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

previously, by adopting Rule 14a-11 we are seeking to facilitate
shareholders' ability under State law to nominate and elect directors,
not necessarily to enhance shareholder representation on the board. We
do not believe that a Commission rule is needed to facilitate the
working relationship between the shareholder-nominated director and the
company-nominated directors, or to provide an incentive for the board
to integrate the shareholder-nominated director into its activities. To
the extent that a shareholder nominee is elected to the board, the
company-nominated directors and the shareholder-nominated director will
have a fiduciary duty to act in the best interests of the company and
its shareholders.
7. Priority of Nominations Received by a Company
a. Priority When Multiple Shareholders Submit Nominees
    Proposed Rule 14a-11(d)(3) addressed situations where more than one
shareholder or group would be eligible to have its nominees included in
the company's form of proxy and disclosed in its proxy statement
pursuant to the proposed rule. In those situations, the company would
have been required to include in its proxy materials the nominee or
nominees of the first nominating shareholder or group from which it
receives timely notice of intent to nominate a director pursuant to the
rule, up to and including the total number of shareholder nominees
required to be included by the company. We proposed this standard
because we believed that there would be a benefit to enabling companies
to begin preparing their proxy materials and coordinating with the
nominating shareholder or group immediately upon receiving an eligible
nomination rather than requiring companies to wait to see whether
another nomination from a larger nominating shareholder or group was
submitted before the notice deadline.
    Commenters were almost uniformly opposed to the proposed ``first-
in'' standard. A large number of commenters expressed general
opposition to the proposed first-in approach, with many presenting
their own recommendations.\443\ Commenters expressed concern that the
first-in approach would rush shareholders to submit nominations.\444\
One commenter worried that even if the Commission included a window
period for submission of shareholder nominees in the final rule, the
first-in approach would encourage a race to file, discourage
constructive dialogue between shareholders and management, and
encourage a ``gamesmanship'' attitude among possible nominating
shareholders or groups.\445\ Another commenter argued that the first-in
approach would undercut the Commission's stated objectives in proposing
Rule 14a-11.\446\ One commenter worried that the ``first in'' approach
would favor large shareholders, who have greater resources to prepare
their submission materials, over small shareholders who must aggregate
to reach the ownership threshold and need to pool resources to prepare
their submission materials.\447\
---------------------------------------------------------------------------

    \443\ See letters from 13D Monitor; 26 Corporate Secretaries;
ABA; ACSI; Advance Auto Parts; Aetna; AFL-CIO; AFSCME; Allstate;
Alston & Bird; Amalgamated Bank; American Bankers Association;
Anadarko; Applied Materials; Avis Budget; Blue Collar Investment
Advisors (``BCIA''); Best Buy; Boeing; BorgWarner; Brink's; BRT;
Burlington Northern; CalPERS; CalSTRS; Caterpillar; CFA Institute;
Chevron; CIGNA; CII; Cleary; Con Edison; COPERA; Corporate Library;
CSX; Cummins; Darden Restaurants; Deere; Devon; Dewey; T. DiNapoli;
Dominican Sisters of Hope; DuPont; Eaton; Emerson Electric;
ExxonMobil; FedEx; Financial Services Roundtable; First Affirmative;
Florida State Board of Administration; FMC Corp.; FPL Group;
Frontier; General Mills; A. Goolsby; Honeywell; IAM; IBM; ICI;
Intel; JPMorgan Chase; Kirkland & Ellis; C. Levin; Leggett; LIUNA;
LUCRF; Marco Consulting; J. McCoy; McDonald's; Joel M. McTague (``J.
McTague''); MeadWestvaco; Mercy Investment Program; Metlife;
Motorola; D. Nappier; Nathan Cummings Foundation; P. Neuhauser;
Norfolk Southern; Norges Bank; Office Depot; OPERS; PACCAR Inc.
(``PACCAR''); Pershing Square; PepsiCo; Pfizer; S. Quinlivan;
RacetotheBottom; RiskMetrics; Ryder; Sara Lee; Social Investment
Forum; Seven Law Firms; Shearman & Sterling; Sheet Metal Workers;
Sidley Austin; SIFMA; Sisters of Mercy; Society of Corporate
Secretaries; Sodali; Southern Company; SWIB; Teamsters; Tenet; TI;
TIAA-CREF; Tri-State Coalition; Trillium; T. Rowe Price; Textron; tw
telecom; Universities Superannuation; Ursuline Sisters of Tildonk;
U.S. Bancorp; USPE; ValueAct Capital; Verizon; Wachtell; Walden;
Wells Fargo; Weyerhaeuser; Whirlpool; WSIB; Xerox.
    \444\ See letters from ABA; BRT; Con Edison; First Affirmative;
C. Levin; Verizon.
    \445\ Letter from ABA.
    \446\ See letter from BRT.
    \447\ See letter from Con Edison.
---------------------------------------------------------------------------

    Some commenters expressed general concern about how companies
should handle multiple nominations received on the same date.\448\ Two
commenters worried that it would be difficult for companies to
determine which nomination was received first because nominations could
be submitted by various methods (e.g., fax transmission, mail, hand
delivery) or arrive on the same date.\449\ Another commenter feared
that a company that receives several nominations on the same date could
choose the nomination submitted by shareholders friendly to
management.\450\
---------------------------------------------------------------------------

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

    Many commenters that opposed the first-in approach suggested
alternatives. Of these, the majority preferred to give priority to the
largest shareholder or group that submits a nomination.\451\ Noting
that the 2003 Proposal included this standard and that it received the
most support, one commenter argued that what matters most is not who is
the fastest to nominate but which shareholder or group has the
``greatest stake in the director election and, ultimately, the long-
term performance of the company'' (with the added benefits of avoiding
``gamesmanship'' and ``administrative challenges'').\452\ Further,
commenters believed that an approach based on the largest holdings
would provide sufficient certainty because the number of shares of the
largest shareholder or group could be determined from the Schedule 14N
filing.\453\
---------------------------------------------------------------------------

    \451\ See letters from 13D Monitor; 26 Corporate Secretaries;
ABA (recommending this approach as one of several recommendations);
ACSI; Advance Auto Parts; Aetna; AFL-CIO; AFSCME; Allstate;
Amalgamated Bank; Anadarko; Applied Materials; Avis Budget; BCIA;
Best Buy; Boeing; BorgWarner; Burlington Northern; CalPERS; CalSTRS;
Caterpillar; CFA Institute; Chevron; CIGNA (recommending this
approach as an alternative to another recommendation that the
shareholder that held the shares the longest be given priority);
CII; Cleary; Con Edison; COPERA; Corporate Library; Cummins; Darden
Restaurants; Deere; Devon; Dominican Sisters of Hope; DuPont; Eaton;
Emerson Electric; ExxonMobil; FedEx; Financial Services Roundtable;
First Affirmative; Florida State Board of Administration (supporting
this approach as an alternative to the first-in approach); FMC
Corp.; Frontier; A. Goolsby; IAM; ICI; JPMorgan Chase; Kirkland &
Ellis; C. Levin; Leggett; LIUNA; LUCRF; Marco Consulting; J. McCoy;
McDonald's; J. McTague; Mercy Investment Program; Metlife; D.
Nappier; Nathan Cummings Foundation; P. Neuhauser; Norfolk Southern;
Office Depot; PACCAR; Pershing Square; PepsiCo; Pfizer; RiskMetrics;
Ryder; Sara Lee; Shamrock; Social Investment Forum; Sodali; Seven
Law Firms; Shearman & Sterling; Sheet Metal Workers; Sidley Austin;
SIFMA; Sisters of Mercy; Society of Corporate Secretaries; Southern
Company; SWIB; Teamsters; Tenet; TI; TIAA-CREF; Tri-State Coalition;
Trillium; T. Rowe Price; Textron; tw telecom; Universities
Superannuation; Ursuline Sisters of Tildonk; U.S. Bancorp; Verizon;
Wachtell; Walden; Wells Fargo; Whirlpool; WSIB.
    \452\ Letter from CII.
    \453\ See letters from CII; Society of Corporate Secretaries.
---------------------------------------------------------------------------

    Commenters presented a wide range of views or recommendations for
determining priority. Some commenters suggested that when the largest
shareholder or group nominates fewer than the maximum number of
nominees allowed under Rule 14a-11, then the second largest shareholder
or group should have the right to have its nominees included (up to the
maximum

number allowable), and so on.\454\ Commenters also suggested that a
nominating shareholder or group be required to ``rank'' their nominees
in the order of preference to facilitate any necessary ``cutbacks.''
\455\
---------------------------------------------------------------------------

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

    A few commenters stated that in the case of competing nominations
submitted by shareholders with equally-sized holdings, the shareholder
that held the shares for the longest period of time should be allowed
to include its nominees.\456\ Two commenters recommended that when
determining the order of priority, an individual shareholder should
have priority over a nominating group.\457\
---------------------------------------------------------------------------

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

    One commenter recommended that nominees be ordered in accordance
with the largest qualifying shareholdings, but subject to the
qualification that the Commission impose a cap on either the permitted
number of members in a nominating group or on the aggregate holdings of
a nominating group and limit each nominating shareholder or group to
only one Rule 14a-11 nomination at an annual meeting.\458\ If
shareholders are not limited to one nomination, then companies should
be allowed to order the nominees based on the largest holdings.
Alternatively, the commenter recommended awarding Rule 14a-11
nomination slots first to the nominating shareholder or group with the
largest holdings, next to the nominating shareholder or group with the
longest holding period, then to the next largest holder, and so on.
---------------------------------------------------------------------------

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

    One commenter stated that priority should be given to the largest
nominating shareholder or group based on the number of voting
securities over which such shareholder or group has voting control (as
opposed to beneficial ownership).\459\ Another commenter stated that in
the case of nominating groups, the determination of the largest holder
should be based on the largest shareholder within the nominating
group.\460\
---------------------------------------------------------------------------

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

    Other commenters recommended that the shareholder or group holding
a company's shares for the longest period be permitted to submit
nominees under Rule 14a-11.\461\ These commenters argued that this
approach would be more consistent with the Commission's stated goal of
making Rule 14a-11 available to shareholders with a long-term interest.
---------------------------------------------------------------------------

    \461\ See letters from BRT; CIGNA (recommending this approach as
an alternative to its recommendation that the largest shareholder be
given priority); Cummins; Darden Restaurants; FPL Group; General
Mills; IBM (recommending this approach as an alternative to its
recommendation that the largest shareholder be given priority);
Motorola; TIAA-CREF; Xerox.
---------------------------------------------------------------------------

    Some commenters preferred to give priority based on a combination
of factors, such as length of ownership and size of ownership
stake.\462\ Several commenters preferred to let companies (e.g., the
nominating committee) choose either the shareholder nominees or the
method for deciding which shareholder nominees are included in the
proxy materials when there are multiple nominations.\463\ Under this
approach, companies would disclose the method in the previous year's
proxy statement or in a Form 8-K.
---------------------------------------------------------------------------

