Question 9(8): Relates to election: If the proposal relates to an
election for membership on the company's board of directors or analogous
governing body.
§ 21.01 Background of the Exclusion
This exclusion permits omission of a proposal that relates to an
election to the company's board of directors or similar body. The rule
also has been interpreted to permit the exclusion of proposals seeking to
censure or remove directors.
§ 21.01[A] History of the Exclusion
In 1976, the SEC codified the staff's longstanding policy to exclude
proposals that related to the election of directors so that proponents
could not use the shareholder proposal process to effectuate a proxy
contest. Along with the policy regarding matters counter to management's
proposals (that became the counterproposal exclusion in 1976), this policy
previously had been included in the last sentence of the procedural
paragraph in the rule.[fn1]
In the mid-1980s, the SEC staff's application of this exclusion was
considered by a federal appeals court. In Rauchman v. Mobil Corp.,[fn2]
the court held that the company could exclude a proposal requesting the
company to adopt a bylaw amendment that "citizens of countries belonging
to OPEC are not qualified for election to, or membership on, the
corporation's Board of Directors." The company had received a no-action
letter from the SEC staff allowing it to exclude the proposal from its
proxy materials on the ground that it related to an election to office.
The proponent sued in federal district court to force the company to
include the proposal.
The district court ruled against the proponent and found that the staff
properly allowed the omission of the proposal based on the
election to office exclusion.[fn3] The court of appeals affirmed,
reasoning that it was undisputed that a Saudi Arabian citizen was running
for reelection to the company's board and that the proposed bylaw would
have made him ineligible to sit on the board.
In 1998, this exclusion was renumbered as 14a-8(i)(8) and the wording
was changed to incorporate the SEC's interpretation that the exclusion
only applies to proposals on elections of individuals for membership to
or removal from boards of directors.[fn4]
Also in 1998, recognizing that not all entities subject to the proxy
rules are corporations, the SEC recast this exclusion to apply it
specifically to the elections of governing bodies that perform the same
functions as the board of directors of a corporation, such as the
governing bodies of partnerships, trusts or LLCs.
The purpose of this exclusion is to ensure that the shareholder
proposal process is not used to circumvent the more elaborate rules
governing election contests. It is the SEC's view that dissidents seeking
election to the board should conduct their own solicitation for their
nominees by delivering proxy materials under the procedures set forth in
Schedule 14A and the related proxy rules.[fn5] As the SEC has stated,
"the principal purpose of this grounds for exclusion is to make clear,
with respect to corporate elections, that Rule 14a-8 is not the proper
means for conducting elections or effecting reforms in elections of that
nature, since other proxy rules, including Rule 14a-11, are applicable
thereto."[fn6] This exclusion effectively prevents
proponents from using Rule 14a-8 to nominate candidates to run against a
company's proposed slate of nominees.
Over several decades, commentators have supported the idea that
companies should allow more than one set of nominees to appear on the
company's ballot. They contend that denying shareholders access to the
company's proxy materials serves to entrench management and thwart
corporate democracy. Accordingly, they support the use of shareholder
proposals to urge companies to allow shareholders to nominate
candidates.[fn7]
[fn5] In early 2000, the SEC expanded Rule 14a-12 to cover all contested
solicitations of proxies. Since this eliminated the need for many of the
provisions in Rule 14a-11, the SEC rescinded Rule 14a-11. In the process,
several provisions from Rule 14a-11 were moved to new Rule 14a-12.
Exchange Act Release No. 42,055, 1999 SEC LEXIS 2291 (Oct. 22,
1999).
[fn7] These commentators include Melvin Eisenberg, "Access to the
Corporate Proxy Machinery," 83 Harv. L. Rev. 1489 (1970); Jayne W.
Barnard, "Shareholder Access to the Proxy Revisited," 40 Cath. U. L.
Rev. 37 (1991); Carol Goforth, "Proxy Reform as a Means of Increasing
Shareholder Participation in Corporate Governance: Too Little, But Not
Too Late," 43 Am. U. L. Rev. 379 (1994).
