January 4, 2008

SEC CLARIFIES RULE 14a-8(i)(8)

REGARDING CERTAIN SHAREHOLDER PROPOSALS

The Securities and Exchange Commission (the SEC) has adopted an amendment to Rule 14a-8(i)(8) to provide certainty regarding the exclusion of certain shareholder proposals from a company’s proxy materials.

By a vote of 3-1, the SEC amended Rule 14a-8(i)(8) under the Securities Exchange Act of 1934, as amended (the Exchange Act), to codify the SEC’s longstanding interpretation that Rule 14a-8 allows a company to exclude from its proxy materials shareholder proposals that may result in a contested election, including those that establish a procedure that may result in a contested election, in either the current or in any future year.

The amendment is specifically intended to reverse the holding of American Federation of State, County & Municipal Employees, Employees Pension Plan v. American International Group, Inc., 462 F.3d 121 (2d Cir. 2006) (AFSCME v. AIG). The release adopting the amendment, SEC Release No. 34-56914 (the Adopting Release), issued on December 6, 2007, is available at http://www.sec.gov/rules/final/2007/34-56914.pdf.

Effective Date

The amendment to Rule 14a-8(i)(8) will be effective on January 10, 2008.

Summary of the Change to Rule 14a-8(i)(8)

Rule 14a-8 sets out the circumstances under which a company must include a shareholder proposal in its proxy statement and identify the proposal in its form of proxy when the company holds an annual or special meeting of shareholders.

Prior to this amendment, Rule 14a-8(i)(8) (the Election Exclusion) specified that a shareholder proposal may be excluded if “the proposal relates to an election for membership on the company’s board of directors or analogous governing body.” As amended, the Election Exclusion will allow the exclusion of a shareholder proposal if “the proposal relates to a nomination or an election for membership on the company’s board of directors or analogous governing body or a procedure for such nomination or election.” (Emphasis added.) The Adopting Release expressly states that the term “procedures” relates to procedures that would result in a contested election either in the year a proposal is submitted or in any subsequent year.

The inclusion of shareholder director nominees in a company’s proxy materials will often create a contested election. Several proxy rules, including Rule 14a-12, are designed to provide investors with full and accurate disclosure regarding contested proxy solicitations. If the Election Exclusion were interpreted to allow inclusion of shareholder nominees in company proxy materials, then the proxy rules designed to assure the integrity of director elections would in effect be circumvented. For this reason, the SEC explained in 1976 that the “principal purpose” of the Election Exclusion is “to make clear, with respect to corporate elections, that Rule 14a-8 is not the proper means for conducting campaigns or effecting reforms in elections.” SEC Release No. 34-12598 (July 7, 1976). In the Adopting Release, the SEC also summarized the historical positions it has taken regarding shareholder proposals that may and may not be excluded under the Election Exclusion.

Amendments Reverse AFSCME v. AIG Interpretation

In AFSCME v. AIG, the Second Circuit of the US Court of Appeals did not defer to these interpretations. The AFSCME court held that AIG could not rely on the Election Exclusion to exclude a shareholder proposal seeking to amend the company’s bylaws to establish a procedure under which the company would be required, in specified circumstances, to include shareholder nominees for director in the company’s proxy materials. The court indicated that a company may exclude a proposal that would result in an immediate election contest but not if the proposal merely establishes a process for a shareholder to wage a future election contest.

The SEC’s amendments will reverse this interpretation and clarify that a company may exclude shareholder proposals regarding procedures for director nominations or elections, including procedures that may result in election contests in future years.

More to Come on Proxy Reform

At the time it proposed amending Rule 14a-8(i)(8), the SEC also issued a companion release proposing a comprehensive package of amendments to the proxy rules and related disclosure requirements. See Release No. 34-56160 (July 27, 2007) (the Companion Release). Most of the 34,000 public comments collectively received on the two releases related to the Companion Release, which is still pending. However, at the public meeting adopting the amendment to Rule 14a-8(i)(8), SEC Chairman Christopher Cox stated that he will "continue to work to strengthen the proxy rules" and that "today is not the end.” Stay tuned for more developments in 2008.