nominees have been 

identified, the characteristics of the 

nominee or nominees that the 

shareholder intends to nominate, if any; 

(C) The percentage of voting power of 

the registrant’s securities that are 

entitled to be voted on the election of 

directors that each soliciting 

shareholder holds or the aggregate 

percentage held by any group to which 

the shareholder belongs; and 

(D) The means by which shareholders 

may contact the soliciting party. 

(iii) Any written soliciting material 

published, sent or given to shareholders 

in accordance with this paragraph must 

be filed by the shareholder with the 

Commission, under the registrant’s 

Exchange Act file number, or, in the 

case of a registrant that is an investment 

company registered under the 

Investment Company Act of 1940 (15 

U.S.C. 80a–1 et seq.), under the 

registrant’s Investment Company Act 

file number, no later than the date the 

material is first published, sent or given 

to shareholders. Three copies of the 

material must at the same time be filed 

with, or mailed for filing to, each 

national securities exchange upon 

which any class of securities of the 

registrant is listed and registered. The 

soliciting material must include a cover 

page in the form set forth in Schedule 

14N (§ 240.14n–101) and the 

appropriate box on the cover page must 

be marked. 

(iv) In the case of an oral solicitation 

made in accordance with the terms of 

this section, the nominating shareholder 

must file a cover page in the form set 

forth in Schedule 14N (§ 240.14n–101), 

with the appropriate box on the cover 

page marked, under the registrant’s 

Exchange Act file number (or in the case 

of an investment company registered 

under the Investment Company Act of 

1940 (15 U.S.C. 80a–1 et seq.), under the 

registrant’s Investment Company Act 

file number), no later than the date of 

the first such communication. 

Instruction to paragraph (b)(7). The 

exemption provided in paragraph (b)(7) 

of this section shall not apply to a 

shareholder that subsequently engages 

in soliciting or other nominating 

activities outside the scope of 

§ 240.14a–2(b)(8) and § 240.14a–11 in 

connection with the subject election of 

directors or is or becomes a member of 

any other group, as determined under 

section 13(d)(3) of the Act (15 U.S.C. 

78m(d)(3) and § 240.13d–5(b)), or 

otherwise, with persons engaged in 

soliciting or other nominating activities 

in connection with the subject election 

of directors. 

(8) Any solicitation by or on behalf of 

a nominating shareholder or nominating 

shareholder group in support of its 

nominee that is included or that will be 

included on the registrant’s form of 

proxy in accordance with § 240.14a–11 

or for or against the registrant’s nominee 

or nominees, provided that: 

(i) The soliciting party does not, at 

any time during such solicitation, seek 

directly or indirectly, either on its own 

or another’s behalf, the power to act as 

proxy for a shareholder and does not 

furnish or otherwise request, or act on 

behalf of a person who furnishes or 

requests, a form of revocation, 

abstention, consent or authorization; 

(ii) Any written communication 

includes: 

(A) The identity of each nominating 

shareholder and a description of his or 

her direct or indirect interests, by 

security holdings or otherwise; 

(B) A prominent legend in clear, plain 

language advising shareholders that a 

shareholder nominee is or will be 

included in the registrant’s proxy 

statement and that they should read the 

registrant’s proxy statement when 

available because it includes important 

information (or, if the registrant’s proxy 

statement is publicly available, advising 

shareholders of that fact and 

encouraging shareholders to read the 

registrant’s proxy statement because it 

includes important information). The 

legend also must explain to 

shareholders that they can find the 

registrant’s proxy statement, other 

soliciting material, and any other 

relevant documents at no charge on the 

Commission’s Web site; and 

(iii) Any written soliciting material 

published, sent or given to shareholders 

in accordance with this paragraph must 

be filed by the nominating shareholder 

or nominating shareholder group with 

the Commission, under the registrant’s 

Exchange Act file number, or, in the 

case of a registrant that is an investment 

company registered under the 

Investment Company Act of 1940 (15 

U.S.C. 80a–1 et seq.), under the 

registrant’s Investment Company Act 

file number, no later than the date the 

material is first published, sent or given 

to shareholders. Three copies of the 

material must at the same time be filed 

with, or mailed for filing to, each 

national securities exchange upon 

which any class of securities of the 

registrant is listed and registered. The 

soliciting material must include a cover 

page in the form set forth in Schedule 

14N (§ 240.14n–101) and the 

appropriate box on the cover page must 

be marked. 

Instruction 1 to paragraph (b)(8). A 

nominating shareholder or nominating 

shareholder group may rely on the 

exemption provided in paragraph (b)(8) 

of this section only after receiving 

notice from the registrant in accordance 

with § 240.14a–11(g)(1) or § 240.14a– 

11(g)(3)(iv) that the registrant will 

include the nominating shareholder’s or 

nominating shareholder group’s 

nominee or nominees in its form of 

proxy. 

Instruction 2 to paragraph (b)(8). Any 

solicitation by or on behalf of a 

nominating shareholder or nominating 

shareholder group in support of its 

nominee included or to be included on 

the registrant’s form of proxy in 

accordance with § 240.14a–11 or for or 

against the registrant’s nominee or 

nominees must be made in reliance on 

the exemption provided in paragraph 

(b)(8) of this section and not on any 

other exemption. 

Instruction 3 to paragraph (b)(8). The 

exemption provided in paragraph (b)(8) 

of this section shall not apply to a 

person that subsequently engages in 

soliciting or other nominating activities 

outside the scope of § 240.14a–11 in 

connection with the subject election of 

directors or is or becomes a member of 

any other group, as determined under 

section 13(d)(3) of the Act (15 U.S.C. 

78m(d)(3) and § 240.13d–5(b)), or 

otherwise, with persons engaged in 

soliciting or other nominating activities 

in connection with the subject election 

of directors. 

* * * * * 

■ 10. Amend § 240.14a–4 by: 

■ a. Revising the first sentence of 

paragraph (b)(2) introductory text; and 


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■ b. Adding a sentence to the end 

paragraph (b)(2) concluding text. 

The revision and addition read as 

follows: 

§ 240.14a–4 Requirements as to proxy. 

* * * * * 

(b) * * * 

(2) A form of proxy that provides for 

the election of directors shall set forth 

the names of persons nominated for 

election as directors, including any 

person whose nomination by a 

shareholder or shareholder group 

satisfies the requirements of § 240.14a– 

11, an applicable state or foreign law 

provision, or a registrant’s governing 

documents as they relate to the 

inclusion of shareholder director 

nominees in the registrant’s proxy 

materials. * * * 

* * * Means to grant authority to 

vote for any nominees as a group or to 

withhold authority for any nominees as 

a group may not be provided if the form 

of proxy includes one or more 

shareholder nominees in accordance 

with § 240.14a–11, an applicable state or 

foreign law provision, or a registrant’s 

governing documents as they relate to 

the inclusion of shareholder director 

nominees in the registrant’s proxy 

materials. 

* * * * * 

■ 11. Amend § 240.14a–5 by: 

■ a. Revising paragraph (e)(1) to remove 

‘‘and’’ at the end of the paragraph; 

■ b. Revising paragraph (e)(2) to remove 

the period at the end of the paragraph 

and add in its place ‘‘; and’’; and 

■ c. Adding paragraph (e)(3) to read as 

follows: 

§ 240.14a–5 Presentation of information in 

proxy statement. 

* * * * * 

(e) * * * 

(3) The deadline for submitting 

nominees for inclusion in the 

registrant’s proxy statement and form of 

proxy pursuant to § 240.14a–11, an 

applicable state or foreign law 

provision, or a registrant’s governing 

documents as they relate to the 

inclusion of shareholder director 

nominees in the registrant’s proxy 

materials for the registrant’s next annual 

meeting of shareholders. 

* * * * * 

■ 12. Amend § 240.14a–6 by: 

a. Redesignating paragraphs (a)(4), 

(a)(5), (a)(6), and (a)(7) as paragraphs 

(a)(5), (a)(6), (a)(7), and (a)(8) 

respectively; 

■ b. Adding new paragraph (a)(4); 

■ c. Adding a sentence at the end of 

Note 3 to paragraph (a); and 

■ d. Adding paragraph (p). 

The revisions and additions read as 

follows: 

§ 240.14a–6 Filing requirements. 

(a) * * * 

(4) A shareholder nominee for 

director included pursuant to § 240.14a– 

11, an applicable state or foreign law 

provision, or a registrant’s governing 

documents as they relate to the 

inclusion of shareholder director 

nominees in the registrant’s proxy 

materials. 

* * * * * 

Note 3. * * * The inclusion of a 

shareholder nominee in the registrant’s proxy 

materials pursuant to § 240.14a–11, an 

applicable state or foreign law provision, or 

a registrant’s governing documents as they 

relate to the inclusion of shareholder director 

nominees in the registrant’s proxy materials 

does not constitute a ‘‘solicitation in 

opposition’’ for purposes of Rule 14a–6(a) 

(§ 240.14a–6(a)), even if the registrant 

opposes the shareholder nominee and solicits 

against the shareholder nominee and in favor 

of a registrant nominee. 

* * * * * 

(p) Solicitations subject to § 240.14a– 

11. Any soliciting material that is 

published, sent or given to shareholders 

in connection with § 240.14a–2(b)(7) or 

(b)(8) must be filed with the 

Commission as specified in that section. 

■ 13. Amend § 240.14a–8 by revising 

paragraph (i)(8) as follows: 

§ 240.14a–8 Shareholder proposals. 

* * * * * 

(i) * * * 

(8) Director elections: If the proposal: 

(i) Would disqualify a nominee who 

is standing for election; 

(ii) Would remove a director from 

office before his or her term expired; 

(iii) Questions the competence, 

business judgment, or character of one 

or more nominees or directors; 

(iv) Seeks to include a specific 

individual in the company’s proxy 

materials for election to the board of 

directors; or 

(v) Otherwise could affect the 

outcome of the upcoming election of 

directors. 

* * * * * 

■ 14. Amend § 240.14a–9 by adding a 

paragraph (c), removing the authority 

citation following the section, and 

redesignating notes (a), (b), (c), and (d) 

as a., b., c., and d. 

The addition reads as follows: 

§ 240.14a–9 False or misleading 

statements. 

