Corporate Governance

Weakening Access and Weakening Corporate Governance Reform

By J Robert Brown Jr.

There has been talk on the Senate side of adding a requirement to the financial reform bill that would limit access to shareholders owning 5% or more of the equity shares. The issue is hottly contested by both sides of the debate. 

Lucian Bebchuk has written on the subject at Dealbook, predictably opposing the proposal.   Steve Bainbridge and Larry Ribstein have taken the other side.  They all do a good job at setting out the relative merits of the issue.

The 5% threshold is significant.  The prior Commission proposed an access bylaw rule that would have set the threshold at 5%.  It was roundly criticized, with commentators providing considerable empirical data showing how difficult it would be to meet the threshold.  Moreover, it is likely that even without congressional involvement, the SEC already has the authority to grant access.  Any attempt to set the threshold at 5% must, therefore, be viewed as weakening the SEC's authority.  This unquestionably makes the proposal anti-shareholder and anti-investor. 

The opposition by professors Bainbridge and Ribstein is predictable.  They would prefer that access be denied in its entirety.  That they would support a high mandatory threshold (5%) is, therefore, of no great surprise.  Their arguments would, frankly, justify a 10% or 20% or even a 100% threshold.   Indeed, as Steve Bainbridge noted:

• Those of us determined to resist Bebchuk's efforts to transform the United States' system of competitive federalism in corporate law and governance into that of a European-style system run by a unitary national sovereign need to draw a line in the sand. Proxy access is as good a place as any.

The irony is that the SEC will get access one way or another.  The preemption of Delaware will happen.  The only issue is the threshold.  By opposing a 5% threshold, Professors Bainbridge and Ribstein apparently favor a one size fits all approach to governance, at least when it comes to federal regulators.  

Full post as published by The Race to the Bottom on June 26, 2010 (boomark / email).