Access and the Commission: The Rule of Unintended Consequences Begins

We have been meaning to mention the post at RiskMetrics about AFSCME's plans in the upcoming proxy season. 

The American Federation of State, County, and Municipal Employees (AFSCME), as you might recall, was the plaintiff in the Second Circuit decision that ultimately struck down the application of the election exclusion in Rule 14a-8 to bylaw proposals that would sometimes require management to include a shareholder nominee in the company's proxy statement.  This was the position that the Commission reversed in its non-access proposal.

In truth, access was always a second best solution.  It required shareholders to propose and adopt a bylaw, then wait until the next election cycle before any nominees could be included in the company's proxy statement.  In companys where no such bylaw existed, shareholders were still denied access to the proxy statement for their nominees.  Over time pressure will grow for more direct access for shareholder nominees. 

In any event, one of the points that we madein opposing non-access was that it would not abate the pressure on the part of shareholders for a greater role in the election of directors.  Moreover, we noted that non-access would result in the rule of unintended consequences.  Without access, activist shareholders would resort to other methods of influencing the election process.  One of them would be to submit proposals that required the company to repay the costs of a sharehlder solicitation. 

Now word comes from AFSCME that it intends to do exactly that.  According to RiskMetrics, AFSCME "is planning to submit binding proposals for the 2008 season that call for the reimbursement of proxy-fight solicitation expenses."  Moreover, the proposal apparently will resemble one submitted to Apache Corporation in the 2007 proxy season. 

RESOLVED, that pursuant to section 109 of the Delaware General Corporation Law and Article XIII section 1 of the bylaws of Apache Corporation ("Apache"), stockholders of Apache hereby amend the bylaws to add the following Section 22 to Article V:
 
"The board of directors shall cause the corporation to reimburse a stockholder or group of stockholders (together, the "Nominator") for reasonable expenses ("Expenses") incurred in connection with nominating one or more candidates in a contested election of directors to the corporation's board of directors, including, without limitation, printing, mailing, legal, solicitation, travel, advertising and public relations expenses, so long as (a) the election of fewer than 50% of the directors to be elected is contested in the election, (b) one or more candidates nominated by the Nominator are elected to the corporation's board of directors, (c) stockholders are not permitted to cumulate their votes for directors, and (d) the election occurred, and the Expenses were incurred, after this bylaw's adoption. The amount paid to a Nominator under this bylaw in respect of a contested election shall not exceed the amount expended by the corporation in connection with such election."

Apache Corporation (Feb. 8, 2007).  The staff of the Commission declined to permit the exclusion of the proposal and reiterated this position in the release accompanying the adoption of the non-access proposal (see note 56).   These reasonable expense proposals avoid the Rule 14a-12 problem but they potentially pose far greater headaches for management than access.  Access merely held out the promise that a shareholder could include a nominee in the company's proxy statement.  It did nothing to defray any of the other costs associated with a serious contest.  Thus, while management could use the corporate treasury, shareholders would have to pay any additional solicitation costs beyond the brief description contained in the company's proxy statement.  The obligation to pay reasonable expenses potentially provides shareholders with far greater resources and increases the odds that they will win the contest.

Access would not have caused significant change, as its use in the 2007 proxy season illustrated.  But it would have taken away some of the pressure from shareholders for greater participation in the election process.  Without access, shareholders are likely to promote other avenues that hold the promise of even greater involvement.  And, to the extent there is regime change following the 2008 elections, their proposals will likely be heard by a Commission that is far more sympathetic.