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

    A small number of commenters supported the proposed first-in
approach.\464\ While understanding the concern about ``a rush to the
courthouse,'' one commenter indicated that this concern may not
necessarily be justified because the `` `first' proponent may have
sufficiently prepared beforehand for the nomination process.'' \465\
Further, the commenter believed that ``[a]llowing the largest
shareholder group to essentially trump the first smaller, but no less
committed or relevant, shareholder submission is not good governance.''
Another commenter believed that the first-in approach would best give
effect to the proposed rule.\466\ If the standard was based on the
amount of securities held instead, the commenter would be concerned
that long-term owners of companies with index-tracking portfolios might
be frozen out of the process. One commenter believed the first-in
approach would provide certainty, but companies should be required to
set the dates in calendar form and announce the dates in Form 8-K
filings at least 30 days prior to the date of effectiveness.\467\
---------------------------------------------------------------------------

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

    After considering the comments, we have revised the manner in which
the rule addresses multiple qualifying nominations. Rather than a
first-in standard, as was proposed, a company will be required to
include in its proxy materials the nominee or nominees of the
nominating shareholder or group with the highest qualifying voting
power percentage.\468\ In this regard, in light of the comments
received, we are concerned that a first-in standard would result in
shareholders rushing to submit nominations, discourage constructive
dialogue between shareholders and management, and encourage
gamesmanship among possible nominating shareholders or groups. When
there are multiple qualifying nominations, giving priority to the
shareholder or group with the highest voting power percentage is
consistent with our overall approach to facilitate director nominations
by shareholders with significant commitments to companies. Finally, we
seek to avoid the confusion that could result if multiple nominating
shareholders or groups submitted their notices on the same day.
---------------------------------------------------------------------------

    \468\ See Rule 14a-11(e). Rule 14a-11(e)(4) prescribes a limited
variation on this principle where the company has more than one
class of voting shares subject to the proxy rules and eligible
nominating shareholders or shareholder groups from more than one of
those classes submit nominations that exceed the 25% maximum. In
this circumstance, priority of nominations will be determined by
reference to the relative voting power of the classes in question.
---------------------------------------------------------------------------

    We believe that the standard we are adopting, under which the
nominating shareholder or group with the highest qualifying voting
power percentage will have its nominees included in the company's proxy
materials, up to the maximum of 25% of the board, addresses these
concerns. We are persuaded that this standard is more consistent with
the other limitations of Rule 14a-11 that seek to balance facilitating
shareholder rights to nominate directors with practical considerations.
    As adopted, Rule 14a-11 addresses situations where more than one
shareholder or group would be eligible to have its nominees included on
the company's proxy card and disclosed in its proxy statement pursuant
to the rule. Given that we are adopting a highest qualifying voting
power percentage standard rather than a first-in standard, the company
will determine which shareholders' nominees it must include in its
proxy statement and on its proxy card by considering which eligible
nominating shareholder or group has the highest qualifying voting power
percentage, as opposed to which eligible nominating shareholder or
group submitted a timely notice first. A company will be required to
include in its proxy statement and on its proxy card the nominee or
nominees of the nominating shareholder or group with

the highest qualifying voting power percentage in the company's
securities as of the date of filing the Schedule 14N, up to and
including the total number of shareholder nominees required to be
included by the company.\469\ Where the nominating shareholder or group
with highest qualifying voting power percentage that is otherwise
eligible to use the rule and that filed a timely notice does not
nominate the maximum number of directors allowed under the rule, the
nominee or nominees of the nominating shareholder or group with the
next highest qualifying voting power percentage that is otherwise
eligible to use the rule and that filed a timely notice of intent to
nominate a director pursuant to the rule would be included in the
company's proxy materials, up to and including the total number of
shareholder nominees required to be included by the company. This
process would continue until the company included the maximum number of
nominees it is required to include in its proxy statement and on its
proxy card or the company exhausts the list of eligible nominees. If
the number of eligible nominees exceeds the maximum number required
under Rule 14a-11 and the shareholder or group with the next highest
qualifying voting power percentage submitted more nominees than there
are remaining available director slots, the nominating shareholder
would have the option to specify which of its nominees are to be
included in the company's proxy materials.\470\
---------------------------------------------------------------------------

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

b. Priority When a Nominating Shareholder or Group or a Nominee
Withdraws or Is Disqualified
    Under the Proposal, we did not address what would be expected of a
company if a nominating shareholder or group or nominee withdraws or is
disqualified after the company has provided notice to the nominating
shareholder or group of its intent to include the nominee in the
company's proxy materials. One commenter asked for guidance on how to
handle such situations.\471\ Another commenter stated that it opposed
allowing a nominating shareholder group to change its composition to
correct an identified deficiency, such as a failure of the group to
meet the requisite ownership threshold.\472\ Two commenters believed
that if any member of a nominating shareholder group becomes ineligible
due to a failure to own the requisite number of shares, then the entire
group and its nominee also should be ineligible to use Rule 14a-
11.\473\ On the other hand, one commenter recommended that a nominating
shareholder group should be allowed to change its composition to
correct an identified deficiency, such as the failure of the group to
meet the requisite threshold.\474\ The commenter also addressed a
situation in which a nominating shareholder group qualifies to use Rule
14a-11, provides the necessary notice, submits its nominees, but then
becomes disqualified before the meeting at which its nominees would
have been put to a shareholder vote. The commenter stated that while it
``generally believe[s] that the nominating shareowner should have a
short window within which to add a shareowner who would meet all
eligibility requirements, a lapse that cannot be cured in that fashion
should be remedied by going to the `second' candidate(s).''
---------------------------------------------------------------------------

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

    Consistent with the Proposal, under our final rules, neither the
composition of the nominating shareholder group nor the shareholder
nominee may be changed as a means to correct a deficiency identified in
the company's notice to the nominating shareholder or nominating
shareholder group--those matters must remain as they were described in
the notice to the company.\475\ We believe that to allow otherwise
could serve to undermine the purpose of the notice deadline provided
for in the rule. Thus, a nominating shareholder or group should be sure
that it and its nominees meet the requirements of the rule--including
the ownership and holding period requirements--before it files its
Schedule 14N, as a nominating shareholder or group will not be
permitted to add or substitute another shareholder or nominee in order
to satisfy the requirements.\476\
---------------------------------------------------------------------------

    \475\ See Instruction 2 to Rule 14a-11(g) and proposed Rule 14a-
11(f)(6).
    \476\ In this regard, we note that if a member of a nominating
shareholder group withdraws, the nominating shareholder group and
its nominee or nominees would continue to be eligible so long as the
group continues to meet the requirements of the rule. If the
withdrawal of a member of the nominating shareholder group would
result in the group failing to meet the ownership threshold, a
company would no longer be required to include any nominees
submitted by the nominating shareholder group. As another example,
if after a nominating shareholder or group submits one nominee for
inclusion in a company's proxy materials and the nominee
subsequently withdraws or is disqualified, a company will not be
required to include a substitute nominee from that nominating
shareholder or group.
---------------------------------------------------------------------------

    In the Proposing Release, we solicited comment on how we should
address situations where a nomination is submitted and the nominating
shareholder subsequently becomes ineligible under the rule. We also
sought comment as to the circumstances under which a second shareholder
or group should be able to have its nominees included in a company's
proxy materials. Some commenters stated that if a nominating
shareholder or group does not remain eligible, the company should be
allowed to withdraw the nominating shareholder's or group's candidate
from its proxy materials.\477\ Some commenters believed that a company
should not be required to include a substitute shareholder nominee if
the original shareholder nominee is excluded by a company after
receiving a no-action letter from the Commission staff regarding the
nomination, is withdrawn by the nominating shareholder or group, or
otherwise becomes ineligible.\478\ These commenters generally argued
that a company would not have enough time to seek the exclusion of such
a substitute nominee. Still other commenters argued that a nominating
shareholder or group should be allowed to submit a new nominee if its
original nominee is determined to be ineligible,\479\ especially if the
company sought and obtained a no-action letter from the staff
concerning the company's determination to exclude the nominee.\480\ One
commenter worried that a prohibition on substitute shareholder nominees
would encourage an unduly adversarial approach by both sides.\481\
Another commenter recommended that if the first nominating shareholder
or group becomes ineligible, then the nominating shareholder or group
with the second-largest holdings should be allowed to submit their own
nominees.\482\
---------------------------------------------------------------------------

    \477\ See letters from BorgWarner; Society of Corporate
Secretaries.
    \478\ See letters from 26 Corporate Secretaries; ABA; Allstate;
American Express; BorgWarner; DTE Energy; Dupont; FPL Group;
Honeywell; IBM; Pfizer; RiskMetrics; Seven Law Firms; Society of
Corporate Secretaries; Xerox.
    \479\ See letters from AFL-CIO; P. Neuhauser; USPE.
    \480\ See letter from P. Neuhauser.
    \481\ See letter from Universities Superannuation.
    \482\ See letter from CFA Institute.
---------------------------------------------------------------------------

    Our final rule provides that if a nominating shareholder or group
withdraws or is disqualified (e.g., because the nominating shareholder
or a member of the group \483\ failed to

continue to hold the qualifying amount of securities) after the company
provides notice to the nominating shareholder or group of the company's
intent to include the nominee or nominees in its proxy materials, the
company will be required to include in its proxy statement and form of
proxy the nominee or nominees of the nominating shareholder or group
with the next highest voting power percentage that is otherwise
eligible to use the rule and that filed a timely notice in accordance
with the rule, if any.\484\ This process would continue until the
company included the maximum number of nominees it is required to
include in its proxy materials or the company exhausts the list of
eligible nominees.
---------------------------------------------------------------------------

    \483\ If one member of a group becomes ineligible to use the
rule but the group continues to qualify to use the rule without that
member, the group would remain eligible overall.
    \484\ See new Rule 14a-11(e)(2).
---------------------------------------------------------------------------

    If a nominee withdraws or is disqualified after the company
provides notice to the nominating shareholder or group of the company's
intent to include the nominee in its proxy materials, the company will
be required to include in its proxy materials any other eligible
nominee submitted by that nominating shareholder or group.\485\ If that
nominating shareholder or group did not include any other nominees in
its notice filed on Schedule 14N, then the company will be required to
include the nominee or nominees of the nominating shareholder or group
with the next highest voting power percentage that is otherwise
eligible to use the rule and that filed a timely notice in accordance
with the rule, if any, until the maximum number of nominees is included
in the company's proxy materials or the list of eligible nominees is
exhausted.
---------------------------------------------------------------------------

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

    We believe that these requirements are appropriate in order to give
effect to the intent of our rule--to facilitate shareholders' ability
to nominate and elect directors. If the nominating shareholder or group
with the highest voting power percentage used all available Rule 14a-11
nominations in a company's proxy materials and the nominating
shareholder or group with the second highest voting power percentage
had its nominees excluded even after one or more nominees from the
nominating shareholder or group with the highest voting power
percentage withdrew or was disqualified, we believe the purpose of our
rule would be undermined. However, in order to address practical
considerations, Rule 14a-11(e)(2) provides that once a company has
commenced printing its proxy materials it will not be required to
include a substitute nominee or nominees. We believe that at that point
in the process it would be too difficult and costly for a company to
change course to include a new nominee or nominees. If a nominating
shareholder or group or nominee withdraws or is disqualified after the
company has commenced printing its proxy materials, the company may
determine whether it wishes to print (and furnish) additional materials
and a proxy card, delete the disqualified or withdrawn nominee, or
instead provide disclosure through additional soliciting materials
informing shareholders about the change.\486\
---------------------------------------------------------------------------

    \486\ We note that pursuant to Exchange Act Rule 14a-4(c)(5) a
completed proxy card containing a disqualified or withdrawn nominee
or nominees could, under certain circumstances, confer discretionary
authority to vote on the election of a substitute director or
directors.
---------------------------------------------------------------------------

