In the wake of the sub-prime loan crisis and the collapse of Lehman Brothers, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act with the goal of making public companies more responsive to investors. The Act authorized the Securities and Exchange Commission (SEC) to implement a proxy access rule—a law that would essentially require companies to give investors a right to place their nominees to the board of directors on the company’s proxy materials, making it easier for shareholders to trigger contested elections and shifting much of the cost of the election process from the shareholders to the company.
The SEC has proposed such a rule three times in the past decade. Each time, public companies protested that the rule would have a negative impact on their finances and governance while delivering no significant benefit to investors. Despite the protest, the agency went forward with the latest incarnation of the rule, passing it by a 3-2 vote in August 2010. A lawsuit to enjoin the rule followed within a month. The rule never went into effect.
Many large companies have multiple shareholders who would be eligible to launch proxy contests. For example, according to public comments from McDonald’s Corp. General Counsel Gloria Santona, as of 2009, McDonald’s had 10 shareholders who met that threshold, leaving the company open to extensive contested elections.
Beyond the costs of contested elections, companies were concerned with the risk that special interest shareholders would abuse the ability to inexpensively launch proxy contests to advance causes unrelated to core corporate goals.