Access Denied

November 28, 2007

The Associated Press reports that the SEC has approved the new proxy rules denying shareholders access to the management proxy for the nomination of corporate directors.  The so-called no-access rule was adopted by a 3-1 vote, with Annette Nazareth, the sole remaining Democratic Commissioner voting against it. Here is the New York Times story: S.E.C Allows Firms to Deny Investors Access to Ballots.

My guess is that the struggle over proxy access will continue for some time.  Some shareholder groups threatened litigation if the proposed rule was adopted.  In addition, Congressional Democrats are opposed to the rule adopted, and are likely to be perturbed that the SEC acted without a full complement of Commissioners.  Despite their dismay, it seems unlikely that Democrats in Congress will muster the initiative to legislatively overrule the Commission

Verret on Shareholder Access

October 22, 2007

I invited Jay Verret to respond to comments from Professor Stephen Bainbridge on his recent posting over at Harvard Corporate Governance Blog.  Verret’s HLS blog posting is here.  Professor Bainbridge’s comments on his blog are here and here.

What follows is Jay Verret’s response:

I appreciate Professor Bainbridge’s response on his blog to my posting on the HLS corporate governance blog. Perhaps my characterization of his “ignoring” the Delaware legal implications of his position should be retracted, but I would note that it still seems that he has understated the implications of Delaware’s decision to justify it’s craftsmanship of the business judgment rule on the shareholder franchise.  That a few subsequent decisions seem to have ignored it is not enough. Delaware corporate law has won the franchise race.  And, I think he would agree with me that the corporate world is enriched by its expertise.  That doesn’t mean we should rest its jurisprudence on mere myth.

Bainbridge also noted two counterarguments to my position on hedge fund activism.  First, he argues that hedge funds seek control rather than change. I would cite the anecdotal experiences of the Peltz challenges, through his firm Trian Investment partners.  The latest OECD report provides economic data that the Trian anecdote is a representative story of the activist hedge fund world, showing that hedge funds typically take 5-10% positions in firms. (available here ). 

In addition, Bainbridge cites the Kahan and Rock article for the proposition that the corporate proxy mechanism is not adequately equipped for serious proxy contests.  Granted.  Ed Rock and Marcel Kahan are right.  I saw them present this paper, and was honored to offer some minor comments.  I think that, perhaps, Professor Bainbridge has missed the objective of their analysis.  Rock and Kahan call for reform of the proxy solicitation process as an antecedent to reform of the corporate ballot.  I concede that reform of the problems they highlight should precede my own reform proposal. That does not mean that neither reform should occur.  Additionally, I would join Professors Black and Hu in arguing for regulation of the issue of empty voting, as some hedge funds engage in that activity.  That is largely irrelevant to this analysis, as they are not properly characterized as activist funds, despite the fact that many lump the two groups together.

In Search of . . . Corporate Democracy

October 22, 2007

An interesting debate is brewing in the corporate blogosphere as academics line up on opposite sides in the debate about increasing the shareholder franchise.  Competing SEC proposals on so-called “shareholder access” form the backdrop for the debate.

On one hand are opponents of expanding shareholder voting rights,  notably Stephen Bainbridge, Jonathan Macey and Lynn Stout.  On the other hand are advocates for increasing shareholder power led most fervently by Lucian Bebchuk.  The recent Virginia Law Review colloquy on the question was discussed earlier on this blog.

The current round of volleys seems to have started with Lynn Stout’s op-ed  in the Wall Street Journal entitled “Corporations Should Not Be Democracies” and her blog posting on Harvard’s Corporate Governance Blog.  The Harvard blog posted responses to Stout from Jay Brown of Race to the Bottom and Jay Verret, who recently published a Business Lawyer article on the topic.

Verret’s comments then prompted a response from Professor Bainbridge who took exception to Verret’s characterizations of his views.  To keep the conversation going, I invited Jay Verret to respond to Professor Bainbridge.  His response follows in a separate post.

