Judge Denies AFSCME Bid To Nominate AIG Directors

The American Federation of State, County and Municipal Employees has once again struck out in its bid to nominate directors to company boards.

Last week, a Federal judge refused to require the American International Group to include in its proxy statement a new bylaw that would allow certain shareholders to nominate directors at its upcoming annual meeting. The complaint, filed by AFSCME, sought to require AIG to include the pension plan’s binding proxy access shareholder proposal on its proxy materials and bring the matter to a vote of shareholders at the company's annual meeting in May.

The proposal had included similar conditions contained in the Securities and Exchange Commission’s October 2003 proxy access proposal.

At the heart of the issue is SEC Rule 14a-8(i)(8), which governs shareholder proposals and requires corporations to include proposals from shareholders on their proxies.

The rule provides an exception, allowing a corporation to exclude a proposal from its proxy if “the proposal relates to an election for membership on the company’s board of directors.”

“Do Not Require”

In his relatively breezy, succinct seven-page ruling, Judge Louis Stanton of U.S. District Court Southern District of New York wrote that AFSCME’s proposal “on its face relates to an election.”

He also nodded to the SEC, which has maintained that 14a-8 “is not the proper means for conducting campaigns or effecting reforms in elections of that nature.” Judge Stanton added that “the language of the rule, and consistent staff and Commission expressions, confirm that the current federal regulations do not require AIG” to include AFSCME’s proposal in its proxy.

He also asserted that even though the pension fund argues that state law imposes such a requirement, “it fails to identify any such statute.” The judge also pointed out that Delaware law, which governs AIG, does not direct inclusion of the resolution. “Creation of rules governing the extent to which a corporation must assist those shareholders who are hostile to its management requires law-making, not adjudicatory, procedures,” he wrote.

Besides, neither AFSCME not its proposed rule would even qualify under the SEC’s proposed proxy access rule, he added, based on how the lawsuit was worded.

Political Shift

Judge Stanton’s ruling is another major setback for AFSCME and other proponents of the SEC’s proxy access proposal, which seems to be languishing despite SEC assurances that the regulatory agency is still committed to some form of the rule.

Hecht

Steven Hecht, a member of the Litigation Department and the Securities Litigation and Enforcement Practice Group at Lowenstein Sandler, says he was not surprised by the decision. “I think he got it right,” says Hecht, stressing that he does not feel partial to either side of the issue.

Hecht asserts the exception to 14a-8 “is expressed outright” that a company can omit a proposal related to the election of a director.

Of course, the SEC has allowed onto proxy materials other kinds of proposals related to the election of directors, such as measures calling for the declassifying of boards of directors and, more recently, measures calling for majority voting when it comes to directors.

Peterson

“Why is this one excludable?” asks Lowell Peterson, a labor and bankruptcy partner in the New York law firm of Meyer, Suozzi, English & Klein, who filed an amicus brief in the AIG case.

Peterson believes there is a political shift going on at the SEC that is impacting policy-making.

Partially for this reason, Hecht and Peterson believe that in his ruling, the Judge, in effect, was throwing the issue back to the SEC. They point to a footnote where Judge Stanton refers to the SEC’s proposed proxy access rule, and notes, “The function of the court is to apply the law as articulated by legislatures or their authorized regulatory agencies, not independently to create new legal obligations in this carefully regulated field.”

“He’s saying that he doesn’t want to deal with it,” says Hecht. “His hands are tied by the SEC. He’s saying, ‘it’s up to the legislature, not me.’”

Hecht also thinks the judge believes if he allows AFSCME’s petition to get through, he would, in effect, open the flood gates for proxy fights before the outside investors even filed their own proxy materials.

Ball In SEC’s Court

So, where could AFSCME go from here?

Richard Ferlauto, director, pension and benefit policy for AFSCME, said in an email message over the weekend, “We have appealed Judge Stanton's decision in the Second Circuit Court of Appeals on an expedited basis, where we are optimistic about its resolution.” And Ferlauto remains determined and confident. “From the beginning, we recognized that any type of proxy access right would be resolved by the courts, where we believe that shareholder rights will prevail on the merits of the case and the inconsistency of the SEC Staffs interpretation of 14a8(i)8.”

But Hecht at Lowenstein Sandler says that for the ruling to be overturned, AFSCME would need a proactive judge to say that Stanton got it all wrong.

Peterson at Meyer, Suozzi, English & Klein agrees. “Maybe they’ll get a less deferential panel,” he speculates.

Or, AFSCME could change the language of the complaint and try the tactic out on another company. But Peterson expects the fund to remain focused on AIG. “I suspect they will want to focus on this,” adds Peterson. “It is not likely they will use the same language elsewhere.”

In the end, the ball is apparently back in the SEC’s court, awaiting the passage of a proxy access rule. “The judge wanted to issue a ruling quickly,” Peterson explains. In essence, Peterson believes the judge was saying, ‘Let the SEC handle this. It smells like elections to me. They have rules they are working on. Don’t let me mess it up.’ ”