The Securities and Exchange Commission today voted to amend Exchange Act Rule 14a-8 to clarify that public companies may exclude from their proxy materials shareholder proposals to adopt bylaws giving shareholders the right to nominate director candidates for inclusion in management’s proxy. The contentious 3-1 vote followed party lines, with Chairman Christopher Cox joining Republican members Paul Atkins and Kathleen Casey in voting for the 14a-8 amendment as proposed in July. Annette Nazareth, the sole remaining Democrat on the Commission (since resignation of Roel Campos earlier this year), voted against the amendment and delivered a long statement expressing disappointment at what she termed a diminution in fundamental state-law rights.
Although Chairman Cox expressed commitment to considering development of a new rule affording greater shareholder access for director nominations in the near future, perhaps as early as next year, the 14a-8 amendment does not contain a “sunset” provision.
The SEC also adopted today, by unanimous vote, final amendments to SEC proxy rules intended to facilitate development and operation of electronic shareholder forums.
Final adopting releases are not yet available. The amendments will be effective 30 days after publication in the Federal Register.
Clarifying Uncertainty on Shareholder-Access Proposals
In 2006, a Second Circuit Court of Appeals panel held that AIG International Group could not omit a binding shareholder-access bylaw proposal submitted by the AFSCME pension fund under the Rule 14a-8(i)(8) exclusion for matters that “relate to an election,” notwithstanding the SEC staff’s long-standing interpretation that such exclusion covers both proposals that would result in a contest in the immediate election and proposals that would set up a process for contested elections in the future. AFSCME v AIG, 462 F.3d 121 (2d Cir. 2006). In light of AFSCME v AIG, the SEC staff indicated in January 2007 that it would not issue no-action letters permitting exclusion of shareholder-access proposals under Rule 14a-8(i)(8), even those originating outside the Second Circuit. Hewlett-Packard Company (January 22, 2007). RiskMetrics-ISS reported four shareholder-access proposals submitted under Rule 14a-8 in the 2007 proxy season, of which three went to shareholder vote, with one passing and two receiving shareholder support in excess of 40%.
In part as a response to AFSCME v AIG, the SEC made two contradictory proposals with respect to Rule 14a-8(i)(8) in July 2007. The first proposal explained the SEC staff’s interpretation and clarified that the 14a-8(i)(8) exclusion covers both proposals resulting in immediate election contests and those that would set up a process for contested elections in the future, in effect overturning AFSCME v. AIG. SEC Release No. 34-56161 (July 27, 2007). The second would have instead amended Rule 14a-8(i)(8) to permit shareholders who hold 5% or more of a company’s shares for a year to propose a binding shareholder-access bylaw in the company’s proxy if certain additional disclosure requirements were met. SEC Release No. 34-56160 (July 27, 2007).
The SEC received over 34,000 comments on the proposals, more than on any other proposals in the history of the SEC. Management commentary generally favored the proposal reversing AFSCME v AIG and clarifying that shareholder-access proposals could be excluded. Comments from institutional investors and shareholder activists generally criticized the 5% threshold and other limitations of the second proposal and encouraged the SEC to leave AFSCME v AIG in place until a broader access rule could be devised.
Today, the SEC adopted the proposal reversing AFSCME v AIG and clarifying that shareholder-access proposals could be excluded under the 14a-8(i)(8) exception in the form proposed in July. In so doing, Chairman Cox indicated that the SEC had a duty to clarify the meaning of its rules and not intentionally leave legal ambiguity in place. He noted that leaving AFSCME v AIG in place could lead to litigation to resolve the law in other federal circuits and to shareholder-access proposals that would not be subject to the necessary disclosure and antifraud protections.
The SEC’s action today came notwithstanding earlier warnings by Congressman Barney Frank (Chairman of the House Financial Services Committee) and Senator Chris Dodd (Chairman of the Senate Committee on Banking, Housing and Urban Affairs) that it would be a mistake for the SEC to act on the contradictory proposals without a full contingent of Commissioners.
Electronic Shareholder Forums
The SEC finalized amendments to the proxy rules substantially in the form proposed as part of the second shareholder-access release in July. The amendments clarify that shareholders and issuers (and third parties representing them) may participate in electronic forums, such as internet investor chat rooms, without being subject to rules applicable to proxy “solicitations” so long as they are not actually seeking a proxy and the participation occurs more than 60 days before an annual or special meeting (or more than two days following an announcement of such a meeting less than 60 days before it occurs). The amendments also clarify that a person sponsoring or operating such an electronic forum is generally not liable under federal antifraud prohibitions for misstatements of others on the forum.
The SEC did not tie adoption of the electronic forum amendments to limitations on non-binding or precatory proposals as had been discussed in the July proposing release.
2008 and Beyond
With respect to shareholder-access proposals, Commissioner Cox stated that “today is not the end.” Although he indicated that the SEC could devise and adopt a new rule providing broader shareholder access to issuer proxy materials for director nominations as early as next year, no specific timetable was tied to the SEC’s action today.
The environment for election of public company directors is evolving rapidly as the majority-election movement continues to grow, new e-proxy rules are implemented and broker discretionary voting of street-name shares hangs in the balance. For the 2008 proxy season, the issue of shareholder-access proposals under Rule 14a-8 appears to have been clarified. Where shareholder-access proposals go beyond 2008, however, is far from clear.