SEC Mulls Shareholder Catch-22

A commission panel considers a judge's sticky question: How can shareholders have their say when a company is barred from holding a shareholder meeting? Chairman Cox says it's worth studying.

For investors in a troubled business, it’s a Catch-22: They might want a shareholder meeting to set straight a company that has fallen out of compliance, but because the company has fallen out of compliance, regulators won’t allow a shareholder meeting.

The inability to meet — owing to the strictures of the Securities and Exchange Commission regarding noncompliant companies — can be a problem for management as well, of course.

At an SEC roundtable on Monday, Vice Chancellor Stephen Lamb of Delaware’s Court of Chancery suggested to SEC Commissioner Christopher Cox and to panelists that the question should be reviewed, “given the options-backdating problem” and other issues that have made the problem for shareholders “widespread.”

When managements are barred by the SEC from issuing proxy disclosures and holding meetings, Judge Lamb said, “there should be some benefit for the shareholders who might want to have a meeting and elect a new board of directors.”

Others panelists, including legal authorities, and representatives of shareholder groups, agreed that investors should have more recourse. And Cox responded that “it’s a real issue we need to deal with, and we will.”

Even so, there was little suggestion of how Judge Lamb’s proposal, made in his opening remarks, could be implemented. Shortly thereafter, the panel returned to a broader discussion of “the purpose and effect of the federal proxy rules.”

A pair of afternoon roundtable sessions, moderated by John White and Martin Dunn of the SEC’s Division of Corporation Finance, were scheduled to cover nonbinding proxy rules and binding proxy rules.

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