Corporate Governance

Access: The Commission's Proposal (Introduction)

By J. Robert Brown

The Commission today voted to issue an access proposal (by a 3-2 vote).  The open meeting can be heard by webcast here.  A description of the proposal can be found here.

Chairwoman Schapiro and Commissioners Walter and Aguilar were vigorous supporters of the proposal.  Commissioner Walter quoted Victor Hugo and his statement that "there is nothing more powerful than idea whose time has come" and concluded that access was something that that "was long overdue."  Aguilar emphasized the impediments (and costs) imposed by the proxy rules that largely eliminated the rights of shareholders under state law right to actually make nominations at a meeting.

The opposition came from Commissioners Casey and Paredes. Casey objected because it preempted state law. As she asserted, access would put the Commission "squarely into the territory of creating a federal corporate governance regime as it affects two matters at the heart of governance: director elections and shareholder rights." She even labeled the staff's approach "paternalism" by denying shareholders the right to consider the requirements for access bylaws.

Casey raised the issue of authority (as has the Chamber of Commerce), presumably a reference to Business Roundtable.  But of course Business Roundtable involved the Commission's authority under Section 19 of the Exchange Act.  Moreover, the case involved substantive rights of shareholders.  Access, on the other hand, comes under the proxy rules and fundamentally involves disclosure (allowing shareholders to piggyback the disclosure about their nominees).

Paredes largely accused the staff of regulating the internal affairs of corporations and taking a one size fits all approach all to the election of directors.  He raised as evidence that access was unnecessary both Delaware's proposal to permit access bylaws and the trend towards majority vote provisions.  And, while not raising the problem of offshore hedge funds, he did suggest that this might encourage special interest directors.

As for his argument in favor of private ordering, that is often code for "one size fits all" that favors management rather than shareholders.  (See Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom).  With respect to majority vote provisions, these have become popular because in the end management controls board membership by invariably reserving the right to accept or reject the resignation of a director.  We will be writing more often in the future about examples of boards that have rejected letters of resignation.  It is not an uncommon occurrence.  In other words, shareholders really have no control over the election of directors, even with majority vote provisions in palce.  And, as we have already noted, the reforms in Delaware are designed to limit not encourage access.

Paredes, amusingly, recommended that instead Rule 14a-8 be amended to allow for access bylaws.  In other words, he wanted to resurrect exactly the proposal that the prior Commission (which did not include Paredes but did include Casey) rejected.  As we have pointed out time and time again, had this weak proposal been adopted under the prior administration, the current proposal for direct access would probably not be under debate.

For a history of access, take a look at The SEC, Corporate Governance, and Shareholder Access to the Board Room.

Full post as published by The Race to the Bottom on May 21, 2009 (boomark / email).