Update On Shareholder Access, Shareholder Bill Of Rights And Other Washington Efforts On Corporate Governance

Sunday, October 4, 2009 - 01:00

Thomas Quaadman

U.S. Chamber of Commerce

Thomas Quaadman is the Executive Director for Financial Reporting Policy and Investor Opportunity with the U.S. Chamber of Commerce's Center for Capital Market Competitiveness.

Washington D.C. is a city whose activities are marked by a unique system of ebbs and flows. With the Congressional recess, August is a quiet month, and following a burst of activity after Labor Day, the Congressional calendar peters out in October or November. That cycle hasn't held this year and won't for the rest of the year. This level of activity could have dramatic impacts on the world of corporate governance.

This past summer was perhaps the most intense in terms of legislative and regulatory activity. Much of the town was in a bustle dealing with regulatory activity at the Securities and Exchange Commission ("SEC") while simultaneously preparing for the legislative session when Congress reconvenes after Labor Day. The current Congressional session will be one of the busiest ever, potentially going right up to the Christmas holidays.

While corporate governance has been in the limelight this year, a number of outside factors have impacted the speed and viability of any legislation that impacts governance.

The Obama administration made a calculated decision to deal with a number of large issues almost simultaneously. While some proposals were considered and enacted into law - the American Recovery and Reinvestment Act of 2009 (also known as the Stimulus Bill), other legislation, such as healthcare reform and climate change, have stalled, clogging the legislative pipeline. This blockage has prevented Congress from taking swift action on corporate governance issues.Indeed, President Obama's recent speech at Federal Hall, on the anniversary of the Lehman Brothers collapse, was widely seen as an effort by the administration to hit the reset button and reenergize the financial regulatory reform and governance agenda.

Seemingly unconnected events have also impacted the governance agenda. Following Senator Edward Kennedy's death on August 25, Senator Chris Dodd (D-CT), chair of the Senate Banking Committee (the Committee of jurisdiction for the Shareholder Bill of Rights and other governance bills), was in line to become chair of the Health, Education, Labor and Pensions Committee. Senator Dodd, who was also recovering from prostate cancer surgery, deliberated over the potential committee change for several weeks. In mid-September, Dodd announced that he would remain as chair of the Banking Committee. However, the prolonged uncertainty on the committee's leadership slowed the trains down a bit.

While this gives a quick overview of the issues, let's take a look at how things currently stand.Shareholder Access To The Company Proxy

On June 30, 2009, several trade associations, the Business Roundtable, the National Association of Corporate Directors, the National Investors Relations Institute, the Securities Transfer Association, the Shareholders Communication Coalition, the Society of Corporate Secretaries and Governance Professionals and the U.S. Chamber of Commerce petitioned the SEC requesting a 30-day extension of the 60-day comment period for the proposed rule facilitating shareholder director nominations. This request for an extension was made because of the proposed rule's fundamental changes in corporate governance and the relative short time period for comments. The SEC did not grant that request and the comment period closed on August 17, 2009. Because of problems with the acceptance of electronically filed comment letters, the SEC issued a public notice acknowledging the problem and continued to accept comment letters past the due date.

The SEC received an extremely large number of comment letters, among the most that have ever been filed on a proposed rule. Obviously, proponents of the rule, large institutional investors, unions and individuals filed comments in favor of the proposal. Business trade associations filed comments against the proposal and a large number of corporations did as well. Many small businesses also filed comment letters expressing concerns that the new rules would have adverse impacts upon vendors and counterparties. Some of the small businesses also stated concerns surrounding their ability to grow into larger businesses. Opponents generally stated that shareholder access to the company proxy is an issue best left to state corporate law.

The SEC proposed rule consisted of two separate changes, 14a-11 and 14a-8. Proposed rule 14a-11 would be a one-size-fits-all approach to shareholder access, while proposed rule 14a-8 allows companies more flexibility in developing shareholder access rules. Most comment letters opposing the SEC proposals were against both 14a-11 and 14a-8. However, many opponents to shareholder access stated that they could tolerate the more flexible approach as presented in 14a-8.

Currently, the SEC, commissioners and staff, are reviewing the comment letters and any potential changes that may be needed. It is widely anticipated that the SEC will try to finalize or reject these proposals at an open meeting in early November. While some have challenged the authority of the SEC to engage in this rulemaking, the Shareholder Bill of Rights would give the SEC such authority. Therefore, there may be a possibility that the SEC will try to time its actions around potential legislative action on the Shareholder Bill of Rights.

This is the third time in six years that the SEC is considering implementing shareholder access. While previous efforts have failed, this comment period has proven to be no less controversial. Proponents of shareholder access are quietly confident that the third time is the charm, however, history and potential legal challenges may prove them wrong.

Shareholder Bill Of Rights (S.1074)

Last spring, Senators Charles Schumer (D-NY) and Maria Cantwell (D-WA) proposed a Shareholder Bill of Rights. This legislation would mandate shareholder access, say on pay votes, majority voting for directors, separating the CEO and chairman positions, ending staggered boards and the establishment of risk management committees. Representative Gary Peters (D-MI) has introduced similar legislation (The Shareholder Empowerment Act, H.R. 2161) in the House of Representatives.

