[Federal Register Volume 75, Number 179 (Thursday, September 16, 2010)]
[Rules and Regulations]
[Pages 56668-56793]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-22218]



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Part II





Securities and Exchange Commission





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17 CFR Parts 200, 232, 240 and 249



Facilitating Shareholder Director Nominations; Final Rule

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

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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.

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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 14C \22\ 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.
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    \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.
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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

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    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, long-term 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.
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    \23\ See 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.
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    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

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nominees in the company's proxy materials.
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    \24\ See, 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, Sec.  971, 124 Stat. 1376 (2010) (``Dodd-Frank 
Act'').
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    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\
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    \26\ For 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.
    \27\ Professor 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).
    \28\ Historically, 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.
    \29\ See 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'').
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    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\
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    \30\ For a discussion of the Commission's previous actions in 
this area, see the Proposing Release and the 2003 Proposal.
    \31\ See 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.
    \33\ See 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.
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    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

[[Page 56671]]

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\
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    \34\ See 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. 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 Sherwin-
Williams 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'').
    \35\ See 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'').
    \36\ See 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.
---------------------------------------------------------------------------

    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.
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    \37\ See, 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.
---------------------------------------------------------------------------

    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

[[Page 56672]]

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.
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    \38\ We 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, Sec.  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 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 Sec.  10-35-08 (2009); see North Dakota Publicly Traded 
Corporations Act, N.D. Cent. Code Sec.  10-35 et al. (2007).
    \40\ See 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
    \42\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \43\ See letters from CII; Sodali; USPE.
---------------------------------------------------------------------------

    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.\45\We 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.
---------------------------------------------------------------------------

    \44\ For a list of these commenters, see footnotes 677, 678, and 
679 below.
    \45\ See letters from CII; USPE.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \46\ See 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; 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.
    \47\ See id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \48\ For 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, Sec.  211(b); Jones Apparel Group v. Maxwell Shoe 
Co., 883 A.2d 837, 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, 
Sec.  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, Sec. Sec.  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, Sec.  242(b)(2)); (v) appraisal rights 
(Del. Code Ann., tit. 8, Sec.  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, Sec.  
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).

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[[Page 56673]]

    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.
---------------------------------------------------------------------------

    \49\ See 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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, Sec.  109(b) and 
Centaur Partners, IV v. National Intergroup, Inc., 582 A.2d 923, 929 
(Del. 1990).
    \52\ See 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 Sec.  23-1-39-1; Okla. 
Stat., tit. 18, Sec.  18-1013.
---------------------------------------------------------------------------

    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 by 
shareholders to adopt company-

[[Page 56674]]

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.
---------------------------------------------------------------------------

    \53\ Throughout 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \55\ See letters from Ameriprise; AT&T L. Behr; BRT; Burlington 
Northern; CMCC; Dewey; M. Eng; FedEx; Grundfest; Keating Muething; 
OPLP; Sidley Austin.
    \56\ When 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 Sec.  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.
    \58\ Exchange Act Sec.  14(a) and Investment Company Act Sec.  
20(a).
    \59\ Dodd-Frank Act Sec.  971(b).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \60\ See letter from BRT.
    \61\ Pacific Gas and Electric Company v. Public Utilities Comm'n 
of California, 475 U.S. 1, 14 n.10 (1986) (emphasis in original).
    \62\ Nor 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).
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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

[[Page 56675]]

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.
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    \63\ Throughout 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).
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    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.
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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.
---------------------------------------------------------------------------

    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

[[Page 56676]]

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

[[Page 56677]]

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.
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    \65\ See Section II.C.5. below.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \66\ See discussion in footnote 50 above.
    \67\ Under 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.
    \68\ We 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.
    \69\ See discussion in Section II.C.5. below.
---------------------------------------------------------------------------

    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\
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    \70\ As 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).
---------------------------------------------------------------------------

    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\
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    \71\ See 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.
    \72\ See letters from CII; COPERA; CtW Investment Group; L. 
Dallas; T. DiNapoli; Florida State Board of Administration; ICGN; D. 
Nappier; OPERS; Pax World; Teamsters.
---------------------------------------------------------------------------

    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\

[[Page 56678]]

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\
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    \73\ See 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.
    \74\ See 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.
    \75\ See 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.
    \76\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \77\ See new Exchange Act Rule 14a-11.
---------------------------------------------------------------------------

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\
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    \78\ See letters from S&C Curtis, Mallet-Prevost, Colt & Mosle 
LLP (``Curtis'').
    \79\ See footnote 70 above.
---------------------------------------------------------------------------

    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.
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    \80\ New 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.
---------------------------------------------------------------------------

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

[[Page 56679]]

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\
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    \81\ See 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; 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.
    \82\ See letters from ABA; BRT; Davis Polk; Delaware Bar; 
Frontier; IBM; Protective.
    \83\ See 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.
---------------------------------------------------------------------------

    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 
shareholder-approved process by the time of the first annual meeting 
held after the adoption of the proposed rules.\86\
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    \84\ See 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.
    \85\ See letters from ABA; BRT; Delaware Bar.
    \86\ See letters from DTE Energy (endorsing the opt-out 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.
---------------------------------------------------------------------------

    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

[[Page 56680]]

title or of the rules and regulations of the Commission* * *.'' \94\
---------------------------------------------------------------------------

    \87\ See 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.
    \88\ See 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.
    \89\ See 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.
    \90\ See letters from Florida State Board of Administration; P. 
Neuhauser; Shamrock.
    \91\ See letter from Shamrock.
    \92\ See letter from P. Neuhauser.
    \93\ Letter from Nine Law Firms.
    \94\ 15 U.S.C. 77n.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \95\ Business Roundtable v. SEC, 905 F.2d 406, 410 (D.C. Cir. 
1990).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \96\ Our 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.
---------------------------------------------------------------------------

    Finally, we considered the objections of some commenters to a 
``one-size-fits-all'' 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-by-company 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.
---------------------------------------------------------------------------

    \97\ See 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.
---------------------------------------------------------------------------

    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

[[Page 56681]]

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.
---------------------------------------------------------------------------

    \98\ This 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.
    \99\ Only votes for and against a proposal would have been 
included in the calculation of the shareholder vote.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \100\ See 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.
    \101\ See letters from AFSCME; CFA Institute; CII; T. DiNapoli; 
LIUNA.
    \102\ See 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.
---------------------------------------------------------------------------

    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\
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    \103\ See letters from CII; Florida State Board of 
Administration; Sodali; USPE.
    \104\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \105\ See letter from CII.
    \106\ See letter from Florida State Board of Administration.
---------------------------------------------------------------------------

    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

[[Page 56682]]

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\
---------------------------------------------------------------------------

    \107\ See letters from ABA; BRT; Davis Polk; Eli Lilly; Seven 
Law Firms; Society of Corporate Secretaries.
    \108\ See Eastbourne Capital LLC No-Action Letter (March 30, 
2009) and Icahn Associates Corp. No-Action Letter (March 30, 2009).
    \109\ Release No. 33-9052, 34-60280 (July 10, 2009) [74 FR 
35076].
    \110\ See letters from ABA; Eli Lilly; JPMorgan Chase; Society 
of Corporate Secretaries.
    \111\ See letters from ABA; Society of Corporate Secretaries.
    \112\ See letters from ABA; BRT; Davis Polk; Eli Lilly; PepsiCo; 
Seven Law Firms; Society of Corporate Secretaries.
    \113\ See letters from ABA; Davis Polk.
    \114\ See Section II.B.4. below for a further discussion of 
change in control intent and the certifications required by the new 
rules.
    \115\ Letter from Davis Polk.
    \116\ See letter from Society of Corporate Secretaries.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \117\ See letters from BRT; Verizon.
    \118\ See letter from ABA.
    \119\ See letter from P. Neuhauser.
---------------------------------------------------------------------------

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

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

[[Page 56683]]

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\
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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).
    \123\ Exchange Act Rule 3a12-3 [17 CFR 240.3a12-3] exempts 
securities of certain foreign issuers from Section 14(a) of the 
Exchange Act.
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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\
---------------------------------------------------------------------------

    \124\ The Commission has considered the impact of this issue on 
investment companies on prior occasions. See, e.g., 2003 Proposal.
---------------------------------------------------------------------------

    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\
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    \125\ See, e.g., letters from AFSCME; CalPERS; CII; Mutual Fund 
Directors Forum (``MFDF''); Julian Reid (``J. Reid''); Jennifer S. 
Taub (``J. Taub''); TIAA-CREF.
    \126\ See letter from MFDF.
    \127\ Letter from J. Reid.
    \128\ See letter from J. Taub.
    \129\ See, e.g., letters from AFSCME; J. Taub.
    \130\ See letter from J. Taub.
---------------------------------------------------------------------------

    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 non-investment 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\
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    \131\ See, 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 
closed-end 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.
    \132\ See 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.
    \133\ One 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.
    \134\ See 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 non-investment 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.
    \135\ See 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)].
---------------------------------------------------------------------------

    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

[[Page 56684]]

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 
shareholder-nominated 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\
---------------------------------------------------------------------------

    \136\ See 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 open-end 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.
    \137\ Commenters 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.
    \138\ See letter from S&C.
---------------------------------------------------------------------------

    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 non-investment 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\
---------------------------------------------------------------------------

    \139\ We note that ``unitary'' or ``cluster'' boards are not 
required by State law.
    \140\ See 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).
    \142\ See, 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.'').
    \143\ See letters from J. Reid; J. Taub.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \144\ See letters from AFSCME; J. Taub.
---------------------------------------------------------------------------

    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

[[Page 56685]]

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\
---------------------------------------------------------------------------

    \145\ Two 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 
attorney-client privilege. For a further discussion of this comment, 
see Section IV.E.1.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \146\ See letters from ABA; MFDF.
    \147\ See letter from J. Taub.
    \148\ See letter from ABA.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \149\ See letter from J. Taub.
---------------------------------------------------------------------------

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 dual-class 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.
---------------------------------------------------------------------------

    \150\ See letter from P. Neuhauser.
    \151\ See letters from ABA; Duane Morris; Media General, Inc. 
(``Media General''); The New York Times Company (``New York 
Times'').
    \152\ See letter from T. Rowe Price.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \153\ See letters from ABA; AllianceBernstein; Cleary; Seven Law 
Firms; Duane Morris LLP (``Duane Morris''); Sidley Austin.
    \154\ See letters from ABA; AllianceBernstein; Cleary; Seven Law 
Firms; Duane Morris; Sidley Austin.
    \155\ See letters from ABA; Seven Law Firms.
    \156\ See 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).
    \157\ See letters from AllianceBernstein; Duane Morris.
---------------------------------------------------------------------------

    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 non-controlling 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 shareholder-nominated 
directors in cases in which these are not directors elected exclusively 
by the non-controlling shareholders, we appreciate that shareholders at 
controlled companies

[[Page 56686]]

may have other reasons for nominating candidates for director.\158\
---------------------------------------------------------------------------

    \158\ We 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \159\ See letters from ABA; CII; Cleary; S&C.
    \160\ See letters from ABA; Cleary; S&C.
    \161\ See 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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \162\ A 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \163\ See letters from ABA; CII; USPE.
    \164\ See letter from USPE.
    \165\ See letter from ABA.
---------------------------------------------------------------------------

    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\
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    \166\ The 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/dir-nominations/dir-nom-briefing.htm.
---------------------------------------------------------------------------

    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

[[Page 56687]]

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\
---------------------------------------------------------------------------

    \167\ See 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.
    \168\ See 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 the requirements for 
smaller reporting companies for its annual and quarterly reports. 
See Exchange Act Rule 12b-2(2).
    \169\ See 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 phase-in 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).
---------------------------------------------------------------------------

    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\
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    \170\ See letters from AFSCME; CII; D. Nappier.
    \171\ See letter from CII.
    \172\ See letters from AFSCME; D. Nappier.
    \173\ See letter from USPE.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \174\ Dodd-Frank Act Sec. Sec.  971(a) and (b).
    \175\ Dodd-Frank Act Sec.  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.
---------------------------------------------------------------------------

    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

[[Page 56688]]

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.
---------------------------------------------------------------------------

    \176\ See 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 non-affiliates 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.
---------------------------------------------------------------------------

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\
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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.
---------------------------------------------------------------------------

     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\
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    \178\ Throughout 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.
    \179\ The 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.
    \180\ See Instruction 3 to new Rule 14a-11(b)(1).
    \181\ See new Rule 14a-11(b)(1).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \182\ See 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.
---------------------------------------------------------------------------

     Continues to hold the required amount of securities used 
to satisfy the ownership threshold through the date of the shareholder 
meeting; \183\
---------------------------------------------------------------------------

    \183\ See new Rule 14a-11(b)(2).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \184\ See new Rule 14a-11(b)(6).
---------------------------------------------------------------------------

     Does not have an agreement with the company regarding the 
nomination; \185\
---------------------------------------------------------------------------

    \185\ See new Rule 14a-11(b)(7).
---------------------------------------------------------------------------

     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
---------------------------------------------------------------------------

    \186\ See 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).
    \187\ The 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.
---------------------------------------------------------------------------

     Includes the certifications required in the shareholder 
notice on Schedule 14N.\188\
---------------------------------------------------------------------------

    \188\ See 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.
---------------------------------------------------------------------------

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.

