Proxy Access

Les Greenberg and I petitioned the SEC for proxy access back in 2002, so we both have a longstanding interest in seeing a proposal move forward. The Council of Institutional Investors said our proposal “re-energized” the “debate over shareholder access to management proxy cards to nominate directors.” (See Equal Access – What Is It?) Of course, AFSCME deserves most of the credit and nothing moved the issue like AFSCME vs AIG. The SEC’s latest attempt, File No. S7-10-09 Facilitating Shareholder Director Nominations, is by far the Commission’s best effort. I’m attempting to formulate myown comments and would welcome your thoughts. (send to

On June 11th Greenberg, on behalf of the Committee of Concerned Shareholders, was among the first to submit extensive comments in this round. He argues mutual funds are too conflicted to run dissident director candidates, whereas large pension funds already have the resources but have stayed on the sidelines. The SEC’s proposed percentage ownership requirement are “arbitrary,” without legal basis or precedent. The thresholds will be nearly impossible to meet except “in extremely rare circumstances”… like when a company is in near bankruptcy (my interpretation). Don’t limit the number of shareowner nominees to 25% and stick with the time-tested threshold of $2,000.

Where this would result in more than two candidates per seat, borrow the “lead plaintiff” concept from the Private Securities Litigation Act of 1995 and include a “lead nominator” provision, something we suggested in amendments to our original submission.

With a ‘lead nominator’ provision, there is absolutely no need for a
percentage stock ownership threshold. The ‘lead nominator’ solution would allow Individual Shareholders to act as watchdogs of their investments at 9,000+ corporations that have publicly traded securities. Institutional Investors do not have the interest, desire and/or resources to seek Director accountability on such a scale.

I would love to see the SEC move in this direction. As far as I’m concerned, let’s have contests at every company. Retail investors might then begin to think of themselves as shareOwners, not betting slip holders. They might even begin to vote!

No government agency can match the vigilance of millions of shareowners. We have the incentive; just give us the tools. In most cases, the only extra expenditure for companies would be for slightly expanding the proxy. Mildly dissatisfied shareowners, aren’t likely to be swayed by the arguments of dissidents… unless they are spot on. If they aren’t spot on, the company will just call them nuts and won’t bother with a campaign.

The long-term result would be that many more shareowners like Les Greenberg at Lubys and Eric Jackson at Yahoo would emerge with thoughtful analysis that could benefit all shareowners. Maybe organizations like the American Association of Individual Investors would then focus just a little on how to add value as owners, instead of exclusively on how to pick and trade stocks.

Phillip Goldstein, representing Opportunity Partners L.P., goes even further in raising fundamental issues in his July 16th comments.

Consider two stockholders who are substantially identical in every respect except (1) Stockholder A did not acquire his shares for the purpose of changing or influencing the control of the issuer but has now become convinced that change is needed in the boardroom while (2) Stockholder B, who was arguably more prescient, bought her shares with the intention of eventually proposing just such a change.

Of course, both have a legal right at the meeting to nominate directors but almost all votes are cast through proxies. While page 9 of the rulemaking says “The proxy rules seek to improve the corporate proxy process so that it functions, as nearly as possible, as a replacement for an actual in-person meeting of shareholders,” but the proposed rules disenfranchise Stockholder B, presumably the brighter of the two.

Goldstein argues, “Consequently, the Commission should junk its quixotic attempts to create a Rube Goldberg-like mechanism to balance the interests of various special interest constituencies that are less than committed to truly free corporate elections.” Instead, “The Commission can craft a simple
common sense rule to require that any proxy card that that excludes the name of any bona fide nominee known to the soliciting party is materially misleading and hence a violation of rule 14a-9(a).”

Goldstein’s proposal is straightforward and within the SEC’s current legal authority, whereas the SEC’s proposal may be neither.

