Bar Group Calls SEC Shareholder Access Proposal Unworkable; Endorses Private Ordering

The SEC’s proposal to give shareholders access to management’s proxy card in the election of directors is unworkable, in the view of the American Bar Association Committee on Federal Securities Regulation. Instead, essentially citing federalism, the committee endorsed private ordering under state law enabling statutes, such as Delaware, whose corporation code expressly recognizes the authority of shareholders to adopt proxy access and expense reimbursement bylaws. Instead of adopting a federal shareholder access rule, the committee urged the SEC to amend Rule 14a-8(i)(8) to permit shareholder proposals to establish a proxy access regime in accordance with state law.

In the group’s view, administering a shareholder access rule would involve the SEC in endless state law and interpretive debates The committee was doubtful that a prescriptive federal rule, especially one without sufficient provision to allow for shareholder opt out, could provide the requisite flexibility to encompass workable provisions that serve their intended purpose. In its comment letter to the SEC, the committee said that proposed Rule 14a-11 would place the Commission and its staff in the position of grappling with important and difficult state law issues concerning corporate governance that are currently within the province of state courts. This is not an area in which the Commission and its staff necessarily have expertise, noted the bar group, nor do they have a mandate under the federal system to perform this role.

Private ordering should be allowed time to develop before the Commission considers what the bar group called ``the extraordinary step’’ of dramatically increasing its intrusion into state corporation law. The committee is concerned that the Commission’s adoption of a prescriptive access rule will stifle the very progress the Commission should be encouraging by occupying the field, preventing evolution and testing of different approaches and discouraging the development of additional alternatives.

The committee said that it is not axiomatic that all investors favor access or one particular type of access regime, as proposed in Rule 14a-11 since they have different interests depending on the company and the particular situation. The Commission should be sensitive to denying room for company and investor choice in an area of corporate governance with respect to which there are so clearly diverse views and interests. It is troublesome to the bar committee that the proxy access rule proposed by the Commission, which is intended to promote shareholder freedom of choice in the selection of directors, itself denies that same freedom of choice when it comes to fashioning an access regime. Given that access deals primarily with basic corporate governance precepts that are within the realm of state corporation law, the bar group believes that any federal requirement should give full effect to the principle of shareholder choice.

.