`

`Elizabeth M. Murphy
`January 19,2010
`Page 2
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`1.
`
`The Corporate Library, The Limits ofPrivate Ordering: Restrictions on
`Shareholders' Ability to Initiate Governance Change and Distortions ofthe
`Shareholder Voting Process (Nov. 2009) ("Corporate Library Paper")
`
`The Corporate Library Paper takes the position that private ordering with respect to proxy access
`is insufficient because, the paper asserts, many companies maintain multiple classes of stock
`with disparate voting rights, place limitations on shareholders' ability to amend company bylaws,
`and/or have supermajority voting provisions governing bylaw amendments. 5 There are multiple
`reasons this analysis provides unreliable support for the proposed rule, however.
`
`First, although the Corporate Library Paper aggregates companies that ban shareholder bylaw
`amendments altogether and those that impose supermajority voting requirements, 6 the paper
`acknowledges that only "4% of companies in the Russell 3000 and Russell 1000 indices do not
`allow shareholders to amend the bylaws" and that, "[a]mong S&P 500 companies, about 3%
`prohibit shareholder bylaw amendments altogether.,,7 The number of companies with bans on
`bylaw amendment therefore is exceptionally small, and cannot provide a basis for a sweeping
`proxy access rule. 8 And non-binding shareholder proposals give shareholders the ability to
`influence corporate governance even at companies where shareholders cannot amend bylaws. 9
`
`The real focus of the Corporate Library Paper, therefore, is supermajority voting requirements.
`But conflating a ban on bylaw amendment with supermajority requirements is unfounded. To
`begin with, such requirements do not foreclose shareholders from amending bylaws, and, in fact,
`they can serve legitimate ends - such as contributing to stability and predictability by ensuring
`that a bare majority cannot effect structural changes to a corporation's foundational documents.
`
`Furthermore, shareholders may avoid bans on bylaw amendments and supermajority voting
`requirements by going directly to a board of directors and requesting that the board implement a
`bylaw change on its own. Indeed, AT&T's own experiences demonstrate the influence
`shareholders wield over corporate governance. At the 2005 annual shareholder meeting,
`AT&T's shareholders voted to approve a proposal requesting that the board take necessary
`
`5 See Corporate Library Paper at 1-2.
`
`6 See id. at 3.
`
`7 Id. at 6.
`
`8 The number of companies with disparate voting rights also is small, as the Corporate
`Library Paper admits, see id. at 8, and could provide no basis for a mandatory proxy access rule.
`Indeed, the substantial variation among corporations with respect to proxy access, voting, and
`bylaw amendment suggests why the Commission should reject a one-size-fits-all approach to
`proxy access in favor of rules that reflect the diversity of shareholder democracy.
`
`9 See, e.g., Roberta Romano, Less Is More: Making Institutional Investor Activism a
`Valuable Mechanism of Corporate Governance, 18 Yale 1. on Reg. 174, 178 (2001)
`("Management often responds to precatory proposals, even those receiving less than a majority
`of the shares.").
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`Elizabeth M. Murphy
`January 19, 2010
`Page 3
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`action to ensure that a majority-vote rule applies to all matters voted on by shareholders. The
`next year, AT&T submitted a proposal to shareholders to amend its certificate of incorporation to
`remove supermajority voting provisions, which was approved by shareholders. 10 In addition, at
`the 2007 annual meeting, AT&T's shareholders voted to approve a proposal requesting that the
`board amend the bylaws to reduce the number of shares required to call a special shareholder
`meeting. As a result, AT&T's board complied with the request and amended the b~laws to
`permit shareholders with 25% of outstanding shares to call such a special meeting. I Finally, at
`the 2009 annual meeting, a proposal was submitted to reduce the shares required to call a special
`meeting to 10% of outstanding shares. 12 Although that proposal did not pass (receiving 49.9% of
`votes cast), AT&T's board has reduced the shares necessary to call a special meeting to 15%.
