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November 29, 2009
For Many Shareowners, Private Ordering Will Mean No Proxy Access
    by Robert Kropp

Report finds that unless SEC regulations on proxy access are enacted at a federal level, many shareowners will continue to face restrictions on corporate governance.


In June, the Securities and Exchange Commission (SEC) issued proposed regulatory reforms that would allow for increased shareowner proxy access. By the end of the comment period on August 17, it had received more than 500 letters commenting on those changes. Comments on behalf of corporations often argued in favor of "private ordering to permit shareholders at each individual company to decide whether proxy access is desirable and to establish its precise contours," instead of a uniform federal rule, according to a recent report.

The report, entitled The Limits of Private Ordering: Restrictions on Shareholders' Ability to Initiate Governance Change and Distortions of the Shareholder Voting Process, was written by Beth Young, a senior research associate at The Corporate Library, for ShareOwners.org and the Council on Institutional Investors (CII).

According to the report, much of the debate thus far on the issue of proxy access has focused on the legitimacy of federal regulation, with "opponents arguing that the proposed rule represents too much of an incursion on states' traditional jurisdiction over corporations' internal affairs." Supporters of private ordering, which would allow the adoption by shareowners of proxy access rules on a case-by-case basis, argue that recent changes in the General Corporation Law in Delaware, where more than half of the largest corporations in the US are incorporated, now permit bylaws establishing a proxy access regime.

However, at the 40% or more of companies incorporated elsewhere, "there is no assurance that a shareholder-initiated bylaw amendment on proxy access would be valid." Some states, for instance, prohibit shareowners from amending proxy access bylaws, while others allow for such amendment but also permit companies to eliminate the right.

Only a small percentage of companies prohibit shareowner bylaw amendments, but more than one-third require a supermajority of votes for such amendments to be passed. While most votes on shareowner proposals require a plurality, or a simple majority, for passage, votes on bylaw amendments at these companies require a majority of total shares outstanding for passage.

Furthermore, nearly 10% of the largest US corporations have more than one class of voting stock. At these companies, holders of one class of shares—"often insiders or members of a company's founding family or group," according to the report—are assigned often significantly greater voting power, allowing "holders of what may be a very small number of shares to determine voting outcomes."

The report concludes that, if the SEC's regulatory reforms are not enacted, shareowners at about 40% of companies will either be prohibited from amending bylaws, or will "face significant challenges in the form of supermajority vote requirements."

Maureen Thompson, the executive director of ShareOwners.org, said, "The only alternative that will enfranchise investors is a uniform SEC proxy access policy. Private ordering would mean that shareholders at a significant number of companies in the broad market indexes would be disenfranchised and essentially have no choice."

 

 
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