BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Martha M. Escutia, Chair
2003-2004 Regular Session
AB 2752 A
Assembly Member Chu B
As Amended April 28, 2004
Hearing Date: June 22, 2004 2
Corporations Code 7
MTY:rm 5
2
SUBJECT
Corporations: Elections
DESCRIPTION
This bill would require a domestic publicly traded company
to have in place a process for its shareholders to
recommend candidates for election as directors, and require
that the process be filed with the Secretary of State's
office and, if the company is domestic, posted on the
corporation's website.
BACKGROUND
The Securities and Exchange Commission (SEC) is currently
in the midst of a rulemaking process on minority
shareholders and corporate election procedures that seeks
to provide minority shareholders with greater ballot access
in corporate elections under certain circumstances. This
rulemaking stems from growing criticism that existing laws
and regulations allow election procedures that make it too
difficult for dissident shareholders to challenge a
company's incumbent board and, by extension, make
corporations unresponsive to shareholders.
This bill seeks to provide California shareholders with
information regarding corporate election procedures by
requiring that they be filed by publicly traded companies
with the Secretary of State's office and, for California
corporations, posted on the company's website.
(more)
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CHANGES TO EXISTING LAW
1. Existing law provides for the creation of California
corporations upon the filing of articles of incorporation
setting forth basic information on the corporation, its
purpose, an agent for service of process, and other very
basic information about share classes and rights.
[Corporations Code Sec. 100 et seq.]
This bill would require publicly traded California
corporations to have in place a process for its
shareholders to recommend candidates for election as
directors.
2. Existing law requires "publicly traded" foreign and
domestic for-profit corporations to file annual
statements with the Secretary of State disclosing
specified information, including, but not limited to
information about the corporation's auditor, its
executives' compensation, bankruptcies and convictions
against its directors or officers, and large securities
law judgments against the corporation. [Corporations
Code Sec. 1502 and 2117.]
This bill would require domestic and foreign corporations
qualified to transact interstate business to file a copy
of their shareholder recommendation processes with the
Secretary of State and again whenever they are changed or
amended.
This bill would require corporations to make available a
copy of their shareholder recommendation procedures upon
shareholder request to the investor relations department
of the corporation.
This bill would require domestic corporations with
websites to post their shareholder recommendation
procedure on that website.
COMMENT
1. Need for the bill
This bill is sponsored by the Secretary of State's
office, which writes that:
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Free and fair elections are an essential component
of our democracy but they are far from the norm in
corporate America. Many corporations limit
shareholder access to proxy statements and force
shareholders interested in nominating their own
slate of directors to pursue costly proxy
contests. Since these policies vary from
corporation to corporation it is important that
shareholders are made aware of corporate practices
that may thwart or limit efforts to improve
director performance and accountability through
the nomination of alternate directors.
The sponsor notes that as introduced, "this bill sought
to codify a requirement that all publicly traded
corporations doing business in California establish
procedures that provide shareholders with greater access
to the corporate proxy for the purpose of nominating
directors." However, after discussions with interested
parties, and in deference to the SEC's ongoing rulemaking
process, the author and sponsor agreed to set aside
specific election requirements and instead require that
shareholders be provided an opportunity to recommend (but
not nominate) director candidates. The bill would
further require that shareholders be provided with
information about the recommendation procedure upon
request and, for California corporations, by website
posting.
2. Brief overview of current SEC rulemaking
In the wake of the corporate scandals of the past few
years and recent manifestations of shareholder discontent
at major corporations (e.g., Disney, Hewlett-Packard),
there has been growing attention to the issue of minority
shareholder rights. Under existing law, election
procedures for a corporation's board of directors are
within the near-exclusive control of the incumbent board
members and executives. This is due to the fact that
under SEC rules, the corporation itself is allowed to
determine which candidates are placed on the "proxy,"
which is the ballot mailed to all shareholders by the
corporation (see SEC Regulation 14a). Dissident
shareholders generally must mount an expensive and uphill
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battle through independent media expenditures and proxy
solicitiations to convince shareholders to vote against
incumbent directors and/or vote for alternative
candidates. Not surprisingly, successful challenges to
incumbent directors are extremely rare.
