WASHINGTON – With the 2008 proxy season approaching, companies and their shareholders are keeping a close watch on how a new rule on proxy access adopted by the Securities and Exchange Commission will play out.
Will the new rule, as investor activists claim, work to impede the rights of shareholders to have a say in corporate governance, or will the rule simply reflect the way most companies already did business, as other experts claim?
“For shareholders, it’s a big step backwards,” asserted Amy Borrus, deputy director of the Council for Institutional Investors.
The SEC adopted the rule in November, by a 3-1 vote, which allows corporations to exclude shareholder proxy proposals relating to the election of members of the company’s board of directors.
But Laurence Lees, a partner in the corporate and securities law department in Duane Morris LLP’s Washington, DC office, said the rule won’t change the way most companies operate.
“They are treading water right now – they are in a holding pattern,” Lees said of the SEC. “What the SEC did was say: ‘Hey, let’s keep the status quo through the 2008 proxy season so that everybody knows what the rules are so there are no surprises.’”

Rule change, or clarification?

Specifically, the SEC’s vote amended Rule 14a-8(i)(8) so that a company may exclude shareholder proposals from proxy materials “if the proposal relates to a nomination or election for membership on the company’s board of directors or analogous governing body of a procedure for such nomination or election.”
SEC Chairman Christopher Cox called the move a simple codification of the SEC’s interpretation of the rule, saying at the time of the vote that the decision “maintains the status quo of the past decade, preserving every right that shareholders presently enjoy, while ensuring that there is no unilateral breach in the disclosure and anti-fraud protections applicable to proxy contests.”
“If the Commission did nothing, then there would be no clear and authoritative interpretation of our rules.” Cox said. “There would be an easy end run around the Commission’s required disclosures and our anti-fraud rules in proxy contests. We owe it to investors and the markets to at least ensure that this does not happen.”
Cox said the vote was meant to give certainly to the proxy process heading into the 2008 proxy season, and the commission could “re-open this discussion in 2008 to consider how to strengthen the proxy rules to better vindicate the fundamental state law rights of shareholders to elect directors.”
The vote was controversial from the onset. The SEC’s lone dissenter in the vote, Commissioner Annette L. Nazareth, sharply criticized the board for approving a rule that would “deny shareholders the opportunity to exercise their state law rights.”
“One of the most fundamental shareholder rights in America is the ability to elect directors, and director elections form the core of shareholder power,” Nazareth said. “This release – which I have termed the non-access release – stands in the way of shareholders’ rights to elect the directors of the companies they own. I do not see a principled way to vote for the non-access release and claim to be supportive of shareholder rights in the longer term.”
Nazareth also questioned whether the move was meant to only be a stopgap measure, noting the lack of a sunset provision.
The vote came in the wake of a 2006 2nd Circuit decision, American Federation of State, County and Municipal Employees versus American International Group, (462 F.3d 121). The court held that a company cannot exclude from proxy materials certain shareholder-nominated candidates for the board of directors on the corporate ballot.
The 2nd Circuit noted the confusing language of Rule 14a-8(i)(8), and pointed out that the SEC interpreted the rule to allow election-related proposals in investor proxy statements from the rule’s adoption in 1976 until about 1990, when it suddenly changed course.
“We believe that an agency’s interpretation of an ambiguous regulation made at the time the regulation was implemented or revised should control unless that agency has offered sufficient reasons for its changed interpretation,” the court said in the opinion.

The 2008 proxy season and beyond

Cox said the AFSCME decision left companies operating in the 2nd Circuit’s jurisdiction (New York, Connecticut and Vermont) following one rule, and the rest of the country under another. The SEC vote, he said, clarified the matter until the commission had a full chance to revisit the issue thoroughly.
But Borrus questions that rationale, noting that the vote came more than a year after AFSCME was decided.
“It’s not as if there was any rush to judgment,” Borrus said.
As a result, she said, investors have fewer rights this season than last.
“Shareholders no longer have (election) proxy access, they have no right to nominate corporate board candidates on company proxy cards,” she said. “They can seek discussions with the chairman of the nominating board, they can suggest a candidate, but there is no right to put these candidates in.”
She said the only recourse now for investors who want to have a say in corporate governance is to institute its own proxy process – a move that is difficult and expensive.
But Lees said it’s too early to say what the SEC will ultimately do. The vote, he said, was a way to bring clarity to current rules until a new SEC board can take a look at the situation and determine what to do once and for all.
“I can understand investor activists saying ‘we’ve lost something,’” Lees said. “Yes, they have lost something. But I think it’s momentary. Then the commission gets back to together, they are going to have to give this a lot of thought.”
It’s not just investor groups, unions, and financial funds that are pressuring the commission, Lees said. “They are being pushed by Congress, too. The SEC will have to do something, and hopefully will include the shareholders’ interests so they are able to participate more.”