§ 21.01[C] Overlap with Other Exclusions
Companies often argue that proposals involving director nominee
criteria are counter to the company's election of directors and thus
excludable under Rule 14a-8(i)(9), in addition to being excludable as
relating to an election of directors.[fn8] This dual approach is used
because these proposals relate both to the election process and are
counter to the company's nomination of its candidates for the board. Such
proposals, if implemented, could disqualify one or more of management's
nominees for election to the board at the upcoming annual meeting. In
these cases, it is not uncommon for the staff to cite both (i)(8) and
(i)(9) as bases to exclude the proposal. However, the staff often gives
proponents an opportunity to revise their proposals so that they apply to
future director nominees.
Recent staff interpretations appear to rely increasingly on (i)(6),
which allows exclusion of a proposal that is beyond the company's power
to effectuate, rather than (i)(8), to allow companies to omit director
eligibility criteria proposals. In these cases, companies have argued
that they do not have the power to ensure the election of persons that
meet the criteria.
[fn8] See infra Chapter 22.
§ 21.02 Application of the Exclusion
§ 21.02[A] Identifying the Key Issues
This exclusion is implicated in a variety of different types of
proposals. The key issue for proposals that seek the nomination of
particular individuals or removal of specific board members is
straightforward: Would the proposal result in the election or removal of
the particular individual? If so, the proposal can be excluded.
However, it is sometimes unclear on the face of a proposal whether it
truly seeks to remove a director or defeat a company's nominee, or just
seeks to criticize him.
More challenging are proposals that deal with nomination procedures or
criteria and those that involve director qualifications. The analysis
normally is whether the proposal would affect the selection of nominees
or the election of nominees at the meeting at which the proposal would be
presented. Generally, proposals with criteria that are prospective (i.e.,
do not apply to the upcoming meeting) are includable unless the criteria
are so narrowly drawn that they impede a company's ability to select its
own nominees for the upcoming meeting or effectively prevent specific
company nominees from being elected.
§ 21.02[B] Nominations of Specific Persons
§ 21.02[B][1] Nominations of Specific Persons Not Permitted
The SEC staff consistently allows companies to exclude proposals
seeking to nominate or elect one or more persons for their board. The
ability to exclude these proposals is clear because their goal is
precisely what the exclusion seeks to prevent — the use of the shareholder
proposal rule to conduct a contested election. As a result, these
proposals normally do not require extensive analysis by the staff.
EXAMPLES:
Exclusion of self-nominating proposals
Bull & Bear U.S. Government Securities Fund, Inc.[fn9]
§ 21.02[B][2] Determination of Whether Communication is a
Proposal or Nomination
When a shareholder communicates with a company with the apparent
intention to nominate himself or herself to the company's board, the
written communication to the company often is ambiguous as to whether the
shareholder seeks to have a proposal included in the proxy statement or
whether the shareholder merely intends to provide the company with notice
of its intention to be nominated to the board.
The bylaws of many companies permit shareholders to orally nominate
themselves for board membership at the stockholders' meeting. This
privilege is often coupled with a requirement that the shareholder provide
advance notice. The question then is whether a written communication from
a shareholder is intended to be a shareholder proposal governed by
Rule 14a-8 or a notice of nomination under the company's bylaws. It is not
uncommon for the written communication to be silent on this issue.
If the shareholder's clear intention is to be nominated pursuant to the
company's bylaws, the SEC staff normally declines to address a no-action
request. If there is no clear indication of whether the communication is
a shareholder proposal, the SEC staff often couches its response by
allowing exclusion if the proponent's submission is deemed to be a
proposal — but the staff avoids determining whether the submission
is indeed a proposal. The staff leaves this up to the parties.
EXAMPLES:
In The York Group, Inc.,[fn17] the company was permitted to
exclude a proposal nominating six individuals for membership on
the company's board, although the SEC stated that it was not
clear that the submission was intended as a proposal under Rule
14a-8. The shareholder's submission to the company stated, "The
undersigned stockholders of The York Group, Inc. hereby notify
the Company of their intent to nominate for election to the board
of directors of the Company at the Company's 2001 annual meeting of stockholders each of the
persons set forth on Appendix A hereto." In the submission, there was
no indication whether the shareholder intended his letter to be a
proposal and the company argued that it was one. The proponent did
not submit a rebuttal.