* * * * * 

(c) No nominee, nominating 

shareholder or nominating shareholder 

group, or any member thereof, shall 

cause to be included in a registrant’s 

proxy materials, either pursuant to the 

Federal proxy rules, an applicable state 

or foreign law provision, or a registrant’s 

governing documents as they relate to 

including shareholder nominees for 

director in a registrant’s proxy materials, 

include in a notice on Schedule 14N 

(§ 240.14n–101), or include in any other 

related communication, any statement 

which, at the time and in the light of the 

circumstances under which it is made, 

is false or misleading with respect to 

any material fact, or which omits to 

state any material fact necessary in 

order to make the statements therein not 

false or misleading or necessary to 

correct any statement in any earlier 

communication with respect to a 

solicitation for the same meeting or 

subject matter which has become false 

or misleading. 

* * * * * 

■ 15. Add § 240.14a–11 to read as 

follows: 

§ 240.14a–11 Shareholder nominations. 

(a) Applicability. In connection with 

an annual (or a special meeting in lieu 

of an annual) meeting of shareholders, 

or a written consent in lieu of such 

meeting, at which directors are elected, 

a registrant will be required to include 

in its proxy statement and form of proxy 

the name of a person or persons 

nominated by a shareholder or group of 

shareholders for election to the board of 

directors and include in its proxy 

statement the disclosure about such 

nominee or nominees and the 

nominating shareholder or members of 

the nominating shareholder group as 

specified in Item 5 of Schedule 14N 

(§ 240.14n–101), provided that the 

conditions set forth in paragraph (b) of 

this section are satisfied. This rule will 

not apply to a registrant if: 

(1) The registrant is subject to the 

proxy rules solely because it has a class 

of debt securities registered under 

section 12 of the Exchange Act (15 

U.S.C. 78l); or 

(2) Applicable state or foreign law or 

a registrant’s governing documents 

prohibit the registrant’s shareholders 

from nominating a candidate or 

candidates for election as director. 

(b) Eligibility. A shareholder nominee 

or nominees shall be included in a 

registrant’s proxy statement and form of 

proxy if the following requirements are 

satisfied: 

(1) The nominating shareholder 

individually, or the nominating 

shareholder group in the aggregate, 

holds at least 3% of the total voting 

power of the registrant’s securities that 

are entitled to be voted on the election 

of directors at the annual (or a special 


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meeting in lieu of the annual) meeting 

of shareholders or on a written consent 

in lieu of such meeting, on the date the 

nominating shareholder or nominating 

shareholder group files the notice on 

Schedule 14N (§ 240.14n–101) with the 

Commission and transmits the notice to 

the registrant; 

Instruction 1 to paragraph (b)(1). In the 

case of a registrant other than an investment 

company registered under the Investment 

Company Act of 1940 (15 U.S.C. 80a–1 et 

seq.), for purposes of (b)(1) of this section, in 

determining the total voting power of the 

registrant’s securities that are entitled to be 

voted on the election of directors, the 

nominating shareholder or nominating 

shareholder group may rely on information 

set forth in the registrant’s most recent 

quarterly or annual report, and any current 

report subsequent thereto, filed with the 

Commission pursuant to this Act, unless the 

nominating shareholder or nominating 

shareholder group knows or has reason to 

know that the information contained therein 

is inaccurate. In the case of a registrant that 

is an investment company registered under 

the Investment Company Act of 1940, for 

purposes of (b)(1) of this section, in 

determining the total voting power of the 

registrant’s securities that are entitled to be 

voted on the election of directors, the 

nominating shareholder or nominating 

shareholder group may rely on information 

set forth in the following documents, unless 

the nominating shareholder or nominating 

shareholder group knows or has reason to 

know that the information contained therein 

is inaccurate: 

a. In the case of a registrant that is a series 

company as defined in Rule 18f–2(a) under 

the Investment Company Act of 1940 

(§ 270.18f–2(a) of this chapter), the Form 8– 

K (§ 249.308 of this chapter) described in 

Instruction 2 to paragraph (b)(1) of this 

section; or 

b. In the case of other investment 

companies, the registrant’s most recent 

annual or semi-annual report filed with the 

Commission on Form N–CSR (§ 249.331 and 

§ 274.128 of this chapter). 

Instruction 2 to paragraph (b)(1). If the 

registrant is an investment company that is 

a series company (as defined in § 270.18f– 

2(a) of this chapter), the registrant must 

disclose pursuant to Item 5.08 of Form 8–K 

(§ 249.308 of this chapter) the total number 

of shares of the registrant outstanding and 

entitled to be voted (or if the votes are to be 

cast on a basis other than one vote per share, 

then the total number of votes entitled to be 

voted and the basis for allocating such votes) 

on the election of directors as of the end of 

the most recent calendar quarter. 

Instruction 3 to paragraph (b)(1). 

a. When determining the total voting 

power of the registrant’s securities, which is 

the denominator in the calculation of the 

percentage of voting power held by the 

nominating shareholder individually or the 

nominating shareholder group in the 

aggregate, calculate the aggregate number of 

votes derived from all classes of securities of 

the registrant that are entitled to vote on the 

election of directors regardless of whether 

solicitation of a proxy with respect to those 

securities would require compliance with 

Exchange Act Regulation 14A (§ 240.14a–1 et 

seq.). 

b. When determining the total voting 

power of the registrant’s securities held by 

the nominating shareholder or any member 

of the nominating shareholder group, which 

is the numerator in the calculation of the 

percentage: 

1. Calculate the number of votes derived 

only from securities with respect to which 

solicitation of a proxy would require 

compliance with Exchange Act Regulation 

14A (§ 240.14a–1 et seq.) and over which the 

nominating shareholder or any member of 

the nominating shareholder group, as the 

case may be, has voting power and 

investment power, either directly or through 

any person acting on their behalf; 

2. Notwithstanding the voting power 

calculation specified in paragraph b.1. of this 

instruction, add to the result of the 

calculation specified in paragraph b.1. of this 

instruction any votes attributable to 

securities with respect to which solicitation 

of a proxy would require compliance with 

Exchange Act Regulation 14A (§ 240.14a–1 et 

seq.) that have been loaned by or on behalf 

of the nominating shareholder or any 

member of the nominating shareholder group 

to another person, if the nominating 

shareholder or member of the nominating 

shareholder group, as the case may be, or any 

person acting on their behalf, has the right to 

recall the loaned securities, and will recall 

the loaned securities upon being notified that 

any of the nominating shareholder’s or 

group’s nominees will be included in the 

registrant’s proxy statement and proxy card; 

and 

3. Subtract from the result of the 

calculation specified in paragraphs b.1. and 

b.2. of this instruction the number of votes 

attributable to securities of the registrant 

entitled to vote on the election of directors, 

regardless of whether solicitation of a proxy 

with respect to those securities would require 

compliance Exchange Act Regulation 14A 

(§ 240.14a–1 et seq.), that the nominating 

shareholder or any member of the 

nominating shareholder group, as the case 

may be, or any person acting on their behalf, 

has sold in a short sale, as defined in 17 CFR 

242.200(a), that is not closed out, or has 

borrowed for purposes other than a short 

sale. 

c. For purposes of the voting power 

calculation in paragraph b.1. of this 

instruction: 

1. A shareholder has voting power directly 

only when the shareholder has the power to 

vote or direct the voting, and investment 

power directly only when the shareholder 

has the power to dispose or direct the 

disposition, of the securities; and 

2. A securities intermediary (as defined in 

§ 240.17Ad–20(b)) shall not have voting 

power or investment power over securities 

for purposes of paragraph b.1. of this 

instruction solely because such intermediary 

holds such securities by or on behalf of 

another person, notwithstanding that 

pursuant to the rules of a national securities 

exchange such intermediary may vote or 

direct the voting of such securities without 

instruction. 

Instruction 4 to paragraph (b)(1). If a 

registrant has more than one class of 

outstanding securities entitled to vote on the 

election of directors and those classes do not 

vote together in the election of all directors, 

then the voting power of the registrant’s 

securities for purposes of the calculation of 

both the numerator and denominator 

specified in Instruction 3 to paragraph (b)(1) 

should be determined only on the basis of the 

voting power of the class or classes of 

securities that would be voting together on 

the election of the person or persons sought 

to be nominated by the nominating 

shareholder or the nominating shareholder 

group. 

(2) The nominating shareholder or 

each member of the nominating 

shareholder group has held the amount 

of securities that are used for purposes 

of satisfying the minimum ownership 

requirement of paragraph (b)(1) of this 

section continuously for at least three 

years as of the date the notice on 

Schedule 14N (§ 240.14n–101) is filed 

with the Commission and transmitted to 

the registrant and must continue to hold 

that amount of securities through the 

date of the subject election of directors; 

Instruction to paragraph (b)(2). To 

determine whether the amount of securities 

that are used for purposes of satisfying the 

minimum ownership requirement of 

paragraph (b)(1) has been held continuously 

during the three year period prior to the date 

the Schedule 14N (§ 240.14n–101) is filed 

and during the period after the Schedule 14N 

is filed through the date of the subject 

election of directors, and with respect to all 

points in time during those periods: 

a. Include only the amount of securities 

with respect to which a solicitation of a 

proxy would require compliance with 

Exchange Act Regulation 14A (§ 240.14a–1 et 

seq.) and over which the nominating 

shareholder or the member of the nominating 

shareholder group, as the case may be, has 

voting power and investment power, either 

directly or through any person acting on their 

behalf; 

b. Notwithstanding the voting power 

determination specified in paragraph a. of 

this instruction, include the amount of 

securities that have been loaned by or on 

behalf of the nominating shareholder or any 

member of the nominating shareholder group 

to another person, if the nominating 

shareholder or member of the nominating 

shareholder group, as the case may be, or any 

person acting on their behalf: 

1. Has the right to recall the loaned 

securities; and 

2. With respect to the period from the date 

the Schedule 14N (§ 240.14n–01) is filed 

through the date of the subject election of 

directors, will recall the loaned securities 

upon being notified that any of the person’s 

nominees will be included in the registrant’s 

proxy statement and proxy card; 

c. Reduce the amount of securities held by 

the amount of securities, on a class basis, that 

the nominating shareholder or any member 

of the nominating shareholder group, as the 

case may be, or any person acting on their 


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behalf, sold in a short sale, as defined in 17 

CFR 242.200(a), during the periods, or 

borrowed for purposes other than a short 

sale; and 

d. Adjust the amount of securities held to 

give effect to any changes in the amount of 

securities during the periods resulting from 

stock splits, reclassifications or other similar 

adjustments by the registrant. 

