provided by the nominating shareholder or group in its notice on
Schedule 14N.

C. Factors Affecting Scope of the New Rules

    Our discussion of the economic effects of the new rules takes into
account various factors, such as the

incentives and actions of certain parties, that will affect the rules'
scope and influence.
    Any future actions of the states and their legislatures could
affect the applicability of the new rules. Rule 14a-11, for instance,
will not apply to companies incorporated in states or other
jurisdictions that prohibit nominations of directors by shareholders or
permit companies to prohibit such nominations and where the company's
governing documents do so.\852\ Under Rule 14a-8, shareholder proposals
must be proper subjects for action by shareholders under the laws of
the jurisdiction of the company's organization. To the extent that
states or other jurisdictions change their laws, for example, to
prohibit the nomination of directors by shareholders, Rule 14a-11 and
Rule 14a-8 would apply less broadly.
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    \852\ As noted above, we are not aware of any states that
currently prohibit shareholder nominations for director.
---------------------------------------------------------------------------

    Future actions of boards may affect the applicability of the new
rules. In the case of Rule 14a-11, we believe that the applicability of
the rule is not likely to be affected by future actions of a board
because companies generally may not prohibit shareholders from
nominating directors under existing State law.\853\ In addition, a
company will not be permitted to exclude pursuant to amended Rule 14a-
8(i)(8) a shareholder proposal that would establish a procedure under a
company's governing documents for the inclusion of one or more
shareholder nominees for director in the company's proxy materials. It
is reasonable to expect that some shareholders will submit this type of
proposal, particularly shareholders who perceive that the current board
does not represent, or possibly may come to not represent, their
interests and are not otherwise able to use Rule 14a-11 (such as if the
shareholder does not qualify to submit a nominee or if larger
shareholders have exhausted the nomination slots available pursuant to
Rule 14a-11). Finally, boards seeking to limit the effect of
shareholder-nominated candidates submitted pursuant to Rule 14a-11 and
elected as directors may, in some instances, choose to expand the board
size to dilute, to an extent, the influence of those directors.\854\
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    \853\ Several commenters also stated that they were unaware of
any law in any state or in the District of Columbia that prohibits
shareholders from nominating directors. See letters from ABA; BRT;
CII; Eaton.
    \854\ As an example, a board of eight directors, with two new
shareholder-nominated directors, may expand to up to 11 directors.
Such an expansion would dilute the influence of the shareholder-
nominated directors without increasing the number of director slots
for shareholder nominees for director in the proxy materials because
Rule 14a-11 includes a provision allowing companies to round down
the number of nominees that must be included when calculating the
25% maximum.
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    The actions and intentions of shareholders also may affect the
applicability of the new rules. To rely on Rule 14a-11, the nominating
shareholder (or where there is a nominating shareholder group, each
member of the nominating shareholder group) must not be holding any of
the company's securities with the purpose, or with the effect, of
changing control of the company \855\ or to gain a number of seats on
the board of directors that exceeds the maximum number of nominees that
the company could be required to include under Rule 14a-11 and must
provide a certification to this effect in its filed Schedule 14N.\856\
The effect of the rule also is affected by the limitation on the number
of shareholder director nominees that a company is required to include
in its proxy materials. Under Rule 14a-11, a company will not be
required to include shareholder nominations for more than a maximum of
one director or 25% of the existing board, whichever is greater. If one
shareholder or group that is eligible to use Rule 14a-11 nominates the
maximum allowable number of candidates, a company will be permitted to
exclude any other shareholder's or group's nominees from the company's
proxy materials.\857\ Further, if the maximum allowable number of
existing shareholder director nominees is currently in place on the
board, additional shareholder director nominees are not required to be
disclosed in the proxy materials pursuant to the rule.\858\
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    \855\ Although Rule 14a-11 does not contain a requirement that
the shareholder nominee or nominees do not have an intent to change
the control of the company, a nominating shareholder's or group's
ability to meet the requirement and certify that it does not have
such an intent will be impacted by the intentions and actions of its
nominee or nominees. For example, a nominating shareholder will not
be able to certify that it does not hold the company's securities
for the purpose, or with the effect, of changing the control of the
company if its nominee launches its own proxy contest or tender
offer. For further discussion, see Section II.B.4.d. above.
    \856\ See certifications in Item 8 of new Schedule 14N.
    \857\ Prior to the time a company has commenced printing its
proxy statement and a form of proxy, if a nominating shareholder or
group withdraws its shareholder director nominee or the nominee
becomes disqualified, the company will be required to include in its
proxy materials the director nominee or nominees of the nominating
shareholder or group with the next highest voting power percentage
that is otherwise eligible to use the rule and that filed a timely
notice in accordance with the rule, if any. This process will
continue until the company includes the maximum number of nominees
that it is required to include in its proxy materials or the company
exhausts the list of eligible nominees. For further discussion, see
Section II.B.7.b above.
    \858\ This could be the case when shareholder-nominated
candidates for director are elected at a company with a classified
board or when a company decides to nominate previously-elected
shareholder-nominated directors after their first term in office.
---------------------------------------------------------------------------

    Shareholders seeking to establish a procedure in a company's
governing documents and submit nominees for director using such a
provision will need to initiate a two-step process to have their
nominees included in a company's proxy materials.\859\ Unlike the use
of Rule 14a-11, this two-step process depends on both the likelihood
that a shareholder will initiate such a process and on its success at
each step of the process (e.g., the successful inclusion of the
shareholder proposal in the company's proxy materials and adoption of
the proposal by the appropriate shareholder vote). The likelihood that
a shareholder will initiate the two-step process could be limited by
the costs arising from the time needed to complete the process (e.g.,
including opportunity costs of holding securities where the shareholder
may consider the company's board composition to be sub-optimal) and the
added risk of failure due to the need to complete two separate steps to
include its director nominees in the proxy materials. The likelihood
that a shareholder will initiate this process is also affected by the
existence of Rule 14a-11, which some eligible shareholders may seek to
use instead.
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    \859\ The first step of this two-step process would be the
submission of a shareholder proposal pursuant to Rule 14a-8 seeking
to establish a procedure in a company's governing documents for the
inclusion of shareholder nominees for director in the company's
proxy materials and shareholder approval of the proposal. The second
step would be the submission and inclusion of shareholder director
nominees in the company's proxy materials pursuant to the nomination
procedures adopted by shareholders.
---------------------------------------------------------------------------

    Lastly, the scope of the effects of Rule 14a-11, including the
expected benefits and costs described below, is affected by the size of
the eligible population of shareholder groups and companies.
Consequently, the scope of the direct effects of Rule 14a-11 will
narrow to the extent that the rule's eligibility criteria reduce the
number of shareholders eligible to take advantage of the rule.
According to the data from Form 13F filings, 33% of the 6,416 public
issuers included in the sample would have one or more shareholders
that, on its own, satisfies the 3% ownership threshold and three-year
holding period

requirement of Rule 14a-11.\860\ Our extension of the holding period
from a one-year period, as proposed, to the three-year period in the
final rule, as well as the increase in the ownership threshold from
that proposed for large accelerated filers, limit the number of
shareholders eligible to use the rule and the number of companies
directly affected by the rule. For non-accelerated filers, the uniform
3% ownership threshold is lower than the 5% ownership threshold that we
proposed for that class of filers. This may result in an increase in
the number of shareholders eligible to use Rule 14a-11 and the number
of companies directly affected by the rule as compared to those
shareholders and companies affected under the proposed one year and 5%
minimum standards; however, we believe that the extension of the
holding period from one to three years may limit any increase in the
number of shareholders eligible to use the rule at smaller reporting
companies. The comments we received on the Proposal did not
substantiate the concern that the rule would have a disproportionate
impact on small issuers, and comments from companies overwhelmingly
supported uniform ownership thresholds for all public companies.
---------------------------------------------------------------------------

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

D. Benefits

    We believe that Rule 14a-11 and the amendment to Rule 14a-8(i)(8),
where applicable, will (1) facilitate shareholders' ability to exercise
their traditional State law rights to nominate and elect directors; (2)
establish a minimum uniform procedure pursuant to which shareholders
will be able to include their director nominees in a company's proxy
materials and enhance shareholders' ability to propose alternative
procedures that further shareholders' rights to nominate and elect
directors; (3) potentially improve overall board and company
performance; and (4) result in more informed voting decisions in
director elections due to improved disclosure of shareholder director
nominations and enhanced communications between shareholders regarding
director nominations.
1. Facilitating Shareholders' Ability to Exercise Their State Law
Rights to Nominate and Elect Directors
    Facilitating shareholders' ability to exercise their traditional
State law rights to nominate and elect directors is a direct benefit of
the new rules for shareholders. The new rules do so by requiring the
company proxy materials to include shareholder nominees under certain
conditions and, as a result, providing alternative means for
shareholders to nominate and elect director candidates other than
through a traditional proxy contest. Some eligible shareholders may
view the new rules as more advantageous than traditional proxy contests
and, hence, the new rules may influence their behavior. In addition,
eligible shareholders who would have considered launching a proxy
contest for purposes other than to change control of the company may
prefer to use the new rules instead. The availability of the new rules
also may encourage shareholders who would not have previously
considered conducting a proxy contest to take a greater role in the
governance of their company by using the new rules to have their
nominees for director included in a company's proxy materials.
    The precise level of the direct benefits to shareholders will
depend on a number of other factors. The benefits may be enhanced to
the extent that companies' governing documents are modified to require
inclusion of shareholder nominees for director in the company's proxy
materials from a broader spectrum of shareholders (for example, by
lowering the ownership threshold required to have a nominee included in
the company's proxy materials or shortening the holding period).\861\
The instances of such changes to provisions in governing documents may
increase as a result of the amendment to Rule 14a-8(i)(8).\862\ We also
recognize the possibility that certain quantifiable benefits for
shareholders, such as a nominating shareholder's or group's savings in
the direct costs of printing and mailing proxy materials, may be less
than the quantifiable costs for a company subject to the new rules. We
note, however, that the benefits of the new rules are not limited to
those that are quantifiable (such as the direct savings in printing and
mailing costs) and instead include benefits that are not as easily
quantifiable (such as the possibility of greater shareholder
participation and communication in the director nomination process), as
discussed below. We believe that these benefits, collectively, justify
the costs of the new rules.
---------------------------------------------------------------------------

    \861\ As adopted, Rule 14a-11 requires the nominating
shareholder individually, or the nominating group in the aggregate,
to hold at least 3% of the total voting power of the company's
securities that are entitled to be voted on the election of
directors at the annual (or a special meeting in lieu of the annual)
meeting of shareholders, or on a written consent in lieu of such
meeting, on the date the nominating shareholder or nominating group
provides notice to the company on Schedule 14N.
    \862\ As amended, companies will no longer be able to rely on
Rule 14a-8(i)(8) to exclude a shareholder proposal that seeks to
establish a procedure in the company's governing documents for the
inclusion of shareholder nominees for director in the company's
proxy materials.
---------------------------------------------------------------------------

    We discuss below the ways in which the new rules will facilitate
shareholders' exercise of their traditional State law rights and the
benefits for shareholders (particularly as compared to a traditional
proxy contest). We discuss specific monetary cost savings, both direct
and indirect, as well as other changes and the resulting benefits for
shareholders.
    Shareholders generally have the right under State law to nominate
and elect their own director candidates--a right that many shareholders
believe they should be able to exercise.\863\ Currently, however, a
shareholder or group that wishes to present its director nominations
for a shareholder vote must generally conduct a proxy contest, which is
a costly endeavor. The nominating shareholder or group would have to
incur costs involved with preparing proxy materials with the required
disclosures regarding the director nominations and mailing the proxy
materials to each shareholder solicited.\864\ Several commenters stated
that the costs of traditional proxy contests have made them
prohibitively expensive for shareholders wishing to exercise their
traditional State law rights to nominate and elect directors.\865\
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    \863\ See letters from AFSCME; Sodali; Universities
Superannuation (citing a June 2009 survey conducted by
ShareOwners.org showing that 82% of the respondents believed that
shareholders should be able to ``nominate and elect directors of
their own choosing to the boards of the companies they own,'' while
16% of the respondents stated that ``shareholders should not be able
to propose directors to sit on the boards of the companies they
own.'').
    \864\ Proxy contests waged in connection with efforts to obtain
control may involve costs related to not only preparing proxy
materials and engaging in solicitation efforts, but to the purchase
or lock-up of a significant amount of the voting securities of the
target company. Such costs could be high.
    \865\ See letters from Americans for Financial Reform; CalPERS;
CII; Florida State Board of Administration; M. Katz; J. McRitchie;
S. Ranzini; Teamsters.
---------------------------------------------------------------------------