8. Notice on Schedule 14N
a. Proposed Notice Requirements
    As proposed, in order to submit a nominee for inclusion in the
company's proxy statement and form of proxy, Rule 14a-11 would require
that the nominating shareholder or group provide a notice on Schedule
14N to the company of its intent to require that the company include
that shareholder's or group's nominee or nominees in the company's
proxy materials.\487\ The shareholder notice on Schedule 14N also would
be required to be filed with the Commission on the date it is first
sent to the company.
---------------------------------------------------------------------------

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

    We proposed to require the notice to be provided to the company and
filed with the Commission by the date specified in the company's
advance notice bylaw provision, or where no such provision is in place,
no later than 120 calendar days before the date the company mailed its
proxy materials for the prior year's annual meeting. If the company did
not hold an annual meeting during the prior year, or if the date of the
meeting changes by more than 30 calendar days from the prior year, the
nominating shareholder must provide notice a reasonable time before the
company mails its proxy materials. The company would be required to
disclose the date by which the shareholder must submit the required
notice in a Form 8-K filed pursuant to proposed Item 5.07 within four
business days after the company determines the anticipated meeting
date.\488\
---------------------------------------------------------------------------

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

    As proposed, the notice on Schedule 14N would include disclosures
relating to the nominating shareholder's or group's interest in the
company, length of ownership, and eligibility to use Rule 14a-11. The
notice on Schedule 14N also would include disclosure required by
proposed Rule 14a-18 about the nominating shareholder or group and the
nominee for director, as well as disclosure regarding the nature and
extent of relationships between the nominating shareholder or group and
nominee or nominees and the company. The disclosure provided by the
nominating shareholder or group would be similar to the disclosure
currently required in a contested election and would be included by the
company in its proxy materials.
    In addition, as proposed, the notice on Schedule 14N also would
include the following representations by the nominating shareholder or
group:
     The nominee's candidacy or, if elected, board membership,
would not violate controlling State or Federal law, or rules of a
national securities exchange or national securities association other
than rules relating to director independence; \489\
---------------------------------------------------------------------------

    \489\ See proposed Rule 14a-18(a). Proposed Rule 14a-11 also
included this provision as a direct requirement. Thus, a company
would not be required to include a shareholder nominee in its proxy
materials if the nominee's candidacy or, if elected, board
membership would violate controlling State law, Federal law, or
rules of a national securities exchange or national securities
association (other than rules of a national securities exchange or
national securities association that set forth requirements
regarding the independence of directors).
---------------------------------------------------------------------------

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

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

     In the case of a company other than an investment company,
the nominee meets the objective criteria for ``independence'' of the
national securities exchange or national securities association rules
applicable to the company, if any, or, in the case of a company that is
an investment company, the nominee is not an ``interested person'' of
the company as defined in Section 2(a)(19) of the Investment Company
Act of 1940; \491\ and
---------------------------------------------------------------------------

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

     Neither the nominee nor the nominating shareholder (or any
member of a nominating shareholder group) has an agreement with the
company regarding the nomination of the nominee.\492\
---------------------------------------------------------------------------

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

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

group that the securities used for purposes of meeting the ownership
threshold in Rule 14a-11 are not held for the purpose, or with the
effect, of changing control of the company or to gain more than a
limited number of seats on the board.
b. Comments on the Proposed Notice Requirements
    Commenters generally supported the proposed content requirements of
Schedule 14N on the general principle that the Commission should impose
disclosure requirements on nominating shareholders and their
nominees.\493\ Two of these commenters also stated that additional
disclosures or representations are not needed.\494\ In addition, some
commenters recommended that all nominees be subject to any new
disclosure rules adopted by the Commission as part of its proxy
disclosure and solicitation enhancements rulemaking.\495\ Four
commenters asked that companies be allowed to require additional
disclosure from a nominating shareholder or group through, for example,
the advance notice bylaws, as long as such requirements are consistent
with State law.\496\ One commenter argued that the nominating
shareholder, group, or nominee should provide any disclosure required
under a company's governing documents as long as such disclosure is
required of all nominees.\497\ One commenter asked that all content
requirements be set forth in Schedule 14N itself, as it found the
structure of the Schedule and the references to disclosure requirements
to be unnecessarily complicated.\498\ The commenter recommended that we
include a requirement that the nominating shareholder or group disclose
information about the nature and extent of the relationships between
the nominating shareholder, group and the nominee and the company or
its affiliates.\499\ Another commenter recommended the rules include a
representation that the nominee is not controlled by the nominating
shareholder or group.\500\
---------------------------------------------------------------------------

    \493\ See letters from ABA; Alston & Bird; Americans for
Financial Reform; CalSTRS; CFA Institute; CII; Corporate Library;
Dominican Sisters of Hope; Florida State Board of Administration;
GovernanceMetrics; ICI; Mercy Investment Program; Protective;
RiskMetrics; Sisters of Mercy; Tri-State Coalition; Ursuline Sisters
of Tildonk; USPE; Walden.
    \494\ See letters from CII; USPE.
    \495\ See letters from ABA; Alaska Air; Robert A. Bassett (``R.
Bassett''); BorgWarner; Eli Lilly; NACD; O'Melveny & Myers; Pfizer;
Society of Corporate Secretaries; UnitedHealth.
    \496\ See letters from ABA; Chevron; Sidley Austin; SIFMA.
    \497\ See letter from Cleary.
    \498\ See letter from ABA.
    \499\ Id.
    \500\ See letter from IBM.
---------------------------------------------------------------------------

    We also sought comment on the proposed representations to be
provided by the nominating shareholder or group in Schedule 14N. One
commenter stated that the proposed representations are appropriate and
no additional representations are needed.\501\ This commenter opposed a
requirement for a shareholder nominee to make any representation either
in addition to, or instead of, those made by the nominating shareholder
or group. One commenter stated simply that none of the proposed
representations in Schedule 14N should be eliminated.\502\ It also
observed generally that the shareholder nominee should be required to
make the representations (e.g., regarding independence) because he or
she would know the facts relating to the representations and therefore
should accept responsibility. One commenter opposed the requirement for
a representation that a shareholder nomination (or election of the
shareholder nominee) would not violate State law, Federal law, or
listing standards.\503\ The commenter also believed it would be
inappropriate to require a representation that the nomination complies
with any independence requirement under Federal law, State law, or
listing standards.
---------------------------------------------------------------------------

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

c. Adopted Notice Requirements
    We are adopting the notice requirements substantially as proposed,
with differences noted below. In addition, we agree that the rules as
proposed could be streamlined to reduce complexity. As adopted,
Schedule 14N will contain the disclosure items that were included in
the Schedule as proposed, as well as the disclosures proposed in Rule
14a-11, Rule 14a-18 and Rule 14a-19. We believe that the disclosure
requirements we are adopting will provide transparency and facilitate
shareholders' ability to make an informed voting decision on a
shareholder director nominee or nominees without being unnecessarily
burdensome on nominating shareholders or groups.
i. Disclosure
    Schedule 14N will require a nominating shareholder or group to
provide the following information about the nominating shareholder or
group and the nominee: \504\
---------------------------------------------------------------------------

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

     The name and address of the nominating shareholder or each
member of the nominating shareholder group;
     Information regarding the amount and percentage of
securities held and entitled to vote on the election of directors at
the meeting and the voting power derived from securities that have been
loaned or sold in a short sale that remains open, as specified in
Instruction 3 to Rule 14a-11(b)(1); \505\
---------------------------------------------------------------------------

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

     A written statement from the registered holder of the
shares held by the nominating shareholder or each member of the
nominating shareholder group, or the brokers or banks through which
such shares are held, verifying that, within seven calendar days prior
to submitting the notice on Schedule 14N to the company, the
shareholder continuously held the qualifying amount of securities for
at least three years; \506\
---------------------------------------------------------------------------

    \506\ See Item 4(a) of new Schedule 14N. A nominating
shareholder would not be required to provide this statement if the
nominating shareholder is the registered holder of the shares or is
attaching or incorporating by reference a previously filed Schedule
13D, Schedule 13G, Form 3, Form 4, and/or Form 5, or amendments to
those documents to prove ownership.
---------------------------------------------------------------------------

     A written statement of the nominating shareholder's or
group's intent to continue to hold the qualifying amount of securities
through the shareholder meeting at which directors are elected.
Additionally, the nominating shareholder or group would provide a
written statement regarding the nominating shareholder's or group's
intent with respect to continued ownership after the election; \507\
---------------------------------------------------------------------------

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

     A statement that the nominee consents to be named in the
company's proxy statement and form of proxy and, if elected, to serve
on the board of directors;\508\
---------------------------------------------------------------------------

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

     Disclosure about the nominee as would be provided in
response to the disclosure requirements of Items 4(b), 5(b), 7(a), (b),
and (c) and, for investment companies, Item 22(b) of Schedule 14A, as
applicable; \509\
---------------------------------------------------------------------------

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

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

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

    \510\ See Item 5(c) of new Schedule 14N and proposed Rule 14a-
18(h). If a nominating shareholder is organized in a form other than
a corporation or partnership, comparable disclosure with respect to
persons in similar capacities would be required.
---------------------------------------------------------------------------

     Disclosure about whether the nominating shareholder or any
member of a nominating shareholder group has been involved in any legal
proceeding during the past ten years, as specified in Item 401(f) of
Regulation S-K;\511\
---------------------------------------------------------------------------

    \511\ See Item 5(d) of new Schedule 14N and proposed Rule 14a-
18(i). As proposed, the rule would have required disclosure
regarding a nominating shareholder's involvement in any legal
proceedings during the past five years. Recently, the Commission
amended Item 401(f) of Regulation S-K to require disclosure
regarding involvement in legal proceedings for the prior ten years.
See Proxy Disclosure Enhancements, Release No. 33-9089; 34-61175
(Dec. 16, 2009) [74 FR 68334] (``Proxy Disclosure Enhancements
Adopting Release''). Accordingly, as adopted, Item 5(d) will require
disclosure about a nominating shareholder's involvement in legal
proceedings during the past ten years.
---------------------------------------------------------------------------

     Disclosure about whether, to the best of the nominating
shareholder's or group's knowledge, the nominee meets the director
qualifications set forth in the company's governing documents, if any;
\512\
---------------------------------------------------------------------------

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

     A statement that, to the best of the nominating
shareholder's or group's knowledge, in the case of a company other than
an investment company, the nominee meets the objective criteria for
``independence'' of the national securities exchange or national
securities association rules applicable to the company, if any, or, in
the case of a company that is an investment company, the nominee is not
an ``interested person'' of the company as defined in Section 2(a)(19)
of the Investment Company Act of 1940; \513\
---------------------------------------------------------------------------

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

     Disclosure about the nature and extent of the
relationships between the nominating shareholder or group, the nominee,
and/or the company or any affiliate of the company,\514\ such as:
---------------------------------------------------------------------------

    \514\ We note that this disclosure requirement would apply to
relationships between the nominating shareholder or group and the
nominee, as well as the relationships between the nominating
shareholder or group or the nominee and the company or its
affiliates. See Item 5(g) of new Schedule 14N.
---------------------------------------------------------------------------

     Any direct or indirect material interest in any contract
or agreement between the nominating shareholder or any member of the
nominating shareholder group, the nominee, and/or the company or any
affiliate of the company (including any employment agreement,
collective bargaining agreement, or consulting agreement);
     Any material pending or threatened litigation in which the
nominating shareholder or any member of the nominating shareholder
group and/or the nominee is a party or a material participant, and that
involves the company, any of its officers or directors, or any
affiliate of the company; and
     Any other material relationship between the nominating
shareholder or any member of the nominating shareholder group, the
nominee, and/or the company or any affiliate of the company not
otherwise disclosed; \515\
---------------------------------------------------------------------------

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

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

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

     If desired to be included in the company's proxy
statement, a statement in support of the shareholder nominee or
nominees, which may not exceed 500 words per nominee.\517\
---------------------------------------------------------------------------

    \517\ See Item 5(i) of new Schedule 14N and proposed Rule 14a-
18(l). This requirement is discussed in more detail in this section.
If a nominating shareholder or group submits a statement in support
that exceeds 500 words per nominee, a company will be required to
include the nominee or nominees, provided that the eligibility
requirements are met, but may exclude the statement in support from
its proxy materials pursuant to Rule 14a-11(g). In this instance,
the company would provide notice to the staff and could, if desired,
seek a no-action letter from the staff. See new Rule 14a-11(c) and
Rule 14a-11(g). The 500 words would be counted in the same manner as
words are counted under Rule 14a-8. Any statements that are, in
effect, arguments in support of the nomination would constitute part
of the supporting statement. Accordingly, any ``title'' or
``heading'' that meets this test would be counted toward the 500-
word limitation. Inclusion of a Web site address in the supporting
statement would not violate the 500-word limitation; rather, the Web
site address would be counted as one word for purposes of the 500-
word limitation.

