The new rules require companies to include the nominees of significant, long-term shareholders in their proxy materials, alongside the nominees of management. This "proxy access" is designed to facilitate the ability of shareholders to exercise their traditional rights under state law to nominate and elect members to company boards of directors.
Under the rules, shareholders will be eligible to have their nominees included in the proxy materials if they own at least 3 percent of the company's shares continuously for at least the prior three years.
It could have been worse. The ownership requirement will deter short term activists from making use of the rule. At the same time, however, proxy access has never been a good idea. See my essay on the SEC's earlier version, Bainbridge, Stephen M., A Comment on the SEC Shareholder Access Proposal (November 14, 2003). UCLA School of Law, Law & Econ. Research Paper No. 03-22. Available at SSRN: http://ssrn.com/abstract=470121
SEC Chair Mary Shapiro trotted out her usual BS:
First, as a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own — candidates that all shareholder-voters may then consider alongside those who are nominated by the incumbent board.
How does fairness come into it? As for accountability, as I have argued elsewhere, shareholder voting is atool of limited utility. Bainbridge, Stephen M., The Case for Limited Shareholder Voting Rights. UCLA Law Review, Vol. 53, pp. 601-636, 2006; UCLA School of Law, Law-Econ Research Paper No. 06-07. Available at SSRN: http://ssrn.com/abstract=887789. As for state law, it has never given shareholders a right to use the company's proxy statement.
More from Shapiro:
Second, the company’s proxy materials offer the best, readily available tool for ensuring that the nominees of long-term and significant shareholders are presented to the electorate in a way that facilitates shareholders’ traditional state law voting and nomination rights.
Proxy access foes not facilitate state law rights, it preempts them. Under state law, the only right shareholders have is to conduct a proxy contest. So much for truthful disclosure.
Predictably, Lucian Bebchuk is pleased. Wrong, but pleased.
SEC Commissioner Troy Paredes issued a powerful and compelling dissent.
The tradition of state corporate law has been not to regulate by mandate. To the contrary, in regulating the internal affairs of corporations, states have adhered to a so-called “enabling” approach as opposed to a “mandatory” approach.
Mandatory corporate law forces a universal governance scheme on all firms without permitting an enterprise to adapt its approach to governance and corporate accountability to its distinct circumstances, as mandatory corporate law forces each firm into the same governance box without regard to what may be best for the enterprise and its shareholders. Recognizing that one-size-fits-all mandates are inappropriate for many businesses, the enabling approach defers to private ordering to determine how each firm should be organized to advance its particular needs and interests most effectively. Enabling corporate law allows the internal affairs of each corporation to be tailored to the firm’s unique attributes and qualities.
The countless characteristics that differentiate thousands of public companies from each other underscore why a mandatory approach to corporate governance is ill-advised. The risk that uniform dictates will be counterproductive is heightened when the dictates are imposed, without variation and without room for innovation, across an expanse of diverse and evolving enterprises and constituencies. Instead of being subject to the constraints of mandates, companies should be permitted to follow different paths in achieving the best results for the enterprise. Stated more directly, Rule 14a-11’s principal flaw is that it imposes a minimum right of proxy access, even when shareholders may prefer a more limited right of access or no proxy access at all.
Exactly right.
Rule 14a-11’s immutability conflicts with state law. Rule 14a-11 is not limited to facilitating the ability of shareholders to exercise their state law rights, but instead confers upon shareholders a new substantive federal right that in many respects runs counter to what state corporate law otherwise provides. Modifying the phrase “state law rights” with the word “traditional,” as the adopting release does, does not change the reality that Rule 14a-11 is at odds with state law.
Exactly right.
To my mind, the adopting release’s treatment of the economic studies is not evenhanded. The release goes to some length in questioning studies that call the benefits of proxy access into doubt — critiquing the authors’ methodologies, noting that the studies’ results are open to interpretation, and cautioning against drawing “sharp inferences” from the data. By way of contrast, the release too readily embraces and extrapolates from the studies it characterizes as supporting the rulemaking, as if these studies were on point and above critique when in fact they are not.
Even with the adopting release’s unbalanced presentation of the economic data, the most the Commission can justifiably claim is that proxy access may improve a company’s performance. This empirical basis is too infirm to support the Commission’s decision to adopt Rule 14a-11. Rather, the varied economic findings are consistent with the view that different governance arrangements are optimal for different companies. Given this, the Commission should amend Rule 14a-8 to facilitate private ordering but should not adopt Rule 14a-11’s mandates.
Exactly right. Based on skimming the adopting release, it looks like a brief, not a neutral analysis.
SEC Commissioner Kathleen Casey's dissent is also well worth reading:
Unfortunately, the 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. The consequences of this exercise include a series of arbitrary choices that are not tethered to empirical data and a number of internal inconsistencies that make the rules difficult to defend. Furthermore, the rules continue a disturbing trend of empowering institutional shareholders to the detriment of individual shareholders. Finally, the policy objectives underlying the rule are unsupported by serious analytical rigor, and the release fails to fairly and adequately consider the costs and impact of these rules. In this regard, I believe these rules are likely to result in significant harm to our economy and capital markets. ...
Rather than presuming, as corporate law does, that companies and their shareholders are generally capable of privately ordering their affairs based on their unique individual circumstances, the rules presume that shareholders are incapable of determining the director election procedures that are in their best interests.
Rather than presuming, as corporate law does, that directors, who are bound by their fiduciary duties and charged with maximizing shareholder value, will in fact act in the best interests of shareholders, the rule seems to presume that the relationship between directors and shareholders is fundamentally an adversarial power struggle.
The paradigm of a power struggle between directors and shareholders is one that activist, largely institutional, investors assiduously promote, and this rule illustrates a troubling trend in our recent and ongoing rulemaking in favor of empowering these shareholders through, among other things, increasingly federalized corporate governance requirements. Yet, these shareholders do not necessarily represent the interests of all shareholders, and the Commission betrays its mission when it treats these investors as a proxy for all shareholders. I believe many activists will concede that their interests in proxy access do not lie solely in the ability to successfully place a nominee on a company’s board of directors; instead, the proxy access right is also an important means of obtaining leverage to seek outcomes outside of the boardroom that may otherwise not be achievable — outcomes that are often unrelated to shareholder value maximization.
