Access and the Delaware Bar Association

The Delaware State Bar Association has written a comment letter on the SEC's proposal to give shareholders access to the company's proxy statement for nominees to the board.  The letter was apparently unique ("To the best of our knowledge, this is the first time that the Delaware State Bar Association or any of its membership groups has ever submitted a formal written comment to the Commission.").  Yet the times are unique.

Predictably, the letter opposed the grant of access.  The main argument was opposition to the one size fits all approach.  ("Proposed Rule 14a-ll, however, would substantially limit the ability of stockholders and boards of directors to set the terms of a proxy access system, or to choose a system of proxy expense reimbursement in lieu of a proxy access regime.").  The letter noted efforts by the Delaware legislature to authorize bylaws in connection with access and reimbursement of proxy expenses.

• By setting forth a non-exclusive list of conditions that bylaws governing proxy access may contain, Section 112 clarifies the extent of stockholder choice in regard to proxy access, through their power (concurrent with that of the board of directors) to adopt bylaws governing the process by which directors are elected. Thus, the new provisions recognize that stockholders (or directors) may determine that a proxy access system may indeed be beneficial, and expressly authorize them to adopt such a system; at the same time, the statute gives stockholders the flexibility to determine that, with respect to any particular corporation, such a system would not be beneficial, or that a reimbursement system might provide a better alternative.

There are so many things to say about this approach.  If Delaware were to require that companies either allow access or require reimbursement and set thresholds at modest levels for those eligible, this would be a reasonable argument.  But in reality, the argument is simply to let companies do whatever they want, which hardly protects shareholders. 

In fact, until the amendments to the Delaware Code (adopted presumably in anticipation that the SEC would put forth a new access proposal), companies incorporated in Delaware had no history of adopting bylaws that allowed access.  Moreover, to the extent these provisions (particularly Section 112) clarfiy, they clarify the limits that can be imposed on access.  The instances of companies adopting access bylaws are chronicled in The SEC, Corporate Governance, and Shareholder Access to the Board Room and there is no evidence of any predilection by Delaware companies to provide shareholders with this authority. 

Similarly, when matters are left to the company's discretion, the result is not a varied approach that meets the needs of multiple constituencies.  The result is a categorical rule that favors management.  At least this has been the case with respect to waiver of liability provisions.  This was chronicled in:  Opting Only in: Contractarians, Waiver of Liability Provisions, and the Race to the Bottom.  In other words, the proposal is really not about access, its about limiting access.

Indeed, the letter itself notes that if companies wanted to adopt access bylaws, it would be in an effort to restrict the use of access.  As the letter describes: 

• The "great deal of comment" on this issue when a mandatory proxy access rule was proposed by the Commission in 2003 (see Access Proposal at 44) suggests that stockholders may prefer utilizing their rights under Section 112 to establish a higher (e.g., 2% in the case of a large accelerated filer) minimum ownership requirement.

• In light of those comments, it is not unreasonable to expect that, if pennitted, stockholders of many corporations would choose a minimum holding period longer than the period that proposed Rule 14a-11 would establish.

• Under the proposed Rule, the corporation would be required to include in its proxy materials as many as three proxy access nominees -the maximum number that the public stockholders are entitled to elect. It is conceivable, however, that the stockholders (either the public stockholders or the stockholders as a whole) would prefer to limit the number of proxy access nominees to one or two, rather than all three ofthe board seats elected by the stockholders at large.

In other words, it is about wanting the preserve the right to restrict access.  What the letter doesn't say is that the most likely position of most companies is to entirely deny access (perhaps by imposing requirements that are so onerous that no one can realistically meet them). 

The letter essentially asserts that this is not the case by pointing to the widespread adoption of majority vote provisions.  The comparison is inapt.  First, it overstates their popularity.  While they have become common among the largest public companies, they are far less common among smaller public companies.  In other words, there is reason to believe that public companies could likewise benefit from a mandatory rule requiring majority approval of directors.

Second, majority vote provisions have been adopted because they in effect change little.  The typical model is to require shareholders without a majority to submit a letter of resignation.  Few directors failed to receive a majority (in part because of the votes they received by brokers engaging in discretionary voting, something eliminated recently by the SEC).  Moreover, when that happened, the board has had the discretion to refuse to accept the letter of resignation, something that has happened on a number of occasions.

Access is different.  It will in fact provide a mechanism for competition with management nominees.  There is no reason to believe that the bylaws will become common (as the last five years have indicated).  Moreover, the bylaws proposed by shareholders will likely meet more resistance than majority vote provisions, seldom passing. This is demonstrated by the empirical evidence.  In the brief period when access bylaw proposals were permitted by shareholders under Rule 14a-8, only three were submitted to shareholders, with one passing and two failing.   

In short, the position taken by the Delaware Bar is not really about additional corporate flexibility.  It is about minimizing or eliminating a right of shareholders to engage in a meaningful effort to nominate directors to the board.  It is a position entirely consistent with Delaware's role in the corporate governance process and a race to the bottom.