"New" Shareholder Proposal Rule to Take Effect

The SEC has announced that it will allow a previously adopted amendment to Rule 14a-8, the shareholder proposal rule, to become effective as soon as notice is published in the Federal Register. Rule 14a-8 requires public companies to include in their proxy materials certain proposals for shareholder vote submitted by shareholders. The SEC adopted the amendment in August 2010, but it has been in limbo since the Business Roundtable challenged the SEC’s adoption of Rule 14a-11, the rule allowing shareholders to nominate candidates for the board of directors. The SEC stayed the effectiveness of both 14a-11 and the amendment to 14a-8, pending resolution of the Business Roundtable case. even though the amendment to 14a-8 was not challenged. The SEC lost the Business Roundtable case, so Rule 14a-11 is gone, but the amendment to Rule 14a-8 is finally going into effect.

The new amendment relates to proposals concerning elections to the board of directors. Rule 14a-8(i)(8) formerly barred a shareholder proposal that “relates to a nomination or an election for membership on the company’s board of directors or analogous governing body or a procedure for such nomination or election.”

The new rule bars a shareholder proposal only if it

(i) Would disqualify a nominee who is standing for election;
(ii) Would remove a director from office before his or her term expired;
(iii) Questions the competence, business judgment, or character of one or more nominees or directors;
(iv) Seeks to include a specific individual in the company’s proxy materials for election to the board of directors; or
(v) Otherwise could affect the outcome of the upcoming election of directors.

In other words, proposals dealing with specific candidates for election or that will affect the upcoming election are barred. But the rule now allows proposals about election procedures or rules—such as a proposal requiring a majority vote for a director to be elected.

Even after the amendment, the SEC does not have the final word. A proposal could still be excluded under another section of the federal rule [Rule 14a-8(i)(1)] if the proposal is not a proper subject for shareholder action under state law. The new rule only eliminates the federal obstacle to shareholder proposals concerning election procedures.

-Steve Bradford