Appeals Court Rules in Favor of Proxy Director Access Proposal

In an important ruling, a federal appeals court panel (CA-2) has ruled that a shareholder proposal seeking to amend a company’s bylaws to establish a procedure by which shareholder-nominated candidates may be included on the corporate ballot does not relate to an election within the meaning of SEC proxy rules and thus cannot be excluded from corporate proxy materials. The proxy access bylaw proposal would amend the bylaws to require the company to publish the names of shareholder-nominated candidates for director positions together with any candidates nominated by the board of directors. (AFSCME v. American International Group, Inc).

The appeals court ruled that a shareholder proposal does not relate to an election under the exclusion if it simply seeks to amend the corporate bylaws to establish a procedure by which shareholders are entitled to include in the corporate proxy materials their nominees for the board of directors.

The SEC has proposed Rule 14a-11 to establish a process by which the shareholder proposal mechanism, subject to heightened eligibility requirements, may be employed to adopt a proxy access rule that is uniform across companies. The court recognized that its holding facilitates a process for adopting non-uniform proxy access rules that are less restrictive than that created by proposed Rule 14a-11. If the Commission ultimately decides to adopt Rule 14a- 11, then such an action, although certainly not necessary, would likely be sufficient to modify the interpretation of Rule 14a-8(i)(8) that the court adopted.

Reacting quickly to the court’s ruling, the SEC announced that the Division of Corporation Finance will recommend an amendment to Rule 14a-8 concerning director nominations by shareholders. Chairman Cox said that important shareholder rights in the proxy process are best secured under a consistent national application of Rule 14a-8 to shareholder proposals. Therefore, to provide certainty with regard to shareholder proposals in every judicial circuit, he has directed the staff to prepare recommendations for revisions to Rule 14a-8 that will assure its consistent nationwide application.