Proxy Access for Activist Investors

September 14th, 2010
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Contributed by: Michael R. Levin, The Activist Investor
With some drama and controversy, last month the SEC granted activist investors one long-held wish, for proxy access. Congress also had a role, clearing up any doubt whether the SEC has the authority to grant that wish, with the passage of the Dodd-Frank Act.

The 451 pages of the release document that the SEC approved on a 3-2 party line vote last week feature impressive and intimidating detail. The new rules themselves occupy only about 60 pages of the release, with the remainder explaining the SEC’s reasoning behind the specific rules, identifying changes between the final and preliminary releases, and discussion of the over 600 comment letters it received. We’ve read it for you and put together a guide with detailed background, explanation, and comments on the specifics, along with a checklist for activist investors that want to take advantage of the new rules. Below are some observations about what it all means.

Proxy access, which allows investors to promote their board nominees on the company’s proxy materials, will likely apply to relatively few activist situations. The SEC positioned it for long-term investors, defined as having 3% of the company’s shares for at least three years (although groups of investors can aggregate their holdings to meet these thresholds). And, of course it pertains only to nominees – investors still need to win elections, or at least settle them favorably.

The settlement possibilities, though, represent a useful pressure point. The threat of a proxy access contest helps shift power from management to investors, so smart activists will use that threat wisely. The threat of bylaws amendments allowing more liberal proxy access than the SEC requires also will serve as a pressure point. Most of all, the new rules represent an important symbol of how Congress and the SEC, along with activist investors of all types, seek a better balance between management and shareholders.

The debate took awhile, decades, in fact. Proxy access proposals first surfaced in the 1940s, not long after the SEC was born. Investors and the SEC tried three times just in the past ten years to gain proxy access. It took the recent financial crisis to focus attention enough to move the debate to a conclusion.

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Related Article Tags: Shareholder Activists, Corporate Raiders and Proxy Battles; Hedge Fund Resources and Featured Partner News

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