Shareholder Access Redux (part 6)

We are revisiting the Commission's decision to amend Rule 14a-8 to permit the exclusion of shareholder proposals that would sometimes require management to include shareholder nominees in the company's proxy statement. All of this is explored in greater detail in my paper, The SEC, Corporate Governance, and Shareholder Access to the Board Room.

By the new millennium, the decision of the Commission to deny shareholders access to the proxy statement for their nominees had again bubbled to the surface. It took a direct challenge from institutional investors, fully active and no longer willing to wait for the Commission to overcome its inertia. In time for the 2003 proxy season, AFSCME submitted a proposal to several companies that, if adopted, would allow shareholders to include nominees in the company’s proxy statement. The proposals amounted to a direct challenge to the position of the staff adopted in 1990. The staff affirmed the existing position and allowed companies to exclude the proposals. Unsatisfied, AFSCME first took its case directly to the Commission but was rebuffed. The Commission did instruct the Division of Corporation Finance to reexamine the proxy rules for possible changes, including the director nomination process. The staff, predictably, recommended that shareholders be given access to the proxy statement for its nominees.

In response to the staff position, the Commission for the first time since 1942 proposed amendments to the proxy rules that would provide direct access to the proxy statement for shareholder nominees. Reflecting the inevitable controversy over the initiative, the proposal was filled with limitations.The proposal attracted approximately 500 comments, dividing along the usual lines, with institutions and ordinary shareholders favoring access, management opposing it.

There the proposal sat, the vociferous nature of the opposition and regime change (Chairman Donaldson replaced by Chairman Cox) explaining the inactivity. But for the Second Circuit's decision in AFSME, the issue probably would have remained unaddressed until the next administration. The Second Circuit, however, struck down the Commission's position that Rule 14a-8(i)(8) prohibited access proposals, providing shareholders with one proxy season to experiment with the proposals.

Experience in the 2007 proxy season suggested the modest impact of access. Only three companies inserted an access proposal in their proxy statement, with a fourth proposed but withdrawn. In addition, one company voluntarily adopted an access proposal. Of the three submitted to a vote, only one, the proposal at CRYO-CELL International, Inc., passed. The proposal provided that shareholders (or groups) owning 5% or more of the company’s voting shares could nominate a short slate of directors.

Despite the modest impact, the Commission proposed an amendment to Rule 14a-8 to overturn the Second Circuit decision and adopted the proposal in December 2007.  Tomorrow we provide some final thoughts on this process.