Corporate Governance

Shareholder Access and the Advocacy Role of Delaware in the Corporate Governance Debate: Conclusion (Part 7)

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.

The Brief concludes that access does not "'facilitate shareholders' effective exercise of their traditional state law rights,' because "it expressly grants a non-traditional, inflexible right contrary to the 'traditional' rights that Delaware's General Assembly and Governor have determined to grant."

The characterization of access as a non-traditional right is certainly true.  As history shows, the traditional right has been to deny shareholders access to the proxy statement for their nominees.  The idea of access has been around almost as long at proxy statements.  As early as the 1940s, the Commission considered allowing shareholders to submit nominees for inclusion in the proxy statement.  The issue was again seriously considered by the Commission in the 1970s.  Rather than permit access, the Agency adopted procedural mechanism designed to encourage companies to more seriously consider shareholder nominees.  The approach, however, did not work. 

Through the 1980s, shareholders regularly submitted and the Commission regularly allowed proposals calling for shareholder access.   None passed and no company put them in place.  Eventually, the Commission barred the proposals under Rule 14a-8, cutting off any meaningful ability of shareholders to submit access bylaws to a vote.  It took until the new millennium and a critical court case before access again returned to the forefront.  All of this is set out in detail in The SEC, Corporate Governance, and Shareholder Access to the Board Room. 

Delaware, therefore, had at least sixty years to craft a regime that would truly allow private ordering to flourish.  It never did.  The State was content with a regime where the categorical rule was to deny access.   Moreover, the lone foray in to the area, the adoption of Section 112, was done only when federal regulation appeared inevitable and was designed not to encourage access but to provide more grounds for restricting the right. 

As we have noted on this Blog, Section 112 of the DGCL was not needed to give shareholders the authority to adopt access bylaws since the authority already existed.  It was adopted to clarify the extent of the restrictions (essentially unlimited) that could be imposed on any right to access.  In other words, Section 112 did not grant rights, it facilitated the ability to take them away.  Had Rule 14a-11 contained an opt out provision, Section 112 would have provided the broadest possible basis for doing so. 

The State has had three score to facilitate private ordering with respect to access.  Had there been any meaningful effort to do so, Congress would not have intervened and the SEC would likely not not be pushing forward with its own effort.  The SEC's role has only arisen because of the complete absence of any meaningful right to access under Delaware law.  Given the State's inactivity, the argument that it deserves the right to control the law in this area is a hollow one and not likely to carry the day.

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 04, 2011 (boomark / email).