Restoring American Financial Stability Act of 2010: Corporate Governance Provisions

We take a temporary breather from our discussion of Kurz v. Holbrook.  The discussion will resume tomorrow.

Instead, we turn to Senator Dodd's leviathan bill on financial reform.  We take a moment to briefly discuss the corporate governance provisions included in the Bill (the text is below).  They include access (which the SEC almost certainly has the authority to do without the legislation), a provision that requires companies to explain why they have or have not separate the chairman and the CEO positions (the SEC has already done this, more or less), and a requirement for listed companies that directors be elected by majority vote in uncontested elections.

The latter is a disappointment.  These provisions have become common enough, particularly among exchange traded companies.  But the legislation would merely require directors not receiving a majority to resign.  The board would then have the discretion to reject or accept the letter.  As RiskMetrics has noted, somewhere around 100 directors in 2009 did not receive a majority vote and none of them lost their position because of this failure. 

In many cases, companies did not have a majority vote provisions in place.  But where they did (Axcelis and Pulte), the companies did not accept the letters of resignation.  In other words, these provisions do not provide shareholders with any additional rights or protections.  Directors lose but the board doesn't remove them.  The provisions are, therefore, a myth.  For a more in depth discussion of the problems with these provisions, see Majority Voting, Delaware Statutory Reform, and Shareholder Access to the Proxy Statement: A Comment to the Securities and Exchange Commission Real reform would provide that directors who do not receive a majority lose and cannot take office. 

Finally, the Axcelis case illustrated that Delaware will not allow the use of inspection rights to obtain information on the materials considered by the board in deciding not to accept letters of resignation.  There is a serious need for federal law to step in and require disclosure of the information denied under Delaware law.  This legislation may at least address this issue.  It requires companies to make public "together with a discussion of the analysis used in reaching the conclusion, the specific reasons" for declining to accept the letter of resignation.  The value formulation will need to be fleshed out by rulemaking to make certain that companies provide all material information on the matter.

There are also provisions in the Bill that would reform the executive compensation process, including a right of banking agencies to ban excessive compensation.  We have discussed this provision in the past and view it as significant and substantive.  We will return to this subject in a later post.  

The draft legislation is posted on the DU Corporate Governance web site.

SEC. 971. ELECTION OF DIRECTORS BY MAJORITY VOTE IN UNCONTESTED ELECTIONS.
The Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.) is amended by inserting after section 14A, as added by this title, the following:

SEC. 14B. CORPORATE GOVERNANCE.

(a) CORPORATE GOVERNANCE STANDARDS.—
(1) LISTING STANDARDS.—
(A) IN GENERAL.—Not later than 1 year after the date of enactment of this subsection,
the Commission shall, by rule, direct the national securities exchanges and national securities associations to prohibit the listing of any security of an issuer that is not in compliance
with any of the requirements of this subsection.

(B) OPPORTUNITY TO COMPLY AND CURE.—The rules established under this para5
graph shall allow an issuer to have an opportunity to come into compliance with the requirements of this subsection, and to cure any defect that would be the basis for a prohibition under subparagraph (A), before the imposition of such prohibition.

(C) AUTHORITY TO EXEMPT.—The Commission may, by rule or order, exempt an issuer from any or all of the requirements of this subsection and the rules issued under this subsection, based on the size of the issuer, the market capitalization of the issuer, the number of shareholders of record of the issuer, or any
other criteria, as the Commission deems necessary and appropriate in the public interest or
for the protection of investors.

(2) COMMISSION RULES ON ELECTIONS.—In an election for membership on the board of directors
of an issuer—
(A) that is uncontested, each director who receives a majority of the votes cast shall be
deemed to be elected;
(B) that is contested, if the number of nominees exceeds the number of directors to be
elected, each director shall be elected by the vote of a plurality of the shares represented at
a meeting and entitled to vote; and
(C) if a director of an issuer receives less than a majority of the votes cast in an
uncontested election—
(i) the director shall tender the resignation of the director to the board of di14
rectors; and
(ii) the board of directors—
(I) shall—

(aa) accept the resignation of the director;

(bb) determine a date on which the resignation will take effect, within a reasonable period of time, as established by the Commission; and

(cc) make the date under item (bb) public within a reason able period of time, as established by the Commission; or

(II) shall, upon a unanimous vote of the board, decline to accept the resignation and, not later than 30 days after the date of the vote (or within such shorter period as the Commission may establish), make public, together with a discussion of the analysis used in reaching the conclusion, the specific reasons that—
(aa) the board chose not to accept the resignation; and
(bb) the decision was in the best interests of the issuer and the shareholders of the issuer.

SEC. 972. PROXY ACCESS.
(a) PROXY ACCESS.—Section 14(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78n(a)) is amended—
(1) by inserting ‘‘(1)’’ after ‘‘(a)’’; and
(2) by adding at the end the following:
(2) The rules and regulations prescribed by the Commission under paragraph (1) may include—

(A) a requirement that a solicitation of proxy, consent, or authorization by (or on behalf of) an
issuer include a nominee submitted by a shareholder to serve on the board of directors of the issuer; and
(B) a requirement that an issuer follow a certain procedure in relation to a solicitation described
in subparagraph (A).
(b) REGULATIONS.—The Commission may issue rules permitting the use by shareholders of proxy solicitation materials supplied by an issuer of securities for the purpose of nominating individuals to membership on the board of directors of the issuer, under such terms and conditions as the Commission determines are in the interests of shareholders and for the protection of investors.

SEC. 973. DISCLOSURES REGARDING CHAIRMAN AND CEO STRUCTURES.

Section 14B of the Securities Exchange Act of 1934, as added by section 971, is amended by adding at the end the following:

(b) DISCLOSURES REGARDING CHAIRMAN AND CEO STRUCTURES.—Not later than 180 days after the date of enactment of this subsection, the Commission shall issue rules that require an issuer to disclose in the annual proxy sent to investors the reasons why the issuer has chosen—

(1) the same person to serve as chairman of the board of directors and chief executive officer (or
in equivalent positions); or

(2) different individuals to serve as chairman of the board of directors and chief executive officer
(or in equivalent positions of the issuer).