[[Page 56689]]

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\
---------------------------------------------------------------------------

    \189\ Similarly, we proposed tiered ownership thresholds for 
registered investment companies with the tiers based on net assets.
    \190\ See 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; 
Sherwin-Williams; 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.
    \191\ See 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; Sherwin-Williams; 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.
    \192\ See letters from ABA; ABA II; BRT; Business Roundtable 
(January 19, 2010) (``BRT II''); Cleary; Davis Polk; Honeywell; 
SIFMA.
    \193\ Letter from BRT II.
    \194\ Letter from California State Teachers' Retirement System 
(Nov. 18, 2009)(``CalSTRS II'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \195\ See letters from Committee of Concerned Shareholders 
(``Concerned Shareholders''); L. Dallas; USPE.
    \196\ See letter from Shearman & Sterling.
    \197\ See, e.g., letters from ICI; S&C T. Rowe Price.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \198\ See 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.
    \199\ See letter from CII.
    \200\ Letter from AFL-CIO.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \201\ See letter from Deere.
---------------------------------------------------------------------------

     At least 2% of a company's voting securities; \202\
---------------------------------------------------------------------------

    \202\ See letter from ADP.
---------------------------------------------------------------------------

     3% of a company's shares; \203\
---------------------------------------------------------------------------

    \203\ See letters from CSI; Calvert; CFA Institute; Labour Union 
Co-operative Retirement Fund (``LUCRF''); S. Ranzini.
---------------------------------------------------------------------------

     5% of the company's voting securities for an individual 
shareholder and 10% for a group of shareholders; \204\
---------------------------------------------------------------------------

    \204\ See 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; Sherwin-Williams; Society 
of Corporate Secretaries; Textron; Tompkins; G. Tooker; 
Weyerhaeuser; Xerox.
---------------------------------------------------------------------------

     5% of a company's outstanding shares; \205\
---------------------------------------------------------------------------

    \205\ See 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.
---------------------------------------------------------------------------

     5% of a company's outstanding shares for an individual 
shareholder and a higher but unspecified threshold for a group of 
shareholders; \206\
---------------------------------------------------------------------------

    \206\ See letters from Applied Materials; U.S. Bancorp.
---------------------------------------------------------------------------

     With regard to investment companies, a 5% threshold; \207\
---------------------------------------------------------------------------

    \207\ See letters from S&C TIAA-CREF.
---------------------------------------------------------------------------

     From 5% to 10% of a company's shares; \208\
---------------------------------------------------------------------------

    \208\ See letters from Davis Polk; Lorsch et al.
---------------------------------------------------------------------------

     10% of the company's shares; \209\
---------------------------------------------------------------------------

    \209\ See 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.
---------------------------------------------------------------------------

     10% of the company's outstanding shares for an individual 
shareholder and 15% of the outstanding shares for a group of 
shareholders; \210\
---------------------------------------------------------------------------

    \210\ See letter from Motorola.
---------------------------------------------------------------------------

     5% to 15% of the company's outstanding shares; \211\
---------------------------------------------------------------------------

    \211\ See letter from Barclays.

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[[Page 56690]]

     15% of the company's shares; \212\ and
---------------------------------------------------------------------------

    \212\ See letter from TI.
---------------------------------------------------------------------------

     20% of a company's shares.\213\
---------------------------------------------------------------------------

    \213\ See letter from AT&T.
---------------------------------------------------------------------------

    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%).
---------------------------------------------------------------------------

    \214\ See letters from Concerned Shareholders; USPE.
    \215\ See letter from Concerned Shareholders.
    \216\ See letter from L. Dallas.
---------------------------------------------------------------------------

    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 non-accelerated 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.
---------------------------------------------------------------------------

    \217\ See, 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \218\ See letter from Shearman & Sterling.
    \219\ See 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).
    \220\ As noted in Section II.B.3.f., we have adopted a three-
year delay in implementation for smaller reporting companies.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \221\ The 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.

[[Page 56691]]



------------------------------------------------------------------------
                                     Non-accelerated   Large accelerated
                                          filers             filers
                                       (approximate       (approximate
                                       percentages)       percentages)
------------------------------------------------------------------------
Companies with at least one 1%                     37                 37
 shareholder......................
Companies with at least one 3%                     33                 32
 shareholder......................
Companies with at least one 5%                     22                 16
 shareholder......................
Companies with at least two 1%                     36                 37
 shareholders.....................
Companies with at least two 1.5%                   33                 33
 shareholders.....................
Companies with at least two 2.5%                   27                 25
 shareholders.....................
------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \222\ See letter from P. Neuhauser (suggesting only two 
ownership eligibility tiers because data show ``almost no difference 
in ownership characteristics between smaller accelerated filers and 
non-accelerated filers.'').
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \223\ As 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \224\ See 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).
    \225\ Letter from TIAA-CREF.
    \226\ Letter from T. Rowe Price.
    \227\ Letters from SCSI and LUCRF.
    \228\ Letter from CFA Institute.
---------------------------------------------------------------------------

    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

[[Page 56692]]

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.
---------------------------------------------------------------------------

    \229\ See letters from CFA Institute; P. Neuhauser; RiskMetrics.
    \230\ See letters from CSX; ITT; Southern Company; Tesoro; tw 
telecom; UnitedHealth; Verizon.
    \231\ See 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.
    \232\ The data in the November 2009 Memorandum suggest that just 
4% of companies would have at least one shareholder with 10%.
    \233\ See, e.g., letters from CSX; ITT; Shearman & Sterling; 
Tesoro; T. Rowe Price; tw telecom.
    \234\ See, 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)).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \235\ Some 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.
    \236\ See 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.'').
    \237\ See letter from BRT II.
    \238\ See, e.g., Rule 14a-2(b)(7).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \239\ We 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 
over- or under-inclusive.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \240\ At 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \241\ On 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.
---------------------------------------------------------------------------

    Nevertheless, and principally because they give effect to holding 
period requirements, we considered the data in

[[Page 56693]]

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\
---------------------------------------------------------------------------

    \242\ See ``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.
    \244\ See letter from JPMorgan Chase.
    \245\ See 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \246\ See 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.
    \247\ See footnote 223 above.
---------------------------------------------------------------------------

    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 non-investment 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 non-investment 
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\
---------------------------------------------------------------------------

    \248\ See, e.g., letters from ICI; S&C T. Rowe Price.
    \249\ One 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).
    \250\ See 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \251\ See letters from Barclays; T. Rowe Price; TIAA-CREF.

---------------------------------------------------------------------------

[[Page 56694]]

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\
---------------------------------------------------------------------------

    \252\ See letters from ABA; Duane Morris; Media General; P. 
Neuhauser; New York Times. These letters illustrated a scenario 
where one publicly-issued 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.
    \253\ See letters from ABA; P. Neuhauser; Duane Morris; Media 
General.
    \254\ See, e.g., discussion in footnote 252 of common ten-to-one 
voting provisions of a structure with Class A and Class B 
securities.
    \255\ See letter from ABA.
    \256\ See letter from Duane Morris.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \257\ See Rule 14a-11(b)(1) and Instruction 3 and the discussion 
below.
    \258\ See Instruction 3 to Rule 14a-11(b)(1).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \259\ See 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.
    \260\ See letters from BRT; Devon; IBM; P. Neuhauser; Society of 
Corporate Secretaries.
    \261\ See letter from ABA.
    \262\ See 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.
    \263\ See 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.
    \264\ See letters from AFL-CIO; Marco Consulting; Sheet Metal 
Workers; SWIB.
    \265\ See letters from CalPERS; CII; COPERA; IAM; LIUNA; D. 
Nappier.
    \266\ See letters from AFL-CIO; CalPERS; CII; IAM; D. Nappier.
    \267\ See letters from CalPERS; CII; IAM; D. Nappier.
    \268\ See letters from COPERA.
---------------------------------------------------------------------------

    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

[[Page 56695]]

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.
---------------------------------------------------------------------------

    \269\ This would include securities registered pursuant to 
Section 12 of the Exchange Act or subject to Investment Company Act 
Rule 20a-1.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \270\ 17 CFR Sec.  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.
    \271\ See Instruction 3.c. to Rule 14a-11(b)(1).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \272\ The 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).
---------------------------------------------------------------------------

    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 long-term 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:
---------------------------------------------------------------------------

    \273\ See letters from AFL-CIO; CalPERS; CII; COPERA; IAM; 
LIUNA; Marco Consulting; P. Neuhauser; D. Nappier; Sheet Metal 
Workers; SWIB.
---------------------------------------------------------------------------

     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.
---------------------------------------------------------------------------

    \274\ See letter from P. Neuhauser.
---------------------------------------------------------------------------

    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,

[[Page 56696]]

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\
---------------------------------------------------------------------------

    \275\ See 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).
    \276\ The 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 included in the amount of holdings 
of the shareholder.
    \277\ We 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.
    \278\ See 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.
---------------------------------------------------------------------------

    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.''
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \280\ See 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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \281\ See Item 5 of proposed Schedule 14N.
    \282\ See the discussion below regarding the holding period we 
are adopting.
---------------------------------------------------------------------------

    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

[[Page 56697]]

should provide the required written statement.\286\
---------------------------------------------------------------------------

    \283\ See letters from BorgWarner; Society of Corporate 
Secretaries.
    \284\ See letter from CII.
    \285\ See letter from P. Neuhauser.
    \286\ See 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)).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \287\ We 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \288\ This 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.
    \289\ See the Instruction to Item 4 of new Schedule 14N.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \290\ See 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'').
    \291\ See 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 
one-year 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.
    \292\ See letters from BRT; CIEBA; IBM; McDonald's; Society of 
Corporate Secretaries.
    \293\ See letters from 13D Monitor; ACSI; British Insurers; 
Ironfire Capital LLC (``Ironfire''); LUCRF.
    \294\ See letter from British Insurers.
    \295\ See letter from 13D Monitor.
---------------------------------------------------------------------------

    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 three-year 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

[[Page 56698]]

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.
---------------------------------------------------------------------------

    \296\ One 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.
    \297\ Letter from Teamsters.
    \298\ Letter from BRT.
    \299\ Letter from Tesoro.
    \300\ See letters from E. Davis; Fenwick.
---------------------------------------------------------------------------

    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\
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    \301\ As 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.
    \302\ See 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. 
    \305\ See the Instruction to Rule 14a-11(b)(2).
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    \306\ See letter from AFSCME.
---------------------------------------------------------------------------

    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

[[Page 56699]]

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\
---------------------------------------------------------------------------

    \307\ See 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.
    \308\ See letter from ABA.
    \309\ For 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.
    \310\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \311\ See new Rule 14a-11(b)(4) and proposed Rule 14a-18(f).
    \312\ See 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.
    \313\ See letter from CII.
    \314\ See letter from Cleary.
    \315\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \316\ See new Rule 14a-11(b)(5) and new Item 4(b) of Schedule 
14N.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \317\ See Item 8 of proposed Schedule 14N.
---------------------------------------------------------------------------

    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

[[Page 56700]]

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\
---------------------------------------------------------------------------

    \318\ See 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.
    \319\ See letters from American Bankers Association; Dewey; 
Emerson Electric; A. Goolsby; Metlife; Protective; Seven Law Firms; 
SIFMA.
    \320\ See letter from Seven Law Firms.
    \321\ See letter from Protective.
    \322\ See letter from P. Neuhauser.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \323\ Although 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.
    \324\ See certifications in Item 8 of new Schedule 14N.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \325\ See Rule 14a-11(b)(6).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \326\ A change in control includes, but is not limited to, an 
extraordinary corporate action, such as a merger or tender offer.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \327\ See new Instruction to Rule 14a-11(b).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \328\ See Section II.B.9.b. below for further discussion of 
determinations to exclude a nominee or nominees.
    \329\ See 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.
---------------------------------------------------------------------------

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

[[Page 56701]]

nominee in the company's proxy materials under Rule 14a-11.
---------------------------------------------------------------------------

    \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 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.
---------------------------------------------------------------------------

    \331\ See letters from ADP; BRT; Calvert; CFA Institute; CII; 
Seven Law Firms; TIAA-CREF; USPE.
    \332\ See letter from CII.
    \333\ See letter from USPE.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \334\ See letters from BRT; Seven Law Firms; Society of 
Corporate Secretaries.
    \335\ See letters from ABA; Steve Quinlivan (``S. Quinlivan''); 
Verizon.
    \336\ See letter from S. Quinlivan.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \337\ We 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \338\ See 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).
---------------------------------------------------------------------------

    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\
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    \339\ See letters from ABA; BRT.
    \340\ See letter from ABA.
    \341\ See letter from BRT.
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    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

[[Page 56702]]

attend the meeting or make other arrangements.\342\
---------------------------------------------------------------------------

    \342\ While 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 Sec.  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.
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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.
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    \343\ See 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.
    \344\ See discussion in Section II.B.5.e. below with regard to 
resubmission of unsuccessful shareholder nominees.
    \345\ See letter from Society of Corporate Secretaries.
    \346\ See letters from CII; Norges Bank; Solutions; USPE; 
Walden.
    \347\ See letter from CII.
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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\
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    \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.
---------------------------------------------------------------------------

