Securities & Corporate Governance - SEC Approves Rule Clarifying Exclusion of Shareholder Director Nominations
On November 28, 2007, the Securities and Exchange Commission (the “SEC”) adopted amendments to Rule 14a-8(i)(8) under the Securities Exchange Act of 1934. The amendments clarify that shareholder proposals on shareholder access to a company’s proxy statement for director nominations are categorically excludable under Rule 14a-8(i)(8) under the Exchange Act. The proposal adopted was one of two that the SEC advanced in August 2007 on shareholder access. The companion proposal, which the SEC did not adopt, would have permitted shareholders to propose bylaw amendments to create procedures for shareholder proxy access. As noted in its press release,
the amendments will be effective 30 days after publication in the Federal Register. The SEC release concerning the rule amendment has not yet been disseminated by the SEC.
Rule 14a-8 permits a shareholder owning a small number of company shares to submit a proposal for inclusion in a company’s proxy materials, provided that the shareholder complies with certain procedural requirements and the
proposal does not fall within one of 13 substantive bases for exclusion. One of the 13 substantive bases for exclusion, former Rule 14a-8(i)(8), permitted a company to omit from its proxy materials any proposal that “relates
to an election for membership on the company’s board of directors or analogous governing body.”
Despite the SEC’s position that a company could exclude any shareholder proposal that may result in a contested election (a proposal may result in a contested election if it is a means either to campaign for or against a director nominee or to require a company to include shareholder-nominated candidates in the company’s proxy materials), the U.S. Court of Appeals for the Second Circuit in American Federation of State, County & Municipal Employees, Employees Pension Plan v. American International Group, Inc., held that Rule 14a-8(i)(8) did not permit a company to exclude a shareholder proposal seeking to amend a company’s bylaws to establish a procedure under which a company would be required, in specified circumstances, to include shareholder nominees for director in the company’s proxy materials. The SEC determined that the Second Circuit’s decision resulted in uncertainty and confusion with respect to the appropriate application of Rule 14a-8(i)(8) and could lead to contested elections for directors without adequate disclosure.
The SEC responded to the AFSCME decision by adopting this amendment to Rule 14a-8(i)(8). The amendment to Rule 14a-8(i)(8) clarifies that a company may exclude from its proxy materials any shareholder proposal that would result in an immediate election contest or set up a process for future election contests by requiring the inclusion of shareholder nominees in company proxy materials. The text of amended Rule 14a-8(i)(8) will read as follows: “If the proposal relates to a nomination or an election for membership on the company’s board of directors or analogous governing body or a procedure for such nomination or election.”
Examples of shareholder proposals that may not be excluded under revised Rule 14a-8(i)(8) include those proposals related to:
- qualifications of directors or board structure (as long as the proposal will not remove current directors or not disqualify current nominees);
- majority or cumulative voting procedures;
- nominating procedures; or
- reimbursement of shareholder expenses in contested elections.
Examples of excludable proposals under revised Rule
14a-8(i)(8) include those that:
- require a company to include a shareholder nominee in the company’s proxy materials or otherwise result in a solicitation on behalf of a shareholder nominee in opposition to board-supported nominees;
- remove a director from office prior to such director’s term in office expiring;
- disqualify a director nominee standing for election; or
- question the competence or business judgment of one or more directors.