Monday, February 21, 2011

SEC's Shareholder Proposal Policy and the Materiality Principle

Here is a very interesting article from Prof. Stephen M. Bainbridge on the absurdity of the new SEC's Shareholder Proposal Policy which basically gives the right to minority shareholders of a publicly listed company to force a vote in a general meeting of shareholders. The absurdity lies in the fact that according to a US court precedent, the tests for granting the validity of such proposal include matters on ethical and social significance, and not only economic matters.

Of course this would be problematic for companies as this is the same with providing the minority shareholders with the ammunition to control the company for matters which are not directly related to its financial and business performance. In this case, I fully agree with Prof. Bainbridge analysis on the importance of materiality principle in securities laws. If the shareholders want to be involved in the company's management, it should be done only for material transactions that may economically affect the investment value of the relevant shareholders in such company. If the shareholders can actively use the company for their own personal and political needs, why bother to have the concept of limited liabilities?

Luckily, Indonesia does not adopt this kind of rule, though I am surprised that the development of shareholders protection law in the United States has already reached a position where it is difficult to differentiate the role of shareholders and management.

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