With a 3-2 vote split along party lines, the Securities and Exchange Commission voted to approve a proposed rule that would give shareholders the right to nominate up to 25 percent of the candidates for a board of directors and to have those nominees included in the proxy statement and card circulated by the company. Interested parties will now have a chance to file comments with the Commission for 60 days, and then the staff will review the comments, revise the proposal, and put it to a final vote. If approved, it could be one of the most fundamental and far-reaching changes in corporate governance since the creation of the SEC in the 1930's. The issue of the role of shareholders in director elections has been under discussion at the Commission almost since that time, and both the Chair and one of the Commissioners commented on the long-term conflicts over this issue over many decades. Currently, if permitted by state law and the company's governing documents, shareholders may nominate candidates for the board, but the complications and expense are all but prohibitive and proxy contests occur in only a fraction of a percentage of corporate elections. In virtually all cases, management and the board select the nominees and no one runs against them. They can serve even if they do not get majority support from the shareholders, as long as they run unopposed. The proposal also gives shareholders the right to submit shareholder proposals relating to the board nomination and election processes. The proposed rule would remove some of the most significant and costly impediments to shareholder nomination of directors. If a significant number of shareholders (the amount is tiered, depending on the market capitalization of the issuer) who have held their stock for a year submit nominees, providing the same kind of information currently required for management-nominated candidates, plus an assurance that the slate is not seeking control, they will be included in the company's proxy and the shareholders will not have to obtain a separate shareholder list and print and circulate their own materials. If more than one group submits a slate, the first in time after the nomination period is open will be included. It is likely that these provisions in particular will provoke some lively debate. Even the most enthusiastic advocates of this proposal do not intend for it to be widely used. Its impact will be felt more pervasively in providing an incentive for management and support for boards to increase the transparency of their procedures and criteria for board nominations and encourage better communication with shareholders. The Commissioners who oppose proxy access, Kathleen L.Casey and Troy Paredes, objected primarily on the issues of federalism, believing that this is a more substantive than procedural and disclosure-related rule and thus impinges on state authority, and on its mandatory application, instead of allowing shareholders to determine on a company by company basis whether proxy access is appropriate. The business community has made it clear they intend to fight this proposal and the Chamber of Commerce has vowed to challenge the rule in court as soon as it becomes final. Their most likely method of attack will be a lawsuit along the lines of the successful challenge to the SEC's jurisdiction in the "one share, one vote" case in the late 1980's. Perhaps in anticipation of this vulnerability, Senator Schumer's bill, also introduced this week, would explicitly grant the Commission the requisite authority. But since the rule is based on state law, we can also expect some lobbying at the state level to permit companies to opt out of giving shareholders the right to nominate candidates.
Nell Minow — Editor
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