    Further, the concern about the costs of conducting a traditional
proxy contest is not limited to the fact that the nominating
shareholder or group must incur these costs directly. A collective
action problem also exists. The time and effort spent by a shareholder
in nominating and advocating for new directors are not shared by other
shareholders. This unequal cost sharing may serve to discourage any one

shareholder from assuming the costs of running a traditional proxy
contest on its own, even though a successful contest could result in a
greater aggregate benefit for all shareholders.\866\ As a result, there
is the added economic cost of foregone opportunities where a qualified
director candidate fails to be nominated because no one shareholder or
group wishes to bear alone the costs of an election contest for the
benefit of all shareholders.
---------------------------------------------------------------------------

    \866\ See, e.g., letters from Bebchuk, et al. (``In evaluating
eligibility and procedural requirements, the SEC should also keep in
mind that many institutional investors lack incentives to invest
actively in seeking governance benefits that would be shared by
their fellow shareholders.''); Lucian A. Bebchuk and Scott Hirst
(``Bebchuk/Hirst'') (submitting the article by Lucian A. Bebchuk and
Scott Hirst, Private Ordering and the Proxy Access Debate, 65 Bus.
Law. 329 (2010) (``Bebchuk and Hirst (2010)''), in which the authors
state: ``Thus, challengers who might be able to improve the
management of the company may be discouraged from running because
they will bear all of the costs but capture only a fraction of the
benefits from any improvement in governance.'' See also Lynn A.
Stout, The Mythical Benefit of Shareholder Control, 93 Va. L. Rev.
789, 789 (2007) (``Stout (2007)'') (``In a public company with
widely dispersed share ownership, it is difficult and expensive for
shareholders to overcome obstacles to collective action and wage a
proxy battle to oust an incumbent board.'') (cited in the Proposing
Release, Section V.B.1.).
---------------------------------------------------------------------------

    We believe Rule 14a-11 will further our stated goal of facilitating
shareholders' ability to nominate and elect their own director
candidates by allowing shareholders to avoid certain direct costs of
conducting a traditional proxy contest and reducing the overall costs
to shareholders for nominating and electing directors--a belief shared
by several commenters.\867\ The new rules also will mitigate collective
action and free-rider concerns that may have otherwise deterred many
shareholders from exercising their rights under State law to nominate
directors.
---------------------------------------------------------------------------

    \867\ See letters from CII; Key Equity Investors; Pershing
Square. The benefit of a reduction in the cost of a proxy
solicitation exists only to the extent that the nominating
shareholder or group views Rule 14a-11 as a substitute for a
traditional proxy contest. Even with the adoption of Rule 14a-11,
some shareholders may prefer to conduct a traditional proxy contest
due to the various restrictions on the use of the rule. For example,
the rule restricts the number of shareholder director nominees that
a company will be required to include in its proxy materials. The
rule also will be available only to shareholders that do not hold
the securities in the company with the purpose, or with the effect,
of changing control of the company. These elements of Rule 14a-11
impose restrictions that are not present in a traditional proxy
contest. Some shareholders also may prefer a traditional proxy
contest over Rule 14a-11 for reasons related to their strategy for
the conduct of the election contest, such as having greater control
over the mailing schedule and contents of their proxy materials.
See, e.g., letter from Carl T. Hagberg (``C. Hagberg'') (stating
that ``most truly serious nominators of director candidates will
surely produce their own proxy materials, and take control of their
own `electioneering' with materials and proxy cards of their own, if
they want to stand a reasonable chance to win.''). Therefore, while
Rule 14a-11 may encourage some shareholders seeking to nominate and
elect their candidates to use the rule instead of conducting a
traditional proxy contest, other shareholders may continue to prefer
a traditional contest. For such shareholders, the expected reduction
in a shareholder's proxy solicitation costs will not materialize.
---------------------------------------------------------------------------

    Direct cost savings, particularly as compared to the cost of a
traditional proxy contest, come from two sources. First, a nominating
shareholder or group may see direct cost savings due to reduced
printing and postage costs. Based on the information available,\868\ we
calculate that a shareholder using Rule 14a-11 to submit a director
nominee or nominees to be included in a company's proxy materials will
save at least $18,000 on average in printing and postage costs.
---------------------------------------------------------------------------

    \868\ According to a study of proxy contests conducted during
2003, 2004, and 2005, the average cost of a proxy contest to a
soliciting shareholder was $368,000. See letter from Automatic Data
Processing, Inc. (April 20, 2006) regarding Internet Availability of
Proxy Materials, Exchange Act Release No. 34-52926 (December 8,
2005) (File No. S7-10-05). The costs included those associated with
proxy advisors and solicitors, processing fees, legal fees, public
relations, advertising, and printing and mailing of proxy materials.
Approximately 95% of the costs were unrelated to printing and
postage. The cost of printing and postage averaged approximately
$18,000.
---------------------------------------------------------------------------

    Second, and significantly, a nominating shareholder or group may
see direct cost savings related to reduced expenditures for advertising
and promotion of its candidates as a result of its ability to use the
company's proxy materials to directly solicit other shareholders. To
the extent that the nominating shareholder or group decides to reduce
its public relations and advertising expenditures to promote its
candidates, or to engage proxy solicitors, the cost savings will be
greater. These reductions in costs may remove a disincentive for
shareholders to submit their own director nominations, mitigate the
collective action concern, and serve the goal of facilitating
shareholders' ability to exercise their traditional State law rights to
nominate and elect directors.
    We received significant comment questioning the need for the new
rules to reduce the costs described above or the degree to which the
reduction in costs will actually facilitate shareholder director
nominations.\869\ One commenter characterized the direct printing and
mailing cost savings as the sole benefit of the new rules for
shareholders and one that is not justified by the costs and disruption
that would result from the rules.\870\ The commenter observed that the
average of $18,000 in estimated savings identified in the Proposing
Release represented less than 5% of the cost of a traditional proxy
contest and did not include costs that would be incurred by a
shareholder actively seeking the election of its nominee, such as costs
related to legal counsel, proxy solicitors, public relations advisers
and advertising.
---------------------------------------------------------------------------

    \869\ See letters from 26 Corporate Secretaries; 3M; Ameriprise;
Association of Corporate Counsel; BRT; Cummins; DuPont; ExxonMobil;
FMC Corp.; Frontier; GE; General Mills; Honeywell; IBM; Keating
Muething; Motorola; Schneider; Sidley Austin; Simpson Thacher; Time
Warner Cable; Wachtell; Wells Fargo; Xerox.
    \870\ See letter from BRT.
---------------------------------------------------------------------------

    We recognize that the adoption of the new rules may not relieve a
nominating shareholder or group of all expenditures that could be
incurred for an active campaign that may be more successful to support
the election of its candidate to the company's board of directors. The
new rules, however, are not intended to serve that purpose. Instead,
the new rules' goal is to facilitate shareholders' ability to present
their own director nominees for a vote at a shareholder meeting by
eliminating or reducing barriers in the proxy solicitation process--one
of which is the direct cost of printing and mailing proxy materials--
that have contributed to frustrating shareholder director
nominations.\871\
---------------------------------------------------------------------------

    \871\ We recognize that other factors may have similarly
frustrated the effective exercise of this State law right. We
discuss below these factors and how the new rules will reduce or
eliminate these factors.
---------------------------------------------------------------------------

    We also recognize that the direct printing and mailing cost savings
of $18,000, on their own, may not be viewed by some to be significant
enough to drive the behavior of large shareholders of public companies.
The comments that we received regarding the likely increase in the
number of election contests resulting from the new rules, however, seem
to undercut this view and suggest instead that shareholders' behavior
may indeed be influenced by the rules.\872\ The extent to which
election contests are predicted to increase as a result of shareholders
nominating their own director candidates for inclusion in the company's
proxy materials strongly indicates that the benefits of the new rules
cannot be fairly characterized as a

``mere $18,000 in estimated savings'' \873\ --a characterization that
we believe obfuscates the significance of this benefit of our new
rules.
---------------------------------------------------------------------------

    \872\ See, e.g., letters from Altman (stating that participants
in its survey predicted that, on average, 15% of companies listed on
U.S. exchanges could expect to face a shareholder director
nomination submitted under Rule 14a-11 in 2011, based on the
eligibility criteria of the Proposal); BRT (stating that the new
rules ``will increase the frequency of contested elections * * *'');
Chamber of Commerce/CCMC (noting that if the new rules are adopted,
``it is likely that proxy contests (in which the company is required
to solicit proxies on behalf of shareholders) will increase greatly
and may become customary.'').
    \873\ See letter from BRT.
---------------------------------------------------------------------------

    We received comment that while certain shareholders may be relieved
of certain costs to run a traditional proxy contest as a result of the
new rules, the rules may simply shift those costs onto the company and,
indirectly, all shareholders.\874\ Therefore, while the rules may
reduce the direct costs of solicitation by a particular shareholder for
its director nominees, it may result in an increase in the overall cost
of a company's proxy solicitation for a director election (e.g.,
additional printing and mailing costs arising from the disclosure of
the shareholder director nominations) and indirectly the cost to all
shareholders, particularly if the new rules lead to an increase in the
number of shareholder director nominations. We have some reason to
believe, however, that the increased costs for the company may not be
as much as would otherwise result if that shareholder engaged in a
traditional proxy contest.\875\ We also note that, to the extent that
the new rules help to address the collective action concern, it could
remove disincentives that previously deterred shareholders from
submitting director nominations that may have ultimately benefited all
shareholders.
---------------------------------------------------------------------------

    \874\ See letter from ABA. We recognized this possibility in the
Proposing Release as well, noting that the rule ``may result in a
decrease in costs to shareholders that would have to conduct proxy
contests in the absence of [proposed] Rule 14a-11, but may increase
the costs for companies.'' See Proposing Release, Section V.C.3.
    \875\ One commenter on the 2003 Proposal estimated that a Rule
14a-11 contest would cost a company approximately one-third what a
full proxy contest costs. See letter from Stephen M. Bainbridge
submitted in connection with the 2003 Proposal (File No. S7-19-
03)(``Bainbridge 2003 Letter''). Based on this assumption and
relying on data from a late 1980s survey, this commenter estimated
that the costs of such a contest to a public company would be
$500,000. This commenter also cited data estimating companies'
annual expenditures on Rule 14a-8 shareholder proposals to be $90
million. While this commenter noted the belief that it is unlikely
that there will be as many Rule 14a-11 election contests as Rule
14a-8 shareholder proposals, the commenter asserted that incumbent
boards are likely to spend considerably more on opposing each Rule
14a-11 contest than on opposing a Rule 14a-8 shareholder proposal.
This commenter estimated that $100 million may be an appropriate
estimate for the lower boundary of the range within which Rule 14a-
11's direct costs will fall. Commenters did not provide any data
during the comment period for the Proposal that compared these costs
for a company.
---------------------------------------------------------------------------

    Other commenters observed that savings in printing and mailing
costs could be obtained through our notice and access model for
electronic delivery of proxy materials \876\ or stated that the notice
and access model has already reduced the costs for shareholders to
effect changes in the membership of a board.\877\ We note that this
observation applies only to the direct printing and mailing costs,
rather than all of the other monetary cost savings discussed throughout
this section. We agree that the notice and access model may decrease
significantly the printing and mailing costs associated with a proxy
solicitation. To the extent that a shareholder chooses to nominate and
elect its director candidates through a traditional proxy contest using
the notice and access model, the expected benefit of a reduction in
printing and mailing costs will be somewhat lower. The notice and
access model, however, may not necessarily provide a soliciting
shareholder with the same cost savings possible under Rule 14a-11.
Under the model, a soliciting shareholder will still incur the costs of
printing and mailing notices of availability of proxy materials to
shareholders from whom the person is soliciting proxy authority.\878\
Further, as we recognized at the time we created the notice and access
model, additional printing and mailing costs will be incurred to the
extent that a solicited shareholder requests paper copies of the proxy
materials.\879\ A soliciting shareholder also may prefer using the new
rules over a traditional proxy contest conducted through the notice and
access model for reasons related to its strategy for the conduct of the
election contest, such as avoiding the need and cost to use Exchange
Act Rule 14a-7 to obtain a shareholder list from the company (or have
the company send proxy materials on its behalf) \880\ as well as the
requirement to file preliminary proxy materials at least ten calendar
days before definitive materials are first sent to shareholders.\881\
---------------------------------------------------------------------------

