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SEC Codifies Status Quo on Director Elections

In a split vote, the commissioners adopted an amendment to 1934 Act rule 14a-8(i)(8) to codify the longstanding interpretation of the rule which allows companies to exclude from their proxy statements proposals that would result in an election contest or would set up a process for conducting an election process in the future. Commissioner Annette Nazareth voted against the amendment, which she has termed the "non-access proposal," because she believes it stands in the way of shareholders' rights to elect directors for the companies they own.

Chairman Christopher Cox explained that the proposal to codify the SEC's longstanding interpretation was the only proposal that would gain the three votes necessary for adoption. To do nothing in the aftermath of the AFSCME v. AIG decision, which called that interpretation into question, would open the door to a potential end-run around the proxy and antifraud rules, he said. The result of the majority vote will be no change to the way the rule was enforced for the last 17 years, according to Cox.

Cox noted that he has tried for a year to improve the proxy access process in light of the Second Circuit's decision in AFSCME, but said it required a willingness to think anew and to go beyond party lines. There is no consensus among the commissioners on this issue. Cox also noted that he has received numerous requests to wait until there is a full Commission to act, but he believes that doing nothing would put all investors at risk. He pledged to use the time between now and the next proxy season to do something other than maintain the status quo.

The only legal question the SEC had to clarify was the meaning of its 30 year old rule, according to Cox. The court advised that the SEC had only to explain itself with respect to the rule's interpretation, and Cox said there was no excuse not to do so. He thanked Nazareth for her contribution to the final amendment even though she did not support the rule.

John White, the director of the Division of Corporation Finance, said it was important to the operation of the shareholder proposal rule to codify the election exclusion for the upcoming proxy season. The codification will enable the staff to return to providing responses on whether proposals are properly excludable under the rule rather than offering no opinion as it did last proxy season. The amendment will take effect 30 days after publication in the Federal Register.

Nazareth argued that if the amendment was truly a temporary measure, it would have included a sunset provision, but it does not. She disagreed that the AFSCME decision created a state of uncertainty or an accelerating state of uncertainty. The non-access proposal was a last minute alternative to the shareholder access proposal which was flawed, she said. She believes the proposal showed an internal resistance to proxy access.

Nazareth said today's action denied shareholder rights simply to put this matter behind the Commission for the time being. The AFSCME decision placed the access issue squarely before the Commission and it took a step backward, in her view. Nazareth said she hopes that Cox's pledge to revisit the issue is successful.

The SEC also approved an amendment to the proxy rules that will facilitate the use of electronic forums as a means of communicating among shareholders. The amendments clarify that the participation in an electronic shareholder forum would be exempt from most of the proxy rules if certain conditions are met. The communications must take place more than 60 days before the date announced by the company for its annual or special meeting of shareholders. The communicating party may not solicit proxy authority while relying on the exemption, but may do so after the exemption is no longer available as long as the solicitation is conducted in accordance with Regulation 14A.

If a company announces a meeting of shareholders that is less than 60 days before the meeting date, solicitations could not take place more than two days after the announcement. Shareholders, companies and third parties that operate electronic shareholder forums will not be liable under the federal securities laws for any statements or information provided by others who are participating in the forum. The amendments will be effective 30 days after publication in the Federal Register.

Nazareth, who joined the other commissioners in support of the electronic forums, said it may have some utility and serves as a partial counterweight to the other action taken at today's meeting.