Proxy Access: The SEC's Proposal And Private Ordering

Editor: Todd, tell our readers about your background.

Lang: I received both my bachelor and law degrees at Yale. I've been with Weil, Gotshal & Manges since graduating from law school, and for many years co-managed the firm and headed its corporate, securities and M&A practice. I participate actively in many organizations, including committees of the American Bar Association and Chair the Advisory Board for the Study of Corporate Law at Yale Law School.

I do want to point out that the views expressed in this interview are strictly my own and not necessarily those of my firm, my partners or the clients of the firm, nor of any organization in whose activities I participate.

Editor: Please give us a brief history of shareholder initiatives with respect to proxy access.

Lang: The background of shareholder access is instructive. In 2003, the SEC proposed a rule that prescribed the conditions under which shareholders could have access to the corporation's proxy materials in order to nominate one or more candidates of their choice for election as director. This rule contrasts with a bylaw proposal by shareholders to provide access and use the corporation's proxy materials for action on the bylaw by the shareholders. Many such bylaw proposals were submitted under the SEC shareholder proposal rule, Rule 14a-8, and many were excluded under a provision of such rule that precluded a proposal which relates to the election of directors. In 2007, the SEC suggested two alternatives to this Rule 14a-8 provision, one which included a right to make bylaw proposals for access and another clarifying the director election exclusion to include any proposal seeking a procedure that relates to the nomination or election to the board. The latter alternative was adopted.

That brings us to today, where there is pending a new SEC proposal to establish a prescriptive rule granting the right of access.

Editor: Describe the current SEC proposal.

Lang: The current SEC proposal is prescriptive in that it establishes an access right for eligible shareholders, meaning those who have held their ownership interest for at least a year and own a specified percentage of the voting securities of the corporation depending on its size. A shareholder proponent cannot have control intent, and the candidate must be independent of the corporation, but not of the sponsor. There are numerous other aspects of the proposed rule pertaining to disclosure, notice and the like. Other rules are proposed to be amended to conform to the proposed access rule.

Editor: I understand that the proposed rule permits submission of shareholder proposals providing for adoption of a bylaw dealing with access to the extent that it does not conflict with Rule 14a-11.

Lang: It does. The consequence of such a provision is that private ordering would be provided to eligible shareholders but not to the corporation so the corporation's proxy materials could be used for such a proposal, loosening the terms of the prescriptive rule which serves as a minimum but mandated for the corporation.

A most serious concern respecting the proposed rule is that it may be unworkable to a large extent. By the very nature of such prescriptive rulemaking, it cannot take into account the capital structure, voting arrangements, commitments and needs of the particular corporation. Also, an SEC rule can only be interpreted since an amendment or modification is an elaborate and time-consuming procedure. As the expression goes, one size does not fit all. This can also raise significant issues respecting the interplay between federal rulemaking and the role of state corporate law. For example, there could be a question as to whether the rule, if adopted, turns out to be inconsistent with the charter or bylaw provisions of the particular corporation which have been validly adopted. The rule either preempts such a provision or would be deemed inapplicable to it. That issue is not addressed in the proposal. Contrast this with the bylaw, which can be prepared in full consideration of the capitalization and voting structures of a particular corporation and can be amended in the future to deal with currently unforeseeable changes, needs or opportunities.

Editor: How many corporations would be affected by the SEC's proxy access rule?

Lang: It is generally estimated that 7,000 corporations would be covered by the rule. Editor: Can the SEC by prescriptive rulemaking meet the needs of individual companies?

Lang: As I have indicated, prescriptive rulemaking presents a difficult workability problem, and in my view, is not the best and most effective means of providing access. Further, if private ordering is the preferred method of dealing with this issue, many corporations will, by director action, adopt a balanced and workable bylaw which would be in the interest of the corporation and its shareholders.

If the SEC were to amend the shareholder proposal rule, at least to permit proposals respecting a shareholder access bylaw to be submitted to shareholders for approval, such action would enable both corporations and shareholders to engage in private ordering.

Editor: Does the SEC have the authority to adopt such a prescriptive rule?

Lang: From an authority point of view, the Business Roundtable decision, quite a few years ago in the DC Circuit, said that only the Congress can preempt state corporate law in our hybrid system and that proxy authority as such does not confer such a right on the SEC, although there are many who dispute that conclusion. On the other hand, legislation has been introduced by Senator Schumer and Representative Peters that would grant this kind of authority to the SEC. SEC Chairman Mary Schapiro has testified that she welcomes the legislation.

Editor: In his interview on page 6, Tom Quaadman of the U.S. Chamber expresses concern that the SEC's proxy access proposal will be used by union-adminstered pension funds to further their own causes.

Lang: Labor has been a major proponent of access and has supported a prescriptive SEC rule. Understandably, labor has interests that may in some circumstances differ from those of shareholders. It is difficult to generalize, but my view is that any access rule or bylaw should require independence of candidates from both the corporation and the sponsor to deal with this kind of an issue, and most importantly, to conform to the purpose of the creation of an access right.

Editor: Should proxy access be mandated before the current proxy voting system is reformed so that it more closely reflects the views of shareholders?

Lang: Proxy access can have an impact on the governance of the corporation. The corporate model assumes that the shareholders, in the conventional sense of those who own economic and voting rights to particular shares, should have a voice in the election of directors and in other prescribed matters. Technology and other developments have enabled a separation of voting and economic rights through the use of derivatives, lending practices with respect to shares and other items. Therefore, the vote expressing the entire interest of the shareholder may have a different meaning than in the past. Votes should be reliable, and there is a serious question as to whether that is currently the case. Errors do occur in the system. Other developments include the inability of brokers to vote client stock in their discretion in connection with the election of directors; rules which limit the ability of corporations to identify and communicate with their shareholders; the impact of voting by e-proxy; the consequences of over voting; and the delegation by many institutions of their vote to proxy advisory firms. The SEC is already considering this subject, but it is complex and likely that no change will take place of substance in the short term. Given the seven-year history of the current debate on proxy access, I do not believe that resolution of this issue should await the completion of reform of the proxy voting system.

Editor: Interest in proxy access will be heightened by the debate with respect to the SEC proxy access proposal whatever the ultimate outcome. You co-chair the Task Force on Shareholders Proposals of the Committee on Federal Regulation of Securities of the ABA's Section of Business Law. Give us some background on the exposure draft of its Illustrative Access Bylaw with Commentary.

Lang: The exposure draft of the bylaw was undertaken in order to establish the basis on which a workable bylaw balanced in its terms could be adopted by corporations and by shareholders. The form of such a bylaw provides guidance as to its precise terms leaving the decision to the corporation or shareholders. It is accompanied by commentary which discusses various considerations applicable to the terms and conditions of such a bylaw. We plan to update and revise the bylaw in the near future, and hopefully it will be of assistance to those who seek access in a workable manner. One feature of the bylaw is that it provides the opportunity for the nominating committee of the corporation to meet with and consider the recommendation of the sponsor as to a suitable candidate. This form of dialogue can be productive and may result in the acceptance of the sponsor's candidate by the corporation. The workability feature derives from the private ordering nature of the bylaw which can take into account capital structure, voting arrangements and other relevant matters. Further, such a bylaw can be amended to deal with future transactions and events, such as a merger where board composition may be an important matter subject to negotiation.

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