30 September 2007

Changing the Proxy Rules II

Electing your friends to the board isn't the only way you, as a corporate activust/dissident, might decide to use proxies. You might seek to force votes at the annual meeting, or press the board to take a stand, on a range of actions through the non-binding resolution for example: that the company will stop doing business with country X until the dictator for life in country X promises free elections.

How much of that should be allowed, and when does it become a pointless distraction that the management and incumbent board can rightly keep off the ballots?

Previous efforts by the Securities and Exchange Commission to codify principles on such points has led to the creation of rule 14a-8. Here's the URL for an outline of 14a-8 prepared by the University of Cincinnati College of Law.


The present shenanigans arose over one particular provision of this rule, 14a-8(i)(8), which says specifically that a company has no obligation to present a shareholder proposal in its proxy materials if that proposal "relates to an election."

The U.S. Court of Appeals, Second Circuit, kicked over this applecart in September 2006, when it ruled in a lawsuit brought by the American Federation of State, County, and Municipal Employees against American International Group Inc. that although an issuer such as AIG can exclude rule changes that "relate to a particular election," it can't exclude rule changes that "like AFSCME's, would establish the procedural rules governing elections generally." [Emphasis added.]

The Second Circuit includes the federal district courts of Vermont, Connecticut, and New York. It seems to have gone "off the reservation" here, though. The other circuits generally understand the federal rule to mean that an issuer can exclude changes about a corporation's election rules full stop, regardless of whether their terms are "general" or "specific." By interpreting the ability to exclude narrowly, the circuit court has given shareholder activists a new target -- to try to change corporate policy by holding these meta-elections, votes about the procedures for future votes.

So the SEC has now proposed two distinct re-workings of 14a-8(i)(8). They are mutually inconsistent, but the SEC hasn't chosen between them. It has put them both out for public comment, saying, "Hey, everyone, help us decide what to do about the AFSCME case!"

In the eyes of most activists or would be activists, the SEC shouldn't do anything about the AFSCME case except embrace it.

But both of the proposals fall short of an embrace. One would allow the meta-elections, but would also set out a very restrictive set of rules about how they would be conducted. The other would disallow them completely.

Personally, I'm in favor of the third option. The SEC should reject both of its own proposals and just embrace the Second Circuit's reading, opening the doors wide (not just a crack) to meta-elections with activist intent.

Why? I'll explain tomorrow, completing this triptych.

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Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.