Risk & Compliance

Appeals Court Revives Proxy-Access Issue

Under the ruling, dissidents can ask for a vote on whether shareholders can submit their own nominees.
Stephen TaubSeptember 7, 2006

The governance issue of proxy access for shareholders seems to have been awakened from its slumber. In a stunning decision, an appeals court ruled on Tuesday night that shareholders should be allowed to consider proposals that would let them nominate their own candidates for a company’s board, according to the Associated Press.

The ruling was made in a case brought last year by the American Federation of State, County, and Municipal Employees (AFSCME) against American International Group, the giant property-casualty insurer that has seen its share of trouble in recent years.

AIG refused to place an AFSCME proposal on its proxy. The SEC approved the decision, arguing that the proposal concerned shareholder elections and was, therefore, not appropriate for a shareholder proposal, AP noted.

AFSCME reportedly argued that the measure was appropriate because it sought to reform election procedures rather than a specific election. But a lower court sided with AIG and the SEC, the wire service pointed out.

Under current rules, dissident shareholders must file their own separate slate in their own proxy—a very costly process that often deters would-be activists.

The appeals court ruling, however, didn’t state that shareholders can submit their own set of nominees for the company’s ballot. Rather, it says that shareholders can submit measures asking for companies to let shareholders vote on the issue, the AP noted.

“This ruling can give shareholders a meaningful voice in board elections by opening up the director nominating process,” said AFSCME President Gerald McEntee. “Proxy access is considered the “holy grail” of corporate governance reform because it offers shareholders the opportunity to change the composition of boards. This ruling will make directors think twice before they put their own interests above the interests of their shareholders.”

AIG spokesman Chris Winans told the wire service that the company is “reviewing the decision.”

The SEC, however, acted swiftly. Under former chairman William Donaldson, the Commission had proposed a process for “proxy access” several years ago, but then apparently backed off from the issue in the face of intense opposition from business groups.

But on Thursday morning, the regulator announced that at a meeting scheduled for Oct. 18 its Division of Corporation Finance will recommend an amendment to Rule 14a-8 under the Securities Exchange Act of 1934 concerning director nominations by shareholders.

Chairman Christopher Cox promised to have a final rule approved in time for the 2007 proxy season. The SEC said in a press release that while the proposal still must be developed, it will address issues raised by the appeals court ruling, “which disagreed with the Commission staff’s longstanding interpretation of Rule 14a-8.”

“The decision by the Second Circuit Court of Appeals is important because of the large number of public companies that are subject to the jurisdiction of that court,” it said in a statement.

“Rule 14a-8, the shareholder proposal rule, provides shareholders important rights in the proxy process,” said Chairman Christopher Cox in a statement. “These rights are best secured under consistent national application of Rule 14a-8 to shareholder proposals. Therefore, to provide certainty with regard to shareholder proposals in every judicial circuit, I have directed the staff to prepare recommendations for revisions to Rule 14a-8 that will assure its consistent nationwide application.”

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