After lengthy and contentious debate, the Securities and Exchange Commission voted 3-to-2 for the “proxy access rule,” which is supposed to make it a little easier for activist investors —such as unions, hedge funds, pension funds—to nominate directors to a company’s board. Big companies were not happy with this idea and found quite a few Republicans to fight their cause. (The SEC vote was split on party lines.)
Yves Smith, among others, has argued that the rules have been watered down at the request of corporate lobbyists , which is no doubt true. Smith notes that in order to qualify to nominate a director, a shareholder must own at least 3 percent of the company and have held those shares for at least three years. Smith then asks an interesting question: “[T]he 3% hurdle is a daunting level, since as I read the SEC’s announcement, this is the level required for a single shareholder. And the SEC further decided upon the longer holding period of three years. Pray tell, how many companies even have shareholders that meet these criteria? The Business Roundtable must be quietly chuckling over this win.”
It’s certainly true that in many of the corporate battles that get a lot of press attention, people like Carl Icahn or Philip Falcone (the subject of a dynamite Reuters investigation published today ) might have trouble with the three-year holding period. But there is at least an approximate answer to Smith’s question. As part of its deliberation over this rule, the SEC produced a study that combed through the filings of 6,416 companies in late 2008. According to the study, 33 percent of companies have one or more shareholders who meet the 3 percent, three-year thresholds; 10 percent have two or more shareholders; 4 percent have three or more; 1 percent have four or more; and no one has five or more. That alone implies that the rule would cover more than 2,000 companies. More importantly, though, I read the SEC rule differently than Smith does; on Page 73 of this document , the SEC very clearly refers to what shareholders or shareholder groups need to do in order to qualify. If I’m right, I think this means that very few legitimate proxy battles would be blocked by these criteria; if you can’t find 3 percent of a company’s shareholders to join in on your action, the chances are pretty good that you’ve got a losing cause anyway.