Shareholder Non-Access, Corporate Governance and the SEC: Promises, Promises (Part 5)

We are discussing the short proposal, the one that would deny shareholder access to the company's proxy statement for bylaw proposals relating to the election of directors.  As we have noted, the proposal, if adopted, would effectively deprive shareholders of the right to make proposals otherwise permitted under state law.  Federal preemption in other words.  The so called "short proposal" can be found inExchange Act Release No. 56161 (July 27, 2007).

In addition, however, the non-access proposal uses vague and extraordinarily broad language, susceptible to a multitude of interpretations.  It will, if adopted, result in challenges to a greater number of proposals, including some in areas previously deemed resolved by the staff.  

It was the Second Circuit  In AFSCME v. AIG , 462 F.3d 121, 125 (2^nd Cir. 2006), that described the language in Rule 14a-8(i)(8)  (“proposal relates to an election for membership on the company’s board of directors”) as “not particularly helpful." In other words, the language was imprecise and not susceptible to clear interpretation.

Likewise the non-access proposal contains language that is not particularly helpful.  In addition to retaining the phrase “relates” to an election of directors, the language adds to the exclusion proposals that relate to a nomination or to “procedures” for any nomination or election.  On its face, therefore, the language would extend to proposals that would impose minimum qualifications for nominees or proposals that seek the adoption of election procedures such as cumulative or majority voting. 

The Commission has acknowledged the problem posed by the broad language but has simply observed in the release that the staff will “not adopt an inappropriately broad reading” of the language in order to exclude “all proposals regarding the qualifications of directors, the composition of the board, shareholder voting procedures, and board nomination procedures.” Some of the prior positions in these areas are listed in the release. See Exchange Act Release No. 56161 n. 41 (July 27, 2007). 

This commitment does little to mitigate the unnecessarily broad language. First, a promise to avoid an “inappropriately broad reading” is no real limitation. It contains no objective content, is susceptible to multiple interpretations, and will likely have shifting meanings over time, as the facts in AFSCME illustrate.

Second, the Commission merely promised not to allow for the exclusion of “all proposals” relating to director qualifications, board composition and voting/nominating procedures. In other words, this was tantamount to an acknowledgement that some will be excluded. The result will likely be increased challenges to shareholder proposals that relate to these areas.

Third, the language is broad enough to allow for the exclusion of proposals that the staff has previously found cannot be excluded. Thus, the short release discloses in footnote 41 that the Commission staff has previously found that “voting procedures,” including proposals on cumulative and majority voting could not be excluded as related to the election of directors.  The release, however, studiously avoided reaffirming these positions (the footnote is merely descriptive) and did not explain how they could survive the proposed changes to Rule 14a-8(i)(8), particularly the addition of the language “relates” to a nomination or the procedures for a nomination or election.  Proposals involving voting procedures, including cumulative and majority voting, seem to fall squarely within the language.  

The imprecise nature of the language (and the likelihood that it will impact future shareholder efforts in other areas) is particularly noticeable when compared with the language used by the Commission in the long proposal. There, the Commission proposed to give shareholders access to the company’s proxy statement for bylaws relating to shareholder nominees. Rather than put in broad, vague language that would potentially allow shareholders to argue that other types of proposals ought to be included, the Commission used very narrow, very precise language designed to make sure that the exclusion applied only to one type of proposal. Yet in the non-access context, the Commission used broad and vague language that would provide companies with additional opportunities to argue for the exclusion of proposals that go well beyond access for shareholder nominees.

If this language is adopted, the Commission staff will find itself having to make fine distinctions on proposals that relate to critical areas of shareholder governance, including nominations and election procedures. Moreover, each type of proposal excluded under this provision will amount to an effective denial of a shareholder’s rights under state law.  The language will result in uncertainty, something that will add cost to the shareholder proposal process, a cost that will be felt most severely by shareholders. Finally, the changes will reopen areas already deemed resolved by the staff of the Commission, with shareholders forced to incur the expenses associated in defending these positions.