In Molecular Biosystems, Inc.,[fn18] the SEC, noting ambiguity
regarding whether the submission was a proposal, allowed
the company to exclude a proposal that related to nominating the
proponent as a director. The company briefly argued that the
shareholder's communication was a proposal and was excludable. The
proponent did not submit a rebuttal. Interestingly, the company noted
that the proponent had posted numerous messages on a Yahoo! Finance
Message Board urging shareholders to support his nomination. This did
not appear to affect the staff's analysis of the no-action request.
[fn17] 2001 SEC No-Act. LEXIS 446 (Apr. 2, 2001).
[fn18] 2000 SEC No-Act. LEXIS 606 (May 2, 2000).
§ 21.02[C] Nomination Criteria or Procedures
§ 21.02[C][1] Proponent Seeks Nomination of Persons from Particular
Group
The SEC staff allows companies to exclude proposals that seek to
require the nomination of persons from a particular group such as
employees or customers. Often, the proposals include narrowly crafted
criteria to ensure that members of a particular group are nominated.
EXAMPLES:
In Delhaize America, Inc.,[fn19] the SEC staff allowed exclusion
of a proposal that asked the company to create a division of
"Ethics and Integrity" and nominate someone from this division to
the board. The company argued that the proposal would create a
discrete group from which the board would be bound to nominate
someone. The proponent did not submit a rebuttal.
In E. I. du Pont de Nemours and Company,[fn20] no-action relief
was denied with respect to a proposal requesting that the board
consider nominating a wage roll employee for election to the
company's board. The proponent argued that the proposal did not
require the company to nominate a wage roll employee, but rather
asked that the company consider a wage roll employee for nomination.
In Pacific Gas and Electric Company,[fn21] the SEC staff granted
no-action relief on a proposal that required at least one nominee to
be a person who has been associated with a California-based
environmental or conservation organization for five years. The
company argued that the inclusion of certain qualifications for
nomination "clearly relates to the election of a specific individual
to the Company's board" but did not identify that person. The
proponent did not submit a rebuttal.
Institutional investors increasingly are interested in electing their
own nominees to corporate boards. To that end, some such investors, led
by union-affiliated funds, file proposals (often referred to as "equal
access to the proxy" proposals) that ask companies to allow owners of
significant levels of equity to nominate persons to their boards. Such
proposals generally require that information about the shareholder
nominees be contained in management's proxy materials and that
shareholders be given the opportunity to vote for the shareholder
nominees on management's proxy card.
The SEC staff normally allows companies to exclude these proposals
because they would establish a procedure that could result in contested
elections of directors. Specifically, the SEC staff is concerned that
equal access proposals would, if implemented, create a loophole in Rule
14a-12, which establishes disclosure requirements for contested
solicitations. Activists supportive of these proposals contend that the
SEC staff's interpretation misapplies the election of directors
exclusion, since equal access proposals may be implemented in ways that
comply with Rule 14a-12.
EXAMPLES:
In Toys "R" Us, Inc.,[fn22] and Kmart Corporation,[fn23] the
companies successfully excluded proposals that related to including
a non-management nominee supported by shareholders who together own 2% of the company's common stock and
developing a system to encourage the candidacy of that non-management
nominee. The companies argued that the proposals were implicitly
contrary to the purpose and procedures of Rule 14a-12, which
contemplates that disclosure for nominees that are not supported by
the board should not be included with the company's proxy
disclosure. Neither proponent submitted a rebuttal.
In Oxford Health Plans, Inc.,[fn24] and Newmont Mining
Corporation,[fn25] the SEC staff granted no-action relief with
respect to proposals urging the companies to ensure that
shareholders with 3% of the companies' common stock be able to
nominate candidates to the companies' board and that the companies
would include the required disclosures regarding these nominees in
their proxy materials. In Oxford Health Plans, the company argued
that the proponent sought to cause future contested elections and
that the shareholder proposal process was not the proper forum in
which to conduct such a campaign. In Newmont Mining, the company
argued that the proposal expressly attempted to set up a system
whereby a shareholder could "register dissent" with the board and
violated the spirit of the exclusion. In both cases, the proponents
did not submit rebuttals. In its responses, the SEC staff noted that
rather than establishing procedures for nomination or qualifications
generally, the proposals would establish procedures that may result
in contested elections of directors.
In BellSouth Corp.,[fn26] the company was permitted to exclude a
proposal recommending an amendment to the company's bylaws that
provided for shareholder nominees, even if the board recommends a
vote against the shareholder nominees. The company argued that the
proposal process was not a mechanism for effecting reform in the
voting process. The proponent claimed that the board had made
changes to the bylaws specifically to block shareholders from making nominations
and argued that his proposed changes would open "the election
process to all shareholders, not just the Board of Directors."
