Activist investors won't let court ruling affect proxy access

Shareholder activist pension funds plan to continue to pursue proxy access, despite a U.S. Court of Appeals ruling overturning SEC rules that would have required corporations to provide shareholder access to corporate proxy materials to nominate directors.

“We continue to strongly support a uniform proxy access rule,” Jeff Mahoney, general counsel, Council of Institutional Investors, Washington, said in an e-mail.

“We are uncertain as how the (Securities and Exchange Commission) will respond to the court's ruling. We, however, believe the court got it wrong, and will encourage and support commission efforts to respond to the process issues raised by the court.”

Amy Borrus, CII deputy director, said in an interview, “We would hope the SEC would remain committed to a proxy access rule and address concerns raised in the ruling. The council is ready to help out as needed.”

Thomas Quaadman, vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, Washington, said, “Proxy access … was limited to an extremely small number of shareholders, which is one thing the court recognized. It was about super rights for a slim majority of shareholders.”

“We believe governance rules of this nature should be governed by state law, not federal law,” Mr. Quaadman said.

Delaware, a haven for incorporation, in 2009 adopted a framework to allow companies to amend bylaws to permit proxy access, Mr. Quaadman noted.

The chamber wanted to see how that change worked out before the SEC embarked on an access rule, he said.

The U.S. Chamber and the Business Roundtable jointly filed a lawsuit last Sept. 29, challenging the rule and leading to the court's July 22 decision. The appellate court has jurisdiction for reviewing SEC rules.

The law firm Kirkland & Ellis LLP, Chicago, which advises corporations on corporate governance, in a statement, called the ruling, “V-day for corporate America.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the SEC to adopt implementation rules to allow proxy access. The rules, adopted by the SEC about a year ago, were to have gone into effect last Nov. 15, but were suspended after the suit was filed.

Under the SEC rules, shareholders would have to own at least 3% of a company's shares continuously for at least the prior three years to be eligible to have their nominees included in the proxy materials and compelling competitive elections with company-nominated candidates to the board. Eligible shareholders could nominate at least one candidate, or up to 25% of a company's board of directors, whichever is greater.

Kevin Callahan, SEC spokesman, said, “We're reviewing the decision and considering our options.”

Claudia H. Allen, Chicago-based partner at the Neal Gerber & Eisenberg LLP law firm and chair of its corporate governance practice group whose clients include corporations and investors, said the SEC, among its options, could seek a rehearing on the ruling or revise the rules to address the court's objections.

As for the council and its adversaries reaching out to each other to seek common ground since the ruling, CII's Mr. Mahoney said in the e-mail: “The council's policy on proxy access reflects the fundamental right of investors to nominate, elect and remove directors. That policy was approved by council members, including public, union, and corporate employee benefit plans. The council will continue to actively reach out to our corporate members and other members of the business community to seek their input on council policies, including our policy on proxy access as well as our other existing and proposed policies.”

Mr. Quaadman said of the chamber, “We're willing to talk with any parties to strengthen corporate governance and … make sure the governance regime is in line with the court's ruling.”

Steven N. Kaplan, Neubauer family distinguished service professor of entrepreneurship and finance, University of Chicago Booth School of Business, said of the court's ruling, “I think it's a terrific decision.”

Mr. Kaplan said the SEC rules discriminated against shareholders like hedge funds and other shorter-term investors, disqualifying them from access.

“If I buy stock in a company and I want to shake things up, I don't qualify under SEC rules,” Mr. Kaplan said.

But the SEC rules “discriminated in favor of political shareholders, i.e., union and public pension funds,” which might have priorities beyond the interests of other shareholders, Mr. Kaplan said.

There is no evidence that long-term shareholders have more interest in the long-term valuation of a company than short-term shareholders, Mr. Kaplan said.

“Why discriminate against short-term holders?”

“I think if (Mary L. Schapiro, SEC chairman) is smart, she won't do anything,” Mr. Kaplan said. “An appeal would go to the Supreme Court and would likely lose.”

“There is no way (access proponents) will get new legislation, given the Republicans control the House” and would oppose it, Mr. Kaplan said.

Ms. Allen said, “What happens in the next election will have a lot to do with determining where proxy access goes. Proxy access tends to be favored more by Democrats.”

Any rewriting of a rule likely won't come soon, she added. “The SEC has a tremendous amount of rulemaking (on other issues) mandated by Dodd-Frank.”

“They have some resources questions. A new proposal for proxy access for the 2012 season is unlikely.”

She questioned whether the SEC would lift its ban to permit shareholder proposals calling for proxy access.

Mark Plichta, Milwaukee-based partner in Foley & Lardner LLP law firm, which advises corporations and shareholders on corporate governance, said it's questionable whether the SEC, if it chooses to do so, could rewrite the access rules to provide a more fulsome cost-benefit analysis to satisfy the court's objection.

Among his clients, Mr. Plichta said, “I see robust corporate governance and ... accountability to shareholders. I don't think proxy access in particular would somehow improve their corporate governance.”

In the court's 3-0 opinion, Judge Douglas H. Ginsburg wrote, The “commission has not sufficiently supported its conclusion that increasing the potential for election of directors nominated by shareholders will result in improved board and company performance and shareholder value.”

The SEC failed to respond to concerns that union, state and local pension funds “whose interests in jobs may well be greater than their interest in share value, can be expected to pursue self-interested objectives rather than the goal of maximizing shareholder value, and will likely cause companies to incur costs even when their nominee is unlikely to be elected,” Mr. Ginsburg wrote.

“By ducking serious evaluation of the costs that could be imposed upon companies from use of the rule by shareholders representing special interests, particularly union and government pension funds, we think the commission acted arbitrarily,” Mr. Ginsburg wrote.

“Indeed, the commission has a unique obligation to consider the effect of a new rule upon ‘efficiency, competition, and capital formation.'”