Corporate Governance

Commissioner Paredes and His Anti-Governance Stance: Opposition Rather than Cooperation

By J. Robert Brown

We are discussing the recent speech given by Commissioner Paredes before the conference sponsored by the Center for Capital Markets Competitiveness at the Chamber of Commerce.  The speech is conveniently posted on the Harvard Corporate Governance site.

We will leave aside his contention that somehow his argument for an enabling approach is supported by the adoption of majority vote requirements (that all but universally allow management to refuse to accept a director's letter of resignation) or the amendments to the Delaware Corporate Code (designed to restrcit rather than advance shareholder access to the company's proxy statement). 

Instead, we note his conclusion that the SEC's approach "encroaches far too much on internal corporate affairs, the traditional domain of state corporate law."  This is a common sort of thing for those against access to say but its simply wrong.  The SEC rule provides shareholders with the right to insert certain information in the proxy statement, a document that is entirely of federal creation, and the proxy card.  It is not much different than the SEC requiring management to disclose information about executive compensation. 

Including material in the proxy statement says nothing about the standards for nominating or electing directors.  These remain state law matters.  Delaware law allows all shareholders, no matter what the size of their holdings, to nominate directors.  There has been little pressure to change this rule because the costs of the proxy process have all but acted as a prohibition for small shareholders to actually invoke the authority.  With access, the SEC takes away some of the cost restrictions. To the extent state law wants to make the right to nominate a bit more discrete, it can do so. 

Thus, the Delaware legislature has the right to amend the corporate code to restrict shareholders who can nominate directors (or allow management in bylaws to so restrict).  If Delaware did so, these same shareholders would lose their right to access.  In other words, access largely limits a federal impediment to the nomination process but it does not otherwise interfere with the state law right to determine the substance.  In many ways, it is ironic that those purporting to support state law are really asking for the retention of a federal restriction that makes state law largely irrelevant. 

In the end, however, Commissioner Paredes cannot entirely defend a regime that relies on the proxy rules to prevent shareholder nominations.  He calls, ironically, for the very access proposal that the Cox Commission considered and rejected, one that would allow shareholders to include in the proxy statement a bylaw that would require companies to include nominees in the proxy statement. 

But he does so with a twist.  These bylaws should only be allowed where "the company's jurisdiction of incorporation has adopted a provision explicitly authorizing a proxy access bylaw."  Most states don't have such a statute.  Yet even without a statute, it is highly likely that such bylaws are legal (albeit with some uncertainty about the type of restrictions that can be imposed on access).  In other words, he would preempt the law in all of the states that permit these bylaws but haven't gone to the trouble of adopting a statute.  It is, in the end, a strange position to take for someone who has relied on state law to justify his opposition to access.

Full post as published by The Race to the Bottom on July 03, 2009 (boomark / email).