August 26, 2010
Proxy Access Forum: J.W. Verret (George Mason Law School)
Posted by J.W. Verret

I am privileged to be back at the Conglomerate, a distinguished group who graciously let a green academic like myself visit when I first started teaching two years ago (which helped me get a full time gig blogging over at Truth on the Market).  I appreciate the opportunity to talk about one of my favorite topics, shareholder voting.  The debates over proxy access in the literature have been a fascinating exercise in scholarly engagement with the policy world, particularly the epic clash of the titans between Professor Bainbridge and Professor Bebchuk, but at long last the debates over whether we should give shareholders access to the proxy have come to a close with the SEC's new proxy access rule. So, now what?  As it turns out, I have a few ideas.

I have joined the forum today with one purpose in mind: to hawk my new paper, Defending Against Shareholder Proxy Access: Delaware's Future Reviewing Company Defenses in the Era of Dodd-Frank, currently in submission.  It hasn't yet found a law review home, but the expedite process is heating up.

In the paper I present 16 defenses companies might consider implementing to thwart shareholders from using their new federal proxy access right.  I first describe the defenses I've invented and how they might offer strategic benefit.  I then consider how they will fare under the scrutiny of the Blasius line of cases in Delaware protecting the shareholder franchise.  (For those non-Delaware companies looking to defend against proxy access, many of the defenses can still apply.  But if not, then I to Delaware).  

The more important defenses I present are entirely legal under Delaware law and can be implemented immediately.  Indeed, this summer I have been assisting a number of Fortune 50 company GCs in designing bylaw amendments to that end.  A few of my defenses would, however, require amendment to the DGCL.  Part of my thesis centers on my prediction that the Delaware Courts will recognize a distinction between defenses intended to thwart exercise of the shareholder franchise and defenses intended to thwart exercise of a shareholder's federal nomination right.  

I also consider whether federal law pre-empts or prohibits my defenses, and I conclude that they are not pre-empted.  To give readers a taste of my work, I'll move to a brief summary of what I believe are the best four defenses, both in terms of their strategic value and in terms of their ability to withstand scrutiny under Blasius and Schnell.  

First, companies can deny insurgent candidates director's and officer's (D&O) insurance coverage against securities and legal liability.  Calpers recently touted its new "Calpers 3d" directory of candidates it intends to draw from for the many new nominations it is planning.  If Calpers had to purchase D&O insurance coverage for all of its candidates, however, I wonder if it would be as interested in nominating so many? Second, and following from that point, companies can refuse to indemnify insurgent directors against liability. 

Third, companies can set director qualification bylaws to limit the experience and other qualifications of directors who may serve.  Indeed, the DGCL expressly permits the Board to adopt director qualification bylaws.  If director candidates, nominated to the company proxy pursuant to the SEC's proxy access rule, fail to meet the strictures of the company's director qualification bylaw, then the Board can refuse to seat the new directors.  This will be true even if the SEC refuses to, in the no-action process, grant a letter permitting the company to exclude the insurgent from the proxy statement.  

Fourth, Boards of Directors can delegate more decisions to subcommittees of the Board that exclude the insurgents.  This, again, is a power directly granted to Boards under the DGCL.  This won't work for all decisions, as the DGCL requires that some issues be considered by the full Board, but it will work for most decisions that come before the Board.

Though all of the Conglomerate's guests offer well considered insights, I find my take on this issue most in agreement with Professor Brett McDonnell's critique of the SEC's rule.  Professor McDonnell urges that companies should be able to opt-out of the SEC's rule.  In a fascinating back-and-forth in The Business Lawyer recently, Professor Bebchuk and Scott Hirst expressed agreement with a fairly constricted opt-out rule, and Professor Grundfest countered in favor of an opt-in rule.  What I hope my paper offers is an effective opt-out, a clean slate onto which companies and their shareholders can then draw a new agreement by which shareholders can, if they would like, nominate candidates.  This could be facilitated by exemptions in the Board defenses for nominations outside of the SEC mandated process.

The Corporate Federalism debate, so central to corporate law theory, is now getting on in years.  President Kennedy's SEC Chairman, William Cary, urged that the SEC should pre-empt Delaware Corporate Law entirely to stop this "pygmy among the 50 states" that "denigrates national policy."  Despite countless SEC Commissioners and Chairmen who shared his view, and have tried to pre-empt state corporation law as much as they could, Delaware continues to not only survive...but truly thrive and grow as a source of corporation law.  

This result is a function of the vibrancy of Delaware's rule-making approach.  The Delaware philosophy is largely one oriented under freedom-of-contract principles.  (Though the Delaware General Corporation Law is certainly more rigid than the LLP or LLC code, when compared to the federal approach to company regulation it is clearly the winner in terms of facilitating private ordering.)  The federal approach, on the other hand, is by its very nature constrictive.  It seeks to affirmatively control market participants rather than enable them.  As such, I think such a constrictive federal code will always find it difficult to fully pre-empt Delaware precisely because Delaware's abiding approach to lawmaking is more nimble and responsive to the preferences of market participants.


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