A New Deal? Governance by--or for--the shareholders?

• Author: Kaback, Hoffer
• Position: QUIDDITIES

FOUR SCORE less three years ago, FDR's New Deal brought forth the Securities Exchange Act of 1934. Ever since, the issue of shareholder access to proxy statements has come up--not continuously or even regularly, but with semi-dependable irregularity.

About 40 years ago--midway between 1934 and today--as a young corporate lawyer I was the point man in handling a shareholder proposal that the CEO's relatively high compensation should be reduced in light of our client company's repeated poor financial performance. It was not difficult to obtain from SEC staff a "no-action" letter protecting the company in its intention to exclude this proposal from the proxy statement; the shareholder had not the flimsiest legal metatarsal to stand on.

Still, one could empathize with his annoyance and frustration. (The company went under a few years later.)

Shareholder access as an issue has, over the last 80 years, again and again bubbled up vigorously from its low simmer because, for a public company, it is simply impossible to escape the inherent, constant tension created by the separation of ownership and control. When shareholders seek to move into the demilitarized zone demarking this separation, there is and must be conflict. Access to the proxy statement has been a key battlefield in that ongoing struggle.

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After repeated fits and starts since 2003, the SEC in late August mandated new proxy access procedures (Rule 14a-11), to be effective November 2010. They provide for shareholders that have owned more than 3% of a company's stock for more than three years to have their director nominees included in the company's proxy statement.

Now we are engaged in a great litigation. At the end of September, Business Roundtable (BRT) and the U.S. Chamber of Commerce filed suit, seeking to have these rule changes nullified. The SEC has stayed their effectiveness, pending resolution of the case; it is to be argued in early April before the U.S. Court of Appeals for the D.C. Circuit and, quite possibly, the Supreme Court thereafter.

Numerous significant players (e.g., the Council of Institutional Investors, CalPERS, and the State of Wisconsin Investment Board) seek to file friend of the court briefs. The State of Delaware has already filed one. It argues that, because the new rule is "one size fits all," it contravenes Delaware law, which permits private ordering by stockholders of the proxy access mechanisms they choose to select; in purporting...