This situation has led to growing complaints that
existing law makes it too difficult for unhappy
shareholders to take action against incumbent directors
and executives. In response to these complaints, late
last year the SEC released a proposed rule which would
mandate minority shareholder access to corporate election
materials when certain thresholds of shareholder
dissatisfaction had been met (35% of shareholders
withheld support for one of the company's director
nominees, or 1% of shareholders propose an alternative
candidate at a shareholder meeting, and that candidate
garners the support of 50% or more of the shareholders
attending that meeting). The public comment period on
the rule ended in December of last year, and a final rule
is expected in the near future.
3. Committee staff suggests amendments to the bill's
definition of "corporate election procedures" to achieve
author and sponsor's intent
It is Committee staff's understanding that the intent of
the bill is to provide meaningful disclosure of the
corporate election procedures of publicly traded
companies to interested shareholders. To that end,
Committee staff suggests that the author may wish
consider the following amendments.
a. Amendments to the definition of "election procedures"
The current version of the bill requires that
corporations file with the Secretary of State what the
bill calls "election procedures." However, the bill's
definition of "election procedure" is a procedure for
shareholders to "recommend" candidates. As a result,
the bill would not technically require the filing of
the election procedures for the board of directors
(which is the author's goal), but rather the mechanism
by which shareholders could "recommend" candidates
(recommendations which, as far as Committee staff can
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determine, could be taken into account or disregarded
by the corporation).
Committee staff suggests that the author may want to
consider deleting the bill's current subdivision (a)
and replacing it with a definition of "election
procedures" as those portions of the corporation's
articles of incorporation and by-laws which relate to
the election procedures for the corporation's board of
directors. This amendment would provide shareholders
with the actual corporate governance documents which
could be used to evaluate minority shareholder rights.
SHOULD THE BILL BE AMENDED TO DEFINE "ELECTION
PROCEDURES" AS THE RELEVANT PORTIONS OF A CORPORATION'S
ARTICLES OF INCORPORATION AND BY-LAWS?
[Committee staff notes, however, that it lacks
sufficient expertise to determine when such information
would provide shareholders with meaningful disclosures.
Committee staff is informed that many publicly traded
corporations have little in the way of election
procedures beyond what is required by SEC regulations.
Those regulations provide certain minimum standards for
disclosures and proxy procedures (see SEC Regulation
14A), and few corporations have more extensive written
policies or procedures. Many publicly traded
corporations have nominating committees, which nominate
candidates for the board. However, few corporations
provide that committee with any written guidance on
nominating procedures beyond general statements of
principle. As a result, it is not clear to Committee
staff how many corporations would file materials with
the Secretary of State's office that contained more
information than current SEC regulations.]
b. Bill should be amended to apply only to publicly
traded companies
The current version of the bill requires all domestic
and foreign corporations to file election procedures
with the Secretary of State, but does not explicitly
limit itself to publicly traded companies. It is
Committee staff's understanding that the author and
sponsor wish to only cover publicly traded companies.
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SHOULD THE BILL BE AMENDED SO THAT THE FILING
REQUIREMENT APPLIES ONLY TO PUBLICLY TRADED COMPANIES?
4. Opponent Department of Corporations argues that state
should defer to SEC procedure; supporters respond that
bill is consistent with SEC efforts
The bill is opposed by the Department of Corporations,
which writes that:
Regulation of corporate election procedures in the
form of proxies of publicly traded companies
engaged in interstate commerce involves an area
that is currently within the scope of
responsibility of the federal Securities and
Exchange Commission. . . . By coordinating with
the [SEC] to help educate shareholders, and by
helping that federal agency craft appropriate
national standards governing shareholder
nomination procedures, the objectives of AB 2752
can be achieved without imposing additional and
duplicative state regulations on companies seeking
to do business in California.
