2009 SEC Proxy Amendments: A Problematic Solution to Shareholder Director Nomination

Author:Nicholas D. Harken
Position:Attorney at Kasdorf, Lewis & Swietlik, s.c. in Milwaukee, Wisconsin
Pages:65-80
 
FREE EXCERPT
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2009 SEC PROXY AMENDMENTS:
A PROBLEMATIC SOLUTION TO SHAREHOLDER DIRECTOR
NOMINATION
ARTICLE
NICHOLAS D. HARKEN*
I. Introduction ......................................................................................................... 65
II. Removing Impediments to Nominate and Elect Directo rs ............................. 67
A. Director Election in its Pr esent Form ........................................................... 68
B. Promoting Director Acco untability to Shareholders ................................... 71
C. Additional Benefits of Re moving Impediments to Proxy Contests ............ 73
III. Shortcomings of the Long-term Requirement .................................................. 75
IV. Time Holds the Cure: Corr ecting the Long-term Shortcoming ..................... 78
V. Conclusion ........................................................................................................... 80
The corporate election process, if it is
to have any validity, must be
conducted with scrupulous f airness
and without any advantage bei ng
conferred or denied to any candidate
or slate of candidates.
-Vice Chancellor Hartnett1
I. INTRODUCTION
HAREHOLDERS ELECT DIRECTORS, BUT THEY TYPICALLY DO NOT SELECT
them.2 THE apparent paradox of that statement has been the subject of
significant discussion re garding the effective ness of the corporate
election process.3 While corporate scholars generally agree that the shareholder
election is intended to ensure that directors are accountable to s hareholders, the
* Attorney at Kasdorf, Lewis & Swietlik, s.c. in Milwaukee, Wisconsin. I thank Professors
Nadelle Grossman and Ed Fallone of Marquette University for their valuable guidance and thoughts
in writing this article. Copyright (c) 2010 by the author.
1 Aprahamian v. HBO & Company, 531 A.2d 1204, 1206 (Del. Ch.1987).
2 See JEFFREY D. BAUMAN ET AL., CO RPORATIONS LAW AND POLICY 491 (Thomson West ed., 6th ed.
2007).
3 See discussion infra Parts I.B, I.C.
S
66 U.P.R. BUSINESS LAW JOURNAL Vol. 1
disagreement is whether it has that effect.4 That disagreement has,
consequently, resulted in debate over whether shareholders should have a more
meaningful role in the selectio n of directors through proxy contests.5 Under
current election rules, shareholders may offer a competing slate of directors for
election through a proxy contest, but significan t costs in mounting such a
contest serve as an effe ctive barrier to pursui ng that action.6 Supporters of
corporate election reform argue that the rules governing proxy contests should
be amended to facilitate sha reholdersability to nominate and elect directors. 7
On June 10, 2009, the Securities and Exchange Commission (SEC) proposed
amendments to the federal proxy rules that would facilitate shareholdersability
to nominate directors to company boards of directors.8 The amendments would
allow nominees of dissident shareholders to avoid the full expense of a proxy
campaign and the current requirement to print and mail their own proxy
statement.9 Instead, if share holders met certain require ments, they could
submit their nomination to the company, and the company would have to
include it in their own prox y statement.10
Not surprisingly, the proposed amendments to the federal proxy rules have
been very contentious. Sin ce proposed, they generate d more than 500 comment
letters during the initial comment per iod,11 and the SEC postponed its decision
on the proposed amendments until 2010 to review the comments.12 Recently, the
SEC re-opened the comment per iod, and a final ruling is still pending.13
In this paper I argue tha t the SEC proposal is appropriate. However, whether
proxy reform is appropriate is a separate question from how it should be
accomplished. Although I agree with the SEC that shareholders eligible to
nominate directors shoul d be restricted to share holders with long-term
4 See discussion infra Parts I.B.
5 Compare, e.g., Lucian Bebchuk, The Myth of the Shareholder Franchise, 93 VA. L. REV. 675
(2007), with Martin Lipton & William Savitt, The Many Myths of Lucian Bebchuk, 93 VA. L. REV. 733
(2007).
6 See discussion infra Part I.A.
7 Leo E. Strine, Jr., Breaking the Corporate Governance Logjam in Washington: Some Constructive
Thoughts on a Responsible Path Forward, 63 BUS. LAW. 1079, 1085-86 (2008) (discussing the SEC’s role
on Proxy access and corporate elections).
8 Facilitating Shareholder Director Nominations, 74 Fed. Reg. 29024 (proposed June 10, 2009) (to
be codified at 17 CFR pts 200, 232, 240, 249 and 274).
9 Id.
10 Id.
11 Posting of Annette L. Nazareth to Harvard Law School Forum on Corporate Governance and
Financial Regulation, http://blogs.law.harvard.edu/corpgov/2009/10/06/sec-urged-to-defer-
adopting-proxy-access-rules/#more-4419 (October 6, 2009 at 9:01 am EST).
12 Jesse Westbrook, SEC to Delay Proxy-Access Rule, Giving Banks Reprieve, BLOOMBERG, Oct. 2,
2009, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aCVx6r4wx15Q.
13 Facilitating Shareholder Director Nominations, 74 Fed. Reg. 67144 (re-opening of comment
period Dec. 14, 2009).

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