Voting Power Without Responsibility or Risk - How Should Proxy Reform Address the Decoupling of Economic and Voting Rights?

The regulation of proxy voting resides at an uncomfortable intersection between federal and state law. Although state law controls the holding of annual meetings to elect directors and the corporate governance aspects of proxy voting, the federal securities laws control the solicitation of proxies. Since at least 1977 shareholder activists have been trying to persuade the Securities and Exchange Committee (“SEC”) to revise the proxy solicitation disseminated by a public corporation to allow competing shareholder nominees to be included in opposition to the board of directors’ nominees. Although the SEC has proposed rules to this effect, such rules have not yet been adopted. An SEC rule permitting some shareholder access to management’s proxy is probably inevitable during the administration of Mary Schapiro as SEC Chair. If a shareholder access rule goes forward, one of the issues the SEC will have to address is which shareholders should be granted such access. The growth of derivatives and various trading strategies by some investors have led to a decoupling of economic and voting rights in public corporations, permitting proxy voting by shareholders with little or no economic interest in the shares they vote. Such voting is referred to as “empty voting.” If the SEC engages in proxy reform to allow competing director nominees to appear on the same ballot, the problems of empty voting in a proxy contest are likely to be exacerbated unless the SEC addresses this issue. But the question of whether economic rights need to be aligned with voting rights in order for voting rights to be valid, would appear to be a state law, rather than a federal law, issue. Further, a recent Delaware Supreme Court case suggests that the Delaware courts are prepared to referee the skirmishes between institutional shareholders and corporate boards with regard to shareholder nominations, and recently enacted legislation in Delaware likewise would deal with shareholder proposals to amend by-laws to allow for shareholder nominees in a company proxy. Therefore, even if the SEC has authority with regard to granting some shareholders access to a company’s proxy, there is a policy question as to whether such regulation of corporate internal affairs is wise.