Caseflicks

Court of Appeals for the Second Circuit • 2006

AMERICAN FEDERATION OF STATE, COUNTY & MUNICIPAL EMPLOYEES, Employees Pension Plan, Appellant, v. AMERICAN INTERNATIONAL GROUP, INC., Appellee

462 F.3d 121 | 2006 U.S. App. LEXIS 22653

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Takeaway

In short, this case held that Rule 14a-8’s election exclusion reaches proposals targeting a particular election contest, not general shareholder proposals that establish future proxy-access procedures.

Background

AFSCME, through its employee pension plan, owned 26,965 shares of AIG voting common stock. It submitted a shareholder proposal for AIG’s 2005 proxy materials that would amend AIG’s bylaws to create a limited proxy-access procedure. Qualifying shareholders or groups holding at least 3% of AIG’s stock for one year could nominate one director candidate and require AIG to place that candidate’s name, disclosures, and an optional supporting statement in AIG’s own proxy materials.

AIG asked the SEC Division of Corporation Finance whether it could omit the proposal under Exchange Act Rule 14a-8(i)(8), which allows exclusion of a proposal that “relates to an election” for the board. The Division issued a no-action letter stating that it would not recommend enforcement if AIG excluded the proposal. AIG did so.

AFSCME sued in the Southern District of New York, seeking declaratory and injunctive relief requiring inclusion of its proposal. The district court denied a preliminary injunction, reasoning that the proposal plainly related to an election and to nothing else. The parties then stipulated that the ruling would serve as a final judgment on the merits. AFSCME appealed.

Issues

Issue #1

Whether a shareholder proposal establishing a general bylaw procedure for shareholder-nominated directors to appear in company proxy materials “relates to an election” and may therefore be excluded under SEC Rule 14a-8(i)(8).

Holding

No. Rule 14a-8(i)(8) does not permit exclusion of a proxy-access bylaw proposal that establishes general procedures for future elections rather than contests a particular upcoming election.

Reasoning

The operative phrase, “relates to an election,” was ambiguous. It could mean only proposals concerning a particular election, as AFSCME argued, or could extend to any proposal concerning elections generally, as AIG maintained. The text alone did not resolve whether a proposal setting the background rules for nominations and ballots was excluded.

Because the regulation was ambiguous, the court looked to the SEC’s interpretations of its own rule. Although informal agency interpretations may generally receive deference when construing an ambiguous agency regulation, deference is reduced when the agency’s current view conflicts with an earlier interpretation and the agency does not adequately explain the shift.

The SEC’s 1976 statement, issued when it last substantively revised the election exclusion, explained that Rule 14a-8 was not the appropriate vehicle for conducting campaigns or reforms involving elections when other proxy rules governing election contests applied. Read in context, that explanation excluded proposals that would oppose management’s solicitation in a particular director election, such as a proposal nominating a candidate for an identified seat at an upcoming meeting.

The same 1976 materials made clear that the SEC did not intend to expand the exclusion to matters previously treated as nonexcludable, including cumulative voting rights and general qualifications for directors. Those matters can affect the likelihood or structure of election contests, but they are not themselves contests over particular director seats. This distinction supported reading the exclusion narrowly.

For approximately sixteen years after 1976, the Division of Corporation Finance generally followed that narrow understanding. It began to treat proposals establishing nomination procedures as excludable around 1990, and its approach remained inconsistent for a time. The court concluded that this later administrative practice conflicted with the contemporaneous 1976 interpretation.

In its amicus brief, the SEC argued that a proposal was excludable if it would result in a contested election, including by requiring a company to include shareholder nominees in its proxy materials in future elections. But the SEC neither acknowledged its departure from the 1976 position nor supplied a reasoned explanation for it. Calling the longstanding prior position a mistake was insufficient.

The court therefore deferred to the SEC’s contemporaneous 1976 interpretation rather than its unexplained later view. AFSCME’s proposal did not nominate anyone for a particular election or oppose management’s nominees in an imminent contest. It instead sought to amend AIG’s bylaws to establish general rules through which qualifying shareholders could nominate candidates in the future. Accordingly, AIG could not exclude it under Rule 14a-8(i)(8).

Issue #2

Whether allowing proxy-access bylaw proposals under Rule 14a-8(i)(8) improperly circumvents SEC disclosure requirements applicable to contested elections.

Holding

No. That policy concern did not justify expanding the election exclusion beyond its proper interpretation.

Reasoning

The SEC warned that allowing proxy-access proposals could enable shareholders to conduct election contests without a separate opposing solicitation and thus avoid disclosures otherwise required in contested elections. The court explained that the legal question was not whether proxy-access bylaws were permissible under federal law; they were. The narrower question was whether a company could exclude a proposal seeking such a bylaw from its proxy materials.

Even if the election exclusion permitted omission, a company could voluntarily include a proxy-access proposal, and shareholders could adopt it. Thus, classifying the proposal as excludable would not eliminate the SEC’s stated disclosure concern; it would only make proxy access less likely.

Moreover, if a proxy-access bylaw were adopted and shareholder nominees appeared in the company’s proxy materials, the company’s solicitation and its treatment of those nominees would remain subject to the ordinary proxy-disclosure rules. If the SEC believed additional disclosures were needed, it could amend its rules or revise its interpretation with a reasoned explanation. Policy judgments about proxy access and disclosure belonged primarily to the SEC, not to the court.