Verret on U.S. Proxy Access Rules
A new rule called proxy access may make it easier to oust corporate directors, but it could be susceptible to legal challenges by opponents who argue it curbs shareholders' say in how companies are run.
The new rule might infringe state limits on power to elect and empower shareholder nominees, says Professor J.W. Verret.
"States have a number of methods whereby boards can defend against proxy access," he suggests.
Among them, Verret says, are to let boards set minimum qualifications for directors, deny insurance coverage to insurgents that board members ordinarily insist on, and even block insurgents from sitting on key subcommittees.
Boards could try also to thwart dissident slates through what Verret calls a "whitemail" defense, named for the white proxy cards that insurgent nominees use.
"It is perfectly OK for boards to pay insurgents to go away," he notes, explaining the defense, "and not to nominate themselves for election via the proxy process."
ANALYSIS-Court fights may loom over US proxy access rules, Fox News, September 2, 2010. By Jonathan Stempel.
"Critics say 'proxy access,' as the rule is known, could propel fringe candidates onto boards who do not have a company's best interests at heart.
"'Lawsuits are virtually certain,' said Joseph Grundfest, a Stanford law school professor and former SEC commissioner. 'The list of plaintiffs include many trade associations and corporations that would be affected by the rules or have to comply.'
"Grundfest said the rule could also run afoul of the Administrative Procedure Act, a federal law explaining how federal agencies set up regulations, because the rule may not rationally relate to its intended purpose.
"The new rule gives shareholders who own 3 percent of a company's stock for at least three years a right to list their nominees for board seats on the company ballot.
"Previously, shareholders would have to lobby for board seats through the mail, a costly and time-consuming process long used by investors like Carl Icahn, and now being used by the billionaire Ron Burkle against Barnes & Noble Inc. Small companies are exempt from the new rule for three years.
"The SEC was expected to craft a proxy access rule in 2009, but took more time amid concern a court could strike it down."