The Securities and Exchange Commission, which had planned to discuss proxy access on Dec. 13, postponed consideration of the issue again as the agency's commissioners struggle to reach a consensus.
"It's a very divisive item, and we don''t have a consensus on the issue yet," Commissioner Roel Campos told Bloomberg News this week.
The SEC, without providing an explanation, omitted proxy access from the agenda for its Dec. 13 open meeting, according to a notice on the agency's Web site. The five commissioners originally were to consider the topic on Oct. 18, but that discussion was postponed until December.
With this latest delay, it is less likely that the SEC's staff will grant requests by Hewlett-Packard and other firms to exclude shareholder proposals for the 2007 season that seek to establish procedures to allow shareholders to nominate directors, access proponents and governance observers say.
"Cox is clearly looking to get a consensus or at least a 4-1 vote on proxy access, and he hasn't got it now," ISS Executive Vice President Patrick McGurn noted. "This means that the shareholder proposal at H-P and maybe a dozen other companies that are likely to get such resolutions have a better chance of making it into the proxy."
The SEC has grappled with the controversial issue of proxy access for years. In October 2003, the agency issued a draft rule to establish procedures to allow investors to propose board candidates to appear on the same proxy ballots as management nominees. While investor advocates welcomed the measure, business groups opposed the rule and argued that the process would be too complicated. In early 2005, the SEC dropped the proposal and allowed American International Group (AIG) and several other companies to exclude shareholder resolutions that were based on the draft rule.
The SEC was forced to revisit the topic again after the U.S. Court of Appeals for the Second Circuit ruled in September that the agency should not have allowed AIG to omit the 2005 access proposal filed by the American Federation of State, County, and Municipal Employees Pension Plan (AFSCME). The appeals court took issue with the SEC's evolving interpretations of Rule 14a-8(i)(8), which allows companies to omit proposals that "relate to an election of directors." Since 1990, the SEC has applied that language more broadly to exclude proposals that deal with election procedures generally, including proxy access resolutions from AFSCME and other investors. The court asked the SEC to spell out the rationale for its change of approach.
Since the court ruling, investor advocates have urged the SEC to allow shareholders to bring access proposals at individual firms and create a mechanism for shareholders to nominate directors. In a Sept. 28 letter, the Council of Institutional Investors (CII) argued: "The shareholder proposal rule is particularly important to long-term investors such as council members who--due to their sizable ownership stake of portfolio companies and their commitment to passive investment strategies--are unable to exercise the 'Wall Street walk' and simply sell their holdings when they are dissatisfied."
"We are prepared to be very flexible. We want shareholders to have a limited ability to bring proposals for shareholder access," Amy Borrus, CII's deputy director, told Governance Weekly. "We are prepared to work with the SEC on a solution that addresses shareholder needs and the business community's concerns."
"I think the commission wants to give [proxy access] careful thought," Cornish Hitchcock, an attorney who represents labor and public pension funds, told Governance Weekly. "[Former] Chairman [William] Donaldson was not able to reach a consensus. I imagine they are still looking at the proposal."
Corporate advocates, including the Business Roundtable, have urged the SEC to reaffirm the agency's position since 1990 that companies should be able to exclude proxy access proposals. That group and the U.S. Chamber of Commerce have warned that the SEC may not have the legal authority to require companies to allow investors to nominate directors.
The American Bar Association's Committee on Federal Regulation of Securities expressed similar views in a Nov. 27 letter to the SEC. "We strongly support the well-founded interpretation of the director election exclusion that the commission has now applied for more than a decade," the lawyers' group wrote. The committee castigated "institutional investors, hedge funds, and activist groups, some of whom have goals that differ from those of shareholders generally."
H-P Seeks Exclusion of Access Proposal
In a Nov. 3 letter, lawyers for Hewlett-Packard asked the staff of the SEC's Division of Corporation Finance for permission to exclude the access proposal filed by AFSCME and state pension funds from Connecticut, New York, and North Carolina. In that letter, Amy L. Goodman, a partner in the law firm of Gibson, Dunn & Crutcher, argued that the AIG decision of the New York-based Second Circuit is not binding on agency staff and Hewlett-Packard, because the computer company is based in California and plans to hold its annual meeting there, which is outside the court's jurisdiction.
Richard Ferlauto, director of pension and benefit policy at AFSCME, said the latest SEC delay means that the agency staff "most likely" will not issue a "no action" letter to allow exclusion of the proposal. "If the company still attempts to omit the proposal, we will seek to enforce our rights in court," Ferlauto told Governance Weekly.
Other SEC Agenda Items
While postponing consideration of proxy access, the SEC plans to address the following issues at its Dec. 13 open meeting:
--Whether to issue interpretative guidance on the internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act to ease the burden on companies, especially small businesses.
--Whether to revise a proposed rule to make it easier for foreign issuers to de-list from U.S. exchanges and de-register with the SEC.
--Whether to amend Section 14 of the Exchange Act to allow companies to post proxy materials on a Web site and provide shareholders with notice of the Internet availability of the materials. Dissident investors waging proxy fights also would be permitted to use the Internet to distribute proxy materials. The commission also will consider whether to propose mandating Internet disclosure of proxy materials.
--The commission will also consider whether to propose a new rule under the Securities Act of 1933 to revise the criteria for "accredited investors" who may invest in hedge funds.
The commission also plans to discuss whether to accept more public comment on its mutual fund governance rules. The draft rules, which would require mutual fund boards to have independent chairs and 75 percent of the directors to be independent, have been on hold after a legal challenge by the Chamber of Commerce.