United States: The Shareholder Bill Of Rights Act Of 2009

On May 19, 2009, Senator Charles Schumer (D-N.Y.) introduced the Shareholder Bill of Rights Act of 2009 (SBRA). SBRA, if passed and signed into law, would give shareholders of all public companies an advisory vote on executive compensation and would generally require proxy access for director elections. SBRA also would require an independent board chairperson, a declassified board, true majority voting for directors, and a risk management committee of the board.

Executive Compensation

SBRA includes two provisions granting shareholders input into executive compensation. Both provisions would apply to meetings of shareholders occurring more than one year following enactment of the legislation.

"Say on Pay" — Public companies would be required to include in any annual meeting proxy statement a separate shareholder resolution to approve executive compensation. The American Recovery and Reinvestment Act of 2009 (ARRA) currently requires say on pay votes only at financial institutions receiving Troubled Asset Relief Program (TARP) funds.

Golden Parachute Payments — In any proxy solicitation materials related to an acquisition, asset sale, merger, or consolidation of a company, the soliciting person would be required to disclose in such materials, in "a clear and simple form," any agreements or understandings such person has with the principal executive officers of such company regarding compensation that is related to the transaction and that has not already been subject to say on pay vote. The materials also would be required to include a separate shareholder vote to approve any such agreements or understanding.

SBRA provides that neither of these shareholder votes would be binding or construed as overruling a decision by the company's board of directors, creating or implying any additional fiduciary duty by such board, or restricting or limiting the ability of shareholders to make proposals for inclusion in the proxy materials related to executive compensation.

Proxy Access

The U.S. Securities and Exchange Commission (SEC) would be required to establish rules relating to shareholder use of issuer-supplied proxy materials to nominate individuals for election to the board of directors. Proxy access under this section would only apply to shareholders or groups of shareholders acting by agreement that have beneficially owned at least one percent of the voting stock of the public company for at least the two years prior to the next scheduled annual meeting. Unlike the executive compensation provisions of SBRA, the proxy access section does not contain a one-year grace period before effectiveness and would appear to be applicable as soon as the SEC would promulgate the necessary rules. The SEC has recently acted on proxy access of its own accord, voting on May 20, 2009 to propose rule amendments that would provide for proxy access, but SBRA would eliminate any doubt about the SEC's authority to promulgate rules on this subject.

Other Corporate Governance Provisions

SBRA would require the SEC to prohibit the listing on national securities exchanges of the securities of any company not in compliance with four provisions described below. The SEC would be required to provide for a "cure" period and would be permitted to exempt companies from the requirements based on criteria such as size or market capitalization.

Independent Chair Required — A public company would be required to have an independent board chairperson. Accordingly, a single chairperson/chief executive officer would no longer be permissible. The chairperson must not have previously served as an executive officer of the company.

End to Staggered Boards — Public companies would be required to provide for the annual election of directors in their bylaws or charters. Accordingly, public companies would no longer be able to have staggered boards of directors.

Majority Voting in Director Elections — In uncontested elections, directors would be required to be elected by a majority of the votes cast for each nominee. In contested elections, directors would be elected by a plurality of the vote. Incumbent directors that failed to receive a majority of the vote in uncontested elections would be required to tender their respective resignations to their boards. In turn, the boards would be required to accept such resignations and publicly disclose the effective date of such resignations within a reasonable period of time.

Risk Management — Within one year of the SEC issuing new 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.

Some commentators have questioned the necessity of SBRA, noting that a number of states, including Delaware, have amended or are in the process of amending their corporation statutes to permit companies to allow adoption of proxy access. Many companies have already adopted majority voting, which some states have facilitated or are facilitating by amending their statutes, and other requirements of SBRA have already been adopted in some form by the largest and most widely held public companies. Although it is uncertain when or if SBRA will be enacted, or what form it may take, many see it as inevitable that some of SBRA's provisions will become law in the near future.

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