Shareholder Access, the SEC, and Corporate Governance: The Problem of Selective Disclosure (Part 4)

We are discussing the proposal made by the Securities and Exchange Commission that would amend Rule 14a-8(i)(8) to clarify that proposals may not be excluded that would sometimes require management to include shareholder nominees in the company’s proxy statement (“access proposal”).  The proposal is contained in Exchange Act Release No. 56160 (July 27, 2007).  This Blog has already written extensively about the alternative proposal made by the Commission that would deny shareholders access for this purpose and has submitted to the Commission a comment letter on the non-access proposal.

In addition to imposing a high ownership threshold (5% of a company's voting shares) and a motivations test (shareholders with an intent to influence control), the proposal also seeks to impose unique disclosure requirements on those shareholders making an access proposal, another substantial departure from the usual approach employed in Rule 14a-8. 

Referencing the three roundtables held by the Commission in May, the Release noted that “the vindication of these state law rights must be accomplished in a way that accommodates the abiding federal interest in the full and fair disclosure to shareholders of information that is material to a contested election.” Exchange Act Release No. 56160 (July 27, 2007).  The proposal does so in part by requiring shareholders submitting nominees to make certain additional disclosure. This is the approach taken by proposed Rule 14a-17.  It would require additional disclosure anytime shareholder nominees are included in the company’s proxy statement, irrespective of the reason for inclusion (whether a result of a mandatory bylaw or done voluntarily by management).

The Commission, however, goes much further and proposes to impose additional disclosure requirements not on a nominating shareholder but on a shareholder merely making an access proposal.  In other words, those making access proposals will be subject to unique disclosure obligations.   

The explanation for the requirement is inadequate.  As the Release notes:  “The already significant role that full disclosure plays in our proxy rules is rendered still more important when individual shareholders or groups of shareholders, who do not owe a fiduciary duty to the company or to other shareholders, use company assets and resources to propose changes in the company’s governing documents.” Exchange Act Release No. 56160 (July 27, 2007).  But the explanation proves too much. All proposals, not just those seeking access for shareholder nominees, use corporate resources.  All proposals presumably require the expenditure of some resources, whether because of the administrative efforts of employees or the increased cost associated with a longer proxy statement. Nothing in the Release sets out a rational that would justify the imposition of disclosure requirements only for shareholders submitting access proposals.

The Release also notes that the information is necessary for “proposals that could cause a fundamental change in the relationship between the company and its shareholders”. Exchange Act Release No. 56160 (July 27, 2007). The history of these proposals to date suggests otherwise, as we have noted here, here, and here.  But even if this highly doubtful contention has some validity, plenty of other proposals pose the same risk. Proposals calling for cumulative voting could cause a fundamental change in the relationship. So could majority vote proposals. Yet nothing in the Release suggests the need for disclosure by the submitting shareholder in these instances.

These requirements should for now be limited to those shareholders actually nominating directors for insertion in the company’s proxy statement. In the meantime, to the extent that the Commission believes that shareholders need disclosure about those proposing a bylaw rather than those nominating a director, it should study the issue systematically rather than impose these requirements in an ad hoc fashion.