[Federal Register: September 16, 2010 (Volume 75, Number 179)]
[Rules and Regulations]
[Page 56667-56793]
[DOCID:fr16se10-8]

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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

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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<PHONE_NUMBER>, or, with
regard to investment companies, Kieran G. Brown, Division of Investment
Management, at<PHONE_NUMBER>, 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

    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

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

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

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

    \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).

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

    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-

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

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

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

    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

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

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

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

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

    \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\

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

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

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

    \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

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

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

    \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

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

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

    \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

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