On May 20, the Securities and Exchange Commission (SEC) proposed changes to the federal proxy rules to provide shareholders (owning a specified percentage of the shares of a public company for at least a one-year period) with the right to nominate up to 25 percent of the company’s board of directors and to have the nominees included in the company’s proxy materials.
The rule proposal can be found at http://sec.gov/rules/proposed/2009/33-9046.pdf.
This is the SEC’s third attempt at issuing a rule proposal on this polarizing issue, having previously issued proposals in 2003 and 2007.
The current economic crisis has rejuvenated the issue of proxy access as politicians and regulators scramble to implement reforms designed to make the board of directors of public companies more accountable to shareholders and the public. Many commentators have predicted that, to borrow a slogan from the 2008 presidential campaign, "change is on the way."
The contentious nature of this issue has inhibited adoption of any rule from the SEC on prior occasions, but this time the consensus is that the only issue open for debate appears to be what the eventual changes to the federal proxy rules will look like.
Under the existing rules, only the company’s nominees for election to the board of directors are included in the company’s proxy materials. If a shareholder wants to nominate opposition candidates, it ordinarily must prepare, pay for and distribute separate proxy materials. Even using the electronic proxy rules, this is a costly process that often prevents shareholders from nominating directors.
The current rule proposal would result in a dramatic change in the proxy rules by more easily facilitating the ability of certain shareholders to include in a company’s proxy materials a short slate of candidates for director that it nominates in opposition to the company’s candidates on a near-costless basis. The proposed rule would not apply to contests seeking a change in control of the company.
It should come as no surprise that the leading advocates favoring proxy access reform are corporate governance activists, spearheaded by labor unions, state and local government pension funds and the Council of Institutional Investors. An equaling shocking revelation is that the business community, led by the U.S. Chamber of Commerce, is vigorously opposed to the proposed rule. The business community is gearing up to challenge any SEC final rule on this issue in the courts.
There are numerous competing policy arguments both in favor of and in opposition to the proposed changes. One leading argument advanced by proponents of the SEC proposal is that the election of more shareholder-nominated directors would make boards more accountable to the shareholders who own the company and that this accountability would improve corporate governance by making companies more responsive to shareholder concerns. On the other side of the debate, there is concern that a shareholder-nominated director may be beholden to and focused solely on the concerns of that specific nominating shareholder or group, rather than on the best interest of the company and the rest of the shareholders.
The SEC’s proposal, if adopted, may result in more contested elections for board seats.
Those in favor of the SEC’s proposal argue that increased competition might lead companies to nominate and elect directors who are better qualified and more independent. Conversely, opponents have expressed concern that frequent contests would be costly and disruptive to companies and could discourage some qualified board candidates from agreeing to appear on a company’s slate of nominees. Some opposition groups have also taken the position that adopting the proxy access rule as proposed unlawfully usurps states’ rights and represents an overreaching federal incursion into traditional areas of state corporate law.
If you feel strongly one way or the other about this proposal to revise the federal proxy rules, now is your chance to voice your opinion. The SEC has requested that interested parties comment on the rule proposal in general or on any of the more than 170 specific questions raised by the SEC therein. All comments are due by Aug. 17 and can be submitted electronically on the SEC’s website at http://sec.gov/cgi-bin/ruling-comments?ruling=s71009&rule_path=/comments/s7-10-09&file_num=S7-10-09&action=Show_Form&title=Facilitating%20Shareholder%20Director%20Nominations.
Chad Wiener is an associate at Quarles & Brady LLP, Milwaukee, in the Corporate Services Practice Group. He can be reached at firstname.lastname@example.org.