Here’s the SEC’s release, its summary and another one by Lisa Fairfax.
As I’ve said, “peek behind the “shareholder democracy” rhetoric and we see * * * federal control of corporate law [and] turning corporate governance into a political battle between unions and managers.”
As for the federal takeover, the SEC’s adopting release says
We believe that having a uniform standard that applies to all companies subject to the rule will simplify use of the rule for shareholders and allowing different procedures and requirements to be adopted by each company could add significant complexity and cost for shareholders and undermine the purposes of our new rule.
This reasoning, of course, applies to all of state corporate governance law. Expect the federal shadow over state law to grow exponentially.
But enough whining. What’s actually going to happen now? Probably not what most people expect. Consider the following possibilities:
1. Foreign companies. The SEC release notes that “foreign companies that come within the definition of ‘foreign private issuer’ are not currently subject to the SEC’s proxy rules and would not be subject to these new rules.” As I said a year ago about the impending adoption of proxy access, “[w]e saw when listings fled to London and elsewhere to escape SOX that even the federal government faces competition.” Will the next IPO boom be in London? After all, small firms face the biggest risk that shareholders can amass enough votes for access under the new rule.
2. Uncorporations. I also pointed last year that
“these rules necessarily apply most directly to corporations. How do you regulate proxy access in uncorporations that don’t have boards and don’t have proxies? At some point tinkering with corporate governance will get so expensive that competitive capital markets and creative lawyers will find and exploit contractual alternatives. The great thing is that these moves to the uncorporation could increase rather than decrease accountability.
Again, small firms may have the biggest incentive to experiment, and the most to gain from “uncorporating.”
3. Interaction with state or foreign law. The rule doesn’t allow firms to opt out of the access rule, but it doesn’t necessarily disable all state laws that could undermine the rule’s effect. The release notes that
a company to which the rule would otherwise apply will not be subject to Rule 14a-11 if applicable state law or the company’s governing documents prohibit shareholders from nominating candidates for the board of directors. The final rule also clarifies that, in the case of a non-U.S. domiciled issuer that does not meet the definition of foreign private issuer under the federal securities laws, the rule will not apply if applicable foreign law prohibits shareholders from nominating a candidate for election as a director.
This raises big questions about possible procedures firms could adopt to bypass proxy access. My TOTM colleague Jay Verret has a whole article about that.
4. State and federal preemption litigation. The potential safety hatches just discussed will trigger litigation calling for interpretation of both Delaware state law and the scope of preemption under the SEC’s rule. The preemption litigation will start at the federal district court level, and for a time decisions may conflict across the country. So much for ending “complexity” through a federal law. I have a recent article discussing the problems of federal law attempting to “micromanage” state law via preemption. Get ready to see what I was talking about.
5. Governance and firms will change in unpredictable ways. As noted above, the new rule has limited scope. If proxy access really is as effective as its proponents hope, firms will find it worthwhile to reshape (or relocate) to avoid it, particularly if they have other internal reasons for making these moves. Corporations may look different because of this rule, but not in the ways the SEC was figuring.
So, expect months or years of litigation, political wrangling and disruption. Just what corporate America needs in a fragile economy.