2006 Lane Reports

Shareholder Democracy Finally in Sight, if SEC Does the Right Thing

Wednesday, November 1, 2006
by Marc J. Lane


Corporate shareholders are poised to reclaim their authority over the boardroom. Within months, they may be able to elect directors who are answerable to them, without bankrolling an expensive proxy contest against management's hand-picked candidates. And the spurious practice of permitting shareholders only to withhold support from incompetent or double-dealing directors — but never to oust them — may soon be outlawed.

Here's the back story: Late in 2003, one of the country's largest public service employee unions filed a proxy-access proposal to allow shareholders to nominate directors at insurance powerhouse American International Group (AIG), whose shares were held by the union's pension plan. After the U.S. Securities and Exchange Commission sided with AIG in refusing to include the proposal among the votes put to shareholders, the union went to court. It lost.

But on September 5th of this year, the 2nd U.S. Circuit Court of Appeals in New York overturned the trial court's judgment, making it easier for shareholders of New York, Vermont and Connecticut companies to nominate directors, and forcing the SEC to decide who controls the nation's publicly held companies.

Although the appeals court gingerly avoided the policy debate about shareholder access to the corporate ballot, the issue is clearly in play. Just two days after the court decided the case, SEC Chairman Christopher Cox, whose agency was admonished by Circuit Judge Richard Wesley for its muddled handling of shareholder proposals seeking proxy access, committed to standardize the "town meeting rule" that guides the commission's staff in issuing no-action letters on election-related shareholder resolutions.

The SEC will hold a public hearing on December 13th to propose a new rule on shareholders' nominations of directors, clouding the 2007 corporate proxy season with uncertainty.

We've been here before. In 2003, the Business Roundtable, representing entrenched CEOs and other self-interested big-business activists, lobbied hard against SEC-proposed rules to afford shareholders a meaningful role in director elections without waging proxy wars. The proposed rules were never adopted because opponents successfully argued that shareholder democracy might allow special interests and short-term agendas to divert management's attention from long-term corporate growth.

And, without public outrage, the SEC might now succumb to the same pressure and adopt a rule that lets companies ignore shareholder proposals seeking proxy access on their ballots.

Shareholders deserve the right to replace ineffective, wrongheaded, complacent or crooked directors. Let's urge Mr. Cox and company to open up the ballot box and ensure that board members are accountable to those whose capital is at risk.

This month's Lane Report is adapted from a guest editorial published in Crain's Chicago Business on October 9, 2006.


Marc J. Lane is the President of The Law Offices of Marc J. Lane, a Professional Corporation, and of its financial-services affiliates. He is a business and tax attorney, a Master Registered Financial Planner, and an Adjunct Professor of Law at Northwestern University School of Law.




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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright © 2007 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission.

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