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Is the SEC Stuck on Proxy Access

SEC Rule 14a-8(i)(8) provides that a proposal may be excluded if it “relates to an election for membership on the company’s board of directors or analogous governing body.” Clearly, this Rule would allow exclusion of a shareholder proposal nominating a specific individual for election to the board. But what if the proposal relates to changing the corporation’s bylaws or articles of incorporation governing director elections?

The issue came to a head when American Federation of State, County & Municipal Employees (AFSCME) submitted to American International Group, Inc. (AIG), a proposal for inclusion in AIG’s 2005 annual meeting proxy statement.  If passed, the proposal would have amended AIG’s bylaws to provide a mechanism for shareholders meeting certain minimum qualifications to nominate candidates for the board of directors that the company would be obliged to include on the proxy card and in the proxy statement. In AFSCME v. AIG, the SEC took the position as amicus that the proposal properly could be excluded pursuant to Rule 14a-8(i)(8). The Second Circuit, however, held that the rule allows exclusion of only of proposals “dealing with an identified board seat in an upcoming election.”

On July 25, 2007, the SEC took the unusual step of issuing two contradictory proposals for rulemaking in response to the AFSCME decision. If adopted, the so-called Status Quo proposal would constitute an authoritative agency interpretation of the rule under which all shareholder-proposed bylaws concerning director nominations may be excluded. In contrast, if the so-called Access Proposal is adopted, it would amend Rule 14a-8(i)(8) to authorize inclusion of a proposal amending the corporation’s bylaws to create a mechanism for shareholders to nominate board candidates if the proposal is submitted by a shareholder (or group of shareholders) that has continuously held more than 5% of the company’s securities for at least one year and has filed a Schedule 13G containing all required information.

Larry Ribstein blogs that the:

WSJ reports that the SEC is no closer to a compromise over shareholder proxy access than when it punted by putting two proposals out for comment. It’s getting pressure to start over. Although Cox is said to support access, he’s losing support for this on the Commission.  As a result, the story says:

People close to Mr. Cox say he is leaning toward voting for the Republican-supported proposal that would deny access. Those people say that approach has the advantage of having a rule in place for the 2008 proxy season and opens an opportunity to revise it to allow access the following year.

Funny that the SEC doesn’t know what to do, except that it thinks it needs to do something. It would seem that this quandary would make even more attractive my suggestion, e.g., here, that the SEC should defer to state corporate law on this internal governance area. More precisely, the SEC should let states determine when shareholders can nominate directors and initiate other actions.

Alternatively, maybe the SEC should pass both proposals and let corporations decide. Isn’t choice supposed to be a good thing?