DELAWARE GEORGIA MARYLAND NORTH CAROLINA SOUTH CAROLINA VIRGINIA WASHINGTON, DC A PROFESSIONAL LIMITED LIABILITY COMPANY
FATE OF SEC SHAREHOLDER ACCESS PROPOSALS REMAINS UNCERTAIN October 15, 2007 Earlier this month, the comment period expired for two competing shareholder access proposals published by the SEC in July 2007. One proposal would allow a limited form of shareholder access to a company’s proxy statement (the “Access Proposal”).1 The other proposal would codify the SEC’s historical interpretation of Rule 14a-8(i)(8), and would allow companies to exclude shareholder proposals that may result in a contested election of directors (the “Exclusion Proposal”).2 The fate of these proposals remains unclear, but the SEC may still act in time to influence the 2008 proxy season. In 2003, the SEC proposed comprehensive revisions to the proxy rules to allow greater shareholder access to the company proxy statement. The SEC ultimately abandoned that proposal following vehement opposition from the business community. After the 2003 shareholder access proposal fizzled, shareholder access stayed out of the headlines until September 2006, when the U.S. Court of Appeals for the Second Circuit rejected the SEC’s longstanding interpretation of Rule 14a8(i)(8). See American Federation of State, County and Municipal Employees, Employees Pension Plan v. American International Group, Inc. (“AFSCME”).3 In AFSCME, the Second Circuit found that AIG could not rely on Rule 14a-8(i)(8) to exclude from its proxy statement a shareholder bylaw proposal that would require AIG, in certain circumstances, to include shareholder nominees for director in its proxy materials at subsequent meetings. AFSCME created at least two problems for the SEC. First, it created uncertainty about the interpretation of Rule 14a-8(i)(8) outside the Second Circuit. Second, it effectively permitted shareholders to initiate director election contests in company proxy materials without complying with applicable disclosure requirements. In response, the SEC reviewed the proxy process and then released the Access Proposal and the Exclusion Proposal for public comment earlier this summer. The two proposals reflect an SEC divided along party lines. Democratic commissioners Roel Campos and Annette Nazareth voted in favor of the Access Proposal (which would provide more expansive shareholder access to the proxy process), while Republican commissioners Paul Atkins and Kathleen Casey voted in favor of the Exclusion Proposal (which calls for less dramatic changes to the proxy process). Republican Chairman Christopher Cox provided the swing vote in favor of each proposal in order to subject both proposals to the formal public comment process. Many
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See SEC Release No. 34-56160 at http://www.sec.gov/rules/proposed/2007/34-56160.pdf. See SEC Release No. 34-56161 at http://www.sec.gov/rules/proposed/2007/34-56161.pdf. 3 462 F.3d 121 (2d Cir. 2006).
commentators believe that Chairman Cox favors access and would support the Access Proposal over the Exclusion Proposal in a vote to adopt a new proxy access process. In September 2007, Mr. Campos left the SEC for the private sector, leaving four commissioners equally divided on both proposals (assuming Chairman Cox would support the Access Proposal and that the remaining commissioners would not deviate from their original positions). No one knows whether a replacement for Mr. Campos will be appointed to relieve the projected deadlock before the commissioners vote on the proposals. Commissioner Nazareth added another layer of uncertainty when she recently announced her intention to leave the SEC. She notified President Bush that she does not wish to be re-nominated, but she has not set a date for her departure and continues to serve as a commissioner. For proponents of shareholder access, the potential stalemate may be welcome. For them, the Exclusion Proposal would be a huge step back, and the Access Proposal is not an ideal solution. The Access Proposal would provide access to 5% shareholders, an ownership threshold that many find too high. On the other side, the business community opposes the Access Proposal with the same intensity it exhibited in derailing the original shareholder access proposal in 2003. The SEC appears to be at an impasse, but it is unlikely that Chairman Cox can stall much longer. Senator Christopher Dodd (D-Conn.) recently indicated that he might be willing to pursue a legislative solution if the SEC did not act soon on either the Access Proposal or the Exclusion Proposal. With Congress appearing ready to step in if the SEC falters, shareholder access is ripe for action. Last week Chairman Cox stated that he wants the SEC to take final action in November 2007 so that new proxy access rules will be in place in time for the 2008 proxy season. It remains to be seen, however, whether Chairman Cox will press forward with these important and politically charged issues, particularly because his fellow commissioners are in flux. If the SEC does not act soon, public companies outside the Second Circuit will face a 2008 proxy season beset with uncertainty courtesy of the AFSCME decision, while those in the Second Circuit may face a new kind of proxy contest. We will continue to monitor the status of the Access Proposal and the Exclusion Proposal, and will update you regarding any future developments. If you have any questions about this client alert, please contact Seth M. Huffstetler (http://www.wcsr.com/SethHuffstetler), the principal drafter of this client alert, or you may contact the Womble Carlyle attorney with whom you usually work or one of our Corporate and Securities attorneys at the following link: http://www.wcsr.com/default.asp?id=1099&objId=10. Womble Carlyle client alerts are intended to provide general information about significant legal developments and should not be construed as legal advice regarding any specific facts and circumstances, nor should they be construed as advertisements for legal services. IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).
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