I n an effort to enhance the transparency of the The new disclosure - - PDF document

Corporate Finance Alert

December 9, 2003

SEC Adopts New Disclosure Requirements Regarding Nominating Committees and Communications Between Shareholders and Boards of Directors

By Peter H. Ehrenberg, Esq. and Mathew B. Hoffman, Esq.

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n an effort to enhance the transparency of the

• perations of boards of directors of public

companies, the SEC has adopted new disclosure requirements regarding the operation of board nominating committees and the means by which shareholders may communicate with directors. These disclosure requirements become effective January 1, 2004. Issuers must comply with these disclosure requirements in proxy or information statements relating to the election of directors that are first sent to shareholders on or after January 1, 2004, and, with respect to certain related disclosures, in Forms 10-K and 10-Q for the first reporting period ending after January 1, 2004.

Nominating Committee Disclosures

The SEC’s proxy rules have, for years, required issuers to disclose whether they have standing nominating committees. The new disclosure rules require issuers that do not have a standing nominating committee to include in their proxy statements a statement setting forth an explanation as to why their boards believe it is appropriate not to have a nominating committee and to identify each director who participates in the consideration

• f director nominees.

The new disclosure requirements also expand current proxy statement disclosures to include the following information regarding an issuer’s director nomination process:

·

A statement as to whether or not the nominating committee of the issuer has a

• charter. If the nominating committee has a

charter, disclosure as to whether or not a current copy of the charter is available on the issuer’s website and, if available, the issuer’s website address. If the nominating committee has a charter but a current copy is not available on the issuer’s website, the charter must be included as an appendix to the issuer’s proxy statement at least once every three years. If a current copy of the charter is not available on the issuer’s website and is not included as an appendix to the issuer’s proxy statement, the issuer must disclose the prior fiscal year in which the charter was attached as an appendix.

·

If the issuer’s securities are listed on a national securities exchange or on an automated inter-dealer quotation system (such as NASDAQ) that has independence requirements for nominating committee members, disclosure as to whether members

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the nominating committee are independent, as defined in the listing standards applicable to the issuer.

·

If the issuer’s securities are not so listed, disclosure as to whether the members of the nominating committee are independent, based on a definition of independence of a national securities exchange or national securities association, and disclosure of the definition of independence used by the issuer.

·

A statement as to whether or not the nominating committee has a policy with regard to the consideration of any director candidates recommended by shareholders. If the nominating committee has such a policy, the proxy statement disclosure must include a description of the material elements of such policy and a description of the procedures to be followed by shareholders in submitting such recommendations. If the nominating committee does not have such a policy, an explanation as to why the issuer does not have such a policy.

·

A description of any specific, minimum qualifications that the nominating committee believes must be met by a nominating committee-recommended nominee, and a description of any specific qualities or skills that the nominating committee believes are necessary for the issuer’s directors to possess.

·

A description of the nominating committee’s process for identifying and evaluating nominees for director, and the differences, if any, in the manner in which the nominating committee evaluates nominees based on whether the nominees are recommended by shareholders of the issuer.

·

With regard to nominees approved by the nominating committee for inclusion on the issuer’s proxy card (other than nominees who are executive officers of the issuer or incumbent directors), a statement as to which

• ne or more of the following categories of

persons or entities recommended that nominee: shareholder, non-management director, chief executive officer, other executive officer, third-party search firm, or

• ther specified source.

·

If the issuer pays a fee to any third party to identify or evaluate potential director nominees, disclosure of the role performed by any such third party.

·

Disclosure of (i) director recommendations made by a shareholder or group of shareholders that, individually or in the aggregate, beneficially own, as of the date of such recommendation and for the preceding twelve month period, greater than 5% of the issuer’s voting common stock; (ii) the identity

• f the shareholder or shareholder group that

made such a recommendation; and (iii) whether or not the nominating committee chose to nominate the director candidate. Any material changes to an issuer’s previously disclosed procedures for shareholders to recommend director nominees to the board are required to be disclosed in an issuer’s Form 10-Q or, if any material change is implemented during the last quarter of an issuer’s fiscal year, in an issuer’s Form 10-K. The initial adoption by an issuer of such procedures will constitute a material change and require disclosure in an issuer’s Form 10-Q or Form 10-K, as applicable.

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Disclosure Regarding Shareholder Communications

The SEC has decided to require issuers to include in their proxy statements a statement as to whether or not their boards have a process for shareholders to follow in sending communications to the board. If the issuer has such a process, the proxy statement must disclose the manner in which shareholders can send communications to the board and, if applicable, to specified directors and, if all shareholder communications are not forwarded to the board, a description of the issuer’s process for determining which communications will be forwarded to the board. If the issuer does not have such a process, the proxy statement must include an explanation as to why the board believes it is appropriate not to have such a process. The issuer is also required to disclose in its proxy statement the issuer’s policy, if any, with regard to board members’ attendance at annual meetings and the number of board members who attended the prior year’s annual meeting. In lieu of describing in the proxy statement the means by which shareholders may communicate with the board, the manner in which the issuer determines those communications that will be forwarded to the board, the issuer’s policy regarding attendance at annual meetings and the number of directors who attended the prior year’s annual meeting, the issuer may disclose such items on its website, provided that the issuer discloses in its proxy statement the website address where such information may be found. The SEC specifically acknowledged that the current disclosure requirements with regard to shareholder proposals submitted pursuant to Rule 14a-8 of the Exchange Act are adequate. Accordingly, shareholder proposals submitted pursuant to Rule 14a-8 of the Exchange Act are expressly excluded from the new disclosure requirements adopted by the SEC. For more information about the new SEC disclosure rules regarding nominating committees and shareholder communications or other recent securities law changes

• r corporate governance reform measures, please

contact Peter H. Ehrenberg, Member of the Firm and Chairman of Lowenstein Sandler’s Corporate Department and M&A and Corporate Finance Practice Group, or Mathew B. Hoffman, associate and a member of the M&A and Corporate Finance Practice Group, at 973.597.2500.

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