Bring it On: The Delaware Courts Speak on Precatory Proposals under Rule 14a-8

We were commenting yesterday on the Commission's role in forcing shareholders to use recommendations in order to avoid having their proposal excluded under Rule 14a-8.  The discussion came up in the context of the shareholder proposal recently adopted by the Verizon shareholders to recommend that management allow for advisory votes on executive compensation.  The post is here.

In the Roundtable held earlier this month at the SEC on the relationship between the proxy rules and state law, Marty Dunn from the Division of Corporation-Finance made the following observation:  

• "Every time we get a binding [shareholder proposal], we get competing state law opinions, one of which says form the company that 141 doesn't allow this, and then we get one that says 109 does allow this.  We sit there and go we don't know.  We are going to say you haven't met your burden of proof because we have competing opinions."

In other words, staff at the Division get competing opinions on whether bylaws submitted by shareholders are proper subjects for shareholder action.  Because of the set up of Rule 14a-8, the staff must spend time trying to resolve disputes where there is no controlling case law.  As we noted in the Verizon post, one consequence of this approach is to push shareholders to make preceptor proposals, ones that only recommend certain action that can then be disregarded by management. 

At the same roundtable, Leo Strine, Vice Chancellor of the Delaware Court of Chancery, had a very interesting retort.  Bring it on, he more or less advised the Commission.  

• "I think those of us from Delaware would say one of the things the Commission could do to facilitate this is to make clear that if it's uncertain under state law and it's a by-law proposal, then it shouldn't be excluded and they should be able to put it on absent some showing, and then leave it to us, hold us accountable, and if we make the wrong decisions, you can bet we are going to hear about it from the institutional investor community and from the management community." 

In other words, when in doubt, allow the proposal to remain in the proxy statement.  It will be up to the parties and the Delaware courts to resolve the legality of the bylaw.  It is exactly what the Commission staff should do.  Precatory proposals should be used by shareholders when they view them as tactically necessary (to win support, for example), not because they are afraid the proposal might otherwise be excluded under Rule 14a-8. 

And what about the Commission's deliberations over whether to allow shareholder proposals that relate to the election of directors?  Vice Chancellor Strine was equally blunt:

• "If it relates to the actual system of elections, let the state courts determine that.  That will allow stockholders to have innovation and actually elegantly gets you out of the middle of this, which is you are facilitating change of the electoral process, responsiveness to stockholders, without a single solution to myriad circumstances.  You are giving life to the state law right.  I actually do not think you need to go to the Delaware Supreme Court every single time.  If it is uncertain, you put it on the ballot.  You let it come out.  If there is a fight about whether it is valid, frankly, a lot of times, the boards go along with it voluntarily once there is a stockholder vote." 

In other words, allow shareholder to include the proposals and let state law sort out their legality.  On these two issues, the Commission should follow the Chancery Court's advise.

Comments

[Steve H]

Jay, are you agreeing with a Delaware judge??

[J. Robert Brown]

I can only say, when they are right, they are right and this blog is not afraid to admit it!