Prompts S.E.C. to Revisit a Rule on Shareholder Proposals
By Floyd Norris;
The New York Times ~
Sep 08, 2006
A federal appeals court has at least temporarily
cleared the way for shareholders to force companies to hold
contested elections for directors, with rival candidates
appearing on the ballots distributed by companies.
That is something that most companies strongly oppose. The
Securities and Exchange Commission has until now allowed
companies to refuse to allow shareholders to vote on such
The decision, issued Tuesday, led the commission to announce
yesterday that it would take up the issue at a meeting on Oct.
18 and consider changing its rules. The S.E.C. chairman,
Christopher C. Cox, did not say what action he favored, but
promised that new rules would take effect in time for annual
meetings in early 2007.
At issue is an S.E.C. rule, No. 14a-8, that lets companies
refuse to allow shareholder votes on any proposal that “relates
to an election.”
The commission interpreted that rule to allow the American
International Group to exclude from its proxy a shareholder
proposal that would have amended the company’s bylaws to allow
any shareholder who had owned at least 3 percent of the
company’s stock for a year to nominate directors to appear on
the company’s proxy as alternatives to the candidates nominated
by the existing board.
Currently, the official slate of candidates runs unopposed at
most companies, and alternatives are available only if
shareholders mount a proxy contest, with expensive mailings to
shareholders and alternative ballots.
A district court held that the proposal could be excluded,
saying that it clearly related to an election. “Indeed,” the
judge added, “it relates to nothing else.”
The United States Court of Appeals for the Second Circuit
disagreed, siding with the American Federation of State, County
and Municipal Employees in saying that the rule should be viewed
with an emphasis on the word “an” — meaning a proposal that
applied to how elections would be conducted could not be
excluded, although one that applied to only a single election
The appeals court said that was the interpretation the
commission followed in 1976, when it last addressed the issue,
saying the rule was not aimed at barring shareholders from
changing the way elections are held, such as by allowing
But the court said that the commission began to change its
interpretation in 1990, at first inconsistently, to bar votes on
all election proposals.
Because the interpretation the commission applies now “conflicts
with what it said in 1976,” the appeals court held, “it does not
merit the usual deference we would reserve for an agency’s
interpretation of its own rules.”
The commission said its division of corporation finance would
recommend an amendment to Rule 14a-8 to address the issues
raised by the court.
“Rule 14a-8, the shareholder proposal rule, provides
shareholders important rights in the proxy process,” Mr. Cox
said. “These rights are best secured under consistent national
application of Rule 14a-8 to shareholder proposals.”
He said the commission staff would recommend revisions to the
rule, and that the S.E.C. would act “in time for the 2007 proxy
The decision brings before the commission a divisive issue that
it had chosen to ignore. Under its former chairman, William H.
Donaldson, the commission proposed a rule that would have made
it possible for large shareholders — in very limited
circumstances — to put candidates on the ballots sent out by
That proposal was opposed by two of the five commissioners, and
aroused a storm of opposition from companies. Mr. Donaldson
never brought it to a final vote.
It appears the commission could get around the court ruling
simply by making clear that the current staff interpretation of
the rule is consistent with what the commission now believes the
rule means, perhaps by changing the wording of the rule.
But until that happens, a combination of state and federal law
could allow such votes. The law in Delaware, where most major
companies, including A.I.G., are incorporated, allows
shareholders to amend corporate bylaws, as was proposed by the
union. And since the second circuit covers New York, the
financial capital of the country, the ruling would appear to
apply to any company with headquarters there.
Copyright 2006 The New York Times Company