Shareholder Proposals Shaking Up Shareholder Say

Sofie Cools is professor of corporate law at the Jan Ronse Institute for Company and Financial Law. This post is based on a chapter, forthcoming in the Research Handbook on Comparative Corporate Governance. Related research from the Program on Corporate Governance includes The Case for Shareholder Access to the Ballot by Lucian Bebchuk (discussed on the Forum here) and The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen.

One of the most remarkable recent developments with regard to shareholder power is how American shareholders have forced boards of directors to amend even charter provisions to strengthen shareholder rights. In stark contrast, shareholder proposals have (so far) been relatively rare in Europe. Is the American abundance of successful shareholder proposals the epitome of strong shareholder power? In a paper that is forthcoming in the Research Handbook on Comparative Corporate Governance (Edward Elgar), I critically analyze the role of such shareholder proposals and their effects on shareholder power and warn of too much euphoria. A comparative analysis of shareholder proposal rights and substantive shareholder rights yields two important lessons.

First, shareholder power related proposals in American companies are essentially closing the gap in substantive shareholder power that existed between the United States and Europe. In the past fifteen years, shareholders have successfully made proposals in individual American corporations to de-stagger the board, to elect directors by majority instead of plurality vote, to allow shareholders to request special meetings and to allow shareholders to include director nominees on the company’s proxy. In doing so, they managed to break down or reduce some of the most important barriers for meaningful shareholder voice in director elections in Delaware companies—barriers that have been uncommon in Europe. At the same time, several European jurisdictions have gradually softened the rule of at will removal of directors, thus allowing directors a higher degree of protection against removal.

Second, empirical data on the frequency of shareholder proposals (especially shareholder power related proposals) in the United States and Europe are barely comparable. One reason is the significant difference in prevailing stock ownership structures between the United States and continental Europe. Controlling shareholders obviously do not need to take recourse to shareholder proposals. Can empirical studies then still compare the number of initiatives between companies with concentrated and companies with dispersed ownership, or between jurisdictions with different prevailing ownership patterns? Controlling shareholders have large investments at stake and may on that ground take initiatives that, in the absence of a controlling shareholder, small shareholders would take. Should cross-country comparisons control for differences in the number of small shareholders per company? For differences in the number of shares (or voting rights) in free float? Comparing the number of shareholder proposals per company is likely to result in skewed data.

Another reason lies in the goal for which shareholder proposals are used. A significant segment of the shareholder proposals in the United States would be redundant in Europe, as they call for provisions in the charter or bylaws that in Europe are provided for by statute, such as majority voting, board de-staggering, proxy access, say on pay and the poison pill. Should these be excluded from comparison? In that case, one should exclude all proposals that do not make sense in any of the jurisdictions compared, thus possibly leaving very few proposals left to examine. One could even argue that the sheer number of non-firm-specific proposals in the United States is a sign that the legislator failed to provide for the rule that most parties would want. Are rules like majority voting, which are adopted in a majority of corporations, not the “majoritarian default” that corporate law should offer in order to reduce transaction costs?

The issue of the subject of shareholder proposals points to a fundamental tenet in comparative law: it is not the formal rule that should be compared, but all mechanisms serving the rule’s function. In the United States, shareholders proposals cannot be used for director elections, while this is an important topic in European shareholder proposals. Conversely, in Europe, proxy solicitations cannot be used to propose candidates in director elections, whereas this is their main application in the United States. In a functional comparative analysis, it is neither proxy contests nor shareholder proposals as such that should be compared, but the instances in which directors are being appointed or dismissed upon the (minority) shareholders’ initiative, whatever mechanism they deploy for that purpose.

The complete paper is available for download here.

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