We are examining shareholder access, reminiscing over the Commission's decision to deny shareholders access to the company's proxy statement. Today we will look at some of the history of the approach. Greater detail on the topic can be found in my paper, The SEC, Corporate Governance, and Shareholder Access to the Board Room.

One of the interesting things about the history of Rule 14a-8 is that, contrary to common expectation, it was adopted in an effort largely to assist management, not shareholders.

Shortly after the adoption of the Exchange Act, the Commission put in place rudimentary proxy rules. One of the earliest disclosure problems concerned the failure by management to disclose shareholder proposals that it knew would be made at an upcoming meeting.

The issue arose in connection with a proxy solicitation by Bethlehem Steel in 1939. See Arthur H. Dean, Non-Compliance with Proxy Regulations, 24 CORNELL L. Q. 483, 503-04 (1938-1939). The company knew about a proposed bylaw that would give shareholders the authority to approve the auditors. The company solicited proxies but made no mention of the proposal. The Commission took the position that this rendered the proxy materials misleading and pressured the company into adjourning the meeting and sending out a revised notice informing shareholders of the proposed bylaw.

Non-disclosure was particularly acute when management sought discretionary voting authority in order to vote against the proposal. The Commission responded by amending the proxy rules. Management was required to reveal in the proxy materials any proposal that it knew would be submitted by shareholders at a meeting, at least where it intended to cast proxy votes against the proposal or “for purposes of a quorum supporting such a vote.” See Exchange Act Release No. 2376 (Jan. 12, 1940). In those circumstances, shareholders were to receive “means shall be provided whereby the person solicited is afforded an opportunity to specify the action which he desires to be taken pursuant to the proxy on such matter.”

But these disclosure requirements placed the onus on management to describe a shareholder's proposal. The shareholder proposal rule lifted this burden. It would be up to the shareholders to provide a statement concerning their proposal.

As an aside, the shareholder proposal rule caused some consternation in Congress, with some members viewing the effort as a communist plot.  At one point, Congressman Wolverton noted that the proxy rules adopted in 1942 had caused “turmoil” and insinuated that this may have been part of a communist plot. See Securi[ties] and Exchange Commission Proxy Rules: Hearings on H.R. 1493, H.R. 1821, and H.R. 2019 Before the House Comm. on Interstate and Foreign Commerce, 78th Cong., 1st Sess. at 289 (1943).

In fact, the Commission's ability to push through a shareholder proposal rule, despite the turmoil and purported communist roots, occurred in large part because it was a continuation of existing practices and couched in terms of disclosure.  Moreover, it had limited reach.  It applied only to stock exchange traded companies (Section 12(g) of the Exchange Act was still 22 years away) and only if they solicited proxies.  Indeed, in the first year of operation, a mere 13 statements were submitted by shareholders and most of them were by the same person, a number that remained small through much of the early decades of the rule.

Tomorrow we'll talk about the early efforts to provide shareholders with access to the proxy statement for their nominees, something proposed in 1942 but not adopted.