American Federation v. American Intern.

• Decision Date: 05 September 2006
• Docket Number: Docket No. 05-2825-cv.
• Citation: 462 F.3d 121
• Court: U.S. Court of Appeals — Second Circuit
• Parties: AMERICAN FEDERATION OF STATE, COUNTY & MUNICIPAL EMPLOYEES, Employees Pension Plan, Appellant, v. AMERICAN INTERNATIONAL GROUP, INC., Appellee.

462 F.3d 121

AMERICAN FEDERATION OF STATE, COUNTY & MUNICIPAL EMPLOYEES, Employees Pension Plan, Appellant, v. AMERICAN INTERNATIONAL GROUP, INC., Appellee.

Docket No. 05-2825-cv.

United States Court of Appeals, Second Circuit.

Argued: December 15, 2005.

Last Submission: June 16, 2006.

Decided: September 5, 2006.

COPYRIGHT MATERIAL OMITTED

Jay W. Eisenhofer (Jacqueline Bryks, Michael J. Barry, on the brief), Grant & Eisenhofer, P.A., New York, N.Y., for Plaintiff-Appellant.

Lewis R. Clayton (Lewis E. Farberman, on the brief), Paul, Weiss, Rifkind, Wharton & Garrison, New York, N.Y., for Defendant-Appellee.

Before: OAKES, CALABRESI, and WESLEY, Circuit Judges.

WESLEY, Circuit Judge:

This case raises the question of whether a shareholder proposal requiring a company to include certain shareholder-nominated candidates for the board of directors on the corporate ballot can be excluded from the corporate proxy materials on the basis that the proposal "relates to an election" under Securities Exchange Act Rule 14a-8(i)(8), 17 C.F.R. § 240.14a-8 ("election exclusion" or "Rule 14a-8(i)(8)"). Complicating this question is not only the ambiguity of Rule 14a-8(i)(8) itself but also the fact that the Securities Exchange Commission (the "SEC" or "Commission") has ascribed two different interpretations to the Rule's language. The SEC's first interpretation was published in 1976, the same year that it last revised the election exclusion. The Division of Corporation Finance (the "Division"), the group within the SEC that handles investor disclosure matters and issues no-action letters,¹ continued to apply this interpretation consistently for fifteen years until 1990, when it began applying a different interpretation, although at first in an ad hoc and inconsistent manner. The result of this gradual interpretive shift is the SEC's second interpretation, as set forth in its amicus brief to this Court. We believe that an agency's interpretation of an ambiguous regulation made at the time the regulation was implemented or revised should control unless that agency has offered sufficient reasons for its changed interpretation. Accordingly, we hold that a shareholder proposal that seeks to amend the corporate bylaws to establish a procedure by which shareholder-nominated candidates may be included on the corporate ballot does not relate to an election within the meaning of the Rule and therefore cannot be excluded from corporate proxy materials under that regulation.

Background

The American Federation of State, County & Municipal Employees ("AFSCME") is one of the country's largest public service employee unions. Through its pension plan, AFSCME holds 26,965 shares of voting common stock of American International Group ("AIG" or "Company"), a multi-national corporation operating in the insurance and financial services sectors. On December 1, 2004, AFSCME submitted to AIG for inclusion in the Company's 2005 proxy statement a shareholder proposal that, if adopted by a majority of AIG shareholders at the Company's 2005 annual meeting,² would amend the AIG bylaws to require the Company, under certain circumstances, to publish the names of shareholder-nominated candidates for director positions together with any candidates nominated by AIG's board of directors ("Proposal").³ AIG sought the input of the Division regarding whether AIG could exclude the Proposal from its proxy statement under the election exclusion on the basis that it "relates to an election." The Division issued a no-action letter in which it indicated that it would not recommend an enforcement action against AIG should the Company exclude the Proposal from its proxy statement. American International Group, Inc., SEC No-Action Letter, 2005 WL 372266 (Feb 14, 2005) ("AIG No-Action Letter"). Armed with the no-action letter, AIG then proceeded to exclude the Proposal from the Company's proxy statement. In response, AFSCME brought suit in the United States District Court for the Southern District of New York (Stanton, J.) seeking a court order compelling AIG to include the Proposal in its next proxy statement. The district court denied AFSCME's motion for a preliminary injunction, concluding that AFSCME's Proposal "on its face `relates to an election.' Indeed, it relates to nothing else." Am. Fed'n of State, County & Mun. Employees Pension Plan v. Am. Int'l Group, 361 F.Supp.2d 344, 346 (S.D.N.Y.2005). After this Court denied AFSCME's motion for expedited appeal, the parties stipulated that the district court's opinion denying AFSCME's motion for a preliminary injunction "be deemed to contain the Court's complete findings of fact and conclusions of law with respect to all claims asserted by plaintiff in this action" and that it also "be deemed a final judgment on the merits with respect to all claims asserted by plaintiff in this action." Pursuant to this joint stipulation, the district court entered final judgment denying plaintiff's claims for declaratory and injunctive relief and dismissing plaintiff's complaint.