(3) The nominating shareholder or 

each member of the nominating 

shareholder group provides proof of 

ownership of the amount of securities 

that are used for purposes of satisfying 

the ownership and holding period 

requirements of paragraphs (b)(1) and 

(b)(2) of this section. If the nominating 

shareholder or each member of the 

nominating shareholder group is not the 

registered holder of the securities, the 

nominating shareholder or each member 

of the nominating shareholder group 

must provide proof of ownership in the 

form of one or more written statements 

from the registered holder of the 

nominating shareholder’s securities (or 

the brokers or banks through which 

those securities are held) verifying that, 

as of a date within seven calendar days 

prior to filing the notice on Schedule 

14N (§ 240.14n–101) with the 

Commission and transmitting the notice 

to the registrant, the nominating 

shareholder or each member of the 

nominating shareholder group, 

continuously held the amount of 

securities being used to satisfy the 

ownership threshold for a period of at 

least three years. The written statement 

or statements proving ownership must 

be attached as an appendix to Schedule 

14N on the date the notice is filed with 

the Commission and transmitted to the 

registrant, and provide the information 

specified in Item 4 of Schedule 14N. In 

the alternative, if the nominating 

shareholder or member of the 

nominating shareholder group has filed 

a Schedule 13D (§ 240.13d–101), 

Schedule 13G (§ 240.13d–102), Form 3 

(§ 249.103 of this chapter), Form 4 

(§ 249.104 of this chapter), and/or Form 

5 (§ 249.105 of this chapter), or 

amendments to those documents, 

reflecting ownership of the securities as 

of or before the date on which the threeyear eligibility period begins, the 

nominating shareholder or member of 

the nominating shareholder group may 

attach the filing as an appendix to the 

Schedule 14N or incorporate the filing 

by reference into the Schedule 14N; 

Instruction to paragraph (b)(3). If the 

nominating shareholder or member of the 

nominating shareholder group must provide 

proof of ownership in the form of a written 

statement with respect to securities held 

through a broker or bank that is a participant 

in the Depository Trust Company or other 

clearing agency acting as a securities 

depository, then a statement from such 

broker or bank will satisfy the requirements 

of paragraph (b)(3) of this section. If the 

securities are held through a broker or bank 

(e.g., in an omnibus account) that is not a 

participant in a clearing agency acting as a 

securities depository, the nominating 

shareholder or member of the nominating 

shareholder group must also obtain and 

submit a separate written statement specified 

in the Instruction to Item 4 of Schedule 14N 

(§ 240.14n–101). 

(4) The nominating shareholder or 

each member of the nominating 

shareholder group provides a statement, 

as specified in Item 4(b) of Schedule 

14N (§ 240.14n–101), on the date the 

notice on Schedule 14N is filed with the 

Commission and transmitted to the 

registrant, that the nominating 

shareholder or each member of the 

nominating shareholder group intends 

to continue to hold the amount of 

securities that are used for purposes of 

satisfying the minimum ownership 

requirement of paragraph (b)(1) of this 

section through the date of the meeting; 

(5) The nominating shareholder or 

each member of the nominating 

shareholder group provides a statement, 

as specified in Item 4(b) of Schedule 

14N (§ 240.14n–101), on the date the 

notice on Schedule 14N is filed with the 

Commission and transmitted to the 

registrant, regarding the nominating 

shareholder’s or group’s intent with 

respect to continued ownership of the 

registrant’s securities after the election; 

(6) The nominating shareholder (or 

where there is a nominating shareholder 

group, each member of the nominating 

shareholder group) is not holding any of 

the registrant’s securities with the 

purpose, or with the effect, of changing 

control of the registrant or to gain a 

number of seats on the board of 

directors that exceeds the maximum 

number of nominees that the registrant 

could be required to include under 

paragraph (d) of this section; 

(7) Neither the nominee nor the 

nominating shareholder (or where there 

is a nominating shareholder group, any 

member of the nominating shareholder 

group) has an agreement with the 

registrant regarding the nomination of 

the nominee; 

Instruction to paragraph (b)(7). 

Negotiations between the nominee, the 

nominating shareholder or nominating 

shareholder group and the nominating 

committee or board of the registrant to have 

the nominee included in the registrant’s 

proxy statement and form of proxy as a 

registrant nominee, where those negotiations 

are unsuccessful, or negotiations that are 

limited to whether the registrant is required 

to include the shareholder nominee in the 

registrant’s proxy statement and form of 

proxy in accordance with this section, will 

not represent a direct or indirect agreement 

with the registrant. 

(8) The nominee’s candidacy or, if 

elected, board membership would not 

violate controlling Federal law, State 

law, foreign law, or rules of a national 

securities exchange or national 

securities association (other than rules 

regarding director independence) or, in 

the case that the nominee’s candidacy 

or, if elected, board membership would 

violate such laws or rules, such 

violation could not be cured by the time 

provided in paragraph (g)(2) of this 

section; 

(9) In the case of a registrant other 

than an investment company, the 

nominee meets the objective criteria for 

‘‘independence’’ of the national 

securities exchange or national 

securities association rules applicable to 

the registrant, if any, or, in the case of 

a registrant that is an investment 

company, the nominee is not an 

‘‘interested person’’ of the registrant as 

defined in section 2(a)(19) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–2(a)(19)); 

Instruction to paragraph (b)(9). For 

purposes of this provision, the nominee 

would be required to meet the definition of 

‘‘independence’’ that is generally applicable 

to directors of the registrant and not any 

particular definition of independence 

applicable to members of the audit 

committee of the registrant’s board of 

directors. To the extent a national securities 

exchange or national securities association 

rule imposes a standard regarding 

independence that requires a subjective 

determination by the board or a group or 

committee of the board (for example, 

requiring that the board of directors or any 

group or committee of the board of directors 

make a determination regarding the existence 

of factors material to a determination of a 

nominee’s independence), the nominee 

would not be required to meet the subjective 

determination of independence as part of the 

shareholder nomination process. 

(10) The nominating shareholder or 

nominating shareholder group provides 

notice to the registrant on Schedule 14N 

(§ 240.14n–101), as specified by 

§ 240.14n–1, of its intent to require that 

the registrant include that shareholder’s 

or group’s nominee in the registrant’s 

proxy statement and form of proxy. This 

notice must be transmitted to the 

registrant on the date it is filed with the 

Commission. The notice must be filed 

with the Commission and transmitted to 

the registrant no earlier than 150 

calendar days, and no later than 120 

calendar days, before the anniversary of 

the date that the registrant mailed its 

proxy materials for the prior year’s 

annual meeting, except that, if the 

registrant did not hold an annual 


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meeting during the prior year, or if the 

date of the meeting has changed by 

more than 30 calendar days from the 

prior year, or if the registrant is holding 

a special meeting or conducting an 

election of directors by written consent, 

then the nominating shareholder or 

nominating shareholder group must 

transmit the notice to the registrant and 

file its notice with the Commission a 

reasonable time before the registrant 

mails its proxy materials, as specified by 

the registrant in a Form 8–K (§ 249.308 

of this chapter) filed pursuant to Item 

5.08 of Form 8–K; and 

Instruction 1 to paragraph (b)(10). If the 

registrant held a meeting the previous year 

and the date of the current year’s annual 

meeting has not changed by more than 30 

calendar days from the date of the previous 

year’s annual meeting, the window period for 

filing a notice on Schedule 14N (§ 240.14n– 

101) with the Commission and transmitting 

that notice to the registrant should be 

calculated by determining the release date 

disclosed in the registrant’s previous year’s 

proxy statement, increasing the year by one, 

and counting back 150 calendar days and 120 

calendar days for the beginning and end of 

the window period, respectively. Where the 

120 calendar day deadline falls on a 

Saturday, Sunday or holiday, the deadline 

will be treated as the first business day 

following the Saturday, Sunday or holiday. 

Instruction 2 to paragraph (b)(10). If the 

registrant did not hold an annual meeting the 

previous year, or if the date of the current 

year’s annual meeting has been changed by 

more than 30 calendar days from the date of 

the previous year’s annual meeting, or if the 

registrant is holding a special meeting or 

conducting the election of directors by 

written consent, the registrant must disclose 

pursuant to Item 5.08 of Form 8–K (§ 249.308 

of this chapter) the date by which a 

shareholder or group must submit the notice 

required pursuant to paragraph (b)(10) of this 

section, which date shall be a reasonable 

time prior to the date the registrant mails its 

proxy materials for the meeting. 

(11) The nominating shareholder or 

nominating shareholder group provides 

the certifications required by Schedule 

14N (§ 240.14n–101) on the date the 

notice on Schedule 14N is filed with the 

Commission and transmitted to the 

registrant. 

Instruction to paragraph (b). A registrant 

will not be required to include a nominee or 

nominees submitted by a nominating 

shareholder or nominating shareholder group 

pursuant to this section if the nominating 

shareholder or any member of the 

nominating shareholder group also submits 

any other nomination to that registrant and/ 

or is participating in more than one 

nominating shareholder group for that 

registrant. In addition, a registrant will not be 

required to include a nominee or nominees 

if a nominating shareholder or member of a 

nominating shareholder group: 

a. Is or becomes a member of any other 

group, as determined under section 13(d)(3) 

of the Act (15 U.S.C. 78m(d)(3) and 

§ 240.13d–5(b)), or otherwise, with persons 

engaged in soliciting or other nominating 

activities in connection with the subject 

election of directors; 

b. Is separately conducting a solicitation in 

connection with the subject election of 

directors other than a solicitation subject to 

§ 240.14a–2(b)(8) in relation to those 

nominees it has nominated pursuant to this 

section or for or against the registrant’s 

nominees; or 

c. Is acting as a participant in another 

person’s solicitation in connection with the 

subject election of directors. 

(c) Statement of support. A registrant 

will be required to include a statement 

of support submitted by a nominating 

shareholder or nominating shareholder 

group in Item 5(i) of the notice on 

Schedule 14N (§ 240.14n-101), provided 

that the statement of support does not 

exceed 500 words per nominee. If a 

statement of support submitted by a 

nominating shareholder or nominating 

shareholder group exceeds 500 words 

per nominee, the registrant will be 

required to include the nominee or 

nominees, provided that the eligibility 

requirements and other conditions of 

the rule are satisfied, but the registrant 

may exclude the supporting 

statement(s). 

