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News < Back Sarbanes Oxley : Law : Thought Leader Holy Grail Ruling for Shareholders on Proxy Access
Long considered the brass ring of corporate governance reform, proxy access rules would require companies to publish the names of candidates nominated by shareholders on the same ballots as those nominated by management. Gerald McEntee, President of the American Federation of State, County & Municipal Employees Pension Plan (AFSCME), which brought the proxy access action against American Insurance Group in 2005, explained: ?Proxy access is considered the ?holy grail? of corporate governance reform because it offers shareholders the opportunity to change the composition of boards.? For years, shareholders have attempted to install proxy access policies at their companies by enabling fellow shareholders to consider and vote on proposals to adopt such policies through corporate proxy materials. Since at least 1997, however, the SEC?s Division of Corporation Finance, with virtually no exception, has effectively blocked efforts to implement proxy access rules by permitting companies to exclude from their proxy ballots any proposals submitted by shareholders to adopt proxy access policies. Without benefit of including such proposals in the company?s proxy materials, individual shareholders would have to bear the full costs of publishing their own proxy materials, a hugely expensive undertaking. Nevertheless, shareholder support for proxy access was so widespread that in 2003 former SEC Chairman William Donaldson proposed adopting a formal rule that would require proxy access for all publicly traded companies. The SEC received more than 13,000 public comments on this proposed rule ? perhaps the largest number of ever received on a single rule. However, in response to intense lobbying by the business community ? including the Business Roundtable and the U.S. Chamber of Commerce ? the SEC tabled the rule in 2004, and has since failed to take further steps to make proxy access mandatory. With the proposed rule seemingly stalled before the SEC, AFSCME opened a new front in the debate by seeking a judicial order against AIG compelling the insurance giant to include AFSCME?s proxy access proposal in the company?s 2005 proxy statement. The lawsuit alleged that, regardless of the long-standing policy of the SEC?s Division of Corporation Finance, relevant law prohibited companies from excluding shareholder proposals advocating the adoption of proxy access rules. Leading securities and corporate governance law firm Grant & Eisenhofer, P.A. served as lead counsel to AFSCME at the trial and appellate courts. AFSCME?s claim was rejected by the trial court, which sided with AIG and held that the Division of Corporation Finance?s long-standing policy was justified by the law. AFSCME appealed to the U.S. Court of Appeals for the Second Circuit. On appeal, AFSCME?s case was opposed not only by AIG, but also by the U.S. Chamber of Commerce, which filed an amicus brief supporting AIG, as well as by the SEC?s Division of Corporation Finance, which filed a brief defending its historical position. On September 5, 2006, however, the Court of Appeals rejected these arguments, and held that AFSCME?s claim was correct ? under existing law, companies are legally precluded from excluding from their proxy materials shareholder proposals advocating the adoption of proxy access policies. ?The importance of the Second Circuit?s decision cannot be overstated,? said Jay Eisenhofer, managing partner of Grant & Eisenhofer. ?Proxy access has been the number one priority for shareholders seeking to impose real democracy at their companies, but for years their efforts have been blocked by the policy adopted by the SEC?s Division of Corporation Finance to permit companies to exclude such proposals from corporate proxy materials. The Second Circuit?s opinion confirms what shareholders have been saying all along ? that the Division?s interpretation of the law was just wrong and completely unjustified.? More importantly, the Second Circuit?s decision opens the door for shareholders to ensure that they have meaningful choices in corporate elections. AFSCME president Gerald McEntee explained: ?The Second Circuit decision is hugely significant for shareholders. We have always argued that you can?t have a true election when only one party is empowered to put a name on the ballot. This ruling can give shareholders a meaningful voice in board elections by opening up the director nominating process.? Confirming the importance of the ruling, he continued, ?It will make directors think twice before they put their own interests above those of their shareholders.? ?The proxy access debate isn?t over, however,? observed Grant & Eisenhofer partner Michael Barry, who worked on the case with Mr. Eisenhofer. The two attorneys co-authored in 2005 the Shareholder Activism Handbook (Aspen Publishers). Indeed, less than 24 hours after the court?s ruling was made public, the SEC announced that it would be considering amendments to the applicable proxy rules to ensure ?consistent nationwide application? of the rules following the Second Circuit?s decision. Mr. Barry commented: ?The Second Circuit?s decision represents a huge victory, and we trust that the SEC will embrace the Second Circuit?s decision and ensure that the proxy rules will be interpreted uniformly to enable shareholders to introduce proxy access proposals regardless of where their particular companies are located.? The SEC has scheduled an open meeting to be held on October 18, 2006, to consider amendments to the proxy rules. Grant & Eisenhofer represents institutional investors nationally in securities class actions and derivative litigation, and currently is lead counsel in the securities class actions against, among others, Global Crossing, Tyco, Parmalat, Refco and Marsh & McLennan. In 2005, the firm Grant & Eisenhofer published a treatise on shareholder activism entitled the Shareholder Activism Handbook, published by Aspen Publishers. In recent months, the firm has obtained major corporate governance settlements for shareholders of News Corp., CA, Inc., Health South, Lone Star Steakhouse and other companies. For more, go to www.gelaw.com. 
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