The Insignificance of Proxy Access

by Marcel Kahan for The Harvard Law School Forum, November 10th, 2010.

The SEC recently adopted rules on proxy access. These rules grant shareholders who hold at least 3% of the company stock for three years the right to nominate directors and to have their nominees included in the company’s proxy statement and the ballots distributed by the company. Because proxy access is viewed as dramatically lowering the costs of an election contest, both proponents and opponents of these rules predict that they will have a significant impact. Contrary to this conventional wisdom, we argue that proxy access will lead to few shareholder nominations, that most of these nominees will be defeated, and that the occasional nominee who does get elected will have little impact.

Based on past involvement in shareholder activism, we believe that neither mutual funds nor private pension funds will make significant use of proxy access. Certain large public pension funds have shown a modest interest in activism and may make some nominations. The entities with the greatest interests in activism — hedge funds and union-affiliated funds — will generally not satisfy the ownership and holding period requirements.

When compared to traditional proxy contests and to withhold campaigns, proxy access involves significant disadvantages, while promising only modest advantages. The cost savings of proxy access compared to traditional contests are overstated because most proxy contests expenses are discretionary campaign expenses or relate to other expense items that are unaffected by the proxy access rule. By contrast, the limitations that come with proxy access are significant: the number of nominees a shareholder can propose is limited; the level of shareholder support required to gain a seat, as a practical matter, is increased; the company retains control over the design of the proxy cards; and the company retains exclusive access to preliminary voting information. (continue reading… )

 

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