    \876\ See, e.g., letters from 26 Corporate Secretaries;
Ameriprise; BRT.
    \877\ See letters from 26 Corporate Secretaries; 3M; Ameriprise;
Association of Corporate Counsel; BRT; Cummins; DuPont; ExxonMobil;
FMC Corp.; Frontier; GE; General Mills; Honeywell; IBM; Keating
Muething; Motorola; Schneider; Sidley Austin; Simpson Thacher; Time
Warner Cable; Wachtell; Wells Fargo; Xerox.
    \878\ Exchange Act Rule 14a-16(l)(2). A soliciting person other
than the company could limit the cost of a solicitation by
soliciting proxies only from a select group of shareholders, such as
those with large holdings, without furnishing other shareholders
with any information. This flexibility would allow a soliciting
person other than the company to reduce even further its printing
and mailing costs by soliciting only those persons who have not
previously requested paper copies of the proxy materials. Certain
practical reasons, however, may deter a soliciting person other than
the company from taking full advantage of this flexibility, such as
the fact that institutional investors may prefer receiving paper
copies of proxy materials. See Jeffrey N. Gordon, Proxy Contests in
an Era of Increasing Shareholder Power: Forget Issuer Proxy Access
and Focus on E-Proxy, 61 Vand. L. Rev. 476, 488 (2008) (noting that
institutional investors ``generally may request paper delivery to
minimize their own printing costs.'') (cited in the letters from BRT
and Simpson Thacher).
    \879\ See Internet Availability of Proxy Materials, Release No.
34-55146 (January 22, 2007) (``Internet Proxy Availability
Release'') (noting that ``to the extent that some shareholders
request paper copies of the proxy materials, the benefits of the
amendments in terms of savings in printing and mailing costs will be
reduced.'').
    \880\ Exchange Act Rule 14a-7 sets forth the obligation of
companies either to provide a shareholder list to a requesting
shareholder or to send the shareholder's proxy materials on the
shareholder's behalf. The rule provides that the company has the
option to provide the list or send the shareholder's materials,
except when the company is soliciting proxies in connection with a
going-private transaction or a roll-up transaction. Under Rule 14a-
7(e), the shareholder must reimburse the company for ``reasonable
expenses'' incurred by the company in providing the shareholder list
or sending the shareholder's proxy materials.
    \881\ Exchange Act Rule 14a-6 requires that preliminary copies
of the proxy statement and form of proxy be filed with the
Commission at least ten calendar days prior to the date that
definitive copies of such materials are first sent or given to
security holders, except if the solicitation relates to certain
matters to be acted upon at the meeting of security holders.
Accordingly, the proxy statement and form of proxy for a traditional
proxy contest must be filed in preliminary form. By contrast, under
the amendments to Rule 14a-6 that we are adopting today, the
inclusion of a shareholder director nominee in the company's proxy
materials will not require the company to file preliminary proxy
materials, provided that the company is otherwise qualified to file
directly in definitive form. In this regard, the inclusion of a
shareholder director nominee will not be deemed a solicitation in
opposition for purposes of the exclusion from filing preliminary
proxy materials.
---------------------------------------------------------------------------

    The new rules will do more than reduce the direct monetary costs
described above. We recognize that shareholders today are widely
dispersed and the corporate proxy is the principal means through which
State law voting rights are exercised. The dispersed nature of
ownership creates certain intangible disincentives to the effective
exercise of shareholders' ability to nominate and elect their own
director candidates, as discussed below. As we stated in the Proposing
Release, the proxy process provides the only practical means for
shareholders to solicit votes from other shareholders in favor of the
election of their nominees. The current inability of many shareholders
to utilize the proxy process for this purpose means that shareholder
director nominees do not have a realistic prospect of being elected
because most, if not all, shareholders would have cast their votes well
in advance of the shareholder meeting. Shareholders are deprived of not
only the ability to exercise a traditional State law right, but the
opportunity to assess

and vote on qualified candidates who could have been presented for a
vote if the proxy process functioned as intended. As with the direct
monetary costs, reducing the costs arising from the dispersed nature of
ownership discussed below will help address any related collective
action concerns.
    Some commenters observed that a shareholder seeking to nominate and
elect its own director candidates through a traditional proxy contest
is disadvantaged by the fact that its candidates are presented to
shareholders through a separate set of proxy materials.\882\ A
nominating shareholder or group may encounter difficulties in having
its nominees evaluated in the same manner as those of management by
shareholders who are used to receiving only the company's proxy
materials and who may react differently, and perhaps negatively, to the
shareholder's nominees simply because the nominees are presented in a
separate, unfamiliar set of proxy materials.
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    \882\ See letters from Bebchuk/Hirst (submitting the Bebchuk and
Hirst (2010) study, which noted the ability of shareholders to
include their nominees in the company's proxy materials would
``avoid intangible disadvantages that may result from being on a
separate card.''); Pershing Square (stating that ``the absence of
universal ballots, on which shareholders can vote from among all
nominees regardless of who proposed them, is glaring and clearly
anti-choice'' and that ``[o]ur hope is that, outside the control
context, selection of the best nominees in a contest will be based
more on character, competency, and relevancy of their experience
rather than the identity of the person nominating the candidate.'').
    At the October 7, 2009 ``Proxy Access Roundtable'' held by the
Harvard Law School Program on Corporate Governance (the transcript
of which was submitted as part of a comment letter from S. Hirst),
Roy Katzovicz, the Chief Legal Officer of Pershing Square Capital
Management, L.P. explained:
    As a cultural matter, there are two sub-points. First and
foremost, having the decision of choosing two people, one next to
the other, invites, we think, a more intelligent analysis on the
part of shareholders generally. In particular, we think that if the
basis for election for a nominee is their merit as an individual, a
fund or an investor of any type that can identify the deadweight on
the board, and in place of that deadweight find ideal candidates
from a skills perspective to round out the board, they're going to
have an easier time getting shareholder support for their nominee.
Their ability to vote among all the nominees and from all
proponents, I think, facilitates that kind of person-by-person
analysis, versus slate-by-slate analysis.
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    As we stated throughout this release, the Federal proxy rules
should not frustrate the exercise of a shareholder's traditional State
law right to present its own director candidates for a shareholder
vote. To the extent that the exercise of this right is hindered simply
because of a nominating shareholder's or group's need to deliver a
separate set of proxy materials and potentially negative reaction by
shareholders to the appearance of this set of materials, we believe
that our new rules will help address that concern. With the new rules,
a shareholder will have the ability to include its director nominees in
the company's proxy materials, provided that the rules' requirements
are met. The fact that a nominating shareholder or group could have its
director nominees included in a company's proxy materials--as opposed
to being included in its own proxy materials--pursuant to the new rules
may be viewed by the shareholder or group as a significant improvement
in its ability to have its nominees evaluated by shareholders in the
same manner as they evaluate management's nominees. Shareholders who
are interested in effecting a change in the company's leadership or
direction may be less likely to be deterred by the prospect that their
director nominees will not be assessed on their merit. Nominating
shareholders also may see less need for additional soliciting efforts,
such as the hiring of proxy solicitors, public relations advisors, or
advertising, if their director nominees are presented alongside those
of management in a set of company proxy materials with which the
company's shareholders are familiar.\883\
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    \883\ As discussed in Section II.B.9.d.ii. above, we have
adopted the proposed amendments to Exchange Act Rule 14a-4 out of a
similar desire to avoid giving management's director nominees an
advantage over those of a nominating shareholder or group and to
create an impartial presentation of the nominees for whom a
shareholder may vote.
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    Shareholders also may be hindered in making their voting decisions
in a traditional proxy contest due to the fact that they have to
evaluate more than one set of proxy materials--one sent by a company
and another sent by an insurgent shareholder--when evaluating whether
and how to grant authority to vote their shares by proxy.\884\
Presenting the competing director nominees on one proxy card, with the
related disclosure contained in one proxy statement, may simplify the
shareholder's decision-making process and reduce the potential for any
confusion on the part of shareholders.\885\ The result may be a greater
degree of participation by shareholders through the proxy process in
the governance of their companies.
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    \884\ One commenter stated that if enabling shareholders to
evaluate a board more efficiently and make more informed voting
decisions is the goal of the Proposal, then enhancing proxy
disclosure, rather than facilitating proxy contests, will better
achieve that goal. See letter from Davis Polk. We recognize the
importance of enhancing the disclosure provided in connection with
proxy solicitations and recently adopted new rules to better enable
shareholders to evaluate the leadership of public companies. See
Proxy Disclosure Enhancements Adopting Release. These rules,
however, do not dispense with the need for Rule 14a-11 and the
amendment to Rule 14a-8(i)(8). The new rules we are adopting will
complement the recently-adopted proxy disclosure enhancement rules
by enabling shareholders to submit their own director nominees if,
after evaluating a company's public disclosures and performance,
they are displeased with that company's current leadership or
direction.
    \885\ As discussed in Section IV.D.4. below, the new disclosure
requirements that we are adopting for shareholder director
nominations submitted pursuant to Rule 14a-11, a state or foreign
law provision, or a provision in the company's governing documents
also will facilitate more informed voting decisions by providing
shareholders with important disclosures and enhancing their ability
to communicate with each other regarding director nominations.
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2. Minimum Uniform Procedure for Inclusion of Shareholder Director
Nominations and Enhanced Ability for Shareholders To Adopt Director
Nomination Procedures
    Rule 14a-11, as adopted, will provide shareholders of companies
subject to the Federal proxy rules the ability to include their
director nominees in the company's proxy materials, provided that the
rule's requirements are met.\886\ Further, with our adoption of the
amendment to Rule 14a-8(i)(8), shareholders will be able to present in
the company's proxy materials a proposal that would seek to establish a
procedure in the company's governing documents for the inclusion of
shareholder nominees for director in the company's proxy
materials.\887\ Shareholders will have a greater ability to present for
a shareholder vote a director nomination procedure with requirements,
such as the requisite ownership threshold or holding period, that
differ from those of Rule 14a-11.\888\
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    \886\ For a discussion of the companies that are subject to Rule
14a-11, see Section II.B.3. above. As discussed in that section,
foreign private issuers and companies that are subject to the
Federal proxy rules solely because they have a class of debt
securities registered under Exchange Act Section 12 will not be
subject to Rule 14a-11. For smaller reporting companies, Rule 14a-11
will become effective three years after the date that the rule
becomes effective for all other companies.
    \887\ As previously discussed, a shareholder proposal seeking to
establish such a procedure will continue to be subject to exclusion
under other provisions of Rule 14a-8.
    \888\ As discussed in Section II.C. above, a provision in a
company's governing documents establishing a procedure for the
inclusion of shareholder director nominees in a company's proxy
materials will not affect the operation of Rule 14a-11, regardless
of whether the company's shareholders have approved the provision.
---------------------------------------------------------------------------

    We received significant comment regarding the uniform applicability
of Rule 14a-11 and the amendment to Rule 14a-8(i)(8).\889\ While there
was widespread support for the amendment to Rule 14a-8(i)(8),
commenters were

divided on the extent to which companies and shareholders should be
permitted to use Rule 14a-8 to propose alternative requirements for
shareholder director nominations and on the related issue of whether
shareholders and companies should be able to opt out of Rule 14a-11
entirely. Some commenters believed that the amendment to Rule 14a-
8(i)(8) should facilitate private ordering under State law by enabling
shareholders to include in the company's proxy materials a Rule 14a-8
proposal that would impose more restrictive eligibility criteria than
those of Rule 14a-11.\890\ A number of commenters also believed that
shareholders should be able to elect to have their companies opt out of
Rule 14a-11, including through the submission of a Rule 14a-8
proposal.\891\ To facilitate private ordering, a significant number of
commenters supported the adoption of the amendment to Rule 14a-8(i)(8)
while opposing adoption of Rule 14a-11.\892\
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    \889\ For further discussion of the comments regarding the
uniform applicability of Rule 14a-11 and the amendment to Rule 14a-
8(i)(8), see Sections II.B.2. and II.C. above.
    \890\ See letters from American Express; BorgWarner; Brink's;
BRT; CIGNA; P. Clapman; Con Edison; CSX; Davis Polk; DTE Energy;
DuPont; GE; General Mills; C. Holliday; JPMorgan Chase; Metlife;
P&G Pfizer; Safeway; Seven Law Firms; Society of Corporate
Secretaries; Southern Company; Tenet; U.S. Bancorp; Verizon.
    \891\ See letters from DTE Energy; JPMorgan Chase; P&G Seven
Law Firms; Society of Corporate Secretaries; U.S. Bancorp.
    \892\ See, e.g., letters from ABA; BRT; Society of Corporate
Secretaries.
---------------------------------------------------------------------------

