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The securities and Exchange Commission (SEC) has proposed rules to make it easier for shareholders to nominate candidates to a company’s board of directors. Currently, a disgruntled shareholder’s primary recourse is an expensive proxy contest. The proposed rules would allow larger shareholders to require the company to include a shareholder nominee in its proxy materials (at the company’s expense) in certain situations that indicate that the company has been unresponsive to shareholder concerns: At least one of the company’s nominees to the board of directors received “withhold” votes from more than 35% of the votes cast, or a shareholder or group of shareholders that owns more than 1% of the company’s shares makes a proposal that shareholders be able to nominate directors and that proposal receives more than 50% of the votes cast. Even though the proposed rules are well intentioned to empower shareholders, the SEC should abandon them for two reasons. First, the SEC should allow the recent changes mandated by the Sarbanes-Oxley Act of 2002 time to take effect without additional rulemaking. The act has resulted in sweeping changes for executive and board accountability and the SEC has been issuing rules to ensure public companies’ compliance with the act’s numerous requirements. Additionally, Nasdaq and the New York Stock Exchange have recently promulgated revised standards for their listed companies to reflect the act’s corporate governance mandates. Fundamental shifts These new corporate governance and accountability standards are fundamentally changing the way public companies and their boards of directors function. Executives must certify the accuracy of their company’s periodic reports and the periodic reports’ compliance with federal securities laws. Companies must make detailed periodic disclosure about the adequacy of their disclosure controls and procedures and their internal controls over financial reporting. Board members must meet new, heightened standards of independence, and a majority of a company’s board-and all members of its audit, governance, nominating and compensation committees-must be independent. All of this takes time. Public companies, rarely nimble when it comes to organizational change, are struggling to adjust to these new requirements, and the compliance deadlines for many of the act’s requirements have yet to occur. It will take time to understand the effects that these new regulations will have on public companies and their boards. Regulators, stock markets and individual companies should give these changes time to take effect and analyze their consequences before the SEC adopts significant new rules. Second, the proposed rules do not lower the bar for small shareholders who want to nominate board members. The complaint from shareholder activists has always been that it is too expensive to mount a proxy contest to remove and replace board members. The proposed rules are supposed to alleviate this financial burden by making the company bear the cost of including shareholders’ nominees in its proxy statement. The proposed rules in fact do little to make it easier for smaller shareholders to nominate directors. First, as discussed, one of the two trigger events that indicate dissatisfaction with management must occur. If either occurs, the proposed rules require that only a shareholder or a group of shareholders holding more than 5% of a company’s securities can nominate a director. This requirement, in effect, limits the reach of the new rules to large institutional shareholders-the shareholders who can most easily afford to mount a proxy fight in the first place. In other words, the proposed rules do not make it any easier for smaller shareholders to voice their dissatisfaction, because these shareholders will either fall short of the 5% threshold or have to expend significant time and money to organize and mobilize a group of shareholders to meet the threshold. Further, large shareholders that contested director nominations in the past never have viewed cost as an obstacle to change. The reduced costs of a direct-access procedure will provide minimal benefits to small shareholders-the intended beneficiaries of the new rules-if the proposed rules are implemented. Lowering the percentage threshold for permitted shareholder nomination of directors is an equally bad idea. Reducing the percentage ownership requirement would have the potential to turn every annual meeting into a squabble among small shareholders. This will distract a company’s management and board members from the company’s business and turn their focus to fighting for their own nominees’ election. The proposed rules have generated much public comment. In response, the SEC will host a roundtable discussion of the new rules on March 10, and will accept further comments through March 31. Hopefully, the SEC will rethink its idea of revamping the proxy regulations. Robert E. Hochstein is an associate at the Boston office of Pittsburgh’s Eckert Seamans Cherin & Mellott.

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