(d) Maximum number of shareholder 

nominees. (1) A registrant will be 

required to include in its proxy 

statement and form of proxy one 

shareholder nominee or the number of 

nominees that represents 25% of the 

total number of the registrant’s board of 

directors, whichever is greater, 

submitted by a nominating shareholder 

or nominating shareholder group 

pursuant to this section, subject to the 

limitations in paragraphs (d)(2), (d)(3), 

(d)(4), and (d)(5) of this section. A 

registrant may exclude a nominee or 

nominees if including the nominee or 

nominees would result in the registrant 

exceeding the maximum number of 

nominees it is required to include in its 

proxy statement and form of proxy 

pursuant to this provision. 

Instruction to paragraph (d)(1). Depending 

on board size, 25% of the board may not 

result in a whole number. In those instances, 

the registrant will round down to the closest 

whole number below 25% to determine the 

maximum number of shareholder nominees 

for director that the registrant is required to 

include in its proxy statement and form of 

proxy. 

(2) Where the registrant has one or 

more directors currently serving on its 

board of directors who were elected as 

a shareholder nominee pursuant to this 

section, and the term of that director or 

directors extends past the election of 

directors for which it is soliciting 

proxies, the registrant will not be 

required to include in the proxy 

statement and form of proxy more 

shareholder nominees than could result 

in the total number of directors who 

were elected as shareholder nominees 

pursuant to this section and serving on 

the board being more than one 

shareholder nominee or 25% of the total 

number of the registrant’s board of 

directors, whichever is greater. 

(3) Where the registrant has multiple 

classes of securities and each class is 

entitled to elect a specified number of 

directors, the registrant will be required 

to include the lesser of the number of 

nominees that the nominating 

shareholder’s or group’s class is entitled 

to elect or 25% of the registrant’s board 

of directors, but in no case less than one 

nominee. 

(4) Where the registrant agrees to 

include in its proxy statement and form 

of proxy, as an unopposed registrant 

nominee, the nominee or nominees of 

the nominating shareholder or 

nominating shareholder group that 

otherwise would be eligible under this 

section to have its nominees included in 

the registrant’s proxy materials, the 

nominee will be considered a 

shareholder nominee for purposes of 

calculating the maximum number of 

shareholder nominees that must be 

included in the registrant’s proxy 

statement and form of proxy, provided 

that the nominating shareholder or 

nominating shareholder group filed its 

notice on Schedule 14N (§ 240.14n–101) 

before beginning communications with 

the registrant about the nomination. 

(5) A nominee included in a 

registrant’s proxy statement and form of 

proxy as a result of an agreement 

between the nominee or nominating 

shareholder (or where there is a 

nominating shareholder group, any 

member of the nominating shareholder 

group) and the registrant, other than as 

specified in paragraph (d)(4) of this 

section, will not be counted as a 

shareholder nominee for purposes of 

calculating the maximum number of 

shareholder nominees that the registrant 

is required to include in its proxy 

statement and form of proxy. 

Instruction to paragraph (d)(5). 

Negotiations between the nominee, the 

nominating shareholder or nominating 

shareholder group and the nominating 

committee or board of the registrant to have 

the nominee included in the registrant’s 

proxy statement and form of proxy as a 

registrant nominee, where those negotiations 

are unsuccessful, or negotiations that are 

limited to whether the registrant is required 

to include the shareholder nominee in the 

registrant’s proxy statement and form of 

proxy in accordance with this section, will 

not represent a direct or indirect agreement 

with the registrant. 


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56786 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

(e) Order of priority for shareholder 

nominees. (1) In the event that more 

than one eligible shareholder or group 

of shareholders submits a nominee or 

nominees for inclusion in the 

registrant’s proxy materials pursuant to 

this section, the registrant shall include 

in the proxy statement and form of 

proxy the nominee or nominees of the 

nominating shareholder or nominating 

shareholder group with the highest 

qualifying voting power percentage 

disclosed as of the date of filing the 

Schedule 14N (§ 240.14n–101) (as 

determined in calculating ownership to 

satisfy the requirement as specified in 

paragraph (b)(1) of this section) from 

which the registrant received a notice 

filed and transmitted as specified in 

paragraph (b)(10) of this section, up to 

and including the total number of 

nominees required to be included by the 

registrant pursuant to this section. 

Where the nominating shareholder or 

nominating shareholder group with the 

highest qualifying voting power 

percentage that is otherwise eligible to 

rely on this section and that filed and 

transmitted the notice as specified in 

paragraph (b)(10) of this section does 

not nominate the maximum number of 

individuals required to be included by 

the registrant, the nominee or nominees 

of the nominating shareholder or 

nominating shareholder group with the 

next highest qualifying voting power 

percentage from which the registrant 

received the notice filed and transmitted 

as specified in paragraph (b)(10) of this 

section would be included in the 

registrant’s proxy statement and form of 

proxy, if any, up to and including the 

total number required to be included by 

the registrant. This process would 

continue until the registrant has 

included the maximum number of 

nominees it is required to include in its 

proxy statement and form of proxy 

pursuant to paragraph (d) of this section 

or the registrant exhausts the list of 

eligible nominees. 

(2) Prior to the time a registrant has 

commenced printing its proxy statement 

and form of proxy, if a nominating 

shareholder or nominating shareholder 

group withdraws or is disqualified, a 

registrant will be required to include in 

its proxy statement and form of proxy 

the nominee or nominees of the 

nominating shareholder or nominating 

shareholder group with the next highest 

qualifying voting power percentage, 

disclosed as of the date of filing the 

Schedule 14N (§ 240.14n–101) (as 

determined in calculating ownership to 

satisfy the requirement as specified in 

paragraph (b)(1) of this section), from 

which the registrant received a notice 

filed and transmitted as specified in 

paragraph (b)(10) of this section, if any, 

up to and including the total number 

required to be included by the 

registrant. This process would continue 

until the registrant included the 

maximum number of nominees it is 

required to include in its proxy 

statement and form of proxy pursuant to 

paragraph (d) of this section or the 

registrant exhausts the list of eligible 

nominees. If the registrant has 

commenced printing its proxy statement 

and form of proxy, the registrant will 

not be required to include a nominee or 

nominees in its proxy statement and 

form of proxy in place of a nominee or 

nominees that has withdrawn or has 

been disqualified. 

(3) If a nominee or nominees 

withdraws or is disqualified after the 

registrant provides notice to the 

nominating shareholder or nominating 

shareholder group of the registrant’s 

intent to include the nominee or 

nominees in its proxy statement and 

form of proxy, the registrant will be 

required to include in its proxy 

statement and form of proxy any other 

eligible nominee submitted by that 

nominating shareholder or nominating 

shareholder group. If that nominating 

shareholder or nominating shareholder 

group did not include any other eligible 

nominees in its notice filed on Schedule 

14N (§ 240.14n–101), then the registrant 

will be required to include the nominee 

or nominees of the nominating 

shareholder or nominating shareholder 

group with the next highest voting 

power percentage, disclosed as of the 

date of filing the Schedule 14N 

(§ 240.14n–101) (as determined in 

calculating ownership to satisfy the 

requirement as specified in paragraph 

(b)(1) of this section), from which the 

registrant received a notice filed and 

transmitted as specified in paragraph 

(b)(10) of this section, if any, up to and 

including the total number required to 

be included by the registrant. This 

process would continue until the 

registrant included the maximum 

number of nominees it is required to 

include in its proxy statement and form 

of proxy pursuant to paragraph (d) of 

this section or the registrant exhausts 

the list of eligible nominees. If the 

registrant has commenced printing its 

proxy statement and form of proxy, the 

registrant will not be required to include 

a nominee or nominees in its proxy 

statement and form of proxy in place of 

a nominee or nominees that has 

withdrawn or has been disqualified. 

(4) Notwithstanding the other 

provisions of this paragraph, if a 

registrant has multiple classes of 

securities and each class is entitled to 

elect a specified number of directors, 

and nominating shareholders or groups 

of nominating shareholders of more 

than one of those classes submit a 

number of eligible nominees for 

inclusion in the registrant’s proxy 

materials pursuant to this section that is 

greater than 25% of the total number of 

the registrant’s board of directors, the 

registrant shall include in the proxy 

statement and form of proxy the 

nominee or nominees of the nominating 

shareholders or groups on the basis of 

the proportion of total voting power in 

the election of directors attributable to 

each class, rounding to the closest 

whole number, if necessary, and 

otherwise in accordance with paragraph 

(e) of this section. 

Instruction 1 to paragraph (e). In 

determining the priority of the nominee or 

nominees to be included in the registrant’s 

proxy materials, the registrant will be 

required to consider only the nominee or 

nominees that would otherwise be required 

to be included under the provisions of this 

section. 

Instruction 2 to paragraph (e). If the 

registrant is including shareholder director 

nominees from more than one nominating 

shareholder or nominating shareholder 

group, as described in this paragraph, and 

including all of the shareholder director 

nominees of the nominating shareholder or 

nominating shareholder group that is last in 

priority would result in exceeding the 

maximum number required under paragraph 

(d) of this section, the nominating 

shareholder or nominating shareholder group 

that is last in priority may specify which of 

its nominees are to be included in the 

registrant’s proxy materials. 

(f) False or misleading statements. 

The registrant is not responsible for any 

information in the notice from the 

nominating shareholder or nominating 

shareholder group submitted as required 

by paragraph (b)(10) of this section or 

otherwise provided by the nominating 

shareholder or nominating shareholder 

group that is included in the registrant’s 

proxy materials. 

(g) Determinations regarding 

eligibility. (1) If the registrant 

determines that it will include a 

shareholder nominee, it must notify the 

nominating shareholder or nominating 

shareholder group (or their authorized 

representative) upon making this 

determination. In no event should the 

notification be postmarked or 

transmitted electronically later than 30 

calendar days before it files its 

definitive proxy statement and form of 

proxy with the Commission. 

(2) If the registrant determines that it 

may exclude a shareholder nominee 

pursuant to a provision in paragraph (a), 

(b), (d), or (e) of this section, or exclude 

a statement of support pursuant to 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56787 

paragraph (c) of this section, the 

registrant must notify in writing the 

nominating shareholder or nominating 

shareholder group (or their authorized 

representative) of this determination. 

