July 11, 2007
SEC Proposal on Shareholder Voting
The SEC is circulating a proposal, not yet formally proposed, to enable shareholders holding 5% or more of a public corporation's stock to put nominees for the board of directors on the corporation's proxy card. The proposal will attract tremendous opposition from both company managements, who support current practice, and from shareholders, who believe the 5% requirement is too high. The opposition will probably cow the SEC into doing nothing.
The SEC approach is a further erosion of its "disclosure only" theory of regulation and a logic step from Rule 14a-8, a rule that requires firms to put specified items requested by shareholders on their proxy cards. The further the SEC steps away from its "disclosure" regulation role the more it displaces state corporate codes control over corporate structure. Some steps at the federal level seem to inevitably turn into to larger steps.
In any event, the way out the SEC's conundrum, is to feature choice not mandatory rule. Publicly-traded corporations could be asked to themselves produce a shareholder voting system that shareholders would have to ratify every five (three??) years or so. Shareholders could submit their own amendments at the ratification vote. Some corporations could opt for 5 year board elections, others for 1 year elections with liberal nominations. Supermajority requirements should require a supermajority ratification vote. A robust system of choice could include modifications of shareholder derivative litigation rules or the choice could be limited to voting procedures. Choice would blunt the criticism of both management and shareholder groups to the current proposal and leave the rule to a shareholder vote.
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