October 22, 2007
The Proper Scope of Shareholder Access
Posted by Julian Velasco

Thanks for the invitation to guest blog!  This is my first-ever blogging stint, so I apologize in advance for any breaches of etiquette.  I’d like to use my first post to talk about shareholder access to the corporate proxy.

First, a very brief background.  Exchange Act Rule 14a-8 regulates shareholder access to the corporate proxy.  It provides, among other things, that the company may exclude a shareholder proposal “[i]f the proposal relates to an election for membership on the company’s board of directors ....”  This provision clearly permits the exclusion of shareholder proposals that would nominate a candidate for the board of directors.  The SEC staff interpreted it more broadly to permit the exclusion of shareholder proposals that would amend the bylaws to require the inclusion of shareholder nominees.  However, the Second Circuit rejected this interpretation.  The SEC responded with two alternative proposals to amend the proxy rules: one that would reinstate the SEC staff’s interpretation, and another that would permit shareholder proposals that meet certain (restrictive) criteria.  Professor Bebchuk and thirty-eight other law professors submitted a comment letter arguing that “both proposals would produce unnecessary and undesirable impediments to shareholders’ exercise of their right under state law to initiate bylaw amendments concerning shareholder nomination of directors.”

At least two important questions are raised by this issue: what is the proper scope of shareholder access to the corporate proxy?  and what is the proper role of the SEC in developing proxy rules?

In my most recent article, Taking Shareholder Rights Seriously, 41 U.C. Davis L. Rev. (forthcoming 2007), I argue (in Part III.D) that shareholder access should correspond to shareholder voting rights.  In other words, shareholders should have access to the company’s proxy for all matters on which they are entitled to vote, but not for any other matters.  Because shareholders have the right to elect directors, they should have access to nominate directors as well; because they have the right to amend the bylaws, they should have access for that purpose as well.  However, because shareholders do not have the right to run the business and affairs of the corporation, they should not have access to make non-binding recommendations on matters that are “significantly related to the company’s business”; similarly, say-on-pay is misguided.

I believe that Rule 14a-8 should be rewritten so that shareholder proposals relating to matters on which they are entitled to vote could not be excluded from the company’s proxy materials for almost any reason, while all other proposals could be rejected without excuse.  Of course, more details would be necessary; but that should be the spirit of the rule.

Whether the federal securities laws should expand shareholder rights may be debatable, but it certainly should not restrict shareholder rights.  It seems to me that the most logical and neutral position the SEC could take (and therefore should take) would be to make shareholder access correspond to their voting rights.

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