    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.''
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    \349\ See 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.
    \350\ See letters from American Bankers Association; BRT; 
Emerson Electric; GE; O'Melveny & Myers; Sidley Austin; Tenet.
    \351\ See letter from American Bankers Association.
    \352\ See letter from CII.
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    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.''
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    \353\ See letter from USPE.
---------------------------------------------------------------------------

    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

[[Page 56703]]

independence standards, and such violation could not be cured during 
the time period provided in the rule.\356\
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    \354\ We 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.
    \355\ We are not aware of other exchange requirements related to 
director qualifications, but should an exchange adopt new 
requirements, this provision would apply.
    \356\ As 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).
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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.
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    \357\ Pursuant 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.
    \358\ See 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 twelve-month 
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.
---------------------------------------------------------------------------

    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\
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    \359\ See 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.
    \360\ See letters from ACSI; CalSTRS; CII; COPERA; LUCRF; P. 
Neuhauser; TIAA-CREF; ValueAct Capital.
    \361\ See letter from CII.
    \362\ See letters from ABA II; ICI.
    \363\ See 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.
---------------------------------------------------------------------------

    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

[[Page 56704]]

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\
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    \364\ See 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.
    \365\ See letters from Board Institute; BRT; Con Edison; C. 
Horner; TI; Verizon.
    \366\ See letters from Metlife; O'Melveny & Myers; Seven Law 
Firms; Wells Fargo.
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    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\
---------------------------------------------------------------------------

    \367\ See Rule 14a-11(b)(9).
---------------------------------------------------------------------------

    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.
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    \368\ See Item 5(f) of new Schedule 14N.
    \369\ See new instruction to paragraph (b)(9) in Rule 14a-11.
    \370\ The 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.
---------------------------------------------------------------------------

    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\
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    \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.'').
    \372\ See letter from ICI.
    \373\ See new Rule 14a-11(b)(9).
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    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

[[Page 56705]]

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.
---------------------------------------------------------------------------

    \374\ See, 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 Sec.  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'').
    \375\ See 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 & 
Myers; PepsiCo; Praxair; Seven Law Firms; Society of Corporate 
Secretaries; Theragenics; UnitedHealth; U.S. Bancorp; Xerox.
    \376\ See Item 5(e) of new Schedule 14N.
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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\
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    \377\ See 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.
    \379\ See instruction to proposed Rule 14a-18(d).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \380\ See letters from ADP; BRT; Calvert; CFA Institute; CII; 
Seven Law Firms; TIAA-CREF; USPE.
    \381\ See Section II.B.4.e. above for a further discussion of 
the comments.
---------------------------------------------------------------------------

    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 non-public information, and lessen the likelihood 
that Rule 14a-11 would be used for change in control attempts.\384\
---------------------------------------------------------------------------

    \382\ The 2003 Proposal included such a requirement. For a 
discussion of this aspect of the 2003 Proposal and the comments 
received, see the Proposing Release.
    \383\ See 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.
    \384\ See letters from ABA; Alaska Air; Eli Lilly; Leggett.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \385\ See 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.
    \386\ See letters from Alaska Air; BorgWarner; Caterpillar; 
JPMorgan Chase; O'Melveny & Myers; Society of Corporate Secretaries.
    \387\ See letters from BRT; Intel.
---------------------------------------------------------------------------

    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

[[Page 56706]]

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\
---------------------------------------------------------------------------

    \388\ Letter from BRT.
    \389\ See 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \391\ See letters from O'Melveny & Myers; SIFMA; UnitedHealth. 
See also letter from CII.
    \392\ Letter from IBM.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \393\ See 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.
    \394\ See letters from CFA Institute; CII; COPERA; P. Neuhauser; 
Pershing Square; Relational; USPE; B. Villiarmois.
    \395\ See letter from CII.
    \396\ See letter from Relational.
    \397\ See letters from CII; Nathan Cummings Foundation.
    \398\ See letter from TIAA-CREF.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \399\ See 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).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \400\ See 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.
    \401\ Letter from Northrop.
    \402\ See 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.
    \403\ Letter from CII.
---------------------------------------------------------------------------

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

[[Page 56707]]

pursuant to Rule 14a-11 continues past the meeting date, that director 
would continue to count for purposes of the 25% maximum.
---------------------------------------------------------------------------

    \404\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \405\ The 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.
    \406\ See, 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \408\ See letters from CalPERS; CalSTRS; CFA Institute; ICGN; 
Nathan Cummings Foundation; P. Neuhauser; Norges Bank; Protective; 
RiskMetrics; TIAA-CREF; T. Rowe Price; WSIB.
    \409\ See letter from CalPERS.
    \410\ See 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.
    \411\ See 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.
    \412\ See letters from CII; L. Dallas; C. Levin; Nathan Cummings 
Foundation; Universities Superannuation.
    \413\ See 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.
    \414\ See 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.
    \415\ See, 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.
---------------------------------------------------------------------------

    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 shareholder-nominated 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

[[Page 56708]]

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.
---------------------------------------------------------------------------

    \416\ See new Rule 14a-11(d)(1).
    \417\ See 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).
    \418\ See letter from ABA.
    \419\ See Rule 14a-11(d)(2).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \420\ Comments 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.
---------------------------------------------------------------------------

    We understand the concerns addressed by some commenters that this 
limitation could result in shareholder-nominated 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.
---------------------------------------------------------------------------

    \421\ See letters from CII; L. Dallas; C. Levin; Nathan Cummins 
Foundation; Universities Superannuation.
    \422\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \423\ See letters from ABA; Duane Morris; Media General; New 
York Times.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \424\ See letters from Media General; New York Times.
    \425\ See letter from Sidley Austin.
    \426\ See letter from BRT.
    \427\ See letter from Media General.
    \428\ See letters from CII; P. Neuhauser.
---------------------------------------------------------------------------

    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,

[[Page 56709]]

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\
---------------------------------------------------------------------------

    \429\ Id.
    \430\ See letter from P. Neuhauser.
    \431\ See letters from Seven Law Firms; Sidley Austin; ValueAct 
Capital.
    \432\ See letter from Seven Law Firms.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \433\ See Section II.B.4.b. above.
    \434\ See new Rule 14a-11(d)(3).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \435\ See new Rule 14a-11(d)(3).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \436\ See letters from BRT; Seven Law Firms; Society of 
Corporate Secretaries.
    \437\ See 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.
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \438\ See letter from Florida State Board of Administration.
---------------------------------------------------------------------------

    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 re-
nominated 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.
---------------------------------------------------------------------------

    \439\ See 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.
    \440\ See letters from P. Neuhauser; RiskMetrics.
    \441\ See letters from ABA; BRT; Seven Law Firms.
    \442\ See letters from Davis Polk; Society of Corporate 
Secretaries.
---------------------------------------------------------------------------

    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 
shareholder-nominated incumbent director that is re-nominated by the 
company. As noted

[[Page 56710]]

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 shareholder-nominated 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\
---------------------------------------------------------------------------

    \443\ See 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.
    \444\ See letters from ABA; BRT; Con Edison; First Affirmative; 
C. Levin; Verizon.
    \445\ Letter from ABA.
    \446\ See letter from BRT.
    \447\ See letter from Con Edison.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \448\ See letters from IBM; S. Quinlivan; USPE; Verizon; Xerox.
    \449\ See letters from IBM; Verizon.
    \450\ See letter from USPE.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \451\ See 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.
    \452\ Letter from CII.
    \453\ See letters from CII; Society of Corporate Secretaries.
---------------------------------------------------------------------------

    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

[[Page 56711]]

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\
---------------------------------------------------------------------------

    \454\ See letters from Amalgamated Bank; CII; COPERA; P. 
Neuhauser; Protective; T. Rowe Price.
    \455\ See letters from Amalgamated Bank; CFA Institute; CII; 
COPERA; P. Neuhauser; Protective; T. Rowe Price.
---------------------------------------------------------------------------

    A few commenters stated that in the case of competing nominations 
submitted by shareholders with equally-sized 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\
---------------------------------------------------------------------------

    \456\ See letters from Allstate; Boeing; Pfizer.
    \457\ See letters from Honeywell; Sara Lee.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \458\ See letter from ABA.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \459\ See letter from Kirkland & Ellis.
    \460\ See letter from Seven Law Firms.
---------------------------------------------------------------------------

    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 long-term interest.
---------------------------------------------------------------------------

    \461\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \462\ See letters from L. Dallas; T. DiNapoli; Nathan Cummings 
Foundation; OPERS; Southern Company.
    \463\ See letters from Alston & Bird; CSX; Textron.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \464\ See letters from Calvert; Florida State Board of 
Administration; Hermes Equity Ownership Services Ltd. (``Hermes''); 
Protective.
    \465\ Letter from Calvert.
    \466\ See letter from Hermes.
    \467\ See letter from Florida State Board of Administration.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \468\ See 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.
---------------------------------------------------------------------------

    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

[[Page 56712]]

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\
---------------------------------------------------------------------------

    \469\ See new Rule 14a-11(e) and proposed Rule 14a-11(d)(3).
    \470\ See Instruction 2 to new Rule 14a-11(e).
---------------------------------------------------------------------------

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).''
---------------------------------------------------------------------------

    \471\ See letter from Best Buy.
    \472\ See letter from ABA.
    \473\ See letters from CFA Institute; Verizon.
    \474\ See letter from CII.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \475\ See 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.
---------------------------------------------------------------------------

    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 second-largest holdings should be allowed to submit their own 
nominees.\482\
---------------------------------------------------------------------------

    \477\ See letters from BorgWarner; Society of Corporate 
Secretaries.
    \478\ See 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.
    \479\ See letters from AFL-CIO; P. Neuhauser; USPE.
    \480\ See letter from P. Neuhauser.
    \481\ See letter from Universities Superannuation.
    \482\ See letter from CFA Institute.
---------------------------------------------------------------------------

    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

[[Page 56713]]

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.
---------------------------------------------------------------------------

    \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.
    \484\ See new Rule 14a-11(e)(2).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \485\ See new Rule 14a-11(e)(3).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \486\ We 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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \487\ See proposed Rule 14a-11(c), Rule 14a-18 and Rule 14n-1.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \488\ See proposed Instruction 2 to Rule 14a-11(a) and proposed 
Rule 14a-18.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \489\ See 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).
---------------------------------------------------------------------------

     The nominating shareholder or group satisfies the 
eligibility conditions in Rule 14a-11; \490\
---------------------------------------------------------------------------

    \490\ See proposed Rule 14a-18(b) (which referred to the 
requirements in proposed Rule 14a-11(b)).
---------------------------------------------------------------------------

     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
---------------------------------------------------------------------------

    \491\ See proposed Rule 14a-18(c).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \492\ See proposed Rule 14a-18(d).
---------------------------------------------------------------------------

    Proposed Item 8 of Schedule 14N would have required a certification 
from the nominating shareholder or each member of the nominating 
shareholder

[[Page 56714]]

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\
---------------------------------------------------------------------------

    \493\ See 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.
    \494\ See letters from CII; USPE.
    \495\ See letters from ABA; Alaska Air; Robert A. Bassett (``R. 
Bassett''); BorgWarner; Eli Lilly; NACD; O'Melveny & Myers; Pfizer; 
Society of Corporate Secretaries; UnitedHealth.
    \496\ See letters from ABA; Chevron; Sidley Austin; SIFMA.
    \497\ See letter from Cleary.
    \498\ See letter from ABA.
    \499\ Id.
    \500\ See letter from IBM.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \501\ See letter from CII.
    \502\ See letter from ABA.
    \503\ See letter from USPE.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \504\ The disclosure requirements proposed in Rule 14a-18(e)-(l) 
are now contained in new Item 4(b) and new Item 5 of Schedule 14N.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \505\ See Item 3 of new Schedule 14N.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \506\ See 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.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \507\ See Item 4(b) of new Schedule 14N. These requirements were 
proposed in Rule 14a-18(f) and Item 5(b) of Schedule 14N.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \508\ See Item 5(a) of new Schedule 14N and proposed Rule 14a-
18(e).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \509\ See Item 5(b) of new Schedule 14N and proposed Rule 14a-
18(g).
---------------------------------------------------------------------------

     Disclosure about the nominating shareholder or each member 
of a nominating shareholder group as would be required in response to 
the disclosure

[[Page 56715]]

requirements of Items 4(b) and 5(b) of Schedule 14A, as applicable; 
\510\
---------------------------------------------------------------------------

    \510\ See 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.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \511\ See 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.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \512\ See Item 5(e) of new Schedule 14N.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \513\ See Item 5(f) of new Schedule 14N.
---------------------------------------------------------------------------

     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:
---------------------------------------------------------------------------

    \514\ We 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.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \515\ See Item 5(g) of new Schedule 14N and proposed Rule 14a-
18(j).
---------------------------------------------------------------------------

     Disclosure of any Web site address on which the nominating 
shareholder or group may publish soliciting materials; \516\ and
---------------------------------------------------------------------------

    \516\ See Item 5(h) of new Schedule 14N and proposed Rule 14a-
18(k).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \517\ See 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.