An increasingly popular type of proposal is one that asks companies to
nominate more than one person for each open board seat at future
meetings. The SEC staff requires the inclusion of these proposals if they
give the board the power to nominate all of the nominees, because such
proposals do not directly contest the board's power. On the other hand, if
a proponent clearly seeks to conduct a contested election — one in which
candidates are nominated by shareholders — through the proposal process,
the staff allows companies to exclude a proposal.
EXAMPLES:
In General Electric Company,[fn27] the proponent defeated a
no-action challenge to a proposal that urged the board to nominate at
least two candidates for each open board position and to provide all
of required disclosures for these candidates in the company's proxy
materials. The proponent noted that a similar proposal submitted to
the company in the prior year had been excluded with the SEC staff's
permission but that this proposal had one notable difference — it
shifted responsibility for nominating all nominees to the board. In
comparison, the prior proposal allowed the proponent to nominate
competing nominees. The company argued that despite this
modification, the proposal's object was the same — to ensure a
"contested election of directors." The company also argued that in
selecting nominees for election as directors, the company's board has
a fiduciary duty to choose the best candidates and that the proposal
would essentially force the board to violate this duty by requiring
it to include alternative candidates to run against those
candidates that the board believes are the best nominees for
election.
In United Road Services, Inc.,[fn28] the company was permitted
to exclude a proposal that mandated an amendment to the company's
bylaws to require that each "duly-nominated candidate for director"
be listed in the company's proxy materials. The company argued that
the purpose of the proposal was clearly to provide a means for
conducting contested elections and that the implementation of the
proposal would contravene the system for contested elections
established by Rule 14a-12. The proponent responded that the proposal
was a corporate governance measure that would apply generally to all
elections, rather than a proposal that relates to an election of
particular candidates. The proponent disagreed over whether a
proposal that encouraged proxy contests should be an appropriate
concern of the SEC and that the point of the proposal was to prevent
management from using shareholders' assets to finance a proxy
solicitation by "one side."
In General Motors Corporation,[fn29] the SEC staff declined to
grant no-action relief on a proposal asking the board to nominate at
least two candidates for each open board position, and provide the
required disclosures of these candidates in the company's proxy
materials. The company noted that the supporting statement showed
that the proponent expected stockholders to use this procedure to
"register dissent about a given candidate" or "to oppose a candidate
that has failed" to perform his or her duties properly or has "other
problems." The company argued that these were the essential elements
of an election contest and should be subject to Rule 14a-12. The
proponent did not submit a rebuttal.
In Boykin Lodging Company,[fn30] the SEC staff granted no-action
relief on a proposal that mandated the amendment of the company's
policies to require that all nominees for director, including those nominated by shareholders, be disclosed
in the company's proxy materials and contain the same types and amounts
of information about each nominee. The company argued that the
proposal was attempting to create a procedure for contesting the
election of directors without the need for compliance with the proxy
rules. The proponent contended that the proposal would simply ensure
that Rule 14a-12 disclosures would be combined in one document,
rather than contained in two (one for management subsidized by all
shareholders, and one for dissidents with no such financial help).
The proponent noted that Rule 14a-12 did not require those opposing
management to finance their own solicitation and that the proposal
dealt with one of the largest problems faced by shareholders — that
management can use shareholders' money to campaign for office, while
shareholders who support an alternative must pay large amounts out of
their own pockets to conduct a solicitation.
The SEC staff normally does not allow the exclusion of proposals that
establish qualifications for the election of directors, as long as the
criteria would not disqualify directors or new company nominees up for
election at an upcoming shareholders' meeting. Sometimes it is difficult
for the staff to determine whether qualifications or procedures truly are
general or are designed to target particular company nominees. To
overcome their burden, companies often show the hidden motives of the
proponents by revealing the relationship between the proposal and its
likely outcome if adopted.
EXAMPLES:
In Waddell and Reed Financial, Inc.,[fn31] the company was
required to include a proposal recommending that no board member
of a former parent company be nominated to serve as a director of
the company, provided the proponent recast
the proposal as prospective. The company argued that the proposal
would have the effect of removing four directors from its board and
precluding one nominee from being elected; in essence, the company
urged that the proponent was conducting an election contest. The
proponent responded that it was not seeking to engage in an election
contest and that the proposal would merely serve as a recommendation
for future nominees.
