October 1, 2007
I write as an attorney who practices in the areas of estate planning, taxation, securities fraud litigation, and corporate law, as part of a larger civil practice. I am admitted to practice in Colorado and New York, and have practiced as an attorney since 1995.
A. Uncontested elections are useless.
An election to a company's board of directors or analogous governing body, in the absence of a contested election, is such a meaningless event to an investor that the public interest would be better served by not conducting it at all. The false sense of control that results from uncontested elections, like uncontested elections in China, pre-invasion Iraq, and Soviet Russia, does more harm than good by perpetuating a sense of shareholder power that does not exist.
Uncontested elections simply clutter mailboxes, waste ink, waste paper and waste the services of the United States Postal Service. Uncontested elections serve no purpose to protect the investing public. They also wastes considerable time on the part of brokerage offices and other investors to even consider the matter. The main real purpose served by uncontested elections for a company's board of directors are to keep shareholder addresses of record current. A simple notice announcing that the uncontested candidates have won the election would be more than sufficient to serve all purposes of an uncontested board of directors election.
It is true that dissent can be conveyed by withholding support from a proxy request, but this is no more effective than a non-binding letter or petition from institutional investors to management outside the SEC regulatory process.
B. Contested elections can serve shareholder interests.
The only time that an election for a company's board of directors via a proxy solicitation serves any valid purpose is when it is contested.
Bona fide contested elections manifestly serve the public good because they allow shareholders, a decisive share in interest of whom are institutional investors and sophisticated wealthy individuals advised by brokers, to choose the leadership team for a company that best serves shareholder interests.
The only time a contested election is not positive for the investing public is when it is launched in bad faith by non-serious candidates with no good faith intent to win. But, frivilous proposals related to the nomination of directors are not inherently any more onerous than frivilous proposals which may currently made via the proxy process, or the current meaningless regime of pro forma filings that provide no choices. The cost of allowing the investing public too many choices is modest. The SEC generally does not paternalistically judge the merits of investments, director candidates, or proxy proposals for investors.
If the SEC does not wish to mandate that it be easy to require a corporation to submit to a contested election, (and the current comment period does not appear to allow for this possibility) it should, at least, make it easy and clearly permissible for shareholders to mandate such a process and effectively enfranchise themselves.
For example, shareholders ought to be permitted to propose in a proxy measure that nominations for future vacancies on the board of directors may be made by any small group of shareholders with a sufficient dollar threshold of stock value. To do otherwise is to substantively limit most proxy contests to shareholders in a position to conduct a corporate takeover, a situation widely criticized in the academic literature on the subject.
C. The Proposed language is vague and encourages litigation.
Both proposed wordings fail to meet this goal. The former is also vague in a way that would encourage litigation. The shorter proposed SEC wording reads:
"If the proposal relates to a nomination or an election for membership on the companys board of directors or analogous governing body or a procedure for such nomination or election."
This wording is classically ambiguous, if its intent is to prohibit contested elections without the required SEC compliance, while not prohibiting amendments to the corporation's bylaws or charter via a proxy proposal.
The shorter language lacks a well defined direct object. Is it talking about a particular nomination or election for membership, or the nomination and election process in general? You can't tell from the face of the proposed wording.
The multiple part longer language offered by the SEC is more clear, but also appears to prohibit both de facto contested elections and recalls on the one hand, and general process changes on the other. It doesn't do what the SEC's preamble indicates that it intends to do.
D. Proposed solution.
Better language would state (added words in brackets):
"If the proposal relates to (1) the nomination or election of an individual to membership on the company's board of directors or analogous governing body or (2) the removal of an individual from membership on the company's board of directors or analogous governing body prior to the expiration of that individual's term of office."
The language I propose is sufficient to prevent circumvention of the contested election rules, without prohibiting general changes in the nomination process itself, a matter that is rightly within the perview of shareholders through the proxy process, in the same manner as regulations of the board member election process such as cumulative voting, staggered elections and similar matters are clearly within the scope of the proxy process under existing SEC regulation.
If the SEC has a concern that the proxy process may be used not simply as a back door means of conducting a particular election, but as a back door means of creating a process contrary to SEC regulations governing contested elections, then an addition exemption could permit a corporation to refuse to distribute proxy materials advocating that the company "change its internal organization in a manner contrary to well established state or federal law."