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\
---------------------------------------------------------------------------

    \518\ See 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).

    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

[[Page 56716]]

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.
---------------------------------------------------------------------------

    \520\ See letters from CII; IBM; O'Melveny & Myers; SIFMA; 
UnitedHealth.
    \521\ See Item 5(e) of new Schedule 14N.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \522\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \524\ See letters from CII; Florida State Board of 
Administration.
    \525\ See letters from ACSI; AFSCME; Hermes; Pax World; USPE.
    \526\ See letters from AFSCME; L. Dallas; P. Neuhauser; USPE.
    \527\ We are adopting this modification in Item 5(i) of Schedule 
14N.
    \528\ See new Rule 14a-11(c) and Rule 14a-11(g).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \529\ See also Section II.B.4. and Section II.B.5. above, 
regarding nominating shareholder and nominee eligibility.
    \530\ See 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.
---------------------------------------------------------------------------

    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

[[Page 56717]]

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.
---------------------------------------------------------------------------

    \531\ See proposed Rule 14a-11(a)(5).
    \532\ See 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.
---------------------------------------------------------------------------

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 no-
action process, Commission appeals, and litigation.\537\
---------------------------------------------------------------------------

    \533\ See 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.
    \534\ See 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.
    \535\ See 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.
    \536\ See 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.
    \537\ See letters from ABA; BRT; Con Edison; TI.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \538\ See new Rule 14a-11(b)(10). The Schedule 14N would, of 
course, have to contain all required disclosure as of the date of 
filing.
    \539\ We 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.
---------------------------------------------------------------------------

    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,

[[Page 56718]]

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\
---------------------------------------------------------------------------

    \540\ See 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.
    \541\ The 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.
    \543\ See 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.
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    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.
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    \544\ Rule 14n-3 specifies that the Schedule 14N must be 
transmitted to the company at its principal executive office.
    \545\ See 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.
    \546\ To 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).
---------------------------------------------------------------------------

    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\
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    \547\ The 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.
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     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 originally-filed 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.
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    \548\ See new Rule 14n-2(a).
    \549\ We 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.
    \550\ See new Rule 14n-2(b).
    \551\ See Item 4(b) of new Schedule 14N.
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    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.
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    \552\ While 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.
---------------------------------------------------------------------------

    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\
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    \553\ For further discussion, see Section II.E.
---------------------------------------------------------------------------

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

[[Page 56719]]

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.
---------------------------------------------------------------------------

    \554\ See proposed Rule 14a-11(f)(2).
---------------------------------------------------------------------------

    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.
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    \555\ See new Rule 14a-11(g)(1) and Instruction 1 to Rule 14a-
11(g).
    \556\ This 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.
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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:
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    \557\ The process was modeled after the staff no-action process 
used in connection with shareholder proposals under Rule 14a-8.
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     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\
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    \558\ See 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.
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    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\
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    \559\ See proposed Rule 14a-11(f).
    \560\ See proposed Rule 14a-11(f)(7)-(14).
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    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:
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    \561\ See proposed Rule 14a-11(f)(3)-(6).
    \562\ We 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.
---------------------------------------------------------------------------

     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\
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    \563\ See proposed Rule 14a-11(f)(3).
---------------------------------------------------------------------------

     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\
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    \564\ See proposed Rule 14a-11(f)(4).
---------------------------------------------------------------------------

     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\
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    \565\ See proposed Rule 14a-11(f)(5).
---------------------------------------------------------------------------

     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

[[Page 56720]]

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\
---------------------------------------------------------------------------

    \566\ See proposed Rule 14a-11(f)(7).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \567\ See proposed Rule 14a-11(f)(8).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \568\ See proposed Rule 14a-11(f)(10).
---------------------------------------------------------------------------

     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\
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    \569\ See proposed Rule 14a-11(f)(11).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \570\ See proposed Rule 14a-11(f)(12).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \571\ See proposed Rule 14a-11(f)(13).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \572\ See letters from CFA Institute; CII; P. Neuhauser; Schulte 
Roth & Zabel; Universities Superannuation.
    \573\ See letters from ABA; Anadarko; BRT; Cleary; Davis Polk; 
Delaware Bar; ExxonMobil; E.J. Kullman; Protective; S. Quinlivan; 
Seven Law Firms; Weyerhaeuser.
    \574\ See letters from CFA Institute; CII.
    \575\ See letters from 26 Corporate Secretaries; Boeing; Con 
Edison; Honeywell; Kirkland & Ellis; Pfizer; Protective; 
UnitedHealth; USPE; Wells Fargo; Whirlpool.
    \576\ See letters from Boeing; Honeywell.
    \577\ See letters from CFA Institute; CII.
    \578\ See letters from Protective; USPE.
    \579\ See letter from BRT.
    \580\ Id.
    \581\ See letters from ABA; BRT.
    \582\ See letter from ABA.
    \583\ See letters from ABA; Delaware Bar.
---------------------------------------------------------------------------

    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 no-action 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

[[Page 56721]]

addition, the staff is committed to timely addressing these matters.
---------------------------------------------------------------------------

    \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 non-exclusive. 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.
    \585\ Other 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.
    \586\ We 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.
    \587\ The 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 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \588\ For 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.
---------------------------------------------------------------------------

    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
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    \589\ Specifically, 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).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \590\ See new Rule 14a-11(d).
---------------------------------------------------------------------------

    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\
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    \591\ See 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.
---------------------------------------------------------------------------

    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

[[Page 56722]]

against materially false or misleading statements.
---------------------------------------------------------------------------

    \593\ See new Rule 14a-9(c) and Rule 14a-11(f).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \594\ See 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.
---------------------------------------------------------------------------

    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   Nominating shareholder or group
 no later than 120 calendar days,         must provide notice on
 before the anniversary of the date       Schedule 14N to the company
 that the company mailed its proxy        and file the Schedule 14N with
 materials for the prior year's annual    the Commission.
 meeting.
No later than 14 calendar days after     Company must notify the
 the close of the window period for       nominating shareholder or
 submission of nominations.               group (or its authorized
                                          representative) of any
                                          determination not to include
                                          the nominee or nominees.
No later than 14 calendar days after     Nominating shareholder or group
 the nominating shareholder's or          must respond to the company's
 group's receipt of the company's         deficiency notice and, where
 deficiency notice.                       applicable, cure any defects
                                          in the nomination.
No later than 80 calendar days before    Company must provide notice of
 the company files its definitive proxy   its intent to exclude the
 statement and form of proxy with the     nominating shareholder's or
 Commission.                              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     Nominating shareholder or group
 the nominating shareholder's or          may submit a response to the
 group's receipt of the company's         company's notice to the
 notice to the Commission.                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        Company must provide notice to
 staff's informal statement of its        the nominating shareholder or
 views.                                   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\
---------------------------------------------------------------------------

    \596\ Refer 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.
    \597\ See new Rule 14a-11(f).
---------------------------------------------------------------------------

    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),

[[Page 56723]]

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\
---------------------------------------------------------------------------

    \598\ We 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

[[Page 56724]]

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.
---------------------------------------------------------------------------

    \600\ This 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \601\ See letters from CII; COPERA; P. Neuhauser; RiskMetrics; 
USPE.
    \602\ Letter from CII.
    \603\ See letter from RiskMetrics.
    \604\ See 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.
    \605\ See letters from Aetna; American Express; Boeing; 
BorgWarner; JPMorgan Chase; Seven Law Firms; Society of Corporate 
Secretaries; U.S. Bancorp.
    \606\ See letters from BorgWarner; Pfizer; Society of Corporate 
Secretaries; Tenet.
    \607\ See letter from ABA.
    \608\ See letter from ICI.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \609\ See 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.
---------------------------------------------------------------------------

    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

[[Page 56725]]

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\
---------------------------------------------------------------------------

    \610\ See proposed revisions to Rule 14a-6(a)(4) and Note 3 to 
that rule.
    \611\ See letters from ABA; CII.
    \612\ See also discussion in footnote 598 above.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \613\ Under 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).
    \614\ See proposed Rule 14a-2(b)(7)(i).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \615\ See letters from Group of 80 Professors of Law, Business, 
Economics and Finance (``Bebchuk, et al.''); CalSTRS; CII; P. 
Neuhauser; RiskMetrics; Schulte Roth & Zabel; USPE.
    \616\ Letter from Bebchuk, et al.
    \617\ See letter from CII.
    \618\ See letter from P. Neuhauser.
    \619\ See letter from RiskMetrics.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \620\ See letters from ABA; Anadarko; BRT; Seven Law Firms.
    \621\ See letters from ABA; Seven Law Firms.
    \622\ See letter from ABA.
    \623\ Id.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \624\ See letters from ABA; Seven Law Firms.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \625\ Id.
---------------------------------------------------------------------------

     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
---------------------------------------------------------------------------

    \626\ See letter from ABA.
---------------------------------------------------------------------------

     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\

    \627\ See letters from ABA; Seven Law Firms.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \628\ Letter from Biogen.
---------------------------------------------------------------------------

    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

[[Page 56726]]

previously filed by the shareholder in connection with the 
nomination.\633\
---------------------------------------------------------------------------

    \629\ See letters from ABA; Seven Law Firms.
    \630\ See letter from Seven Law Firms.
    \631\ See letters from CII; Cleary; P. Neuhauser; Schulte Roth & 
Zabel; USPE.
    \632\ See letters from CII; USPE.
    \633\ See letter from Cleary.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \634\ See letters from ABA; CII.
    \635\ See letter from Schulte Roth & Zabel.
    \636\ See letter from ABA.
    \637\ See letters from CalSTRS; COPERA; P. Neuhauser.
    \638\ See letter from P. Neuhauser.
    \639\ See letter from COPERA.
    \640\ See letter from CalSTRS.
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \641\ See letters from ABA; CII; USPE.
    \642\ See letter from ABA.
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \643\ See letters from ABA; Seven Law Firms.

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\
---------------------------------------------------------------------------

    \644\ See letter from ABA.
    \645\ See letter from Schulte Roth & Zabel.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \646\ Shareholders 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.
---------------------------------------------------------------------------

    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

[[Page 56727]]

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.
---------------------------------------------------------------------------

    \647\ Materials 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \648\ See new Instruction to Rule 14a-2(b)(7).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \649\ Similarly, the exemption would not be available for 
solicitations in connection with nominations made pursuant to 
foreign law provisions.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \650\ See Exchange Act Rule 14a-12.
---------------------------------------------------------------------------

    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.


[[Page 56728]]


    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\
---------------------------------------------------------------------------

    \651\ For a registered investment company, the filing would be 
made under the company's Investment Company Act file number.
    \652\ See proposed Rule 14a-2(b)(8)(iii).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \653\ See letters from CII; COPERA; P. Neuhauser.
    \654\ See letters from COPERA; P. Neuhauser.
    \655\ See letter from CII.
    \656\ See letter from ABA.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \657\ The 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.
    \658\ See letter from Seven Law Firms.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \659\ See 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).
---------------------------------------------------------------------------

 Each written communication includes:\660\
---------------------------------------------------------------------------

    \660\ See new Rule 14a-2(b)(8)(ii).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \661\ See new Rule 14a-2(b)(8)(iii).

    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.
---------------------------------------------------------------------------

    \662\ As noted above, the soliciting material will be filed 
under cover of Schedule 14N and will appear as Schedule 14N-S on 
EDGAR.
---------------------------------------------------------------------------

    We have added a new instruction to the exemption clarifying that a

[[Page 56729]]

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\
---------------------------------------------------------------------------

    \663\ See Instruction 1 to Rule 14a-2(b)(8).
    \664\ See letter from ABA.
    \665\ See letter from CII.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \666\ See Exchange Act Rule 14a-12(a).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \667\ See letters from CII; COPERA; P. Neuhauser.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \668\ See Instruction 3 to Rule 14a-2(b)(8).
    \669\ See Instruction 2 to Rule 14a-2(b)(8).
---------------------------------------------------------------------------

    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

[[Page 56730]]

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.
---------------------------------------------------------------------------

    \670\ Similarly, the exemption would not be available for 
solicitations in connection with nominations made pursuant to 
foreign law provisions.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \671\ See Rule 14a-11(b)(10) and discussion in Section 
II.B.8.c.ii. above.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \672\ See Election of Directors Adopting Release.
    \673\ See Election of Directors Adopting Release.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \674\ Under 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \675\ Currently, 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.
---------------------------------------------------------------------------

    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.

[[Page 56731]]

    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\
---------------------------------------------------------------------------

    \677\ See 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'').
    \678\ See 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.
    \679\ See letters from AFL-CIO; CFA Institute; CII; Governance 
for Owners; C. Levin; Marco Consulting; SWIB.
    \680\ See letters from CII; USPE.
    \681\ See letters from American Express; Brink's; BRT; CSX; 
Davis Polk; DuPont; C. Holliday; GE; General Mills; MetLife; 
Safeway; Tenet; Verizon.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \682\ See letters from ABA; BorgWarner; CII; J. McRitchie; P. 
Neuhauser; O'Melveny & Myers; Seven Law Firms.
    \683\ See letters from ABA; Seven Law Firms.
    \684\ See letter from ABA.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \685\ As 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), if the proposal or supporting statement was contrary to 
any of the Commission's proxy rules.

