SEC Open Meeting re amendments to proxy rules

By Cydney Posner

At a rather contentious open meeting this morning, the SEC voted to adopt the following amendments to the proxy rules:

Electronic Shareholder Forums

No controversy here, or not much anyway. The SEC unanimously adopted amendments to the proxy rules, substantially as proposed, to facilitate the use of electronic shareholder forums (some of us might say "fora," but never mind). The amendments are designed to clarify that a company is not liable for independent statements by shareholders on a company’s electronic shareholder forum and to address any ambiguity concerning whether use of an electronic shareholder forum could constitute a proxy solicitation. These forums are envisioned as something similar to chat rooms on sites such as Motley Fool and Yahoo (which would not be affected by the rule amendments). The only dissonant note struck here came from Commissioner Nazareth, who, while supporting this proposal, observed that the proposal was originally only peripheral to the central proposal providing shareholder access to company proxies and expressed concerned that this current proposal was intended, not to "vindicate shareholder rights," as Chairman Cox viewed the proposal, but rather to "mitigate" or "mask" the SEC's failures in the subsequent shareholder access proposal.

The use of an electronic forum restricted to shareholders was one of the suggestions arising out of the SEC's recent roundtables. The idea was intended to allow shareholders to discuss among themselves throughout the year the subjects that most concerned them. A forum could be used to test the waters for particular suggested actions and even to quantify the level of potential support. The company could also use the forum to provide information or views. There are no technical requirements or approved regulatory versions of an electronic shareholder forum; rather, the rules would allow hosts to develop their forums as they wished. The staff will be monitoring for abuses.

New Rule 14a-17 would provide that if a company, shareholder or third party acting on its behalf simply established, maintained or operated an electronic shareholder forum, it would not be exposed to liability under the federal securities laws for any statement or information provided by another person on the forum. (Chairman Cox noted that this protection is similar to that afforded under the Internet Freedom and Family Empowerment Act, which he co-authored.) Persons providing information to or making statements on the electronic shareholder forum would remain liable for the content of those communications under traditional liability theories under the federal securities laws, including anti-fraud prohibitions against primary or secondary participation in fraud, deception or manipulation.

In addition, the amendments exempt from most proxy rules any solicitation (as broadly defined) in an electronic shareholder forum by or on behalf of a shareholder, company or third party acting on its behalf so long as the solicitation (1) does not seek, directly or indirectly, proxy authority or any form of revocation, abstention, consent or authorization, and (2) occurs more than 60 days prior to the date announced by the company for its annual or special meeting of shareholders. If the company announces the meeting less than 60 days before the meeting date, the solicitation may not occur more than two days following the company’s announcement. Solicitations not within these time periods (e.g., communications and data that remain on the forum within the 60-day period) may no longer be exempt. (Shareholders without intent to seek proxy authorization may be able to rely on Rule 14a-2(b)(1) within the 60-day period.) A person who participates in an electronic shareholder forum and makes solicitations in reliance upon the proposed exemption would continue to be eligible to solicit proxies outside of the proposed new rule in compliance with Reg 14A. In that event, however, the person would need to "go dark" or otherwise post only in compliance with the proxy rules. (Note that the protections from liability would continue into the 60-day period.) Shareholders acting together to conduct solicitations would need to consider whether they had formed a "group " for purposes of 13D.

The amendments will be effective 30 days after publication in the Federal Register.

Shareholder Proposals Relating to the Election of Directors

The SEC could muster only three votes to adopt, without revision, the proposal to amend Rule 14a-8(i)(8) to clarify the staff's longstanding interpretation of that rule. According to its three supporters, the rule amendment is designed to provide certainty, in light of the Second Circuit decision in AFSCME v. AMERICAN INTERNATIONAL GROUP, INC., as to the meaning of the exclusion for shareholder proposals related to the election of directors. That case called into question the SEC's interpretation of its own regulation because, in the court's view, the agency had not offered sufficient reasons for its 1990 change in interpretation. As a result of this decision, in the past year, the staff has not issued any determinations as to whether shareholder proposals may or may not be properly excluded under Rule 14a-8(i)(8). This uncertainty led Chairman Cox to vow that the SEC would clarify the ambiguity in time for the 2008 proxy season. While the SEC initially issued two alternative proposals addressing the issue-- one providing for proxy access, the other codifying the staff's current position--when it became clear that a consensus (or even the necessary three-vote majority) could not be reached to broaden proxy access, the SEC proposed to move forward with the current proposal designed, in Chairman Cox's view, to maintain the status quo. (See my emails of 8/14/07 and 9/7/06.)