In Adams Express Company,[fn32] the SEC staff allowed exclusion
of a proposal providing that director nominees should own a minimum
of 1,000 shares of the company's common stock; however, the proponent
was given an opportunity to revise the proposal so that it applied
only to persons who were nominated at subsequent annual meetings. The
company argued that the proposal could nullify its nominations to the
extent that the nominees would not satisfy the share ownership
requirement prescribed by the proposal at the time of the election.
The proponent did not submit a rebuttal.
In Duke Energy Corporation,[fn33] the proponent turned back a
no-action challenge to a proposal requesting that the board limit
future director nominations to persons serving on no more than four
boards of other companies, organizations or entities. The company
argued that the proposal related to elections because the proposal
intruded on the board's ability to identify, attract and recommend a
group of its candidates. The proponent noted that the purpose of the
proposal was to obtain directors who could devote the highest level
of time and attention paid by the board to the company's business.
In America West Holdings Corporation,[fn34] the company
unsuccessfully sought to exclude a proposal urging the board to
require that an independent director who had not served as the
company's chief executive officer serve as chairman
of the board. The company argued that due to the specific nature of
the proposal, it targeted specific members of the board of directors
and "appear[ed] to derogate the quality and integrity of these board
members of the extent [sic] that the proposal may be deemed an effort
to oppose the management solicitation on behalf of the re-election of
these persons." The proponent responded that the proposal did not
mention the election of directors, but rather simply proposed that
the chair and CEO be split, and that the proposal did not
specifically apply to the current CEO.
The following are examples of other proposal topics that proponents
have successfully included over company objections that the proposals
related to the election of directors:
directors over 70 years of age — LSB Industries.[fn38]
age of directors — Archer-Daniels-Midland Company.[fn38.1]
prohibition on employees and consultants (and spouses and
immediate family) from serving on the board — Nuclear Support
Services, Inc.[fn39]
director attendance at shareholders' meetings — Chicago
Milwaukee Corporation.[fn40]
independence of directors — Prior to 1991, the SEC staff
excluded proposals requiring a certain portion of the board to be
independent on the ground that they related to the election of
directors. Since the SEC staff changed its interpretative stance
in 1991, its position has been that proponents can include proposals that ask
companies to ensure that a majority of their board is independent.
The staff's interpretative change became evident in the following
letters: Dillard Department Stores, Inc.,[fn41] Waste Management
Inc.,[fn42] and Tribune Co.[fn43] Today, the disputes that arise
are over the proper definition of independence.
If a proposal impugns the character of a director who is renominated
for election, the SEC staff often concludes that the proposal is
excludable on the theory that the proposal indirectly seeks to influence
the election. Exclusion will be allowed if the proposal specifically
relates to the election or even if the proposal is more general and does
not appear to implicate the election process.
EXAMPLES:
In Xerox Corporation,[fn44] the company was allowed to exclude a
proposal that related to certain board members immediately vacating
their positions and provided guidelines for selecting those
directors' replacements. In arguing that the proposal impugned
certain directors, who most likely would be nominees at the upcoming
shareholders' meeting, the company noted that the proposal included
accusatory statements including that directors caused a "serious
breech [sic] of trust," that they are "dominated and influenced by
employee directors" and must "accept responsibility for [the]
unacceptable performance" of the company. In addition, the company
noted that the supporting statement opined that "we recognize that
the current Board of Directors cannot restore our investment." The
proponent did not submit a rebuttal.
In AT&T Corp.,[fn45] the SEC staff granted no-action relief on a
proposal seeking the separation of the chairman and CEO
positions. The company argued that the proposal sought to prevent the
current CEO from serving as chairman after his current term expired.
The proponent responded that it was clear that the proposal did not
apply to the current chairman. In its response, the SEC staff noted
that the proposal, together with the supporting statement, appeared
to question the business judgment of the company's chairman, who was
up for re-election at the upcoming stockholders' meeting.
