Final rule amendment related to Rule 14a-8(i)(8)

By Cydney Posner

The SEC has posted its adopting release related to the final rule amendments codifying the meaning of Rule 14a-8(i)(8) under the Exchange Act. Rule 14a-8 provides shareholders with an opportunity to place certain proposals in a company’s proxy materials for a vote at an annual or special meeting of shareholders. Rule 14a-8(i)(8) does not require the inclusion of any proposal that "relates to an election for membership on the company’s board of directors or analogous governing body." The SEC views the rules as "particularly critical to assuring that investors receive adequate disclosure in election contests, and that they benefit from the full protection of the antifraud provisions of the securities laws." Because the inclusion of shareholder nominees for director in a company’s proxy materials normally would create a contested election of directors, use of Rule 14a-8(i)(8) to include shareholder nominees in company proxy materials would, in effect, circumvent the other proxy rules designed to assure the integrity of director elections. According to the release, the rule amendments are designed to provide clarity in light of continuing uncertainty with regard to the interpretation of the rule. (See postings on 11/28/07, 8/14/07 and 9/7/06 for a more complete discussion of the controversy surrounding the SEC's interpretation of the rule and adoption of this amendment.)

Under the SEC's interpretation of Rule 14a-8(i)(8), a shareholder proposal may be excluded if it would result in an immediate election contest (e.g., by making or opposing a director nomination for a particular meeting) or if it would set up a process for shareholders to conduct an election contest in the future by requiring the company to include shareholders’ director nominees in the company’s proxy materials for subsequent meetings. The new amendment to the rule adopted by the SEC clarifies that a shareholder proposal may be excluded:

"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."

The release notes that the term "procedures" in the election exclusion relates to procedures that would result in a contested election either in the year in which the proposal is submitted or in any subsequent year.

The release emphasizes that the changes relate only to procedures that would result in a contested election and do not affect or address any other aspect of the SEC's prior interpretations of the exclusion. While confirming that, under the amended rule, the proposal that was at issue in AFSCME v. AIG-- to allow shareholders to use the company’s proxy materials to nominate director candidates--would be excludable, the release reaffirms, on a non-exclusive basis, prior staff positions permitting exclusion of a shareholder proposal under Rule 14a-8(i)(8) if it could have the effect of, or proposed a procedure that could have the effect of, any of the following:

• disqualifying board nominees who are standing for election;
• removing a director from office before his or her term expired;
• questioning the competence or business judgment of one or more directors; or
• requiring companies to include shareholder nominees for director in the companies’ proxy materials or otherwise resulting in a solicitation on behalf of shareholder nominees in opposition to management-chosen nominees.

The release also reaffirms the currency of prior staff positions that a proposal may not be excluded under Rule 14a-8(i)(8) if it relates to any of the following:

• qualifications of directors or board structure (as long as the proposal will not remove current directors or disqualify current nominees);
• voting procedures (such as majority or plurality voting standards or cumulative voting);
• nominating procedures (other than those that would result in the inclusion of a shareholder nominee in company proxy materials); or
• reimbursement of shareholder expenses in contested elections.

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