Internal Contradictions in the SEC's Proposed Proxy Access Rules

Abstract

The Securities and Exchange Commission has proposed proxy rules mandating shareholder access under conditions that can be modified by a shareholder majority to make proxy access easier, but not more difficult. The Proposing Release, however, contradicts the Proposed Rules in two distinct respects that render the Proposed Rules arbitrary and capricious in violation of the Administrative Procedure Act. The first contradiction relates to core principles of shareholder self determination. A fundamental premise of every proxy access proposal is that the majority of shareholders are sufficiently intelligent and responsible to nominate and elect directors. But the Proposed Rules prohibit the identical shareholder majority from establishing a proxy access regime, or from amending the Proposed Rules to establish more stringent access standards. The Commission offers no rationale as to why an identical majority of shareholders is so selectively intelligent and responsible that it can be relied upon to elect directors nominated pursuant to the Commission’s imposed access standards, but cannot be relied upon to set its own access standards.The second contradiction relates to the Commission’s assertion that the Proposed Rules replicate the physical shareholder meeting as governed by state law. Nothing in state law sets a minimum proxy access standard, defines the contours of any access proposal to be considered by shareholders, or prohibits a majority of shareholders from amending an access standard to make it more stringent while allowing the same majority to relax the standard. The Proposed Rules thus fail to achieve the Commission’s stated objective, and instead erect barriers to shareholder action that exist nowhere in state law.Both contradictions are potentially cured by a fully-enabling approach in which proxy rules are modified to allow shareholders to propose, and a majority of shareholders to adopt, access rules that are appropriately suited to the individual circumstances of individual corporations. Only this fully-enabling approach is consistent with core principles of shareholder self-determination, and with the operation of state law governing by-law amendments.