The SEC has released two conflicting proposals regarding shareholder access to proxy statements. The SEC has been considering different versions of increased shareholder access to proxy statements for several years, but it was last year’s Second Circuit decision in American Federation of State, County, and Municipal Employees, Employees Pension Plan v. American International Group, Inc. (462 F. 3d 121) that has driven the recent wave of activity.
By way of background, shareholders have a state law right to nominate and elect directors; they just can’t use the company’s proxy statement to solicit votes for their candidates. The SEC believes the philosophy of the proxy statement is in conflict if two competing parties (the company and a rogue shareholder) can use the same document (the company’s proxy statement) to solicit proxies for competing nominees for director.
Instead, the proxy rules contemplate a separate proxy statement for shareholders who want to nominate directors. And, just to make sure these shareholders don’t get onto the company’s proxy through a backdoor, there is a specific rule (14a-8(i)(8)) that allows the company to exclude shareholder proposals that relate to the election of the board.
The Second Circuit disrupted this system in the AIG case when it ruled that AIG could not rely on Rule 14a-8(i)(8) to exclude a shareholder proposal aimed at direct election of directors. The shareholder proposal was for an amendment to the AIG bylaws that would allow for a procedure under which AIG would be required to include shareholder nominated directors in its proxy materials.
The SEC is worried that this ruling allows a shareholder to get nominees on the company proxy without having to disclose all the information that would be required if the shareholder would have to produce its own proxy statement. Hence the two proposed changes to the proxy rules:
Proposal (1) is an affront to the AIG decision. It would amend Rule 14a-8(i)(8) in hopes of allowing it to exist essentially the way it did before the AIG decision. Of course, a court could always disagree that the amendment has this effect.
Proposal (2) embraces the AIG decision, in that it would allow for shareholder director nominees to appear on the company’s proxy statement; however, there are significant caveats. For example, only shareholders who have been 5% holders for the previous year would be permitted to propose bylaw amendments in the company’s proxy, and they would first need to file a more-detailed Schedule 13G disclosing their background and interactions with the company. And, a shareholder that nominates a director must also disclose the same type of information that would currently be required in a separate proxy, such as basic information about the nominating shareholder and the nominee. Nominating shareholders will have the burden of providing this information to the company and will be liable for any fraud that goes along with this information.
Proposal (1) is an attempt to preserve the status quo despite the Second Circuit’s ruling in the AIG case. Proposal (2) is a whole new system. Both proposals are sure to produce significant comments and discussion.