Based on his recent speech to the Society for Corporate Governance, it certainly seems as if SEC Commissioner Mark Uyeda would welcome an end to shareholder proposals. He proposes ideas that would empower companies to limit severely how shareholders could offer resolutions at the annual general meeting (AGM).
Uyeda suggests companies consider amending bylaws to do to precatory proposals what companies have sought to do to director nominations. He doesn’t come right out and say so. He probably should not advocate against proposals given his position as their arbiter. Yet, he doesn’t like them, his reasoning leads inevitably to this conclusion, and he writes a sort of roadmap for doing just that.
In the Proxy or on the Agenda
Uyeda distinguishes crucially between how a proposal makes it into the company proxy statement and how it makes it onto the agenda for the AGM. He does so as he contrasts which laws affect each:
In a scenario where all shareholders attend a meeting and vote in person and no proxies are solicited, state law, including the company’s charter and bylaws, can impose requirements … on a shareholder’s ability to add a proposal to the meeting agenda. If the company were to solicit proxies and a shareholder wished to include his or her proposal on the company’s proxy statement, the federal securities laws will govern the company’s proxy solicitation.
These are two very different things.
He lives in the world of proxy statements, and how Sec. 14a-8 of the SEC proxy solicitation rules govern how companies and shareholders use those proxy statements. Yet, how a proposal gets in a proxy statement is a later step in the process. A shareholder first submits the proposal to the company for inclusion on the AGM agenda.
Companies in general have two basic requirements for so including a proposal. First, a shareholder must submit a proposal pursuant to the same advance notice deadlines for director nominations. At United Airlines Holdings (UA), a representative example, it’s 90-120 days before the anniversary of the AGM (Art. 2.10(2)).
Second, a shareholder discloses some information about itself and the proposal. At UA, that includes identity of the shareholder, shares and derivatives owned, relationships with other shareholders, legal proceedings, and a few other mostly-trivial and easy-to-disclose items (Art. 2.10(3)(A)). Of course, the shareholder also describes the proposal and submits the text (Art. 2.10(3)(C)).
Uyeda surely knows shareholders confront more stringent requirements to include a proposal in a proxy statement. The SEC allows companies to exclude proposals from a proxy statement based on the wide range of all-too-well-known reasons, including “ordinary business”, “substantial implementation”, and the rest. So, a shareholder could find their proposal is eligible for presentation, discussion, and vote at the AGM, but shareholders that vote by proxy (almost all of them!) would have no way to learn about and vote on it.
State Law Regulates an AGM
Uyeda thinks state laws that apply to an AGM should consider how companies treat shareholder proposals:
[S]imply because the shareholder is using the company’s proxy solicitation, can state law no longer impose requirements, such as share ownership thresholds and submission deadlines, on the shareholder’s ability to add the proposal to the meeting agenda? No – state law must continue to have a say. Section 14(a)…should not be read in a manner that allows the [SEC] to abrogate the role of state corporate law regarding the conduct of shareholder meetings, including any requirements or conditions on a shareholder’s ability to add a proposal to the meeting agenda.
Since states don’t regulate proxies, the SEC does, he seems to want states to regulate how companies consider AGM proposals.
Private Ordering Means Bylaw Amendments
Uyeda goes beyond wanting the Delaware legislature to write a law about how companies should treat shareholder proposals. He prefers private ordering as the means to establish specific rules: “For shareholder proposals, private ordering can offer potential benefits to companies and their shareholders,” calling it “appealing”.
Private ordering permits companies to set their own corporate governance rules, rather than federal or state law and regulation. We noted it allows companies and shareholders flexibility to design corp gov that fits a specific situation. It works only when shareholders have a meaningful voice, which they typically do not.
How would a company order privately its approach to shareholder proposals? Through bylaw amendments, of course (emphasis ours):
To reflect [Sec. 14a-8] philosophy and intent, a company should have the right to adopt, in its governing documents, requirements[61] for shareholder proposals that differ from those set forth in rule 14a-8.
fn 61: … Both courts and the [SEC] have stated that the right to present a proposal is a matter of state law. If the procedural requirements contained in … rule 14a-8 were framed in a company’s governing documents as requirements to present a proposal at a meeting, then state law would seem to govern those requirements.
He states it clearly: if a company amends bylaws to include all or some of the exclusions in Sec 14a-8 or some other requirements, then state law would govern how those exclusions and requirements work. Right now, company bylaws generally don’t have those exclusions. Imagine bylaw terms that allow a company to exclude a shareholder proposal from the AGM agenda based on it constituting “ordinary business”…
Does Delaware Issue No-Action Letters?
Of course not. A shareholder can only sue a company over its bylaws, almost always in state court.
Activists saw companies exclude director nominees based on failure to comply with advance notice bylaw terms. BoDs tighten those terms to make it easier to exclude those nominees. They dare shareholders to challenge those exclusions, which they can do only by litigating the matter, usually in Delaware Chancery Court.
Uyeda appears to invite a similar approach to shareholder proposals. He doesn’t like them, citing figures about declining shareholder support, complaining about their cost to companies, asking in response to the increased number lately, “[a]t what point will there be shareholder proposal overload…”, and calling them “Tyranny of the Minority.”
Thus, he thinks companies can and maybe should amend bylaws to throw up onerous obstacles to including shareholder proposals on the AGM agenda. How about reflecting the standard SEC proxy statement exclusion bases in the bylaws? The sole recourse is suing the company.
BoD attorneys spent last year drafting bylaw amendments limiting director nominations under the guise of conforming to UPC. They probably need something to do this summer and fall. We await a new batch of bylaw amendments that copy or extend on 14a-8 exclusions, with the pretense of conforming bylaws to the 14a-8 rules.
This post comes to us from Michael R. Levin, founder and editor of The Activist Investor.