Corporate Governance

As Predicted: The SEC and the Further Denial of Shareholder Access (The Consequences) (Part 21)

By J. Robert Brown

The case has considerable consequences.  Most immediately, shareholder proposed bylaws that call for the reimbursement of proxy expenses will be considered invalid unless they include a fiduciary out.  This all but spells the death knell for the proposals. A fiduciary out means that reimbursement is not guaranteed but will require the affirmative consent of those opposed in the proxy contest.  In other words, most shareholders wanting to run a short slate will view reimbursement as unlikely.  The fiduciary out, therefore, eliminates most if not all of the added incentive to run a competing slate of directors. 

The broader impact, however, will be felt under Rule 14a-8.  The Court provided a basis for arguing that any proposal addressing substance (as opposed to process) is an improper subject for shareholders under Section 141(a).  But even in the area of process (shareholder elections), the Court essentially invalidated anything that would result in mandatory impositions on the board.  A strong argument will now exist that any shareholder proposal without a fiduciary out will be invalid. 

The Commission denied shareholders access to the proxy statement for its nominees.  In so doing, however, the Commission stated that the amendments to Rule 14a-8 would not undo any prior interpretations of the rule.  But by referring the matter to the Delaware Supreme Court, the effect has been the same.  The Commission has made it harder for shareholders to participate in any meaningful way in the nomination process.

The AFSCME bylaw was unlikely to have much impact.  Few would pass and those that did would probably not encourage many shareholders to incur the risk of a proxy contest.  In other words, it was a way for the Delaware Courts (and the Commission) to provide some semblance of shareholder involvement in the nomination process without really changing the dynamics of director elections.  The same was true of the access proposal considered by the Commission. 

With the unwillingness to accept even this modest proposals, the Delaware courts simply make the case for preemption.  In the aftermath of the November 2008 elections, pressure will build on the Commission to return to the issue of access.  But shareholders will not want the access bylaw considered last year.  The pressure will build for direct access for shareholder nominees to the company's proxy statement.  When this occurs, it will render decisions like CA v. AFSCME largely irrelevant. 

Full post as published by The Race to the Bottom on July 18, 2008 (boomark / email).