I know of no state that requires a holding period or a minimum
investment before a stockholder can propose a nominee. Why then should the Commission discriminate between long and short-term stockholders or between large and small stockholders? More importantly, there is no legal basis to do so…

The Commission should have banned “one party” proxy cards years ago. It is obvious that such a proxy card frustrates the free exercise of voting rights because it results in the “election” of
directors who might not have otherwise been elected if a proxy card with all bona fide nominees was provided to shareholders.

A better model than the proposed “Rube Goldberg-like mechanism to balance the interests of various special interest constituencies that are less than committed to truly free corporate elections,” which includes directors and management, would be to craft a rule more akin to those governing union elections requiring:

Every labor organization refrain from discrimination in favor of or against any candidate with respect to the use of lists of members, and whenever such labor organizations or its officers authorize the distribution by mail or otherwise to members of campaign literature on behalf of any candidate or of the labor organization itself with reference to such election, similar distribution at the
request of any other bona fide candidate shall be made by such labor organization and its officers, with equal treatment as to the expense of such distribution.

Goldstein concludes:

A rule requiring every proxy card to include all known bona fide nominees as well as rules modeled after Section 481 of The Labor-Management Reporting and Disclosure Act of 1959 would ensure “the free exercise of the voting rights of stockholders” and would almost certainly be upheld by a court as a valid exercise of the Commission’s rulemaking authority.

Both Greenberg and Goldstein get to the real issues. I’m afraid too many will be distracted by the hundreds of questions raised by the SEC, the labyrinth of language only an SEC attorney could love, and the need to arrive at a consensus document that all with a vested interest in the status quo can at least live with.

So far, the best start of an analysis I’ve seen in this direction is posted in bits by J. Brown at Brown goes as eagerly into the weeds as a Labrador Retriever. For example, he says language in proposed Form 14N-1, which requires the person signing to certify their shares aren’t held for the purpose of changing changing control,

is unnecessary and likely to provide grist for the litigation mill. Boards may decline to include nominees if they can develop an argument that submitting shareholder has a control purpose. The fact that the director was submitted at all is evidence of some desire to influence control. Anyone with a history of sometimes trying to get control will be an easy target. Moreover, the Commission is not limiting its analysis to the current motivation of shareholders. Instead, they must represent that when they were acquired (one year ago, five years ago), there was no intent to effect a change of control or acquire more than a ‘limited number’ of seats…

To the extent that the agency wants to reduce the use of Proposed Rule 14a-11 for any attempted change in control, it would be enough to provide that nominees may only be submitted by those shareholders who meet the ownership requirements and who are not otherwise engaged in a proxy contest (or in league with anyone who was) under Rule 14a-11. In that way, the issue wouldn’t turn on control but on the number of directors nominated in any given election.

Brown also goes into an interesting analysis of the SEC’s attempt to address exclusion of shareowner nominees through board adopted qualification requirements.

To the extent that a company uses qualifications to exclude a nominee from the proxy statement, it will be in violation of the proxy rules and risk a federal law suit. If the nominee is allowed, the company may nonetheless refuse to seat anyone elected if they violated the board imposed qualification requirements. This in turn may precipitate a law suit in state court over the validity of the qualification requirement.

In another post, Brown criticizes the rush to the courthouse approach, endorsing instead the SEC’s 2003 proposal in this area giving priority to nominees from the largest shareholders. He also express concerns about the proposed threshold, especially with respect to smaller companies.

While the release notes that many companies below $75 million have 5% shareholders, it is also likely the case that these companies more often have controlling shareholders. Thus, the 5% shareholders may already have control of the board. In those circumstances, there may be even greater need to enable minority shareholders to elect their own nominees. This may require a lowering of the percentage.

I look forward to much more from J. Brown. If anyone else is posting comments on the proxy access proposals or is willing to share preliminary thoughts, please let me know. (send to Comments to the SEC are due August 17, 2009. Voice your opinion by sending an e-mail to Be sure to include “File S7-10-09” in the subject line.

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