The Destructive Ambiguity of Federal Proxy Access

Abstract

After almost seventy years of debate, on August 25, 2010, the SEC adopted a federal proxy access rule. This Article examines the new rule and concludes that, despite the prolonged rule-making effort, the new rule is ambiguous in its application and unlikely to increase shareholder input into the composition of corporate boards. More troubling is the SEC’s ambiguous justification for its rule which is neither grounded in state law nor premised on a normative vision of the appropriate role of shareholder nominations in corporate governance.

Although the federal proxy access rule drew an unprecedented number of comment letters and is now being challenged in court, its practical significance is likely to be minimal. The SEC’s ambiguous approach to proxy access is particularly problematic because its rules continue to burden issuer-specific innovations in nominating procedures. The SEC has admitted that its rules impede shareholder participation in the nominating process, but it has refused to remove existing regulatory burdens on such participation.

The core of the problem is that, as this Article will show, federal regulation is poorly suited for regulating corporate governance. Private ordering, within the framework of existing state regulation, offers a more flexible mechanism for maintaining equilibrium in the allocation of power between shareholder and managers. The article concludes by outlining the federal regulatory changes necessary to enable effective private ordering.

Keywords: Corporate governance, directors, boards, shareholders, shareholder rights, shareholder voting, shareholder franchise, corporate elections, corporate ballot, proxy fights, proxy contests, access to the ballot, staggered boards, proxy rules, SEC

JEL Classification: G34, G38, K22