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State of Delaware Amicus Brief Says SEC Proxy Access Rule Runs Afoul of Principles of Stockholder Choice and Private Ordering

By Jim Hamilton

The SEC?s proxy access rule is completely contradictory to Delaware law governing proxy access and denies stockholders their state law right to freely amend proxy access bylaws, according to the State of Delaware. In an amicus brief filed in an action in the DC Circuit Court of Appeals seeking to have the proxy access rule vacated, the State of Delaware contended that the SEC?s attempt to facilitate shareholders? effective exercise of their traditional state law rights to nominate directors and cast their votes for nominees fails because it ignores Delaware?s policy of allowing stockholders, through their ability to amend bylaws, to determine how any particular corporation will protect the rights of stockholders in the election process. (Business Roundtable and US Chamber of Commerce v. SEC, US District Court for the District of Columbia Circuit, No. 10-1305, Dec. 9, 2010).

The SEC adopted shareholder proxy access, Rule 14a-11, which is shorthand for a regulatory framework under which a shareholder may require the company to include in its proxy statement and proxy card a person nominated by the shareholder, and not by the board, for election to the board. The proxy access rule would apply to all Exchange Act reporting companies, including investment companies, other than companies whose only public securities are debt securities. The SEC also amended Rule 14a-8, which is not being challenged in the DC Circuit, requiring companies to include in their proxy materials shareholder proposals seeking to establish a procedure in the company?s governing documents for the inclusion of shareholder director nominees in company proxy materials.

The Delaware corporate code provides that a company?s bylaws can establish a right of proxy access, which gives stockholders the ability to decide whether and when stockholders would be granted such a right of access. According to the brief, this provision, together with the amendments to SEC Rule 14a-8, would allow stockholders increased flexibility in shaping the process by which directors are elected. This company-by-company flexibility is said to be consistent with longstanding Delaware corporate law principles.

Delaware corporate law, composed of a code and the common law, is enabling, said amicus, and grants corporations and their stockholders broad latitude to privately order their corporate governance structure. This body of law protects the ability of stockholders to choose and replace the directors. The Delaware principles of stockholder choice and private ordering give stockholders a clear right to adopt a wide variety of proxy access models.

Amicus argues that mandating proxy access would fundamentally alter the policy of stockholder choice embodied in Delaware corporate law. SEC Rule 14a-11 prevents stockholders from exercising their right to adopt a variety of terms for proxy access that would differ from the strictures of Rule 14a-11 if they would prevent any nomination permitted under the rule. Thus, even where a majority of stockholders want to exercise their state law rights to adopt a more stringent bylaw, noted the State of Delaware, they are prevented from doing so by the mandatory provisions of Rule 14a-11. Moreover, stockholders are prevented from exercising their Delaware law right to adopt an alternative to proxy access.

In the State?s view, Delaware law working in tandem with amended Rule 14a-8 would allow stockholders to make efficacious decisions for their particular corporations and to learn from each other?s innovations and mistakes. Such flexibility and diversity are hallmark virtues of a system based on stockholder freedom of choice. On the other hand, a government-mandated system that makes all corporate electorates bear the cost of a rigid approach eliminates those virtues.

Full post as published by Jim Hamilton's World of Securities Regulation on December 17, 2010 (boomark / email).