The current debate over shareholder access to the issuer's proxy statement for the purpose of making director nominations is both overstated in its importance and misses the serious issue in question. The Securities and Exchange Commission's ("SEC's") new e- proxy rules, which permit reliance on proxy materials posted on a website, should substantially reduce the production and distribution cost differences between a meaningful contest waged via the issuer's proxy and a freestanding proxy solicitation. No matter which avenue is used, however, the serious question relates to the appropriate disclosure required of a shareholder nominator. Should the nominator be subject to the broad-ranging disclosure requirements now associated with the freestanding contest? Or should there be curtailed disclosure for a nominator (who disavows control motives) of a limited number of directors whose election will not change control? The inescapable costs lie in disclosure, not so much because of the drafting costs, but because of the liability standard associated with the current proxy solicitation rules. A party may be subject to a private suit for material misstatements or omissions in connection with a solicitation even without a showing of scienter. Disclosure under such a regime entails not only the up-front costs of precaution, but also the uncertain (and potentially high) costs of litigation. These costs – not the production, distribution, or other solicitation costs in an e-proxy-eligible world – will constrain director nominations made by a "good governance" activist without a large stake or a control motive. The current regulatory round associated with the SEC's sidestepping of the Second Circuit's proxy access opinion in AFSCME v. AIG is a sideshow, diverting attention from this important issue.
Business Organizations Law | Law
Jeffrey N. Gordon,
Proxy Contests in an Era of Increasing Shareholder Power: Forget Issuer Proxy Access and Focus on E-Proxy,
Vand. L. Rev.
Available at: https://scholarship.law.columbia.edu/faculty_scholarship/3361