Shareholder Access Redux (Part 7)

We are revisiting the Commission's decision to amend Rule 14a-8 to permit the exclusion of shareholder proposals that would sometimes require management to include shareholder nominees in the company's proxy statement. All of this is explored in greater detail in my paper, The SEC, Corporate Governance, and Shareholder Access to the Board Room. Today we offer some final thoughts.

The non-access amendment adopted by the Commission was done on partisan lines, with the lone Democrat voting against it. It contained language far broader than what was required to overturn the Second Circuit, creating plenty of opportunities for management to argue that other types of proposals should be excluded. In discussing the amendment, the Commission described the language as “clear and concise,” doing nothing more than codifying “the agency's longstanding interpretation.” Yet to explain the “clear and concise” language, the adopting release provided all manners of interpretive gloss.

The amendment also left in place the very problem that ostensibly led to its adoption. The Commission claimed as a central motivation concern that shareholders inserting their proposals in the company's proxy statements would sidestep the election contest rules. See Rule 14a-12(c), 17 CFR 240.14a-12(c). But of course prohibiting access proposals under Rule 14a-8 did not mean there would be no instances of shareholders including nominees in the company's proxy statement, leaving the election contest rules and, at least according to the Commission, the proxy antifraud provision inapplicable. In other words, the amendment did not fix the ostensible problem.

The actual language adopted in the non-access proposal was a Trojan horse. Instead of allowing the exclusion of proposals that “relate to an election,” the amendment expanded the exclusion to include any proposal relating “to a nomination or an election for membership on the company's board of directors . . . or a procedure for such nomination or election.”  In other words, the explicit language of the amendment put in play areas not at issue in AFSCME and that had traditionally not been subject to exclusion under Rule 14a-8.

The denial of shareholder access also undermined the goal of improving disclosure through the mechanism of independent directors. To be more than an expediency, the directors had to be genuinely independent. With the stock exchanges and state courts unwilling to adopt a definition that would accomplish this, access provided an alternative mechanism. By allowing shareholders to nominate and elect directors, access increased the likelihood of truly independent directors on the board.

Finally, the decision was inconsistent with the Commission’s mission to promoting full disclosure. Denying access left in place a structural problem with the proxy rules that meant shareholders could still avoid the election contest rules and, at least according to the Commission’s reasoning, the antifraud provision of the proxy rules.  In other words, the Commission left in place a set of rules that all but guaranteed that in some election contests, shareholders would not receive all relevant information.

What does the future hold?  The pressure from institutional investors will continue.  The Commission's absolutist approach and the weak underlying reasoning will do nothing to abate the pressure.  Moreover, the pressure will build not for attenuated access to the proxy statement but direct access, without having to first force shareholders to adopt an access bylaw.  This issue will be revisited and will be at the top of the agenda after the November 2008 elections.