Truth on the Market

The furor over the proxy access defenses contained in my forthcoming paper, “Delaware’s Future: Reviewing Company Defenses to Shareholder Proxy Access” continues.  I invested my summer writing this August submission, which law review editors will be receiving within the next few weeks.  My last few posts have detailed my growing debate with the central proponents of proxy access in the institutional investor community.

Proxy access was the single most important corporate governance reform included in the Dodd-Frank Act, and we can expect that Boards of Directors will be anxious to implement defenses against insurgent shareholder campaigns as a result.  This struggle is more than an academic exercise, it is about who will control the 13,000 publicly traded companies in the United States that themselves control the roughly $20 trillion in wealth tied up in those companies.  Tom Donahue, President of the US Chamber of Commerce, has said that proxy access is one of the five most important issues to his organization.  This paper considers what defenses would be strategically useful against proxy access, and then analyzes whether they will survive review in Delaware, federal courts, the SEC and the stock exchanges.  It follows my previous academic work and testimony on proxy access.

The Council of Institutional Investors, the leading lobby group for American Pension Funds, both private and public (including the California Pension Fund CalPers, the AFL-CIO, and the Exxon-Mobil pension) has issued a “Corporate Governance Alert” to let their many members know about the defenses currently being cooked up in my corporate governance laboratory with the title “Law Professor Touts Ways Companies Can Circumvent Proxy Access.”  Here’s what they have to say:

The SEC has yet to approve a proxy access rule but that hasn’t stopped law professor J.W. Verret from suggesting ways that companies can evade it. Verret, an assistant professor at the George Mason University School of Law, has begun posting what he says will be a series of tactics for circumventing proxy access, on www.truthonthemarket.com

But, our loyal TOTM readers already know that, it’s only recently become news to the hundreds of CII members who lobbied for proxy access.  So here’s the new meat this post offers to the proponents of Dodd-Frank.  I hereby offer Proxy Access Defense #4, a defense I call the “Chinese Menu Ballot.”

In a previous article on proxy voting I noted the possibility of using preferential voting with an ordinal ballot, as well as instantaneous runoffs, to dig more deeply into the preferences of shareholders in contested elections.  Ironically, one of the principal opponents to my recent Congressional testimony on proxy access, and someone who has blogged against my previous three defenses to proxy access, Nell Minow, editor of the Corporate Library, actually endorsed the article in which I presented this idea as among the “latest and greatest in corporate governance literature.”

The Chinese Menu Ballot proxy would limit the ability of special interests to take over the corporate ballot, as it would in some circumstances eliminate candidates for which a majority of shareholders have a strong preference against.  See more detail in a previous post at Deallawyers here.  It would allow shareholders to rank the candidates they prefer, in the order in which they prefer them.  One of the reasons that special interests have a chance to influence corporate elections is that the realities of the election process do not permit runoffs, but with an ordinally ranked ballot an election inspector could count a shareholder as voting for their successively ranked preferences in a hypothetical runoff.  This would have the benefit of requiring that nominees receive a broad base of preferential support among the entire group of shareholders.

The strategic value of such a configuration would depend in part on the number of nominees, with its value increasing as the number of filed nominees increases.  It would be particularly useful in cases in which one shareholder nominates through the federal proxy access process and a different shareholder also simultaneously funds their own contested slates. This method would also significantly complicate the voting process itself, which would mean that a greater percentage of shareholder ballots would likely go uncounted as being invalidly filled out.  In the event that voided ballots tended to favor insurgents, it may offer an added defensive benefit.  The SEC proxy rules leave significant room open for redesigning the proxy ballot form, since their rules weren’t designed with contested elections in mind, and this method would clearly be permissible under the SEC’s existing rules.

There are at least 12 defenses left from among the 16 I have come up with over the last few months.  I will most certainly save the best for last.  The first 14 will be collectively prohibitive, but the final two defenses I will offer stand to completely subvert any of the benefits of proxy access.  The final two defenses I will propose will ensure that no investor will have any remaining incentive to nominate directors onto the corporate proxy under the SEC’s proxy access regime, and they will be certain to withstand challenge in both Delaware and the federal courts.  Stay tuned.