At its November 28, 2007 open meeting, the Securities and Exchange Commission (the “SEC”) voted three to one to adopt a proposed amendment to Rule 14a-8(i)(8) under the Securities Exchange Act of 1934 to confirm its long-standing interpretation that a company may exclude from its proxy materials shareholder proposals relating to an election for membership on the company’s board of directors. The SEC adopted the amendment substantially as it had been proposed.
Rule 14a-8(i)(8) sets forth one of several substantive bases upon which a company may rely to exclude a shareholder proposal from its proxy materials. Prior to the amendment, Rule 14a-8(i)(8) provided that a company need not include a proposal in its proxy materials “[i]f the proposal relates to an election for membership on the company’s board of directors or analogous governing body.”
In its application of Rule 14a-8(i)(8), the SEC staff historically permitted companies to exclude any shareholder proposal that might result in a contested election at the immediate or any future shareholder meeting, reasoning that Rule 14a-8 is not the proper means for conducting director election campaigns. Rather, as the staff noted, other proxy rules, which have been carefully crafted to ensure that investors receive adequate disclosure and an opportunity to make informed voting decisions in contested elections, are applicable.
The SEC’s long-standing interpretation of Rule 14a-8(i)(8), however, was called into question in American Federation of State, County & Municipal Employees, Employees Pension Plan v. American International Group, Inc., which involved a shareholder proposal in the form of a bylaw amendment to permit large, long-term shareholders access to AIG’s proxy materials in subsequent years for the purpose of nominating director candidates. AIG excluded the proposal under 14a-8(i)(8) on the basis that it related to an election of the board of directors. The Second Circuit held that the proposal was not properly excludable under Rule 14a-8(i)(8) because it did not relate to a specific election, but to procedures for elections generally. The Second Circuit held that the SEC’s current interpretation was inconsistent with the earlier adoption of Rule 14a-8(i)(8) and that the SEC must formally adopt, via the notice and comment procedures, its current interpretation if it disagreed with the Court.
The amendment adopted by the SEC responds to the uncertainty and confusion with respect to the appropriate application of Rule 14a-8(i)(8) following the Second Circuit’s decision in AIG and clarifies the SEC’s position that shareholder proposals on proxy statement access for board nominations are excludable pursuant to Rule 14a-8(i)(8) if the proposal (1) would result in an immediate election contest (e.g., by making or opposing a director nomination for a particular meeting) or (2) would set up a process for shareholders to conduct an election contest in the future by requiring the company to include shareholders’ director nominees in the company’s proxy materials for subsequent meetings.
As amended, Rule 14a-8(i)(8) will now provide that a company may exclude a shareholder proposal
[i]f the proposal relates to a nomination or an election for membership on the company’s board of directors or analogous governing body or a procedure for such nomination or election.
The battle over shareholder access to company proxy materials may not be over: SEC Chairman Cox noted at the November 28 meeting that the adoption of the amendment was not meant to circumvent or prevent further discussion, analysis or SEC action in the area of shareholder access to company proxy materials.