Corporate Governance

The SEC, Access and the Need to Preempt Delaware Law

By J. Robert Brown

As the SEC considers an access proposal, Delaware has acted to cut off the anticipated federal right.  As we have discussed, legislative proposals were drafted (and recently adopted) that would allow companies to put in place bylaws that permit shareholders to have access to the proxy statement for their own nominees.  Specifically, new Section 112 allows bylaws that address access and specifically provides that they can set ownership thresholds and tenure requirements for shareholders submitting nominees. 

In considering an access proposal, the SEC is likely to limit shareholder nominees to those shareholders who own a specified number of shares (somewhere around 1-3%) and have held them for the requisite one year.  Section 112, however, allows companies to adopt bylaws to establish stricter criteria. Companies could, for example, adopt bylaws that permit access only for shareholders who own a larger percentage of shares (say 10%) and have held the shares for a longer time period (say 5 years). 

The legislature specifically contemplated a restrictive use for these bylaws.  As the legislative history to Section 112 noted:

• In particular, and in the interest of avoiding election contests instituted by stockholders having little or no economic interest in the corporation, Section 112 authorizes the bylaws to prescribe a minimum level of stock ownership as a prerequisite to requiring inclusion of nominees in the corporation's proxy materials. In establishing such a minimum level of stock ownership, the bylaws may define beneficial ownership to take account of ownership of options or other rights in respect of or relating to stock (including rights that derive their value from the market price of the stock).

The presence of a stricter bylaw arguably takes precedent over the requirements of Rule 14a-8.  See Exchange Act Release No. 56160 (July 27, 2007)("To the extent a company had in place a bylaw under which non-binding shareholder proposals were not permitted to be raised at meetings of shareholders, a company may be able to look to Rule 14a-8(i)(1) with regard to the exclusion of such proposals.").  

 In drafting an access requirement, therefore, the Commission should include in the text of the rule a provision that provides that the presence of a conflicting bylaw shall not result in the exclusion of a shareholder nominee otherwise submitted in accordance with Rule 14a-8.

Full post as published by The Race to the Bottom on April 23, 2009 (boomark / email).