This decision has not been without controversy, including in the pristine world of politics, where various members of Congress threatened a legislative alternative if the SEC did not act to adopt some form of proxy access. The SEC received over 34,000 comments on the two proposals. Chairman Cox made clear that he was himself dissatisfied with this result and intended that something be done to provide proxy access next year. In his view, however, more time was needed to address commenters' concerns regarding, for example, the proposed 5% threshold for shareholder access. He made clear, however, that adoption of the current proposal would not affect momentum for change, averring that he was "committed to tangible improvements" in shareholder access. Nevertheless, the prevailing ambiguity was unacceptable: there was "no excuse for the SEC not to explain itself." Moreover, the uncertainty resulting from the Second Circuit decision was compounded by a Supreme Court case, Long Island Care, in which the court unanimously concluded that the interpretation by an agency (not the SEC) of its own rules was controlling and that a change did not provide grounds for disregarding the interpretation unless it was plainly wrong. Moreover, Cox feared that inaction by the SEC could allow perhaps unscrupulous shareholders to circumvent the SEC's antifraud rules requiring adequate disclosure in the election of directors.

Commissioner Nazareth expressed her disappointment with the adoption of SEC rules that would "stand in the way of shareholder rights" under state law. She found "no principled way" to vote in favor of the proposal. While the amendments were "ostensibly" to provide certainty, she disagreed with the other commissioners' views that the uncertainty surrounding the rule had been escalating. Indeed, she noted that last year there were only three requests for staff determinations regarding Rule 14a-8(i)(8). In her view, the arguments in favor of the proposal provided only a "post hoc rationalization of a path ill-conceived in the first place."

The amendments as adopted essentially affirm the SEC's 1990 position construing Rule 14a-8(i)(8) to permit the exclusion of shareholder proposals related to election reforms that would result in contested elections. Under that position, a shareholder proposal could be excluded under Rule 14a-8(i)(8) 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.

Prior to today's amendments, the text of Rule 14a-8(i)(8) stated only that a proposal may be excluded "[i]f the proposal relates to an election for membership on the company’s board of directors or analogous governing body." To clarify the meaning of the exclusion, consistent with the staff's interpretation, the amendments revise the exclusion to read: "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 term "procedures" relates to procedures that would result in a contested election, either in the year in which the proposal is submitted or in subsequent years.

The staff made clear that the amendments have no effect and do not address other staff interpretations of the rule. Accordingly, consistent with past interpretations, the interpretation of whether a proposal "relates to an election" should not be read to permit the exclusion of other proposals regarding the qualifications of directors, the composition of the board, shareholder voting procedures or board nomination procedures that would not result in an election contest or significantly conflict with the SEC's other proxy rules. More specifically, the staff has taken the position that a proposal relates to "an election for membership on the company’s board of directors or analogous governing body" and, as such, may be excluded under Rule 14a-8(i)(8) if it 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.

Conversely, the staff has taken the position 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 not disqualify current nominees);
• voting procedures (such as majority or cumulative voting);
• nominating procedures; or
• reimbursement of shareholder expenses in contested elections.

The amendments will become effective 30 days after publication in the Federal Register.

This content is provided for general informational purposes only, and your access or use of the content does not create an attorney-client relationship between you or your organization and Cooley LLP, Cooley (UK) LLP, or any other affiliated practice or entity (collectively referred to as “Cooley”). By accessing this content, you agree that the information provided does not constitute legal or other professional advice. This content is not a substitute for obtaining legal advice from a qualified attorney licensed in your jurisdiction and you should not act or refrain from acting based on this content. This content may be changed without notice. It is not guaranteed to be complete, correct or up to date, and it may not reflect the most current legal developments. Prior results do not guarantee a similar outcome. Do not send any confidential information to Cooley, as we do not have any duty to keep any information you provide to us confidential. This content may be considered Attorney Advertising and is subject to our legal notices.