The Dodd-Frank Wall Street Reform Act and the Preemption of Delaware Law (Shareholder Access)

The provision on shareholder access also has preemptive effect. 

Shareholder access is probably the most important governance provision in the Dodd-Frank Wall Street Reform Act.  Had the Act been silence, the Commission had a strong argument that it had the authority to compel access.  After all, the requirement would have been nothing more than a disclosure obligation in the proxy statement.  The effect of the election remained a matter of state law.  Nonetheless, some within the legions opposing access made noises about suing should the Commission act.  As a result, explicit authority was inserted into both the House and Senate versions of the Act, eliminating the issue from litigation.

During conference, however, the Senate surprised many investor/shareholder advocates and inserted into the access provision a requirement that the authority be limited to shareholders owning 5% of the company's shares.  There was also a two year holding period.  Had this remained in the final legislation, access authority would have been almost useless.  It did show, however, that those opposed to access would probably have been more effective had they focused less on preventing access entirely (something that, due to changes in the dynamics of the market, had become increasingly inevitable), and instead tried to obtain high thresholds. 

Indeed, one has to go back to the Commission under Cox when the access proposal would merely have permitted access bylaws, bylaws that if they were adopted would allow for access in subsequent proxy solicitations.  Such a bylaw would have required proponents of access to first obtain enough support to pass the bylaw and then obtain enough support to elect their candidates, neither of which was guaranteed.  Yet the vociferous opposition to even this mild requirement put matters on hold (actually the Commission adopted an anti-access provision to reverse the AFSCME decision) until a more aggressive approach could materialize once Administrations changed.

The restrictions proposed by the Senate were ultimately deleted, with Congressman Frank and Congresswoman Waters refusing to relent.  As a result, the SEC received almost plenary authority to regulate access.  Specifically, the Dodd-Frank Act amended Section 14(a) of the Exchange Act, the source of the Commission's authority on the proxy rules, and provided explicitly that the Commission had the power to require an issuer to include in its proxy statement "a nominee submitted by a shareholder to serve on the board of directors of the issuer."  Likewise, the Commission could determine any procedures that must be followed by the company. 

The limits on the Commission's authority?  The rules can contain any "terms and conditions as the Commission determines are in the interests of shareholders and for the protection of investors."  The provision invites but does not require the Commission to consider exempting certain classes of smaller companies from the requirement.

How broad is this authority?  There is nothing that limits the Commission in its determination of the ownership threshold necessary to submit a nominee.  The Commission need not require that the number only be a short slate.  The provision gives the SEC rulemaking authority in connection with "solicitation materials," not just the proxy statement.  It could, therefore, require disclosure in follow up materials distributed by the company.

In short, opposition to access has been absolute, without leaving much room for compromise.  It was the vociferous opposition to access that resulted in the non-adoption of the weak access bylaw provision proposed back in 2006.  And, it was the vociferous opposition that resulted in the adoption by Congress of sweeping authority in the area for the Commission.  Had the focus been on limiting rather than eliminating the Commission's authority (the effort to squeeze in a 5% threshold was too late and too excessive), the outcome in Congress might have been different.

In any event, the Commission has the authority to adopt a rule governing access.  This will happen shortly.  The express grant of congressional authority has made it clear that any state law impediments will be preempted. 

The Dodd-Frank Wall Street Reform Act and a short Summary of the legislation are posted online.  We have reprinted the proxy access provision below.

SEC. 971. PROXY ACCESS.

(a) PROXY ACCESS. Section 14(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78n(a) is amended-

(1) by inserting "(1)" after "(a)"; and
(2) by adding at the end the following:

"(2) The rules and regulations prescribed by the Commission under paragraph (1) may include-
"(A) a requirement that a solicitation of proxy, consent, or authorization by (or on behalf of) an issuer include a nominee submitted by a shareholder to serve on the board of directors of the issuer; and

"(B) a requirement that an issuer follow a certain procedure in relation to a solicitation described in subparagraph (A)."

(b) REGULATIONS.-The Commission may issue rules permitting the use by a shareholder of proxy solicitation materials supplied by an issuer of securities for the purpose of nominating individuals to membership on the board of directors of the issuer, under such terms and conditions as the Commission determines are in the interests of shareholders and for the protection of investors.

(c) EXEMPTIONS.-The Commission may, by rule or order, exempt an issuer or class of issuers from the requirement made by this section or an amendment made by this section. In determining whether to make an exemption under this subsection, the Commission shall take into account, among other considerations, whether the requirement in the amendment made by subsection (a) disproportionately burdens small issuers.