The Senate Banking Committee, before the August recess, held a hearing on the Shareholder Bill of Rights. Senator Schumer has reiterated that he plans to push forward with passage of the bill, possibly by including it in a broader financial regulatory reform legislative package. Business groups, including the U.S. Chamber of Commerce and the Business Roundtable, have lobbied against the bill. However, most proponents of the legislation have concentrated their efforts on other pressing issues such as healthcare reform, or the SEC's proposal on shareholder access.

This situation may change. If the Obama administration's efforts to jump-start regulatory reform and to resolve the Senate Banking Committee's chairmanship prove successful, it may renew its efforts to pass the Shareholder Bill of Rights. It appears that the fight for now will be concentrated on the Senate side. House Financial Services Committee Chairman Barney Frank (D-MA) has said that he intends to move some form of corporate governance legislation after financial regulatory reform passes. Such a timetable would kick a House corporate governance bill into 2010. It is also unclear if Chairman Frank will use the Schumer Bill, the Peters Bill or his own bill as the vehicle for changes in governance.

Say On Pay Bill (H.R. 3261)

One of the patterns of legislative activity this year has prompted the quick consideration of legislation regarding corporate governance or executive compensation if other legislative priorities get bogged down. In July, the House was unable to bring healthcare reform legislation or a proposed Consumer Financial Protection Agency bill to the floor for a vote. The House leadership and Representative Frank quickly rushed the Say on Pay bill through the Financial Services Committee and to the floor before the August recess.

A version of the Say on Pay bill passed the House in 2007 by a vote of 269-134, but died in the Senate. This year's version of the Say on Pay bill, formally known as the Corporate and Financial Institution Compensation Fairness Act, was a different animal. While advisory say on pay votes for public companies are still the central piece of the legislation, other items were added on: independent compensation committees, requirements and revelations of potential conflicts of interest regarding compensation consultants and the regulation of all incentive-based compensation throughout the financial services sector. Representative Scott Garrett (R-NJ) offered an alternative bill that provided a triennial vote on Say on Pay with an opt-out and provided a non-federal preemption clause if state corporate law allowed a mechanism for independent compensation committees. Chairman Frank amended the bill in committee to allow the SEC to draft rules exempting small and midsize companies from annual say on pay votes.

The Say on Pay bill passed the House of Representatives on July 31, 2009 by a vote of 237 to 185. It is unclear at this time if the Senate will consider this legislation, take up its own legislation or, as it had in 2007, let the bill die. It should also be noted that the Obama administration supports annual say on pay votes and independent compensation committees. However, the administration has been silent on the financial services compensation regulation portion of the bill, and it is unclear what position the administration would take if H.R. 3269 were to pass both the House and the Senate.

SEC Proxy Disclosure And Solicitation Enhancements

At its July 1, 2009 opening meeting, the SEC proposed new rules regarding increased disclosure regarding proxy disclosures and solicitation enhancements. This proposal increased the disclosure surrounding directors' or nominees' biographical information and qualifications. Other areas of increased disclosure include compensation policies, more disclosures regarding compensation consultants and disclosure regarding leadership structures and risk management. Other parts of the proposal include improvements to the solicitation process, quicker voting tabulation and disclosure, while allowing the rounding out of non-management nominee slates.

The SEC's comment period ended on September 15, 2009, and while a number of comments were filed, the volume was not comparable to the Shareholder Access proposals. It is unclear when the SEC will meet to try and finalize these proposals, though it is assumed that an attempt will be made to have the new rules ready for the 2010 proxy season. However, because the Proxy Disclosure Enhancements are closely linked to the Shareholder Access proposals, it would seem logical that these proposals will be dealt with at the same time.

Legal Entity Transparency And Law Enforcement Assistance Act (S.569)

Senator Carl Levin (D-MI) has reintroduced a bill that would require the public disclosure of all beneficial owners of a non-public corporation and limited liability corporations. The rationale behind Senator Levin's bill is that these entities have been used for money laundering purposes and such disclosure would help prevent such activities. Under this legislation, no such disclosure requirements would exist for partnerships or sole-proprietorships, and a failure by corporations to keep information current would be subject to criminal prosecution. Groups such as the Chamber of Commerce, the National Association of Manufacturers and the National Association of Secretaries of State have opposed this bill because it could create a chilling effect on legitimate business activities, while federalizing corporate law.

This legislation has fallen under the jurisdiction of the Homeland Security and Governmental Affairs Committee and Chairman Joseph Lieberman (D-CT), who indicated that the bill may be marked up this fall. Traditionally, legislation of this type has been considered by the Banking Committee. Efforts may be made to send this legislation back to the Banking Committee, which may have a different view of the legislation.

Summing Up

Governance proposals currently being considered by Congress and the SEC are far-reaching in their scope and breadth. If these proposals pass, the federal government will assume the role, which it has never had, as the main arbiter of corporate governance in the United States. For the first time in the history of corporations in the United States, federal laws and regulations will begin to supplant state law, which has traditionally governed organic corporate activities. This fall represents a potential sea change in corporate law, and the impacts, whether these proposals pass or fail, will be felt for years to come.