BILL ANALYSIS
AJR 79
Page 1
Date of Hearing: April 22, 2004
ASSEMBLY COMMITTEE ON BANKING AND FINANCE
Patricia Wiggins, Chair
AJR 79 (Chu) - As Introduced: April 14, 2004
SUBJECT : Corporate Elections
SUMMARY : Requests the Securities and Exchange Commission (SEC)
to implement its proposed shareholder participation rules in
order to address the need for reform in corporate transparency
and give shareholders access to proxy. Specifically, this
resolution :
Makes findings and declarations that:
1)The California Legislature has noted with growing concern the
accounting scandals of major corporations including Enron,
WorldCom, and HealthSouth, and their sustained negative effect
on institutional and individual investors and on California's
economy.
2)The cumulative effect of instances of fraud and wrongdoing has
been to inflict avoidable investor losses totaling in the
billions of dollars and to significantly damage investor
confidence in California and elsewhere.
3)The events of fraud and accounting scandals have pointed to an
urgent need for greater corporate accountability, and
specifically for corporate boards to engage in greater
oversight over corporate operations, thereby fulfilling their
traditional role as independent fiduciaries rather than
passive arms of management.
4)One way to achieve greater accountability on the part of
corporate boards is to increase shareholder access to proxy,
defined as the ability of shareholders to nominate a candidate
or slate of candidates for election to the board at annual
company meetings held for that purpose.
5)Federal law controls many aspects of corporate election
procedures, and under current federal law and SEC rules,
shareholder access to proxy is not required.
6)The SEC has been working for several months on proposed
AJR 79
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reforms to address the crisis of corporate accountability and
investor confidence. SEC in part devised a means of providing
within the framework of the rules of the SEC a mechanism for
greater shareholder access to proxy and, has proposed a rule
to improve the ability of shareholders to participate in the
nomination and election of directors of corporate boards.
EXISTING LAW establishes General Corporations Law which sets
certain rules for corporate governance, such as in reference to
voting of shares and setting clarifications as to interpretation
of votes cast by majority or other proportions. However, the
existing law does not specifically address any laws to direct
corporate elections. (Corporations Code, Section 111 and 112)
FISCAL EFFECT : None
AJR 79
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COMMENTS :
Need for the Resolution: Recently, the SEC proposed Exchange
Act Rule 14a-11 for Security Holder Director Nominations that
would require, under certain circumstances, companies to include
in their proxy materials security holder nominees for election
as director. Under the proposed rules, if 35% of shareholders
withhold a vote against directors it would trigger a process
that would give a large investor or group of shareholders the
right to place a director on a company's proxy.
According to the SEC, "These proposed rules are intended to
improve disclosure to security holders to enhance their ability
to participate meaningfully in the proxy process for the
nomination and election of directors."
The author of this resolution would like these proposed rules
adopted because "shareholder access to proxy statements is an
important incentive for improving director performance and
accountability to the shareholders that elect them."
Secretary of State Kevin Shelley, the resolution's sponsor,
argues that under the SEC's current rules the minimum cost of a
proxy battle is estimated at $250,000. Because of the great
expense and effort required, many shareholders are unable to
wage a fight even when they have concerns about the
corporation's directors.
Opposition to the SEC's Proposed Rule. The U.S. Chamber of
Commerce opposes the proposed rule, arguing that regulators
should "give all of the new rules enacted over the past two
years, such as Sarbanes Oxley Act of 2002, more time to work
before instituting new reforms that could make the United States
companies less competitive." Thomas Donohue, the president and
CEO of the U.S. Chamber also expressed his opinion that
"corporate directors - the ones you really want to get - are not
very good local politicians".
The Business Roundtable argues that a special interest
shareholder might put forward an agenda that does not serve the
interest of investors. Further, the opponents of the proposed
rules hold that it might deter potential Directors from serving
on a board, since shareholders might not fulfill their fiduciary
duties and make a wrong choice, which could lead to worse
corporate boards.
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A state or federal solution? California's ability to regulate
foreign corporations is limited. Also, there is a legitimate
question whether states should regulate the corporate election
process for publicly traded companies that are incorporated in
their state. Or, should that responsibility be left to an
entity that regulates the actions of all publicly traded
companies such as the SEC?
According to the author and the sponsor the "best way of
achieving meaningful reform of corporate elections and providing
shareholders with greater access to the nomination process for
directors is to support the passage of the SEC's Exchange Act
Rules for Security Holder Director Nominations." AJR 79
communicates the Legislature's sentiment that these proposed
reforms are greatly needed.
Related Legislation : AB 2752 (Chu), as amended on April 14,
2004, requires publicly traded corporations to file a copy of
their corporate election procedures with the Secretary of
State's office. Additionally, it requires that these procedures
be made available for viewing on the corporation's web-site and
to any shareholder upon request.
REGISTERED SUPPORT / OPPOSITION :
Support
Secretary of State Kevin Shelley (sponsor)
Opposition
None received
Analysis Prepared by : Chitwan Kaur / B. & F. / (916) 319-3081