---------------------------------------------------------------------------

[[Page 56732]]

    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\
---------------------------------------------------------------------------

    \686\ We 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.

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.
---------------------------------------------------------------------------

    \687\ See letter from ICI.
---------------------------------------------------------------------------

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 fully-informed 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.
---------------------------------------------------------------------------

    \688\ Shareholders 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.
    \689\ See letters from CII; Florida State Board of 
Administration; United Brotherhood of Carpenters.
    \690\ See letters from ICI; Keating Muething; O'Melveny & Myers.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \691\ This 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--
generally, shareholder proponents are not required to provide any 
specific type of disclosure along with their proposal.

---------------------------------------------------------------------------

[[Page 56733]]

    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\
---------------------------------------------------------------------------

    \692\ See North Dakota Publicly Traded Corporations Act, N.D. 
Cent. Code Sec.  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 Sec.  10-35 et al. 
(2007).
    \693\ See proposed Rule 14a-19.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \694\ See proposed Rule 14a-19.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \695\ See proposed Rule 14a-19(a).
---------------------------------------------------------------------------

 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\
---------------------------------------------------------------------------

    \696\ See 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.
---------------------------------------------------------------------------

 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\
---------------------------------------------------------------------------

    \697\ See proposed Rule 14a-19(c).
---------------------------------------------------------------------------

 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\
---------------------------------------------------------------------------

    \698\ See proposed Rule 14a-19(d).
---------------------------------------------------------------------------

 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
---------------------------------------------------------------------------

    \699\ See proposed Rule 14a-19(e).
---------------------------------------------------------------------------

 Disclosure of any Web site address on which the nominating 
shareholder or group may publish soliciting materials.\700\
---------------------------------------------------------------------------

    \700\ See proposed Rule 14a-19(f).

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

[[Page 56734]]

suggested that we extend the disclosure requirement to nominations 
submitted pursuant to a provision under foreign law.\703\
---------------------------------------------------------------------------

    \701\ See letter from P. Neuhauser.
    \702\ See letter from Cleary.
    \703\ See letter from Curtis.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \704\ As 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.
    \705\ See proposed Rule 14a-9(c).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \706\ As 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \708\ See proposed Item 5.07 to Form 8-K.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \709\ See letter from ICI.
    \710\ See letter from ABA.
---------------------------------------------------------------------------

    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

[[Page 56735]]

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.
---------------------------------------------------------------------------

    \711\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \712\ See 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.
    \713\ We 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \714\ See new Rule 14a-5(e)(3).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \715\ The 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).
    \716\ See Exchange Act Rule 13d-1.
    \717\ See Exchange Act Rule 13d-1(b).
    \718\ See Exchange Act Rule 13d-1(c).
---------------------------------------------------------------------------

    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.

[[Page 56736]]

    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.
---------------------------------------------------------------------------

    \719\ See 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.
    \720\ See 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.
    \721\ See letter from Schulte Roth & Zabel.
    \722\ See letter from P. Neuhauser.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \723\ See letters from ABA; Alston & Bird; BRT; Cleary; 
Microsoft; Seven Law Firms; Shearman & Sterling; Society of 
Corporate Secretaries; Vinson & Elkins.
    \724\ See letters from ABA; Cleary; Microsoft; Seven Law Firm; 
Shearman & Sterling.
    \725\ See letter from ABA.
    \726\ See letter from Seven Law Firms.
    \727\ See letter from ABA.
    \728\ See letters from ABA; Alston & Bird; BRT; Seven Law Firms; 
Society of Corporate Secretaries; Vinson & Elkins.
    \729\ See letter from ABA.
    \730\ Id
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \731\ We 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.
---------------------------------------------------------------------------

    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'

[[Page 56737]]

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.
---------------------------------------------------------------------------

    \732\ 15 U.S.C. 78p.
    \733\ As 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.
    \734\ See Exchange Act Rule 13d-5(b) [17 CFR 240.13d-5(b)].
    \735\ See Exchange Act Rule 16a-1(a)(1) [17 CFR 240.16a-
1(a)(1)].
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \736\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \737\ See letters from ICI; Schulte Roth & Zabel; ValueAct 
Capital.
    \738\ See letters from ICI; Schulte Roth & Zabel.
    \739\ See letters from ABA; Alston & Bird; CII; Seven Law Firms.
    \740\ See letters from ABA; CII; Seven Law Firms.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \741\ This 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.
---------------------------------------------------------------------------

    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

[[Page 56738]]

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\
---------------------------------------------------------------------------

    \742\ See letters from CII; Protective; Schulte Roth & Zabel.
    \743\ See letter from CII.
    \744\ See letter from Protective.
    \745\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \746\ See letters from ABA; Seven Law Firms.
    \747\ See letter from ABA.
    \748\ See letters from ABA; Seven Law Firms.
---------------------------------------------------------------------------

    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-and-
circumstance 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

[[Page 56739]]

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\
---------------------------------------------------------------------------

    \749\ See letter from CII.
    \750\ See letter from Protective.
    \751\ See letter from Verizon.
    \752\ See letter from Universities Superannuation.
    \753\ See letter from Verizon.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \754\ See proposed Rule 14a-11(e).
    \755\ See Note to proposed Rule 14a-19.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \756\ See 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.
    \757\ See letters from American Bankers Association; Ameriprise; 
BorgWarner; BRT; Caterpillar; ExxonMobil; Honeywell; S. Quinlivan; 
UnitedHealth; Verizon.
    \758\ See letters from Alaska Air; BorgWarner; BRT; DTE Energy; 
Protective; Seven Law Firms; Society of Corporate Secretaries.
    \759\ See letters from Alaska Air; BorgWarner; BRT; DTE Energy; 
Protective; Seven Law Firms; Sidley Austin; Society of Corporate 
Secretaries; Southern Company; United Health; Verizon.
    \760\ See letter from ABA.
    \761\ See letters from ABA; BorgWarner; BRT; Caterpillar; 
Society of Corporate Secretaries; Southern Company.
    \762\ See letters from Alaska Air; BorgWarner; BRT; ICI; 
Protective.
    \763\ See letter from BRT.
---------------------------------------------------------------------------

    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

[[Page 56740]]

information provided by a nominating shareholder or group only if it 
knew the information was false or misleading.\768\
---------------------------------------------------------------------------

    \764\ See letters from ABA; Sidley Austin.
    \765\ See letter from ABA.
    \766\ Letter from Sidley Austin.
    \767\ See letter from Ameriprise.
    \768\ See letter from ICI.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \769\ See Rule 14a-11(f).
    \770\ See Instruction to new Rule 14a-18. See also Note to 
proposed Rule 14a-19.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \771\ See the Instruction to proposed Item 7(e) of Schedule 14A; 
Instruction to proposed Item 22(b)(18) of Schedule 14A.
    \772\ See the Instruction to proposed Item 7(f) of Schedule 14A; 
Instruction to proposed Item 22(b)(19) of Schedule 14A.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \773\ See letters from ABA; CII; Protective.
    \774\ See letters from ABA; Protective.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \775\ See 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.
---------------------------------------------------------------------------

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:
---------------------------------------------------------------------------

    \776\ 44 U.S.C. 3501 et seq.
    \777\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

    (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

[[Page 56741]]

information collection will not be kept confidential and there is no 
mandatory retention period for the information disclosed.
---------------------------------------------------------------------------

    \778\ The 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \779\ For an additional discussion of the Rule 14a-11 
eligibility requirements, see Section II.B.4 above.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \780\ Exchange 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \782\ See Sections II.B.8 and II.C.5 above.
    \783\ Schedule 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \784\ See Item 5 of Schedule 14N.
---------------------------------------------------------------------------

    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

[[Page 56742]]

than is required for a nomination pursuant to Rule 14a-11.\786\
---------------------------------------------------------------------------

    \785\ See Item 6 of Schedule 14N.
    \786\ See Item 8(b) of Schedule 14N.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \787\ For further discussion of these exemptions, see Section 
II.B.10 above.
    \788\ See new Rule 14a-2(b)(7).
    \789\ See new Rule 14a-2(b)(8).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \790\ See 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.
    \791\ See letters from BRT; Society of Corporate Secretaries.
    \792\ See letter from S&C.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \793\ Id.
    \794\ See letter from BRT.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \795\ See 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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \796\ See Item 5(e) of Schedule 14N.
---------------------------------------------------------------------------

    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

[[Page 56743]]

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.
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    \797\ For 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.
    \798\ See new Rules 14a-2(b)(7) and 14a-2(b)(8).
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    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\
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    \799\ This 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.
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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.
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    \800\ The burdens associated with Schedule 14N are discussed 
below.
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    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.
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    \801\ See Section II.B.4.b. above for a discussion of how voting 
power is determined.
    \802\ The 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.
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    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

[[Page 56744]]

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\
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    \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.
    \805\ We 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.
    \806\ For 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 non-investment companies, we believe it is 
reasonable to discount the 24 contested elections and board-related 
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.
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    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 x 0.75) of company time, and a cost of approximately $21,100 
(211 x 0.25 x $400) for the services of outside professionals. In each 
case, this estimate includes:
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    \808\ According 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.
    \809\ See 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).
---------------------------------------------------------------------------

     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\
---------------------------------------------------------------------------

    \810\ The requirement is in amended Rule 14a-4.
---------------------------------------------------------------------------

     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\
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    \811\ As discussed below, for companies that exclude a nominee 
but do not request no-action relief, we estimate this burden to be 
100 hours.
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    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 x 5 hours/company), 
which corresponds to 154 burden hours of company time (41 companies x 5 
hours/company x 0.75) and $20,500 in services of outside professionals 
(41 companies x 5 hours/company x 0.25 x $400). For registered 
investment companies, this will result in 25 aggregate burden hours (5 
companies x 5 hours/company), which corresponds to 19 burden hours of 
company time (5 companies x 5 hours/company x 0.75), and $2,500 for 
services of outside professionals (5 companies x 5 hours/company x 0.25 
x $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 x 5 hours/response times; 2 
nominees) for reporting companies (other than registered investment 
companies), and 50 aggregate burden hours (5 responses x 5 hours/
response x 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\
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    \812\ The calculations for these numbers are: 410 burden hours x 
0.75 = 308 burden hours of company time and 410 burden hours x 0.25 
x $400 = $41,000 for services of outside professionals.
    \813\ The calculations for these numbers are: 50 burden hours x 
0.75 = 38 hours of company time and 50 burden hours x 0.25 x $400 = 
$5,000 for services of outside professionals.
---------------------------------------------------------------------------

    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

[[Page 56745]]

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 x 40 hours/statement x 2 nominees). This corresponds to 
2,460 hours of company time (41 statements x 40 hours/statement x 2 
nominees x 0.75) and $328,000 for services of outside professionals (41 
statements x 40 hours/statement x 2 nominees x 0.25 x $400) for 
reporting companies (other than registered investment companies). For 
registered investment companies, this will result in 400 aggregate 
burden hours (5 statements x 40 hours/statement x 2 nominees). This 
corresponds to 300 hours of company time (5 statements x 40 hours/
statement x 2 nominees x 0.75) and $40,000 for services of outside 
professionals (5 statements x 40 hours/statement x 2 nominees x 0.25 x 
$400).
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    \814\ We assume that each company that includes a shareholder 
nominee in its proxy materials would include such a statement.
    \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.
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    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

[[Page 56746]]

the nominee and request no-action relief based on 2009 data received 
from commenters.\820\
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    \816\ With respect to companies other than registered investment 
companies, we assume that 6 of these submissions ultimately would be 
excludable under the rule.
    \817\ This 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).
    \818\ We 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.
    \819\ See letter from BRT.
    \820\ Our prior estimate of 65 hours in the Proposing Release 
was based on 2003 data.
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    In the case of reporting companies (other than registered 
investment companies) that have determined they may exclude a nominee 
and seek no-action relief from the staff, we estimate that this will 
result in an aggregate burden of 696 hours (6 notices x 116 hours/
notice), corresponding to 522 hours of company time (6 notices x 116 
hours/notice x 0.75) and $69,600 for the services of outside 
professionals (6 notices x 116 hours/notice x 0.25 x $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 
x 116 hours/notice), which will correspond to 87 hours of company time 
(1 notice x 116 hours/notice x 0.75) and $11,600 for the services of 
outside professionals (1 notice x 116 hours/notice x 0.25 x $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 x 100 hours/notice), 
corresponding to 225 hours of company time (3 notices x 100 hours/
notice x 0.75) and $30,000 for the services of outside professionals (3 
notices x 100 hours/notice x 0.25 x $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.
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    \821\ As 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.
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    We also estimate that the annual burden for the nominating 
shareholder's or group's participation in the no-action process\822\ 
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 x 60 hours/response). 
This will correspond to 270 hours of shareholder time (6 responses x 60 
hours/response x 0.75) and $36,000 for services of outside 
professionals (6 responses x 60 hours/response x 0.25 x $400). For 
nominating shareholders or groups of registered investment companies, 
this will result in 60 total burden hours (1 response x 60 hours/
response). This will correspond to 45 hours of shareholder time (1 
response x 60 hours/response x 0.75) and $6,000 for services of outside 
professionals (1 response x 60 hours/response x 0.25 x $400). This 
burden would be added to the PRA burden of Schedule 14N.
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    \822\ There 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.
    \823\ As 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.
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    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 x 1 hour/solicitation), 
which corresponds to 23 hours of shareholder time (31 solicitations x 1 
hour/solicitation x 0.75) and $3,100 for the services of outside 
professionals (31 solicitations x 1 hour/solicitation x 0.25 x $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 x 1 
hour/solicitation), which corresponds to 4 hours of shareholder time (5 
solicitations x 1 hour/solicitation x 0.75) and $500 for the services 
of outside professionals (5 solicitations x 1 hour/solicitation x 0.25 
x $400). These burden hours would be added to the PRA burden of 
Schedule 14N.
---------------------------------------------------------------------------