    By contrast, other commenters supported an amendment enabling
shareholders to include in a company's proxy materials a Rule 14a-8
proposal that establishes a shareholder director nomination procedure
but only if the procedure would provide shareholders with a greater
ability to include their director nominees in the company's proxy
materials.\893\ A number of commenters also opposed any provision that
would permit companies to opt out of Rule 14a-11 \894\ and preferred
the uniform applicability of Rule 14a-11 to all companies.\895\
---------------------------------------------------------------------------

    \893\ See letters from CII; Governance for Owners; D. Nappier.
    \894\ See letters from AFL-CIO; Amalgamated Bank; W. Baker;
Florida State Board of Administration; IAM; Marco Consulting; P.
Neuhauser; Nine Law Firms; Norges Bank; Relational; Shamrock; TIAA-
CREF; USPE; ValueAct Capital.
    \895\ See letters from AFSCME; CalPERS; CalSTRS; CII; COPERA;
Florida State Board of Administration; John C. Liu (``J. Liu''); D.
Nappier; Nathan Cummings Foundation; Phil Nicholas (``P.
Nicholas''); OPERS; State Universities Retirement System of Illinois
(``SURSI''); SWIB; WSIB.
---------------------------------------------------------------------------

    We considered these comments carefully. As discussed above, and
noted in the Proposal, the purpose of the rules is to facilitate
shareholders' traditional State law rights to nominate and elect their
own director candidates. As such, we believe that a uniform application
of Rule 14a-11 to companies subject to the Federal proxy rules is the
best way to enable shareholders of these companies to do so without
having to incur the types of costs and other disadvantages that
shareholders traditionally have encountered. A single, uniform rule
will provide shareholders of any company subject to the rule with the
ability to meaningfully exercise their traditional State law rights to
present their own director candidates for a vote at a shareholder
meeting may be invoked through the proxy process. With the adoption of
the amendment to Rule 14a-8(i)(8), shareholders will be able to
establish procedures that can further facilitate this ability, if they
wish.
    By contrast, we believe that exclusive reliance on private ordering
under State law would not be as effective and efficient in facilitating
the exercise of these rights. Commenters identified procedural and
legal difficulties that they believe would hinder the establishment of
a shareholder director nomination procedure under private ordering,
including: A supermajority voting standard for approval of the
proposal; \896\ the constraints imposed by the 500-word limit for a
Rule 14a-8 proposal; \897\ the significant percentage of companies that
restrict shareholders' ability to amend or propose bylaws; \898\ and
the potential ability of a board to repeal or amend a shareholder-
adopted bylaw procedure.\899\ Some commenters also expressed a general
concern that under private ordering, the provisions in a company's
governing documents regarding shareholder director nominations may be
so restrictive that it would be impossible for shareholders to have
candidates included in company proxy materials.\900\ Other commenters,
however, disagreed that these difficulties would actually interfere
with the establishment of a procedure under a private ordering
approach.\901\
---------------------------------------------------------------------------

    \896\ See B. Young, footnote 52, above (``Data on bylaw
amendment limitations show that at between 38 and 43% of companies,
depending on the index, shareholders are either unable to amend the
bylaws or face significant challenges in the form of supermajority
vote requirements.''); see also letters from AFSCME; Bebchuk/Hirst;
Florida State Board of Administration; J. Liu.
    \897\ See letters from Bebchuk/Hirst; CII; Florida State Board
of Administration.
    \898\ See letters from AFSCME; Florida State Board of
Administration; Nathan Cummings Foundation; SWIB.
    \899\ See letters from AFSCME; Corporate Library; Sodali. See
also Michael E. Murphy, The Nominating Process for Corporate Boards
of Directors: A Decision-Making Analysis, 5 Berkeley Bus. L.J. 131,
144 (2008) (discussing how a company's management defeated a
shareholder proposal regarding shareholder director nominations
through the use of a bylaw requiring a super-majority shareholder
vote in favor of such a shareholder proposal and noting that ``[t]he
super-majority requirement was one of several potential defenses
that management might have employed; it might also have imposed
inconvenient notice requirements, stringent shareholder
qualification rules, or restrictions mirroring the conditions of SEC
rule 14a-8. If these barriers proved insufficient, management might
have considered counter-initiatives; it is an open question in
Delaware and certain other states whether the board of directors has
the power to repeal a shareholder-initiated bylaw by adopting a
superseding bylaw amendment.'')
    \900\ See letters from Florida State Board of Administration; P.
Neuhauser; Shamrock.
    \901\ See letters from AT&T ABA; BRT; J. Grundfest; Keller
Group; Lemonjuice.biz (``Lemonjuice''); Seven Law Firms.
---------------------------------------------------------------------------

    As previously discussed, we believe that our rules should provide
shareholders with the ability to include director nominees in a
company's proxy materials without the need for shareholders to bear the
burdens of overcoming substantial obstacles to creating that ability on
a company-by-company basis.\902\ Private ordering based on an opt-in
approach would require shareholders to incur significant costs,
regardless of the presence of the difficulties described above.
Shareholders would need to expend both time and funds to draft and
submit a proposal, such as a Rule 14a-8 proposal, establishing a
shareholder director nomination procedure on a company-by-company
basis.\903\ These costs may be higher if the company opposes and
solicits against adoption of the proposal--a possibility that is very
likely at companies where disagreements between incumbent directors and
a nominating shareholder or group already exist.\904\ Further,
shareholders may be disinclined to undergo a two-step process to submit
their own nominees--first, to establish a nomination procedure through
a Rule 14a-8 shareholder proposal and, second, to submit their director
candidates for inclusion in the company's proxy materials--given the

length of time that they will have to hold the requisite amount of
securities and, perhaps more importantly, the risk of failure at each
step of the process.
---------------------------------------------------------------------------

    \902\ See Section II.B.2. above, for additional discussion of
our consideration of a private ordering approach.
    \903\ See letters from CalPERS; Florida State Board of
Administration; D. Nappier; P. Neuhauser. One of these commenters
estimated that the approximate cost for shareholders of ``running a
proposal'' is $30,000. See letter from CalPERS. The commenter
estimated that it would cost $351,000,000 to attempt to establish
the right of shareholders of Russell 3000 companies to include their
director nominees in a company's proxy materials.
    \904\ The reluctance of companies to support the establishment
of a shareholder director nomination procedure was noted in an
article submitted by a commenter. See letter from Bebchuk/Hirst
(referring to Bebchuk and Hirst (2010)). In their article, the
authors observed that while the establishment of such a procedure is
permissible under the existing laws of some states, including
Delaware, only three companies have in fact established a
shareholder director nomination procedure.
---------------------------------------------------------------------------

    Different but equally significant issues would arise under an opt-
out approach. Shareholders who wish to retain their ability to include
their director nominees in the company's proxy materials pursuant to
Rule 14a-11 may find it difficult to successfully oppose an opt-out
proposal due to management's ability to draw on the company's resources
to promote the adoption of the proposal.\905\ We also believe that if
we were to allow an opt-out approach, even one in which only
shareholders could approve an opt out, there is a high likelihood that
the effort to procure such approval could be supported by management
and funded by company assets, while opposing views could not be
advanced effectively. Shareholders of these companies would find
themselves, once again, left without an effective or efficient ability
to nominate and elect their own director candidates. Further, as some
commenters observed, both the opt-in and opt-out approaches may impose
unnecessary complexity and administrative burdens for shareholders with
diversified holdings in numerous companies and may hinder their
exercise of a traditional State law right.\906\
---------------------------------------------------------------------------

    \905\ In this regard, we note that a survey that one commenter
conducted showed that, if available, a large majority of its member
companies--approximately two-thirds--would seek to implement an opt-
out from Rule 14a-11. See letter from Society of Corporate
Secretaries. This survey suggests that shareholders of many
companies may, once again, be limited in their ability to have their
director candidates included in the companies' proxy materials.
    \906\ See letters from CFA Institute; CII; COPERA; D. Nappier;
OPERS. One commenter countered that most long-term institutional
shareholders are unlikely to submit director candidates at a large
number of companies simultaneously and predicted that private
ordering will lead to ``some degree of standardization'' in the
types of shareholder director nomination procedures. See letter from
Society of Corporate Secretaries. While we appreciate these points,
we believe that adoption of Rule 14a-11, in fact, provides such
``standardization.'' The amendment to Rule 14a-8(i)(8) complements
Rule 14a-11 by enabling shareholders to consider and vote on
proposals that provide shareholders with an even greater ability to
present their own director candidates for a shareholder vote.
Lastly, we recognize that the amendment to Rule 14a-8(i)(8) could
result in some complexity as well, in that shareholders could
establish director nomination procedures that require, for example,
a different ownership threshold or holding period than those
contained in Rule 14a-11. We believe, however, that such complexity
is justified because it furthers our goal of facilitating, as much
as possible, the effective exercise of shareholders' traditional
State law right of shareholders to nominate their own director
candidates for a vote at a shareholder meeting.
---------------------------------------------------------------------------

3. Potential Improved Board Performance and Company Performance
    As discussed throughout this release, we are adopting the new rules
with the goal of facilitating shareholders' ability under State law to
nominate and elect directors for election to the board. Because State
law provides shareholders with the right to nominate and elect
directors to ensure that boards remain accountable to shareholders and
to mitigate the agency problems associated with the separation of
ownership from control, facilitating shareholders' exercise of these
rights may have the potential of improviing board accountability and
efficiency and increasing shareholder value. In the Proposing Release,
we requested comment on the assertion that the Proposal could improve
board performance and, hence, company performance--both for boards that
include shareholder-nominated directors elected pursuant to the new
rules and for boards that may be more attentive and responsive to
shareholder concerns to avoid the submission of shareholder director
nominations pursuant to the new rules.\907\
---------------------------------------------------------------------------

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

    We received significant comment regarding this assertion. Many
commenters agreed that the new rules may result in the benefit of more
accountable, more responsive, and generally better-performing
boards.\908\ Other commenters, however, questioned whether the new
rules would in fact promote board accountability,\909\ warned of the
costs of distracting and expensive election contests,\910\ and disputed
the conclusions of a study regarding the benefits enjoyed by companies
with ``hybrid boards'' that was cited in the Proposing Release.\911\
Commenters also challenged the basis for any suggestions in the
Proposing Release that the recent economic crisis was somehow linked to
the inability of shareholders to include their director nominees in the
company's proxy materials, pointing out that we have contemplated
similar regulatory efforts several times before the recent crisis
occurred.\912\
---------------------------------------------------------------------------

