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SEC Commissioner Challenges Harvard Shareholder Rights Project in New Paper

A new paper co-authored by current SEC Commissioner Dan Gallagher and former SEC Commissioner Joseph Grundfest takes aim at the Harvard Shareholder Rights Project’s (SRP) push for the de-staggering of corporate boards. The SRP seeks to end the practice of corporate boards staggering elections of directors, instead advocating that companies place the full slate of directors up for election each year. Since its inception in 2012, the SRP counts 121 successful “engagements” in which companies that received proposals from the group are now moving towards annual elections. The de-staggering trend can generally be seen in the S&P 500 which had 300 staggered boards in 2000 compared to 60 in 2013, though the paper argues that the debate is still relevant because smaller companies have not seen such a sharp decline. The SRP represents several large institutional investors and submits proposals under SEC Rule 14a-8, which requires a company to include shareholder proposals in its proxy statement, subject to certain requirements.

While the SRP’s proposals contend that research shows that staggered boards are contrary to shareholder interests, the paper asserts that “more recent research concludes that classified boards are, in the aggregate, beneficial for shareholders” and also that the likely positive or negative effect of staggered boards is dependent on the specifics of the company. The authors charge that the proposal’s “failure accurately to describe the current state of the academic literature can be characterized as a material omission that violates Rule 14a-9.” The paper appears to lay out a roadmap for opposing future proposals on a case-by-case basis through no-action relief or by requesting declaratory relief in court, and further suggests that shareholders could bring private actions to invalidate proposals that have already been enacted. The authors also argue that the “the potentially false and misleading nature of the Harvard Proposal exposes Harvard, as a university, to liability in SEC enforcement proceedings, as well as in private actions alleging violations of Rule 14a-9.”

Gallagher and Grundfest also argue that the SEC staff has taken a “narrow view” regarding no-action relief in this area, which represents “an abdication of responsibility by the Commission, not its Staff, that damages the integrity of the proxy process and places an unnecessary burden on registrants forced to respond to potentially misleading proxy statements.” However, the authors place responsibility with the Commission rather than the staff for the “hands-off” approach because they “observe that the Commission has direct control over the staff that issues these interpretations, releases, and no-action letters,” and these documents can be “easily amended or reversed, if the Commission so decided.”

Jonathan Macy, a law professor at Yale University, offers an analysis and rebuttal here, to which Grundfest responded here. Additionally, Harvey Pitt, former Chair of the SEC, weighed in on the conversation here