This notice must be postmarked or 

transmitted electronically to the 

nominating shareholder or nominating 

shareholder group (or their authorized 

representative) no later than 14 calendar 

days after the close of the period for 

submission specified in paragraph 

(b)(10) of this section. 

(i) The registrant’s notice to the 

nominating shareholder or nominating 

shareholder group (or their authorized 

representative) that it has determined 

that it may exclude a shareholder 

nominee or statement of support must 

include an explanation of the 

registrant’s basis for determining that it 

may exclude the nominee or statement 

of support. 

(ii) The nominating shareholder or 

nominating shareholder group shall 

have 14 calendar days after receipt of 

the registrant’s notice pursuant to 

paragraph (g)(2)(i) of this section to 

respond to the registrant’s notice and 

correct any eligibility or procedural 

deficiencies identified in that notice. 

The nominating shareholder’s or 

nominating shareholder group’s 

response must be postmarked or 

transmitted electronically to the 

registrant no later than 14 calendar days 

after receipt of the registrant’s notice. 

(3) If the registrant intends to exclude 

a shareholder nominee or statement of 

support, after providing the requisite 

notice of and time for the nominating 

shareholder or nominating shareholder 

group to remedy any eligibility or 

procedural deficiencies in the 

nomination or statement, the registrant 

must provide notice of the basis for its 

determination to the Commission no 

later than 80 calendar days before it files 

its definitive proxy statement and form 

of proxy with the Commission. The 

Commission staff may permit the 

registrant to make its submission later 

than 80 calendar days before the 

registrant files its definitive proxy 

statement and form of proxy if the 

registrant demonstrates good cause for 

missing the deadline. 

(i) The registrant’s notice to the 

Commission shall include: 

(A) Identification of the nominating 

shareholder or each member of the 

nominating shareholder group, as 

applicable; 

(B) The name of the nominee or 

nominees; 

(C) An explanation of the registrant’s 

basis for determining that the registrant 

may exclude the nominee or nominees 

or a statement of support; and 

(D) A supporting opinion of counsel 

when the registrant’s basis for excluding 

a nominee or nominees relies on a 

matter of state or foreign law. 

(ii) The registrant must file its notice 

to the Commission and simultaneously 

provide a copy to the nominating 

shareholder or each member of the 

nominating shareholder group (or their 

authorized representative). At the time 

the registrant files its notice, the 

registrant also may seek an informal 

statement of the Commission staff’s 

views with regard to its determination 

to exclude from its proxy materials a 

nominee or nominees or a statement of 

support. The Commission staff may 

provide an informal statement of its 

views to the registrant along with a copy 

to the nominating shareholder or 

nominating shareholder group (or their 

authorized representative); 

(iii) The nominating shareholder or 

nominating shareholder group may 

submit a response to the registrant’s 

notice to the Commission. This response 

must be postmarked or transmitted 

electronically to the Commission no 

later than 14 calendar days after the 

nominating shareholder’s or nominating 

shareholder group’s receipt of the 

registrant’s notice to the Commission. 

The nominating shareholder or 

nominating shareholder group must 

simultaneously provide to the registrant 

a copy of its response to the 

Commission. 

(iv) If the registrant seeks an informal 

statement of the Commission staff’s 

views with regard to its determination 

to exclude a shareholder nominee or 

nominees, the registrant shall provide 

the nominating shareholder or 

nominating shareholder group (or their 

authorized representative) with notice, 

either postmarked or transmitted 

electronically, promptly following 

receipt of the staff’s response, of 

whether it will include or exclude the 

shareholder nominee; and 

(v) The exclusion of a shareholder 

nominee or a statement of support by a 

registrant where that exclusion is not 

permissible under paragraph (a), (b), (c), 

(d), or (e) of this section shall be a 

violation of this section. 

Instruction 1 to paragraph (g). When a 

registrant must provide a notice to a 

nominating shareholder, member of a 

nominating shareholder group, or authorized 

representative of a nominating shareholder 

group, the registrant is responsible for 

providing the notice in a manner that 

evidences timely transmission. Where a 

nominating shareholder, member of a 

nominating shareholder group, or authorized 

representative of a nominating shareholder 

group responds to a notice, the nominating 

shareholder, member of a nominating 

shareholder group, or authorized 

representative of a nominating shareholder 

group is responsible for providing the 

response in a manner that evidences timely 

transmission. 

Instruction 2 to paragraph (g). Neither the 

composition of the nominating shareholder 

group nor the shareholder nominee may be 

changed as a means to correct a deficiency 

identified in the registrant’s notice to the 

nominating shareholder or nominating 

shareholder group under paragraph (g)(2) of 

this section; however, where a nominating 

shareholder or nominating shareholder group 

submits a number of nominees that exceeds 

the maximum number required to be 

included by the registrant under the 

circumstances set forth in paragraph (d) of 

this section, the nominating shareholder or 

nominating shareholder group may specify 

which nominee or nominees are not to be 

included in the registrant’s proxy materials. 

Instruction 3 to paragraph (g). Unless 

otherwise indicated in this section, the 

burden is on the registrant to demonstrate 

that it may exclude a nominee or statement 

of support. 

■ 16. Amend § 240.14a–12 by removing 

the heading following paragraph 

(c)(2)(iii) ‘‘Instructions to § 240.14a–12’’; 

by removing the numbers 1. and 2. of 

instructions 1 and 2 to § 240.14a–12 and 

adding in their places the phrases 

‘‘Instruction 1 to § 240.14a–12.’’ and 

‘‘Instruction 2 to § 240.14a–12.’’, 

respectively; and adding Instruction 3 to 

§ 240.14a–12 to read as follows: 

§ 240.14a–12 Solicitation before furnishing 

a proxy statement. 

* * * * * 

Instruction 3 to § 240.14a–12. 

Inclusion of a nominee pursuant to 

§ 240.14a–11, an applicable state or 

foreign law provision, or a registrant’s 

governing documents as they relate to 

the inclusion of shareholder director 

nominees in the registrant’s proxy 

materials, or solicitations by a 

nominating shareholder or nominating 

shareholder group that are made in 

connection with that nomination 

constitute solicitations in opposition 

subject to § 240.14a–12(c), except for 

purposes of § 240.14a–6(a). 

■ 17. Add § 240.14a–18 to read as 

follows: 

§ 240.14a–18 Disclosure regarding 

nominating shareholders and nominees 

submitted for inclusion in a registrant’s 

proxy materials pursuant to applicable state 

or foreign law, or a registrant’s governing 

documents. 

To have a nominee included in a 

registrant’s proxy materials pursuant to 

a procedure set forth under applicable 

state or foreign law, or the registrant’s 

governing documents addressing the 

inclusion of shareholder director 

nominees in the registrant’s proxy 

materials, the nominating shareholder 

or nominating shareholder group must 


emcdonald on DSK2BSOYB1PROD with RULES2
56788 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

provide notice to the registrant of its 

intent to do so on a Schedule 14N 

(§ 240.14n–101) and file that notice, 

including the required disclosure, with 

the Commission on the date first 

transmitted to the registrant. This notice 

shall be postmarked or transmitted 

electronically to the registrant by the 

date specified by the registrant’s 

advance notice provision or, where no 

such provision is in place, no later than 

120 calendar days before the 

anniversary of the date that the 

registrant mailed its proxy materials for 

the prior year’s annual meeting, except 

that, if the registrant did not hold an 

annual meeting during the prior year, or 

if the date of the meeting has changed 

by more than 30 calendar days from the 

prior year, then the nominating 

shareholder or nominating shareholder 

group must provide notice a reasonable 

time before the registrant mails its proxy 

materials, as specified by the registrant 

in a Form 8–K (§ 249.308 of this 

chapter) filed pursuant to Item 5.08 of 

Form 8–K. 

Instruction to § 240.14a–18. The 

registrant is not responsible for any 

information provided in the Schedule 

14N (§ 240.14n–101) by the nominating 

shareholder or nominating shareholder 

group, which is submitted as required 

by this section or otherwise provided by 

the nominating shareholder or 

nominating shareholder group that is 

included in the registrant’s proxy 

materials. 

■ 18. Amend § 240.14a–101 by: 

■ a. Revising Item 7 as follows: 

■ i. Redesignating paragraph (e) as 

paragraph (g); and 

■ ii. Adding new paragraph (e) and 

paragraph (f); and 

■ b. Adding paragraphs (18) and (19) to 

Item 22(b). 

The additions read as follows: 

§ 240.14a–101 Schedule 14A. Information 

required in proxy statement. 

SCHEDULE 14A INFORMATION 

* * * * * 

Item 7. * * * 

* * * * * 

(e) If a shareholder nominee or 

nominees are submitted to the registrant 

for inclusion in the registrant’s proxy 

materials pursuant to § 240.14a–11 and 

the registrant is not permitted to 

exclude the nominee or nominees 

pursuant to the provisions of § 240.14a– 

11, the registrant must include in its 

proxy statement the disclosure required 

from the nominating shareholder or 

nominating shareholder group under 

Item 5 of § 240.14n–101 with regard to 

the nominee or nominees and the 

nominating shareholder or nominating 

shareholder group. 

Instruction to Item 7(e). The 

information disclosed pursuant to 

paragraph (e) of this Item will not be 

deemed incorporated by reference into 

any filing under the Securities Act of 

1933 (15 U.S.C. 77a et seq.), the 

Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.), or the Investment 

Company Act of 1940 (15 U.S.C. 80a–1 

et seq.), except to the extent that the 

registrant specifically incorporates that 

information by reference. 

(f) If a registrant is required to include 

a shareholder nominee or nominees 

submitted to the registrant for inclusion 

in the registrant’s proxy materials 

pursuant to a procedure set forth under 

applicable state or foreign law, or the 

registrant’s governing documents 

providing for the inclusion of 

shareholder director nominees in the 

registrant’s proxy materials, the 

registrant must include in its proxy 

statement the disclosure required from 

the nominating shareholder or 

nominating shareholder group under 

Item 6 of § 240.14n–101 with regard to 

the nominee or nominees and the 

nominating shareholder or nominating 

shareholder group. 