    \908\ See letters from AFSCME; Bebchuk, et al.; Brigham;
CalPERS; CII; L. Dallas; T. DiNapoli; A. Dral; GovernanceMetrics;
Governance for Owners; Hermes; M. Katz; LUCRF; J. McRitchie; R.
Moulton-Ely; D. Nappier; P. Neuhauser; NJSIC; OPERS; Pax World;
Pershing Square; Relational; RiskMetrics; D. Romine;
Shareowners.org; Social Investment Forum; Teamsters; TIAA-CREF;
Universities Superannuation; USPE; Walden. One commenter added that
the benefits of the right to include shareholder director nominees
in the company's proxy materials, including enhanced shareholder
value from hybrid boards and directors becoming ``more alert to
their duties,'' are ``less easy to quantify.'' See letter from P.
Neuhauser.
    \909\ See, e.g., letters from Alaska Air; Ameriprise; Brink's;
Comcast; CSX; General Mills; Piedmont; Praxair; William H.
Steinbrink (``W. Steinbrink''); Time Warner Cable; United
Brotherhood of Carpenters.
    \910\ See letters from ABA; Atlas; AT&T Book Celler; Carlson;
Carolina Mills; Chamber of Commerce/CCMC; Chevron; Crespin; M. Eng;
Erickson; ExxonMobil; Fenwick; GE; General Mills; Glass Lewis;
Glaspell; Intelect; R. Clark King; Koppers; MCO; MeadWestvaco;
MedFaxx; Medical Insurance; Merchants Terminal; D. Merilatt; NAM;
NIRI; NK; O3 Strategies; Roppe; Rosen; Safeway; Sara Lee; Schneider;
Southland; Style Crest; Tenet; TI; tw telecom; R. VanEngelenhoven;
Wachtell; Wells Fargo; Weyerhaeuser; Yahoo.
    \911\ See, e.g., letters from IBM; Simpson Thacher. These
commenters questioned the conclusions of the study by Chris Cernich,
et al., ``Effectiveness of Hybrid Boards,'' IRRC Institute for
Corporate Responsibility (May 2009) (``Cernich (2009)''), available
at http://www.irrcinstitute.org/pdf/IRRC_05_09_
EffectiveHybridBoards.pdf (cited in the Proposing Release, Section
V.B.3.). For example, one of these commenters stated that the study
``demonstrates that the objectives of successful dissidents were
often short-term in nature'' and ``suggests that companies with
dissidents on their board perform better than their peers over a
one-year period, but that they perform worse over a three-year
period.'' See letter from Simpson Thacher. The other commenter
stated that ``the only conclusion that could fairly be drawn from
the data is that some companies perform better, and many perform
worse, under such circumstances'' and ``of the companies with
dissident directors studied for three years after the contest
period, share performance averaged just 0.7%, which is 6.6% less
than peer companies.''
    We recognize the limitations of the Cernich (2009) study as
well. While it provides useful documentation of patterns of behavior
of activist investors, its long-term findings on shareholder value
creation are difficult to interpret. Return estimates are presented
without standard errors. For long-term returns in particular, this
shortcoming makes it difficult to infer whether results arise
because returns are different than peers in expectation, or because
of random chance. Other studies cited in this release do use
standard statistical inference techniques to approach similar
questions. See, e.g., J. Harold Mulherin and Annette B. Poulsen,
Proxy Contests and Corporate Change: Implications For Shareholder
Wealth, J. Fin. Econ. (March 1998) (``Mulherin and Poulsen (1998)'')
(cited in the NERA Report submitted as part of the letter from BRT).
    \912\ See letters from 3M; ACE; Ameriprise; American Bankers
Association; BRT; Devon; Dewey; GE; A. Goolsby; C. Holliday;
Honeywell; IBM; Jones Day; Norfolk Southern; Pfizer; Sidley Austin;
Simpson Thacher; TI; tw telecom; Unitrin; Wachtell. See also letters
from BRT (submitting the study by Andrea Beltratti and Ren[eacute]
M. Stulz, Why Did Some Banks Perform Better During the Credit
Crisis? A Cross-Country Study of the Impact of Governance and
Regulation (July 2009) (``Beltratti and Stulz (2009)''), in which
the authors found ``no consistent evidence that better governance
led to better performance during the crisis'' but found ``strong
evidence that banks with more shareholder-friendly boards performed
worse.''); Chamber of Commerce/CCMC (submitting an article by Brian
R. Cheffins, Did Corporate Governance ``Fail'' During the 2008 Stock
Market Meltdown? The Case of the S&P 500 (``Cheffins (2010)''),
which stated that because ``corporate governance functioned
tolerably well in companies removed from the S&P 500 and that a
combination of regulation and market forces will likely prompt
financial firms to scale back the free-wheeling business activities
that arguably helped to precipitate the stock market meltdown, the
case is not yet made for fundamental reform of current corporate
governance arrangements.'').

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

    The comments reflect the sharp divide on the question of whether
facilitating shareholders' ability to exercise their rights to nominate
and elect directors would lead to the benefit of improved board and
company performance. We have considered these comments carefully and
appreciate both the fact that the empirical evidence may appear mixed
and the potential for negative effects due to management distraction
and discord on the board that some commenters identified. After
assessing the costs and benefits identified by commenters, and for
reasons discussed below, we believe that the totality of the evidence
and economic theory supports the view that facilitating shareholders'
ability to include their director nominees in a company's proxy
materials has the potential of creating the benefit of improved board
performance and enhanced shareholder value--both in companies with the
actual election of shareholder-nominated directors and in companies
that react to shareholders' concerns because of the possibility of such
directors being elected. Thus, as discussed below, it is our conclusion
that the potential benefits of improved board and company performance
and shareholder value justify the potential costs.
    By facilitating shareholders' exercise of their traditional State
law rights to nominate and elect directors, we believe that eligible
shareholders may prefer to use the new rules over a costly traditional
proxy contest, making election contests a more plausible avenue for
shareholders to participate in the governance of their company. This
may have two beneficial effects on the governance of a company. First,
the board and management of a company may be increasingly responsive to
shareholders' concerns, even when contested elections do not occur,
because of shareholders' ability to present their director nominees
more easily. Second, new shareholder-nominated directors may be more
inclined to exercise judgment independent of the company's incumbent
directors and management.
    The new rules will remove or reduce some of the current
disincentives to shareholders' exercise of their traditional State law
rights to nominate director candidates. Once the rules become
effective, boards' responsiveness to concerns expressed by shareholders
may increase because shareholders could more easily nominate their own
directors to run against incumbent directors.\913\ In response to the
Proposal, commenters submitted studies regarding the effects of
reducing incumbent directors' insulation from removal, which showed
measures that make incumbent directors more vulnerable to replacement
by shareholder action have salutary deterrent effects against board
complacency and improve corporate governance and shareholder
value.\914\ Further, by creating a new threat of removal, the new rules
could lead to greater accountability on the part of incumbent directors
to the extent they see a close link between their performance and the
prospect of removal.\915\ In response to the Proposal, one commenter
also submitted studies that showed that anti-takeover provisions
protecting incumbent management are associated with economically
significant reductions in firm valuation, returns and performance, and
share prices increase when activists prompt elimination of provisions
such as staggered boards.\916\ Conversely, the creation of a staggered
board structure was found to be associated with a reduction in firm
value.\917\ Because our new rules may make director elections more
competitive by facilitating shareholders' ability to nominate and elect
their own director candidates and, hence, also make some incumbent
directors less secure in their positions, we believe that the rules may
have analogous salutary effects.
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    \913\ The Supreme Court's recent opinion in Citizens United v.
FEC, 130 S.Ct. 876 (2010) underscores the importance of board
responsiveness to shareholder concerns. In Citizens United, the
government asserted an interest in limiting independent expenditures
by corporations in political campaigns in order to prevent
dissenting shareholders from being compelled to fund corporate
political speech with which they disagreed. Citizens United, 130
S.Ct. at 911. The Court, however, stated that any such coercion
could be addressed ``through the procedures of corporate
democracy.'' Id., quotation omitted.
    \914\ See letter from L. Bebchuk (noting the article by Lucian
A. Bebchuk and Alma Cohen, The Costs of Entrenched Boards, J. Fin.
Econ. (November 2005) (``Bebchuk and Cohen (2005)''), in which the
authors stated: ``Staggered boards are associated with an
economically meaningful reduction in firm value * * * [w]e also
provide suggestive evidence that staggered boards bring about, and
not merely reflect, an economically significant reduction in firm
value * * * [f]inally, the correlation with reduced firm value is
stronger for staggered boards that are established in the corporate
charter (which shareholders cannot amend) than for staggered boards
established in the company's bylaws (which shareholders can
amend).'').
    Commenters also submitted empirical studies indicating that
facilitating shareholders' rights and voice may result in better
company performance. See letters from L. Bebchuk; CalSTRS; Nathan
Cummings Foundation (noting the study by Paul Gompers, Joy Ishii and
Andrew Metrick, Corporate Governance and Equity Prices, 118 Q.J.
Econ. 107 (2003), in which the authors found that ``firms with
stronger shareholder rights had higher firm value, higher profits,
higher sales growth, lower capital expenditures, and made fewer
corporate acquisitions.''); letters from CalSTRS; Nathan Cummings
Foundation (noting the study by B. Lawrence Brown and Marcus Caylor,
The Correlation Between Corporate Governance and Company
Performance, Research Commissioned Institutional Shareholder
Services (2004), in which the authors found that ``firms with weaker
governance perform more poorly, are less profitable, more risky, and
have lower dividends than firms with better governance.''). See also
letter from T. Yang (noting the study by Bonnie Buchanan, Jeffry M.
Netter, and Tina Yang, Proxy Rules and Proxy Practice: An Empirical
Study of US and UK Shareholder Proposals (September 2009)
(``Buchanan, Netter, and Yang (2009)''), in which the authors found
that ``after receiving a shareholder proposal, [U.S.] firms exhibit
higher stock returns and the improvement is greater [ ] when the
proposal is likely to be wealth maximizing or sponsored by a
shareholder owning a relatively large equity stake in the target
firm.'').
    \915\ As we noted in the Proposing Release, economists have put
forth theory and evidence on the link between incentives that are
associated with accountability and performance. See, e.g., Benjamin
E. Hermalin and Michael S. Weisbach, Endogenously Chosen Board of
Directors and Their Monitoring of the Board, 88 Am. Econ. Rev. 96
(1998) (cited in the Proposing Release, Section V.B.3); Milton
Harris and Artur Raviv, Control of Corporate Decisions: Shareholders
vs. Management (May 29, 2008), available at http://papers.ssrn.com/
sol3/papers.cfm?abstract_id=965559 (cited in the Proposing Release,
Section V.B.3.).
    \916\ See Bebchuk and Hirst (2010) (noting the ``substantial
empirical evidence indicating that director insulation from removal
is associated with lower firm value and worse performance.''). See
also letter from L. Bebchuk (noting the following articles: Lucian
A. Bebchuk, Alma Cohen and Allen Ferrell, What Matters in Corporate
Governance?, 22 Rev. Fin. Studs. 783 (2009) (``Bebchuk, Cohen, and
Ferrell (2009)'') (``We put forward an entrenchment index based on
six provisions: staggered boards, limits to shareholder bylaw
amendments, poison pills, golden parachutes, and supermajority
requirements for mergers and charter amendments * * * [w]e find that
increases in the index level are monotonically associated with
economically significant reductions in firm valuation as well as
large negative abnormal returns during the 1990-2003 period.''); Re-
Jin Guo, Timothy A. Kruse and Tom Nohel, Undoing the Powerful Anti-
Takeover Force of Staggered Boards, J. Corp. Fin. (June 2008)
(``Guo, Kruse and Nohel (2008)'') (``We find that de-staggering the
board creates wealth and that shareholder activism is an important
catalyst for pushing through this change.''); Olubunmi Faleye,
Classified Boards, Firm Value, and Managerial Entrenchment, J. Fin.
Econ. (February 2007) (``Faleye (2007)'') (noting that ``classified
boards significantly insulate management from market discipline,
thus suggesting that the observed reduction in value is due to
managerial entrenchment and diminished board accountability.'')).
    \917\ See Bebchuk and Hirst (2010); Bebchuk and Cohen (2005).
---------------------------------------------------------------------------

    As we noted in the Proposing Release, the presence of directors
nominated by shareholders may have an effect on company performance and
shareholder value.\918\ We also noted in the Proposing

Release that academic literature indicates the benefit to shareholders
of having an independent, active and committed board of directors.\919\
Directors are charged under State law to act as disinterested
fiduciaries on behalf of all shareholders, but it has been recognized
that the difficult agency problem created by the separation in public
companies of ownership from control creates conflicts not completely
addressed by State law. We received comment expressing concern
regarding the close relationships between directors and a company's
management and the degree to which the nomination process is dominated
by management.\920\ Directors nominated by shareholders pursuant to the
new rules will owe their presence on the board to their nomination by
one or more significant shareholders and therefore may be independent
in a way that is fundamentally different from directors nominated by
the incumbent directors. We found to be relevant the empirical evidence
cited in our Proposing Release and by commenters regarding the effect
on shareholder value of so-called ``hybrid boards'' (i.e., boards
composed of a majority of incumbent directors and a minority of
dissident directors).\921\ Such boards are a close, but not perfect,
analog to the results from an election in which shareholder nominees
submitted pursuant to the new rules are elected and typically result
when the shareholder's nominees join the board through an actual or
threatened proxy contest, but without a change of control. In the study
cited in the Proposing Release, ongoing businesses with a minority of
dissident directors posted increases in shareholder value of 9.1%,
relative to peers, during the contest period, indicating that the
market viewed the contest as having a positive effect on shareholder
value.\922\ Other commenters adduce evidence that boards with a
minority of dissident directors produce positive changes in corporate
governance structures and strategy and result in increased shareholder
value measured in both absolute returns and relative to peers.\923\
Amending our proxy rules to facilitate the operation of State laws
permitting shareholder nominations of directors may allow shareholders
to elect directors who, without obtaining control, can exercise similar
influence over decisions critical to shareholder value.
---------------------------------------------------------------------------

