Shareholders May Wield More Power in Director Elections

Securities and Exchange Commission (SEC) regulations regarding board elections do not bar shareholder proposals to amend company bylaws that would allow shareholder-nominated candidates to be listed in corporate proxy materials, the court said.

The decision by the federal appellate court comes at a time when shareholders are trying to wield more power over corporate governance. If the decision survives appeal, it could give weighty shareholders such as pension plans and hedge funds more sway, bringing them head-to-head with the management over who gets the coveted board seats (See   Running the Fund: Majority Rules?).

The case stems from a 2004 request by the pension plan of the American Federation of State, Country & Muncipal Employees (AFSCME), one of the US’s largest public service unions, to AIG, of which the pension plan holds about 26,000 shares of voting common stock. AFSCME wanted to put in the 2005 proxy materials an amendment to require, in some circumstances, the insurance giant to publish the names of shareholder-nominated candidates for director positions along with the ones nominated by AIG.

The question was whether a SEC regulation prevented a shareholder proposal requiring a company to include shareholder-nominated candidates for the board of directors on the corporate ballot can be excluded from proxy materials because it “relates to an election.”

Armed with a no-action letter from a division of the SEC, which said it would not recommend an enforcement action against the company if it refused to include the proposal in the proxy statement, AIG denied the union’s request. The refusal prompted the union to file suit in the US District Court for the Southern District of New York seeking an order compelling AIG to include the proposal on the next proxy statement.

The district court denied AFSCME’s motion, saying that the proposal, on its face, “relates to an election,” and in fact, “relates to nothing else.”   The district court then denied the union’s claims for relief and dismissed the complaint.

The SEC regulation (Rule 14a-8(i)(8)) that governs recommendations or requirements by shareholders that the company take action says a shareholder proposal must meet eligibility requirements. AIG claimed that the AFSCME proposal “relates to an election,” and was not required to be included in the proxy materials.

Covering Elections in General

The three-judge appellate panel said the regulation only applies to “shareholder proposals that related to a particular election and not to proposals that, like AFSCME’s, would establish the procedural rules governing elections generally.”

“If this stands, it is the most significant change to shareholder rights in 30 years,” said Richard Ferlauto, a spokesman for the union, told the Los Angeles Times. “This is the Holy Grail that we have always sought – to be able to easily and cost-effectively nominate a director who could stand on the proxy card, along with the company nominees.”

AIG could appeal the ruling by requesting a review by the full panel of the 2 ^nd Circuit judges, or by appealing the decision to the US Supreme Court.

General Motors Corp. shareholders approved proposals in June that would give them more weight in director elections, but stopped short of allowing shareholders to submit nominations. One proposal would require board members to receive a majority of votes cast by shareholders to be re-elected and another proposal would permit shareholders to pool their shares for a single candidate or a few candidates, rather than the full slate.( See GM Shareholders Approve Majority Voting Proposal).

However, CVS Corp. shareholders shot down a proposal in May by a pension fund that would require director nominees get a majority vote (See CVS Board Axes Director Majority Voting Proposal ).

For the full opinion go here .