`These examples demonstrate that, contrary to the central premise of the Corporate Library Paper,
`shareholders have a variety of means to influence corporate governance and that corporations are
`responsive to non-binding shareholder requests. 13
`
`Second, although the Corporate Library Paper acknowledges that Delaware "recently enacted
`changes to its corporate law clarifying that bylaws establishing a proxy access regime are
`permissible,,,14 it does not give any weight to the likelihood that, to the extent the Delaware
`model is successful in promoting shareholders' interests, other states will follow suit. Indeed, as
`the Corporate Library Paper notes, consideration already is being given "to amending the Model
`Business Corporation Act to follow Delaware's lead."ls In fact, since the Corporate Library
`Paper was submitted to the Commission, such amendments have been approved to the Model
`Business Corporation Act. 16 In this way, state corporate law can be expected to serve as a
`
`10 See AT&T News Release, AT&T Inc. Announces Preliminary Results of2006 Annual
`Meeting (Apr. 28,2006), available at http://www.att.comlgen/press-room?pid=5097&cdvn=
`news&newsarticleid=22249.
`II See AT&T News Release, AT&T Inc. Announces Targeted Ad Hoc Pension Increase,'
`Preliminary Results of2007 Annual Meeting Released (Apr. 27,2007), available at
`http://www.att.comlgen/press-room?pid=5097&cdvn=news&newsarticleid=23739.
`
`12 See AT&T News Release, AT&T Announces Preliminary Results of2009 Annual
`Meeting (Apr. 24, 2009), available at http://www.att.comlgen/press-room?pid=
`4800&cdvn=news&newsarticleid=26772.
`
`13 The Corporate Library Paper also ignores that shareholders can "vote" with their feet:
`the public market for buying and selling shares empowers shareholders to decide for themselves
`whether a corporation's ban on bylaw amendment or a supermajority requirement ultimately is in
`their best economic interest. The paper offers no theoretical or empirical case for believing
`shareholders cannot be trusted to make such decisions.
`14 Corporate Library Paper at 1.
`IS Id. at 5.
`
`16 See American Bar Ass'n Press Release, Corporate Laws Committee Adopts New Model
`Business Corporation Act Amendments To Provide for Proxy Access and Expense
`
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`Elizabeth M. Murphy
`January 19, 2010
`Page 4
`
`laboratory for experimentation with different approaches to shareholder proxy access, leaving
`shareholders free to choose those models they believe will best protect their interests and state
`legislators free to choose those approaches to corporate governance that they believe best serve
`the public good. Such innovation and experimentation would be foreclosed, of course, by a
`one-size-fits-all federal mandate such as the Commission's proposed proxy access rule.
`
`Third, even were the Commission concerned about bans on bylaw amendment and supermajority
`voting requirements, that would provide no support for a mandatory, across-the-board proxy
`access rule. Instead, the Commission could set a default or mandatory rule of proxy access for
`those companies - and only those companies - that substantially restrict bylaw amendment or
`that impose supermajority requirements. These approaches would best advance shareholder
`democracy by respecting the ability of shareholders to make decisions about what type and level
`of proxy access best serve their interests. Indeed, for that reason, this approach would avoid the
`deep contradiction regarding shareholders' capacity to make reasoned, informed decisions that
`lies at the heart of the proposed rule. 17 The Commission has a statutory obligation to consider
`these alternatives - which maximize shareholder choice - and to provide a reasoned explanation
`for rejecting them before moving forward with a proxy access rule. 18
`
`2.
