Setting Optimal Rules for Shareholder Proxy Access

Recent developments in Delaware concerning shareholder bylaws and the SEC proposal concerning shareholder proxy access have moved the U.S. closer to a set of optimal rules for shareholder proxy access in nominating director candidates, but not all the way there. These rules must address both the default rule which applies in the absence of agreement within a corporation to the contrary, and the altering rule which specifies who within a corporation may choose to opt out of the default provisions. Applying principles of accountability and freedom of contract, the optimal default rule would allow for certain shareholders to use the corporate proxy to nominate director candidates. The optimal altering rule would make it easy for shareholders to propose bylaws under the Rule 14a-8 process which opt out of the default provisions. Although it would be desirable were states to set these rules on their own, a degree of managerialism at the state level combines with the history of extensive SEC regulation of the proxy process to give the SEC an important role in helping set the rules. As matters currently stand, Delaware is appropriately flexible but has the wrong default rule, while the SEC’s proposal has the right default rule but too little flexibility