Corporate Governance

Shareholder Access and the Advocacy Role of Delaware in the Corporate Governance Debate: Preserving the Right to Restrict Access (Part 6)

By J Robert Brown Jr.

We are examining the Amicus Brief submitted by the State of Delaware in Business Roundtable v. SEC, the case challenging the SEC's rule providing certain shareholders with access for their nominees to the proxy statement.

In the end, the only real argument made in the Brief for opposing access (other than the inherent need to defer to Delaware) is a negative one.  As a categorical rule, Rule 14a-11 prevents management and sharehodlers from enacting access bylaws that eliminate the right of access or impose limits that are more severe than those in the rule.  As the Brief states:  

• Mandating proxy access would fundamentally alter the policy of stockholder choice embodied in Section 112. Rule 14a-11 prevents stockholders from exercising their right to adopt a variety of terms for proxy access that would differ from the strictures of Rule 14a-11 if they would prevent any nomination permitted under the rule. Thus, even where a majority of stockholders want to exercise their state law rights to adopt a more stringent bylaw under Section 112, they are prevented from doing so by the mandatory provisions of Rule 14a-11. 

In other words, the Delaware position is not about ensuring shareholder access but ensuring the right to restrict access.  Moreover, the limits on shareholder rights are only with respect to Section 112. 

The Brief did weakly suggest that access prevented the introduction of alternatives.  

• Moreover, stockholders are prevented from exercising their Delaware law right to adopt an alternative to proxy access. For example, stockholders are prevented from adopting a proxy reimbursement bylaw under Section 113 in lieu of granting access. And, of course, stockholders are prevented from determining for themselves that, in the case of their particular corporation, neither reimbursement nor access is appropriate.

Note that the passage speaks in terms of stockholders, not management.  In other words, the State does not even make the argument that management would seek to develop alternatives to access.

While access makes certain types of alternative provisions less likely as a practical matter, it does not prohibit their use.  For one thing, some alternatives (reimbursement of proxy expenses) would presumably benefit shareholders using access since they will incur other expenses not eliminated by Rule 14a-11.  Moreover, Rule 14a-11 is very narrowly drawn and contains numerous restrictions.  Alternatives could be used to facilitate the right of those shareholders to nominate and elect directors. 

In fact, there are no examples of shareholders adopting "alternatives."  Any attempt to do so would also have to confront, as the Petitioners put it, "60 years of opposition to proxy access by corporations".  Petitioners Brief, at 43.  Thus, there is little evidence that access has resulted in any meaningful interference with the right of shareholders to develop "alternatives." 

For a history of the SEC's efforts to provide for shareholder access (a process that dates back to 1942), see The SEC, Corporate Governance, and Shareholder Access to the Board Room.   Assorted briefs and motions in this case can be found at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on February 03, 2011 (boomark / email).