TheCorporateCounsel.net

September 8, 2006

Monday’s Conference: A Few Last Points

If you are attending Monday’s Executive Compensation Disclosure Conference by webcast, remember that you need to use your Conference ID/password to access the video webcast. Your ID/password for TheCorporateCounsel.net or CompensationStandards.com will not work to access the video webcast. Here are other troubleshooting tips if you need them.

To gain access, simply go to the home page of one of the sites and follow the prominent links that will be at the top of the page. If you’re coming to DC, see ya there! “Walk-ups” will be accepted in DC, but I would call our HQ today to let us know you are coming and to find out the amount you should bring (our HQ’s number is 925.685.5111 or email info@thecorporatecounsel.net).

Binding Proposals: Second Circuit Overturns SEC’s Interpretation of (i)(8) Exclusion

On Tuesday, the Second Circuit of the US Court of Appeals ruled in favor of AFSCME in its lawsuit against AIG over the SEC Staff’s interpretation of the Rule 14a-8(i)(8) exclusion in the context of whether the shareholder proposal rule bars proxy access proposals. This decision reverses the district court, which decided in favor of AIG last year. Now, AIG is considering whether to ask for en banc review or appeal the decision to the US Supreme Court. We have posted a copy of the court opinion in our “Majority Vote Movement” Practice Area.

For the past two proxy seasons, AFSCME has submitted binding shareholder proposals to a handful of companies seeking to amend their bylaws to add a provision establishing procedures by which shareholders could nominate directors under certain circumstances (including that the shareholder or group of shareholders owns 3% or more of the company’s stock for at least one year). The SEC Staff permitted the exclusion of these proposals under (i)(8) because the proposals “related to an election.” AFSCME sued AIG – one of the companies that excluded the proposal in 2005 – in an attempt to force the company to include the binding proposal.

The Second Circuit decision states that it takes “no side in the policy debate regarding shareholder access to the corporate ballot.” Rather, the Court based its decision on the view that the current SEC interpretation of (i)(8) is a change from how the SEC Staff formerly interpreted the exclusion basis for a period of 15 years – from 1976 to 1990 – thereby creating an “ambiguous regulation.” In 1976, the Commission created the (i)(8) exclusion when it codified the Staff’s longstanding policy to exclude proposals that related to the election of directors so that proponents could not use the shareholder proposal process to effectuate a proxy contest.

Starting in 1990, the Staff began to interpret the (i)(8) basis more broadly to allow more companies to exclude proposals, but didn’t provide a rationale for this shift in position. However, the Staff very rarely provides the reasoning for a particular no-action response, because each letter is analyzed under its own unique circumstances. In a sense, the Court appears to take issue with the way the Staff provides no-action responses when it states that the original 1976 Commission interpretation should control (as interpreted by the Court), unless the SEC can offer “sufficient reasons for its changed interpretation.” The last paragraph on page 13 of the opinion drives the Court’s point home.

I’m not sure I agree with the Court’s logic here because forcing the Staff to provide a rationale for each no-action response would require the Staff to devote significant more resources to processing the hundreds of letters it reviews during the proxy season – and even then, what can appear to be very similar letters can get opposite results, because the Staff really does look closely at all the language in the proposal and supporting statement as part of its analysis.

The upshot may be that the SEC will reconsider whether it’s worth the hassle of going through the burdensome no-action letter process if it’s not allowed to change an interpretation over time. As evident from the last round of Rule 14a-8 rulemaking in 1998, the Staff would love nothing more than eliminating its role as referee in these disputes. But in that contentious rulemaking, one of the few things that everyone agreed upon was that it was critical that the Staff continue to serve as zebras.

Maybe a middle road is the Staff issuing more frequent Staff Legal Bulletins (recently, the Staff has issued one after each proxy season), such as issuing one whenever it decides to change a position under one of the shareholder proposal rule’s exclusion bases. If these SLBs included the Staff’s reasoning, that would appear to satisfy the Second Circuit – and it would help proponents and companies understand the latest Staff thinking.

What Does the AFSCME Decision Mean? Shareholder Access is Back!

The Second Circuit’s reversal essentially revives the SEC’s “shareholder access” reform – which was proposed by the SEC in 2003, but abandoned in the face of significant opposition – as it effectively allows for shareholder access until (and if) the SEC amends the shareholder proposal rule as noted below. It isn’t so much the bylaw element that is at issue here – rather, the decision questions the validity of the Staff’s view that 14a-8(i)(8) permits the exclusion of proposals that create election procedures that would have the effect of giving shareholders access to company proxy materials.

As a result of this decision, we should expect to see a huge increase in the number of binding “shareholder access” proposals this proxy season. If the decision stands “as is,” it would make it significantly easier for shareholders to add their own nominees to ballots, since shareholders could submit proposals under Rule 14a-8 that would allow them to make nominations to the board in future years (if the proposals were approved by shareholders and if the nominating shareholders were eligible to nominate candidates under the criteria set forth in the bylaw amendment).

The SEC’s Response: Amend Rule 14a-8

Just as I wrapped up drafting my blog yesterday morning, the SEC posted this press release noting that “that the Division of Corporation Finance will recommend an amendment to Rule 14a-8 under the Securities Exchange Act of 1934 concerning director nominations by shareholders. The staff proposal, still to be developed, will address issues raised by a decision of the U.S. Court of Appeals for the Second Circuit on Tuesday, which disagreed with the Commission staff’s longstanding interpretation of Rule 14a-8.

The Commission has calendared the recommendation for consideration by the Commission at an open meeting to be held on Oct. 18, 2006.”

Given the debate that took place inside the SEC when it was considering shareholder access the first time around, I would expect that there may still be some fiery exchanges within the SEC on this controversial topic – and remember that Chairman Cox and Commissioner Casey will be considering these issues for the first time…