[This story previously appeared in Securities Regulation Daily.]
By Anne Sherry, J.D.
The announcement that SEC Commissioner Daniel Gallagher and Stanford professor Joseph Grundfest will revise their argument that the Harvard Shareholder Rights Project (SRP) has violated federal securities laws has only further provoked their critics. Yale law professor Jonathan R. Macey called the authors’ plans to develop arguments that they had previously dismissed “a rather desperate attempt to salvage assertions of illegality that the authors ought to drop,” while Boston University law professor Tamar Frankel posited that Gallagher’s continued accusations may violate the SEC Canon of Ethics.
Previous dialogue. Professor Macey’s first response to the Gallagher-Grundfest paper maintained that the SRP’s shareholder proposals to declassify boards of directors did not contain material omissions in violation of the securities laws. He also questioned the policy rationale for threatening proponents with securities litigation and noted that there was no precedent for an enforcement action over a shareholder proposal that failed to cite research contrary to its argument. In his own response posted to Harvard’s corporate governance blog on Monday, Professor Grundfest expressed gratitude for Professor Macey’s post “suggest[ing] strategies to strengthen the coming revision” of the Gallagher-Grundfest paper.
Contrary to Professor Macey’s arguments, Professor Grundfest states, the current and former SEC commissioners are not limiting their criticism to just seven shareholder proposals; instead, they maintain that every instance in which the Harvard proposal appears in a proxy statement violates Rule 14a-9. Among his other rebuttals, Professor Grundfest also concedes that there is no precedent for the type of enforcement action or private suit discussed in his paper, but states that the lack of precedent for the litigation theory “makes it novel, not incorrect.”
“The dramatic flip-flop.” Now, in his second response, posted to the same blog on Tuesday, Professor Macey characterizes the Grundfest post as a “dramatic shift of allegations” as well as a failure to address the deficiencies he identified via his first response. Gallagher and Grundfest’s plan to revise their paper is “troubling,” in the Yale professor’s view, in that the authors mean to develop four arguments that they had mentioned in passing in their original paper but expressly declined to rely upon. “Making up new spurious claims when earlier ones are discredited is unworthy of a sitting SEC Commissioner,” Macey writes.
Ethical issues. Professor Frankel expressed agreement with the Macey view, but her own response, posted on Wednesday, focuses less on the substantive merits of the debate and more on the propriety of Commissioner Gallagher’s actions. She writes, “There is a big difference between discussing general policy problems, which SEC Commissioners should be doing, and attacking or urging actions against particular individuals and organizations, which SEC Commissioners should not be doing.”
Specifically, Professor Frankel cites Section 200.66 of the SEC Canon of Ethics, which provides that “no public pronouncement of the pendency of such an investigation should be made in the absence of reasonable evidence that the law has been violated and that the public welfare demand it.” In her view, either Commissioner Gallagher expected the SEC to investigate the SRP proposals—in which case he was bound by the Canon of Ethics not to make pronouncements about such a case—or he publicly issued a paper urging enforcement action that he knew or assumed would not occur. The latter scenario might also violate Section 200.66, which bars SEC staff from “suggest[ing] … an investigation aimed at a particular individual for reasons of animus, prejudice or vindictiveness,” the professor reasons.