Compromise Charter Provisions May Impair Shareholder Rights

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By Che Odom

March 8 — When shareholders request charter amendments, directors and officers often respond with compromised provisions, which can substantially impair shareholders' rights, according to the author of a new paper on the topic.

Geeyoung Min, an assistant professor at University of Virginia School of Law and a fellow at Columbia Law School's Ira M. Millstein Center, told Bloomberg BNA in an interview March 8 that the impact of such compromised charter provisions is under-estimated.

The Securities and Exchange Commission and proxy advisers “are not, at least yet, treating them differently from adopting shareholders' requests without any modifications,” said Min, whose paper, “Who Controls Corporate Charters? Shareholder Activism and Charter Amendments,” was published last week in the Law and Economics Research Paper Series.

“Although it is not right to characterize them as being either maximizing or destroying shareholder value as a whole, compromised corporate charters can substantially impair shareholders' rights” because ultimately, they're not getting what they want, she said.

The SEC currently is grappling with a flurry of shareholder proposals attempting to alter proxy access bylaw and charter provisions adopted by companies.

In granting access to the proxy, companies may use “innovative customization” in determining ownership requirements or how many investors may group together to meet an ownership threshold needed to nominate director candidates, Min said.

Threat of Innovation

While there is “no magic number or terms that are best to maximize firm value,” such compromised provisions will become more innovative as time passes, and “all the market participants and regulators should be vigilant about the changes,” she said.

Min will present her paper March 15 at the 2016 Corporate Governance Symposium at the University of Delaware.

Min looked at the corporate charters of the 221 largest, publicly traded U.S. companies and found a substantial increase in charter amendment activity, starting around 2005, she said.

Impact of SEC Rule

Her paper argues that a new SEC rule in 2003 under the Investment Advisers Act, combined with the regulator's subsequent interpretation, played an important role in empowering proxy advisers, such as Institutional Shareholder Services Inc. and Glass Lewis & Co., quickly leading to an increase in shareholder campaigns for charter amendments.

“While it is not new that the rise of shareholder activism may affect corporate decision-makings, including charter amendments, it was puzzling to me why” there was such a steep increase, she said. “I tried to understand what happened around that time and found an important mechanism change” that led to the rise.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

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