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The Securities and Exchange Commission may expand its proposal to give investors more influence over corporate board elections. Shareholder groups with a 15 percent stake in a company may gain the right to nominate a director on its proxy card in any given year, sources close to the agency said. Such nominations would have to occur at least 90 to 120 days before the annual meeting. In October the SEC proposed a two-step process to give investors more influence over how companies nominate board members on their formal ballots. First, at least 35 percent of voting shareholders must withhold their support for a company’s director candidate. If that threshold is reached, then the following year a group representing at least 5 percent of shares may run its own nominee on the corporate proxy card. The new proposal would give investors more leverage over corporate governance. “This compromise would be even more helpful for shareholders than the original proposal,” a source close to the agency said. Sources said SEC commissioners will meet in the next few weeks to decide whether to adopt one or both proposals. Other alternatives also could emerge before the meeting, they said. Business groups are likely to oppose the 15 percent limit more vigorously than the two-step system because it would give shareholders immediate access to the corporate proxy card. Supporters of the 15 percent proposal contend that it would not be overused because shareholders would only be able to form such a large group at corporations with particularly poor governance. For example, at Walt Disney Co. a dissident shareholder group would have to amass roughly $7 billion in stock to nominate a director candidate. That suggests it would more often come into play in fights over small and midsize companies, where investors could more easily reach the required investment threshold. If adopted, the 15 percent provision would require that large groups of institutional investors, including pension, mutual and hedge funds, unite to nominate corporate directors. Under current proxy voting regulations, dissident shareholders wishing to challenge a company’s management must mount costly proxy fights, which entail introducing their own director slates on separate ballots. The proposal also would bar shareholders from nominating a board member whose declared intent is to oust management or force a company sale. To do that they would have to launch a proxy contest and force a sale the following year. The 15 percent proposal is just one of many measures SEC officials are weighing since the agency introduced draft proxy voting rules. Over the past few months, SEC corporate finance division chief Alan Beller has periodically brought several variations of the proposed measure to commissioners for consideration, agency officials said. Commissioners are expected to eliminate another proposal that would permit a 1 percent shareholder to introduce a proxy proposal seeking shareholder approval to nominate a candidate on a company’s official proxy card the following year. Sources close to the agency said the SEC is still tinkering with the two-step proposal. They may require a 50 percent withhold vote instead of the 35 percent threshold previously discussed. Yet the revised plan would ban stockbrokers from casting votes on behalf of investors who haven’t filed a proxy card either supporting or rejecting an incumbent board member. “It’s clearly more intellectually appealing to have a majority approve a change rather than just 35 percent,” one source said. Sources also said there is at least some support at the SEC for a compromise endorsed by the corporate community. It would permit a company’s nominating committee, rather than investors, to appoint a new director after a majority of shareholders withhold their votes for an incumbent director. Presumably, in such a case, the company would call a special meeting to hold an election for another candidate chosen by the nomination committee. SEC chairman William Donaldson, a Bush appointee, has publicly expressed support for many of the more shareholder-friendly proposals, and he may join the two Democrats on the SEC to ensure their adoption. Copyright �2004 TDD, LLC. All rights reserved.

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