The disclosure provided by the nominating shareholder or group in Item
5 of Schedule 14N would be included by the company in its proxy
materials,\518\ along with the company's disclosure in response to
Items 4(b) and 5(b) of Schedule 14A.\519\
---------------------------------------------------------------------------

    \518\ See Item 7(e) of Schedule 14A. Similarly, if a company
receives a nominee for inclusion in its proxy materials pursuant to
a procedure set forth under applicable state or foreign law, or the
company's governing documents providing for the inclusion of
shareholder director nominees in the company's proxy materials, the
disclosure provided by the nominating shareholder or group in
response to Item 6 of Schedule 14N would be included in the
company's proxy materials. See Item 7(f) of Schedule 14A.
    \519\ Instruction 3 to Rule 14a-12(c) clarifies that though
inclusion of a nominee pursuant to Rule 14a-11 or solicitations by a
nominating shareholder or nominating shareholder group that are made
in connection with that nomination would constitute solicitations in
opposition subject to Rule 14a-12(c), they would not be treated as
such for purposes of Exchange Act Rule 14a-6(a).

    In a traditional proxy contest, shareholders receive the disclosure
required by Items 4(b), 5(b), 7, and 22, as applicable, of Schedule 14A
from both the company and the insurgent when the contest relates to an
annual election of directors. The new Schedule 14N disclosure
requirements are somewhat more expansive in that they also include the
disclosures concerning ownership amount, length of ownership, intent to
continue to hold the shares through the date of the meeting and with
respect to continued ownership after the meeting, and disclosure
regarding the nature and extent of the relationships between the
nominating shareholder or group and nominee and the company or any
affiliate of the company. We believe that these disclosures will assist
shareholders in making an informed voting decision with regard to any
nominee or nominees put forth by the nominating shareholder or group
using Rule 14a-11, in that the disclosures will enable shareholders to
gauge the nominating shareholder's or group's interest in the company,
longevity of ownership, and intent with regard to continued ownership
in the company. These disclosures also will be important to the company
in determining whether the nominating shareholder or group is eligible
to rely on Rule 14a-11 to require the company to include a nominee or
nominees in the company's proxy materials.
    In some cases, the requirements in new Schedule 14N are slightly
different than we proposed. We have clarified that the nominating
shareholder or group will be required to include disclosure in the
Schedule 14N concerning specified relationships between the nominating
shareholder or group and the nominee or nominees. As discussed in
Section II.B.5.d. above, we received comment suggesting that, in the
absence of a limitation on relationships between the nominating
shareholder or group and their nominee or nominees, we should adopt a
disclosure requirement concerning relationships between the
parties.\520\ Similarly, and as discussed in Section II.B.5.b., we have
added a requirement that a nominating shareholder or group disclose
whether, to the best of their knowledge, the nominating shareholder's
or group's nominee meets the company's director qualifications, if any,
as set forth in the company's governing documents.\521\ We added this
requirement because we believe that this information will be useful to
shareholders in making a voting

decision by enabling them to consider whether shareholder nominees
would meet a company's director qualifications. Shareholders will
provide this disclosure ``to the best of their knowledge'' to address
the fact that the standards will be company standards and thus could be
subject to interpretation.
---------------------------------------------------------------------------

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

    We also have added an instruction to Item 4 of Schedule 14N to
provide a form of written statement that may be used for verifying the
amount of securities held by the nominating shareholder, and that the
qualifying amount of securities has been held continuously for at least
three years.\522\ A statement will be required from a nominating
shareholder that is not the registered holder of the securities and is
not proving ownership by providing previously filed Schedules 13D or
13G, or Forms 3, 4, or 5. We believe that providing a form of written
statement will make it easier for nominating shareholders and the
persons through which they hold their securities to comply with the
requirement and reduce complexity for shareholders and companies in
determining whether satisfactory proof of ownership has been
provided.\523\ In addition, as noted above, Item 5(d) will require
disclosure about each nominating shareholder's involvement in legal
proceedings during the past ten years rather than the past five years
as proposed, consistent with the changes recently adopted by the
Commission for board nominees in general.
---------------------------------------------------------------------------

    \522\ See the Instruction to Item 4 of new Schedule 14N.
    \523\ In this regard, we note that providing proper proof of
ownership has proved to be an area of confusion for some shareholder
proponents using Rule 14a-8 who must obtain a written statement from
the ``record'' holder of the proponent's securities. Thus, we
believe that providing a form of written statement that may be used
to provide proof of ownership for purposes of Rule 14a-11(b)(3) will
alleviate any potential confusion that could arise in this context.
---------------------------------------------------------------------------

    In connection with our revisions to the rule concerning calculation
of ownership, we also have added new Items 3(c) and (d) to the Schedule
14N to require disclosure of the voting power attributable to
securities that have been loaned or sold in a short sale that is not
closed out, or that have been borrowed for purposes other than a short
sale, as specified in Instruction 3 to Rule 14a-11(b)(1).
    Finally, as proposed, a nominating shareholder or group could
provide a statement in support of a shareholder nominee or nominees,
which could not exceed 500 words if the nominating shareholder or group
elects to have such a statement included in the company's proxy
materials. Two commenters stated that a limit of 500 words would be
appropriate,\524\ five commenters recommended that a nominating
shareholder or group be permitted to include a supporting statement of
more than 500 words,\525\ and four commenters proposed a limit of
either 750 or 1000 words.\526\ We believe it is appropriate to allow a
nominating shareholder or group to provide a statement in support of
the shareholder nominee or nominees which may not exceed 500 words for
each nominee, rather than 500 words for all nominees in total,\527\ if
the nominating shareholder or group elects to have such a statement
included in the company's proxy materials. We believe that a limitation
of 500 words per nominee is sufficient for a nominating shareholder or
group to express their support for a nominee. In this regard, we note
that shareholders and companies are familiar with the 500 word
limitation, as it is the limit on the number of words that may be used
to support a shareholder proposal submitted under Rule 14a-8. While we
believe it is appropriate to limit the length of the supporting
statement that the company is required to include, we note that if a
nominating shareholder or group wishes to provide additional
information, it is free to do so in supplemental materials, provided it
complies with the requirements of Rule 14a-2(b)(8). If a nominating
shareholder or group submits a statement in support that exceeds 500
words per nominee, a company will be required to include the nominee or
nominees, provided that the eligibility requirements are met, but the
company may exclude the statement in support from its proxy materials
provided it provides notice to the staff of its intent to do so.\528\
---------------------------------------------------------------------------

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

    As noted above, we proposed to require certain representations to
be provided in the Schedule 14N, either in the form of representations
or as certifications. As adopted, we are including the proposed
representations and certifications as direct requirements in Rule 14a-
11.\529\ Consequently, we have simplified the requirements so that
under the final rules a nominating shareholder or group will be
required to certify, in its notice on Schedule 14N filed with the
Commission, that it does not have a change in control intent or an
intent to gain more than the maximum number of board seats provided for
under Rule 14a-11 and that the nominating shareholder and the nominee
satisfies the applicable requirements of Rule 14a-11.\530\ We have
retained the certification with regard to no change in control intent
or intent to gain more than the maximum number of board seats provided
for under Rule 14a-11, even though this is also a direct requirement in
Rule 14a-11 as adopted, because we believe it is important to highlight
this requirement for nominating shareholders or groups signing the
certification. As was proposed, the nominating shareholder or each
member of the nominating shareholder group (or authorized
representative) will be required to certify when signing the Schedule
14N that, ``after reasonable inquiry and to the best of my knowledge
and belief,'' the information in the statement is ``true, complete and
correct.'' Though all disclosure in the Schedule 14N would be covered
by this representation, we have specifically included it in the
certifications concerning compliance with the requirements of Rule 14a-
11 as well.
---------------------------------------------------------------------------

    \529\ See also Section II.B.4. and Section II.B.5. above,
regarding nominating shareholder and nominee eligibility.
    \530\ See new Rule 14a-11(b)(11) and Item 8(a) of new Schedule
14N. We note that in some cases, an authorized representative may
file a Schedule 14N for each member of a nominating shareholder
group and would provide the required disclosures and certifications.
In such cases, each member of the nominating shareholder group
represented by the authorized representative will be deemed to have
provided the certifications.
---------------------------------------------------------------------------

    We have revised the rule to delete the provision that had the
effect of allowing exclusion of a nominee if any required
representation or certification was materially false or
misleading.\531\ Rather than allowing companies to exclude Rule 14a-11
nominees on that basis, we believe companies should address any
concerns regarding false or misleading disclosures through their own
disclosures, as in traditional proxy contests. This change will limit
the bases on which a company may exclude a nominee,\532\ but we
emphasize that the nominating shareholder or group will

have Rule 14a-9 liability for any statement included in the Schedule
14N or which it causes to be included in a company's proxy materials
which, at the time and in light of the circumstances under which it is
made, is false or misleading with respect to any material fact or that
omits to state any material fact necessary to make the statements
therein not false or misleading. In addition, as discussed in Section
II.E. below, we have provided in the final rules that the company is
not responsible for the information provided by the nominating
shareholder or group in its Schedule 14N and included by the company in
its proxy materials.
---------------------------------------------------------------------------

