The holiday cheer that Securities and Exchange Commission gave corporate America by letting executives block shareholders from nominating directors may be short-lived.

Public-pension fund activists are gearing up for a litigation fight, should companies seek the shelter the S.E.C. is offering.

A joyous memo to corporate clients from Wachtell, Lipton, Rosen and Katz warned that the American Federation of State, County and Municipal Employees was—"predictably"—"threatening" litigation.

More like a promise.

"We're not just thinking about it," says Richard Ferlauto, AFSCME's director of pension and benefit policy. The union has put proposals for shareholder bylaws that would allow proxy access before Bear Stearns and J.P. Morgan Chase, Ferlauto said at a shareholder activism conference at the Essex Hotel today. The conference was sponsored by the law firm Grant & Eisenhofer.

Ferlauto said that the union also wants to discuss the proposals with company managers in advance of the annual proxy season. Corporate leaders could as the S.E.C. for a "no-action" letter under the new rule, giving them right to leave all such proposals off the ballot.

"If they chose not to put them on," Ferlauto said, referring to the shareholder proxy measures, "and seek no-action relief under the new rule, we'll sue those companies."

Bear Stearns and J.P. Morgan are just the start, he added. "We are targeting companies that failed to manage risk in the sub-prime sector," the union leader said.

Companies should take the threat seriously. One of the union's lawyers, Jay Eisenhofer, won AFSCME a major victory on proxy access in September 2006. A federal appeals court in Manhattan ordered American International Group to put an AFSCME proposal—to make it easier for A.I.G.'s shareholders to nominate directors—on the ballot.

That decision upended an S.E.C. policy that had been in place since 1990. A.I.G. settled with the union and the proposal went to a vote, but lost.

The new S.E.C. rule adopted on Wednesday has not deterred Ferlauto. He speaks with the zeal of a missionary. At a panel today, he lamented: "We have got a systemic problem here, where boards have fundamentally failed the owners. Corporate management is praying at the mantra of alpha."

Fellow panelist Trevor Norwitz, a Wachtell partner, seemed untroubled.

"Things have been moving in the right direction," he said, noting that management meets with institutional investors regularly.

"It used to me our advice would be, 'Tell them to go jump in the lake,'" Norwitz added. "That's changed. Now there's a constant dialogue."

There had better be. If not, Ferlauto plans to see management again in court.

by Karen Donovan