Corporate Governance

The SEC's Access Proposal: Some Observations (The Impact on Board Nomination of Insurgent Directors)

By J. Robert Brown

Access is designed not to affect control.  The number of access nominees is limited to 25% of the board and nominees can only be submitted by those shareholders without a control purpose.  On the other hand, there is at least one circumstance where access could still result in a change of control.

It is uncommon but not unheard of for insurgents to seek membership on the board and, in the face of a protracted and losing proxy contest, to have management agree to nominate and elect some insurgent directors.  Thus, a board could have a number of directors who were nominated but not selected by management. 

These directors, when coupled with 25% of the directors elected through shareholder nominees, could result in a change of control.  Of course, the board usually only accepts a minority of insurgent directors and, for control to shift, the number, when added to the access nominees, would have to result in a change of control, an unlikely mathematical equation.  Moreover, the shareholder making the nominations could not be in league with the insurgent already on the board since this would result in a disqualifying control motive.

Nonetheless, it is at least possible.  This may, as a result, cause boards to think twice before seating insurgent directors or at least seat only a small number of them.

Full post as published by The Race to the Bottom on July 01, 2009 (boomark / email).