SEC Adopts Shareholder Access (Non-Access?) Proposal

Spurred into action by a Second Circuit panel decision, a four-member SEC wrote another chapter in the saga of shareholder access by adopting an amendment to the proxy proposal rule to codify the longstanding interpretation of the rule which allows companies to exclude from their proxy statements proposals that would result in an election contest or would set up a process for conducting an election process in the future. Commissioner Annette Nazareth voted against the amendment, which she termed the “non-access proposal” because she believes it stands in the way of shareholders' rights to elect directors for the companies they own.

The appeals panel invalidated the SEC staff's long standing interpretation of Rule 14a-8(i)(8). That interpretation had been applied since 1990, but the court found it inconsistent with a prior interpretation. The court said that it would "take no side in the policy debate regarding shareholder access to the corporate ballot," noting that such issues are appropriately the province of the SEC

Chairman Christopher Cox explained that the proposal to codify the SEC's interpretation was the only proposal that would gain the three votes necessary for adoption. To do nothing in the aftermath of the appeals court decision, which called that interpretation into question, would open the door to a potential end-run around the proxy and antifraud rules, he said. The result of the majority vote will be no change to the way the rule was enforced for the last 17 years, according to Cox.

Cox also noted that he has received numerous requests to wait until there is a full Commission to act, but he believes that doing nothing would put all investors at risk. He pledged to use the time between now and the next proxy season to do something other than maintain the status quo.

One of the persons requesting that the SEC delay action was Senate Banking Committee Chair Christopher Dodd, who cautioned the SEC not to adopt any shareholder access proposals until the Commission is at its full complement of five members. In a letter to Chairman Cox, Sen. Dodd said that the shareholder access rules do not have to be completed in time for the 2008 proxy season. In his view, it is better to formulate rules that are thoroughly vetted with all interested parties and subject to decision-making by five commissioners rather than hastily completing a final rule. Currently, there are four commissioners, with one of the four having announced her resignation.

The shareholder access debate has been going on inside the shareholder democracy debate for some time. In 1984, SEC Chairman Shad said that the disenfranchisement of shareholders poses a present and real issue that must be debated and addressed.

I think that one has to admit that the debate over shareholder access has become somewhat political, with the Republican commissioners lined up against increasing access and the lone Democrat for expanding shareholder access (former Democratic Commissioner Campos was also in favor of expanded shareholder rights). Chairman Cox is somewhere in the middle right now.

In 2008, of course, changes will be coming one way or another. It may take a Democratic majority Commission before we see an expansion of shareholder access. And that, of course, hinges on the 2008 presidential election. It is unfortunate that an issue of basic securities regulation has become so politicized.