In Foster Wheeler Corporation,[fn46] the SEC staff allowed the
company to exclude a proposal recommending that if the company's
current chairman of the board was re-elected, that he be removed
from that role and replaced with an independent director. The
company argued that the supporting statement included numerous
remarks about the chairman that could affect his candidacy at the
upcoming meeting. The proponent responded that the remarks were
statements of fact.
In PepsiCo, Inc.,[fn47] the company obtained no-action relief
with respect to a proposal that the board establish a policy
requiring resignation of board members whose individual professional
responsibilities change. The company argued that the proposal,
together with the supporting statement, appeared to question the
ability of two members of the board who were up for re-election at
the next annual meeting. The company pointed out that the supporting
statement called for resignation of two directors because they were
"ousted from their own places of employment."
The SEC staff allows companies to exclude proposals that would
require them to remove specific directors from office. The basis
for the position is that this type of proposal is viewed as an
effort to oppose the board's decision to nominate those directors
for re-election and that this is contrary to the election process.
EXAMPLES:
In Second Bancorp Incorporated,[fn48] the SEC staff allowed
exclusion of a proposal that related to the resignation of a
director. The company argued that the proposal would call for an
action that is contrary to the election process and the proposal
impugned the director. The proponent responded that the election
of directors exclusion did not apply to proposals dealing with
the topic of resignation.
In Milacron Inc.,[fn49] the company was permitted to exclude a
proposal relating to the removal of the company's chief executive
officer, who was also the chairman of the board. The company
argued that, to the extent that the proposal sought to remove the
chief executive officer from office, it also sought his removal
from the board. The proponent contended that the proposal merely
related to a vote of confidence in the CEO of the company, and
that a vote of no confidence would merely be a suggestion to the
board and not a mandate for action.
The SEC staff interprets the election of directors exclusion to allow
companies to exclude proposals that call into question the business
judgment and competence of the board, including proposals that seek the
removal of the entire board. In particular, the SEC staff consistently
permits companies to omit proposals that ask for a vote of "no confidence"
in the board.
EXAMPLES:
In Honeywell International Inc.,[fn50] the company successfully
excluded a proposal that sought to make directors ineligible
for election if they fail to enact any proposal approved by
shareholders. The company stated that although the proposal was
generic, it rendered some board members who were up for re-election
ineligible in the next board election. The proponent argued that the
proposal had no effect on elections — just future nominations — and that
it was the shareholders' right to eliminate directors who did not
share their priorities for the company.
In Novell, Inc.,[fn51] the SEC staff allowed the company to
exclude a proposal providing that shareholders have "no confidence"
in the company's board and that all shareholder votes should be
withheld from the current directors. The company argued that the
proposal clearly called into question the ability of the current
board to continue to serve in such capacity and was tantamount to
opposing the company's solicitation for their re-election. The
proponent did not submit a rebuttal.
In U.S. Bancorp,[fn52] the company successfully excluded a
proposal that mandated the removal of all of the company's officers
and directors. The company argued that because the proposal called
for the removal from office of all of the company's directors, it
expressly related to an election for membership on the board. In
addition, the company noted that because the board was divided into
three classes, the effect of the proposal would be to remove ten of
the company's 15 directors before their terms had been completed. The
proponent did not submit a rebuttal.
§ 21.02[D] Voting Procedures and Nominee Disclosure
§ 21.02[D][1] Voting Levels
Occasionally, shareholders submit proposals that relate to the level of
votes required to elect directors. In most cases, the staff allows these
proposals to be included because they do not directly
relate to the actual election of directors, just the process. However,
companies often argue that the proponents have ulterior motives to affect
the upcoming election.
EXAMPLES:
In Lockheed Martin Corporation,[fn53] the company was required to
include a proposal recommending reinstatement of simple majority
voting on all matters that are submitted to shareholder vote. The
company argued that the proposal impugned several directors in
the supporting statement. The proponent noted that each of its
statements were statements of fact or quotes from publications.
In Phoenix Gold International, Inc.,[fn54] the SEC staff denied
no-action relief on a proposal recommending that the board provide
for cumulative voting. The proponent noted that as a significant
minority shareholder, it would likely nominate someone if cumulative
voting were implemented. The company argued that this statement
reflected the proponent's intention to nominate and elect its own
candidate.
Occasionally, shareholders submit proposals that would set certain
standards for the kinds of information that companies should provide
concerning nominees. The SEC staff may allow this type of proposal to be
included, depending on whether the disclosure could directly affect the
election of any of the company's nominees for election at an upcoming
meeting.