The bill's supporters respond that the bill complements
the SEC's efforts. The Secretary of State's office
writes that:
AB 2752 will also benefit shareholders and
prospective investors if the SEC approves its
proposed rule. Such approval would require
corporations to modify their election procedures
and these new procedures would be publicly
disclosed under AB 2752.
The department's objections would appear to be twofold:
first, that the bill would be potentially inconsistent
with ongoing SEC efforts, and second, even if not
inconsistent, would be duplicative and unnecessary.
As to inconsistency, Committee staff believes that if the
amendments suggested in Comment 2 are adopted, the bill
would place no substantive regulations on corporate
election procedures. Instead, the bill would be solely a
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disclosure bill. As a result, in the opinion of
Committee staff, if the amendments are taken, any
argument that the bill would be inconsistent with ongoing
SEC processes would be inaccurate.
Whether the disclosure requirements would be duplicative
of federal efforts is difficult to determine. As noted
above in Comment 2a, Committee staff does not know
whether there are many publicly traded companies that
have written election procedures beyond what is required
by SEC regulations. Those companies that do simply
comply with SEC regulations would presumably just file
those regulations; while companies with more extensive
procedures would file those.
5. Committee staff suggests that website posting
requirement be deleted from the bill
The bill would require California corporations with
websites to post their election procedures on that
website. Committee staff suggests that this requirement
be deleted from the bill, for several reasons. First,
the requirement would apply only to California's publicly
traded companies, who constitute only a tiny percentage
of publicly traded companies. Second, while corporate
governance is an important issue, Committee staff
questions whether it is of sufficient interest to the
general consumer public such that it merits disclosure on
a company's website. Finally, as noted above in Comment
2a, if the bill were to be enacted into law, Committee
staff does not know how many corporations would disclose
nothing more than current SEC regulations, which are
available at the SEC's website.
SHOULD THE WEB POSTING REQUIREMENT BE DELETED FROM THE
BILL?
6. Suggested technical amendments
Committee staff suggests that the author may want to
consider the following technical amendments.
a. Revise definition of "publicly traded" to conform
with changes to be made by AB 1000 (Dutra)
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The bill relies on a definition of publicly traded
created by AB 55 (Shelley) of 2002. That definition is
being revised and clarified by this year's AB 1000,
also sponsored by the Secretary of State's office.
Committee staff suggests that this bill's definition of
publicly traded should also be revised.
SHOULD THE BILL'S DEFINITION OF PUBLICLY TRADED COMPANY
BE CONFORMED TO THE DEFINITION CONTAINED IN AB 1000?
b. "Qualified to transact interstate" should be amended
to "qualified to transact intrastate"
The bill's filing requirements would apply to domestic
corporations or foreign corporations qualified to
transact "interstate" business. Foreign corporations
that conduct interstate business are not required to
qualify with the Secretary of State's office; foreign
businesses that transact intrastate business are (see
Corporations Code Sec. 2105).
SHOULD THE BILL BE AMENDED TO REPLACE "INTERSTATE" WITH
"INTRASTATE"?
Support: CalPERS Board of Administration; California
School Employees Association (CSEA); California
Labor Federation, AFL-CIO; American Federation of
State, County, and Municipal Employees (AFSCME)
Opposition: Department of Corporations; Committee of
Concerned Shareholders
HISTORY
Source: Secretary of State's Office
Related Pending Legislation: AB 1000 (Dutra) would make a
variety of technical and clarifying
changes to corporate disclosure
requirements placed on publicly
traded companies pursuant to AB 55
(Shelley) of 2002. The bill is
scheduled to be heard in Committee
today (for vote only).
Prior Legislation: AB 55 of 2002 (Shelley), Ch. 1015,
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Stats. of 2002, created the Corporate
Disclosure Act of 2002, which required
publicly traded companies to disclose
information regarding their auditors,
executive compensation, and judgments and
convictions against officers and directors.
Prior Vote: Assembly Banking and Finance Cmte. (10-0)
Assembly Appropriations Cmte. (20-0)
Assembly Floor (46-30)
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