    \531\ See proposed Rule 14a-11(a)(5).
    \532\ See Section II.B.9. below for a discussion of the
requirements for a company receiving a nomination submitted pursuant
to Rule 14a-11 and the process for seeking a staff no-action letter
with respect to a company's decision to exclude a nominee. As noted
below, assertions that a certification or disclosure provided by a
nominating shareholder or group is false or misleading will not be a
basis for excluding a nominee or nominees. A company seeking a no-
action letter from the staff with regard to a determination to
exclude a nominee or nominees would need to assert that a
requirement of the rule has not been met.
---------------------------------------------------------------------------

ii. Schedule 14N Filing Requirements
    We proposed to require the notice to be provided to the company and
filed with the Commission by the date specified in the company's
advance notice bylaw provision, or where no such provision is in place,
no later than 120 calendar days before the date the company mailed its
proxy materials for the prior year's annual meeting. A significant
number of commenters suggested using a uniform deadline for all
companies, as is the case in Rule 14a-8.\533\ Many of these commenters
believed that the proposed timing requirement would create difficulties
for companies with advance notice bylaws providing a later deadline
and, thus, would preclude those companies from engaging in the proposed
staff process.\534\ Some commenters supported the proposed default 120
calendar day deadline,\535\ while others argued that the 120 calendar
day deadline would provide too little time for companies.\536\ Some
commenters worried that the proposed deadline would not give sufficient
time for companies to resolve any eligibility issues presented by
potential nominees, including resolution through the Rule 14a-11 no-
action process, Commission appeals, and litigation.\537\
---------------------------------------------------------------------------

    \533\ See letters from 26 Corporate Secretaries; ABA; Alaska
Air; American Express; Anadarko; Boeing; BorgWarner; BRT;
Caterpillar; CIGNA; CII; Dewey; Florida State Board of
Administration; FPL Group; Honeywell; JPMorgan Chase; Keating
Muething; P. Neuhauser; PepsiCo; Pfizer; Praxair; Schulte Roth &
Zabel; Seven Law Firms; Shearman & Sterling; Sidley Austin; Society
of Corporate Securities; Thompson Hine LLP (``Thompson Hine''); TI;
USPE; Wells Fargo; Xerox.
    \534\ See letters from ABA; Alaska Air; BRT; Caterpillar; CIGNA;
Dewey; Honeywell; JPMorgan Chase; Keating Muething; PepsiCo; Sidley
Austin; Society of Corporate Securities; Thompson Hine; TI; Wells
Fargo.
    \535\ See letters from Alaska Air; Boeing; BorgWarner; CII;
Dewey; JPMorgan Chase; P. Neuhauser; O'Melveny & Myers; PepsiCo;
Praxair; Seven Law Firms; Shearman & Sterling; Society of Corporate
Secretaries; Thompson Hine; USPE.
    \536\ See letters from 26 Corporate Secretaries; ABA; Alcoa;
Allstate; American Express; Boeing; BRT; Con Edison; Davis Polk; FPL
Group; JPMorgan Chase; McDonald's; P. Neuhauser; Pfizer; Protective;
RiskMetrics; Seven Law Firms; TI; Xerox.
    \537\ See letters from ABA; BRT; Con Edison; TI.
---------------------------------------------------------------------------

    We are adopting a uniform deadline of no later than 120 calendar
days before the anniversary of the date that the company mailed its
proxy materials for the prior year's annual meeting for all companies
subject to the rule.\538\ We believe that a uniform deadline will
benefit shareholders by providing them with one standard to comply with
at all companies and should address concerns of companies that an
advance notice bylaw deadline would provide too little time. We also
believe that a deadline of 120 calendar days will provide adequate time
for companies to take the steps necessary to include or, where
appropriate, to exclude a shareholder nominee for director that is
submitted pursuant to Rule 14a-11.\539\
---------------------------------------------------------------------------

    \538\ See new Rule 14a-11(b)(10). The Schedule 14N would, of
course, have to contain all required disclosure as of the date of
filing.
    \539\ We note that as with Rule 14a-8, Rule 14a-11 requires a
company to provide notice to the Commission if it intends to exclude
a nominee. Also as with Rule 14a-8, if a company determines that it
may exclude a nominee, the rule does not require the company to seek
a no-action letter from the staff with regard to the determination
to exclude the nominee. In this regard, we note that the 120-day
deadline in Rule 14a-8 appears to provide companies with sufficient
time in which to consider complex matters. For example, companies
routinely consider whether a proposal submitted pursuant to Rule
14a-8 would cause the company to violate Federal or State law and
submit requests for no-action letters, along with detailed legal
opinions, with respect to those proposals. We believe that a company
will consider nominees submitted pursuant to Rule 14a-11 in a
similar manner. Thus, we believe a deadline of 120 calendar days
before the date that the company mailed its proxy materials the
prior year is sufficient.
---------------------------------------------------------------------------

    In the Proposing Release, we solicited comment as to whether a
window period should be provided for the submission of the notice on
Schedule 14N and the appropriate time period for the window. A number
of commenters recommended a window period during which a nominating
shareholder or group could submit its Rule 14a-11 nomination.\540\
These commenters believed that including such a requirement would
prevent a race to file among shareholders that could discourage
dialogue with the board and force the board to address nominations
throughout the year.\541\ We agree and are adopting a window period for
the submission of the notice to the company. Limiting the time period
during which Rule 14a-11 nominations could be made should help reduce
disruptions that might occur when a company receives shareholder
nominations for director submitted pursuant to Rule 14a-11. In this
regard, as noted above, commenters generally supported a 30-day window
period. We believe that a window of 30 days is sufficient for the
submission of the notice on Schedule 14N because it provides
shareholders with an opportunity to submit a nomination, as well as the
opportunity to consider any nominations that have been submitted and
whether the shareholder would like to submit a nomination, either
individually or as a group. Therefore, we are adopting a requirement
that the notice on Schedule 14N be transmitted to the company and filed
with the Commission no earlier than 150 calendar days, and no later
than 120 calendar days, before the anniversary of the date that the
company mailed its proxy materials for the prior year's annual meeting.
As proposed, we are adopting a requirement that if the company did not
hold an annual meeting during the prior year, or if the date of the
meeting has changed by more than 30 calendar days from the prior year,
then the nominating shareholder must provide notice a reasonable time
before the company mails its proxy materials.\542\ In that case,

the company will be required to disclose the date by which the
shareholder must submit the required notice in a Form 8-K filed
pursuant to new Item 5.08 within four business days after the company
determines the anticipated meeting date.\543\
---------------------------------------------------------------------------

    \540\ See letters from 26 Corporate Secretaries; Aetna;
Allstate; Boeing; BorgWarner; L. Dallas; DuPont; Florida State Board
of Administration; FPL Group; Kirkland & Ellis; Leggett; P.
Neuhauser; PepsiCo; Pfizer; S. Quinlivan; RiskMetrics; Schulte Roth
& Zabel; Shearman & Sterling; SIFMA; Society of Corporate
Secretaries; Southern Company; TI; USPE; Wells Fargo; Xerox.
    \541\ The commenters generally mentioned various 30-day ranges
that we requested comment on (e.g., no earlier than 180 days and no
later than 150 days before the date that the company mailed its
proxy materials for the prior year's annual meeting; no earlier than
150 calendar days and no later than 120 calendar days before the
date that the company mailed its proxy materials for the prior
year's annual meeting; no earlier than 120 calendar days and no
later than 90 calendar days prior to the anniversary of the
company's last annual meeting). One commenter suggested that the
Commission limit the nomination process to a 45-day window period
commencing four months after the company's annual shareholder
meeting. See letter from Aetna. Another commenter suggested that
nominations be submitted within a 30-day period commencing five
months after the company's annual meeting. See letter from SIFMA. We
believe that starting the period for nominations earlier than 150
calendar days before the anniversary of the date the company mailed
its proxy materials for the prior year's annual meeting would not
provide the current board with sufficient opportunity to perform its
duties and demonstrate its performance, nor would it provide
shareholders with enough time to evaluate the board's performance,
to make an informed decision with respect to a potential nomination.
    \542\ In addition, if a company is holding a special meeting in
lieu of an annual meeting, the nominating shareholder must provide
notice a reasonable time before the company mails its proxy
materials.
    \543\ See new Rule 14a-11(b)(10). See also proposed Instruction
2 to Rule 14a-11(a) and Rule 14a-18. This would be similar to the
requirement currently included in Rule 14a-5(f), which specifies
that, where the date of the next annual meeting is advanced or
delayed by more than 30 calendar days from the date of the annual
meeting to which the proxy statement relates, the company must
disclose the new meeting date in the company's earliest possible
quarterly report on Form 10-Q. Although registered investment
companies generally are not required to file Form 8-K, we are
requiring them to file a Form 8-K disclosing the date by which the
shareholder notice must be provided if the company did not hold an
annual meeting during the prior year, or if the date of the meeting
has changed by more than 30 calendar days from the prior year. For a
further discussion of the Form 8-K filing requirement for registered
investment companies, see Section II.D.1.
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    As noted, the notice on Schedule 14N must be transmitted to the
company \544\ and filed with the Commission on the same day.\545\
Consistent with the Proposal, the Schedule 14N must be filed with the
Commission on EDGAR. To file the Schedule 14N on EDGAR, a nominating
shareholder or group and any nominee will need to have or obtain EDGAR
filing codes and user identification numbers, which may be obtained by
filing electronically a Form ID in advance of filing the Schedule
14N.\546\ We encourage nominating shareholders and groups to take the
steps necessary to obtain an EDGAR filing code and CIK code well in
advance of the deadline for filing a notice on Schedule 14N.
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    \544\ Rule 14n-3 specifies that the Schedule 14N must be
transmitted to the company at its principal executive office.
    \545\ See new Rule 14n-1. In this regard, we are adopting an
amendment to Rule 13(a)(4) of Regulation S-T, as proposed, to
provide that a Schedule 14N will be deemed to be filed on the same
business day if it is filed on or before 10 p.m. Eastern Standard
Time or Eastern Daylight Saving Time, whichever is currently in
effect. This will allow nominating shareholders additional time to
file the notice on Schedule 14N and transmit the notice to the
company.
    \546\ To file the Schedule 14N on EDGAR, a nominating
shareholder or group and any nominee that does not already have
EDGAR filing codes, and to which the Commission has not previously
assigned a user identification number, which we call a ``Central
Index Key (CIK)'' code, will need to obtain the codes by filing
electronically a Form ID (17 CFR 293.63; 249.446; and 274.402) at
https://www.filermanagement.edgarfiling.sec.gov. The applicant also
will be required to submit a notarized authenticating document. If
the authenticating document is prepared before the applicant makes
the Form ID filing, the authenticating document may be uploaded as a
Portable Document Format (PDF) attachment to the electronic filing.
An applicant also may submit the authenticating document by faxing
it to the Commission within two business days before or after
electronically filing the Form ID. The authenticating document would
need to be manually signed by the applicant over the applicant's
typed signature, include the information contained in the Form ID,
and confirm the authenticity of the Form ID. If the authenticating
document is filed after electronically filing the Form ID, it would
need to include the accession number assigned to the electronically
filed Form ID as a result of its filing. See 17 CFR 232.10(b)(2).
---------------------------------------------------------------------------

    The Schedule 14N will:
     Include a cover page in the form set forth in Schedule 14N
with the appropriate box on the cover page marked to specify that the
filing relates to a Rule 14a-11 nomination; \547\
---------------------------------------------------------------------------

    \547\ The Schedule 14N also would be used for disclosure
concerning the inclusion of shareholder nominees in company proxy
materials when made pursuant to an applicable state or foreign law
provision or a company's governing documents. See new Rule 14a-18
and proposed Rule 14a-19, as discussed in Section II.C.5. below.
---------------------------------------------------------------------------

