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A recent federal appeals court decision is forcing U.S. Securities and Exchange Commission Chairman Christopher Cox to show which way he leans on investor rights. The 2d U.S. Circuit Court of Appeals on Sept. 5 ruled that the SEC was wrong to let American International Group Inc. exclude from its ballot an investor proposal intended to make it easier for shareholders to nominate alternative candidates to the company board. Under the proposal, shareholders would have asked to support letting any shareholder holding a 3% stake for one year to nominate directors on the company’s proxy. Access to the corporate proxy would cut significantly the printing and mailing costs of waging a proxy contest. Dissidents now must make their pitches to shareholders separate from the company’s materials. At issue is an SEC rule, No. 14a-8, which lets companies reject shareholder votes on any proposal that “relates to an election.” The court found that the SEC had misinterpreted its rules because the shareholder proposal did not directly relate to an election, but rather only set in place a process for eventually allowing investor candidates on the company ballot. To resolve the difference between the SEC and court interpretations of the rules, Cox plans to discuss the issue at an SEC meeting on Oct. 18. A management tilt? Some securities lawyers believe that Cox may seek to clarify agency rules in a way that agrees with the court’s decision. But prevailing opinion is that he will side with management interests by suggesting that proposals relating to the process of electing a director also relate to an election of directors, and the agency can exclude those from company proxy cards. “Cox’s decision to have a rule-making indicates that he wants to clarify the exemption to make sure that in those instances companies are protected against shareholder groups,” said David Sirignano, a former associate director in the SEC’s Corporate Finance Division and now a partner in Morgan, Lewis & Bockius’ Washington office. Ethan Klingsberg, partner at Cleary Gottlieb Steen & Hamilton in New York, said that Cox could propose an amendment to make it expressly clear that setting up a process for nominating a director is the same as electing directors. “With a little tinkering, the SEC can continue to exclude those proposals,” he said. Republican chairmen have found it difficult to support any avenue for shareholders to nominate directors on the company proxy, Sirignano noted. Former SEC Chairman William Donaldson learned that the hard way in 2003 when he introduced a proposal that would have allowed shareholders to nominate directors, in some circumstances, on the company ballot. But opposition from business groups and the SEC’s two other Republican commissioners forced Donaldson to drop the idea. SEC Commissioner Paul Atkins, who opposed Donaldson’s initiative, said that he’s not necessarily opposed to giving shareholders more power to advance other nominees onto proxies. Proposal ‘too complicated’ As for the Donaldson proposal, Atkins said it simply was too complicated. “A lot of people questioned our authority and whether it is too complex,” Atkins said. “There is still a discussion to be had about what influence shareholders should have.” Even if Cox doesn’t stand for more shareholder power to list nominees on the proxy, he is likely to point out that the agency has supported other initiatives aimed at bolstering shareholder input. For instance, at several companies the SEC allowed shareholder revolts against the prevailing “plurality voting” system, which gives company directors a leg up in vote counts. The plurality system allows a director candidate to win, even if a majority of participating shareholders actually abstain from voting for the seat or withhold their proxies. Pension operators have been introducing proposals to replace the plurality voting system with one that requires winning directors to receive an outright majority of voting shares. Companies have petitioned the SEC to remove these measures, but the agency has refused.

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