The other place where the Act uses listing standards is with respect to staggered boards.  Section 974 would add a new subsection to Section 14 of the Exchange Act to require shareholders to approve staggered board provisions.  The provision relies on listing standards, thereby limiting its reach to public companies traded on an exchange.  Interestingly, the provision does not include a mandatory right to cure but presumably allows for immediate delisting of non-conforming companies.

The provision provides that a company may not have a staggered board unless the company “has obtained the approval . . . of the shareholders."  Specifically, shareholders must approve the provision by the percentage needed to approve amendments to the articles or to adopt a staggered board bylaw. 

The provision looks like it will have little effect.  Staggered board provisions are typically in the articles (although a study by Bebchuk published in 2005 showed that about 10% of the provisions were bylaws).   Those in the articles have already been approved by shareholders.  This does not mean that public shareholders were given an opportunity to weigh in on the provision.  In some cases, approval likely occurred before the company went public. 

The provision leaves open the treatment of staggered board provisions that are approved as part of the reincorporation process.  Reincorporation is usually done as a merger, with the approval of the merger also approving the articles of incorporation of the surviving company.  To the extent that the surviving company has a staggered board, it was “approved” as part of the merger but not approved separately by shareholders.  As a result, companies that adopted staggered board provisions as part of the reincorporation process may be obligated to seek shareholder approval. 

Once the provision has been inserted in the articles, shareholders cannot initiate a change.  State law does not allow shareholders to initiate amendments to the articles of incorporation.  A far better approach, therefore, would be to require companies to resubmit staggered board provisions to shareholders at a regular (three year/five year) interval.   

In the meantime, the bill and a summary are posted at the DU Corporate Governance web site.

SEC. 974. SHAREHOLDER VOTE ON STAGGERED TERMS OF  DIRECTORS.

Section 14 of the Securities Exchange Act of 1934 (15 U.S.C. 78n), as amended by this subtitle, is amended by adding at the end the following:

(k) SHAREHOLDER VOTE ON STAGGERED BOARD OF DIRECTORS.—

(1) LISTING STANDARDS.—Not later than 1 year after the date of enactment of this subsection, the Commission shall, by rule, direct the national securities exchanges and the national securities associations to prohibit the listing of any security of an issuer that is not in compliance with any of the requirements of this subsection.

(2) SHAREHOLDER VOTE REQUIRED.—

(A) IN GENERAL.—No issuer may have a board of directors with staggered terms of service, unless the issuer has obtained the approval or ratification of the shareholders of the issuer, in accordance with subparagraph (B), before the adoption of such board of directors with staggered terms of service.

(B) SHAREHOLDER VOTE.—The percentage of shareholders required to approve or ratify the board of directors with staggered terms of service of an issuer shall be the percentage required by the issuer for an amendment to—

(i) the certificate of incorporation of the issuer, in the case of a board of directors with staggered terms of service adopted pursuant to a certificate of incorporation of the issuer; or

(ii) the bylaws of the issuer, in the case of a board of directors with staggered terms of service adopted pursuant to the bylaws of the issuer.

(C) TRANSITION PERIOD.—In the case of any issuer having a board of directors with

staggered terms of service that, on the effective date of the rule promulgated by the Commission under paragraph (1), was not approved or ratified by a vote of the shareholders of the issuer, the issuer shall not be deemed to be in violation of this subsection if such issuer—

(i) seeks the approval of the shareholders of the issuer at the first annual meeting immediately following the date on which the Commission promulgates rules under paragraph (1); or (ii) in the event that the annual meeting described in clause (i) is scheduled be held fewer than 120 days after the effective date of the rules promulgated by the Commission under subparagraph (1), seeks the approval of the shareholders of the issuer at first annual meeting immediately following the end of such 120-day period.

(D) DEFINITION.—In this paragraph, the term ‘board of directors with staggered terms of service’ means a board of directors of an issuer that conducts an annual election for membership on such board of directors in which fewer than all members are elected to such board of directors.