Strategies for the New Reality of Shareholder Proxy Access

Access to company proxy materials for board candidates nominated by shareholders is now an imminent reality. Since the SEC first proposed a shareholder proxy access regime in 2003, the wisdom of such a fundamental departure from traditional practice has been hotly debated. We have long been of the view that shareholder proxy access is a serious mistake, likely to impair the ability of public companies to attract and retain quality directors and lead to a further politicization and balkanization of the boardroom, with attendant negative consequences for American capitalism and competitiveness. (See our comment letters to the SEC in response to the SEC’s 2003 and 2007 proxy access rulemaking proposals.)

Political developments have turned the tide strongly in the other direction. SEC Chairman Schapiro has said that the SEC will consider a shareholder access rule later this month, and Senator Schumer has said that shareholder access will be an element of his so-called “Shareholder Bill of Rights Act of 2009.” In an effort to forestall these attempts to further federalize corporate law, Delaware last month enacted legislation which expressly enables the adoption by Delaware companies of bylaws permitting shareholder access to company proxy materials. Crucially, such bylaws can be adopted not only by a company’s board of directors, but also by shareholder action on shareholder initiative.

Due to the negative impact of shareholder proxy access, we expect that many companies will understandably resist the adoption of shareholder access bylaws of any sort. Others will favor a wait-and-see attitude, particularly since federal legislation or regulation may change the ground rules further. Some companies, however, may wish to consider the preemptive adoption of a reasonable and carefully tailored bylaw, in part to deter, or discourage adoption of, more extreme versions of shareholder access that may be proposed by short-term activist or special-interest shareholders. We have prepared a model shareholder access bylaw (attached) for consideration.

Our model permits shareholders holding at least 5% of a company’s common stock for at least a year to nominate a limited number of independent director candidates using the company’s proxy statement and card. Our model bylaw also contains features designed to prevent the use of shareholder access as a “Trojan Horse” for takeover activity. For shareholders seeking to effect a takeover via director election, the SEC’s existing proxy contest process, containing essential disclosure and procedural safeguards, remains the appropriate mechanism.

The potential variations on the model access bylaw are many, and a board’s decision whether to adopt a shareholder access bylaw at all and, if so, what features it should have, must be carefully considered in the context of each company’s particular situation. For that reason, we believe that if shareholder access is to be a part of our public company landscape, the private-ordering approach through company specific bylaws contemplated by the Delaware legislation is preferable to a federally mandated one-size-fits-all proxy access rule. We expect that significant, long-term shareholders that do not desire the companies in which they invest to be subject to director election free-for-alls – and the risks likely to result – should find that the attached model shareholder access bylaw offers a reasonable framework.