Instruction to Item 7(f). The 

information disclosed pursuant to 

paragraph (f) of this Item will not be 

deemed incorporated by reference into 

any filing under the Securities Act of 

1933 (15 U.S.C. 77a et seq.), the 

Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.), or the Investment 

Company Act of 1940 (15 U.S.C. 80a–1 

et seq.), except to the extent that the 

registrant specifically incorporates that 

information by reference. 

* * * * * 

Item 22. Information required in 

investment company proxy statement. 

* * * * * 

(b) * * * 

(18) If a shareholder nominee or 

nominees are submitted to the Fund for 

inclusion in the Fund’s proxy materials 

pursuant to § 240.14a–11 and the Fund 

is not permitted to exclude the nominee 

or nominees pursuant to the provisions 

of § 240.14a–11, the Fund must include 

in its proxy statement the disclosure 

required from the nominating 

shareholder or nominating shareholder 

group under Item 5 of § 240.14n–101 

with regard to the nominee or nominees 

and the nominating shareholder or 

nominating shareholder group. 

Instruction to paragraph (b)(18). The 

information disclosed pursuant to 

paragraph (b)(18) of this Item will not be 

deemed incorporated by reference into 

any filing under the Securities Act of 

1933 (15 U.S.C. 77a et seq.), the 

Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.), or the Investment 

Company Act of 1940 (15 U.S.C. 80a–1 

et seq.), except to the extent that the 

Fund specifically incorporates that 

information by reference. 

(19) If a Fund is required to include 

a shareholder nominee or nominees 

submitted to the Fund for inclusion in 

the Fund’s proxy materials pursuant to 

a procedure set forth under applicable 

state or foreign law or the Fund’s 

governing documents providing for the 

inclusion of shareholder director 

nominees in the Fund’s proxy materials, 

the Fund must include in its proxy 

statement the disclosure required from 

the nominating shareholder or 

nominating shareholder group under 

Item 6 of § 240.14n–101 with regard to 

the nominee or nominees and the 

nominating shareholder or nominating 

shareholder group. 

Instruction to paragraph (b)(19). The 

information disclosed pursuant to 

paragraph (b)(19) of this Item will not be 

deemed incorporated by reference into 

any filing under the Securities Act of 

1933 (15 U.S.C. 77a et seq.), the 

Securities Exchange Act of 1934 (15 

U.S.C. 78a et seq.), or the Investment 

Company Act of 1940 (15 U.S.C. 80a–1 

et seq.), except to the extent that the 

Fund specifically incorporates that 

information by reference. 

* * * * * 

■ 19. Amend part 240 by adding an 

undesignated center heading and 

§§ 240.14n–1 through 240.14n–3 and 

§ 240.14n–101 to read as follows: 

Regulation 14N: Filings Required by 

Certain Nominating Shareholders 

§ 240.14n–1 Filing of Schedule 14N. 

(a) A shareholder or group of 

shareholders that submits a nominee or 

nominees in accordance with § 240.14a– 

11 or a procedure set forth under 

applicable state or foreign law, or a 

registrant’s governing documents 

providing for the inclusion of 

shareholder director nominees in the 

registrant’s proxy materials shall file 

with the Commission a statement 

containing the information required by 

Schedule 14N (§ 240.14n–101) and 

simultaneously provide the notice on 

Schedule 14N to the registrant. 

(b)(1) Whenever two or more persons 

are required to file a statement 

containing the information required by 

Schedule 14N (§ 240.14n–101), only one 

statement need be filed. The statement 

must identify all such persons, contain 

the required information with regard to 

each such person, indicate that the 

statement is filed on behalf of all such 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56789 

persons, and include, as an appendix, 

their agreement in writing that the 

statement is filed on behalf of each of 

them. Each person on whose behalf the 

statement is filed is responsible for the 

timely filing of that statement and any 

amendments thereto, and for the 

completeness and accuracy of the 

information concerning such person 

contained therein; such person is not 

responsible for the completeness or 

accuracy of the information concerning 

the other persons making the filing. 

(2) If the group’s members elect to 

make their own filings, each filing 

should identify all members of the 

group but the information provided 

concerning the other persons making 

the filing need only reflect information 

which the filing person knows or has 

reason to know. 

§ 240.14n–2 Filing of amendments to 

Schedule 14N. 

(a) If any material change occurs with 

respect to the nomination, or in the 

disclosure or certifications set forth in 

the Schedule 14N (§ 240.14n–101) 

required by § 240.14n–1(a), the person 

or persons who were required to file the 

statement shall promptly file or cause to 

be filed with the Commission an 

amendment disclosing that change. 

(b) An amendment shall be filed 

within 10 calendar days of the final 

results of the election being announced 

by the registrant stating the nominating 

shareholder’s or the nominating 

shareholder group’s intention with 

regard to continued ownership of their 

shares. 

§ 240.14n–3 Dissemination. 

One copy of Schedule 14N 

(§ 240.14n–101) filed pursuant to 

§§ 240.14n–1 and 240.14n–2 shall be 

mailed by registered or certified mail or 

electronically transmitted to the 

registrant at its principal executive 

office. Three copies of the material must 

at the same time be filed with, or mailed 

for filing to, each national securities 

exchange upon which any class of 

securities of the registrant is listed and 

registered. 

§ 240.14n–101 Schedule 14N—Information 

to be included in statements filed pursuant 

to § 240.14n–1 and amendments thereto 

filed pursuant to § 240.14n–2. 

Securities and Exchange Commission, 

Washington, DC 20549 

Schedule 14N 

Under the Securities Exchange Act of 

1934 

(Amendment No. _)* 

(Name of Issuer) 

lllllllllllllllllllll

(Title of Class of Securities) 

lllllllllllllllllllll

(CUSIP Number) 

lllllllllllllllllllll

[ ] Solicitation pursuant to § 240.14a– 

2(b)(7) 

[ ] Solicitation pursuant to § 240.14a– 

2(b)(8) 

[ ] Notice of Submission of a Nominee 

or Nominees in Accordance with 

§ 240.14a–11 

[ ] Notice of Submission of a Nominee 

or Nominees in Accordance with 

Procedures Set Forth Under 

Applicable State or Foreign Law, or 

the Registrant’s Governing Documents 

* The remainder of this cover page 

shall be filled out for a reporting 

person’s initial filing on this form, and 

for any subsequent amendment 

containing information which would 

alter the disclosures provided in a prior 

cover page. 

The information required in the 

remainder of this cover page shall not be 

deemed to be ‘‘filed’’ for the purpose of 

Section 18 of the Securities Exchange 

Act of 1934 (‘‘Act’’) or otherwise subject 

to the liabilities of that section of the 

Act but shall be subject to all other 

provisions of the Act. 

(1) Names of reporting persons: 

llllllllllll 

(2) Mailing address and phone 

number of each reporting person (or, 

where applicable, the authorized 

representative): 

llllllllllll 

(3) Amount of securities held that are 

entitled to be voted on the election of 

directors held by each reporting person 

(and, where applicable, amount of 

securities held in the aggregate by the 

nominating shareholder group), but 

including loaned securities and net of 

securities sold short or borrowed for 

purposes other than a short sale: 

llllllllllll 

(4) Number of votes attributable to the 

securities entitled to be voted on the 

election of directors represented by 

amount in Row (3) (and, where 

applicable, aggregate number of votes 

attributable to the securities entitled to 

be voted on the election of directors 

held by group): 

llllllllllll 

Instructions for Cover Page: 

(1) Names of Reporting Persons— 

Furnish the full legal name of each 

person for whom the report is filed— 

i.e., each person required to sign the 

schedule itself—including each member 

of a group. Do not include the name of 

a person required to be identified in the 

report but who is not a reporting person. 

(3) and (4) Amount Held by Each 

Reporting Person—Rows (3) and (4) are 

to be completed in accordance with the 

provisions of Item 3 of Schedule 14N. 

Notes: Attach as many copies of parts one 

through three of the cover page as are 

needed, one reporting person per copy. 

Filing persons may, in order to avoid 

unnecessary duplication, answer items 

on Schedule 14N by appropriate cross 

references to an item or items on the 

cover page(s). This approach may only 

be used where the cover page item or 

items provide all the disclosure required 

by the schedule item. Moreover, such a 

use of a cover page item will result in 

the item becoming a part of the schedule 

and accordingly being considered as 

‘‘filed’’ for purposes of Section 18 of the 

Act or otherwise subject to the liabilities 

of that section of the Act. 

Special Instructions for Complying 

With Schedule 14N 

Under Sections 14 and 23 of the 

Securities Exchange Act of 1934 and the 

rules and regulations thereunder, the 

Commission is authorized to solicit the 

information required to be supplied by 

this Schedule. The information will be 

used for the primary purpose of 

determining and disclosing the holdings 

and interests of a nominating 

shareholder or nominating shareholder 

group. This statement will be made a 

matter of public record. Therefore, any 

information given will be available for 

inspection by any member of the public. 

Because of the public nature of the 

information, the Commission can use it 

for a variety of purposes, including 

referral to other governmental 

authorities or securities self-regulatory 

organizations for investigatory purposes 

or in connection with litigation 

involving the Federal securities laws or 

other civil, criminal or regulatory 

statutes or provisions. Failure to 

disclose the information requested by 

this schedule may result in civil or 

criminal action against the persons 

involved for violation of the Federal 

securities laws and rules promulgated 

thereunder, or in some cases, exclusion 

of the nominee from the registrant’s 

proxy materials. 

General Instructions to Item 

Requirements 

The item numbers and captions of the 

items shall be included but the text of 

the items is to be omitted. The answers 

to the items shall be prepared so as to 

indicate clearly the coverage of the 

items without referring to the text of the 

items. Answer every item. If an item is 

inapplicable or the answer is in the 

negative, so state. 


emcdonald on DSK2BSOYB1PROD with RULES2
56790 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

Item 1(a). Name of Registrant 

Item 1(b). Address of Registrant’s 

Principal Executive Offices 

Item 2(a). Name of Person Filing 

Item 2(b). Address or Principal 

Business Office or, if None, Residence 

Item 2(c). Title of Class of Securities 

Item 2(d). CUSIP No. 

Item 3. Ownership 

Provide the following information, in 

accordance with Instruction 3 to 

§ 240.14a–11(b)(1): 

(a) Amount of securities held and 

entitled to be voted on the election of 

directors (and, where applicable, 

amount of securities held in the 

aggregate by the nominating shareholder 

group): ______. 

