Non-Access, the SEC, and the Restrictions on Shareholder Rights (Part 4)

The Commission decided on non-access at an open meeting on November 28.  The accompanying release was only published on December 6.  The adopting release ishere.  It is not a good example of responsible agency rulemaking.

The fundamental flaw in the Commission's non-access proposal is that it doesn't ensure adequate disclosure or compliance with the proxy rules.  As the Release noted:

• Accordingly, were the election exclusion not available for proposals that would establish a process for the election of directors that circumvent the proxy disclosure rules, it would be possible for a person to wage an election contest without providing the disclosure required by the Commission's present rules governing such contests.

In fact, it continues to remain possible for shareholders to wage an election contest without providing the disclosure required by the proxy rules.  Two companies (Comverse and Cryo) have an access proposal in place.  Qualifying shareholders may, therefore, submit nominees without complying with the election contest rules.  Similarly, with access an important part of the governance equation, other companies will likely adopt access policies.  In those circumstances, shareholders will be able to engender a contest without complying with the contest rules.

In other words, the Commission sought to ensure compliance with the election contest rules not by adopting a rule that made those requirements applicable to shareholder submitted nominees, but by attempting to prohibit shareholders from submitting nominees.  Nothing in the release explained the failure to adopt the more logical and reasonable approach that would solve the problem of inadequate disclosure in the case of election contests.  

Finally, cutting off access was unnecessary at this stage if the Agency was truly concerned about disclosure.  The provisions mentioned in the Release go to mandatory disclosure in connection with an election contest.  Access proposals don't result in an election contest.  The contest only occurs later, if an access proposal was adopted.  With only four access proposals in place and the likelihood that most would not receive a shareholder nominee under the proposals, the problem of inadequate disclosure in connection with an election contest for the 2008 proxy season was negligible.  In other words, there was no reason to act if the concern was disclosure during election contests.  The Commission could have done nothing but made sure a rule addressing election contests arising from nominees inserted in the company's proxy statement was in place by the 2009 proxy season.   

The approach and justification is arbitrary.  Were this this rule to be challenged in court, it would confront some risk of being struck down as arbitrary and capricious.