Access and the Commission: Shifting the Burden to State Law

Its always been an anomaly that those opposing access often labeled it as inconsistent with state law.  State law allows any shareholder, irrespective of the number of shares owned, to nominate directors.  In public companies, shareholders did not exercise the authority because of the costs associated with the proxy process.  Access reduces the costs.

Because shareholders did not nominate directors as a result of the federal proxy rules, state authorities never seriously considered restrictions on the right of shareholders to nominate directors.  Access, however, has flipped the issue back to the states.  The Commission has made it clear that nominees can be excluded where the shareholder is prohibited under state law.  To the extent, for example, Delaware wants to limit the right of shareholders to nominate (by, say, imposing an ownership threshold), it will have to do so explicitly.  It can no longer rely on federal law and the expenses associated with the proxy process to accomplish the same purpose.

Delaware has shown an amazing ability to respond quickly to developments disliked by management through legislative initiatives.  It will be interesting to see whether the legislature responds by amending the Delaware code to allow companies, in their foundational documents, to restrict the ability to nominate directors based upon ownership thresholds and holding periods.