(b) The number of votes attributable to 

the securities referred to in paragraph 

(a) of this Item: ______. 

(c) The number of votes attributable to 

securities that have been loaned but 

which the reporting person: 

(i) has the right to recall; and 

(ii) will recall upon being notified that 

any of the nominees will be included in 

the registrant’s proxy statement and 

proxy card: ______. 

(d) The number of votes attributable 

to securities that have been sold in a 

short sale that is not closed out, or that 

have been borrowed for purposes other 

than a short sale: ______. 

(e) The sum of paragraphs (b) and (c), 

minus paragraph (d) of this Item, 

divided by the aggregate number of 

votes derived from all classes of 

securities of the registrant that are 

entitled to vote on the election of 

directors, and expressed as a percentage: 

______. 

Item 4. Statement of Ownership From a 

Nominating Shareholder or Each 

Member of a Nominating Shareholder 

Group Submitting this Notice Pursuant 

to § 240.14a–11 

(a) If the nominating shareholder, or 

each member of the nominating 

shareholder group, is the registered 

holder of the shares, please so state. 

Otherwise, attach to the Schedule 14N 

one or more written statements from the 

persons (usually brokers or banks) 

through which the nominating 

shareholder’s securities are held, 

verifying that, within seven calendar 

days prior to filing the shareholder 

notice on Schedule 14N with the 

Commission and transmitting the notice 

to the registrant, the nominating 

shareholder continuously held the 

amount of securities being used to 

satisfy the ownership threshold for a 

period of at least three years. In the 

alternative, if the nominating 

shareholder has filed a Schedule 13D 

(§ 240.13d–101), Schedule 13G 

(§ 240.13d–102), Form 3 (§ 249.103 of 

this chapter), Form 4 (§ 249.104 of this 

chapter), and/or Form 5 (§ 249.105 of 

this chapter), or amendments to those 

documents, reflecting ownership of the 

securities as of or before the date on 

which the three-year eligibility period 

begins, so state and incorporate that 

filing or amendment by reference. 

(b) Provide a written statement that 

the nominating shareholder, or each 

member of the nominating shareholder 

group, intends to continue to hold the 

amount of securities that are used for 

purposes of satisfying the minimum 

ownership requirement of § 240.14a– 

11(b)(1) through the date of the meeting 

of shareholders, as required by 

§ 240.14a–11(b)(4). Additionally, 

provide a written statement from the 

nominating shareholder or each member 

of the nominating shareholder group 

regarding the nominating shareholder’s 

or nominating shareholder group 

member’s intent with respect to 

continued ownership after the election 

of directors, as required by § 240.14a– 

11(b)(5). 

Instruction to Item 4. If the 

nominating shareholder or any member 

of the nominating shareholder group is 

not the registered holder of the 

securities and is not proving ownership 

for purposes of § 240.14a–11(b)(3) by 

providing previously filed Schedules 

13D or 13G or Forms 3, 4, or 5, and the 

securities are held in an account with a 

broker or bank that is a participant in 

the Depository Trust Company (‘‘DTC’’) 

or other clearing agency acting as a 

securities depository, a written 

statement or statements from that 

participant or participants in the 

following form will satisfy § 240.14a– 

11(b)(3): 

As of [date of this statement], [name 

of nominating shareholder or member of 

the nominating shareholder group] held 

at least [number of securities owned 

continuously for at least three years] of 

the [registrant’s] [class of securities], 

and has held at least this amount of 

such securities continuously for [at least 

three years]. [Name of clearing agency 

participant] is a participant in [name of 

clearing agency] whose nominee name 

is [nominee name]. 

[name of clearing agency 

participant] 

By: [name and title of 

representative] 

Date: 

If the securities are held through a 

broker or bank (e.g. in an omnibus 

account) that is not a participant in a 

clearing agency acting as a securities 

depository, the nominating shareholder 

or member of the nominating 

shareholder group must (a) obtain and 

submit a written statement or statements 

(the ‘‘initial broker statement’’) from the 

broker or bank with which the 

nominating shareholder or member of 

the nominating shareholder group 

maintains an account that provides the 

information about securities ownership 

set forth above and (b) obtain and 

submit a separate written statement 

from the clearing agency participant 

through which the securities of the 

nominating shareholder or member of 

the nominating shareholder group are 

held, that (i) identifies the broker or 

bank for whom the clearing agency 

participant holds the securities, and (ii) 

states that the account of such broker or 

bank has held, as of the date of the 

separate written statement, at least the 

number of securities specified in the 

initial broker statement, and (iii) states 

that this account has held at least that 

amount of securities continuously for at 

least three years. 

If the securities have been held for 

less than three years at the relevant 

entity, provide written statements 

covering a continuous period of three 

years and modify the language set forth 

above as appropriate. 

For purposes of complying with 

§ 240.14a–11(b)(3), loaned securities 

may be included in the amount of 

securities set forth in the written 

statements. 

Item 5. Disclosure Required for 

Shareholder Nominations Submitted 

Pursuant to § 240.14a–11 

If a nominating shareholder or 

nominating shareholder group is 

submitting this notice in connection 

with the inclusion of a shareholder 

nominee or nominees for director in the 

registrant’s proxy materials pursuant to 

§ 240.14a–11, provide the following 

information: 

(a) A statement that the nominee 

consents to be named in the registrant’s 

proxy statement and form of proxy and, 

if elected, to serve on the registrant’s 

board of directors; 

(b) Disclosure about the nominee as 

would be provided in response to the 

disclosure requirements of Items 4(b), 

5(b), 7(a), (b) and (c) and, for investment 

companies, Item 22(b) of Schedule 14A 

(§ 240.14a–101), as applicable; 

(c) Disclosure about the nominating 

shareholder or each member of a 

nominating shareholder group as would 

be required of a participant in response 

to the disclosure requirements of Items 

4(b) and 5(b) of Schedule 14A 

(§ 240.14a–101), as applicable; 


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Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56791 

(d) Disclosure about whether the 

nominating shareholder or any member 

of a nominating shareholder group has 

been involved in any legal proceeding 

during the past ten years, as specified in 

Item 401(f) of Regulation S–K (§ 229.10 

of this chapter). Disclosure pursuant to 

this paragraph need not be provided if 

provided in response to Item 5(c) of this 

section; 

Instruction 1 to Item 5(c) and (d). 

Where the nominating shareholder is a 

general or limited partnership, 

syndicate or other group, the 

information called for in paragraphs (c) 

and (d) of this Item must be given with 

respect to: 

a. Each partner of the general 

partnership; 

b. Each partner who is, or functions 

as, a general partner of the limited 

partnership; 

c. Each member of the syndicate or 

group; and 

d. Each person controlling the partner 

or member. 

Instruction 2 to Item 5(c) and (d). If 

the nominating shareholder is a 

corporation or if a person referred to in 

a., b., c. or d. of Instruction 1 to 

paragraphs (c) and (d) of this Item is a 

corporation, the information called for 

in paragraphs (c) and (d) of this Item 

must be given with respect to: 

a. Each executive officer and director 

of the corporation; 

b. Each person controlling the 

corporation; and 

c. Each executive officer and director 

of any corporation or other person 

ultimately in control of the corporation. 

(e) Disclosure about whether, to the 

best of the nominating shareholder’s or 

group’s knowledge, the nominee meets 

the director qualifications, if any, set 

forth in the registrant’s governing 

documents; 

(f) A statement that, to the best of the 

nominating shareholder’s or group’s 

knowledge, in the case of a registrant 

other than an investment company, the 

nominee meets the objective criteria for 

‘‘independence’’ of the national 

securities exchange or national 

securities association rules applicable to 

the registrant, if any, or, in the case of 

a registrant that is an investment 

company, the nominee is not an 

‘‘interested person’’ of the registrant as 

defined in section 2(a)(19) of the 

Investment Company Act of 1940 (15 

U.S.C. 80a–2(a)(19)). 

Instruction to Item 5(f). For this 

purpose, the nominee would be 

required to meet the definition of 

‘‘independence’’ that is generally 

applicable to directors of the registrant 

and not any particular definition of 

independence applicable to members of 

the audit committee of the registrant’s 

board of directors. To the extent a 

national securities exchange or national 

securities association rule imposes a 

standard regarding independence that 

requires a subjective determination by 

the board or a group or committee of the 

board (for example, requiring that the 

board of directors or any group or 

committee of the board of directors 

make a determination regarding the 

existence of factors material to a 

determination of a nominee’s 

independence), the nominee would not 

be required to meet the subjective 

determination of independence as part 

of the shareholder nomination process. 

(g) The following information 

regarding the nature and extent of the 

relationships between the nominating 

shareholder or nominating shareholder 

group, the nominee, and/or the 

registrant or any affiliate of the 

registrant: 

(1) Any direct or indirect material 

interest in any contract or agreement 

between the nominating shareholder or 

any member of the nominating 

shareholder group, the nominee, and/or 

the registrant or any affiliate of the 

registrant (including any employment 

agreement, collective bargaining 

agreement, or consulting agreement); 

(2) Any material pending or 

threatened legal proceeding in which 

the nominating shareholder or any 

member of the nominating shareholder 

group and/or the nominee is a party or 

a material participant, and that involves 

the registrant, any of its executive 

officers or directors, or any affiliate of 

the registrant; and 

(3) Any other material relationship 

between the nominating shareholder or 

any member of the nominating 

shareholder group, the nominee, and/or 

the registrant or any affiliate of the 

registrant not otherwise disclosed; 

Note to Item 5(g)(3). Any other 

material relationship of the nominating 

shareholder or any member of the 

nominating shareholder group or 

nominee with the registrant or any 

affiliate of the registrant may include, 

but is not limited to, whether the 

nominating shareholder or any member 

of the nominating shareholder group 

currently has, or has had in the past, an 

employment relationship with the 

registrant or any affiliate of the 

registrant (including consulting 

arrangements). 

(h) The Web site address on which the 

nominating shareholder or nominating 

shareholder group may publish 

soliciting materials, if any; and 

(i) Any statement in support of the 

shareholder nominee or nominees, 

which may not exceed 500 words for 

each nominee, if the nominating 

shareholder or nominating shareholder 

group elects to have such statement 

included in the registrant’s proxy 

materials. 