    \824\ See new Rule 14a-2(b)(7).
---------------------------------------------------------------------------

    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 x 1 hour/solicitation), which corresponds to 15 
hours of shareholder time (20 solicitations x 1 hour/solicitation x 
0.75) and $2,000 for services of outside professionals (20 
solicitations x 1 hour/solicitation x 0.25 x $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 x 1 hour/solicitation), which 
corresponds to 2 hours of shareholder time (3 solicitations x 1 hour/
solicitation x 0.75) and $300 for services of outside professionals (3 
solicitations x 1 hour/solicitation x 0.25 x $400). These burden hours 
would be added to the PRA burden of Schedule 14N.
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    \825\ See new Rule 14a-2(b)(8).
---------------------------------------------------------------------------

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

[[Page 56747]]

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 
no-action 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 no-action 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.
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    \826\ See North Dakota Publicly Traded Corporations Act, N.D. 
Cent. Code Sec.  10-35-08 (2009).
---------------------------------------------------------------------------

    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\
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    \827\ See 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.
    \828\ See 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).
    \829\ See 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.
    \830\ See footnote 804 above.
    \831\ We 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.
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    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

[[Page 56748]]

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 x 10 hours/proposal). This will correspond 
to 480 hours of shareholder time (64 proposals x 10 hours/proposal x 
0.75) and $64,000 for the services of outside professionals (64 
proposals x 10 hours/proposal x 0.25 x $400).\833\
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    \832\ The 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 of proposals 
(a shareholder is limited to submitting one shareholder proposal to 
each company).
    \833\ We 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.
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    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 x 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 x 116 hours/proposal) for reporting companies (other than 
registered investment companies). This will correspond to 9,570 hours 
of company time (110 proposals x 116 hours/proposal x 0.75) and 
$1,276,000 for the services of outside professionals (110 proposals x 
116 hours/proposal x 0.25 x $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 x 
60 hours/proposal).\834\ This will correspond to 4,950 hours of 
shareholder time (110 proposals x 60 hours/proposal x 0.75) and 
$660,000 for services of outside professionals (110 proposals x 60 
hours/proposal x 0.25 x $400). These burdens would be added to the PRA 
burden of Schedules 14A and 14C.
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    \834\ As 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 no-action 
request.
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    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 x 10 hours/proposal). This would correspond to 90 hours 
of shareholder time (12 proposals x 10 hours/proposal x 0.75) and 
$12,000 for the services of outside professionals (12 proposals x 10 
hours/proposal x 0.25 x $400).
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    \835\ The 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.
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    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 no-action 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 
x 116 hours/proposal). This corresponds to 1,914 hours of company time 
(22 proposals x 116 hours/proposal x 0.75) and $255,200 for the 
services of outside professionals (22 proposals x 116 hours/proposal x 
0.25 x $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 x 60 hours/proposal). This corresponds to 990 hours of 
shareholder time (22 proposals x 60 hours/proposal x 0.75) and $132,000 
for the services of outside professionals (22 proposals x 60 hours/
proposal x 0.25 x $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.

[[Page 56749]]

    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.
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    \836\ We currently estimate the burden per response for 
preparing a Schedule 13G filing to be 12.4 hours.
    \837\ We 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.
    \838\ We 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.
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    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).
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    \839\ This 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.
---------------------------------------------------------------------------

    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 x 47 hours/notice x 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 x 47 hours/notice x 2 
nominees/shareholder x 0.75) and costs of $423,000 (45 notices x 47 
hours/notice x 2 nominees/shareholder x 0.25 x $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 x 47 hours/response x 2 nominees) in 
aggregate each year, which corresponds to 423 hours of shareholder time 
(6 responses x 47 hours/response x 2 nominees x 0.75) and costs of 
$56,400 for the services of outside professionals (6 responses x 47 
hours/response x 2 nominees x 0.25 x $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 x 10 hours/statement x 2 nominees/shareholder), 
which corresponds to 675 hours of shareholder time (45 statements x 10 
hours/statement x 2 nominees/shareholder x 0.75) and $90,000 for 
services of outside professionals (45 statements x 10 hours/

[[Page 56750]]

statement x 2 nominees/shareholder x 0.25 x $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 x 10 hours/statement x 2 nominees/
shareholder), which corresponds to 90 hours of shareholder time (6 
statements x 10 hours/statement x 2 nominees/shareholder x 0.75) and 
$12,000 for services of outside professionals (6 statements x 10 hours/
statement x 2 nominees/shareholder x 0.25 x $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 x 40 
hours/notice x 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 x 40 hours/notice x 2 nominees/shareholder x 0.75) and 
costs of $240,000 for the services of outside professionals (30 notices 
x 40 hours/notice x 2 nominees/shareholder x 0.25 x $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 x 40 hours/notice x 2 nominees/
shareholder) each year, which corresponds to 720 hours of shareholder 
time (12 notices x 40 hours/notice x 2 nominees/shareholder x 0.75) and 
costs of $96,000 for the services of outside professionals (12 notices 
x 40 hours/notice x 2 nominees/shareholder x 0.25 x $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.
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    \840\ As 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.
    \841\ We 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.
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    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 x 10 hours/statement x 2 nominees/shareholder) for 
shareholders of reporting companies (other than registered investment 
companies), which corresponds to 450 hours of shareholder time (30 
statements x 10 hours/statement x 2 nominees/shareholder x 0.75) and 
$60,000 for services of outside professionals (30 statements x 10 
hours/statement x 2 nominees/shareholder x 0.25 x $400). For registered 
investment companies, this results in an aggregate burden of 240 hours 
(12 statements x 10 hours/statement x 2 nominees/shareholder), which 
corresponds to 180 hours of shareholder time (12 statements x 10 hours/
statement x 2 nominees/shareholder x 0.75) and $24,000 for services of 
outside professionals (12 statements x 10 hours/statement x 2 nominees/
shareholder x 0.25 x $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.
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    \842\ We 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.
---------------------------------------------------------------------------

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

[[Page 56751]]

the end of the most recent calendar quarter.\843\
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    \843\ The 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.
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    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 x 5 hours/filing). This total burden 
corresponds to 1,650 hours of company time (440 filings x 5 hours/
filing x 0.75) and $220,000 for services of outside professionals (440 
filings x 5 hours/filing x 0.25 x $400).
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    \844\ Based 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.
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    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 closed-end 
management investment companies x 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 x 5 hours/filing). This 
total burden corresponds to 2,344 hours of company time (625 filings x 
5 hours/filing x 0.75) and $312,500 for services of outside 
professionals (625 filings x 5 hours/filing x 0.25 x $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.
---------------------------------------------------------------------------

    \845\ We 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.
    \846\ We 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 closed-end management 
investment companies are traded on an exchange.
    \847\ Consistent 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.
---------------------------------------------------------------------------

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 x 12.4 hours/schedule). This burden 
corresponds to 81 hours of shareholder time (26 additional Schedule 
13Gs x 12.4 hours/Schedule x 0.25) and $96,720 for services of outside 
professionals (26 additional Schedule 13Gs x 12.4 hours/Schedule x 0.75 
x $400).
---------------------------------------------------------------------------

    \848\ We 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.
---------------------------------------------------------------------------

    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 closed-end 
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 x 12.4 hours/schedule). 
This burden corresponds to 6 hours of shareholder time (2 additional 
Schedule 13Gs x 12.4 hours/schedule x 0.25) and $7,440 for services of 
outside

[[Page 56752]]

professionals (2 additional Schedule 13Gs x 12.4 hours/schedule x 0.75 
x $400).
---------------------------------------------------------------------------

    \849\ Under 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.
---------------------------------------------------------------------------

    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 x 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.
---------------------------------------------------------------------------

    \850\ We currently estimate the burden associated with Form ID 
is 0.15 hours per response.
---------------------------------------------------------------------------

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.

[[Page 56753]]



                                                Table 1--Calculation of Incremental PRA Burden Estimates*
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 Current      Proposed     Current    Increase in    Proposed      Current     Increase in    Proposed
                                                  annual       annual       burden       burden       burden    professional  professional  professional
                                                responses    responses      hours        hours        hours         costs         costs         costs
                                                       (A)          (B)          (C)          (D)          (E)           (F)           (G)             =
                                                                                                             =                                         F
                                                                                                             C                                         +
                                                                                                             +                                         G
                                                                                                             D
--------------------------------------------------------------------------------------------------------------------------------------------------------
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\
---------------------------------------------------------------------------

    \851\ See Rules 14a-2(b)(7) and 14a-2(b)(8).
---------------------------------------------------------------------------

    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

[[Page 56754]]

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.
---------------------------------------------------------------------------

    \852\ As noted above, we are not aware of any states that 
currently prohibit shareholder nominations for director.
---------------------------------------------------------------------------

    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 
shareholder-nominated 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\
---------------------------------------------------------------------------

    \853\ Several 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.
    \854\ As 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 shareholder-
nominated 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \855\ Although 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.
    \856\ See certifications in Item 8 of new Schedule 14N.
    \857\ Prior 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.
    \858\ This could be the case when shareholder-nominated 
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.
---------------------------------------------------------------------------

    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 sub-optimal) 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.
---------------------------------------------------------------------------

    \859\ The 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.
---------------------------------------------------------------------------

    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

[[Page 56755]]

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.
---------------------------------------------------------------------------

    \860\ November 2009 Memorandum. See Section II.B.4.b. above for 
a discussion of the data, including its limitations.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \861\ As 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.
    \862\ As 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \863\ See 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.'').
    \864\ Proxy 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 lock-up of a significant amount of the voting securities of the 
target company. Such costs could be high.
    \865\ See letters from Americans for Financial Reform; CalPERS; 
CII; Florida State Board of Administration; M. Katz; J. McRitchie; 
S. Ranzini; Teamsters.
---------------------------------------------------------------------------

    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

[[Page 56756]]

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.
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    \866\ See, 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.).
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    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.
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    \867\ See 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.
---------------------------------------------------------------------------

    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.
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    \868\ According 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.
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    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.
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    \869\ See 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.
    \870\ See letter from BRT.
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    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\
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    \871\ We 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.
---------------------------------------------------------------------------

    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

[[Page 56757]]

``mere $18,000 in estimated savings'' \873\ --a characterization that 
we believe obfuscates the significance of this benefit of our new 
rules.
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    \872\ See, 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.'').
    \873\ See letter from BRT.
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    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.
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    \874\ See 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.
    \875\ One 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.
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    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\
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    \876\ See, e.g., letters from 26 Corporate Secretaries; 
Ameriprise; BRT.
    \877\ See 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.
    \878\ Exchange 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).
    \879\ See 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.'').
    \880\ Exchange 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.
    \881\ Exchange 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.
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    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

[[Page 56758]]

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.
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    \882\ See 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 person-by-person 
analysis, versus slate-by-slate analysis.
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    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\
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    \883\ As 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.
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    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 decision-making 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.
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    \884\ One 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.
    \885\ As 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.
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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\
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    \886\ For 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.
    \887\ As 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.
    \888\ As 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.
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    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

[[Page 56759]]

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\
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    \889\ For 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.
    \890\ See 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.
    \891\ See letters from DTE Energy; JPMorgan Chase; P&G Seven 
Law Firms; Society of Corporate Secretaries; U.S. Bancorp.
    \892\ See, e.g., letters from ABA; BRT; Society of Corporate 
Secretaries.
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    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\
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    \893\ See letters from CII; Governance for Owners; D. Nappier.
    \894\ See 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.
    \895\ See 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.
---------------------------------------------------------------------------

    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\
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    \896\ See 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.
    \897\ See letters from Bebchuk/Hirst; CII; Florida State Board 
of Administration.
    \898\ See letters from AFSCME; Florida State Board of 
Administration; Nathan Cummings Foundation; SWIB.
    \899\ See 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 
super-majority 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 counter-initiatives; 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.'')
    \900\ See letters from Florida State Board of Administration; P. 
Neuhauser; Shamrock.
    \901\ See letters from AT&T ABA; BRT; J. Grundfest; Keller 
Group; Lemonjuice.biz (``Lemonjuice''); Seven Law Firms.
---------------------------------------------------------------------------

    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-by-company 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

[[Page 56760]]

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.
---------------------------------------------------------------------------

    \902\ See Section II.B.2. above, for additional discussion of 
our consideration of a private ordering approach.
    \903\ See 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.
    \904\ The 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.
---------------------------------------------------------------------------

    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 opt-out 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\
---------------------------------------------------------------------------

    \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.
    \906\ See 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \907\ See Proposing Release, Section V.B.3.
---------------------------------------------------------------------------

    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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    \908\ See 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. 
Moulton-Ely; 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.
    \909\ See, 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.
    \910\ See 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.
    \911\ See, 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 
one-year 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).
    \912\ See 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 Ren[eacute] 
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 shareholder-friendly 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.'').

