Protecting Shareholders from Themselves: The SEC and Restrictions on Shareholder Voting Rights

Abstract

Corporate governance and the relationship between managers and owners has undergone rapid evolution in recent years. As part of this process, shareholders have obtained greater ability to influence the behavior of the board of directors. In seeking to exert influence, shareholders often do so through the proxy process. The proxy process provides shareholders with a cost effective method of voting without having to physically attend the shareholder meeting. The proxy rules, which are administered by the Securities and Exchange Commission (“SEC”), were drafted in an earlier era when shareholders were less involved in the governance process. As a result, the rules are one-sided and do not adequately reflect the interests of shareholders. The proxy rules contain a number of restrictions and limitations that reduce the voting rights of shareholders. This article examines an example of this phenomena. Under the rules, the execution of a proxy card results in an involuntary transfer of voting authority from shareholders to management in connection with any proposal that comes up at the meeting but does not otherwise appear in the proxy statement. The effect of this transfer is to ensure that any proposal made at the meeting will be defeated. At the same time, the SEC has interpreted the proxy rules to allow companies to omit certain types of proposals from the proxy statement. Proposals can be omitted that address the rotation, ratification or qualification of the outside auditor, issues of significant importance to shareholders. To raise these matters, therefore, shareholders must do so at the meeting. At the same time, however, the proxy rules, through the involuntary transfer of voting rights, ensure that the proposals will be defeated. The article makes the case for a reevaluation of the proxy rules to better reflect the current state of the corporate governance debate. At a minimum, this means repealing restrictions in the rules that limit or reduce the voting rights of shareholders. The article suggests a number of changes to the proxy rules that are needed to accomplish this goal.