`
`Division of Risk, Strategy, and Financial Innovation, Memorandum
`Regarding Supplemental Analysis of Share Ownership and Holding-Period
`Patterns from Form 13F Data (Nov. 24,2009) ("Staff Memorandum")
`
`Using data culled exclusively from Form 13F filings for the quarter ending December 31,2008,
`the Staff Memorandum offers an analysis of the percentage of public companies that would
`satisfy various holding-period and ownership thresholds. The Staff Memorandum confirms how
`and why Rule 14a-ll will impose substantial costs on public companies. According to these
`data, the proposed rule would result in broad shareholder eligibility for proxy access: 74% of all
`public companies, and 94% of all public companies with a market capitalization greater than $50
`billion, would have one or more shareholders eligible for proxy access under a one-year holding
`period and a 1% ownership threshold. 19 Furthermore, 64% of all public companies, and 91 % of
`all public companies with a market capitalization greater than $50 billion, would have one or
`more shareholders eligible for proxy access under a one-year holding period and a 3% ownership
`
`Reimbursement (Dec. 17,2009) available at http://www.abanet.orglabanetlmedia/
`release/news release.cfin?releaseid=848.
`17 See AT&T August Comments at 6-8.
`
`18 See, e.g., Public Citizen v. Steed, 733 F.2d 93, 103 (D.C. Cir. 1984) ("NHTSA's action
`was also arbitrary and capricious because the agency failed to pursue available alternatives that
`might have corrected the deficiencies in the program which the agency relied upon to justify the
`suspension. At the very least, NHTSA was required to explain why those alternatives would not
`correct the variability problems it had identified.").
`19 See Staff Memorandum, Tables lA & IB.
`
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`Elizabeth M. Murphy
`January 19, 2010
`Page 5
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`threshold.20 In view of the substantial costs associated with expanded shareholder proxy access
`- as described in AT&T's previous comments and in other comments submitted - these data are
`significant.2\
`
`In all events, the ultimate number of shareholders with a potential to nominate directors - and
`thereby to give rise to costly and distracting proxy contests - under the proposed rule is not
`relevant. The aim of any regulatory policy should be to empower those shareholders - and only
`those shareholders - who are committed to the long-term fortunes of the company and who have
`a reasonable prospect of success to nominate directors. As AT&T has explained, if the
`Commission is inclined to move in this direction, meaningful threshold and duration
`22
`requirements are vital to achieve that objective.
`
`3.
`
`NERA Economic Consulting, Report on Effects ofProposed SEC Rule 14a-ll
`on Efficiency, Competitiveness and Capital Formation (Aug. 17,2009)
`("NERA Report")
`
`The NERA Report provides strong support for AT&T's position that proposed Rule 14a-l1 is
`unnecessary and that it would impose substantial costs on public companies. The overall
`conclusion of the NERA Report is straightforward: "the proposed rules risk undermining, rather
`than improving, board quality and composition and are likely to undermine the ability of boards
`of directors to serve the interests of shareholders.,,23 The NERA Report sets forth several
`important points in support of that conclusion.
`
`First, the NERA Report collects compelling empirical evidence establishing that shareholders
`already possess a variety of means to address any problems with management and boards. The
`NERA Report explains, for example, that "[i]nvestors can and do express dissatisfaction with
`boards by selling shares or taking short positions," that institutional investors can influence
`boards by reducing holdings in "poorly performing companies," and that the "[e]mpirical
`research bears out the theoretical insight that managers are replaced when a company's stock
`performance is poor.,,24 And, as explained above, AT&T's own ex~eriences provide concrete
`evidence that corporations are responsive to shareholders' requests. 5 Absent concrete evidence
`
`20 See id.
`
`2\ See, e.g., AT&T August Comments at 8-10.
`
`22 See id. at 10-12.
`
`
`23 NERA Report at 1.
`
`24 I d. at 2.
`
`25 See supra pp. 2-3.
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`Elizabeth M. Murphy
`January 19,2010
`Page 6
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`of a problem with the lack of shareholders' ability to influence boards, the Commission's
`proposed proxy access rule would be unlawful.26
`
`Furthermore, the NERA Report explains why Rule 14a-11 would impair the quality of boards.