     Be made under the subject company's Exchange Act file
number (or in the case of a registered investment company, under the
subject company's Investment Company Act file number); and
     Be made on the date the notice is first transmitted to the
company.
    We are adopting, as proposed, a requirement that the Schedule 14N
be amended promptly for any material change to the disclosure and
certifications provided in the originally-filed Schedule 14N.\548\ In
this regard, we would view withdrawal of a nominating shareholder or
group (or any member of the group), or of a director nominee, and the
reasons for any such withdrawal, as a material change. For example,
such a withdrawal could be material because it may result in a group no
longer meeting the required ownership threshold under Rule 14a-11. We
also would view as material entering into an agreement between the
company and the nominating shareholder or group for the company to
include a nominee in the company's proxy materials as a company
nominee.\549\ The nominating shareholder or group also will be
required, as proposed, to file a final amendment to the Schedule 14N
disclosing within 10 days of the final results of the election being
announced by the company the nominating shareholder's or group's
intention with regard to continued ownership of its shares.\550\ As
discussed above, the nominating shareholder or group would be required
to disclose its intent with regard to continued ownership of the
company's securities in its original notice on Schedule 14N.\551\
Filing an amendment to the Schedule 14N within 10 days after the
announcement of the final results of the election will provide
shareholders with information as to whether the outcome of the election
may have altered the intent of the nominating shareholder or group and
what further plans the nominating shareholder or group may have with
regard to the company.
---------------------------------------------------------------------------

    \548\ See new Rule 14n-2(a).
    \549\ We note that if this occurs, the nominee would no longer
be a Rule 14a-11 nominee. See Section II.B.6.c. for a discussion of
how this would affect the calculation of the maximum number of Rule
14a-11 nominees.
    \550\ See new Rule 14n-2(b).
    \551\ See Item 4(b) of new Schedule 14N.
---------------------------------------------------------------------------

    As was proposed,\552\ the Schedule 14N may be signed either by each
person on whose behalf the statement is filed or his or her authorized
representative. We assume that in many cases group members will choose
to appoint an authorized representative from among the group. If the
statement is signed on behalf of a person by his authorized
representative other than an executive officer or general partner of
the filing person, evidence of the representative's authority to sign
on behalf of such person must be filed with the statement, provided,
however, that a power of attorney for this purpose which is already on
file with the Commission may be incorporated by reference.
---------------------------------------------------------------------------

    \552\ While the proposed Schedule 14N included the instruction
regarding the signing of the Schedule by an authorized
representative, we did not discuss this aspect of the proposed rule
text in the narrative portion of the release.
---------------------------------------------------------------------------

    The Schedule 14N, as filed with the Commission, as well as any
amendments to the Schedule 14N, will be subject to the liability
provisions of Exchange Act Rule 14a-9 pursuant to new paragraph (c) to
the rule.\553\
---------------------------------------------------------------------------

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

9. Requirements for a Company That Receives a Notice From a Nominating
Shareholder or Group
a. Procedure if Company Plans To Include Rule 14a-11 Nominee
    In the Proposing Release, we proposed a process for a company to
follow once it received a nomination submitted pursuant to Rule 14a-11.
Upon receipt of a shareholder's or group's notice of its intent to
require the company to include in its proxy materials a shareholder
nominee or nominees pursuant to Rule 14a-11, the company would
determine whether it would include the nominee or whether it believed
it would be desirable to, and that the company had a basis upon which
it could rely to, exclude a nominee. If a company determined it would
include the nominee, the company would notify in writing the nominating
shareholder or group no later than 30 calendar days before the

company files its definitive proxy statement and form of proxy with the
Commission that it will include the nominee or nominees.\554\ The
company would be required to provide this notice in a manner that
provides evidence of timely receipt by the nominating shareholder or
group.
---------------------------------------------------------------------------

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

    We are adopting this requirement as proposed, with a clarification
regarding the timing of the company's transmission of the notice and
receipt by the nominating shareholder or group.\555\ As adopted, if a
company will include a shareholder nominee, a company will be required
to notify the nominating shareholder or group (or their authorized
representative). Rather than including the proposed requirement that
the company must provide the notice in a manner that evidences timely
receipt by the shareholder, we are adopting a requirement that the
notification must be postmarked or transmitted electronically no later
than 30 calendar days before it files its definitive proxy materials
with the Commission.\556\ We believe this will provide for ease of use
and administration because it should be clear when the notice was
transmitted. We also note that it is consistent with the transmission
standard we are adopting for submitting a notice of intent with respect
to a nomination pursuant to Rule 14a-11(b)(10). We note that while we
are not adopting a requirement regarding the evidence of timely receipt
by the nominating shareholder or group, we believe it is in a company's
interest to send the notice to the nominating shareholder or group in a
manner that will allow the company to demonstrate that the nominating
shareholder or group received the notice, as doing so may avoid
potential disputes.
---------------------------------------------------------------------------

    \555\ See new Rule 14a-11(g)(1) and Instruction 1 to Rule 14a-
11(g).
    \556\ This 30-day deadline for this notice should provide a
nominating shareholder or group with sufficient time to engage in
soliciting activities with respect to its nominee or nominees, if it
has not done so already, or pursue any legal remedies that may be
available if the company determines it will exclude the nominating
shareholder's or group's nominee or nominees.
---------------------------------------------------------------------------

b. Procedure if Company Plans To Exclude Rule 14a-11 Nominee
    The Proposal also included a process for a company to follow if it
determined that it could exclude a nominee submitted pursuant to Rule
14a-11.\557\ As proposed, a company could determine that it is not
required under Rule 14a-11 to include a nominee from a nominating
shareholder or group in its proxy materials if:
---------------------------------------------------------------------------

    \557\ The process was modeled after the staff no-action process
used in connection with shareholder proposals under Rule 14a-8.
---------------------------------------------------------------------------

     Proposed Rule 14a-11 is not applicable to the company;
     The nominating shareholder or group has not complied with
the requirements of Rule 14a-11;
     The nominee does not meet the requirements of Rule 14a-11;
     Any representation required to be included in the notice
to the company is false or misleading in any material respect; or
     The company has received more nominees than it is required
to include by proposed Rule 14a-11 and the nominating shareholder or
group is not entitled to have its nominee included under the criteria
proposed in Rule 14a-11(d)(3).\558\
---------------------------------------------------------------------------

    \558\ See proposed Rule 14a-11(a). More specifically, under the
proposal a company would not be required to include a nominee where
(1) applicable State law or the company's governing documents
prohibit the company's shareholders from nominating a candidate for
director; (2) the nominee's candidacy, or if elected, board
membership, would violate controlling State law, Federal law or
rules of a national securities exchange or national securities
association; (3) the nominating shareholder or group does not meet
the rule's eligibility requirements; (4) the nominating
shareholder's or group's notice is deficient; (5) any representation
in the nominating shareholder's or group's notice is false in any
material respect; or (6) the nominee is not required to be included
in the company's proxy materials due to the proposed limitation on
the number of nominees required to be included.
---------------------------------------------------------------------------

    Under the Proposal, the nominating shareholder or group would need
to be notified of the company's determination not to include the
shareholder nominee in sufficient time to consider the validity of any
determination to exclude the nominee and respond to such a notice.\559\
In this regard, we noted the time-sensitive nature of Rule 14a-11 and
the interpretive issues that may arise in applying the new rule. After
the company provided such a notice to a nominating shareholder or group
and afforded the nominating shareholder or group the opportunity to
respond, the company would be required to provide a notice to the
Commission regarding its intent not to include a shareholder nominee in
its proxy materials. The company could seek a no-action letter from the
staff with respect to its decision to exclude the nominee.\560\
---------------------------------------------------------------------------

    \559\ See proposed Rule 14a-11(f).
    \560\ See proposed Rule 14a-11(f)(7)-(14).
---------------------------------------------------------------------------

    The proposed process would have afforded a nominating shareholder
or group the opportunity to remedy certain eligibility or procedural
deficiencies in a nomination.\561\ The various time deadlines set out
in the proposed process were determined by considering the appropriate
balance between companies' needs in meeting printing and filing
deadlines for their shareholder meetings with shareholders' need for
adequate time to satisfy the requirements of the rule.\562\
Specifically, as proposed, a company determining that the nominating
shareholder or group or nominee or nominees has not satisfied the
eligibility requirements could exclude the shareholder nominee or
nominees, subject to the following requirements:
---------------------------------------------------------------------------

    \561\ See proposed Rule 14a-11(f)(3)-(6).
    \562\ We considered the timing requirements and deadlines in
Rule 14a-8 when crafting the proposed requirements and deadlines for
Rule 14a-11; however, due to the potential complexity of the
nomination process, we determined in the proposal that it would be
appropriate to provide additional time for the process.
---------------------------------------------------------------------------

     The company would notify in writing the nominating
shareholder or group of its determination. The notice would be required
to be postmarked or transmitted electronically no later than 14
calendar days after the company receives the shareholder notice of
intent to nominate. The company would have to provide the notice in a
manner that provides evidence of receipt by the nominating shareholder
or group; \563\
---------------------------------------------------------------------------

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

     The company's notice to the nominating shareholder or
group that it determined that the company may exclude a shareholder
nominee or nominees would be required to include an explanation of the
company's basis for determining that it may exclude the nominee or
nominees; \564\
---------------------------------------------------------------------------

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

     The nominating shareholder or group would have 14 calendar
days after receipt of the written notice of deficiency to respond to
the notice and correct any eligibility or procedural deficiencies
identified in the notice. The nominating shareholder or group would
have to provide the response in a manner that provides evidence of its
receipt by the company; \565\
---------------------------------------------------------------------------

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

     If, upon review of the nominating shareholder's or group's
response, the company determines that the company still may exclude the
shareholder nominee or nominees, after providing the requisite notice
of and time for the nominating shareholder or group to remedy any
eligibility or procedural deficiencies in the nomination, the company
would be required to provide notice of the basis for its determination
to the Commission no later than 80 calendar days before it files its
definitive proxy statement and form of proxy with the Commission. The
Commission staff could permit the company to make its submission later

than 80 calendar days before the company files its definitive proxy
statement and form of proxy if the company demonstrates good cause for
missing the deadline; \566\
---------------------------------------------------------------------------

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

     The company's notice to the Commission would be required
to include:
     Identification of the nominating shareholder or each
member of the nominating shareholder group, as applicable;
     The name of the nominee or nominees;
     An explanation of the company's basis for determining that
it may exclude the nominee or nominees; and
     A supporting opinion of counsel when the company's basis
for excluding a nominee or nominees relies on a matter of State law;
\567\
---------------------------------------------------------------------------

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

     The company would be required to file its notice of intent
to exclude with the Commission and simultaneously provide a copy to the
nominating shareholder or each member of the nominating shareholder or
group; \568\
---------------------------------------------------------------------------

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

     The nominating shareholder or group could submit a
response to the company's notice to the Commission. The response would
be required to be postmarked or transmitted electronically no later
than 14 calendar days after the nominating shareholder's or group's
receipt of the company's notice to the Commission. The nominating
shareholder or group would be required to provide a copy of its
response to the Commission simultaneously to the company; \569\
---------------------------------------------------------------------------

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

     If requested by the company, the Commission staff would,
at its discretion, provide an informal statement of its views (commonly
known as a no-action letter) to the company and the nominating
shareholder or group; \570\
---------------------------------------------------------------------------

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

     The company would provide the nominating shareholder or
group with notice, no later than 30 calendar days before it files its
definitive proxy statement and form of proxy with the Commission, of
whether it will include or exclude the shareholder nominee or
nominees.\571\
---------------------------------------------------------------------------