Discussion

Rule 14a-8(i)(8), also known as "the town meeting rule," regulates what are referred to as "shareholders proposals," that is, "recommendation[s] or requirement[s] that the company and/or its board of directors take [some] action, which [the submitting shareholder(s)] intend to present at a meeting of the company's shareholders," 17 C.F.R. § 240.14a-8(a). If a shareholder seeking to submit a proposal meets certain eligibility and procedural requirements,⁴ the corporation is required to include the proposal in its proxy statement and identify the proposal in its form of proxy, unless the corporation can prove to the SEC that a given proposal may be excluded based on one of thirteen grounds enumerated in the regulations. Id. § 240.14a-8(i)(1)-(13). One of these grounds, Rule 14a-8(i)(8), provides that a corporation may exclude a shareholder proposal "[i]f the proposal relates to an election for membership on the company's board of directors or analogous governing body." Id. § 240.14a-8(i)(8).

We must determine whether, under Rule 14a-8(i)(8), a shareholder proposal "relates to an election" if it seeks to amend the corporate bylaws to establish a procedure by which certain shareholders are entitled to include in the corporate proxy materials their nominees for the board of directors ("proxy access bylaw proposal"). "In interpreting an administrative regulation, as in interpreting a statute, we must begin by examining the language of the provision at issue." Resnik v. Swartz, 303 F.3d 147, 151-52 (2d Cir.2002) (citing New York Currency Research Corp. v. CFTC, 180 F.3d 83, 92 (2d Cir.1999)). The relevant language here—"relates to an election" —is not particularly helpful. AFSCME reads the election exclusion as creating an obvious distinction between proposals addressing a particular seat in a particular election (which AFSCME concedes are excludable) and those, like AFSCME's proposal, that simply set the background rules governing elections generally (which AFSCME claims are not excludable). AFSCME's distinction rests on Rule 14a-8(i)(8)'s use of the article "an," which AFSCME claims "necessarily implies that the phrase `relates to an election' is intended to relate to proposals that address particular elections, instead of simply `elections' generally." It is at least plausible that the words "an election" were intended to narrow the scope of the election exclusion, confining its application to proposals relating to "a particular election and not elections generally." It is, however, also plausible that the phrase was intended to create a comparatively broader exclusion, one covering "a particular election or elections generally" since any proposal that relates to elections in general will necessarily relate to an election in particular. The language of Rule 14a8(i)(8) provides no reason to adopt one interpretation over the other.

When the language of a regulation is ambiguous, we typically look for guidance in any interpretation made by the agency that promulgated the regulation in question. See Auer v. Robbins, 519 U.S. 452, 461, 117 S.Ct. 905, 137 L.Ed.2d 79 (1997) (holding that an agency's interpretation of its own regulation is entitled to deference provided that the regulation is ambiguous); see also Christensen v. Harris County, 529 U.S. 576, 588, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000). We are aware of two statements published by the SEC that offer informal interpretations of Rule 14a-8(i)(8). The first is a statement appearing in the amicus brief that the SEC filed in this case at our request.⁵ The second interpretation is contained in a statement the SEC published in 1976, the last time the SEC revised the election exclusion. Neither of these interpretations has the force of law. But, while agency interpretations that lack the force of law do not warrant deference when they interpret ambiguous statutes, they do normally warrant deference when they interpret ambiguous regulations. See Christensen, 529 U.S. at 588, 120 S.Ct. 1655 (citing Auer, 519 U.S. at 461, 117 S.Ct. 905); see also Levy v. Southbrook Int'l Invs., Ltd., 263 F.3d 10, 14 (2d Cir. 2001) (explaining that courts will defer to an agency's interpretation of its own regulation, presented in the agency's amicus brief, unless the interpretation is plainly erroneous or inconsistent with the regulation).

In its amicus brief, the SEC interprets Rule 14a-8(i)(8) as permitting the exclusion of shareholder proposals that "would result in contested elections." The SEC explains that "[f]or purposes of Rule 14a-8, a proposal would result in a contested election if it is a means either to campaign for or against a director nominee or to require a company to include shareholder-nominated candidates in the company's proxy materials." Under this interpretation, a proxy access bylaw proposal like AFSCME's would be excludable under Rule 14a-8(i)(8) because it "is a means to require AIG to...