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HOUSTON-Reliant Energy Inc. wants a federal judge to give it permission to ignore a request from a shareholder who wants to place a proposal on Reliant’s 2007 proxy statement that could make it easier in the future for shareholders to nominate board directors. The decision in Reliant Energy Inc. v. Seneca Capital L.P. could ultimately make law in the 5th U.S. Circuit Court of Appeals that would help other corporations maintain control of what’s on their proxy statements. “It is a cutting-edge issue,” said Charles Schwartz, a litigation partner in the Houston office of New York’s Skadden, Arps, Slate, Meagher & Flom who represents Reliant. On Jan. 29, Reliant, a Houston power company, filed a complaint in the U.S. District Court for the Southern District of Texas seeking a declaratory judgment that it can “properly omit” from proxy materials, which will be distributed in connection with the company’s 2007 annual meeting, a proposal submitted by Seneca Capital. Seneca Capital is a New York hedge fund that owns Reliant stock. Circumventing Rule 14a? Seneca Capital asked Reliant to include a proposal on the proxy statement asking shareholders to amend the company’s bylaws to permit holders of at least 3% of the company’s stock to be eligible to nominate a candidate for the company’s board of directors. But Reliant alleges that provisions in Rule 14a of the Securities Exchange Act of 1934 allow it to properly exclude the proposal from proxy materials. Reliant alleges the company’s bylaws currently allow stockholders such as Seneca to nominate directors by submitting a nomination to the company or by filing a separate proxy statement at their own expense. Proxy statements are filed with the U.S. Securities and Exchange Commission (SEC) and distributed to shareholders. Reliant alleges Seneca is trying to develop a procedure that would circumvent Rule 14a by amending the company’s bylaws, and then next year nominating candidates that the company would be required to include in its proxy materials. Through an assistant, Doug Hirsch, managing member of Seneca Capital, declined to comment. He also declined to identify the lawyers representing Seneca in the suit, and Seneca had not responded to the complaint before press time. This is not the first time Seneca has tried to get its candidates on Reliant’s board. In 2006, Seneca attempted to get a slate of three candidates elected as directors on Reliant’s board. But in April 2006, Reliant and Seneca came to an agreement calling for Reliant to appoint a new director to the board who is a representative of a substantial institutional stockholder. According to a press release issued by Reliant in April 2006, the company had previously announced its intention to add two new independent directors before the end of 2006. Jumping the gun? But a year later, Reliant is again in a battle with the hedge fund shareholder over proxy materials. In December 2006, Reliant received a request from Seneca to put the bylaws proposal on the 2007 proxy statement. On Jan. 16, Reliant asked SEC regulators to “concur” with the company’s view that the Seneca Capital proposal should be omitted from the company’s proxy statement. However, the SEC has not acted on Reliant’s request, and the company expects to file its 2007 proxy statement with the SEC in early April. So, on Jan. 29, it filed the complaint seeking the declaratory judgment. The suit is assigned to U.S. District Judge Gray Miller of Houston. Reliant alleges in its request for declaratory judgment that the interpretation of Rule 14a is well established, and the SEC has “repeatedly stated that companies were not required to include in their proxy materials proposals such as that submitted by Seneca.” But Reliant notes in the complaint that a decision by the 2d U.S. Circuit Court of Appeals in 2006 in American Federation of State, County & Municipal Employees v. American International Group Inc., concludes otherwise, finding that such proposals did not fall within exemptions outlined in Rule 14a. Reliant said it disagrees with the 2d Circuit’s decision in American Federation and Schwartz and Mike Rogan, a securities partner at Skadden Arps in Washington who also represents Reliant, hope the 5th Circuit will not follow the 2d Circuit. Rogan said Reliant would like to give the SEC an opportunity to address the issue raised by Seneca’s proposal, but with no decision immediately forthcoming, Reliant decided to seek the court order. “We, like all the rest of the public company community in the United States, should be able to wait and see how the regulator resolves the various policy issues and have the benefit of that process rather than have this proposal amend our bylaws,” Rogan said. “This subject is tremendously important to the whole public community.” Rogan said Seneca’s proposal “jumps the gun.” Michael Jines, senior vice president and general counsel at Reliant Energy, referred comment to Rogan. Bernard Black, a professor at the University of Texas School of Law who teaches securities law and corporate governance, said federal securities law is pretty clear, and Reliant can keep Seneca’s proposal off its proxy statement. Black noted that U.S. corporations sometimes do include shareholder proposals on proxy statements, but typically companies wouldn’t agree to put a shareholder’s director nominees on the company-issued proxy statement.

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