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Michael Eisner, the top dog at Walt Disney Co., got a firsthand taste of newly emboldened investors last week when 43 percent of shareholders withheld their votes to re-elect him to the company’s board of directors. Unhappy with Eisner’s performance, several large institutional investors announced they would effectively call for his head. But the level of dissent surprised observers, and Eisner was stripped of his chairman title. The no-confidence vote is the latest sign of investors increasingly throwing their weight around corporate boardrooms by latching onto the proxy voting process, which takes place every spring and allows investors to vote on aspects of the company. The proxy card has become the crucible of a larger debate about corporate reform and accountability. And the struggle to append ballot measures, or shareholder proposals, to a company’s proxy material is creating a seasonal sub-practice for corporate securities lawyers. Their practice could ramp up even more if a Securities and Exchange Commission rule change under consideration — which has generated more interest than any rule change in SEC history — gets the green light. “Shareholders are becoming more and more focused on the shareholder proposal process and the way of making their views known to management, and are exercising those rights more and more as each year goes by,” said Teresa Johnson, the chair of the business department at Howard, Rice, Nemerovski, Canady, Falk & Rabkin. Take the case of Sheet Metal Workers’ National Pension Fund. The $2.6 billion pension fund, with 72,000 members, has been increasing the number of its shareholder proposals. In 2003, it made 23. So far this year the fund has filed 42. “To us it’s really all about creating shareholder value,” said Kenneth Colombo, the fund’s coordinator. According to the Investment Responsibility Research Center, shareholders filed 1,111 proposals in 2003, up roughly 50 percent from the 737 submitted in 1998. Investors have not been shy about flexing their muscles in the wake of Enron and other corporate scandals. Wednesday the SEC held an all-day roundtable meeting in Washington, D.C., to discuss a proposed rule change that would give investors even more clout. The rule would make it easier for unhappy shareholders to replace corporate directors through the proxy process. The potential change, said Skadden, Arps, Slate, Meagher & Flom partner Celeste Greene, is a “radical shareholder access proposal that really threatens to alter the face of corporate democracy.” RUNNING THE GAMUT The current generation of shareholder proposals runs the gamut from corporate governance and accounting issues like executive compensation and stock options expensing, to social issues such as labor and environmental policies. One popular proposal this year asks companies to disclose their political contributions. Though typically not binding, the proposals allow shareholders to send a message to a company’s management by garnering a large share of investor votes at the annual meeting. Of course, before a proposal can be voted on by shareholders, its backers must get it accepted on the company’s proxy card — and that is often where the fight lies. Brian Wong, a Pillsbury Winthrop attorney in San Francisco who specializes in corporate governance and SEC reporting, has supervised the response to four or five shareholder proposals for clients this year. Shareholder proposals are subject to technical limitations under the Securities Exchange Act of 1934 . Companies can also exclude proposals for a variety of reasons, including personal grievances or those relating to a company’s “ordinary business operations.” Corporate efforts to block proposals from the ballot are a cross between corporate disclosure work and litigation. “There’s an element of the adversarial process in that,” Wong said. Similar to litigators citing case law, corporate attorneys comb through past SEC “no-action” letters, in which the agency disqualifies a shareholder proposal. The process can be time-consuming and challenging, said Howard, Rice’s Johnson, especially as the backers of the proposals have gotten more serious. “As the shareholder proposals that we see tend to be drafted with a considerable degree of sophistication, so too a response requires a degree of sophistication as well,” Johnson said. This new level of sophistication is evident within labor unions, which are among the most prolific authors of shareholder proposals today. When Sheet Metal Workers’ National Pension Fund first began dabbling in shareholder proposals a few years ago, the fund penned a handful of proposals on its own. Today the fund retains ProxyVote Plus, an Illinois-based firm that specializes in preparing shareholder proposals for labor funds. “As we learned a little bit more about it, we’re getting a little more support,” fund manager Colombo said. The pension fund also has adopted a more coordinated strategy. At the onset of this year’s proxy season, Colombo explains, the fund met with several other building trade unions and brainstormed a shareholder proposal strategy. “We got together and said, �Let’s pick a good corporate governance issue prior to the proxy season,’” Colombo said. The group settled on independent auditor ratification. Altogether, the members of the ad hoc alliance fired off a combined 140 letters to companies asking them to voluntarily allow shareholders to ratify the company’s choice of an auditor through a proxy ballot. If investors seem to have the proxy bug now, however, some attorneys predict that shareholder proposals will mushroom under the controversial SEC rule change currently under discussion. The proposed regulation, known as 14a-11, affects only the nomination of corporate directors, but it could lead to sweeping changes in corporate governance. Currently, shareholders can only withhold their votes on a company’s director nominee but cannot actually place a competing candidate on the proxy material — they’re categorically barred from doing so. Investors wishing to nominate rival directors must launch a so-called proxy contest, and incur the prohibitive expense of drafting and distributing separate proxy cards. The new rule would create a new shareholder proposal category — one that a company can’t automatically disqualify — by allowing investors to place their director candidates directly on the company’s proxy card. But some attorneys say the rule would make it too easy to place a rival slate of directors on a proxy. If at least one of the company’s own director nominees received more than 35 percent “withhold” votes in an annual shareholder meeting after Jan. 1 of this year (as was the case with Disney’s Eisner), shareholders would have the right to place rival candidates on the next proxy card. Alternatively, a shareholder proposal requesting “direct access” to the nomination procedure that garners more than 50 percent of the vote would also trigger the right to field a candidate on the card. “Those triggering events create a very real possibility that these would not be unusual occurrences, but would be pursued on a frequent basis,” said Pillsbury Winthrop mergers and acquisitions group co-chair Nathaniel Cartmell III. “That really puts a bargaining chip in the hands of institutional investors that they didn’t have before.” Interest in the proposed rule change is intense. So far the SEC has received more than 13,000 public comments more than any previously proposal rule change in the history of the SEC. Proponents of the new rule argue that it will level the playing field for shareholders and break the cycle of self-perpetuated, unresponsive boards of directors. But some critics question whether the SEC has the authority to federally mandate corporate regulations that have traditionally fallen within the state’s purview. “Unlike the SEC’s previous rules and regulations, this one grants to shareholders a substantive right to access,” Skadden’s Greene said. “It gives shareholder proposals real teeth.”

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