Access: The Commission's Proposal (Some Thoughts)

The Commission, by a 3-2 vote, today approved a rule proposal that would provide shareholders with access to the company's proxy statement.

There are a few interesting observations that can be made at this point. First, under Rule 14a-11, shareholders (the percentage is tiered based upon the size of the company) can nominate directors if they have held the requisite number of shares for one year. This is shorter than the time period set out in the yet to be introduced Shareholder Bill of Rights (which requires a two year holding period).

Second, the proposal provides for a short slate of no more than one director or 25% of the board (which ever is greater). Where more than one shareholder submits nominees, the shareholders who submit first will be accepted.

Third, the provision preempts state law. It provides that if a shareholder lacked nomination rights, it could not use access. See SEC Press Release ("Under the proposal, shareholders who otherwise are provided the opportunity to nominate directors at a shareholder meeting would be able to have their nominees included in the company proxy ballot that is sent to all voters."). But articles and bylaws cannot be used to impose stricter requirements than what is required in the proxy rules. This effectively eliminates the possibility that recent amendments adopted under Delaware law can be used to eliminate access at the federal level.

Fourth, the nominees must be independent under the listing standards of the stock exchanges. It is an interesting requirement since, in general, the fact that directors are not nominated by the board is insufficient to ensure that they are independent. Perhaps this is an added protection should, in fact, the nominees come from management friendly shareholders (since the rule provides that nominees are accepted on a first come first served basis, which gives management friendly shareholders an incentive to act). It also prevents violations of exchange rules that require a minimum number of independent directors.

Perhaps the most interesting aspect of the independence requirement was to place in the hands of shareholders some obligation to interpret the listing standards implemented by the exchanges. In fact, it has so far been a matter of interpretation limited to the boards of the effected companies and the exchanges. As we have noted, there is reason to believe that these rules have not been properly interpreted or adequately enforced. Perhaps if this provision remains in place that will change.

For a history of access, take a look at The SEC, Corporate Governance, and Shareholder Access to the Board Room.