Access and Its Opponents: The Inevitability of Access

Access is inevitable.  As we have written (The SEC, Corporate Governance, and Shareholder Access to the Board Room), the denial of access only occurred because, in the early days of the proxy rules, issuers opposed it and, frankly, so did shareholders.  With no constituency of consequence supporting the right (to the extent there was a consistent support of access, it was the staff of the Commission), access languished.

But it remained an anomaly.  For an agency that ostensibly was on a mission to protect shareholders and investors, it was a provision that largely allowed federal law to eviscerate the right of shareholders under state law to nominate directors.  As shareholders began to lobby for access, the incongruity of the restriction became harder and harder to justify.  

Putting aside the merits of the proposal, the blunt truth is that the proxy rules are being used to mask what ought to be done under state law.  To the extent that restrictions on shareholder nominations exist, they should be imposed under state law.  Yet state law (read Delaware) has not really had to address this since the restrictions in the proxy rules did it for them.  

When access is adopted, the remarkably responsible Delaware legislature (not to mention the courts) has an out.  They can effectively give to corporations the right to prohibit nominations by shareholders, perhaps based on the size of the holdings or the tenure of ownership.  Access does not allow the submission of nominees from those shareholders who cannot nominate.  

The effect of this, however, would be to force Delaware to affirmatively restrict the right of shareholders to nominate directors.  As a result of their pro-management bias, the legislature and the courts would, almost certainly have no problem with the approach.  Nonetheless, it would be an overt example of anti-shareholder bias that would make the role of this state and its courts much clearer (and facilitate the arguments by those who seek federal preemption in the area). 

Access is about overturning federal restrictions on shareholder rights.  It does not displace the role of states but forces states to more clearly define their restrictions.