Item 6. Disclosure Required by 

§ 240.14a–18 

If a nominating shareholder or 

nominating shareholder group is 

submitting this notice in connection 

with the inclusion of a shareholder 

nominee or nominees for director in the 

registrant’s proxy materials pursuant to 

a procedure set forth under applicable 

state or foreign law, or the registrant’s 

governing documents provide the 

following disclosure: 

(a) A statement that the nominee 

consents to be named in the registrant’s 

proxy statement and form of proxy and, 

if elected, to serve on the registrant’s 

board of directors; 

(b) Disclosure about the nominee as 

would be provided in response to the 

disclosure requirements of Items 4(b), 

5(b), 7(a), (b) and (c) and, for investment 

companies, Item 22(b) of Schedule 14A 

(§ 240.14a–101), as applicable; 

(c) Disclosure about the nominating 

shareholder or each member of a 

nominating shareholder group as would 

be required in response to the disclosure 

requirements of Items 4(b) and 5(b) of 

Schedule 14A (§ 240.14a–101), as 

applicable; 

(d) Disclosure about whether the 

nominating shareholder or any member 

of a nominating shareholder group has 

been involved in any legal proceeding 

during the past ten years, as specified in 

Item 401(f) of Regulation S–K (§ 229.10 

of this chapter). Disclosure pursuant to 

this paragraph need not be provided if 

provided in response to Item 6(c) of this 

section; 

Instruction 1 to Item 6(c) and (d). 

Where the nominating shareholder is a 

general or limited partnership, 

syndicate or other group, the 

information called for in paragraphs (c) 

and (d) of this Item must be given with 

respect to: 

a. Each partner of the general 

partnership; 

b. Each partner who is, or functions 

as, a general partner of the limited 

partnership; 

c. Each member of the syndicate or 

group; and 

d. Each person controlling the partner 

or member. 

Instruction 2 to Item 6(c) and (d). If 

the nominating shareholder is a 

corporation or if a person referred to in 

a., b., c. or d. of Instruction 1 to 

paragraphs (c) and (d) of this Item is a 

corporation, the information called for 


emcdonald on DSK2BSOYB1PROD with RULES2
56792 Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 

in paragraphs (c) and (d) of this Item 

must be given with respect to: 

a. Each executive officer and director 

of the corporation; 

b. Each person controlling the 

corporation; and 

c. Each executive officer and director 

of any corporation or other person 

ultimately in control of the corporation. 

(e) The following information 

regarding the nature and extent of the 

relationships between the nominating 

shareholder or nominating shareholder 

group, the nominee, and/or the 

registrant or any affiliate of the 

registrant: 

(1) Any direct or indirect material 

interest in any contract or agreement 

between the nominating shareholder or 

any member of the nominating 

shareholder group, the nominee, and/or 

the registrant or any affiliate of the 

registrant (including any employment 

agreement, collective bargaining 

agreement, or consulting agreement); 

(2) Any material pending or 

threatened legal proceeding in which 

the nominating shareholder or any 

member of the nominating shareholder 

group and/or nominee is a party or a 

material participant, involving the 

registrant, any of its executive officers or 

directors, or any affiliate of the 

registrant; and 

(3) Any other material relationship 

between the nominating shareholder or 

any member of the nominating 

shareholder group, the nominee, and/or 

the registrant or any affiliate of the 

registrant not otherwise disclosed; and 

Instruction to Item 6(e)(3). Any other 

material relationship of the nominating 

shareholder or any member of the 

nominating shareholder group with the 

registrant or any affiliate of the 

registrant may include, but is not 

limited to, whether the nominating 

shareholder or any member of the 

nominating shareholder group currently 

has, or has had in the past, an 

employment relationship with the 

registrant or any affiliate of the 

registrant (including consulting 

arrangements). 

(f) The Web site address on which the 

nominating shareholder or nominating 

shareholder group may publish 

soliciting materials, if any. 

Item 7. Notice of Dissolution of Group 

or Termination of Shareholder 

Nomination 

Notice of dissolution of a nominating 

shareholder group or the termination of 

a shareholder nomination shall state the 

date of the dissolution or termination. 

Item 8. Signatures 

(a) The following certifications shall 

be provided by the filing person 

submitting this notice pursuant to 

§ 240.14a–11, or in the case of a group, 

each filing person whose securities are 

being aggregated for purposes of 

meeting the ownership threshold set out 

in § 240.14a–11(b)(1) exactly as set forth 

below: 

I, [identify the certifying individual], 

after reasonable inquiry and to the best 

of my knowledge and belief, certify that: 

(1) I [or if signed by an authorized 

representative, the name of the 

nominating shareholder or each member 

of the nominating shareholder group, as 

appropriate] am [is] not holding any of 

the registrant’s securities with the 

purpose, or with the effect, of changing 

control of the registrant or to gain a 

number of seats on the board of 

directors that exceeds the maximum 

number of nominees that the registrant 

could be required to include under 

§ 240.14a–11(d); 

(2) I [or if signed by an authorized 

representative, the name of the 

nominating shareholder or each member 

of the nominating shareholder group, as 

appropriate] otherwise satisfy [satisfies] 

the requirements of § 240.14a–11(b), as 

applicable; 

(3) The nominee or nominees satisfies 

the requirements of § 240.14a–11(b), as 

applicable; and 

(4) The information set forth in this 

notice on Schedule 14N is true, 

complete and correct. 

(b) The following certification shall be 

provided by the filing person or persons 

submitting this notice in connection 

with the submission of a nominee or 

nominees in accordance with 

procedures set forth under applicable 

state or foreign law or the registrant’s 

governing documents: 

I, [identify the certifying individual], 

after reasonable inquiry and to the best 

of my knowledge and belief, certify that 

the information set forth in this notice 

on Schedule 14N is true, complete and 

correct. 

Dated: lllllllllllllllll

Signature: llllllllllllllll

Name/Title: lllllllllllllll

The original statement shall be signed 

by each person on whose behalf the 

statement is filed or his authorized 

representative. If the statement is signed 

on behalf of a person by his authorized 

representative other than an executive 

officer or general partner of the filing 

person, evidence of the representative’s 

authority to sign on behalf of such 

person shall be filed with the statement, 

provided, however, that a power of 

attorney for this purpose which is 

already on file with the Commission 

may be incorporated by reference. The 

name and any title of each person who 

signs the statement shall be typed or 

printed beneath his signature. 

Attention: Intentional misstatements 

or omissions of fact constitute Federal 

criminal violations (see 18 U.S.C. 1001). 

■ 20. Amend § 240.15d–11 by revising 

paragraph (b) to read as follows: 

§ 240.15d–11 Current reports on Form 8–K 

(§ 249.308 of this chapter). 

* * * * * 

(b) This section shall not apply to 

foreign governments, foreign private 

issuers required to make reports on 

Form 6–K (17 CFR 249.306) pursuant to 

§ 240.15d–16, issuers of American 

Depositary Receipts for securities of any 

foreign issuer, or investment companies 

required to file reports pursuant to 

§ 270.30b1–1 of this chapter under the 

Investment Company Act of 1940, 

except where such an investment 

company is required to file: 

(1) Notice of a blackout period 

pursuant to § 245.104 of this chapter; 

(2) Disclosure pursuant to Instruction 

2 to § 240.14a–11(b)(1) of information 

concerning outstanding shares and 

voting; or 

(3) Disclosure pursuant to Instruction 

2 to § 240.14a–11(b)(10) of the date by 

which a nominating shareholder or 

nominating shareholder group must 

submit the notice required pursuant to 

§ 240.14a–11(b)(10). 

* * * * * 

PART 249—FORMS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 21. The authority citation for Part 249 

continues to read, in part, as follows: 

Authority: 15 U.S.C. 78a et seq. and 7201 

et seq.; and 18 U.S.C. 1350, unless otherwise 

noted. 

* * * * * 

■ 22. Amend Form 8–K (referenced in 

§ 249.308) by: 

■ a. Adding a sentence at the end of 

General Instruction B.1; 

■ b. Removing the phrase ‘‘Section 5.06’’ 

in the heading and adding in its place 

‘‘Item 5.06’’; and 

■ c. Adding Item 5.08. 

The additions read as follows: 

Note: The text of Form 8–K does not, and 

this amendment will not, appear in the Code 

of Federal Regulations. 

Form 8–K 

* * * * * 

GENERAL INSTRUCTIONS 

* * * * * 


emcdonald on DSK2BSOYB1PROD with RULES2
Federal Register / Vol. 75, No. 179 / Thursday, September 16, 2010 / Rules and Regulations 56793 

B. Events To Be Reported and Time for 

Filing Reports 

1. * * * A report pursuant to Item 

5.08 is to be filed within four business 

days after the registrant determines the 

anticipated meeting date. 

* * * * * 

Item 5.08 Shareholder Director 

Nominations 

(a) If the registrant did not hold an 

annual meeting the previous year, or if 

the date of this year’s annual meeting 

has been changed by more than 30 

calendar days from the date of the 

previous year’s meeting, then the 

registrant is required to disclose the date 

by which a nominating shareholder or 

nominating shareholder group must 

submit the notice on Schedule 14N 

(§ 240.14n–101) required pursuant to 

§ 240.14a–11(b)(10), which date shall be 

a reasonable time before the registrant 

mails its proxy materials for the 

meeting. Where a registrant is required 

to include shareholder director 

nominees in the registrant’s proxy 

materials pursuant to either an 

applicable state or foreign law 

provision, or a provision in the 

registrant’s governing documents, then 

the registrant is required to disclose the 

date by which a nominating shareholder 

or nominating shareholder group must 

submit the notice on Schedule 14N 

required pursuant to § 240.14a–18. 

(b) If the registrant is a series 

company as defined in Rule 18f–2(a) 

under the Investment Company Act of 

1940 (§ 270.18f–2 of this chapter), then 

the registrant is required to disclose in 

connection with the election of directors 

at an annual meeting of shareholders 

(or, in lieu of such an annual meeting, 

a special meeting of shareholders) the 

total number of shares of the registrant 

outstanding and entitled to be voted (or 

if the votes are to be cast on a basis 

other than one vote per share, then the 

total number of votes entitled to be 

voted and the basis for allocating such 

votes) on the election of directors at 

such meeting of shareholders as of the 

end of the most recent calendar quarter. 

* * * * * 

By the Commission. 

Dated: August 25, 2010. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2010–22218 Filed 9–15–10; 8:45 am] 

BILLING CODE 8010–01–P 


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