The SEC today announced that the staff would recommend an amendment to the proxy access rules to respond to the issues raised in AFSCME v. AIG, and scheduled an open meeting on October 18 to consider the recommendation. In making the announcement, the chairman of the SEC noted that shareholder rights in the proxy process "are best secured under a consistent national application of Rule 14a-8 to shareholder proposals" and that the SEC would schedule public comment and final consideration of the proposal "to allow a final rule to go into effect in time for the 2007 proxy season."

As noted in our earlier article, the court’s decision in AFSCME v. AIG invited the SEC to reconsider whether its proxy access rules allow a company to omit only shareholder proposals that relate to a particular election, as AFSCME argued, or also apply to proposals that would establish procedural rules governing elections generally, as AIG argued. Although the SEC immediately accepted the court’s invitation, it is by no means certain that the SEC will clarify its existing rule so as to allow shareholders to propose bylaw amendments that would establish procedures for direct shareholder nomination of directors. It is even less likely that the SEC will revive its 2003 proposed rule which granted shareholders the right to nominate unaffiliated directors under certain circumstances.

The court’s decision was hailed by a spokesman for AFSCME as "[t]he Holy Grail that we have always sought – to be able to easily and cost-effectively nominate a director who could stand on the proxy card with the company nominees." If the SEC does clarify its existing rules to permit shareholders to establish proxy access procedures on a company-by-company basis, many shareholder activists predict a surge in such proposals. The passage of such proposals could turn board elections into highly politicized events with institutional shareholders offering their own slates against the nominees of the incumbent board, with an attendant increase in the cost and divisiveness of annual elections. Further, the strides made by shareholder activists in advancing majority vote proposals and NYSE reconsideration of its rules allowing brokers to vote shares held in "street name" in the absence of instructions from the beneficial owner may already have tipped the scale far enough in favor of shareholder primacy.

Roel Campos, one of the two Democratic appointees to the five-member commission, reportedly has said that the court’s decision gives the SEC the opportunity "to seek broad commentary on shareholder access and the use of proxies to elect directors." In light of the vigorous opposition from business which derailed the SEC’s 2003 proxy access proposal, and the fact that Commissioner Casey and Chairman Cox are newly appointed and did not participate in the earlier debates as members of the agency, it may be difficult for the SEC to significantly revamp its rules in time to allow shareholders to nominate directors during the 2007 proxy season.

The SEC’s 2003 proposed proxy access rule was never adopted in the face of vocal opposition by business groups, dissent within the SEC and complaints from all sides that the proposal was too complex. The proposed rule applied only to a shareholder who had owned more than 5% of the company’s voting securities for at least two years, and then only after the occurrence of one of the following triggering events:

  • at least one of the board’s nominees had received "withhold" votes from more than 35% of the votes cast at an annual meeting, other than a meeting involving a proxy contest or where a shareholder nominee has been included pursuant to the rule; or
  • a shareholder (or group of shareholders) who had held at least 1% of the outstanding voting securities for at least one year submits a proposal that the company become subject to this shareholder nomination procedure and the proposal receives at least 50% of the votes cast at an annual meeting.

The SEC further requested comments on whether this nomination procedure should also be triggered when a board fails to implement any shareholder proposal approved by more than 50% of the votes cast, if the proposal was submitted by a shareholder (or group of shareholders) who had held at least 1% of the outstanding voting securities for at least one year.

For further information, please contact Peter M. Menard at (213) 617-5483.