We are examining shareholder access to the proxy statement, with a brief exegesis into the history of the shareholder proposal. Much of what is written can be examined in greater detail in my paper, The SEC, Corporate Governance, and Shareholder Access to the Board Room.

The Commission adopted the shareholder proposal rule in 1942. The rule gave shareholders some access to the company's proxy statement for their proposals. What about shareholder nominees?

As we have noted, even before the adoption of the shareholder proposal rule, the Commission required companies to disclose information about upcoming proposals at the upcoming meeting and provide shareholders with some opportunity "to specify the action which he desires to be taken pursuant to the proxy on such matter." Exchange Act Release No. 2376 (Jan. 12, 1940). The authority did not, however, apply "to the matter of an election to any office which the persons making the solicitation are informed other persons intend to present for action at such meeting." Id.

Two years later, however, the Commission floated a proposal that would require companies to include shareholder nominees in their proxy materials. Management, however, had the right to limit the number of nominees “on some fair and equitable basis." See Securit[ies] 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 35 (1943). The circulated proposal would have allowed management to limit the number of nominees to “twice as many nominees as there are directors of the issuer.” Id. at 157. Shareholders would have been required to disclose “the information about such officers . . . required by the rules.”

The Commission never adopted the proposal. The release itself contained no explanation. It was clear, however, that the proposal to allow shareholders to insert their nominees into the proxy statement caused stiff resistance. Business interests opposed the right of shareholders to insert nominees in the company’s proxy materials, sentiments echoed in Congress.  Criticisms included concerns over the Commission’s authority to “change the proxy into a ballot,” the possibility that implementation would result in violations of state law, the vagueness in the grounds for excluding a nominee, the failure of the proposal to deal with staggered boards, and the risk of shareholder confusion. None of the criticisms challenged the right of shareholders to nominate directors under state law nor contested the impact of the proxy provisions on that right.

Most of the concerns could have been addressed through more adroit drafting. The Commission, however, chose not to go forward with the proposal, the controversy too great. Four years later, the shareholder proposal rule was amended to make the implicit explicit, barring its use for proposals relating to “elections to office.” See Exchange Act Release No. 3998 (Oct. 10, 1947) (proposing to add language that “This rule does not apply, however, to elections to office.”).

In fact, the proposal had no real prospect for success.  Not only was opposition vociferous, the beneficiaries were nowhere to be seen.  In an era predating the rise of activist investors and the institutionalization of the market, shareholders not only had little interest in the authority, generally opposing any increase in their role in the governance process. Aside from the Commission, therefore, no clear constituency favoring access had yet emerged.  Nor had the costs of a separate solicitation become prohibitive or the importance of independent directors on the board firmly established.