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Column
The SEC is poised to act on shareholder access. Maybe. Calling Lawrence P. Berra? By Hoffer Kaback Should shareholders be given the right to have information about their own slate of director-candidates included in the company’s proxy statement? Readers experiencing deja vu can be assured that that sensation is fully warranted. For this issue of proxy access is decidedly familiar, having been the subject of not inconsiderable attention several times during the last 30 years and, most recently, in 2003. An SEC proposed rule mandating it was actively promoted (and actively opposed) during much of that year, with copious attendant publicity. Most observers anticipated that resolution of the matter would occur before the end of 2003 through the adoption of a final rule requiring access, even if some provisions were watered down to reflect points made in comment letters and elsewhere. Several of the infirmities of the 2003 proposal were analyzed in my column “Access Denied!” (Summer 2003). Undoubtedly, SEC adoption of a proxy access rule based principally on that proposal would, in short order, have been challenged in court. That “round two” never happened. The SEC did not finish “round one”; it did not adopt any new rule relating to proxy access. Its 2003 proposal withered and died. But it was not forgotten. The SEC is now formally reconsidering the issue. Different Approaches It is, though, doing so in an unusual manner. The agency issued two Exchange Act Releases (Nos. 34-56160 and 34-56161, each dated August 3, 2007). Each reflects a quite different legal and governance approach. Indeed, they are inconsistent. Moreover, each release sets forth proposed amendments to the proxy rules very different from the 2003 proposal. (The latter directly involved shareholder nominees; the new proposals are less direct in that they relate to putting forward bylaw amendments that would affect future elections.) For example, in Release 34-56161 (let’s call it the exclusion release), the SEC proposes to amend the proxy rules to permit exclusion (from the company’s proxy statement) of a shareholder proposal if it “relates to a nomination or an election for membership on the company’s board ... or a procedure for such nomination or election.” The exclusion release makes clear that the word “procedures” here refers to procedures that result in a contested election, either in the year in which the proposal is submitted or thereafter. In stark contrast, in the other (inclusion) release, the SEC sets up a mechanism to permit inclusion in the company’s proxy statement of shareholder proposals for bylaw amendments pertaining to director nomination procedures. The issuance of the releases follows a series of roundtables the SEC held in May with judges, practitioners, and others with a view to coming to grips with the purposes, reach, and effects of federal law (the proxy rules contained in the Securities Exchange Act) vis a vis shareholders’ rights under state law (state corporation statutes). This tension has been a major undercurrent and theme since the Exchange Act was proposed and passed in 1934. Not Hemingway While I have frequently urged the Directors & Boards audience to read for itself selected corporate governance primary source material (e.g., certain legal opinions and special reports), it must be admitted that neither release challenges Hemingway as a candidate for quality bedtime-reading. Somewhat more lively is an August 27 legal memorandum, available on the Council of Institutional Investors website, by attorney Cornish F. Hitchcock that discusses a long list of negatives (from the CII perspective) in the inclusion release. These include: burdensomeness of the disclosures and recordkeeping the inclusion release would require from shareholder-proponents, and its potential for torpedoing routine shareholder-company communication. Notably, the inclusion release has a one-year holding period requirement; a 5 percent ownership requirement; and distinguishes between holders who wish to influence control of the corporation and those who don’t. Either analytically or as a matter of fairness, do these limitations and distinctions between kinds of shareholders hold up? Without regard to the ultimate issue of the desirability of proxy access, should discriminating against (“bad” “active”) “short-term” shareholders and in favor of (“good” “passive”) “long-term” shareholders be condoned? My column “The Good, the Bad ... and the Ugly” (Spring 2001) considered several aspects of that question. A Presumption of Action Shareholder-activist types likely will treat the exclusion release with contempt and ignore it and, simultaneously, evaluate the inclusion release as woefully short of the mark. Those who believe the barbarians are at the gate will probably find the exclusion release palatable and the inclusion release unworkable anyhow. Comment letters will no doubt be animated. The comment period ended October 2. Thereafter, presumably, the SEC will act. If, instead, it re-defers the issue, it may be years — perhaps 2010 or 2011 at the earliest — before there is another reconsideration. We may then (in the immortal words of Lawrence P. Berra) experience “deja vu all over again.” |
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| Hoffer
Kaback is President of Gloucester Capital Corp., New York, and has
served on several corporate boards. He has been the lead columnist for Directors & Boards
for 10 years, authoring the “Quiddities” column in each edition. He can
be contacted at hkaback@directorsandboards.com. Copyright © 2007 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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