The ongoing financial crisis, which has been attributed, in part, to certain failures of corporate governance, has facilitated a drive for widespread expansion of shareholder rights and corporate governance requirements. Over the past month, two specific proposals have been introduced in response to these events. Additionally, the Chairman of the Securities and Exchange Commission (the SEC) recently testified before a Senate Subcommittee regarding the SEC's role in helping to address the financial crisis. This bulletin addresses these recent developments.
Shareholder Bill of Rights
On May 19, 2009, Sen. Charles Schumer (D-NY) introduced the Shareholder Bill of Rights Act of 2009 (S. 1074) (the "Act"), which would encompass perhaps the most fundamental restructuring of corporate governance in recent years. The bill would add a new Section 14A to the Securities Exchange Act of 1934 containing a number of new requirements, including:
- Proxy Access – The Act would require the SEC to establish rules requiring companies to include shareholder nominees in their proxy materials. Proxy access under this section would only apply to shareholders (or groups of shareholders acting by agreement) that have beneficially owned at least 1 percent of the voting stock of the public company for at least two years prior to the next scheduled annual meeting. For more information on this topic, see "Proposed SEC Proxy Rule Changes," below.
- "Say On Pay" Voting – The Act would require public company proxy statements to include a shareholder resolution approving the compensation of company executives. Additionally, proxy statements regarding mergers, acquisitions, or similar transactions would be required to include a resolution approving executive severance pay and other compensation related to the transaction. Both of these votes would be non-binding.
- Other Corporate Governance Provisions – The Act would also require the SEC to prohibit the listing on national securities exchanges of the securities of any company not in compliance with the provisions described below subject to a "cure" period and exceptions to be determined by the SEC based on criteria such as the size or market capitalization of companies.
– Independent Chair Required – A public company would be required to have an independent chairperson, as defined by subsequent SEC rule, who has not previously served as an executive officer of the company. Accordingly, a single chairperson/chief executive officer would no longer be allowed.
– Annual Election of Directors – Staggered terms for directors would be eliminated as public companies would be required to provide in their governing documents for the annual election of each member of the board of directors.
– Majority Voting in Director Elections – Incumbent directors who fail to receive a majority of the vote in uncontested elections would be required to tender their resignations to their boards and, in turn, the boards would be required to accept the resignations and publicly disclose the effective date of the resignations within a reasonable period of time.
– Risk Management – Within one year of the SEC issuing final rules on the subject, public companies would be required to establish a "risk committee" consisting solely of independent directors who would be responsible for the establishment and evaluation of the risk management practices of the issuer.
This bill adopts a fairly radical, "one size fits all" approach to governance. If enacted, several of its provisions could be subject to challenge on constitutional grounds.
Proposed SEC Proxy Rule Changes
On May 20, 2009, the SEC voted to propose rule amendments to facilitate the rights of shareholders to nominate directors. According to SEC Release 2009-116, these amendments would "provide shareholders with a meaningful ability to exercise their own state law rights to nominate the directors of the companies that they own." While the proposed rule amendments have not yet been published, public comments must be received by the SEC within 60 days of publication in the Federal Register.
- Proposed Rule 14a-11. Under the proposed rule, which would apply to all public companies, certain shareholders would be able to include their nominees for director in the company's proxy materials unless the shareholders are otherwise prohibited – either by applicable state law or the company's charter or bylaws – from nominating a candidate. Shareholders would be eligible to have their nominee included in the proxy statement if they hold a minimum percentage of the company's shares (5 percent of non-accelerated filers; 3 percent of accelerated filers and 1 percent of large accelerated filers) and have held their shares for at least one year. Such shareholders would also be required to sign statements declaring their intent to continue to own their shares through the annual meeting at which directors are elected and that they are not holding their stock for the purpose of changing control of the company. The proposed rule limits the number of shareholder nominees in a company's proxy statement to the greater of one or 25 percent of the company's board of directors.
- Proposed Revision to Rule 14a-8(i)(8). This rule currently permits companies to exclude shareholder proposals that "relate to an election." The proposed rule would narrow this exclusion, specifically allowing shareholder proposals to amend a company's governing documents concerning the company's nomination procedures or other director nomination disclosure provisions. Shareholders seeking to include such provisions would have to meet the current Rule 14a-8 holding requirements: specifically, they must have held the lesser of $2,000 in market value or 1 percent of the company's securities for at least one year.
SEC Chairman Testimony
On June 2, 2009, SEC Chairman Mary L. Schapiro testified before a Subcommittee of the Senate Committee on Appropriations regarding the SEC's role in helping to address the financial crisis. Chairman Schapiro also discussed certain reforms to improve investor protection and confidence in the financial markets. Chairman Schapiro testified that the SEC will "take up a broad package of corporate disclosure improvements" in the coming weeks, designed to provide shareholders with important information about companies' key policies, procedures and practices, including compensation policies and incentive arrangements. Specifically, the SEC will consider the following proposals:
- Enhanced disclosure of the experience, qualifications and skills of director nominees, so that shareholders can make more informed voting decisions
- Disclosures to shareholders about why a board has chosen its particular leadership structure (including whether that structure includes an independent chair or combines the positions of CEO and chair)
- Whether greater disclosure is needed about how a company – particularly the board of directors – manages risks, both generally and in the context of compensation
- Whether greater disclosure is needed about a company's overall compensation approach, beyond decisions with respect to only the highest paid executive officers as is currently the case
- Disclosure regarding conflicts of interest with compensation consultants
The proposals are part of a review of certain policies by the SEC and other agencies addressing practices that many believe led financial companies to take on too much risk. With this additional information, according to Chairman Schapiro, shareholders will be better able to hold directors accountable for the decisions that they make. These rules could be addressed by the SEC as early as July 2009. The proposed rules would then go through a public-comment period and require final agency approval before they were declared effective.
Emerging Trends
Regardless of whether the proposals mentioned above are adopted into law, states have begun to adopt similar proposals in response to shareholder sentiment. For example, Delaware recently amended its General Corporation Law to permit (but not require) shareholder access to proxy statements for director nominees. Additionally, North Dakota has adopted much broader amendments to its Publicly Traded Corporations Act. Such changes to state law indicate that shareholders' voices are already being heard and call into question whether federal legislation is needed in these areas of corporate governance.
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