The HP Letter: SEC Staff Takes No View Position on Shareholder Access Proposal
By Jane K. Storero

On January 23, 2007, the Staff of the Securities and Exchange Commission released its much awaited but not unexpected response letter to Hewlett-Packard Company's request to exclude a shareholder access bylaw proposal from Hewlett-Packard’s proxy materials. The bylaw amendment proposed by the American Federation of State, County and Municipal Employees, Employees Pension Plan (AFSCME) and others would require Hewlett-Packard to include the name and other information regarding certain shareholder nominated candidates for director into the compan'’s proxy statement. The SEC Staff took a "no view" position on Hewlett - Packard’s ability to exclude the shareholder's access bylaw proposal citing the Second Circuit Court’s decision in AFSCME v. American International Group, Inc. (AIG), handed down in September 2006, which disagreed with several long standing Staff interpretations in this area.

The Staff’s decision to express “no view” on this issue was not unexpected since for many years the SEC Staff has elected to take a pass on controversial issues where the law in question is unsettled. As a result of this Staff position and in the absence of additional guidance from the Commission, companies not located in the Second Circuit facing shareholder access proposals during the 2007 proxy season may have to take their chances with potential law suits if they fail to include such proposals in their proxy materials.

In the AFSCME v. AIG case, the AFSCME proposed a similar amendment to the AIG bylaws which would require AIG, under certain circumstances, to include the names of shareholder nominated candidates for director together with any candidates nominated by AIG’s board of directors in AIG’s proxy materials. This shareholder proposal has the effect of utilizing the SEC’s proxy rules, and in particular Rule 14a-8, to end run the SEC rules applicable to proxy contests including, Rule 14a-11. The Commission Staff interpreting Rule 14a-8(1)(8) issued a “no-action” position that indicated that the Staff would not recommend enforcement action if the company excluded such a proposal from its proxy materials. The SEC Staff had previously taken the position that “Rule 14a-8 is not the proper means of conducting campaigns or effecting reforms in elections of that nature since other proxy rules, including Rule 14a-11 are applicable thereto.” Siding with AIG, the SEC Staff indicated that AIG could properly exclude AFSCME’s proposal from its proxy statement under Rule 14a-8. AFSCME sued AIG seeking to compel the inclusion of the AFSCME proposal in its proxy statement. The District Court, for the Southern District of New York, denied AFSCME’s motion for a preliminary injunction. The Court of Appeals denied AFSCME’s motion appealing the lower court decision and the District Court entered a final judgment dismissing AFSCME’s complaint.

In September 2006, the United States Court of Appeals for the Second Circuit reversed the decision of the lower court and permitted the lawsuit of AFSCME against AIG to proceed. The Second Circuit decision summarily rejected a long standing SEC Staff interpretation of Rule 14a-8 that has permitted public companies to exclude from their proxy statements proposals by shareholders if such proposals would result in contested elections. The Second Circuit decision also created a lack of uniformity in the law among the circuits regarding the status of these bylaw proposals which leaves the door open for SEC action to clarify this issue.

The Commission itself, however, appears to be undecided on how to address this Second Circuit Court’s decision. At open Commission meetings in December 2006 and January 2007, the Commission passed on responding to the well publicized Second Circuit decision. Comments by SEC Chairman, Christopher Cox, suggest that the Commission is still debating this issue among themselves and will take their time in responding to the issue. Mr. Cox has indicated that their objective is to have a rule in place for the next proxy season.

In recent remarks, Commissioner Paul Atkins expressed his view that: “The Commission has an obligation to the capital markets to remove such uncertainty and articulate a clear policy. We have an obligation to create a learned, organized discussion on this subject.” Undoubtedly, questions the Commission must consider, include whether it has authority to adopt rules on director selection and if it does, what are the consequences of this action, as well as, the effect of reduced costs associated with the use of the internet to disseminate proxy materials on this issue in light of the SEC’s new proxy internet availability release. Opponents of such rules argue that these rules would open the floodgates to special interest groups seeking to promote their interests and create a class of special interest directors elected to promote a particular group’s interest.

Over the years, the SEC looked at shareholder access issues a number of times and considered the issue as far
back as 1942. The last time the SEC looked at this issue was in 2003 when it issued a proposed rule on shareholder nominations of directors. This proposal raised a substantial amount of discussions and criticisms, including claims of pre-emption of state law. As a result, the Commission decided not to proceed with the 2003 proposal. The SEC Staff’s “no view” position will likely provide limited comfort to companies since the SEC Staff would likely not recommend enforcement action against companies that exclude shareholder access proposals from their proxy statements. This letter obviously provided no comfort to Hewlett-Packard; however, as Hewitt-Packard filed its proxy materials on January 24, 2007 and included the shareholder access proposal. In addition, on January 29, 2007, Reliant Energy, Inc., a Houston based electricity and energy services company, filed suit in federal district court in Texas seeking a declaratory judgment that it may exclude from its proxy statement a shareholder access bylaw similar to the ones received by Hewlett-Packard and AIG. Reliant received a shareholder access proposal from its stockholder, Seneca Capital, L.P., and requested no action relief from the SEC Staff. Like Hewlett-Packard, Reliant argued to the SEC Staff that the Second Circuit Court decision in the AIG case was not binding on Reliant.

The SEC Staff’s no view position leaves open the possibility that proponents of such proposals could be successful in persuading the courts to force the inclusion of such proposals absent Commission action to clarify the issue. Public companies will have to wait a bit longer to see what the Commission does to address this discrepancy.

About the Authors

Jane K. Storero is a partner at Blank Rome LLP. She advises companies on securities offerings, mergers and acquisitions and compensation disclosure. Ms. Storero also advises boards of directors on corporate and securities law issues including corporate governance matters. Contact: Storero@BlankRome.com.