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[[Page 56761]]

    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 shareholder-nominated 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.
---------------------------------------------------------------------------

    \913\ The 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.
    \914\ See 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.'').
    \915\ As 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.).
    \916\ See 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 de-staggering 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.'')).
    \917\ See Bebchuk and Hirst (2010); Bebchuk and Cohen (2005).
---------------------------------------------------------------------------

    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

[[Page 56762]]

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.
---------------------------------------------------------------------------

    \918\ See 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 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).
    \919\ See 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).
    \920\ See, 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.'').
    \921\ Cernich (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.
    \922\ Cernich (2009).
    \923\ See 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).
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    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\
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    \924\ See 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'')).
    \925\ See 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.
---------------------------------------------------------------------------

    We have reviewed these studies and have reason to question some of 
their conclusions either because of questions raised by subsequent 
studies,\926\

[[Page 56763]]

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.
---------------------------------------------------------------------------

    \926\ For 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)'').
    \927\ For 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.
    \928\ For 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \929\ See NERA Report.
    \930\ Id.
---------------------------------------------------------------------------

    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 long-term value in order to avoid 
nominations.
---------------------------------------------------------------------------

    \931\ See, e.g., letters from BRT; GE; General Mills; IBM; 
Metlife; Office Depot; Safeway; Wachtell.
    \932\ See Mulherin and Poulsen (1998) and discussion in footnote 
926 above.
---------------------------------------------------------------------------

    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 non-investment 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

[[Page 56764]]

structure of most investment companies.\938\
---------------------------------------------------------------------------

    \933\ See, e.g., letters from ABA; ICI; ICI/IDC; IDC; MFDF; S&C 
T. Rowe Price; Vanguard.
    \934\ See letters from ICI; ICI/IDC; S&C T. Rowe Price.
    \935\ See letters from ABA; Barclays; ICI; ICI/IDC; IDC; T. Rowe 
Price; S&C Vanguard.
    \936\ See letters from J. Reid; J. Taub.
    \937\ See 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.'').
    \938\ See footnote 142 above.
---------------------------------------------------------------------------

    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 shareholder-nominated 
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\
---------------------------------------------------------------------------

    \939\ See Proposing Release, Section V.B.3.
    \940\ For a more detailed discussion, see Section IV.E.1. below.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \941\ See 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.
    \942\ Among 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \944\ See 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).
    \945\ See Rule 14a-18, Rule 14n-1, and Schedule 14N.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \946\ See Item 7(e) of Schedule 14A and Item 5(i) of Schedule 
14N.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \947\ See Rules 14a-2(b)(7) and 14a-2(b)(8).
    \948\ See Rule 14a-2(b)(7).
    \949\ See Rule 14a-2(b)(8).
---------------------------------------------------------------------------

    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.

[[Page 56765]]

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\
---------------------------------------------------------------------------

    \950\ See 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.
    \951\ See, 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.).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \952\ See new Rule 14a-11(d) (5). For a discussion of this 
modification, see Section II.B.6.c. above.
---------------------------------------------------------------------------

    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 re-examination 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.
---------------------------------------------------------------------------

    \953\ See, e.g., letters from Biogen; GE.
---------------------------------------------------------------------------

    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

[[Page 56766]]

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.
---------------------------------------------------------------------------

    \954\ See 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 trust-based relationships that causes horizontal monitoring 
within the board to provide effective constraints on agency 
costs.'') (cited in the Proposing Release, Section V.C.1.).
    \955\ See 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.
    \956\ See 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.
    \957\ See Rules 14a-11, 14a-18 and 14n-1, and Schedule 14N.
    \958\ See letters from BCI; Bebchuk, et al.; CII; T. DiNapoli; 
Florida State Board of Administration; Governance for Owners; A. 
Krakovsky; P. Neuhauser; NJSIC; Relational; Shamrock; Social 
Investment Forum.
    \959\ See Rule 14a-11(d)(1).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \960\ See 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.
    \961\ See, e.g., letters from Ameriprise; BRT; Chamber of 
Commerce/CCMC.
    \962\ See letters from Florida State Board of Administration; 
Pershing Square.
    \963\ See letter from Pershing Square.
    \964\ See 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.
    \965\ See Proposing Release, Section V.C.1.
---------------------------------------------------------------------------

    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 decision-making 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 shareholder-nominated 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 decision-
making 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\
---------------------------------------------------------------------------

    \966\ See, 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.'').
    \967\ See Section IV.D.3. above.
---------------------------------------------------------------------------

    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

[[Page 56767]]

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.
---------------------------------------------------------------------------

    \968\ See, 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.'').
    \969\ See 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.
    \970\ See Rule 14a-11, Rule 14a-18, Rule 14n-1, and Schedule 
14N.
    \971\ See letter from CII. See also Veasey & DiGuglielmo, above.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \972\ See letter from BRT.
    \973\ See 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'').
    \974\ See letters from ACSI; CalPERS; ICGN; LUCRF; Pax World; 
RiskMetrics; Social Investment Forum; SWIB.
---------------------------------------------------------------------------

    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 shareholder-nominated 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.
---------------------------------------------------------------------------

    \975\ See, e.g., letters from ABA; ICI; ICI/IDC; IDC; MFDF; S&C 
T. Rowe Price; Vanguard.
    \976\ See, e.g., letters from ICI; ICI/IDC; IDC; MFDF; Vanguard.
---------------------------------------------------------------------------

    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 shareholder-nominated 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 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 attorney-client privilege. 
Finally, we believe the concerns expressed in the memorandum about 
confidentiality agreements were either not compelling or speculative in 
nature.
---------------------------------------------------------------------------

    \977\ See letter from ICI/IDC (including attached legal 
memorandum).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \978\ See letter from J. Taub.
---------------------------------------------------------------------------

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

[[Page 56768]]

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 highly-complex 
and unclear rule.
---------------------------------------------------------------------------

    \979\ See, 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.
    \980\ See letter from Wachtell.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \981\ See 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).
    \982\ See Section II.B.2.e. above.
    \983\ See Section II.B.7.b. above.
    \984\ See Sections II.B.4.b. and II.B.6.a. above.
    \985\ See Section II.B.8.c.ii. above.
    \986\ See letter from CII.
    \987\ For 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.
---------------------------------------------------------------------------

    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 decision-making 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.
---------------------------------------------------------------------------

    \988\ See Section IV.D.1. above.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \989\ We note that these increased costs may be less for 
companies using the notice and access model. See Internet Proxy 
Availability Release.
---------------------------------------------------------------------------

    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

[[Page 56769]]

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\
---------------------------------------------------------------------------

    \990\ For 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.
    \991\ For 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.
    \992\ See, e.g., letter from S&C.
    \993\ See letters from BRT; Society of Corporate Secretaries.
    \994\ See Section III.C. above, for discussion of the estimates 
included in the letters from BRT and Society of Corporate 
Secretaries.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \995\ See letter from BRT.
    \996\ See 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.''
    \997\ See letter from CII.
    \998\ This 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 x 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 x 116 hours/proposal) for reporting 
companies (other than registered investment companies). This will 
correspond to 9,570 hours of company time (110 proposals x 116 
hours/proposal x 0.75) and $1,276,000 for the services of outside 
professionals (110 proposals x 116 hours/proposal x 0.25 x $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.
    \999\ As discussed in Section II.B.3. above, Rule 14a-11 will 
not apply to certain types of companies.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \1000\ However, 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.
---------------------------------------------------------------------------

    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,

[[Page 56770]]

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.
---------------------------------------------------------------------------

    \1001\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \1003\ See letter from Chamber of Commerce/CCMC.
    \1004\ See letter from BRT.
    \1005\ See letter from Ryder.
    \1006\ See letter from Biogen.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1007\ See 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.'').
    \1008\ See letters from CalSTRS; CII; Florida State Board of 
Administration.
    \1009\ See letters from ABA; BRT.
    \1010\ The 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.
    \1011\ For 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).
---------------------------------------------------------------------------

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 non-

[[Page 56771]]

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.
---------------------------------------------------------------------------

    \1012\ See letter from S&C. NYSE Rule 452 provides that, with 
respect to registered investment companies, brokers may not vote 
uninstructed shares in contested elections.
    \1013\ See letters from ABA; MFDF.
    \1014\ See letter from J. Taub.
    \1015\ See letter from ABA.
---------------------------------------------------------------------------

    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\
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    \1016\ The 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.
    \1017\ See 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).
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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.
---------------------------------------------------------------------------

    \1018\ 15 U.S.C. 78w(a)(2).
    \1019\ 15 U.S.C. 78c(f).
    \1020\ 15 U.S.C. 80a-2(c).
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    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\
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    \1021\ We 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.
    \1022\ One 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 Sec.  10-35-08 (2009).
---------------------------------------------------------------------------

    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

[[Page 56772]]

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\
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    \1023\ Many 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.
    \1024\ See letter from ABA.
    \1025\ See Bainbridge 2003 Letter.
    \1026\ See Section IV.D.1. above.
---------------------------------------------------------------------------

    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 
decision-making 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\
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    \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.
    \1028\ As 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).
    \1029\ See Section IV.D.1. above.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1030\ See 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. 
Moulton-Ely; 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.
    \1031\ We 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).
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    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\
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    \1032\ See, 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.
    \1033\ See Proposing Release, Section V.C.1.
---------------------------------------------------------------------------

    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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    \1034\ See, 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.
    \1035\ See 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 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).

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[[Page 56773]]

    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\
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    \1037\ See 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.
    \1038\ See Section IV.D.3. above.
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    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.
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    \1039\ For a discussion of these costs, see Section IV.E.3. 
above.
    \1040\ See, e.g., letters from ABA; Wachtell.
    \1041\ See 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.''
    \1042\ For further discussion, see Section II.E. above.
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    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.
---------------------------------------------------------------------------

    \1043\ See, e.g., letters from ABA; ICI; ICI/IDC; IDC; MFDF; 
S&C T. Rowe Price; Vanguard.
    \1044\ See letter from ICI.
---------------------------------------------------------------------------

    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.
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    \1045\ See, e.g., letters from ICI; ICI/IDC; IDC; MFDF; 
Vanguard.
    \1046\ For 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.
    \1047\ See letter from J. Taub.
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    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

[[Page 56774]]

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.
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    \1048\ See 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.
    \1049\ See letters from ACSI; CalPERS; ICGN; LUCRF; Pax World; 
RiskMetrics; Social Investment Forum; SWIB.
    \1050\ Exchange Act Rule 3a12-3 exempts securities of certain 
foreign issuers from Section 14(a) of the Exchange Act.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1051\ See Instruction 4 to new Schedule 14N.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1052\ See Section IV.D.3. above.
---------------------------------------------------------------------------

    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\
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    \1053\ See, 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.'').
    \1054\ See letter from Universities Superannuation.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1055\ See 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.
---------------------------------------------------------------------------

    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

[[Page 56775]]

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-by-
company 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\
---------------------------------------------------------------------------

    \1056\ For 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).
    \1057\ See Sections II.B.2. and IV.D.2. above.
    \1058\ See letters from CalPERS; D. Nappier; P. Neuhauser; 
Pershing Square; Schulte Roth & Zabel.
    \1059\ See 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.
    \1060\ See letters from CalPERS; D. Nappier; P. Neuhauser.
    \1061\ See letter from CII.
    \1062\ Id.
    \1063\ See 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'').
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
    \1065\ See letter from Florida State Board of Administration.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1066\ See 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.'').
    \1067\ See 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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \1068\ See J.W. Verret, Pandora's Ballot Box, Or a Proxy with 
Moxie? Majority Voting, Corporate Ballot Access, and the Legend of 
Martin Lipton Re-Examined, 62 Bus. Law. 1007, 1014 (2007) (reporting 
on one replacement of a board chairman following a withhold campaign 
resulting in a 43% withhold vote).
    \1069\ See letter from AFSCME.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \1070\ See Section IV.D.1. above.
    \1071\ Id.
---------------------------------------------------------------------------

    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

[[Page 56776]]

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.''
---------------------------------------------------------------------------

    \1072\ See letter from BRT (referring to the NERA Report).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \1073\ ABA; Barclays; ICI; IDC; T. Rowe Price; S&C Vanguard.
    \1074\ See footnote 142 above.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \1075\ 5 U.S.C. 601.
---------------------------------------------------------------------------

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

[[Page 56777]]

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.
---------------------------------------------------------------------------

    \1076\ For 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.
    \1077\ As 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 director in company proxy materials 
would disproportionately burden small issuers.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \1078\ See 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.
    \1079\ See 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.
    \1080\ See 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.
    \1082\ See letter from ICI.
    \1083\ See letters from AFSCME; CII; D. Nappier.
    \1084\ See letter from USPE.
    \1085\ See letter from CII.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1086\ See letters from AFSCME; D. Nappier.
    \1087\ See letter from CII.
---------------------------------------------------------------------------

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

[[Page 56778]]

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\
---------------------------------------------------------------------------

    \1088\ 5 U.S.C. 601(6).
    \1089\ 17 CFR 230.157.
    \1090\ 17 CFR 240.0-10(a).
    \1091\ The estimated number of reporting small entities is based 
on 2009 data, including the Commission's EDGAR database and Standard 
& Poor's.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1092\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \1093\ See, e.g., Bebchuk (2007).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1094\ See letter from ICI.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \1095\ See 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.
    \1096\ See 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.
---------------------------------------------------------------------------

    We considered changes to Rule 14a-8(i)(8) in 2007 that would enable 
shareholders to have their proposals for bylaw amendments regarding the

[[Page 56779]]

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\
---------------------------------------------------------------------------

    \1097\ For further discussion, see Section II.B.4. above.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \1098\ See Section II.B.3.f. above.
---------------------------------------------------------------------------

    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.


