Lisa Fairfax points out that the SEC's new proxy access rule "rejected the private ordering arguments that arose in several contexts" and picks up a pertinent quote from the adopting release:
"Corporate governance is not merely a matter a private ordering. Rights, including shareholder rights, are artifacts of law, and in the realm of corporate governance some rights cannot be bargained away but rather are imposed by statute. There is nothing novel about mandated limitations on private ordering in corporate governance."
I, of course, believe that the corporation is properly understood as a nexus of contracts. In my book om corporation law and economics, I addressed arguments such as those made by the SEC:
Contractarians model the firm not as an entity, but as an aggregate of various inputs acting together to produce goods or services. Employees provide labor. Creditors provide debt capital. Shareholders initially provide equity capital and subsequently bear the risk of losses and monitor the performance of management. Management monitors the performance of employees and coordinates the activities of all the firm’s inputs. The firm is a legal fiction representing the complex set of contractual relationships between these inputs. In other words, the firm is not a thing, but rather a nexus or web of explicit and implicit contracts establishing rights and obligations among the various inputs making up the firm. ...
Some reject the positive contractarian story on grounds that corporate law is pervaded by mandatory rules. But this objection is far from fatal. In the first instance, many mandatory corporate law rules are in fact trivial, in the sense that they are subject to evasion through choice of form or jurisdiction, or to the extent that some rules appear across the spectrum of possible organizational forms, they are rules almost everyone would reach in the event of actual bargaining.
In the second, most contractarians probably regard the normative story as being the more important of the two. As such, we cheerfully concede the existence of mandatory rules, while deploring that unfortunate fact. Contractarians assume that default rules are preferable to mandatory rules in most settings. So long as the default rule is properly chosen, of course, most parties will be spared the need to reach a private agreement on the issue in question. Default rules in this sense provide cost savings comparable to those provided by standard form contracts, because both can be accepted without the need for costly negotiation. At the same time, however, because the default rule can be modified by contrary agreement, idiosyncratic parties wishing a different rule can be accommodated. Given these advantages, a fairly compelling case ought to be required before we impose a mandatory rule. Mandatory rules are justifiable only if a default rule would demonstrably create significant negative externalities or, perhaps, if one of the contracting parties is demonstrably unable to protect itself through bargaining.
Given that state law has already moved to facilitate private ordering of proxy access, neither of the conditions for a mandatory rule was satisfied. Hence, all the SEC needed to do was to create an opt-in regime by amending Rule 14a-8 to allow shareholder proposals to put forward proxy access bylaws. The SEC's failure to go this route makes a rather curious statement. They trust shareholders to nominate directors, but they don't trust shareholders to decide whether they want to have the right to nominate directors.
When you understand that proxy access isn't really about shareholders as a whole, but rather is a political payoff by the Democrats in Congress and at the SEC for their buddies at union and state and local government pension funds, of course, the mystery is solved.
Anyway, Lisa's post offers a nice, concise summary of the new rule. Check it out. In a second post, Lisa offers five preliminary reactions to the new rule. It's a good read, as well.
