Proxy Access Rule Will Lead to Greater Controversy

by Kathleen L. Casey for The Harvard Law School Forum, August 27th, 2010.

Let me start with an observation and a prediction. The observation is that it appears that a primary, if unstated, objective of this rule is to put the issue of proxy access behind the Commission once and for all. My prediction is that, paradoxically, the rule that the Commission adopts today virtually guarantees that the Commission will be forced to deal with this issue for years to come. I say this for two reasons. First, I believe that the rule is so fundamentally and fatally flawed that it will have great difficulty surviving judicial scrutiny. Second, an inevitable consequence of this rule, if it survives, is that the staff will be tasked with the unenviable responsibility of brokering disputes and addressing a broad array of issues arising from the operation of this new federal right every proxy season.

This result is unfortunate, because it was so clearly avoidable — it was not a necessary consequence of adopting a rule that would truly facilitate shareholders’ state law rights to nominate directors.

Unfortunately, the adopting release goes through a jiu-jitsu exercise of purporting to give deference to state law and to increase shareholder choices under state law, when in fact the rules do exactly the opposite. As a result, the logic does violence to our historical understanding of the roles of federal securities law, state law, shareholder suffrage and private ordering, with potentially far-reaching implications. The consequences of this exercise include a series of arbitrary choices that are not tethered to empirical data and a number of internal inconsistencies that make the rules difficult to defend. Furthermore, the rules continue a disturbing trend of empowering institutional shareholders to the detriment of individual shareholders. Finally, the policy objectives underlying the rule are unsupported by serious analytical rigor, and the release fails to fairly and adequately consider the costs and impact of these rules. In this regard, I believe these rules are likely to result in significant harm to our economy and capital markets. (continue reading… )

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