Reacting To Shareholder Proxy Access Proposals

This year, as a result of recent amendments to SEC rules, shareholder proponents can require companies for the first time to allow shareholders to vote on the company's proxy card for proposals to amend the bylaws to facilitate contested elections for directors. If approved, these proposals ("proxy access" proposals) would require a company in the future to permit voting on the company's proxy card for persons that shareholders nominate for election as directors, thus enabling shareholders to mount contested elections at minimal cost.

The deadline for requesting inclusion of proposals in company proxy materials for the spring meeting season approaches in November. To assist companies in considering possible responses to these proposals, this paper will discuss:

The historically varying and current terms of the "election exclusion" in Rule 14a-8(i)(8) The likelihood of receiving a proxy access proposal Possible procedural grounds for excluding a proxy access proposal from the company's proxy statement A possible state corporation law basis for excluding a proxy access proposal The Twists and Turns of Rule 14a-8(i)(8)

If a shareholder of a public corporation submits a proposal for shareholder action at the annual meeting, and meets certain eligibility and procedural requirements, the corporation is required to include the proposal in its proxy statement and identify the proposal in its form of proxy, unless the proposal may be excluded under one of 13 grounds enumerated in Rule 14a-8 (Rule 14a-8(i)(1)-(13)). From 1976 to 2008, one of these grounds, Rule 14a-8(i)(8), provided that a corporation may exclude a shareholder proposal "[i]f the proposal relates to an election for membership on the company's board of directors or analogous governing body."

AFSCME v. AIG

In 2005, the AFSCME Employees Pension Plan submitted a proposal to American International Group, Inc. for action by its shareholders to amend the bylaws to require the company to include in its proxy materials and allow shareholders to vote on the company's proxy card for, persons nominated for election as directors by qualifying shareholders. AIG sought a no-action letter from the SEC permitting exclusion of the proposed bylaw amendment from the company's proxy materials on the grounds that it related to the election of directors. The SEC agreed and issued the requested no-action letter, which was consistent with the SEC's customary position on the excludability of proxy access proposals under Rule 14a-8(i)(8). In response, AFSCME brought suit in federal court seeking an order to compel AIG to include the proposal, arguing that the Rule should be interpreted to allow the exclusion only of proposals directly affecting an upcoming election, and not generally applicable procedural proposals. After the federal district court rejected the suit, AFSCME appealed. The Second Circuit held, in AFSCME v. AIG, 462 F.3d 121 (2d Cir. 2006), that the election exclusion in Rule 14a-8(i)(8) as it was then worded ("relates to an election") applied only to permit exclusion of shareholder proposals that related to a particular election of directors, and did not permit exclusion of proposals like AFSCME's that would establish a procedural rule governing elections generally.

January 10, 2008 Amendment to 14a-8(i)(8)

In response to the AFSCME v. AIG decision, the SEC adopted an amendment to Rule 14a-8(i)(8) having the effect of overruling that decision. Under the amended Rule, effective January 10, 2008, the "election exclusion" was reworded so as to permit exclusion of a proposal "relating to" a nomination or an election of a director, "or a procedure for such nomination or election." Thus, under the amended Rule, a proposal to change the company's constituent documents to require inclusion of shareholder director nominees in the company's proxy materials would be excludable.

New Amendment to 14a-8(i)(8) to Become Effective November 15, 2010

In 2010, as part of the SEC's adoption of rules, including new Rule 14a-11, requiring proxy access for public corporations, the SEC adopted amendments to Rule 14a-8(i)(8). Under the amended rule, stated to become effective November 15, 2010, the "election exclusion" was reworded so that only proposals meeting any of five specific criteria would be excludable. Exclusion is permitted if the proposal: would disqualify a nominee who is standing for election; would remove a director from office before his or her term expired; questions the competence, business judgment or character of one or more nominees or directors; seeks to include a specific individual in the company's proxy materials for election to the board of directors; or otherwise could affect the outcome of the upcoming election of directors.

This amendment reversed the 2008 amendment and in effect reinstated the position adopted by the court in AFSCME v. AIG. Under the amended Rule, a company could not exclude a proposal to change the company's constituent documents to require inclusion of shareholder director nominees in the company's proxy materials.

Stay and Release of Stay of the November 15, 2010 Amendment

The amendment did not become effective November 15, 2010. On October 4, 2010, the SEC stayed effectiveness of the amendment to Rule 14a-8(i)(8) until resolution of the petition for review of Rule 14a-11 in Business Roundtable et al. v. Securities Exchange Commission (D.C. Cir., filed Sept. 20, 2010). On July 22, 2011, the United States Court of Appeals for the District of Columbia Circuit issued an order vacating Rule 14a-11, and on September 14, 2011, the court issued its mandate concluding the litigation. The stay of the amendment to Rule 14a-8(i)(8) thus expired in accordance with its terms. Subsequently, the SEC issued a release indicating that the effective date of the amendment to Rule 14a-8(i)(8) would be September 20, 2011. On that date, the amendment became effective, narrowing the election exclusion so as to no longer permit exclusion of proxy access proposals.

Will There be Proxy Access Proposals for the 2012 Meeting Season?

Proposal Deadline

For most companies, the deadline under Rule 14a-8 for shareholders to request the inclusion of proposals in the company's proxy materials for the 2012 meeting will range from November 2011 to January 2012. The Rule requires that a shareholder proposal be submitted not less than 120 days prior to the anniversary of the mailing of proxy materials for the previous year's annual meeting. With the mailing typically occurring around 30 days prior to the meeting, for a meeting scheduled in mid-April 2012, the proposal deadline under the Rule is mid-November 2011.

There is thus sufficient time between the effectiveness of the 14a-8(i)(8) amendments on September 20, 2011 and the range of deadlines for proposals for the 2012 meeting season to permit shareholders to develop and submit proxy access proposals in a timely manner.

Shareholder Eligibility

Many activist shareholders, such as John and Ray Chevedden and William and Kenneth Steiner, as well as a variety of union and state pension funds, have acquired...