    \918\ See Proposing Release, Section V.B.3. (citing Cernich
(2009)). Moreover, as we noted in the same section of the Proposing
Release, empirical evidence has indicated that the ability of
significant shareholders to hold corporate managers accountable for
activity that does not benefit investors may reduce agency costs and
increase shareholder value. See, e.g., Brad M. Barber, ``Monitoring
the Monitor: Evaluating CalPERS' Activism'' (November 2006),
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_
id=890321 (cited in the Proposing Release, Section V.B.3.). See also
Deutsche Bank, Global Equity Research, ``Beyond the Numbers:
Corporate Governance in Europe,'' (March 5, 2005) (cited in the
Proposing Release, Section V.B.3).
    \919\ See Proposing Release, Section V.B.3. (citing Fitch
Ratings, ``Evaluating Corporate Governance'' (December 12, 2007),
available at http://www.fitchratings.com/corporate/reports/report_
frame.cfm?rpt_id=363502).
    \920\ See, e.g., letters from CII (noting that ``some boards are
dominated by the chief executive officer, who often plays the key
role in selecting and nominating directors'' and quoting a view
expressed by a prominent investor that ``[t]hese people [chief
executive officers] aren't looking for Dobermans. * * * They're
looking for cocker spaniels.''); J. McRitchie (``It is well known
that until recently the vast majority of board vacancies were filled
via recommendations from CEOs who also are typically chairmen of the
boards * * * Recent requirements for an `independent' nominating
committee provide little assurance against continued management
domination. These `independent' board members serve at the pleasure
of the CEOs and the other board members; they have no independent
base of power.'').
    \921\ Cernich (2009). See also letters from D. Romine;
GovernanceMetrics; P. Neuhauser; Social Investment Forum; TIAA-CREF;
Universities Superannuation.
    As we previously noted, the Cernich (2009) study cites long-term
return results, relative to peers, which are positive over the
subsequent year but negative over the subsequent three years.
However, these results are not reported with standard errors, making
it difficult to determine whether the expected returns following
contests are different from peers, or whether the realized long-term
returns during the sample period are merely the result of random
chance. Other research, such as Mulherin and Poulsen (1998), is
consistent with these findings, but investigates the impact of proxy
contests generally, rather than hybrid boards.
    \922\ Cernich (2009).
    \923\ See letters from D. Romine; GovernanceMetrics; P.
Neuhauser; Social Investment Forum; TIAA-CREF; Universities
Superannuation. See also Mulherin and Poulsen (1998); James F.
Cotter, Anil Shivdasani, and Marc Zenner, Do Independent Directors
Enhance Target Shareholder Wealth During Tender Offers?, J. Fin.
Econ. (February 1997) (finding, after examining a sample of 169
tender offers conducted from 1989 through 1992, that target
shareholder gains from tender offers were approximately 20% greater
when the board was independent).
---------------------------------------------------------------------------

    We recognize the existence of studies that reached conclusions
contrary to those discussed above.\924\ Other commenters warn that the
new rules will lead to election contests that will be distracting,
time-consuming, and inefficient for companies, boards, and
management.\925\
---------------------------------------------------------------------------

    \924\ See letter from BRT (referring to the ``Report on Effects
of Proposed SEC Rule 14a-11 on Efficiency, Competitiveness and
Capital Formation, in Support of Comments by Business Roundtable''
by NERA Economic Consulting (``NERA Report'')); David Ikenberry and
Joself Lakonishok, Corporate Governance Through the Proxy Contest:
Evidence and Implications, 66 J. Bus. 420 (1993) (``Ikenberry and
Lakonishok (1993)) (claiming that ``companies with dissident board
members substantially underperform compared to their peers.'')
(cited in the NERA Report); Lisa Borstadt and Thomas Zwirlein, The
Efficient Monitoring Role of Proxy Contests: An Empirical Analysis
of Post-Contest Control Changes and Firm Performance, Fin. Mgm't
(1992) (``Borstadt and Zwirlein (1992)'') (asserting that, in the
long run, proxy contests destroy shareholder value) (cited in NERA
Report); Beltratti and Stulz (2009) (submitted as part of the letter
from BRT and cited in letters from AT&T, BRT, and Seven Law Firms);
Cheffins (2010) (examining thirty-seven companies removed from the
S&P 500 index during 2008 and concluding that corporate governance
functioned ``tolerably well'' in these companies to negate the need
for fundamental reform of the current corporate governance
arrangements) (submitted as part of the letter from Chamber of
Commerce/CCMC); Ali C. Akyol, Wei Fen Lim and Patrick Verwijmeren,
Shareholders in the Boardroom: Wealth Effects of the SEC's Rule to
Facilitate Director Nominations (December 14, 2009) (``Akyol, Lim,
and Verwijmeren (2009)'') (documenting negative stock price
reactions to the announcements of regulatory activities related to
shareholders' right to include director nominees in the company's
proxy materials, including the Proposal) (submitted as part of the
letter from J. Grundfest); David F. Larcker, Gaizka Ormazabal and
Daniel J. Taylor, The Regulation of Corporate Governance (January
16, 2010)) (``Larcker, Ormazabal, and Taylor (2010)'') (submitted as
part of the letter from David F. Larcker (``D. Larcker'')).
    \925\ See letters from ABA; Atlas; AT&T Book Celler; Carlson;
Carolina Mills; Chamber of Commerce/CCMC; Chevron; Crespin; M. Eng;
Erickson; ExxonMobil; Fenwick; GE; General Mills; Glass Lewis;
Glaspell; Intelect; R. Clark King; Koppers; MCO; MeadWestvaco;
MedFaxx; Medical Insurance; Merchants Terminal; D. Merilatt; NAM;
NIRI; NK; O3 Strategies; Roppe; Rosen; Safeway; Sara Lee; Schneider;
Southland; Style Crest; Tenet; TI; tw telecom; R. VanEngelenhoven;
Wachtell; Wells Fargo; Weyerhaeuser; Yahoo.
---------------------------------------------------------------------------

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

limitations acknowledged by the studies' authors,\927\ or our own
concerns about the studies' methodology or scope.\928\ While we
recognize that there are strongly-held views on every side of this
debate, we believe that, as discussed throughout this release and
supported by commenters' views and empirical data, we have a reasonable
basis for expecting the benefits described above.
---------------------------------------------------------------------------

    \926\ For example, we note that a study highlighted a
methodological flaw in the Ikenberry and Lakonishok (1993) study.
Mulherin and Poulsen (1998) noted that this study had required that
companies exist as the same entity in the COMPUSTAT database
subsequent to the contest, eliminating some of the most favorable
outcomes of proxy contests from consideration and biasing the
estimate of long-term returns downward. After making corrections for
this statistical bias and examining a sample of 270 proxy contests
for board seats conducted from 1979 to 1994, the authors found that
the market had a favorable response to the initiation of the proxy
contest with an average abnormal return of 8.04% in the initiation
period, followed by long-run returns statistically indistinguishable
from those of comparable stocks. Their analysis showed that the
wealth gains during proxy contests stemmed mainly from firms that
were acquired. Overall, the authors concluded that proxy contests
generally create value, and for companies that were not acquired,
``the occurrence of management turnover [had] a significant,
positive effect on shareholder wealth relative to the firms that do
not replace senior management.'' In the Borstadt and Zwirlein (1992)
study, the finding of a negative risk-adjusted return, conditional
on dissidents winning, was based on a sample of 32 firms. Borstadt
and Zwirlein note that, overall, ``dissident activity leads to gains
for shareholders and is often followed by corporate reforms * * *
such that the realized gains over the contest period appear to be
permanent.'' A survey article on corporate governance confirmed that
this is the current academic consensus, stating that ``[t]he latest
evidence suggests that proxy fights provide a degree of managerial
disciplining and enhance shareholder value.'' See Marco Becht,
Patrick Bolton and Ailsa Roell, Corporate Governance and Control,
Handbook of the Economics of Finance (2003) (``Becht, Bolton and
Roell (2003)'').
    \927\ For example, we believe that attempts to draw sharp
inferences from the Beltratti and Stulz (2009) study may not be
warranted because, as the authors themselves noted, the evidence
leaves much to interpretation. The authors concluded that negative
conclusions about board effectiveness may be unwarranted because it
is unfair to evaluate ex-ante decisions using hind-sight. In
particular, they explained that:
    Such a result does not mean that good governance is bad. Rather
it is consistent with the view that banks that were pushed by their
boards to maximize shareholder wealth before the crisis took risks
that were understood to create shareholder wealth, but were costly
ex post because of outcomes that were not expected when the risks
were taken.
     Beltratti and Stulz (2009) at 3.
    \928\ For example, the relatively short timeframe and small
number of companies examined in Cheffins (2010) study alone justify
some caution in attempting to draw any sharp inferences from the
study. As for the Akyol, Lim, and Verwijmeren (2009) and Larcker,
Ormazabal, and Taylor (2010) studies, we note that, even if
facilitating shareholders' ability to include their nominees in a
company's proxy materials enhances shareholder value, it may be
possible to observe negative stock price reactions for a particular
set of public announcement dates. The problem lies in ascertaining
the first time investors learned about the regulatory efforts to
facilitate this shareholder right. On that initial date, investors
may have adjusted share prices for both the capitalized value of the
benefits (or costs) associated with the regulatory effort and the
probability of the effort's success. Subsequent public announcements
may simply cause investors to update these initial assessments of
the valuation impact and the probability of success. Consequently,
it is difficult to infer whether the price reactions are independent
of past announcements or simply a revision of the investors' prior
expectations. It is important, therefore, to disentangle investor
expectations about the probability of the success of the regulatory
effort from the associated valuation implications. It appears that
the Akyol, Lim, and Verwijmeren (2009) and Larcker, Ormazabal, and
Taylor (2010) studies did not focus on this distinction.
---------------------------------------------------------------------------

    We are aware, of course, that the new rules are additive to many
existing means of monitoring and ``disciplining'' a company's board and
management,\929\ which include: Hostile takeovers; stockholders
``voting with their feet'' by selling their shares; board members being
replaced by other means when the company's stock performance is poor;
and management turnover following poor performance or wrongdoing.\930\
---------------------------------------------------------------------------

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

    We acknowledge these alternatives, but believe that, for the
reasons noted above, directors nominated pursuant to the new rules will
have a degree of independence that is not present in the existing means
of ``disciplining'' a company's board and management. Moreover, the
ability of shareholders to ``vote with their feet'' or submit to a
takeover bid may be unattractive from a shareholder's perspective if
those transactions occur after a period of weak management that has
depressed the company's share price. Further, shareholders who invest
in indices may not be readily able to sell securities of a particular
company that is part of the index, making it difficult for them to
``vote with their feet.'' The high costs involved with other existing
mechanisms for ``management discipline,'' such as a traditional proxy
contest, often mean that the prospect of replacing incumbent directors
is remote unless the company's performance falls below a very low
threshold. By that time, a significant amount of shareholder value will
have, by hypothesis, already been lost and will require additional time
to recoup. We believe that the new rules will help shareholders exert
``management discipline'' by reducing the cost of, and otherwise making
more plausible, shareholder nominations.
    We also acknowledge concerns expressed by commenters that the
Proposal would encourage boards to make decisions to improve results in
the short-term at the expense of long-term shareholder value
creation.\931\ For the reasons described above, we believe the new
rules have the potential to lead to improved company performance and
enhanced shareholder value for both short-term and long-term
shareholders. Evidence suggests that, historically, proxy contests have
created value in both the short-run and long-run for shareholders.\932\
The possible inclusion and potential election of shareholder director
nominees in company proxy materials would not negate the board's
fiduciary obligations, which are to all shareholders. Finally,
shareholder director nominees are subject to election by both long-term
and short-term shareholders, who will express their interest through
their vote. In sum, we do not expect that the prospect that such
holders would nominate directors should lead boards to take short-term
actions that would detract from long-term value in order to avoid
nominations.
---------------------------------------------------------------------------

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

    A number of commenters expressed special concerns with respect to
the Proposal's effect on investment companies, asserting that the
election of a shareholder director nominee may, in some circumstances,
increase costs and potentially decrease the effectiveness and
efficiency of a unitary or cluster board utilized by a fund
complex.\933\ Some of these commenters noted their belief that
investment company governance presents a special case, arguing that the
rules should not be extended to them absent empirical evidence
specifically related to boards in this industry.\934\ Commenters also
argued that investment companies are subject to a unique regulatory
regime under the Investment Company Act that provides additional
protection to investors, such as the requirement to obtain shareholder
approval to engage in certain transactions or activities, and that
investment companies and their boards have very different functions
from non-investment companies and their boards.\935\ We understand
these concerns, but we also note that some commenters have raised
governance concerns regarding the relationship between boards and
investment advisers.\936\ Moreover, although investment companies and
their boards may have different functions from non-investment companies
and their boards, investment company boards, like the boards of other
companies, have significant responsibilities in protecting shareholder
interests, such as the approval of advisory contracts and fees.\937\ We
also do not believe that the regulatory protections offered by the
Investment Company Act (including requirements to obtain shareholder
approval to engage in certain transactions and activities) serve to
decrease the importance of the rights that are granted to shareholders
under State law. In fact, the separate regulatory regime to which
investment companies are subject emphasizes the importance of
investment company directors in dealing with the conflicts of interest
created by the external management

