Corporate & Securities Law

Commentary on Proxy Access Defenses

I was honored to get a paragraph in Wachtell Lipton Rosen and Katz’s recent client memo on proxy access.  David Katz and Laura McIntosh published that memo in the New York Law Journal today with the following commentary on my work:

Some commentators have suggested “hardball tactics” for circumventing the intended effect of the rules, such as screening out challenge candidates through director qualification bylaws, preventing shareholder eligibility with poison pill thresholds below three percent, or delegating decision-making to board committees from which access nominees are excluded;(FN9) in our view, such actions could in many cases be significantly more disruptive than accepting access nominees who are elected as full board members of the board and forging a constructive working relationship with the new director or directors and their nominating shareholders.  If they are to be used at all, the use of hardball tactics should be reserved for extreme cases in which an elected proxy access nominee becomes disruptive or threatens the effective operation of the board, which we believe will be the exception rather than the rule.

FN9: See, e.g., J.W. Verret, “Defending Against Shareholder Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank,” George Mason Law & Economics Research Paper No. 10-37 (Aug. 8, 2010), available at www.ssrn.com/abstract=1655482.

I can understand why they have to say that.  Some board members are fairly risk averse and willing to quickly make a deal with challengers.  Official pronouncements by law firms need to reflect the wishes of a broad base of clients, and can’t appear too impolitic, where hardball tactics are better discussed in the boardroom with clients one-on-one.  I am, however, proud to see that my inventions have made their way into the Wachtell Lipton extreme case, hardball tactic toolkit.  I could kick myself for not taking out a business method patent for these things.  Morris, Nichols, Arsht & Tunnell, one of the leading Delaware firms, took a shot at me in passing with the following observation in their client update:

Although the SEC’s proxy access regime is unwelcome news to many, we would counsel against overreaction.  Provisions seeking to thwart proxy access nominees with overly complicated procedural hurdles, to treat such nominees with overly complicated procedural hurdles, to treat such nominees differently with respect to indemnification or similar rights, or isolate them through committee structure, are likely to be counterproductive.

At least cite me if you’re going to argue with me.  Notice what they didn’t say…that my defenses face risk of being struck down or that they don’t offer the prospect of strategic benefit in stopping nominees.  I frankly don’t think that the equivalent of a peace treaty with conflicted shareholders is a good idea, but the prospect of a board using my defenses is always there.  Since my defenses are always an implicit part of the board’s toolkit, then they give even appeasing boards greater bargaining leverage.

Don’t get me wrong…I am not an opponent of proxy access in any and all forms.  I merely think that a one-size fits all solution is a bad idea and presents the risk of empowering conflicted institutional shareholders.  As such, I hope that my work presents a roadmap for muting the federal proxy access rule and opening up a space for boards and shareholders to negotiate alternatives.

I am heartened that the leading board advisory firms feel the need to engage with my work.  It’s better than some folks in the blogosphere, where I have been compared to Dr. Strangelove and also compared to Professor Severus Snape.  Good grief.

Full post as published by Truth on the Market on September 23, 2010 (boomark / email).