Proposal Requiring CEO to Justify Compensation Must Be Included in Proxy if Recast in Form of Request to Board of Directors
April 7, 2008
In a SEC No-Action Letter, available March 7, 2008, the SEC stated that the registrant may exclude from proxy materials for its upcoming annual meeting a shareholder proposal that the chief executive officer be required to provide a statement in each annual report stating what he personally has contributed to justify his compensation. However, the SEC staff conditioned its response and stated that the proposal may be revised and recast in the form of a recommendation or request to the board of directors.
Counsel for the registrant argued that the proposal’s language is mandatory in nature and urged that the proposal is excludable under Rule 14a-8(i)(1) because it violates applicable state law, which grants the power to manage the affairs of the corporation to the board of directors and not the shareholders. Counsel for the registrant also argued that the proposal could be omitted under Rule 14a-8(i)(10) of the Securities Exchange Act of 1934 as duplicative of existing SEC disclosure requirements such as the Compensation Discussion and Analysis. In this regard, counsel argued that the SEC’s “regulations require that the company’s annual report on Form 10-K contain management’s discussion of material information necessary to understand the policies and decisions regarding compensation awarded to, earned by, or paid to certain executive officers, including the chief executive officer.” In addition, counsel asserted that the proposal deals with ordinary business and thus is excludable under Rule 14a-8(i)(7).
Pursuant to the No-Action Letter, the SEC staff stated that there appears to be some basis to the registrant’s assertion that the proposal could be omitted under Rule 14a-8(i)(1) as an improper subject for shareholder action under state law. However, the SEC staff indicated that this defect could be cured if the proposal were recast as a recommendation or request to the board of directors. The staff advised that if the proponent fails to make this revision, the registrant may omit the proposal in reliance on Rule 14a-8(i)(1). In addition, the SEC staff stated that it was unable to concur that the registrant may exclude the proposal in reliance on Rules 14a-8(i)(7) and 14a-8(i)(10).
http://www.sec.gov/Archives/edgar/data/1004980/999999999708010041/9999999997-08-010041.paper