Rock Center Proxy Access Forum

The Rock Center for Corporate Governance at Stanford University is hosting a panel discussion on May 6th with SEC Commissioner Troy A. Paredes and relevant constituencies to discuss the SEC’s proxy access proposal and how it will play out.

A summary of the SEC proposal, highlighting the principal controversies raised by various commentators and interest groups, and prepared by a group of Stanford Law School students in conjunction with Davis Polk & Wardwell LLP, is available, along with the SEC proposal here.

Professor Joseph A. Grundfest will moderate the discussion. Speakers include:

• The Hon. Troy A. Paredes, Commisioner of the U.S. Securities and Exchange Commission
• Francis S. Currie, Partner, Davis Polk & Wardwell LLP
• Abe M. Friedman, Global Head of Corporate Governance and Responsible Investment, BlackRock, Inc.
• Anne Sheehan, Director of Corporate Governance, California State Teachers’ Retirement System

This event is free and open to the public; registration is requested. The background paper speculates on potential outcomes, including the following:

• The one-way versus two-way opt-out debate has become the primary remaining ideological battle before the SEC as it considers the structure of its final rule. An alternative opt-out proposal advanced by a number of opt-in proponents is to suspend operation of the SEC’s proxy access rule for companies who agree to pay for the cost of independent director solicitations by qualifying shareholders.
• It would not be surprising if the SEC increased some ownership thresholds in its final rule.
• The SEC may well adopt a two-year holding period in its final rule.
• It is expected the SEC may require or permit related disclosure requirements so that shareholders are presented more complete information.
• We expect the “first-to-file” aspect of the proposal to change to some variation of a “largest shareholder” rule.
• The final Rule 14a-11 could have a single nominee per shareholder requirement.
• We expect that the SEC may adopt suggested modifications to bar shareholders from making nominations for a period of 1 to 3 years if their candidates fail to 10% to 30% of the vote in order to prevent them from repeatedly forcing the company “into an expensive contested election or governance proposal, even if the vast majority of other shareholders opposed such actions.”

I certainly hope the SEC doesn’t yield to an opt out provision. The ownership levels proposed are already onerous, especially at small companies where institutional investors are scarce and entrenched boards are not uncommon. I expect a two-year holding period and for the SEC to move from first to file to something like the “lead plaintiff” provisions of the Private Securities Litigation Act of 1995, which favors large shareowners. Regarding the need to require additional disclosures, that tactic was used previously… to require more information for a short slate than for an actual contest. Any additional requirements should be minimal.

I don’t recall previously seeing the argument that shareowners be limited to a single nominee. No logic is provided for this recommendation, other than “Corporations, corporate law firms, and publicly traded companies have generally maintained that each nominating shareholder or shareholder group should only have one nominee.” That certainly isn’t compelling to me and I don’t expect Commissioners to find it so either. Allowing a single shareowner or group to nominate more than one director is more likely to result in a board with balanced talent, because qualifications can be better weighed in context.

Regarding the need to set voting thresholds and/or to bar resubmissions because of a fear of wasting corporate assets on expensive elections, a better solution would be to severely limit the amount that both sides can spend on such contests. Decades ago Lewis Gilbert recommended limiting the amount a company and insurgents can spend on a proxy fight, based on size of the company and number of shareowners, so as to not drain corporate treasuries. Nothing “forces” management to make these short slate contests, which don’t change control of boards, into “expensive contested elections.” Since the money they spend to entrench themselves comes out of the corporate treasury and potentially reduces shareowner value, both shareowner sponsors and the companies facing such “contests” should be barred from hiring solicitors to create expensive contests. Let shareowners decide based on the information contained in the proxy and on respective websites. Your thoughts?