Earlier this week, the U.S. Securities and Exchange Commission (SEC) adopted the much anticipated proxy access rule which allows shareholders to nominate candidates for directorship. The essence of the new rules is as follows:
The new rules require companies to include the nominees of significant, long-term shareholders in their proxy materials, alongside the nominees of management. This “proxy access” is designed to facilitate the ability of shareholders to exercise their traditional rights under state law to nominate and elect members to company boards of directors.
Under the rules, shareholders will be eligible to have their nominees included in the proxy materials if they own at least 3 percent of the company’s shares continuously for at least the prior three years.
This has generated an extensive debate (e.g. on the Conglomerate Blog) as to whether such proxy access to shareholders has merit when it comes to nomination and appointment of directors.
All of this might seem like “much-ado-about-nothing” in parts of the Commonwealth where shareholder rights to nominate directors have been available traditionally within law. For example, in India, shareholders have extensive rights under the Companies Act, 1956 to determine the composition of the board (Sec. 257: propose candidates for directorship; Sec. 263: vote for appointment of directors; Sec. 284: vote for removal of directors). To that extent, the developments under U.S. federal law continue to trail behind the position in many parts of the Commonwealth such as India as regards shareholder democracy under corporate law. Even though proxy access has enhanced rights of shareholders in U.S. companies, those additional rights come along with stringent conditions (such as the requirement to own 3% over 3 continuous years).