SEC Proxy Access Rule Taking Shape

June 13, 2007

BNA’s Corporate Counsel Weekly has an interesting report that provides insight into the likely contours of the Securities and Exchange Commission’s (SEC) anticipated new rule on Shareholder Access.  The article, SEC Proxy Access Rule Taking Shape ‘Practically Meaningless’ (subscription required), reports on the proceedings of a recent Compliance Week Conference in Washington. 

Participants predicted that the SEC would take steps to eliminate shareholders’ ability to make “precatory” non-binding proposals of the sort that currently dominate the SEC’s Rule 14a-8 shareholder proposal regime.  In “exchange,” the SEC would expand shareholders’ rights to submit binding shareholder proposals and provide a limited right to nominate board candidates on the management proxy statement. 

From the comments quoted in the article, it seems that representatives of corporate management are happy with the proposed “bargain,” while representatives of institutional investors are not.  Patrick McGurn of Institutional Shareholder Services is quoted as describing the SEC’s anticipated proxy access rule as “practically meaningless.”

Interestingly, the SEC and corporate counsel seem to favor creating “virtual annual meeting” chat rooms as a venue for shareholders to air greivances and opinions currently channeled through the Rule 14a-8 shareholder proposal process.  It is unclear to me why such a process would be appealing to corporations.  A legally mandated venue available 24/7 for any shareholder to anonymously express any opinion, view, or gripe seems problematic on a number of levels.  This seems to be a system that would defy efforts to impose order and control, which could be being more damaging to a corporation’s interests than the shareholder proposal process which has strict limitations on who can make proposals, how often and on what topics. 

Increasing shareholder power to bind management through shareholder proposals while providing shareholder activists an unfettered venue for expression of dissenting viewpoints, in “exchange” for scrapping the essentially toothless Rule 14a-8 precatory proposal regime, may indeed be a case where corporate management should be careful what it wishes for.

Interactive Federalism and the Proxy Access Debate

May 25, 2007

The latest academic salvos in the proxy access debate are now available online in the Virginia Law Review.  The May issue features an essay by Lucian Bebchuck, The Myth of the Shareholder Franchise, along with responses from Lynn Stout, Jonathan Macey and others disputing Bebchuk’s analysis and recommendations.

This important debate highlights the phenomenon of interactive federalism.  The various interations of policy proposals designed to “fix” perceived problems in the director election process play off of one another in an interesting and somewhat predictable fashion.   Corporate governance “activists” press their case with Congress or the SEC for reforms to federal regulatory scheme.  Business interests (represented in this instance by the corporate bar and Delaware judges) take note of the activists’ agitation and the SEC’s perceived responsiveness and advocate for more mild reforms at the state level.

Majority voting amendments to the Delaware Code and the Model Business Corporation Act reflect this pattern and succeeded in sidetracking the SEC’s 2003 shareholder access proposal.  However, the state-led majority vote movement may have helped spur another activist tactic: binding bylaw amendments, which has kept shareholder access on the federal agenda despite the apparent inclination by current Commissioners to sweep it aside.

This interactive pattern shows that states respond to federal reform proposals even when federal reform efforts languish.  It also shows that the state approach to shareholder voting reform will not be the final word, and that reform proponents will continue to seek alternative avenues of reform when their efforts are thwarted either at the state or federal level.

Stephen Bainbridge, The Scope of the SECs Authority Over Shareholder Voting Rights

May 23, 2007

Stephen Bainbridge has posted, The Scope of the SECs Authority Over Shareholder Voting Rights on SSRN.  It looks to be the written version of his comments before the SEC at its May 7 roundtable on Federal Proxy Rules and State Corporation Law.  Here is the abstract:

At a May 2007 Roundtable on The Federal Proxy Rules and State Corporation Law, the Securities and Exchange Commission posed the following question for discussion: What should be the relationship of federal and state law with respect to shareholders’ voting rights and ability to govern the corporation? To answer that question, this essay reviews the legislative history of Section 14(a) and of the Securities Exchange Act generally, as well as the leading judicial precedents. It concludes that, as a general rule of thumb, federal law appropriately is concerned mainly with disclosure obligations, as well as procedural and antifraud rules designed to make disclosure more effective. In contrast, regulating the substance of corporate governance standards is a matter for state corporation law.

