Alert January 10, 2008

SEC Adopts Rule Permitting Exclusion of Proxy Access Stockholder Proposals

The SEC recently adopted an amendment to its rules that govern when a company must include stockholder proposals in its proxy statement. The amendment, which codifies existing SEC interpretations, permits companies to exclude from their proxy statements stockholder proposals relating 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 amendment was adopted in response to the 2006 decision by the U.S. Court of Appeals for the Second Circuit in AFSCME v. AIG, which held that AIG could not rely on the existing SEC rules to exclude a stockholder proposal seeking to amend the company’s bylaws to establish a procedure under which the company would be required to include stockholder nominees for director in the company’s proxy materials. The primary result of the amendment will be to clarify that companies can exclude from their proxy statements these types of stockholder proposals.

In the adopting release, the SEC made it clear that the amendment, despite its relatively broad language, was only intended to codify existing SEC interpretations that permit the exclusion of stockholder proposals relating to procedures that would result in a contested election, either in the year in which the proposal is submitted or in subsequent years. In particular, the SEC stated that, consistent with its existing interpretations, a stockholder proposal may be excluded under the amended rule if it could have the effect of, or proposes 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 stockholder nominees in opposition to management-chosen nominees.

Conversely, under the amended rules, companies may not exclude from their proxy materials stockholder proposals relating to the following matters:

  • 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 stockholder nominee in company proxy materials); or
  • reimbursement of stockholder expenses in contested elections.

While the amendment does provide short-term clarity on the specific proxy access issues that were raised by the AFSCME v. AIG case, the SEC has indicated that it is continuing to consider what, if any, changes it should make to its existing rules to address the fundamental issue underlying this case – i.e., the ability of stockholders to effect the nomination and election of directors. However, any additional rulemaking from the SEC in this area is not expected to occur in advance of the 2008 annual meeting season.

The amendment took effect on January 10, 2008. The SEC release adopting the amendment is available on the SEC website at www.sec.gov/rules/final/2007/34-56914.pdf.