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SEC attracts US law professors fury over Harvard

Law professors from America's leading law schools have taken a united stance against a paper co-authored by SEC Commissioner Daniel Gallagher which accused Harvard University's Shareholder Rights Project of possible SEC violations.

Harvard: Leading professors have backed the law faculty Yevgenia Gorbulsky

A row has broken out between leading US law school professors and SEC Commissioner Daniel Gallagher after he co-authored an article with Stanford professor Joseph Grundfest making allegations about Harvard’s Shareholder Rights Project. The Shareholder Rights Project is part of the Harvard law faculty and is run on a pro bono basis to help students get to grips with corporate governance practices. It represents five institutions, four pension funds and one foundation. The Gallagher/Grundfest paper accused Harvard and the SRP of violating federal securities law by assisting investors with shareholder proposals that did not include sufficient references to certain academic studies.

The nub of the issue is a widespread disagreement over  whether boards should stagger elections of its directors or introduce annual elections.  Harvard supports annual elections for directors and claims to have persuaded 100 of the US’s largest publicly traded companies to destagger. This has irked Messrs Gallagher and Grundfest who argue against de-staggering boards and suggest that Harvard could violate federal securities law when dealing with proxy voting on the basis of not providing enough information on the subject to companies.

The two authors claimed that ‘ Under the principle of respondeat superior, the SEC could bring enforcement proceedings against Harvard University alleging violations of Rule 14a-9. Private party plaintiffs should also be able to prevail in 14a-9 actions against Harvard. Courts have the authority to void prior votes that caused boards to de-stagger, but it is a matter of judicial discretion -- and a subject for conjecture -- as to whether such a remedy would be imposed as a cure for the material omissions in the Harvard Proposal.’ 

Thirty-four senior corporate and securities law professors from 17 of the  US’s leading law schools responded to the allegations by vigorously defending Harvard University. The group said, in a statement, that such accusations were deeply flawed. ‘Members of our bipartisan group differ widely in our views on corporate law issues, including on the appropriate use of staggered boards and shareholder proposals. However, we all agree that Commissioner Gallagher and Professor Grundfest should withdraw their accusations.’ 

They added that the proposals were consistent with the SEC’s ‘long-standing policy on shareholder proposals; none of the more than one hundred public companies receiving proposals, many represented by the country’s premier law firms, raised any of the claims put forward by the authors; and there is no precedent for an enforcement action or private suit against shareholder proponents, let alone those assisting them, of the type that the paper urged against Harvard and the SRP.’

And they said: ‘Furthermore, while it is always regrettable when meritless allegations are raised by any author, we are especially concerned that a sitting SEC Commissioner has chosen to issue such allegations without support from a prior investigation by the SEC staff and without due process of law. While the Commissioner has indicated his interest in changing the SEC’s long-held policy in this area, meritless accusations against private parties should not be part of an effort to bring about such a change. We worry that Commissioner Gallagher’s decision to level meritless allegations against specific private parties will have adverse consequences for the important work that the SEC must do.’  Sources: Gallagher/Grundfest paperHarvard Law Blogs ;  Statement; 

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22 January 2015

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