Corporate & Securities Law

Proxy Defenses Already Causing a Fracas, & PA Defense #3

My last two posts described two of the roughly 16 defenses I am developing for Boards of Directors to use in the wake of the shareholder proxy access regime included in the Dodd-Frank Bill.  The defenses are featured in the paper I plan to submit to law review editors next week, Delaware’s Future: Reviewing Company Defenses to Shareholder Proxy Access.   It seems that my last two posts have touched a nerve.  James McRitchie, who writes at Corpgov.net and works with the large institutional investors like the AFL-CIO and the California State Pension Fund that lobbied for proxy access, recently summarized the two defenses I previously featured here and here, then he noted:

I wonder if Professor Verret also offers advice on how to circumvent tax codes, the Occupational Safety and Health Act, or the Americans With Disabilities Act. Harvard must be pleased to have such a distinguished scholar. Hopefully, most companies will seek to work with their shareowners but I suppose there will always be companies like Apache that may find Verret?s strategies appealing. No, I?m not adding these posts to our Links page. Hopefully, they will fall under the category of fantasy.

Strong words.  I haven’t seen such acerbic rhetoric since I testified next to Nell Minnow of the Corporate Library when the House Financial Services Committee was first considering proxy access in 2009.  Rhetoric and invective, however, are a poor substitute for reason.

The structure of corporate law is an enabling one.  The lessons of Easterbrook & Fischel and Coates are alive and well.  My work will hopefully sketch the field in which firms and shareholders will engage in Coasian bargaining, but it certainly doesn’t prohibit shareholder access to the corporate proxy.  If shareholders want that change, they will bargain for it and implement new bylaws immune from the board defenses I describe.  For companies at which shareholders have obtained the right to act by written consent, they can do so unilaterally.  For companies whose shareholders have expressed their apathy toward action by written consent, they will need to engage boards.  My ideas are merely intended as a way to block the one-size-fits-all federal approach.

And there are good reasons to block the federal proxy access rule.  Enabling large institutional investors like CalPers and the AFL-CIO will result in politicization of the shareholder voting process.  Groups like Corpgov.net and Nell Minow’s Corporate Library hide behind fluffy notions like the “triple bottom line” to justify pushing companies toward vague objectives like sustainability or stakeholder accountability in order to support their ideas that companies should make decisions about health care coverage or wages without a view to profitability.  Those groups have never been able to effectively respond to Bainbridge’s argument that the profit motive is the only viable accountability mechanism for corporate boards.

Before I close this post, I should give the shareholder activism community a new bone to chew on.  So, here comes Proxy Access Defense #3: Delegation to Board Committees.  The Delaware General Corporation Law gives Boards a wide authority to delegate matters to subcommittees of the Board.  The full Board must approve changes to the charter or bylaws, but otherwise nearly all matters considered by the Board can be delegated to Committees.  If the SEC’s last proposal on proxy access is approved pursuant to Dodd-Frank, including the rule that shareholders can nominate up to a quarter of the board, then Boards could simply create an Executive Committee of the Board consisting of the incumbent directors constituting the other 75% of the Board and delegate nearly every major decision to that Committee.  The insurgent directors could be barred from the Committee meeting.  They would be given the minutes of the meeting, prepared by the corporate secretary, and otherwise be excluded from the deliberations.

The fact that James McRitchie is so adamant in his opposition to my ideas is heartening.  It means I’m getting somewhere.  I have 13 potential defenses left to describe.  This will be fun.

Full post as published by Truth on the Market on July 27, 2010 (boomark / email).