As Predicted: The SEC and the Further Denial of Shareholder Access

When the battle raged over the access proposal, the Commission adopted amendments to Rule 14a-8(i)(8) that included extremely broad language.  The release, however, promised that the broad language would not be used to exclude existing types of proposals that had been held by the staff to be consistent with the exclusion.  Specifically, the release  included a list of previously approved proposals, including one that if adopted would require the company to pay the costs of a dissident's proxy solicitation.  

The staff has now embarked on an approach designed to renege on that promise.  In a no action letter to CA, Inc. concerning an attempt to exclude a shareholder proposal submitted by AFSCME that called for the repayment of solicitation expenses, the staff declined to allow it to be excluded.  Nonetheless, for the first time, the staff referred the matter to the Delaware Supreme Court for an opinion.  As the no action letter noted: 

• Under Section 11(8) of Article IV of the Delaware Constitution, the Delaware Supreme Court may hear and determine questions of law certified to it by the Commission. To help us determine whether you have satisfied your burden of demonstrating that CA may exclude the proposal under rule 14a-8(i)(1) or under rule 14a-8(i)(2), at our request, the Commission has certified the state law questions raised by your letter under rule 14a-8(i)(1) and rule 14a-8(i)(2) to the Delaware Supreme Court, specifically, (1) whether the proposal is a proper subject for action by shareholders as a matter of Delaware law, and (2) whether the proposal, if adopted, would cause CA to violate any Delaware law to which it is subject.

This is a very bad idea for so many reasons.  First, as a matter of policy, the Commission should not be in the position of having its interpretation decided by the pro-management Delaware courts. 

Second, it is entirely unnecessary.  There is an alternative mechanism for testing the legality of this type of proposal.  Allow it to be included and if it passes, let the company challenge the proposal in the Delaware courts.  There is absolutely no reason to submit it to the courts now. 

Third, the staff's choice for submission to the Delaware Supreme Court for the first time is curious.  These proposals, if adopted and implemented, would increase the ability of shareholders to elect directors.  Having already squelched shareholder rights in this area through the denial of access, it now looks like a back door effort by the staff to restrict other types of proposals designed to increase the ability of shareholders to elect directors.

With two democrats on the Commission, they should insist on an immediate review of this policy and frankly order the staff to withdraw the request.  Let the proposal go forward and leave it to the parties to sort it out in the Delaware courts if they think it appropriate. 

Comments

[Harry Gerla]

The problem you've highlighted in your post is caused neither by the SEC's unfortunate access decision, nor by the SEC staff's decision to ask the Delaware Supreme Court for an advisory opinion. The problem is caused by Rule 14(a)8's exclusion for matters which are not a proper subject for shareholders under state law. As long as that exemption exists, the ability of shareholders to express their voice through access to a registrant's proxy materials will be subject to abridgment by pro management courts or legislatures be they in Delaware or other states.

Allowing state courts to control interpretation of 14(a)8 may be bad policy, but it was a policy created long ago when the exclusion for matters which were not proper subjects for shareholders under state law was created.

The argument that the SEC's certification of the question to the Delaware Supreme Court is "unnecessary" is also strained. You argue that the SEC staff can simply rule that the proposal cannot be excluded, and allow the amendment to be challenged in the Delaware courts if it passes. The problem with that argument is that it can be made with respect to any claim that a proposal can be excluded under (i)(1). If the SEC staff consistently adopted that approach, it would render the (i)(1) exclusion virtually meaningless. Getting rid of the exclusion may be good policy, but it should be done by amending the rule, not by a back door policy of not enforcing the exclusion.

It is also hard to argue with the SEC staff's decision to certify the question to the Delaware Supreme Court. Obtaining a ruling from that body is certainly cheaper and faster than holding the shareholder meeting and vote on the proposal, and if it passes, having it challenged in Chancery and then having that challenge reviewed by the Delaware Supreme Court.

In spite of my "legal" defense of the Staff's action, I too am extremely concerned with what the
Delaware Supreme Court might do in this case. The issue in the CA no action letter touches on a major gray area in corporate law--how to reconcile the legal right of shareholders in Delaware and many other jurisdictions to amend directly a corporation's bylaws, and the delegation by the state corporation code to the Board of Directors of the power to direct the business and affairs of the corporation. Given the Delaware Court's pro management bent, I fear that it may take this opportunity to issue a decision that heavily emphasizes the latter at the expense of the former.