As discussed here, here and here, the Second Circuit recently rejected the SECâ€™s interpretation of Rule 14a-8(i)(8) which allows a company to exclude a shareholder proposal from its proxy materials â€œ[i]f the proposal relates to an election for membership on the companyâ€™s board of directors . . . â€? (see AFSCME v. AIG, 2006 WL 2557941). Since 1990, the SEC has interpreted this rule to allow the exclusion of any shareholder proposal that would result in a contested election, including a proposal â€œto require a company to include shareholder-nominated candidates in the companyâ€™s proxy materials.â€? (See here for the AFSCME proposal). The court found, however, that such a proposal would not have been excludable under the SECâ€™s interpretation of the Rule 14a-8(i)(8) from 1976 (the year the Rule was adopted) to 1990. And largely because the SEC â€œhas not provided, nor to our knowledge has it or the Division ever provided, reasons for its changed position regarding the excludability of proxy access bylaw proposals,â€? the court determined the pre-1990 interpretation prevails. As articulated by the court, this interpretation â€œclearly reflects the view that the election exclusion is limited to shareholder proposals used to oppose solicitations dealing with an identified board seat in an upcoming election and rejects the somewhat broader interpretation that the election exclusion applies to shareholder proposals that would institute procedures making such election contests more likely.â€?
As noted here, the SEC responded almost immediately in a press release stating it will formulate and recommend an amendment to Rule 14a-8 addressing issues raised by the decision. The proposed amendment is scheduled to be considered at an open meeting on October 18, 2006 (obviously they intend to get this sorted out prior to the next proxy season). Itâ€™s not clear how the SEC will respond. The SEC’s own efforts to allow shareholder nominations was highly controversial and died in 2003 with the resignation of Chairman Donaldson. I do not believe Chairman Cox has publicly taken a position on the issue. And the courtâ€™s opinion seems to afford the SEC the option of reaffirming its 1990 interpretation. Specifically the court notes that â€œthe SEC has substantial discretion to adopt new interpretations of its own regulations in light of, for example, changes in the capital markets or even simply because of a shift in the Commission’s regulatory approachâ€? so long as it explains â€œits departure from prior norms.â€? Hence, it seems to me that the SEC could simply put out a release explaining its departure from its pre-1990 position. It should be interesting.
Regardless of what the SEC does, another intriguing angle here is state involvement. If the SEC were to simply let the decision stand, a state could likely nonetheless effectively block these types of shareholder proposed bylaws by amending state corporate. This is because under Rule 14a-8(i)(2), a company can exclude a proposal that is contrary to state law. Although such a move seems unlikely in the current political climate.