SEC Set To Make Activism Easier; Not Easy Enough, Says Goldstein

Date: Wednesday, May 9, 2007
Author: FINalternatives

Activist hedge funds’ salad days may be in the not-too-distant future, as the Securities and Exchange Commission wrestles with the notion of shareholder democracy in the wake of a court decision. But one high-profile activist manager—and seasoned SEC antagonist—says the changes will not go far enough.

SEC Chairman Christopher Cox said the agency will propose a new rule on shareholder rights in the proxy voting process in early summer. In September, a court tossed the regulator’s longstanding practice, which gave enormous power to company management in deciding how directors are nominated and what proposals get onto a proxy ballot.

“We want to make sure the system is working well, that directors are responding to shareholders,” Cox said at the first of three roundtables the SEC will hold to study the issue, which focused on just how much democracy is too much.

Bulldog Investors’ Philip Goldstein, who successfully litigated against the SEC’s hedge fund registration rule last year, applauds the current initiative, but says there are bigger issues than mere access. “The elections the way they are now are not fair,” he says.

“For one, management gets to use the company’s money to promote its own interest,” he notes. “Why shouldn’t all sides in the proxy context have the same access to shareholder money? It would be like having an election for a political office where the incumbents get to use taxpayers’ money and the challenger has to get his own money. That and management’s ability to use shareholder money to sue the insurgents are far bigger problems than what the SEC is currently addressing.”

The SEC panel, including a number of law professors, debated how to prevent shareholders from micromanaging company decisions and how to limit the number of proxies, especially those representing “political causes.” Suggestions included a materiality standard and one requiring a “substantial showing” of shareholder interest.

Whatever the outcome—SEC Commissioner Roel Campos, for one, took issue with the idea that there is such a thing as too much democracy—the new rule will almost certainly make it easier for hedge funds to get their director nominees and proxy proposals on the ballot.