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The Securities and Exchange Commission voted 3-2 on Wednesday to change how public company shareholders can nominate directors on proxy materials. The final rule generally allows a shareholder or group of shareholders who have owned at least 3 percent of the company’s voting stock for at least three years to get their own corporate director candidates listed on company-issued shareholder voting materials. The change makes it less expensive and easier for shareholders to nominate their own candidates for director slots. Although SEC Chairman Mary Schapiro said that the rule “reflects compromise and weighing of competing interests,” the dissenting commissioners, as well as business interests, criticized it because it gives more leverage to institutional shareholders at the expense of individual shareholders. Schapiro opened the 75-minute meeting by noting that the director nomination process has been debated for more than 30 years and for the fourth time in recent years. She also said that the July 21 enactment of the financial reform bill, officially the Dodd-Frank Wall Street Reform And Consumer Protection Act, put to rest questions about whether the SEC has the authority to issue the proxy access rule. The rule’s effective date is 60 days after publication in the Federal Register. But not all public companies will be subject to the rules next year because nominating shareholders or groups must notify the company 120 days before the company mailed last year’s shareholder voting materials. Some companies likely mailed last year’s shareholder voting materials too early to give nominating shareholders and groups enough time to provide notice. Companies with fiscal years ending on Dec. 31 typically vote for new directors and hold annual meetings in the spring. The SEC also deferred the effective date for “smaller reporting companies” under SEC rules for three years. The agency said it might make changes for smaller companies depending on how the rules impact larger companies in the interim. The rule also limits shareholder nominees to the greater of one nominee or 25 percent of the board in an effort to prevent shareholders from using the rule to change control of the company. “[These rules] do not reflect all the view of any one group,” Schapiro said. They are rational and balanced and intended to increase investor confidence.” Joining in her in voting for the proposal were commissioners Elisse Walter and Luis Aguilar. Commissioners Kathleen Casey and Troy Paredes, who both voted against adopting the rule, each offered detailed and impassioned reasons for their dissent. Casey opened her remarks by asserting that although she adamantly disagreed with just about everything in the proposal, she appreciates the SEC staff’s efforts. She went on to predict that the rule “will have great difficulty surviving judicial scrutiny,” because it’s “so fundamentally and fatally flawed.” Casey also said that the rule “does violence to the historical understanding of securities law” by mandating a federal proxy access rule that state corporate law and governing documents cannot narrow or waive.”It continues a disturbing trend of empowering institutional shareholders to the detriment of individual shareholders,” Casey said. “In this regard I believe these rules are likely to result in significant harm to our economy and capital markets.” Paredes called the rule “ill-advised” because a mandatory rule “forces each firm into the same governance box.” He also said the mandatory approach “conflicts with the traditional enabling approach of states.” He noted that an August 2009 amendment to the Delaware General Corporation Law enables, but does not mandate, corporate bylaws to require inclusion of stockholders’ nominees for director positions on company proxy materials. Speaking in support of the rule, Walter said, “For far too long shareholders have been effectively shut out of the director nomination and election process … We are adopting the first effective mechanism to facilitate shareholder nomination and voting rights.” The impact of the regulation “will be felt most immediately and most strongly” by the largest public companies that have numerous long-term institutional shareholders, said Horace Nash, a partner at Mountain View, Calif.-based Fenwick & West who chairs its securities group. “This is where the high-profile shareholder activist groups will be prominent,” Nash said. Major shareholders of midsize public companies that have experienced financial or other setbacks in recent years could also use the proxy rule to get a candidate on the company board. “These companies may be less well prepared to deal with a proxy access challenge than the larger companies are,” Nash said. The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness issued a statement opposing the rule. “This special interest-driven rule is a giant step backwards for average investors,” said David Hirschmann, president and chief executive officer of the center. “Using the proxy process to give labor union pension funds and others greater leverage to try to ram through their agenda makes no sense.” Sophisticated public companies have already been making changes in advance of the SEC’s actions, such as reviewing how they communicate with larger shareholders, assessing their potential governance risks and weaknesses and reassessing the criteria for board members on the director’s nominating committee, said Michael Littenberg, a business transactions partner at New York’s Schulte Roth & Zabel. “The adoption of proxy access was not a surprise to public company America,” Littenberg said. “It has been the big ship off in the distance. You see it from a long way away, but it takes a while to get to port. You’re going to see those preparations stepped up now that there’s a final rule.”

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