Shareholder Access, the SEC and Corporate Governance: The Problem of Imprecise Language (Part 6)

We are discussing the proposal made by the Securities and Exchange Commission that would amend Rule 14a-8(i)(8) to clarify that proposals may not be excluded that would sometimes require management to include shareholder nominees in the company’s proxy statement (“access proposal”).  The proposal is contained in Exchange Act Release No. 56160 (July 27, 2007).  This Blog has already written extensively about the alternative proposal made by the Commission that would deny shareholders access for this purpose and has submitted to the Commission a comment letter on the non-access proposal.

Another less discussed problem has been the decision to broaden the reach of the exclusion in Rule 14a-8(i)(8) well beyond the access proposal at issue in AFSCME.  The proposed language would allow for the exclusion of proposals that relate to the nomination of directors or that relate to procedures used to nominate or elect directors. Nowhere in the Release is this language discussed. On its face, the language would allow for the exclusion of proposals that sought to impose minimum qualifications for director nominees or proposals that sought the institution of election procedures such as majority or cumulative voting, areas that, in the past, the staff has declined to permit exclusion.

In the short release, the Commission acknowledged the problem posed by the broad language but merely 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.” Exchange Act Release No. 56161 (July 27, 2007).  The language, however, does not appear in the long release, suggesting that the staff is not making the same commitment.

Even if the interpretation applies in the case of the long release, we view the promise as inadequate to ensure a proper interpretation of Rule 14a-8. 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. Moreover, the language is broad enough to allow for the exclusion of proposals that the staff has previously concluded are not subject to exclusion.

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, limited only by vague admonitions against inappropriately broad readings. 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.