Editor’s Note: Professor Grundfest’s
post is based on extracts (with footnotes removed) from his Working Paper of the same name published by the Rock Center For Corporate Governance
on July 24, 2009; the complete Working Paper, including footnotes, can be downloaded from Social Sciences Research Network Electronic Paper Collection here
Administrative agencies are wise not to contradict themselves when rulemaking: contradictions invite courts to overturn agency action as arbitrary and capricious. Also like Charles Barkley’s claim that he was misquoted in his autobiography, contradictions spawn skepticism as to the credibility of an entire enterprise.
This simple observation strikes a death knell for the Securities and Exchange Commission’s 2009 proposed Proxy Access Rules. If adopted, these rules would dramatically transform the process by which directors of publicly traded corporations are nominated and elected. They would establish a “Mandatory Minimum Access Regime” under which corporations would be compelled, even against the will of the shareholder majority, to provide proxy access in accordance with SEC-established standards. Shareholders could, by majority vote, set less stringent access standards, but could not adopt more stringent proxy access rules.
The Commission proposes to add one new rule and amend an existing rule:
• Proposed Rule 14a-11 would provide for proxy access in the event a nominating shareholder, or group of shareholders, of a large accelerated filer have, for at least one year, held one percent or more of the company’s voting securities. Access would not be available to stockholders seeking a change in control, or to stockholders seeking more than a limited number of seats on a board. Nominating stockholders would be required to make certain disclosures, subject to the antifraud provisions of Rule 14a-9. These disclosures include representations that the nominees satisfy the objective criteria for director independence set forth in listing standards, that there is no agreement with the company regarding the nomination of the nominees, and that the nominating stockholders intend to continue holding the requisite number of shares through the date of the stockholder meeting. Disclosure would also be required of relationships between the nominating stockholders, the nominee, and the company, if any.
• Modifications to Rule 14a-8(i)(8) would recast the election exclusion so as to require that companies include in their proxy materials stockholder proposals that would amend, or propose to amend, the company’s governing documents regarding shareholder nominations. The proposals could not, however, weaken or eliminate the proxy access criteria prescribed by proposed Rule 14a-11.
Taken together, the Proposed Rules create a mandatory form of proxy access to be imposed on all publicly traded corporations subject to the rule, even if the majority of each corporation’s shareholders object strenuously to the operation of the Proposed Rules. The Proposed Rules would permit modifications making access easier for stockholder-nominated directors, but forbid modification making access more difficult. Again, the will of the shareholder majority is irrelevant to the Commission. The Proposed Rules are thus accurately described as creating a “Mandatory Minimum Access Regime.”
The text of the Proposing Release is, however, at war with the text of the Proposed Rules in a clash that generates two profound contradictions. Each contradiction is sufficiently material that there is little prospect that the Proposed Rules can withstand challenge under the Administrative Procedure Act (“APA”).
…continue reading: Internal Contradictions in the SEC’s Proposed Proxy Access Rules