0
In accordance with the foregoing, the Securities and Exchange 
Commission is amending Title 17, chapter II of the Code of Federal 
Regulations as follows:

[[Page 56780]]

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

Subpart D--Information and Requests

0
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.
* * * * *

0
2. Add Sec.  200.82a to read as follows:


Sec.  200.82a  Public availability of materials filed pursuant to Sec.  
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

0
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.
* * * * *

0
4. Amend Sec.  232.13 by revising paragraph (a)(4) (the note remains 
unchanged) to read as follows:


Sec.  232.13  Date of filing; adjustment of filing date.

    (a) * * *
    (4) Notwithstanding paragraph (a)(2) of this section, a Form 3, 4 
or 5 (Sec. Sec.  249.103, 249.104, and 249.105 of this chapter) or a 
Schedule 14N (Sec.  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

0
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.
* * * * *


0
6. Amend Sec.  240.13a-11 by revising paragraph (b) to read as follows:


Sec.  240.13a-11  Current reports on Form 8-K (Sec.  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 Sec.  240.13a-16, issuers of American Depositary Receipts 
for securities of any foreign issuer, or investment companies required 
to file reports pursuant to Sec.  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 Sec.  245.104 of this 
chapter;
    (2) Disclosure pursuant to Instruction 2 to Sec.  240.14a-11(b)(1) 
of information concerning outstanding shares and voting; or
    (3) Disclosure pursuant to Instruction 2 to Sec.  240.14a-11(b)(10) 
of the date by which a nominating shareholder or nominating shareholder 
group must submit the notice required pursuant to Sec.  240.14a-
11(b)(10).
* * * * *

0
7. Amend Sec.  240.13d-1 by revising paragraphs (b)(1)(i) and (c)(1) 
and adding Instruction 1 to paragraph (b)(1) to read as follows:


Sec.  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 Sec.  240.13d-3(b), other 
than activities solely in connection with a nomination under Sec.  
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 Sec.  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 Sec.  240.13d-
3(b), other than activities solely in connection with a nomination 
under Sec.  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 Sec.  240.14a-11 will not be available after the 
election of directors.
* * * * *

0
8. Amend Sec.  240.13d-102 by revising the sentences following the 
introductory text in Items 10(a) and (c) as follows:


Sec.  240.13d-102  Schedule 13G--Information to be included in 
statements filed pursuant to Sec.  240.13d-1(b), (c), and (d) and 
amendments thereto filed pursuant to Sec.  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 Sec.  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 Sec.  240.14a-11.
* * * * *

0
9. Amend Sec.  240.14a-2 by:
0
a. Revising paragraph (b) introductory text; and
0
b. Adding paragraphs (b)(7) and (b)(8).
    The revision and additions read as follows:


Sec.  240.14a-2  Solicitations to which Sec.  240.14a-3 to Sec.  
240.14a-15 apply.

* * * * *
    (b) Sections 240.14a-3 to 240.14a-6 (other than paragraphs 14a-6(g) 
and

[[Page 56781]]

14a-6(p)), Sec.  240.14a-8, Sec.  240.14a-10, and Sec. Sec.  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 Sec.  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 Sec.  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 Sec.  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 (Sec.  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 (Sec.  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 Sec.  240.14a-2(b)(8) and Sec.  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 Sec.  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 Sec.  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 (Sec.  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 Sec.  240.14a-11(g)(1) or Sec.  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 Sec.  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 Sec.  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 
Sec.  240.13d-5(b)), or otherwise, with persons engaged in soliciting 
or other nominating activities in connection with the subject election 
of directors.
* * * * *

0
10. Amend Sec.  240.14a-4 by:
0
a. Revising the first sentence of paragraph (b)(2) introductory text; 
and

[[Page 56782]]

0
b. Adding a sentence to the end paragraph (b)(2) concluding text.
    The revision and addition read as follows:


Sec.  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 Sec.  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 Sec.  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.
* * * * *


0
11. Amend Sec.  240.14a-5 by:
0
a. Revising paragraph (e)(1) to remove ``and'' at the end of the 
paragraph;
0
b. Revising paragraph (e)(2) to remove the period at the end of the 
paragraph and add in its place ``; and''; and
0
c. Adding paragraph (e)(3) to read as follows:


Sec.  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 Sec.  
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.
* * * * *
0
12. Amend Sec.  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;
0
b. Adding new paragraph (a)(4);
0
c. Adding a sentence at the end of Note 3 to paragraph (a); and
0
d. Adding paragraph (p).
    The revisions and additions read as follows:


Sec.  240.14a-6  Filing requirements.

    (a) * * *
    (4) A shareholder nominee for director included pursuant to Sec.  
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 Sec.  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) (Sec.  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 Sec.  240.14a-11. Any soliciting 
material that is published, sent or given to shareholders in connection 
with Sec.  240.14a-2(b)(7) or (b)(8) must be filed with the Commission 
as specified in that section.


0
13. Amend Sec.  240.14a-8 by revising paragraph (i)(8) as follows:


Sec.  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.
* * * * *

0
14. Amend Sec.  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:


Sec.  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 (Sec.  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.
* * * * *

0
15. Add Sec.  240.14a-11 to read as follows:


Sec.  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 (Sec.  
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

[[Page 56783]]

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 (Sec.  
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 
(Sec.  270.18f-2(a) of this chapter), the Form 8-K (Sec.  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 (Sec.  249.331 and Sec.  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 Sec.  
270.18f-2(a) of this chapter), the registrant must disclose pursuant 
to Item 5.08 of Form 8-K (Sec.  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 (Sec.  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 (Sec.  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 
(Sec.  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 (Sec.  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 Sec.  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 (Sec.  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 
(Sec.  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 (Sec.  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 
(Sec.  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

[[Page 56784]]

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 (Sec.  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 (Sec.  240.13d-101), Schedule 13G (Sec.  
240.13d-102), Form 3 (Sec.  249.103 of this chapter), Form 4 (Sec.  
249.104 of this chapter), and/or Form 5 (Sec.  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, 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 (Sec.  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 (Sec.  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 (Sec.  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 (Sec.  240.14n-101), 
as specified by Sec.  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

[[Page 56785]]

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 (Sec.  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 (Sec.  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 (Sec.  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 (Sec.  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 Sec.  
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 Sec.  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 
(Sec.  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 (Sec.  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.


[[Page 56786]]


    (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 (Sec.  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 (Sec.  
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 (Sec.  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 (Sec.  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

[[Page 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.

0
16. Amend Sec.  240.14a-12 by removing the heading following paragraph 
(c)(2)(iii) ``Instructions to Sec.  240.14a-12''; by removing the 
numbers 1. and 2. of instructions 1 and 2 to Sec.  240.14a-12 and 
adding in their places the phrases ``Instruction 1 to Sec.  240.14a-
12.'' and ``Instruction 2 to Sec.  240.14a-12.'', respectively; and 
adding Instruction 3 to Sec.  240.14a-12 to read as follows:


Sec.  240.14a-12  Solicitation before furnishing a proxy statement.

* * * * *
    Instruction 3 to Sec.  240.14a-12. Inclusion of a nominee pursuant 
to Sec.  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 Sec.  240.14a-12(c), except for 
purposes of Sec.  240.14a-6(a).

0
17. Add Sec.  240.14a-18 to read as follows:


Sec.  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

[[Page 56788]]

provide notice to the registrant of its intent to do so on a Schedule 
14N (Sec.  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 (Sec.  249.308 
of this chapter) filed pursuant to Item 5.08 of Form 8-K.
    Instruction to Sec.  240.14a-18. The registrant is not responsible 
for any information provided in the Schedule 14N (Sec.  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.

0
18. Amend Sec.  240.14a-101 by:
0
a. Revising Item 7 as follows:
0
i. Redesignating paragraph (e) as paragraph (g); and
0
ii. Adding new paragraph (e) and paragraph (f); and
0
b. Adding paragraphs (18) and (19) to Item 22(b).
    The additions read as follows:


Sec.  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 Sec.  240.14a-11 and the registrant is not permitted to exclude the 
nominee or nominees pursuant to the provisions of Sec.  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 Sec.  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 Sec.  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 Sec.  240.14a-
11 and the Fund is not permitted to exclude the nominee or nominees 
pursuant to the provisions of Sec.  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 Sec.  
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 Sec.  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.
* * * * *

0
19. Amend part 240 by adding an undesignated center heading and 
Sec. Sec.  240.14n-1 through 240.14n-3 and Sec.  240.14n-101 to read as 
follows:

Regulation 14N: Filings Required by Certain Nominating Shareholders


Sec.  240.14n-1  Filing of Schedule 14N.

    (a) A shareholder or group of shareholders that submits a nominee 
or nominees in accordance with Sec.  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 (Sec.  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 (Sec.  
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

[[Page 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.


Sec.  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 
(Sec.  240.14n-101) required by Sec.  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.


Sec.  240.14n-3  Dissemination.

    One copy of Schedule 14N (Sec.  240.14n-101) filed pursuant to 
Sec. Sec.  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.


Sec.  240.14n-101  Schedule 14N--Information to be included in 
statements filed pursuant to Sec.  240.14n-1 and amendments thereto 
filed pursuant to Sec.  240.14n-2.

Securities and Exchange Commission, Washington, DC 20549
Schedule 14N
Under the Securities Exchange Act of 1934
(Amendment No. --)*


(Name of Issuer)
-----------------------------------------------------------------------


(Title of Class of Securities)
-----------------------------------------------------------------------


(CUSIP Number)
-----------------------------------------------------------------------

[ ] Solicitation pursuant to Sec.  240.14a-2(b)(7)
[ ] Solicitation pursuant to Sec.  240.14a-2(b)(8)
[ ] Notice of Submission of a Nominee or Nominees in Accordance with 
Sec.  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: ------------------------
    (2) Mailing address and phone number of each reporting person (or, 
where applicable, the authorized representative): --------------------
----
    (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: ------------------------
    (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): ------------------------
    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.

[[Page 56790]]

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 Sec.  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 Sec.  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 (Sec.  240.13d-101), Schedule 13G 
(Sec.  240.13d-102), Form 3 (Sec.  249.103 of this chapter), Form 4 
(Sec.  249.104 of this chapter), and/or Form 5 (Sec.  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 Sec.  240.14a-11(b)(1) through the 
date of the meeting of shareholders, as required by Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 (Sec.  
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 (Sec.  240.14a-101), as applicable;

[[Page 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 (Sec.  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 Sec.  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 (Sec.  
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 (Sec.  
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 (Sec.  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

[[Page 56792]]

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 Sec.  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 
Sec.  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 Sec.  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 Sec.  240.14a-11(b), as applicable;
    (3) The nominee or nominees satisfies the requirements of Sec.  
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:-----------------------------------------------------------------
Signature:-------------------------------------------------------------
Name/Title:------------------------------------------------------------

    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).

0
20. Amend Sec.  240.15d-11 by revising paragraph (b) to read as 
follows:


Sec.  240.15d-11  Current reports on Form 8-K (Sec.  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 Sec.  240.15d-16, issuers of American Depositary Receipts 
for securities of any foreign issuer, or investment companies required 
to file reports pursuant to Sec.  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 Sec.  245.104 of this 
chapter;
    (2) Disclosure pursuant to Instruction 2 to Sec.  240.14a-11(b)(1) 
of information concerning outstanding shares and voting; or
    (3) Disclosure pursuant to Instruction 2 to Sec.  240.14a-11(b)(10) 
of the date by which a nominating shareholder or nominating shareholder 
group must submit the notice required pursuant to Sec.  240.14a-
11(b)(10).
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
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.
* * * * *

0
22. Amend Form 8-K (referenced in Sec.  249.308) by:
0
a. Adding a sentence at the end of General Instruction B.1;
0
b. Removing the phrase ``Section 5.06'' in the heading and adding in 
its place ``Item 5.06''; and
0
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

* * * * *

[[Page 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 (Sec.  240.14n-101) required pursuant to 
Sec.  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 Sec.  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 (Sec.  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