May 20, 2009

Schumer’s “Shareholder Bill of Rights”: Why, What, When and If

Yesterday, Senator Charles Schumer – along with Senator Maria Cantwell – finally introduced the “Shareholder Bill of Rights Act of 2009” (this is the final proposed bill). Here is my ten cents on your burning questions:

1. Why? – Typically, it would be expected that this type of legislation would originate in Rep. Barney Frank’s House Financial Services Committee. So why did Senator Schumer begin frontrunning his own bill a few weeks ago. The likely answer is that influential parties wanted governance reform as part of the discussion over Obama’s “First 100 Days” to keep these issues in the spotlight. And Frank was too busy with financial regulatory reform to drum up something as a placeholder.

2. What? – As noted in this blog before, the bill is a virtual “wish list” for investors interested in reform (eg. CII’s press release and Paul Hodgson’s observations in “The Corporate Library Blog”) as it tackles every hot governance there is today (with the notable exception of CEO succession planning).

3. When? – The big question: “What are the odds of this bill getting passed?” I think the odds are fairly slim that this bill becomes law because it includes too many items that potentially contravene state law and open it up to a Constitutional challenge. However, if another big scandal suddenly surfaces, Congress could push this through unexpectedly (just as WorldCom’s implosion pushed Congress to adopt Sarbanes-Oxley).

The fact that only one other Senator placed her name on this bill is a “tell” that there might not be a lot of momentum for it. My guess is that Sen. Schumer wanted to make a mark within the first 100 days of the Administration – and that he wanted this bill to influence what Rep. Frank produces later in the year as well as influence the financial regulatory reform that is being crafted now. In the end, I think the chances of certain provisions of this bill becoming law by the end of the year is fairly high, including say-on-pay and shareholder access – just not as part of this bill.

4. If? – What if this bill gets passed? Wow…

Looks like the parameters of today’s proxy access proposal have been made available to the mainstream media since this NY Times’ article states: “The proposal would permit large shareholders — typically institutional investors like pension funds or hedge funds — or alliances of shareholders to nominate as many as one-quarter of the directors. For the 700 largest public companies, the proposal would require approval by 1 percent of the shareholders for a dissident slate to be nominated. For smaller companies, it would be either 3 percent or 5 percent, depending on the size of the business.

It Ain’t Over Til It’s Over: SCOTUS to Review Constitutionality of SOX

On Monday, the US Supreme Court granted certiorari and agreed to consider a constitutional challenge to ability of Sarbanes-Oxley to create the PCAOB. As you might recall, this is the long-standing case brought by a small auditing firm, Beckstead and Watts and the Free Enterprise Fund.

At issue is whether Congress treaded on the Constitution’s separation of powers, specifically Article 2, Section 2 known as the “Appointments Clause” because it gives power to the President to appoint and supervise executive-branch officials. The SEC appoints the members of the PCAOB’s board rather than the President – and the SEC can only remove the PCAOB board members “for cause.” Check out Professor Jay Brown’s blog on the chances of its success.

Last August, the US Court of Appeals for the DC Circuit – voting 2-1 – concluded that the SEC’s “comprehensive” oversight of the PCAOB satisfied the appointments clause. Then in November, the full DC Circuit voted 5-4 not to
reconsider the ruling. We continue to post the central pleadings in this case in our “Sarbanes-Oxley Reform” Practice Area.

May-June Issue: Deal Lawyers Print Newsletter

This May-June issue of the Deal Lawyers print newsletter is out and includes articles on:

– Reversing Course: Delaware’s Supreme Court Provides Comfort to Directors Regarding Revlon Process and Bad Faith
– Going In-House: Stewart Landefeld On His Time at Washington Mutual
– The Shareholder Activist Corner: Mario Gabelli’s GAMCO
– Are We There Yet? Issuer Debt Tender Offers and Offering Period Requirements
– Private Equity in 2009: “Back to Basics” Practice Tips

If you’re not yet a subscriber, try a no-risk trial to get a non-blurred version of this issue for free.

– Broc Romanek