SEC Proposed Rule: Shareholder Nomination of Directors

Today’s Wall Street Journal has an article Fight Brews as Proxy-Access Nears. It is worth reading to contrast the reactions of companies, on the one hand, and shareholder activists, on the other, to a proposed SEC plan for greater accountability in corporate governance. Whether shareholders should be allowed to nominate and elect their own candidates as company directors is not a new topic. For some time, proponents of “shareholder democracy” have advocated more shareholder input in the nomination of directors. Typically, in large companies, the company management, not the shareholders, controls the nominating process, so that directors become loyal to the company and often lose sight of shareholder interests. If shareholders want to nominate their own candidate for the board of directors, they have to send separate ballots to all other shareholders at their own expense. Although obligated by law to provide shareholder lists, often company management makes that process as difficult as possible. As a result, when shareholders do nominate their own candidates as company directors, they often spend tens of thousands of dollars in a proxy battle to inform shareholders that there is a contested election.

In an effort to make companies more accountable and responsible to shareholders, the SEC voted earlier this year to enact a proposed rule change to the federal proxy rules that would permit shareholders to nominate directors as part of a corporation’s annual proxy solicitation process. In explaining the need for the reform, the SEC cited the current economic crisis suggesting that the crisis has led many to raise serious concerns about the accountability and responsiveness of some companies and boards of directors to the interests of shareholders, and has resulted in a loss of investor confidence. Under the new rules, shareholders could also modify a company’s nomination procedures or disclosure about elections, subject to applicable state law requirements.

There are certain complexities in the proposed rule change. For example, 14a-11 would allow large shareholders to include nominations in the company’s proxy statement. The proposed change sets thresholds that would allow shareholders to organize and put together groups for submitting nominations to the board (1% for companies above $750 million; 3% for companies above $75 million; 5% for companies below $75 million) without triggering most of the requirements of the proxy rules.

For greater detail on the topic of the SEC’s access proposal, see several excellent postings in The Race to the Bottom that provides an analysis of laws and regulatory measures that govern today’s corporations. One of those posts, Access and Its Opponents: An Overview, includes contrasting views by legal practitioners and the legal academy in submissions made during the recently ended comment period regarding the proposed rule change. The two comment of special interest are the one letter from seven large law firms that took the unusual step of submitting a joint letter opposing the idea; the other letter from 80 law professors, including BLS Law Professors James A. Fanto and Arthur r. Pinto, supported the SEC’s proposal.