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

    \933\ See, e.g., letters from ABA; ICI; ICI/IDC; IDC; MFDF; S&C
T. Rowe Price; Vanguard.
    \934\ See letters from ICI; ICI/IDC; S&C T. Rowe Price.
    \935\ See letters from ABA; Barclays; ICI; ICI/IDC; IDC; T. Rowe
Price; S&C Vanguard.
    \936\ See letters from J. Reid; J. Taub.
    \937\ See Jones v. Harris Assocs., 130 S.Ct. 1418, 1423, 176 L.
Ed. 2d 265, 273-274 (2010). See also S. Rep. No. 91-184; 91st
Congress 1st Session; S. 2224 (1969) (``This section is not intended
to authorize a court to substitute its business judgment for that of
the mutual fund's board of directors in the area of management fees.
* * * The directors of a mutual fund, like directors of any other
corporation will continue to have * * * overall fiduciary duties as
directors for the supervision of all of the affairs of the fund.'').
    \938\ See footnote 142 above.
---------------------------------------------------------------------------

    Lastly, improved board performance may result from the possible
increase in the pool of qualified director candidates. When a company
does not include shareholder nominees for director in its proxy
materials, it loses the opportunity to increase the pool of qualified
nominees. Further, it deprives shareholders of the opportunity to
consider and assess all qualified candidates if asked to make an
informed voting decision in director elections. As we stated in the
Proposing Release, facilitating shareholders' ability to include
director nominations in a company's proxy materials may result in a
larger pool of qualified director nominees from which to choose.\939\
By allowing shareholders to submit their own director nominees for
inclusion in the company's proxy materials, the demand for qualified
individuals who may be willing to serve as shareholder-nominated
directors also may increase. This increased demand may, in turn,
encourage more individuals to present themselves as potential
shareholder director nominees, resulting in a large pool of potential
candidates. We recognize, however, this benefit may be offset by the
possibility that some qualified individuals may be less willing to be
nominated to serve on a board if faced with a contested election.\940\
---------------------------------------------------------------------------

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

4. More Informed Voting Decisions in Director Elections Due to Improved
Disclosure of Shareholder Director Nominations and Enhanced Shareholder
Communications
    There was widespread support among commenters for the principle
that the Commission should require disclosures regarding nominating
shareholders and their nominees.\941\ The new requirements in Rule 14a-
11, Rule 14n-1, and Schedule 14N will require certain disclosures and
certifications to be provided on Schedule 14N by shareholders who
submit a nominee under Rule 14a-11. A nominating shareholder or group
will be required to provide disclosure of the information similar to
that currently required in a proxy contest regarding the nominating
shareholder and nominee \942\ as well as certain certifications
required for use of Rule 14a-11.\943\ Rule 14a-18, Rule 14n-1 and
Schedule 14N will require similar disclosures when a shareholder or
group uses an applicable state or foreign law provision or company's
governing documents to include shareholder nominees for director in the
company's proxy materials. The information provided by the disclosures
and certifications will help provide transparency to shareholders when
voting on shareholder nominees for director and therefore may lead to
better informed voting decisions.
---------------------------------------------------------------------------

    \941\ See letters from ABA; Alston & Bird; Americans for
Financial Reform; CalSTRS; CFA Institute; CII; Corporate Library;
Dominican Sisters of Hope; Florida State Board of Administration;
GovernanceMetrics; ICI; Mercy Investment Program; Protective;
RiskMetrics; Sisters of Mercy; Tri-State Coalition; Ursuline Sisters
of Tildonk; USPE; Walden.
    \942\ Among the information included in Schedule 14N is the
disclosure required by Items 4(b), 5(b), 7 and, for investment
companies, Item 22(b) of Schedule 14A. This disclosure is the same
disclosure required for a solicitation subject to Exchange Act Rule
14a-12(c).
    \943\ Item 8 of Schedule 14N. These certifications include: A
certification that the nominating shareholder (or where there is a
nominating shareholder group, each member of the nominating
shareholder group) is not holding any of the company's securities
with the purpose, or with the effect, of changing control of the
company or to gain a number of seats on the board that exceeds the
maximum number of nominees that the company could be required to
include under Rule 14a-11; a certification that the nominating
shareholder or group satisfies the applicable eligibility
requirements of Rule 14a-11; a certification that the shareholder
director nominee satisfies the applicable eligibility requirements
of Rule 14a-11; and a certification that the information set forth
in the notice on Schedule 14N is true, complete, and correct.
---------------------------------------------------------------------------

    With respect to Rule 14a-8(i)(8), companies previously have been
permitted to exclude shareholder proposals to establish procedures for
including shareholder director nominees in the company's proxy
materials. This exclusion arose out of the concern that allowing such
proposals would result in the occurrence of contested elections without
the disclosure that otherwise would be required in a traditional proxy
contest.\944\ The new disclosure requirements applicable to nominations
made pursuant to state or foreign law or a company's governing
documents address that concern by mandating disclosure that is similar
to that required in a traditional proxy contest.\945\
---------------------------------------------------------------------------

    \944\ See Shareholder Proposal Proposing Release (proposing
amendments to Rule 14a-8 to ``make clear that director nominations
made pursuant to [bylaw amendments concerning shareholder
nominations of directors] would be subject to the disclosure
requirements currently applicable to proxy contests'' and noting
that such disclosure is of ``great importance'' to an informed
voting decision by shareholders).
    \945\ See Rule 14a-18, Rule 14n-1, and Schedule 14N.
---------------------------------------------------------------------------

    In addition to improved disclosure, our new rules will enhance
shareholders' ability to communicate with each other regarding director
nominations and elections through the proxy process. Shareholders
eligible to use Rule 14a-11 will be able to utilize the company's proxy
materials to present their own director nominees for a vote by other
shareholders. They will be able to include in the company's proxy
materials a statement supporting their director nominees.\946\
Shareholders who are dissatisfied with the company's existing board or
the company's director nominees will be able to communicate this view
and their preference for alternative candidates through the votes they
cast under the proxy process.
---------------------------------------------------------------------------

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

    The new solicitation exemptions also will facilitate communications
between shareholders.\947\ Shareholders interested in forming a
nominating group to use Rule 14a-11 can contact other shareholders--
through both oral and written communications--for that purpose without
fear that their communications would be viewed as solicitations under
the proxy rules, as long as the exemption's conditions are
satisfied.\948\ If its director nominees are included in the company's
proxy materials pursuant to Rule 14a-11, the nominating shareholder or
group can solicit other shareholders to vote in favor of its nominees,
or against the company's own nominees, as long as the exemption's
conditions are satisfied.\949\
---------------------------------------------------------------------------

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

    With the new amendment to Rule 14a-8(i)(8), shareholders will
benefit from a greater ability to present a proposal to establish an
alternative procedure under a company's governing documents for the
inclusion of one or more shareholder director nominees in the company's
proxy materials. Thus, shareholders will be able to present for
consideration by other shareholders a director nomination procedure
that they believe is appropriate for their company. Through their votes
on the proposal, shareholders will then have an opportunity to
communicate their views on this proposal to other shareholders and the
company's management.

E. Costs

    We anticipate that the new rules, where applicable, may result in
costs related to (1) potential adverse effects on company and board
performance; (2) additional complexity in the proxy process; and (3)
preparing the required disclosures, printing and mailing, and costs of
additional solicitations.

1. Costs Related to Potential Adverse Effects on Company and Board
Performance

    Rule 14a-11 and the amendment to Rule 14a-8(i)(8) may result in
potential adverse effects on the performance of a company and its board
of directors.
    First, we received significant comment stating that election
contests are distracting and time-consuming for companies, boards, and
management.\950\ Further, to the extent that a more competitive
nomination and election process motivates incumbent directors to be
more responsive to shareholders' concerns, the board may incur costs in
attempting to institute policies and procedures it believes will
address shareholder concerns. It is possible that the time a board
spends on shareholder relations could reduce the time that it otherwise
would spend on strategic and long-term thinking and overseeing
management, which, in turn, may negatively affect shareholder
value.\951\
---------------------------------------------------------------------------

    \950\ See letters from ABA; Atlas; AT&T Book Celler; BRT;
Carlson; Carolina Mills; Chamber of Commerce/CCMC; Chevron; Crespin;
M. Eng; Erickson; ExxonMobil; Fenwick; GE; General Mills; Glass
Lewis; Glaspell; Intelect; R. Clark King; Koppers; MCO;
MeadWestvaco; MedFaxx; Medical Insurance; Merchants Terminal; D.
Merilatt; NAM; NIRI; NK; O3 Strategies; Roppe; Rosen; Safeway; Sara
Lee; Schneider; Southland; Style Crest; Tenet; TI; tw telecom; R.
VanEngelenhoven; Wachtell; Wells Fargo; Weyerhaeuser; Yahoo.
    \951\ See, e.g., Akyol, Lim, and Verwijmeren (2009) (finding
that, based on the market response of a sample of 1,315 firms, ``the
proposed rule is perceived as costly by shareholders,'' ``that
increasing shareholder rights, specifically by facilitating director
nominations by shareholders, may actually be detrimental to
shareholder wealth,'' and that ``empowering shareholders is not
necessarily perceived as a good thing by most shareholders.'');
Stout (2007) (``Perhaps the most obvious [economic function of board
governance] is promoting more efficient and informed business
decisionmaking. It is difficult and expensive to arrange for
thousands of dispersed shareholders to express their often-differing
views on the best way to run the firm.''); see generally Stephen M.
Bainbridge, Response to Increasing Shareholder Power: Director
Primacy and Shareholder Disempowerment, 119 Harv. L. Rev. 1735
(2006) (discussing how concern for accountability may undermine
decision-making discretion and authority) (cited in the Proposing
Release, Section V.C.1.). But see Lucian Arye Bebchuk, The Case for
Increasing Shareholder Power, 118 Harv. L. Rev. 833, 883 (2005)
(``[M]ere recognition that back-seat driving might sometimes be
counter-productive is hardly sufficient to mandate general deference
to management. Such mandated deference would follow only if one
assumes that shareholders are so irrational or undisciplined that
they cannot be trusted to decide for themselves whether deference
would best serve their interests.'') (cited in the Proposing
Release, Section V.C.1.).
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    We considered these comments and appreciate commenters' concerns
regarding these costs. We believe it is important to note that these
costs are associated with the traditional State law right to nominate
and elect directors, and are not costs incurred for including
shareholder nominees for director in the company's proxy materials.
Further, the ownership threshold and holding period that we adopted in
response to commenters' concerns should limit the use of Rule 14a-11 to
only holders who demonstrate a long-term, significant commitment to the
company. To encourage constructive dialogue between a company and a
nominating shareholder or group regarding the director nominees to be
presented to shareholders for a vote, we revised the rule so that if a
company negotiates with the nominating shareholder or group that
otherwise would be eligible to have its nominees included in the
company's proxy materials after the nominating shareholder or group has
submitted its nomination on Schedule 14N, and the company agrees to
include the nominating shareholder's or group's nominees on the
company's proxy card as company nominees, those nominees will count
toward the 25% maximum set forth in the rule.\952\ We believe that the
cost described above may be offset by other factors as well. The
additional communication between a board and the company's shareholders
may lead to enhanced transparency into the board's decision-making
process, more effective monitoring of this process by shareholders,
and, ultimately, a better decision-making process by the board. The
cost also may be offset to the extent that shareholders understand that
the board's time and other resources are in scarce supply and will take
these considerations into account in deciding to nominate directors,
recognizing that the cost of a distracted board may not justify
pursuing their own specific concerns.
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    \952\ See new Rule 14a-11(d) (5). For a discussion of this
modification, see Section II.B.6.c. above.
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    Second, the new rules may lead some companies to re-examine their
current procedures for shareholders to submit their own director
nominees for consideration by either the company's board or nominating
committee, especially if the company is subject to, or thinks it likely
will be subject to, shareholder-nominated director candidates submitted
pursuant to Rule 14a-11. These companies may incur costs associated
with such a re-examination and any resulting adjustments to their
procedures.\953\ These costs may be limited, however, to the extent
that the new rules improve the overall efficiency of the director
nomination process and lead to improvements in the existing procedures
for director nominations.
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    \953\ See, e.g., letters from Biogen; GE.
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    Third, the new rules could, in some cases, result in lower quality
boards.\954\ The quality of a company's board may decrease if, as some
commenters predicted, unqualified individuals are elected to the
board.\955\ Commenters worried, in particular, that a shareholder
director nominee will be elected without undergoing the same extensive
vetting process or having to comply with the same independence or
director qualification standards applicable to other director
nominees.\956\ The presence of directors who lack the proper
qualifications may result in a lower quality board and represent a cost
to companies and shareholders. It is important to recognize that Rule
14a-11 provides for only the inclusion of a shareholder director
nominee in the company's proxy materials, not the election of that
nominee. Further, the new disclosure requirements contained in the
Proposal will provide shareholders with information for them to assess
whether a shareholder nominee possesses the necessary qualifications
and experience to serve as a director.\957\ Accordingly, as other
commenters have noted, an unqualified individual, even if nominated,
will still need to receive the support of a significant number of
shareholders in order to be elected to the board.\958\ Therefore, the
cost arising

