Corporate Governance

Shareholder Access Redux (Part 1)

By J. Robert Brown

We will spend a week or so revisiting the issue of shareholder access. 

It is a topic that only grows in importance.  We have seen from the Director Compensation Project run by students at the University of Denver Sturm College of Law that "independent" directors on public companies make healthy amounts, with at least one company paying directors in the vicinity of $700,000 a year.  We likewise have pointed out often that directors on boards have little chance of being defeated in election contests.  There are few elections contests and when they occur, insurgents usually do not win.

As a reminder, the Commission in December 2007 amended Rule 14a-8(i)(8) to allow companies to exclude not only actual nominations for the board but also proposals that, if adopted, would require companies to include nominees submitted by eligible shareholders in the company's proxy statement.  In so doing, the Commission overturned the decision of the Second Circuit in AFSCME.  Moreover, the Commission did so by using language far broader than necessary, putting in play for exclusion proposals that address director nominations and procedures used in the nominating and election process. 

The actions taken by the Commission effectively denied shareholders the right to nominate directors, a right provided under state law.  As such, federal law continued to be a barrier to state law rights, demonstrating the falacy of the Commission's position that the "proxy process is meant to serve, as nearly as possible, as a replacement for an actual, in-person meeting of shareholders,"  Exchange Act Release No. 56160 (July 27, 2007).   

As a result, only those capable of fronting the costs of a proxy solicitation, with the likelihood that they will never be repaid, can effectively nominate candidates for the board.  As a result, the number of proxy contests each year are insignificant.  Directors, therefore, retain their position on the board not by acting in the best interests of shareholders, but by doing everything necessary to be renominated by the board.  The best way to achieve that result is to maintain positive relations with management.

We will reexamine the issue of access, including the historical basis for the position of the SEC to allow for the exclusion of shareholder nominations.  Much of what is written can be examined in greater detail in my paper, The SEC, Corporate Governance, and Shareholder Access to the Board Room.  

Full post as published by The Race to the Bottom on June 02, 2008 (boomark / email).