The Arizona State Law Journal will soon publish an article by Brett McDonnell, Professor of Law at the University of Minnesota School of Law. Professor McDonnell’s article, Setting Optimal Rules for Shareholder Proxy Access, surveys recent state and federal changes concerning the shareholder proxy access and the “altering rule,” whereby shareholders can propose a change to the bylaws about proxy access. Prior to the SEC promulgating a new rule, shareholders did not have access to the corporate proxy materials to make board nominations in any state except one. Further, boards could also exclude a proposal to the bylaws by shareholders to allow such access. While shareholders could run their own candidates, without access to the proxy materials sent out to all shareholders by the corporation, this was prohibitively expensive. This restriction limited shareholders’ power to alter board directors to two alternatives: voting on board members or selling their shares. The change to the rule gives more power to shareholders.
Shareholder proxy access allows shareholders to nominate their own candidates for director positions. The SEC recently modified Rule 14a-11 so that by default, shareholders who have owned at least three percent of the outstanding shares of stock for at least three years can nominate up to one director or twenty-five percent of the board, whichever is greater. McDonnell argues that this is consistent with shareholder power to vote for directors without being able to interfere with specific policy decisions. Shareholder voting is a form of accountability. As directors act as agents for shareholders, he argues, allowing shareholders to nominate and vote makes the accountability more effective than the mere rubberstamp of voting for board-nominated candidates.
While the SEC set the default rule in Rule 14a-11 to broaden shareholder power, Rule 14a-8 does not allow shareholders to vote to change this default to a more restrictive rule. McDonnell argues that important principles, like freedom of contract, are safeguarded by allowing a more generous altering rule. He proposes that shareholders ought to be able to change the rule by amending the bylaws if they so choose. Further, principles of federalism are less implicated by allowing a more generous altering rule. Setting corporate rules is a traditional state power. The problem is that states, eager to attract businesses, create rules with a managerial bias. It is managers, not shareholders, that decide the state of incorporation. While the federal government has arguably acted to protect shareholders, allowing parties to voluntarily change the default rule would be less intrusive to state power. The article concludes that while the change to the default rule improves the previous no-proxy-access rule, the best altering rule would allow shareholders to propose an amendment to alter the rule if they so chose.