Corporate Governance

Shareholder Access and the Advocacy Role of Delaware in the Corporate Governance Debate: The Protection of Shareholders and Inspection Rights (Part 3)

By J Robert Brown Jr.

We are examining the Amicus Brief submitted by the State of Delaware in Business Roundtable v. SEC, the case challenging the SEC's rule providing certain shareholders with access for their nominees to the proxy statement.

Delaware, according to the Brief, also contains a body of law that "protects the ability of stockholders to choose and replace the directors." The brief points to the right to obtain a shareholder list and the ability of the courts to protect the franchise.  The reality on the ground, however, is very different.  

For one thing, as the Brief notes, "all stockholders have the right to obtain a list of stockholders of the corporation pursuant to Section 220 of the DGCL, for any proper purpose, including distributing proxy materials to other stockholders and soliciting their proxies," a true enough statement.  Where the courts have been parsimonious is with respect to the contents of the list.  The courts do not require companies to obtain NOBO lists and turn them over to requesting shareholders, even if the requesting shareholders agree to pay for them.  Given the percentage of beneficial owners in most public companies, insurgents are effectively denied the identity of most owners. 

Moreover, the right to obtain the list ignores the federal overlay.  If the state did not provide for a list, shareholders would simply resort to the proxy rules.  Rule 14a-7 requires companies either to provide a list or forward the materials to shareholders/beneficial owners.  One way or another, with or without Delaware, the proxy materials will be delivered.

More to the point, shareholders wanting to communicate with other owners to make the case for a change in the board need access to information on board behavior.  On this score, Section 220 and the credible basis standard has been used to deny shareholders access to such basic information as the reasons for arguably excessive compensation (see Seinfeld) or the board's refusal to accept letters of resignation of directors who did not receive the requisite support under a majority vote provision see Axcelis).  The courts in Delaware have long used excessive procedural thresholds to deny shareholders basic information that any owner of a business would want to have.  See Disloyalty Without Limits: Independent' Directors and the Elimination of the Duty of Loyalty.

Add in, of course, that when shareholders litigate and obtain the sought after documents under Section 220, the Delaware courts rarely award them their fees.  In effect, the cost of litigation has become a barrier to the exercise of inspection rights.

For a history of the SEC's efforts to provide for shareholder access (a process that dates back to 1942), see The SEC, Corporate Governance, and Shareholder Access to the Board Room.  Assorted briefs and motions in this case can be found at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on February 01, 2011 (boomark / email).