from unqualified directors may be limited to the extent that
shareholders understand that experience and competence are important
director qualifications and cast their votes for the most-qualified
candidates. Moreover, as adopted, the rule will require a company to
include in its proxy materials no more than one shareholder director
nominee or a number of nominees that represent 25% of the company's
board, whichever is greater.\959\ We believe that this provision will
limit the effect of any potential decrease in the overall quality of a
board. Lastly, to the extent that there is a risk of unqualified
individuals being elected as directors, it is a risk that arises
because shareholders are given the right under state or foreign law to
determine who sits on the board of directors.
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    \954\ See letters from 3M; ABA; American Electric Power;
Atlantic Bingo; AT&T Avis Budget; Biogen; Boeing; BRT; Burlington
Northern; Callaway; Carlson; Chamber of Commerce/CCMC; CIGNA;
Columbine; Cummins; CSX; J. Dillon; Emerson Electric; Erickson;
ExxonMobil; FedEx; Headwaters; C. Holliday; IBM; Intelect; R. Clark
King; Lange; Louisiana Agencies; Metlife; NIRI; O3 Strategies; V.
Pelson; PepsiCo; Pfizer; Roppe; Rosen; Ryder; Sara Lee; Sidley
Austin; tw telecom; Wachtell; Wells Fargo; Weyerhaeuser; Yahoo. See
also Stephen M. Bainbridge, A Comment on the SEC Shareholder Access
Proposal (November 14, 2003) at 17, available at http://ssrn.com/
abstract=470121 (``The likely effects of electing a shareholder
representative therefore will not be better governance. It will be
an increase in affectional conflict . * * * It will be a reduction
in the trust-based relationships that causes horizontal monitoring
within the board to provide effective constraints on agency
costs.'') (cited in the Proposing Release, Section V.C.1.).
    \955\ See letters from AGL; Air Tite, Inc. (``Air Tite''); All
Cast; John C. Astle (``J. Astle''); Astrum Solar (``Astrum'');
Atlantic Bingo; Burlington Northern; Glen Burton (``G. Burton''); R.
Chicko; Columbine; Darden Restaurants; Erickson; Fluharty; Horizon;
Lange; Mama's; Massey Services; NIRI; O3 Strategies; P&G PepsiCo;
W. Steinbrink; Stringer; Theragenics; VCG; Wachtell; and Wells
Fargo.
    \956\ See letters from AGL; Astrum; Boeing; R. Burt; G. Burton;
S. Campbell; Carolina Mills; Columbine; W. Cornwell; Erickson;
Fenwick; FPL Group; Intelect; Little; McDonald's; MedFaxx; Norfolk
Southern; P&G, Rosen; UnitedHealth; VCG; Wells Fargo; Xerox; Yahoo.
    \957\ See Rules 14a-11, 14a-18 and 14n-1, and Schedule 14N.
    \958\ See letters from BCI; Bebchuk, et al.; CII; T. DiNapoli;
Florida State Board of Administration; Governance for Owners; A.
Krakovsky; P. Neuhauser; NJSIC; Relational; Shamrock; Social
Investment Forum.
    \959\ See Rule 14a-11(d)(1).
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    The quality of a board also may decrease if, as some commenters
warned, the increased likelihood of a contested election discourages
experienced and capable individuals from serving on boards, making it
more difficult for companies to recruit qualified directors or create a
board with the proper mix of experience, skills, and
characteristics.\960\ Some commenters noted that it is already
difficult to recruit qualified independent directors.\961\ Other
commenters, however, did not believe that Rule 14a-11 will discourage
experienced, capable directors from serving,\962\ with one commenter
stating that it encountered no difficulty in finding executives willing
to serve on a shareholder-nominated slate.\963\ To the extent that the
prospect of a contested election deters an otherwise qualified
individual from considering a board seat, this will represent a cost to
both the company and its shareholders. This cost may be mitigated,
however, by the ability of other individuals--those who would not have
been considered or nominated by the incumbent directors--to be
nominated and presented for a shareholder vote pursuant to Rule 14a-11
or a procedure in the company's governing documents established through
Rule 14a-8. The cost may be further mitigated to the extent that the
new rules lead to the election of individuals who will present a
greater diversity of views for the board's consideration, thereby
leading to a better decision-making process, and, ultimately, greater
shareholder value.\964\ Lastly, as we stated in the Proposing
Release,\965\ the possibility of qualified candidates being discouraged
from running for a board seat may be limited by shareholders'
understanding that board dynamics can be important, and that changing
them may not always be beneficial.
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    \960\ See letters from 3M; ABA; American Electric Power;
Atlantic Bingo; AT&T Avis Budget; Biogen; Boeing; BRT; Burlington
Northern; Callaway; Carlson; Chamber of Commerce/CCMC; CIGNA;
Columbine; Cummins; CSX; J. Dillon; Emerson Electric; Erickson;
ExxonMobil; FedEx; Headwaters; C. Holliday; IBM; Intelect; R. Clark
King; Lange; Louisiana Agencies; Metlife; NIRI; O3 Strategies; V.
Pelson; PepsiCo; Pfizer; Roppe; Rosen; Ryder; Sara Lee; Sidley
Austin; tw telecom; Wachtell; Wells Fargo; Weyerhaeuser; Yahoo.
    \961\ See, e.g., letters from Ameriprise; BRT; Chamber of
Commerce/CCMC.
    \962\ See letters from Florida State Board of Administration;
Pershing Square.
    \963\ See letter from Pershing Square.
    \964\ See letters from L. Dallas (citing Jerry Goodstein et al.,
The Effects of Board Size and Diversity on Strategic Change, 15
Strategic Mgmt. J. 241 (1994) and Lynne L. Dallas, The New
Managerialism and Diversity on Corporate Boards of Directors, 76
Tulane L. Rev. 1363 (2002)); LIUNA; RiskMetrics (noting that it
tracked over a four-year period the returns of a portfolio of
companies where activists gained board seats in 2005, found that the
portfolio outperformed the S&P 500 index even during the recent
market turmoil, and saw no indication that the presence of dissident
directors on boards had a detrimental impact on shareholder value);
Teamsters.
    \965\ See Proposing Release, Section V.C.1.
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    Fourth, potential disruptions in boardroom deliberations represent
another possible cost to shareholders and companies. If a shareholder
director nominee is elected and disruptions or polarization in
boardroom dynamics occur as a result, the disruptions may delay or
impair the board's decision-making process. Such boardroom disruption
may occur when one or more directors seek to promote an agenda that
conflicts with that of the rest of the board. We received significant
comment that the presence of shareholder-nominated directors could
disrupt the collegiality and efficiency of boards.\966\ We recognize
the view that for companies whose boards are already well-functioning,
such disruption could be counterproductive and could delay the board's
decision-making process and a delay or impairment in the decision-
making process could constitute an indirect economic cost to
shareholder value. For the reasons discussed above, however, we believe
that boards with directors who were not nominated by the incumbent
directors would, on balance, improve company performance and increase
shareholder value.\967\
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    \966\ See, e.g., letters from Association of Corporate Counsel;
BRT; Chamber of Commerce/CCMC; GE; IBM; McDonald's; O'Melveny &
Myers; P&G PepsiCo; Seven Law Firms; Society of Corporate
Secretaries (also presenting data that the average hedge fund
ownership is 7.15%, the number of S&P 500 companies with hedge fund
ownership at or above 5% is 273, and the number of S&P 500 companies
with hedge fund ownership at or above 10% is 104); Vinson & Elkins;
Wachtell; Xerox; Yahoo. See also Larcker, Ormazabal, and Taylor
(2010)(stating that ``the evidence suggests shareholders react
negatively to regulation of proxy access, and that the reaction is
decreasing in the number of large blockholders and increasing in the
number of small institutional investors,'' and that ``the market
perceives that shareholders of firms with many large blockholders
are harmed by proxy access and is consistent with critics' claims
that large blockholders will use the privileges afforded them by
proxy access regulation to manipulate the governance process to make
themselves better off at the expense of other shareholders.'').
    \967\ See Section IV.D.3. above.
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    In addition, it may be possible for an investor to submit director
nominees through the new rules with the intention of having the
nominees, if elected, advocate for board decisions that maximize the
investor's private gains but at the expense of other shareholders.\968\
In the case of Rule 14a-11, the cost may be limited to the extent that
the ownership threshold and holding requirement allow the use of the
rule by only holders who demonstrated a significant, long-term
commitment to the company. This cost may be limited to the extent that
a director nominee with narrow interests must still gain the support of
a significant number of shareholders to be elected.\969\ The disclosure
requirements that we are adopting also may alert shareholders to the
narrow interests of the nominating shareholder or group in advance of
the election so that they can cast their votes in favor of the
candidate who will best serve the interests of all shareholders.\970\
The cost may be further limited to the extent that a shareholder
director nominee, once elected to the board, will be subject to the
same fiduciary duties applicable to all other directors.\971\ The
possibility of a director seeking to promote private gain at the
expense of shareholders generally--and the related costs to the board's
overall performance and dynamics--should be limited to the extent that
such a director recognizes these duties and strives to fulfill these
legal obligations. The cost also may be limited to the extent that
shareholders recognize the potential

harm from misuse of the board's decision-making process and therefore
do not vote for the nominee if they view the cost as sufficiently high.
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    \968\ See, e.g., letters from BRT; Eaton; IBM; McDonald's; Seven
Law Firms; Society of Corporate Secretaries; UnitedHealth. See also
Stout (2007) at 794 (``[B]y making it easier for large shareholders
in public firms to threaten directors, a more effective shareholder
franchise might increase the risk of intershareholder `rent-seeking'
in public companies.'').
    \969\ See letters from BCIA; Bebchuk, et al.; CII; T. DiNapoli;
Florida State Board of Administration; Governance for Owners; A.
Krakovsky; P. Neuhauser; NJSIC; Relational; Shamrock; Social
Investment Forum.
    \970\ See Rule 14a-11, Rule 14a-18, Rule 14n-1, and Schedule
14N.
    \971\ See letter from CII. See also Veasey & DiGuglielmo, above.
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    Fifth, to the extent that the need to comply with the new rules
makes the U.S. public equity markets less attractive,\972\ discourages
private companies from conducting public offerings in the U.S.,\973\ or
encourages U.S. reporting companies to become non-reporting companies,
this would be a cost of the new rules because investors' investment
opportunities could be limited. This cost may be mitigated to the
extent that the new rules help improve board accountability and
corporate governance, generate stronger company performance, and
increase shareholder value. Investors may be more willing to invest or
continue to invest in companies in which they have the ability to
present their own shareholder director nominees in the company's proxy
materials if they are displeased with the company's performance. We
also note that shareholders in many foreign countries already have the
ability to include their director nominees in the company's proxy
materials.\974\ We therefore believe that the new rules may bring the
U.S. capital markets closer in line with international practice by
giving shareholders of U.S. companies an ability that may already be
enjoyed by shareholders of many non-U.S. companies.
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    \972\ See letter from BRT.
    \973\ See letters from Altman (stating that its survey of 36
public companies showed that 80.85% of respondents believe the new
rules ``will deter some U.S. private companies from going public and
some foreign companies from listing on U.S. exchanges.''); BRT;
Richard Tullo (``R. Tullo'').
    \974\ See letters from ACSI; CalPERS; ICGN; LUCRF; Pax World;
RiskMetrics; Social Investment Forum; SWIB.
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    Lastly, with respect to investment companies, a number of
commenters expressed concern that the election of a shareholder
director nominee may, in some circumstances, increase costs and burdens
(e.g., the shareholder-nominated director would have to leave during
discussions that pertain to the other investment companies in the
complex, board materials would have to be customized for the director,
and the fund complex would face challenges in preserving the status of
privileged information) and potentially decrease the efficiency of a
unitary or cluster board utilized by a fund complex.\975\ We recognize