Delaware Bar Group Opposes SEC Proposed Shareholder Access Rule in First Ever Comment Letter

In what it said was its first ever comment letter to the SEC, the Delaware State Bar Association asked the Commission to withdraw proposed Rule 14a-11 and allow shareholder proxy access systems to develop under the framework of private ordering and shareholder choice created by state law. A universal mandatory shareholder proxy access rule would impair significant substantive rights under state corporate law. If adopted, Rule 14a-11 would deprive Delaware corporations of the flexibility state law confers to deal effectively with myriad different circumstances that rulemakers cannot anticipate, and would thereby undermine a key element of the state system of corporate governance that has been largely successful for decades.

Proxy access is a shorthand term for a framework of rules under which a stockholder may require the corporation to include in its proxy statement and proxy card a person nominated by the stockholder, but not by the board of directors, for election to the board of directors. Changes to the Delaware corporation code that took effect August 1, 2009 make it easier for shareholders to nominate directors to corporate boards. A new Section 112 of the Delaware General Corporation Law clarifies that company bylaws may require, that if the company solicits proxies on an election of directors, the company may be required to include in its proxy materials one or more nominees submitted by shareholders in addition to individuals nominated by the board.

The Delaware approach provides a considerably more flexible and responsive solution, said the bar group, permitting proxy access bylaws to evolve fluidly and efficiently with experience. Any unanticipated problems can be fixed by simple board of directors action to amend the proxy access bylaw. In contrast, a rigid regulatory regime like proposed Rule 14a-ll will prevent stockholders and boards of directors from developing a reliable and tested proxy access system that is compatible with the particular needs and circumstances of their corporation.
If it adopts Rule 14a-11, argued the bar group, the Commission would be establishing a complex administrative system to resolve disputes over the interpretation of a complex set of proxy access rules.

Moreover, such disputes could proceed in federal courts, with attendant potential for conflicting interpretations of the Rule. By contrast, if the issues addressed by the proposal are left to development under state law, noted the group, controversies can be definitively and efficiently resolved in the courts of the company’s state of incorporation. For example, disputes over the operation of a Delaware corporation's proxy access bylaw could be quickly resolved by the Court of Chancery, a court with a well-earned reputation for prompt, sophisticated and efficient resolution of specialized corporate law disputes.

The Commission’s fear that litigation over proxy access rights may delay shareholder meetings is unfounded, said the group, at least regarding Delaware corporations, because Delaware courts have a long record of attempting to avoid delays of shareholder meetings, in the absence of disclosure violations that threaten the integrity of the vote. The Delaware corporation law gives the courts jurisdiction to allow voting for directors to go forward and determine later, and very promptly, which nominees have been elected.

Moreover, the group believes that the Commission's access proposal presents a formidable number of questions about how Rule 14a-l1 should operate. Under a mandatory proxy access rule, said the group, the Commission will necessarily have to answer most if not all of the knotty mechanical and policy questions, and its determinations will apply uniformly and inflexibly to all public companies. In contrast, if proposed Rule 14a-11 is withdrawn and stockholders and directors are allowed to develop their own proxy access regimes under state law bylaw provisions, reasoned the group, all of these intricate policy judgments can be left to those whose economic relationships and rights will be affected by them.

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