Larry decides to be as charitable as possible and still comes out against new Rule 14a-11:
Let’s start out with the heroic assumption that more shareholder proxy access might be a good thing to offset excessive managerial power under state law. I don’t believe that, but I’m assuming it for the sake of getting to the nub of the problem. Based on this assumption, the SEC’s amendment to Rule 14a-8 clarifying that shareholders may use the rule to propose proxy access makes sense.
I will go further and assume for the sake of argument that it was constructive for the SEC to provide in Rule 14a-11 for its own version of proxy access for 3%-3-year shareholders. I am very sympathetic with the argument of former SEC Commissioner Paul Atkins and in a WSJ editorial that this rule was designed to, and does, favor unions, who are uniquely able to maintain such substantial holdings for this period, and to disfavor hedge funds, which cannot. Indeed, I would go further and say that there may be many reasons why this rule perversely unbalances corporate governance. But I suppose that one might make similar arguments against any version of SEC-imposed proxy access, and I’m going to be as charitable as possible.
The real problem is that the SEC has barred any possibility for the shareholders or state law to provide for less proxy access than under the new rule. How can a rule that bars shareholders from making certain types of governance rules, either directly or by choosing the state of incorporation, increase shareholder participation in governance?
Perhaps the answer is that shareholders shouldn’t participate in governance because they are too easily manipulated and misled and simply don’t know what’s good for them. Rather, the SEC knows best.
But as dissenting Commissioner Paredes points out, this is inconsistent with the whole point of proxy access and with the SEC’s stated intent to “facilitate the effective exercise of shareholders’ traditional state law rights.” Dissenting Commissioner Casey also said:
[T]he adopting release goes through a jiu-jitsu exercise of purporting to give deference to state law and to increase shareholder choices under state law, when in fact the rules do exactly the opposite. As a result, the logic does violence to our historical understanding of the roles of federal securities law, state law, shareholder suffrage and private ordering, with potentially far-reaching implications. * * *
Consider the most obvious anomalies: If the shareholders can’t be trusted to decrease proxy access, why should they be trusted to increase it? If we fear that managers, even with the new proxy rule, can still manipulate shareholders, then why trust the shareholders to do anything? And if the shareholders can’t be trusted, why should the securities laws force firms, at great cost, to inform shareholders so they can participate in the proxy process? In other words, the rule is fundamentally inconsistent with the whole point of the securities laws to provide the disclosure necessary to enable the shareholder to be effective governors of their firms.
