Access and the New Regime: The Countdown Begins

My how a few months can change around the corporate governance agenda. 

Under the prior regime, the SEC considered whether to give shareholders some access to the company's proxy statement for their nominees.  The proposal considered by the Commission was complicated and inefficient.  Shareholders would not have received the right to include nominees in management's proxy statement.  Instead, shareholders would only have received the right to include a bylaw that, if adopted, would permit shareholders to include nominees at the next meeting.  It was unlikely to have had much impact.  Few companies would likely have passed the bylaws and, even if they did, even fewer would have elected directors nominated by shareholders.

Even this minuscule effort at reform was too much for the prior Commission (and for most public companies).  The provision was not adopted and, instead, the Commission affirmatively banned the access bylaws.

With regime change, however, things have changed in a significant way.  On Wednesday, the Commission will make a new access proposal.  According to the New York Times, the SEC's proposal will allow 1% shareholders (the prior administration's threshold was 5%) to submit nominees directly for inclusion in the company's proxy statement (in other words, direct access, with no need for a bylaw first).  The thresholds will apparently depend upon the size of the company.  As the Times reported:

• The proposal would permit large shareholders — typically institutional investors like pension funds or hedge funds — or alliances of shareholders to nominate as many as one-quarter of the directors. For the 700 largest public companies, the proposal would require approval by 1 percent of the shareholders for a dissident slate to be nominated. For smaller companies, it would be either 3 percent or 5 percent, depending on the size of the business.

This is, mind you, only a proposal.  Nonetheless, it comes early enough that a final rule can be in place in time for the 2010 proxy season.

Direct access is the right answer.  But had the prior regime been a bit more willing to compromise and accept the system of indirect access that required companies to first adopt the requisite bylaw, we would probably not be considering this issue.  It was a short sighted approach but one that ultimately will work to the benefit of shareholders.  Of course, there is still the need to ensure that Delaware does not interfere with the federally mandated right to access.