`The NERA Report points to evidence that companies with dissident board members perform
`poorly compared to their peers: "Several empirical studies establish that when dissident
`directors win board seats, those firms underperform peers by 19 to 40% over the two years
`following the proxy contest.,,27 Furthermore, the NERA Report explains that the proposed rule­
`by empowering institutional shareholders with parochial interests to nominate "like-minded"
`directors - will frustrate companies' efforts to achieve a balance of skill and experience on
`boards necessary to steer companies through challenging economic times.28 The NERA Report
`also explains persuasively why it will be shareholders with narrow special interests that avail
`themselves of the opportunity to bring costly proxy fights: "If nominating a candidate has
`minimal cost, it is likely that [shareholders with special interests] will put forth candidates at
`everyelection.,,29 The NERA Report's findings on this score support AT&T's comments, which
`describe how and why the Commission's proposed rule would impair the functioning of boards
`and benefit only a small class of shareholders at the expense of all shareholders.3o
`
`Finally, the NERA Report explains that, were the Commission to go forward with a proxy access
`rule, it should do so with "higher ownership thresholds.,,3l Higher thresholds, the NERA Report
`reasons, would "better align the incentives of qualifying shareholders with other shareholders"
`by"reduc[ing] the odds that shareholders would make nominations to advance agendas contrary
`to shareholder wealth maximization": the higher the ownership threshold, the more costly the
`pursuit of any such agenda would be.32 This proposal is consistent with AT&T's comments,
`which explain why higher ownership thresholds and longer duration requirements would be
`critical to cabin the adverse effects of the proposed rule on public companies.33
`
`26 See National Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 843-44 (D.C. Cir. 2006)
`("Professing that an order ameliorates a real industry problem but then citing no evidence
`demonstrating that there is in fact an industry problem is not reasoned decisionmaking.").
`27 NERA Report at 9.
`28 I d. at 10.
`29 I d. at 11.
`30 See AT&T August Comments at 8-10.
`
`3l NERA Report at 15.
`32 I d.
`33 See AT&T August Comments at 10-12.
`
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`

`Elizabeth M. Murphy
`
`January 19, 2010
`
`Page 7
`
`
`4.
`
`Andrea Beltratti & Rene M. Stulz, Why Did Some Banks Perform Better
`During the Credit Crisis? A Cross-Country Study ofthe Impact ofGovernance
`and Regulation (July 2009) ("Cross-Country Study")
`
`The final report on which the Commission has invited comment - an economic analysis of bank
`performance during the most recent credit crisis - demonstrates why increased shareholder
`influence over boards may not advance the Commission's stated goal of improving companies'
`ability to sustain long-term economic growth. The Cross-Country Study summarizes an analysis
`of banks' stock return worldwide from July 2007 to December 2008. The Cross-Country Study
`concludes that "banks with more shareholder-friendly boards performed worse during that
`period.,,34 That finding runs contrary to the "conventional wisdom," which assumed that more
`shareholder-friendly boards would lead to better-governed banks.35 One explanation offered for
`this result is directly relevant here: "banks that took more risks" were "rewarded by the market"
`and shareholders, and those same banks suffered the greatest during the economic crisis because
`of a focus on short-term returns driven by shareholder influence. 36
`
`The Cross-Country Study is consistent with AT&T's explanation that, by empowering
`shareholders with a singular focus on short-term gains to influence boards, the proposedlroxy
`access rule would impair corporations' ability to achieve sustainable long-term growth. 3 An
`increased focus on short-term value would be an inevitable result of the proposed proxy access
`rule - an outcome that would exacerbate, not remedy, the economic issues the Commission
`hopes that Rule 14a-11 would help to combat.38
`
`Sincerely,
`
`{!~tJdi-
`
`Sr. Executive Vice President & General Counsel
`
`34 Cross-Country Study at 21 (emphasis added).
`35 I d.
`36 I d.
`37 See AT&T August Comments at 9-10.
`38 See id. at 10.
`
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