The College Of
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School of Law

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June 12, 2003

Jonathan Katz
Secretary
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, DC 20549-0609

VIA e-mail re: Notice 34-47778

File No. S7-10-03
Notice of Solicitation of Public
Views Regarding Possible
Changes to the Proxy Rules

To Whom it May Concern:

I am writing with regard to possible changes in the SEC's proxy regulations that would permit shareholders of public companies to nominate candidates for board positions. I am the author of Shareholder Access to the Proxy Revisited, 40 Cath. U. L. Rev. 37 (1990). In that article, I traced the long history of proposals to afford shareholders the right to nominate directorial candidates and have their nominations included in the official corporate ballot. I proposed in that article that shareholders (or groups of shareholders) representing three to five percent (3-5%) of the outstanding equity of a public company and who had held their shares for at least one year should be permitted to nominate up to three candidates at an annual meeting. Nominators would be limited to the use of the proxy statement and a "common ballot" and would not be permitted to utilize a separate written solicitation. They would, however, be permitted to make their case for each nominee in a 500-word entry contained in the proxy statement. (Management could do the same for its nominees.) Nominees would also be required to provide the information required in Schedule 14B.

I commend the Commission on its willingness to explore the possibility of shareholder access to the proxy. I recognize that any rule that would permit shareholder nominations to be included in the proxy statement would be a significant departure from longstanding traditions. Still, given the increase in the ownership and expertise of institutional investors, shareholder access is an idea whose time has come.

As I see it, there are three major issues that the Commission will have to decide if it proceeds with rulemaking to provide shareholder access:

    (1) What is the threshold for shareholder access?

    (2) How many nominees will a shareholder or shareholder group be permitted to advance in a given year?

    (3) What devices are necessary to ensure that only serious, qualified nominees are included in the proxy statement and that the resultant board will be able to work together as a team?

The Threshold

Obviously, the Commission will have to set some reasonable threshold for shareholder access. The purpose of shareholder access is not to provide a moment of glory for a disgruntled investor, or to provide an outlet for venting disappointment at a corporation's short-term performance. Only those with a serious and sustained financial commitment to the company should be afforded access to the proxy. Whether that commitment is satisfied by a 1%, 3% or 5% stake is a legitimate question for the Commission. I agree with the Harvard ad hoc group, however, that until we know just how this experiment will work, it is better to impose a high threshold and then, perhaps, work downward, than to begin with a threshold that proves to be too low.

Some commentators (Responsible Wealth, Southwest Center for Economic Integrity) suggest that nominations should be accepted only if a nominating coalition of at least 25 shareholders can be assembled. The proponents of this position seem to think that a coalition requirement is necessary to thwart unilateral action by a large institution. I think this suggestion is unnecessary. I doubt that an institution would advance a nominee if it didn't already have a pretty good idea of the strength of its coalition. So, to require rounding up 24 other shareholders and get them to sign a piece of paper in order to authorize an otherwise-legitimate nomination seems to me to be a superfluous and unnecessary burden.

Coalitions will often be necessary to meet the threshold requirement. But coalitions should not be required.

The Cap on the Number of Nominees Permitted

The Commission will have to be sensitive to the possibility that some shareholders will seek to abuse the shareholder access privilege in order to disrupt governance. In this regard, suggestions that no more than a certain (minority) percentage of a board should be open to direct shareholder nomination in a given year (AFL-CIO, Council of Institutional Investors, Southwest Center for Economic Integrity) are sound. Whether the magic number is1/4 or 1/3 or some other number, is a legitimate question for the Commission.

As for the number of slates permitted, I concur with the AFL-CIO's suggestion that only the nominations of the shareholder or shareholder coalition representing the largest equity stake in a given year should be included in the proxy. This will make complicated exercises such as the "instant run off" (CorpGov.Net) unnecessary.

Devices to Ensure the Integrity of the Process

Several good suggestions that have been advanced in recent weeks make sense if the Commission is to permit shareholder access. These include (1) a registration fee for each candidate nominated to defray some portion of the costs of proxy solicitation (no more than $2000 per candidate, however); (2) an alphabetical listing of all candidates in the proxy statement and on the proxy ballot, rather than listing by "slates," (3) publication of an easy-to-read chart in the proxy statement, indicating at a glance which nominees were nominated by whom; and (4) clear disclosure of the identity of the nominator(s), including "organized special interests."

Other suggestions, like clarification of Regulation 13D to exclude the formation of nominating coalitions, and safeguards against management "gaming" the system, will have to be adopted if shareholder access is to work.

Related Issues

I favor the suggestion of the Nathan Cummings Foundation to eliminate or liberalize the "ordinary business operations" exclusion in Rule 14a-8, the shareholder proposal rule.

I disfavor the suggestion from Georgeson Shareholder Communications, Inc. to create some official mechanism of communication between 10% shareholders and the nominating committee. This suggestion is window dressing. Any shareholder or shareholder group with 10% of a company's equity surely has the means already to communicate with the nominating committee without the intervention of the Commission. While it would be easy to sidestep shareholders' demand for meaningful access to the proxy by adopting such a suggestion, it will not satisfy that demand and it is unlikely to work. Captive nominating committees have often disregarded the very real and serious nominations advanced by institutional investors. Shareholder access means creating a mechanism, in extraordinary cases where talk is not enough, by which shareholders can effectively compete with the nominating committee.

Further, if the Commission finds that it is unable to adopt a meaningful access-to-the-proxy rule, the Georgeson suggestion is a poor alternative. It would be better in that event forthe Commission to permit access-to-the-proxy proposals to be included in Rule 14a-8. Then, proposals such as the one recently advanced at Citigroup, Inc. by AFSCME could receive a full airing on a company-by-company basis. If shareholder demand for access were high, companies could then offer access on a "voluntary" basis, as I understand Apria Healthcare Group, Inc. has just done for its shareholders.

It would be far better, of course, if the Commission were to bite the bullet and proceed with a meaningful access-to-the-proxy rule.

Conclusion

In Shareholder Access to the Proxy Revisited, I argued that:

The SEC should adopt a limited access to the proxy rule for a limited category of shareholders. The object of this proposal is quite modest - to permit shareholders of demonstrated strength and fidelity to a public company to express directly and communicate a directorial preference to other shareholders. If shareholders' suffrage rights are to mean anything, this option should be made available for their use.

Recent scholarship cited in the CorpGov.Net submission reinforces this idea. Shareholder access to the proxy is likely to lead to better governance, higher share prices, and a higher level of shareholder confidence in the markets.

Very truly yours,

Jayne W. Barnard
James Goold Cutler Professor of Law