The Commisson and Access: Preempting State Law

As we've noted in the past, federal law is increasingly preempting state law in the area of corporate governance.  Dodd-Frank certainly did so and now acces follows.  While the contents of the proxy statement is a matter of federal law, the Commission went further and took away from the board the authority to exclude nominees, excepting only in circumstances where shareholders lack the authority under state law.  The approach effects the authority of states and the authority of the board.  As the release explained: 

• We have concluded that the ability to include shareholder nominees in company proxy materials pursuant to Rule 14a-11  must be available to shareholders who are entitled under state law to nominate and elect directors, regardless of any provision of state law or a company’s governing documents that purports to waive or prohibit the use of Rule 14a-11.  . . .  if state law or a provision of the company’s governing documents were ever to prohibit a shareholder from making a nomination (as opposed to including a validly nominated individual in the company’s proxy materials), Rule 14a-11 would not require the company to include in its proxy materials information about, and the ability to vote for, any such nominee. The rule defers entirely to state law as to whether shareholders have the right to nominate directors and what voting rights shareholders have in the election of directors.

The irony in this is that the Delaware Supreme Court in Axcelis just made clear that the board had the authority to determine the suitability of directors.  Yet with a stroke of the pen, that authority has been removed, at least with respect to nominees that qualify under the access rule.

Delaware has, in the last two decades, done a yeoman's job in minimizing board duties and eviscerating shareholder rights.  While a Van Gorkom or Unocal was possible in the 1980s, Disney and other similar cases show that this is no longer the case.  Delaware may have always has a pro-management approach to corporate law, but cases such as Citigroup, Selectica, and Axcelis, suggest that the approach has shifted much further in that direction.  The approach is almost singularly responsible for the transfer of governance rights from the states to the federal government. 

Thus, Delaware's profligacy has essentially resulted in a loss of authority for the other 49 states.  Nor is there any hint that the process will slow.