Chamber Challenges SEC Authority re Shareholder Access

BNA reportsthat:

As the Securities and Exchange Commission prepares to reconsider the contentious issue of granting shareholders access to corporate proxy statements for the purpose of nominating directors, the world's largest business association April 28 contended that the agency lacks the legal authority to act in this area.

In a letter to SEC Chairman Mary Schapiro, David Hirschmann, president and chief executive officer of the U.S. Chamber of Commerce, said that director elections and shareholder rights are matters of state law and the U.S. Supreme Court has ruled accordingly. While the 1934 Securities Exchange Act allows the SEC to regulate proxy solicitations, the letter stated that the statute provides no authority to regulate corporate governance.

I agree with the Chamber that a federal proxy access rule is undesirable as a matter of policy, as I explained in my article A Comment on the SEC’s Shareholder Access Proposal, Engage, April 2004, at 18. Yet, as I also concluded in that essay, the SEC does have legal authority to adopt an access rule:

 

According to [Business Roundtable v. SEC], federal proxy regulation has two principal goals. First, and foremost, it regulates the disclosures shareholders receive when they are asked to vote. Second, it regulates the procedures by which proxy solicitations are conducted. Section 14(a)’s purposes thus do not include regulating substantive aspects of shareholder voting. While confirming that the SEC has extensive authority to adopt rules assuring full disclosure and fair solicitation procedures, the Business Roundtable decision thus also drew a critical distinction between substantive and procedural regulation of shareholder voting. As to the former, the SEC has little, if any, authority.

The court’s … decision recognized the “murky area between substance and procedure,” in which rules may resist classification. Nonetheless, the opinion offers a few signposts by which the validity of Rule 14a-11 can be resolved. In particular, consider the distinction the court drew between Rule 19c-4 and Rule 14a-4(b)(2)’s requirement that proxies give shareholders an opportunity to withhold authority to vote for individual director nominees. In the court’s view, the latter “bars a kind of electoral tying arrangement, and may be supportable as a control over management’s power to set the voting agenda, or, slightly more broadly, voting procedures,” while “Rule 19c-4 much more directly interferes with the substance of what shareholders may enact.”

On which side of the line does Rule 14a-11 fall? In an article I wrote on 19c-4, I concluded that the shareholder- proposal rule would pass muster under the Business Roundtable approach. Absent Rule 14a-8, shareholders have no practical means of initiating action in the voting process or otherwise affecting the agenda. As such, I argued, Rule 14a-8 presumably is supportable “as a control over management’s power to set the voting agenda.” Director-nomination rules would seem to fall into that category as well.

For a detailed overview of the SEC's authority to regulate voting rights in general, see my article The Scope of the SEC’s Authority Over Shareholder Voting Rights, Engage, June 2007, at 25.