The author was an invited panelist at the May 7th Roundtable and submitted this essay as his written comments.

J.W. Verret, Pandora’s Ballot Box, or a Proxy With Moxie? The Majority Voting Amendment to Delaware Corporate Law

May 22, 2007

Much of the academic discussion on shareholder voting rights focuses on the merits and demerits of the SEC’s recent shareholder access proposal or variations thereof.  The states’ efforts to reform director elections have received far less attention.  Because state-led reforms inevitably respond to and influence reform efforts at the federal level, this oversight is unfortunate. 

A forthcoming Business Lawyer article by Jay Verret seeks to fill this gap.  The article explores the impact and reform potential of Delaware’s recent legislative amendments aimed at facilitating “majority voting” rules for director elections.  Here is the abstract: 

The Delaware General Assembly has recently adopted a provision to the Delaware General Corporation Law which provides that where shareholders have adopted a majority voting bylaw for corporate elections over the traditional plurality scheme, a corporation may not subsequently amend its bylaws to return to plurality voting without shareholder approval.

I will compare this provision to other approaches and try to explain the reasons underlying its adoption. I will also briefly summarize the evolving shareholder empowerment debate and analyze the majority voting provision in the context of that discussion. I will then describe some unique and unanticipated interactions between majority voting bylaws and various other working parts of corporation and securities law affecting the shareholder franchise, a carefully protected right in Delaware jurisprudence. The most prevalent corporate strategies responding to this movement will be explored and the difficulties of implementing majority voting will be described.

Finally, I will analyze voting schemes from the political sphere to generate analogous lessons for the corporate arena. I will then end with some predictions about future developments which will hinge on the outcome of SEC rules proposals, further DGCL revisions, and the responses of Delaware incorporated entities. This analysis blends three distinct groups of thought i) Theoretical corporate law scholarship, especially on the general shareholder empowerment debate, ii) Analysis of Delaware Court of Chancery and Supreme Court cases, with a focus on those that directly implicate the shareholder franchise, and iii) Practical analysis on the future of the majority voting movement for Delaware incorporated entities, and the strategic choices facing boards of directors in light of online proxy solicitation, Exchange Rule 452, and the looming specter of corporate ballot access.

Shareholder Voting

May 21, 2007

The next few posts will be on the topic of shareholder voting.  The SEC recently held the first of three open roundtables on Shareholder Rights and the Federal Proxy Rules.  The webcast of the May 7 roundtable on the Federal Proxy Rules and State Corporation Law is now available here.  The unofficial transcript of the same event is here.

In light of expected reforms to the SEC’s proxy rules, it seems like an ideal time to catalogue and examine various viewpoints on the purposes and value of shareholder voting rights.  To some extent differing viewpoints about the extent to which shareholders should be able to exert control over major corporate decisions can be traced to very different understandings of the added value of shareholder power in the corporate governance system. 

To the extent that shareholders add no value or represent a nuisance, the nominal power currently provided under the existing regime seems ideal.  To the extent that shareholders could provide an important source of accountability for directors and executives, the need to enhance shareholder rights seems self-evident.

Upcoming posts will highlight current and forthcoming papers on these topics along with commentary regarding the interesting interplay between federal and state rules in this important area of corporate law.

Yair Listokin on why “Management Always Wins the Close Votes”

May 8, 2007

Yair Listokin of Yale Law School is guest blogging at PrawfsBlawg.  He has an interesting post on his work in progress investigating the phenomenon of corporate management winning “close” votes on proxy statement proposals more often then would be expected in the random course of events. Here is the link: Management Always Wins the Close Votes.