SEC's Atkins Tackles Shareholder Rights

In his last public appearance as a member of the Securities and Exchange Commission, Commissioner Paul Atkins said that, with regards to shareholder rights, the agency “would be wise to continue to respect the principles of federalism and avoid the temptation to exceed the limitations on its authority delegated by the Congress.”

Speaking yesterday before the U.S. Chamber of Commerce, Atkins addressed a controversial change to the SEC’s Rule 14a-8, which lays out the circumstances under which shareholder proposals may be included in proxy materials. The rule allows shareholders who own a small quantity of a company’s stock to have their proposals considered alongside management’s in proxy statements for presentation at annual or special shareholders meetings.

The modified Rule 14a-8, proposed in July 2007 in response to a ruling by the U.S. Court of Appeals for the Second Circuit, would permit shareholders to propose proxy access bylaw amendments if they hold at least 5% of the company’s outstanding shares. While the proposal – the so-called “long release” – was not adopted, chairman Christopher Cox indicated that he may revisit it once the SEC has five members in place, with the goal of establishing a rule prior to the 2009 proxy season.

Since last year, the SEC has been operating with three Republican commissioners and no Democrats. Late last month, the Senate unanimously approved three new commissioners – Democrats Elisse Walter and Luis Aguilar, and Republican Troy Paredes – allowing the agency to once again operate with a full complement of commissioners.

Atkins said he is worried that the SEC might inappropriately seek to infringe on state laws governing the relationship between shareholders and the corporations they own.

“My most significant concern is that the commission could try to move to adopt a final rule based on the long release without additional public notice or comment,” he said. “The long proposal was controversial with almost every group commenting on it. … It suffered from concerns as to the SEC’s authority to do it, plus it undermines the proxy disclosure and solicitation regime.”

Atkins also attacked what he called the “abusive use” of the shareholder proposal process by some institutional investors.

“What we are basically seeing is large institutional investors … pushing behind the scenes … particular measures that fail at company after company when actually put up for a shareholder vote,” he said. “We must be vigilant that the shareholder proposal process does not result in the tyranny of the minority.”

The worst approach, added Atkins, would be to try to adopt with little warning a new rule similar to the long release.

“The commission has not had a good track record recently of adopting controversial rules under dubious assertions of authority,” he noted.

Atkins, a Republican sworn in by President Bush in August 2002, will step down from the commission next week after serving two terms. He has been a vigorous opponent of large penalties, and his pro-business approach has sometimes put him at odds with fellow members.

Most recently, Atkins called for an independent advisory panel to evaluate the SEC’s enforcement program, making sure it “protected the rights of defendants and others with whom the agency interacted.”