Shareholder Access and the Comments (Part 2)

We are discussing the Comment Letters submitted to the SEC regarding the proposals to amend Rule 14a-8(i)(8). Comment Letters opposing both SEC proposals accounted for the vast majority of all Comment Letters submitted. The Comment Letters in this category can be broken down into sub-categories of Letters urging the Commission to adopt no changes and Letters providing alternative suggestions in place of either proposal.  We are discussing the letters that opposed the "non-access" proposal.  This post does not discuss the letter on the subject submitted by this Blog.  The letter can be foundhere.

Letters opposing "non access" (and the limitations imposed on access) rely on four main arguments. First, and most frequent, most letters assert a general argument that the approach would reduce shareholder access to company proxies, thus, removing an important tool of management and accountability to shareholders. One letter described the choice for shareholders between the two proposals as “heads you win, tails I lose.” Many letters contend that any reduction in shareholder access is especially misplaced given that many of the problems with large public corporations e.g., excessive CEO Pay, short-term gains vs. long-term growth, backdating stock options, and accounting restatements are attributable to poor oversight by directors

Second, many letters contend that any proposal amending the current interpretation of Rule 14a-8 is premature considering the Second Circuit’s recent ruling in AFSCME . These Letters assert that proxy access resolutions filed since the AFSCME ruling have generated extraordinary success. One Letter claims recent proxy access resolutions have garnered “average support of 44% at three companies in 2007.” Therefore, adopting a new proposal would ignore the tremendous investor support of these resolutions and rollback the shareholder rights expounded by the federal courts. These letters reason (either implicitly or explicitly) that any reduction of shareholder rights would have serious consequences for the capital markets.

A third common argument is that the proposed 5% threshold is unreasonable. These Letters argue that a 5% threshold is, in most instances, insurmountable and, as a result, does not offer shareholders meaningful access to the election of directors.  Many letters from individual investors contend that a 5% threshold is unreachable except by institutional investors and the very wealthy. However, many institutional investors submitted Letters arguing that a 5% threshold would be unworkable, even for investors of their size.

The last main argument has the effect of a counter-argument to “non-access” proponents, who argue that denial of shareholders access protects from the danger that directors will be elected to serve the interests of specific shareholders at the expense of other owners. A few letters argue that the safeguards in place are sufficient to protect from this danger. The first safeguard works by denying access if shareholders’ proposed amendment to the by-laws allowing shareholder nominations does not gain a majority vote. Even if a shareholder gets through the first hoop, any nominee still must be elected by shareholders.   These letters claim the majority votes needed at two levels provide sufficient safeguards from the dangers mentioned above.

A few letters in favor of shareholder access did not urge the Commission to deny both proposals, rather, these letters offered changes to the proposals. Offered changes included: (a) shareholders holding 1% of stock in a company could nominate board members; (b) board members must certify that they have no dealings with the company; (c) stockholders are permitted to vote on CEO pay; (d) shareholders with more than 10% of the stock should be granted a seat on the board; and (e) 10 year term limits for all board members.