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

    Some commenters supported the proposed staff review process for
handling disputes regarding a company's determination to exclude a
shareholder nominee.\572\ Other commenters expressed concerns about the
staff's expertise and ability to handle disputes in a timely
manner.\573\ With respect to the timing requirements in the proposed
process, two commenters supported the proposed 14-day time period for
the company to respond to a nominating shareholder's or group's
notice.\574\ A number of commenters criticized the proposed 14-day time
period as too short or requested a longer time period for the company
to respond.\575\ Commenters explained that boards would need time to
consider various issues, such as if the election of a shareholder
nominee would trigger issues under the laws and regulations relevant to
the company's business (e.g., antitrust laws, government procurement,
security clearances and export control) as well as under listing
standards and State law.\576\ Two commenters supported the proposed 14-
day time period for a nominating shareholder or group to respond to a
company's notice of deficiency.\577\ Two commenters worried the 14-day
time period would give too little time for a response and recommended
instead a 21-day time period.\578\ One commenter warned that the
Commission is underestimating the number of boards that would challenge
shareholder nominees and the level of intensity of these
challenges.\579\ This commenter suggested that such challenges and
possible litigation would demand significant time and resources from
the Commission's staff.\580\ Commenters also argued that challenges to
Rule 14a-11 nominations likely would raise highly complex issues that
fall outside the scope of the staff's expertise (e.g., whether a
candidacy would violate State law).\581\ One commenter pointed to
difficulties arising from the ``dueling'' legal opinions situation in
the Rule 14a-8 no-action process.\582\ A couple commenters believed
that courts, rather than the staff, would be better able to resolve
disputes regarding shareholder director nominations.\583\
---------------------------------------------------------------------------

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

    After considering the comments, we believe that it is in
shareholders' and companies' interest to have a process available for
seeking to resolve certain disputes regarding nominations submitted
pursuant to Rule 14a-11.\584\ Therefore, the rules we are adopting set
out the process by which a company would determine whether to include a
shareholder nominee and notify the nominating shareholder or group (or
their authorized representative) of its determination.\585\ The rules
also include a process by which a company would notify a nominating
shareholder or group (or their authorized representative) of a
deficiency in its notice on Schedule 14N, the nominating shareholder or
group would have the opportunity to respond, and the company would send
a notice to the Commission if the company intends to exclude a
shareholder nominee from its proxy materials. Consistent with the
Proposal, a company making the determination to exclude a shareholder
nominee will be required to submit a notice to the Commission regarding
its determination, and it may also choose to avail itself of the
process to seek a no-action letter from the staff with respect to its
decision.\586\ While we understand the concerns raised by commenters
regarding the rule's timing requirements, we believe the requirements
are appropriate in light of the need to facilitate the process between
a company and its shareholders in time for an annual meeting.\587\ In

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

    \584\ In this regard, we note that the staff process for aiding
in the resolution of disputes related to nominations made pursuant
to Rule 14a-11 is non-exclusive. As discussed throughout this
release, a company can seek the staff's view with regard to its
determination to exclude a nominee from its proxy materials, but it
is not required to do so. A company could engage in negotiations
with a nominating shareholder or group and ultimately reach a
resolution outside of the staff process, or the parties could avail
themselves of other alternatives, such as litigation.
    \585\ Other than the modifications to the standards relating to
transmission and receipt of notices and responses, which are
described below, we are adopting the process as proposed.
    \586\ We encourage companies and shareholders to attempt to
resolve disputes independently. To the extent that a company and
nominating shareholder or group are able to resolve an issue at any
point during the staff process, the company should withdraw its
request for a no-action letter from the staff.
    \587\ The final rule does not include the proposed 30-calendar
day notice requirement when a company determines to exclude a
nominee. We believe this requirement is rendered unnecessary by the
requirement in paragraph (g)(3) of Rule 14a-11 that the company
provide notice to the Commission staff and nominating shareholder or
group no later than 80 calendar days before the company files its
definitive proxy statement and form of proxy. In addition, if a
company seeks the staff's informal view with respect to the
company's determination to exclude a nominee, promptly following
receipt of the staff's response a company would be required to
provide a notice to the nominating shareholder or group stating
whether it will include or exclude the nominee.
---------------------------------------------------------------------------

    We are changing and clarifying the requirements related to the
timing of sending and receiving notifications. As proposed, if a
company determined that it could exclude a shareholder nominee, it
would be required to notify the nominating shareholder or group and the
notification would be required to be postmarked or transmitted
electronically no later than 14 calendar days after the company
received the notice on Schedule 14N. The proposed rule stated that the
company would be responsible for providing the notice in a manner that
evidences timely receipt by the nominating shareholder or group. The
proposed rule also included similar requirements for a response to the
notice by the nominating shareholder or group. As adopted, the rules
will keep the deadlines as they were proposed but will use a
transmission standard in determining the deadlines, similar to the
standard discussed above for new Rule 14a-11(g)(1). We believe using
such a uniform standard for all notification aspects of the rule will
provide clarity and ease of use. Under the final rule, a company's
notification must be postmarked or transmitted electronically no later
than 14 calendar days after the close of the window period for
submission of nominations pursuant to Rule 14a-11. We believe this
change from the Proposal is appropriate because it will allow
shareholders to submit their nominations, and companies to receive all
the nominations, before requiring a company to send a notice to the
nominating shareholder or group (or their authorized representative) as
to whether it will include or exclude a nominee. Thus, a company will
be able to make an informed decision with respect to individual
nominations because it will be able to evaluate and respond to all the
nominations it has received at one time, rather than evaluating and
responding to the nominations as they are received. This approach
should help reduce the possibility of any confusion that could result
from requiring a company to respond to each nomination no later than 14
days after it is transmitted.\588\ A nominating shareholder's or
group's response to the company's notice must be postmarked or
transmitted electronically no later than 14 calendar days after receipt
of the company's notification. We note that a timely transmission
standard applies in both instances; however, we urge companies to send
the notification, and nominating shareholders or groups to send a
response, in a manner that will allow them to demonstrate when the
communication is received, as doing so may avoid potential disputes.
---------------------------------------------------------------------------

    \588\ For example, suppose a company decided it did not have a
reason to exclude a nominee submitted by a nominating shareholder
during the first week of the window period. If we were to require
that a company must respond to a nomination no later than 14 days
after it was transmitted, the company would be required to respond
to the nominating shareholder or group before the window period
closed, and the company would inform the nominating shareholder that
it intends to include the nominee. If, subsequent to the company
sending a notice to the nominating shareholder of its intent to
include the nominee, a nominating shareholder with a higher
qualifying ownership percentage submits a nomination for the maximum
number of nominees the company would be required to include under
the rule, the company would be required to include those nominees
assuming that the company determined that it did not have a reason
to exclude the nominees. In that situation, confusion could result
because, under the rule, the company would no longer be required to
include the nominee submitted by the nominating shareholder during
the first week of the window period, even though the company had
informed the nominating shareholder it would include its nominee.
---------------------------------------------------------------------------

    Under new Rule 14a-11(g), a company may exclude a shareholder
nominee because:
     Rule 14a-11 is not applicable to the company;
     The nominating shareholder or group or nominee failed to
satisfy the eligibility requirements in Rule 14a-11(b);) \589\ or
---------------------------------------------------------------------------

    \589\ Specifically, the final rule provides that a company could
exclude a shareholder nominee because the nominating shareholder or
group, or the nominee, fails to satisfy the applicable eligibility
requirements in Rule 14a-11(b). In this regard, we note that the
nominating shareholder or each member of the nominating shareholder
group (or authorized representative) would be required to certify
that, after reasonable inquiry and to the best of its knowledge and
belief, the nominating shareholder or member of the nominating
shareholder or group and the nominee satisfied the applicable
requirements of Rule 14a-11(b).
---------------------------------------------------------------------------

     Including the nominee or nominees would result in the
company exceeding the maximum number of nominees it is required to
include in its proxy statement and form of proxy.\590\
---------------------------------------------------------------------------

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

    In addition, a company would be permitted to exclude a statement in
support of a nominee or nominees if the statement in support exceeds
500 words for each nominee.\591\ In such cases, a company would be
required to include the nominee or nominees, provided the eligibility
requirements were satisfied, but would be permitted to exclude the
statement in support. Although we did not propose to allow for
exclusion of a supporting statement that exceeds the length specified
in the rule, we believe that it is appropriate to provide the ability
to do so in the final rule.\592\
---------------------------------------------------------------------------

    \591\ See new Rule 14a-11(c).
    \592\ In this regard, we note that this is consistent with Rule
14a-8, which specifies that a company may exclude a proposal if the
proposal, including any accompanying supporting statement, exceeds
500 words.
---------------------------------------------------------------------------

    We note that, in a change from the Proposal, under the final rule a
company may not exclude a nominee or a statement in support on the
basis that, in the company's view, the Schedule 14N (which will include
the statement in support) contains materially false or misleading
statements. Nominating shareholders and groups will have liability for
any materially false or misleading information or for making a false or
misleading certification in the notice filed on Schedule 14N, and
companies will not be responsible for this information.\593\ We believe
that such disputes concerning whether information is false or
misleading should be handled through disclosure, and if necessary,
through private litigation, rather than through exclusion of the
nominee under our rule. A company and the nominating shareholder or
group will be in possession of the facts and circumstances regarding
any disputes that arise about the truthfulness or accuracy of
information or representations made by a nominating shareholder or
group; thus, they will be in a better position than the staff to
resolve those disputes. In addition, we note that in traditional proxy
contests, companies and insurgents regularly use disclosure to
communicate with a company's shareholders about an insurgent's
nominee(s) and provide related information, including disclosure
disputing the information provided by the other party. We believe that
it is appropriate for companies and nominating shareholders engaged in
the Rule 14a-11 nomination process to work together to resolve these
types of issues. While we encourage private parties to resolve disputes
under this provision, the Commission could, of course, bring
enforcement actions in appropriate instances. All filings associated
with a nomination included in the company's proxy materials pursuant to
Rule 14a-11, including the Schedule 14N, the company's proxy statement
and any additional soliciting materials provided by the company or the
nominating shareholder, will be subject to the staff's proxy contest
review procedures and, as noted, will be subject to the Rule 14a-9
prohibition

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

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

    In the Proposing Release, we noted that:
     Unless otherwise provided in Rule 14a-11 (e.g., the
nominating shareholder's or group's obligation to demonstrate that it
responded to a company's notice of deficiency, where applicable, within
14 calendar days after receipt of the notice of deficiency), the burden
would be on the company to demonstrate that it may exclude a nominee or
nominees; and
     All materials submitted to the Commission in relation to
proposed Rule 14a-11(g) would be publicly available upon submission.

