Corporate Governance

Business Roundtable v. SEC: Private Ordering and the Lack of Empirical Support

By J Robert Brown Jr.

Opponents of access assert that the matter should be left to private ordering and that the recently added Section 112 of the Delaware General Corporate Law provides the requisite authority. 

We have long argued on this brief that such provisions were authorized before the adoption of Section 112 (the Section simply clarified the limits that management could impose on the authority) and that, contrary to the private ordering argument, there in fact had not been any.  The Amicus filed by CII, TIAA-CREF, et al, brings this point home.

• As their brief's centerpiece, petitioners cite (at 5, 8, 9, 22-23, 46, 51-52) Delaware's revision to its General Corporation Law, Del. Code Ann. tit. 8, § 112,  which ostensibly permits companies to provide proxy access by amending corporate bylaws. But that shows precisely why an 'optional' approach does not work.  The cited Delaware statute merely restates longstanding   Delaware   law: '[T]he permissibility of such bylaws was generally recognized prior to the enactment of section 112.' CRI 608 at 12 n.46.  Even though over half of all corporations traded  on major stock exchanges are incorporated in Delaware, shareholders there have  rarely obtained access, and never over strong management opposition.  Id. at 12- 13; 75 Fed. Reg. at 56,759 n.904. 

It was, and always has been, an argument that, at its core, seeks a legal regime that effectively denies shareholders access rights.  As the brief states: 

• Petitioners'   invocation   of   the   Delaware   model   is   thus  just   another   way   of urging     that  the SEC should  have done nothing.  Given petitioners' failure to challenge the SEC's findings on the current system's dysfunction, the SEC cannot be faulted for rejecting that do-nothing   approach.  The SEC thus properly concluded that 'it would be inappropriate to rely solely on an   enabling approach to facilitate shareholders' ability to exercise their state-law rights to nominate   and elect directors' because such enablement would—apart from its potentially enormous costs,  see pp. 27, supra—exist in theory but not in fact.  75 Fed. Reg. at 56,672-73.

Had proponents been serious about private ordering, they would have acknowledged the limitations confronted by shareholders (some practical and some legal) and sought to eliminate or reduce them.  State law could be changed to eliminate super majority restrictions on bylaw amendments or to allow shareholders to initiate amendments to the articles.  But in fact Section 112 was really an argument for the status quo, a status quo which effectively denies access. 

Primary materials, including all of the briefs, are posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on February 10, 2011 (boomark / email).