Corporate Governance

Access and Its Opponents: The Ostensible Benefits of Private Ordering

By J. Robert Brown

Many have taken the position that the SEC is taking a "one size fits all" approach that should be eschewed in favor of private ordering.  Private ordering is a concept that suggests companies ought to put in place provisions that uniquely fit their own needs and circumstances and, that, presumably, includes the views of management and owners.

In fact, the whole concept of private ordering in the corporate law environment is flawed.  It presupposes that directors and shareholders will somehow negotiate and adopt the most efficient set of provisions. The theory does not coincide with the practice. Evidence suggests that management's control over the drafting process and its ability to rely on the corporate treasury eliminate any real prospect of private ordering. Instead, when matters are made discretionary, they result in a categorical rule that favors management. This has been the case with respect to waiver of liability provisions and likely to be the case with respect to access proposals.  This has been chronicled in Brown & Gopalan, Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom, 42 Indiana L. Rev. (2009).

The evidence points to a categorical rule against access.  Until the SEC's proposal, there has been no history of boards adopting access bylaw.  Since the new milenium, only three companies have done so (Comverse, Aprial Healthcare, and Riskmetrics).  In three other instances, proposals were submitted to shareholders and vigorously resisted.  Two failed (HP and United Health), one passed (Cryo Cell).  The empirical evidence to date (supported by the comment letters filed in connection with the access proposal) shows almost implacable opposition by issuers.

There is no evidence that in the absence of an SEC rule in this area, that shareholders will obtain meaningful access in an appreciable number of cases.  Indeed, the evidence is entirely to the contrary.  Those calling for private ordering are really proposing a system that will result in a categorical rule denying shareholders access.  It is, in fact, the system that is currently in place.

For the complete letter filed by this Blog with the SEC on the access proposal, go here.  For a history of access, go here. 

Full post as published by The Race to the Bottom on August 26, 2009 (boomark / email).