We are adopting these aspects of the rules as proposed. We did not
receive significant comment on these aspects of the proposed rules,
although two commenters requested that companies bear the burden of
proof when objecting to a nominee.\594\ The rule, as adopted and
proposed, specifies that the burden is on the company to demonstrate
that it may exclude a nominee or statement of support, unless otherwise
specified.\595\ In addition, as we discussed in the Proposing Release,
the staff's responses to the submissions made pursuant to new Rule 14a-
11(g) would reflect only informal views. The staff determinations
reached in these responses would not, and cannot, adjudicate the merits
of a company's position with respect to exclusion of a shareholder
nominee under Rule 14a-11. Accordingly, a discretionary staff
determination would not preclude an interested person from pursuing a
judicial determination regarding the application of Rule 14a-11.
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    \594\ See letters from CII; Universities Superannuation.
    \595\ In the Proposal, we noted that the exclusion of a nominee
or nominees where the exclusion was not permissible would result in
a violation of the rule. We are adopting that provision as proposed.
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    As noted above, if a nominee withdraws or is disqualified, a
company will be required to include an otherwise eligible nominee
submitted by the shareholder or group with the next highest qualifying
ownership percentage, if any. The company would be required to continue
replacing withdrawn or disqualified nominees until it included the
maximum number of nominees it is required to include in its proxy
materials or the list of shareholder nominees is exhausted. As
described above, a company will be required to give notice that it
plans to exclude a nominee for any nominee that it intends to exclude,
and the notice must include the reasons for the exclusion. If a company
anticipates that it would seek a no-action letter from the staff with
respect to its decision to exclude any Rule 14a-11 nominee or nominees,
it should seek a no-action letter with regard to all nominees that it
wishes to exclude at the outset and should assert all available bases
for exclusion at that time. For example, if a company receives more
nominees than it is required to include, its reasons for exclusion
would note that basis. In addition, if the company believes it has
other bases to exclude the nominee, it should note those other bases in
its notice and include the other bases in its request for a no-action
letter.
c. Timing of Process
    The process generally would operate as follows:

------------------------------------------------------------------------
                Due date                         Action required
------------------------------------------------------------------------
No earlier than 150 calendar days, and   Nominating shareholder or group
 no later than 120 calendar days,         must provide notice on
 before the anniversary of the date       Schedule 14N to the company
 that the company mailed its proxy        and file the Schedule 14N with
 materials for the prior year's annual    the Commission.
 meeting.
No later than 14 calendar days after     Company must notify the
 the close of the window period for       nominating shareholder or
 submission of nominations.               group (or its authorized
                                          representative) of any
                                          determination not to include
                                          the nominee or nominees.
No later than 14 calendar days after     Nominating shareholder or group
 the nominating shareholder's or          must respond to the company's
 group's receipt of the company's         deficiency notice and, where
 deficiency notice.                       applicable, cure any defects
                                          in the nomination.
No later than 80 calendar days before    Company must provide notice of
 the company files its definitive proxy   its intent to exclude the
 statement and form of proxy with the     nominating shareholder's or
 Commission.                              group's nominee or nominees
                                          and the basis for its
                                          determination to the
                                          Commission and, if desired,
                                          seek a no-action letter from
                                          the staff with regard to its
                                          determination.
No later than 14 calendar days after     Nominating shareholder or group
 the nominating shareholder's or          may submit a response to the
 group's receipt of the company's         company's notice to the
 notice to the Commission.                Commission staff.
As soon as practicable.................  If requested by the company,
                                          Commission staff would, at its
                                          discretion, provide an
                                          informal statement of its
                                          views to the company and the
                                          nominating shareholder or
                                          group.
Promptly following receipt of the        Company must provide notice to
 staff's informal statement of its        the nominating shareholder or
 views.                                   group stating whether it will
                                          include or exclude the
                                          nominee.
------------------------------------------------------------------------

d. Information Required in Company Proxy Materials
i. Proxy Statement
    As discussed in Section II.B.8. above, we proposed and are adopting
a requirement that a company that is including a shareholder director
nominee in its proxy statement and form of proxy pursuant to Rule 14a-
11 include certain disclosure about the nominating shareholder or group
and the nominee in the company proxy statement. This disclosure will be
provided by the nominating shareholder or group in its notice on
Schedule 14N in response to Item 5 of that Schedule and will be
included in the company's proxy statement pursuant to Item 7(e) (and,
in the case of investment companies, Item 22(b)(18)) of Schedule
14A.\596\ As we proposed, the company will not be responsible for the
disclosure; rather, the nominating shareholder or group will have
liability for any materially false or misleading statements.\597\
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    \596\ Refer to Section II.B.8. for a discussion of comments
received on the proposed disclosure and changes made in response to
these comments. We did not receive comment specifically on new Items
7(e) or 22(b)(18) of Schedule 14A.
    \597\ See new Rule 14a-11(f).
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    As discussed in Section II.B.8., the disclosures to be included in
the company's proxy statement include:
     A statement that the nominee consents to be named in the
company's proxy statement and form of proxy and, if elected, to serve
on the company's board of directors;
     Disclosure about the nominee as would be provided in
response to the disclosure requirements of Items 4(b),

5(b), 7(a), (b) and (c) and, for investment companies, Item 22(b) of
Schedule 14A, as applicable;
     Disclosure about the nominating shareholder or each member
of a nominating shareholder group as would be required of a participant
in response to the disclosure requirements of Items 4(b) and 5(b) of
Schedule 14A, as applicable;
     Disclosure about whether the nominating shareholder or any
member of a nominating shareholder group has been involved in any legal
proceeding during the past ten years, as specified in Item 401(f) of
Regulation S-K;
     Disclosure about whether, to the best of the nominating
shareholder's or group's knowledge, the nominee meets the director
qualifications set forth in the company's governing documents, if any;
     A statement that, to the best of the nominating
shareholder's or group's knowledge, in the case of a registrant other
than an investment company, the nominee meets the objective criteria
for ``independence'' of the national securities exchange or national
securities association rules applicable to the company, if any, or, in
the case of a registrant that is an investment company, the nominee is
not an ``interested person'' of the registrant as defined in Section
2(a)(19) of the Investment Company Act of 1940;
     The following information regarding the nature and extent
of the relationships between the nominating shareholder or group, the
nominee, and/or the company or any affiliate of the company:
     Any direct or indirect material interest in any contract
or agreement between the nominating shareholder or any member of the
nominating shareholder group, the nominee, and/or the company or any
affiliate of the company (including any employment agreement,
collective bargaining agreement, or consulting agreement);
     Any material pending or threatened litigation in which the
nominating shareholder or any member of the nominating shareholder
group and/or the nominee is a party or a material participant, and that
involves the company, any of its officers or directors, or any
affiliate of the company;
     Any other material relationship between the nominating
shareholder or any member of the nominating shareholder group, the
nominee, and/or the company or any affiliate of the company not
otherwise disclosed; and
     The Web site address on which the nominating shareholder
or nominating shareholder group may publish soliciting materials, if
any.
    The disclosures set out in Items 4(b) and 5(b) of Schedule 14A are
specifically tailored to contested elections and currently are provided
by both companies and insurgents in traditional proxy contests. The
disclosures required pursuant to Item 4(b) include:
     Who is making the solicitation and the methods of
solicitation;
     If employees of the soliciting party are engaged in the
solicitation, what types of employees are engaged in the solicitation
and the manner and nature of their employment;
     If specially engaged employees are engaged in the
solicitation, the material features of the engagement, the cost, and
the number of employees;
     The total amount estimated to be spent and the total
expenditures to date for the solicitation;
     Who will bear the cost of the solicitation; and
     The terms of any settlement between the company and the
soliciting parties, including the cost to the company.
    The disclosures included pursuant to Item 5(b) include:
     Any substantial interest of the soliciting party in the
matter to be voted on;
     Certain biographical information about the soliciting
party, such as name and business address, principal occupation, and any
criminal convictions in the past 10 years;
     The amount of company securities beneficially owned and
owned of record;
     Dates and amounts of any securities purchased or sold
within the past two years and the amount of funds borrowed and owed to
purchase the securities;
     Whether the soliciting person is or was within the past
year a party to any contracts, arrangements or understandings with
respect to the company's securities and the terms of the contract,
arrangement or understanding;
     Beneficial ownership of company securities by any
associate of the soliciting person;
     Beneficial ownership by the soliciting person of any
parent or subsidiary of the company;
     Disclosure responsive to Item 404(a) of Regulation S-K
with regard to the soliciting person and any associate;
     Disclosure of any arrangements concerning future
employment or transactions with the company; and
     Any substantial interest in the vote, either by security
holdings or otherwise, held by a party to an arrangement or
understanding related to a director nominee.
    The company also will include in its proxy statement disclosure
about the management nominees responsive to Items 4(b), 5(b), 7(a), (b)
and (c) and, for investment companies, Item 22(b) of Schedule 14A, as
applicable, as well as disclosure concerning the persons making the
solicitation for the management nominees responsive to Items 4(b) and
5(b) of Schedule 14A, as applicable. We did not amend the disclosure
requirements in this regard, as companies are already required to make
these disclosures in the context of a ``solicitation in opposition,''
under Rule 14a-12(c).\598\
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    \598\ We have clarified in new Instruction 3 to Rule 14a-12 that
inclusion of a shareholder director nominee pursuant to Rule 14a-11,
an applicable state or foreign law provision, or a company's
governing documents as they relate to the inclusion of shareholder
director nominees in the company's proxy materials, or solicitations
that are made in connection with that nomination, constitute
solicitations subject to Rule 14a-12(c), except for purposes of the
requirement for the company to file their proxy statement in
preliminary form pursuant to Rule 14a-6(a).
---------------------------------------------------------------------------

    In addition, as discussed in Section II.B.8., we proposed and
adopted a requirement that the company include in its proxy statement
the nominating shareholder's or group's statement in support of the
shareholder nominee or nominees, if the nominating shareholder or group
elects to have such statement included in the company's proxy
materials. As discussed in Section II.B.8., we had proposed that this
statement not exceed 500 words total, but in response to commenters'
concerns, we have revised this provision in the final rule to enable a
nominating shareholder or group to include up to 500 words for each
nominee. The company also would have the option to include a statement
of support for the management nominees.\599\
---------------------------------------------------------------------------

    \599\ In the Proxy Disclosure Enhancements Adopting Release, we
amended our rules to require disclosure about directors that will
provide investors with more meaningful disclosure to enable them to
determine whether and why a director or nominee is an appropriate
choice for a particular company. The information is required in the
company's proxy statement for each director nominee and each
director who will continue to serve after the shareholder meeting.
Under revised Item 401 of Regulation S-K, a nominating shareholder
or group will be required to discuss the particular experience,
qualifications, attributes or skills of the nominee or nominees that
led the nominating shareholder or group to conclude that the person
should be put forward as a candidate for director on the company's
board of directors.
---------------------------------------------------------------------------

ii. Form of Proxy
    Under the Proposal, a company that is required to include a
shareholder nominee or nominees on its form of proxy could identify the
shareholder nominees as such and recommend

whether shareholders should vote for, against, or withhold votes on
those nominees and management nominees on the form of proxy.\600\ In
addition, the company could determine the order in which its nominees
and any shareholder nominees are listed in the form of proxy. The
company would otherwise be required to present the nominees in an
impartial manner in accordance with Rule 14a-4.
---------------------------------------------------------------------------

    \600\ This would be similar to the current practice with regard
to shareholder proposals submitted pursuant to Rule 14a-8 where
companies identify the shareholder proposals and provide a
recommendation to shareholders as to how they should vote on each of
those proposals.
---------------------------------------------------------------------------

    Under the current rules, a company may provide shareholders with
the option to vote for or withhold authority to vote for the company's
nominees as a group, provided that shareholders also are given a means
to withhold authority for specific nominees in the group. In our view,
as we stated in the Proposal, this option would not be appropriate
where the company's form of proxy includes shareholder nominees, as