Proxy Access and Director Qualification Requirements

by Keith Bishop for California Corporate & Securities Law , August 30th, 2010.

Last week, the Securities and Exchange Commission adopted its final changes to the federal proxy rules.  These new rules will require public companies, under specified circumstances, to include in their proxy materials information about, and the ability to vote for, a shareholder’s (or shareholder group’s) nominee(s) for director.  In adopting these rule changes, the SEC expressly declined to allow for the exclusion of shareholder nominees who do not meet a corporation’s director qualification requirements.

The California General Corporation Law does not specify any qualifications for election and service as a director.However, Corporations Code Section 212(b)(4) does authorize a corporation to include in its bylaws a provision (to the extent not in conflict with law or the articles) specifying the qualifications of directors.  For example, a bylaw could require that a director be a shareholder.  There may also be regulatory or other reasons for imposing particular qualifications.

What happens when a shareholder nominates someone who doesn’t meet the qualification requirements of the bylaws?  The SEC’s rule changes will require that the nominee be included in the corporation’s proxy materials and in its proxy card.  Thus, proxy holders will be obligated to vote in accordance with those instructions.  However, a proxy card is not a vote and voting occurs at the meeting itself.  The SEC seems to have recognized this principle in the adopting release (“We note that state law will control what happens if a candidate is not nominated at the meeting because the person supporting the candidate does not attend the meeting or make other arrangements.”  The SEC’s adopting release also encourages disclosure in the proxy statement if a corporation’s charter documents would preclude the corporation from seating a director who fails to meet specified qualifications. (continue reading… )

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