The SEC, Corporate Governance, and Shareholder Access to the Proxy Statement

The Commission at an open meeting Wednesday (July 25) voted to issue proposed amendments to Rule 14a-8 that would allow shareholders to submit bylaw proposals that addressed the method of electing directors.  The webcast can be found at the SEC's web site.  The Commissioners only received the final proposals late Tuesday night.  The Commission approved, by a 3-2 vote, a proposal to allow shareholders to include proposals in the proxy statement (the shareholder access proposal) and by a 3-2 vote a proposal that would not allow them to do so (the shareholder non-access proposal).  Comments will be invited on both.  We have already written about the shareholder access proposal. 

Chairman Cox was the deciding vote on both, something that has been described as Solomon like.  In listening to the webcast, however, his views are clear.  He favors a proposal that would allow shareholders access to the proxy statement to make the proposals but is in favor of an incremental approach in order to not disrupt the capital raising process. 

In his opening remarks, Chairman Cox noted that any proposal should be respectful of state law, should be measured and incremental, and should not create new rights for shareholders but should vindicate existing rights.  Interestingly, he emphasized that the proposals would not impose a uniform national requirement on all companies (one size fits all) but would allow for "private ordering."  Private ordering is the phrase most often used by those who view corporations as a "nexus of contracts".  It contemplates that legal requirements should not be imposed categorically but should be the subject of bargaining between shareholders and directors.  My paper here deals with this topic at greater length.  

It was an interesting choice of language since those in the "nexus of contracts" camp generally oppose the efforts to give shareholders the right to make these kinds of proposals.  Larry Ribstein falls into this camp.  In a way, therefore, Chairman Cox was couching the proposal in the very language used by its opponents. 

After noting that shareholders had few rights in the United States, less than in overseas markets, Chairman Cox observed that they had an "ironclad legal right to do one thing for themselves and that's to choose the company's directors."  He went on to criticize the view made by some (including Larry Ribstein) that shareholders ought to be denied complete access to the proxy statement. 

• "And yet some say the company's proxy materials which are produced at the shareholders expense should under all circumstances be inaccessible to the shareholder when it comes to nominating directors. That would seem to stand the principal of fair corporate suffrage on its head.  And that harsh conclusion would seem especially warranted if what's being considered is not the shareholder's opportunity to use the company's proxy to nominate a director but rather only to propose a bylaw that would set up a procedure by which that could happen but that would itself have to first be approved by a majority of the company's shareholders."

He also referenced at least twice the efforts by Chairman Shad back in the 1980s to ensure proper governance through the use of listing standards, an approach struck down by the DC Circuit in Business Roundtable v. SEC, a case we have characterized on this Blog as a Phyrric victory.  Had the SEC been able to use listing standards to improve governance, it is likely that these proceedings and probably at least some provisions in Sarbanes Oxley would not have been necessary.

Commissioner Atkins made his opposition to the access proposal equally clear.  He shows no sympathy for shareholders or their rights.  He struggled to explain his opposition, at one point making the startling statement (without any accompanying explanation) that the Commission might lack the authority to adopt the shareholder access proposal.  His opposition is broad and philosophical.  Nothing in the comment period will change his views.  

Commissioner Campos favors shareholder access and spent much of his opening statement taking issue with the principal arguments against the proposal.  He specifically invited comments on whether the proposal to limit access to those shareholders owning 5% or more of a company's stock was appropriate.  In questioning the staff, he got them to admit that, in the next proxy season, the Division of Corporation Finance would take the same position as the prior proxy season with respect to shareholder proposals concerning the method of electing directors.  In other words, absent the adoption of a rule, the Division of Corporation Finance would decline to grant no action letter to companies seeking to exclude these proposals.

Commissioner Nazareth supported shareholder access.  On the most controversial aspect, the requirement that shareholders must own 5% or more shares to be eligible to submit a proposal, Nazareth indicated that she supported some type of ownership threshold.  In her remarks, she seemed miffed that the a second proposal had surfaced unexpectedly that would amend the rules to deny shareholders the authority to include proposals concerning the method of electing directors in the proxy statement.  She referred to this as the non-access proposal and expressed concern that the final rule might borrow from both proposals.  

Commissioner Casey not only opposed the shareholder access proposal but essentially accused the staff as legerdemain.  After criticizing the "abrupt change of course" that came with the shareholder access proposal, she indicated her belief that the proxy roundtables held in May were structured not as fact finding endeavors but, based upon the "aggressive" scheduling, to lay the foundation for a "predetermined proposal."  In other words, the staff (presumably in league with the Chairman) were attempting to manipulate the process.  Casey characterized the access proposal as a "sea change" and objected to alterations in the "carefully crafted" proxy rules, emphasizing the need for caution. Nothing in her remarks evidenced any sympathy with shareholders and their substantive rights under state law.

The irony in the positions taken by Casey and Atkins is that the access proposal in fact permits private ordering and respects state law.  It seems relatively clear that Commissioners Casey and Atkins simply don't want shareholders having the right to nominate their own directors, although they refuse to come out and say it.  It is a short sighted perspective.  If their view carries the day, the position will simply be reversed the next time a democrat appoints the chair of the Commission.  If Campos and Nazarath carry the day, the likelihood that a future Commission will tamper with the result is is substantially less.