The Commission's decision to amend Rule 14a-8 to deny access to the proxy statement for bylaws that would sometimes require management to insert shareholder nominees into the company's proxy statement was a bad one, effectively denying shareholders their state law rights to nominate directors. The decision -- supported by hyperbole and poor reasoning -- was issued with an empty promise that the Commission would reexamine the issue in the aftermath of the 2008 proxy season. How important is it? In the Chairman's remarks on the agenda for the upcoming year, it got one oblique sentence ("During 2008, the Division will continue to pursue our fundamental objective of making the federally-regulated proxy system fit better with the state-authorized rights of shareholders to determine the directors of the companies they own."), hardly a ringing endorsement.
The most substantial error by the Commission (and the corporate community supporting the position) is that access would have calmed the investor community but at the same time made it very difficult to actually elect directors to the board. Access proposals must first pass. When they do, they are typically limited to a short slate of directors (one or two) and can only be made by large (3-5%) shareholders or groups of shareholders. Many access proposals would likely fail and, even if passed, would likely remain unused. Apria Healthcare has had an access proposal in place since 2003 but it has never been used.
By not allowing access, the Commission left the growing investor pressure for increased participation in the nomination process unaddressed. As a result, shareholders continue to agitate and search for avenues, including proposals that require management to accept as part of its slate nominees selected from large shareholders or proposals that require management to pay the costs of any solicitation contest.
In the meantime, institutional investors have not let up on access, laying the ground work for a possible court challenge to what is arguably arbitrary actions by the Commission. AFSCME has already submitted, and the Commission staff has allowed to be excluded, access proposals to E Trade,Bear Stearns, andJP Morgan. Moreover, access has spread beyond AFSCME. Calpers has likewise submitted a proposal toKellwood Companies, with the staff also permitting it to be excluded. The same thing happened with respect to a proposal submitted toCroghan Bancshares, Inc.
There will come a time when institutional investors are no longer willing to settle for access but will instead demand the right to insert nominees into the proxy statement without having to first adopt an access bylaw. When that happens, the wisdom of access will become much more apparent, particularly to the issuer community.