SEC approves rule giving shareholders new power
WASHINGTON (MarketWatch) – Setting the stage for a new round of battles between company executives and shareholders, the Securities and Exchange Commission narrowly approved controversial regulations on Wednesday giving institutional investors much more power in director elections corporate and behind-the-scenes negotiations with senior executives from 2011.
The agency approved, in a 3: 2 vote, an SEC proposal known as “shareholder access” that will allow shareholders – especially institutional investors – to nominate a minority list of one or two candidates for election to the boards of directors. inexpensively, using the company’s proxy documents.
The approval was a major victory for institutional investors seeking a greater voice in the operation of businesses. Giving shareholders an easier way to nominate a list of minority directors has been on the SEC’s agenda since the 1940s, but has never worked out until now. Read “Power to the people, will they use it?” “
Shareholders have long held the right to nominate candidate directors, but have had to use their own proxy documents, at a significant cost. Traditionally, activist hedge fund managers and corporate raiders have typically used their own proxy cards to appoint directors. The new rule is expected to open the door to director elections for institutional investors.
“In the interests of fairness and accountability, long-term significant shareholders should have the means to nominate candidates to the boards of directors of the companies they own – candidates that all shareholder-voters can then consider alongside. those appointed by the current board of directors, ”said SEC President Mary Schapiro.
Former SEC chairmen William Donaldson and Christopher Cox put forward proposals, in 2004 and 2007 respectively, that would have used a similar protocol for electing candidate shareholders, but neither followed in adopting the provisions.
The measure is controversial and the two Republican commissioners of the agency’s five-person board of directors have opposed it.
Supporters of the measure argue that if shareholders had more say in the composition of boards of directors, the banks might have taken out fewer toxic mortgages and the financial crisis could have been avoided.
However, opponents of the new rules, including the US Chamber of Commerce, argue that the changes will allow unions and green investor groups to discuss behind the scenes at the expense of shareholder value. Tom Quaadman, Vice President of the American Chamber of Commerce. argues that the measure will also be costly and disruptive for businesses.
“We are concerned that proxy access will allow some shareholders to have a stronger voice than others and harm the very investors this rule claims to defend,” said Tom Quaadman, Deputy Speaker of the House of Commons. American trade. “If you are faced with the real possibility of an acrimonious election battle every year, the danger is that instead of running the company, of trying to make decisions that will pay off in three to five years, directors and management make short-term decisions. ”
Kathleen Casey, a Republican commissioner who opposed the rule, echoed those concerns. “The rule does not seek to address special short-term interests,” Casey said. “I think these rules are likely to cause material damage to our capital markets.”
Troy Paredes, a Republican commissioner, opposed the rule, arguing that it contradicts state law. Paredes said he was ready to come to a compromise with Democrats after the Dodd-Frank law was passed, but was unable to find consensus.
“Businesses should be allowed to follow different paths,” he said.
However, labor groups and institutional investors were happy with the outcome, arguing that the measure did not allow special interests as a majority of all investors in a company would be needed to elect a shareholder-backed director candidate.
“Today, the SEC has taken an important and historic step in empowering long-term investors,” said AFL-CIO President Richard Trumka.
Ann Yerger, executive director of the Council of Institutional Investors, said the rule is “revolutionary” for investors and is needed in response to a “massive failure of board oversight” during the financial crisis that rocked the economy on the brink of collapse in 2008. “Access to the proxy will boost board elections and make boards more responsive to shareholders and more vigilant in their oversight of companies,” Yerger said.
John Olson, a partner at Gibson Dunn & Crutcher LLP in Washington, said the move was in line with what most SEC watchers had anticipated. “Well-savvy companies have been gearing up for this to be in effect for the 2011 proxy season and are not surprised,” he said.
Specifically, with the final proposal, investor groups would need a 3% stake in US companies – which they have held for at least three years – to nominate their nominees for director.
Investors could nominate as many candidate directors as they wish as long as their nominees do not represent more than 25% of the board of directors. Thus, in a board of eight members, a shareholder could nominate two candidate directors. Investor groups would not be eligible to use these new powers if they own the securities for the purpose of changing control of the company or if they wish to appoint more candidate directors than the rule allows.
Small businesses with a market capitalization of less than $ 75 million would be subject to the rule, but it would only apply to them after a period of three years. The SEC had considered completely exempting small public companies from the requirement.
Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, says the new rule makes it more difficult for small shareholders and other shareholders to use the process to appoint their own nominee directors because of the The huge 3% threshold, an amount that in medium and large companies represents millions or billions of dollars of investment.
“The idea that only large shareholders have the capacity to nominate director nominees flies in the face of the SEC’s investor protection role for all investors,” Elson said. “Have you repealed the rights of small investors? ”
Elson added that even institutional investors who plan to use the new inexpensive process for appointing directors will have to spend significant sums on solicitation fees to get their message across.
Instead, Elson argued that the SEC should have followed Delaware’s approach of allowing shareholders to choose whether or not to put the process in place to allow investors to appoint directors.
Noting the high cost of proxy races, Elson said one option is to require companies to partially reimburse shareholders who hold proxy races even if they lose but get substantial support.
“The price of a full proxy solicitation is the big deal here,” he said.
Judicial review is possible
Schapiro was waiting for the passage of the Dodd-Frank law – which was approved in July – because the law contains a provision that aims to make the SEC rule litigation-proof. The SEC was concerned that the US House would initiate legal action arguing that the agency lacks the power to enforce the new rules. Read about the full bank invoice.
“Part of the debate in the past has revolved around whether the commission has the power to adopt these rules,” Schapiro said. “This issue was resolved last month, when Congress passed and the President signed the Dodd-Frank Act. This Act confirms the authority of the commission to act in this regard. Now is the time to resolve the matter. to know under what circumstances the Commission should adopt an access power of attorney. “
However, Quaadman of the US Chamber said the chamber will analyze the regulations to see if the SEC is acting in an arbitrary and capricious manner. “If we think they were predisposed to make a decision and did not take into account all the comment letters and information that were submitted to them, then we could file a complaint,” Quaadman said.
Casey, one of the Republican commissioners, argues the rule would struggle to prevail against all lawsuits against it.
“The rule is so fundamentally and fatally flawed that it will have great difficulty surviving judicial review,” Casey said.
An effort by then SEC President Donaldson in 2004 to give investors a greater voice in board elections failed after groups of companies, including the US Chamber of Commerce, lobbied against it. Donaldson, a Republican, had joined two Democrats on the five-member commission in bringing forward a proposal to allow shareholders to include their director nominees in the company’s proxy rules. However, regulatory observers argue that after voting with Democrats to pass two more controversial rules for hedge funds and mutual funds, Donaldson lacked the political capital to pass shareholder access with two Democrats. Donaldson’s two Republican colleagues at the time, Cynthia Glassman and Paul Atkins, were strongly opposed to the director election measure.
Christopher Cox, who succeeded Donaldson as chairman, introduced his own shareholder access approach in 2007, but then opposed it in a 3-1 party line vote later this that year.