In recent prepared remarks, U.S. Securities and Exchange Commission (SEC) Chair Paul S. Atkins laid out his priorities for the SEC, including efforts to make operating as a public company attractive to more businesses.
Atkins specifically addressed precatory (nonbinding) shareholder proposals as a source of companies’ unwelcome time, attention, and spending on issues that are increasingly political, noting:
[I]f there is no fundamental right under Delaware law for a company’s shareholders to vote on precatory proposals—and the company has not created that right through its governing documents—then one could make an argument that a precatory shareholder proposal submitted to a Delaware company is excludable under paragraph (i)(1) of Rule 14a-8.
Rule 14a-8 provides a mechanism for a shareholder to include its proposal in a company’s proxy statement, provided that the proposal can properly be brought before a shareholder meeting under state law. Rule 14a-8(i)(1) allows a company to exclude a shareholder proposal from its proxy statement “[i]f the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company’s organization.” Note 1 to Rule 14a8(i)(1) states, “[M]ost proposals that are cast as recommendations or requests that the board of directors take specified action are proper under state law.” Thus, it has long been assumed that such precatory proposals are a proper subject for shareholders of Delaware companies to bring subject to Rule 14a-8, even though the Delaware General Corporation Law (DGCL) does not expressly contemplate a nonbinding proposal. Atkins stated in his remarks that “the notion that Rule 14a-8 gives shareholders the right to present precatory proposals—when state law does not—is supported neither by the text of the note nor its history.” He went on to say he has “high confidence” that the SEC staff would honor an argument to this effect (accompanied by a Delaware legal opinion) made under Rule 14a-8(i)(1), and he pointed out that the SEC has the right to certify questions of law to the Delaware Supreme Court, which could allow for quick resolution if any shareholder proponent took an opposing argument.
The impact of this position on the next proxy season could be substantial, given that currently almost all shareholder proposals are presented as nonbinding.
Atkins also noted that companies may be able to add provisions to their governing documents that would effectively override Rule 14a-8’s relatively minor shareholder ownership requirements. Citing a recently enacted code provision in Texas that allows companies to opt into a law that required a shareholder to own at least $1 million in market value or 3% of the company’s voting shares in order to submit a shareholder proposal, Atkins indicated that he believed these provisions, if adopted by a company, would control over Rule 14a-8’s significantly less onerous shareholder ownership requirements.
The SEC is slated to review Rule 14a-8 this spring, but if these alternative pathways to reducing or eliminating shareholder proposals are bolstered by rulings in Delaware (or, perhaps, by sufficiently well-supported legal opinions), companies may be impacted as soon as this coming proxy season.
Takeaways
Atkins has suggested that nonbinding proposals are not automatically a “proper subject” under the DGCL. Unless a company has created a shareholder right to vote on such a proposal in its governing documents, no-action letters that argue such proposals can be excluded from a proxy statement under Rule 14a8(i)(1) will likely succeed, provided a Delaware opinion can be obtained. In addition, companies should consult with counsel to determine if there are benefits to adopting charter or bylaw provisions that strengthen the ownership or other requirements for shareholders to introduce proposals to be voted upon at stockholder meetings.