Corporate Governance

The Dodd-Frank Wall Street Reform Act and the Preemption of Delaware Law (A New Sheriff in Dodge)

By J Robert Brown Jr.

Recognizing that Delaware has seen its authority substantially weakened, where has it gone?  Mostly to the Securities and Exchange Commission, a process begun in ernest in SOX and continued in the DFA.

As we have already noted, the SEC has been placed in the center of say on pay.   It is the Commission, through its determination of the requirements of Item 402, that will determine which "executives" and what information about the compensation of those executives, will be subject to shareholder approval.

That is not the only shareholder voting authority given to the Agency.  Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b), has been amended to give the SEC what amounts to almost plenary control over the right of brokers to vote the uninstructed shares of their account holders.  This authority has been within the exclusive control of the stock exchanges since 1937.   Interestingly, the provision prohibits the voting of uninstructed shares for the election of directors, a step already taken by the Commission but only over the opposition of two commissioners.

The SEC has received affirmative authority to define independent directors for purposes of the stock exchanges.  This will give a regulator with a decidedly pro-shareholder perspective significant control over the definition.  Some current weaknesses in the definition (the failure to take into account fees, for example), are likely to be addressed.  At least for public companies, the SEC's definition is likely to supplant those under state law. 

The SEC's authority with respect to access has been clarified, eliminating any meaningful legal challenge to rulemaking in the area.  The SEC can, therefore, use the proxy rules to facilitate the election of shareholder nominated directors.  Moreover, efforts by some in the Senate to limit access to 3% shareholders who met a two year holding period was successfully defeated.  The SEC's authority in the area is essentially plenary. 

The SEC has received substantial substantive authority in the area of corporate governance, authority mostly taken from Delaware.  The Commission will provide for a single, national law regulating corporate governance that is applicable to public companies.  The biggest concern in this area is the potential politicization of governance.  While the SEC is an "independent" agency, it is not immune from politics.  Moreover, if Justice Bryer had his way, there would be no "for cause" removal restriction on the President's ability to replace commissioners, further politicizing the agency's actions.  See FEF v. PCAOB, 561 US --- (2010)(Bryer, J. dissenting). 

Any regulator in the field of corporate governance will have strengths and weaknesses.  The SEC may yet make a hash of it.  But that is speculation while the role of Delaware and the Delaware courts has already been established.  It is time for a new sheriff in Dodge.

The Dodd-Frank Wall Street Reform Act and a short Summary of the legislation are posted online.

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