EXAMPLES:
In Occidental Petroleum Corporation,[fn55] the proponent
successfully defended against a no-action challenge to a proposal
asking the company to give each director nominee the
right to submit a report in the proxy statement and to disclose
if any nominee decided not to include such a report. The company
argued that the proposal related to the election of directors
because its bylaws contained a procedure for shareholders to
nominate candidates for election to the board; as a result, the
company urged, it was possible that there could be nominees not
endorsed by the board with respect to whom the company would not
be able to include the requested disclosure. The proponent stated
that it did not intend to affect any election and that the proposal
was "intended to hear from each director in a forum that is intended
as a direct communication from the directors to the stockowners,
i.e., the proxy statement."
In American Telephone & Telegraph Co.,[fn56] the SEC staff
declined to grant no-action relief with respect to a proposal
requesting that company disclose the labor union affiliations of each
nominee. The company argued that the disclosure could lead
shareholders to conclude that a nominee for election without past or
present union affiliation is not as qualified as one who had such an
affiliation. The proponent stated that since many of the company's
employees were shareholders and that since the majority of employees
were union members "disclosing this information would assist the Bell
System and other worker-shareholders in making their decision to elect
proper directors for the board of AT&T."
A relatively new type of proposal would require companies to hire proxy
advisory firms to advise shareholders on how to vote on matters raised at
future stockholders' meetings. Companies often seek to exclude these
proposals on a number of grounds, including the proper subject exclusion,
the "ordinary business" exclusion and the "election to the board"
provision. Some companies have argued that these proposals run afoul of
this exclusion because they would require the proxy advisory firm to
render an opinion on the election of specific nominees for the board, which could result in a contested
election. The SEC staff appears to have embraced this argument, at
least where the proposal recommends analysis regarding candidates
for election to the board.
EXAMPLES:
In Cirrus Logic, Inc.,[fn57] the company successfully excluded a
proposal that related to the company hiring a proxy advisory firm, to
be chosen by shareholder vote, to give voting advice to
shareholders. The company argued that the hiring of a proxy firm to
provide voting advice "interferes with the existing mechanisms
established under Rule 14a-[12] to administer proxy contests." The
proponent had submitted this proposal numerous times to various
companies and requested that the SEC staff reconsider its decisions
to exclude this type of proposal. The proponent argued that Rule
14a-12, which governs election contests, provides no mechanism for
shareowners to request the corporate governance improvements, so the
shareholder proposal procedure is the appropriate way to make such a
request. The proponent also argued that the proposal would not change
the process for election contests, but simply give all shareholders
access to information which is available now only to some.
In General Motors Corporation,[fn58] the company was allowed to
exclude a proposal recommending that an independent analysis be
included in the company's proxy statement regarding each item to be
voted on at each shareholders' meeting. The company noted that the
proponent's sole example of how the independent analysis would work
suggested that the company would have to provide disclosure regarding
directors with purported governance weaknesses, such as
interrelationships with other companies, service on a number of other
boards, length of service on the board, relationships
with other companies overlapping with business relationships, and
limited stock ownership. The company argued that this example made
it clear that the proposal was meant to evaluate the board's nominees
against criteria proposed by the analyst. The proponent argued that
only the director information segment of the proposal was challenged
by the company, and that this segment only had the effect of better
informing the shareholders.
Present any evidence available of impugned character. A company should
submit any evidence it can find to show that a proponent seeks to impugn
the character of a company nominee — whether it is from an e-mail, a Web
message board or remarks to the press.
Look for relationship with election contests. The SEC staff appears to be
especially likely to allow exclusion of a proposal if an argument can be
made that the proposal, if implemented, will create an election contest
outside the parameters of Rule 14a-12. Analyze the proposal to determine
whether it could lead to such a result.
Proponent Practice Pointers
Prospective application. A proponent should make clear that the proposal
would establish qualifications or procedures applicable only to future
elections and that the proposal would not affect the company's nominees
for the upcoming meeting.
Avoid excessive personal attacks. Do not include personal criticisms
directed at individual board members in the proposal or supporting
statement. Proponents should focus their arguments instead on company
performance; if individual directors are singled out, keep the discussion
factual and low-key.
Company Practice Pointers