The SEC – which was expected to vote on Direct Access to the corporate proxy machinery for the purpose of nominating director candidates on Nov. 8th, announced in early October that it would delay a vote on the final rules until early 2010 – to be sure that they would “get itright.”
As we’ve noted before, a majority of the Commissioners are on record as being in favor of Proxy Access – and we are absolutely sure that some sorts of access provisions WILL be mandated by SEC rules. But it does seem that even the most rabid supporters were taken aback by the many practical issues that were raised by the corporate and legal community comments AND, even more so we think, by the huge burden that would suddenly fall on the SEC if 150+ years of legal and administrative precedents that have evolved under our current State-governed system were to be suddenly tossed into the dumpster.
We think that in the little bit of time that remains here, there is still a chance to convince the SEC – and the proponents of a Federal Shareholder Bill of Rights too – that there needs to be room for shareholders themselves to cast votes that would modify, and supersede the “particulars” of any Federal rules regarding such things as required thresholds for submitting proposals… and what it takes to pass such proposals. The potential wild-card is the Federal Bill itself, which, once passed, may make the idea of “private ordering” by shareholders themselves suddenly illegal. We’d urge an all-out effort to slow, and ideally to stop the train here, so that shareholders – and not some new and bigger bunch of bureaucrats – ARE put in charge of the director election process. Meanwhile…here are….
OUR TOP TIPS ON HOW TO USE THE ADDED TIME TO YOUR ADVANTAGE
1. Start NOW to contact your top-ten or top-twenty investors to ask if they have any governance issues or objectives or observations they’d like to discuss with you. This is really our “top tip” if your goal is to build a strong bulwark against potential “noisemakers” and “professional troublemakers” who will be the most likely kinds of people to seize the Direct Access opportunity: We’ve said it before…as has every institutional investor we’ve ever heard on this subject: The time to talk to them is BEFORE there is an “issue”… or a problem…or a case where you really need their vote. And don’t expect they’ll have time during “proxy season”. So the time to talk really IS now. Be sure you talk to the folks who actually decide on the way the institution will vote, of course…and recognize too that many people won’t admit it’s not them, so do your homework here. No serious investor (excluding raiders and noisemakers, of course, who are NOT “investors” in the real sense of the word) will ever try to nominate candidates to run against your slate…as long as a “reasonable dialogue” is open tothem.
2. Cool your jets on Direct Access before you start calling around or writing anyone: Start by recognizing that Direct Access will only be employed in the most egregious of cases – and that’s not your company…Or if it is, it’s better to stay in the weeds. Over-the-top rhetoric and Chicken-Little clucking
that the sky will fall if Direct Access comes along were big factors behind the mess we’re in right now. Stick to logical and well reasoned opinions about Direct Access, please, and focus on the practical issues…And please remember that your company is probably not in line for this anyway…so cool your jets, as we said.
3. Do recognize however that there ARE two areas of vulnerability here, and maybe your company IS in the danger zone: Case-one, and the most common sorts of case by far, are small and mid-sized companies that are thinly-owned and thinly traded, where a proxy fight can and will trigger either a quick pop in the stock (where dissidents can and usually do cash out pronto) or an actual change of control, where a dissident group – even if they are not, and have no intention of being the eventual acquirer – figure they can buy on the cheap. Among the primary victims here are companies that are largely owned by family members of the second or third generation, where there is a “parting of ways”; small financial institutions – like community banks, thrifts and smallish REITS – and small manufacturing companies, and even a few “tech-companies” with lots of patient long-term owners who like the slow but steady status quo, but where the company - like those banks and REITS - suddenly “gets discovered” by investors who want them to be on a faster track. Almost all of the proxy fights here, by the way, end up in a virtual dead-heat between investors with long-term and short-term horizons for ultimately cashing in.
Case-two, as a colleague pointed out - and at whose company this sorry situation happened - is a sideswipe by Carl Icahn, or someone of his ilk, for whom a “totally free ride” on the company’s proxy statement will be simply too good to resist. If you find that your company might be vulnerable to either of these situations, be smart and get your “proxy fighting plan” and your proxy fighting team in place asap.
4. Once you have figured out, as we did, that federalizing the proxy process is NOT a good idea, and that Direct Access will have a huge and hugely disproportionate impact on small and midsize companies, write your Congressman, and your Senators, in support of our traditional State-governed system of corporate governance. Bone up first, by reading the Society’s letter to the SEC on this subject, the excellent letter from the Delaware Bar Association and the refreshing and rather surprising letter from Ed Durkin of the Carpenter’s Union, who makes the case that majority voting is the real preventive measure against ‘bad boards’…and a sure cure should one slip in. (Durkin is right on the money too, when he notes, in his in person discussions, that nominating directors is not in his pay-grade.)
5. We are still OK with the idea of making Direct Access part of a “Shareholder Bill of Rights” but we think that the best way by far for these rights to be protected…and perfected…is via our traditional, and deep, and richly evolved and still evolving systems of State law. We are deeply concerned, and we think you should be too, that by making Direct Access part of such a Bill, and by making the SEC the primary rule maker here, we will not only preclude issuers - and their shareholders - from freely choosing the kind of “Access Rules” that THEY deem best, we will be throwing out over 150 years of invaluable case law, leaving an already overburdened SEC to try to “reinvent the wheels of corporate governance” that have been evolving rapidly over the past few years, and which have been serving investors of every stripe quite nicely we say…as the current debate is actually demonstrating.
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