The current debate over shareholder access to the issuer's proxy statement for the purpose of making director nominations is both overstated in its importance and misses the serious issue in question. The Securities and Exchange Commission's ("SEC's") new eproxy rules, which permit reliance on proxy materials posted on a website, should substantially reduce the production and distribution cost differences between a meaningful contest waged via the issuer's proxy and a freestanding proxy solicitation. No matter which avenue is used, however, the serious question relates to the appropriate disclosure required of a shareholder nominator. Should the nominator be subject to the broad-ranging disclosure requirements now associated with the freestanding contest? Or should there be curtailed disclosure for a nominator (who disavows control motives) of a limited number of directors whose election will not change control? The inescapable costs lie in disclosure, not so much because of the drafting costs, but because of the liability standard associated with the current proxy solicitation rules. A party may be subject to a private suit for material misstatements or omissions in connection with a solicitation even without a showing of scienter. Disclosure under such a regime entails not only the up-front costs of precaution, but also the uncertain (and potentially high) costs of litigation. These costs-not the production, distribution, or other solicitation costs in an e-proxyeligible world-will constrain director nominations made by a "good governance" activist without a large stake or a control motive. The current regulatory round associated with the SEC's sidestepping of the Second Circuit's proxy access opinion in AFSCME v. AIG1 is a sideshow, diverting attention from this important issue.2
Part I of this Essay briefly describes what shareholder access to the issuer's proxy statement entails. Part II summarizes how we have come to the present regulatory moment. Part III describes the eproxy rules that should lead us to refocus the debate. Part IV sets up the key question: what is the appropriate disclosure (in content and liability risk) to require of a shareholder nominator? One obvious possible distinction is between nominators with and without control motives; another is between instances in which the election of shareholder nominees would or would not shift control of the board.
Packaged into the disclosure question are concerns about the rising influence of institutional investors and the newly fashionable issue of "agency capitalism," which focuses on the distinctive motives and incentives of the agents for these institutions.3 The longstanding tradition in U.S. corporate law is that a shareholder "may vote as he pleases,"4 subject to a set of constraints on controlling shareholders who use the corporate machinery for self-dealing or other potentially improper purposes.6 This view was sustained over a long midtwentieth century period, during which shareholder voting (outside of a contest for control) diminished in significance in favor of managerialist governance constrained (if at all) by control markets. This move to managerialism was, in important part, the result of increasingly diffuse share ownership, for which the free-rider and other collective action problems provoked "exit" rather than "voice" by the disgruntled shareholder.6
But with the rise of institutional investors, the diffusion of stock ownership has reversed course. The Berle-Means corporation of the twenty-first century exhibits the traditional separation of ownership from control, in that the owners still play no role in management.7 But that separation has taken on a new form: instead of millions of dispersed retail investors, we have hundreds (perhaps thousands) of institutional investors who serve as financial intermediaries. The ability of these institutional actors to coordinate at a much lower cost changes the collective action equation and rejuvenates a shareholder activism that depends on voting as a credible mechanism for shareholder influence, even outside of a control contest. …