Must a company allow a stockholder, no matter the size of its stake, to submit non-binding proposals for stockholder action at a meeting, regardless of their number or subject matter? The answer depends on whether, under Delaware law, stockholders have an inherent right to submit precatory proposals for a vote at meetings. The SEC has long held that precatory proposals are generally proper subjects for stockholder action, but there is much debate over whether this view is supported by state law. In a forthcoming article, I argue that Delaware law does not provide stockholders such an inherent right.
LACK OF DELAWARE LAW BASIS
An examination of Delaware statutory and case law, as well as public policy considerations, demonstrates that none of these sources establish, or support the existence of, an inherent stockholder right to submit precatory proposals under Delaware law, and accordingly, that no such right exists.
ABSENCE OF STATUTORY AND COMMON LAW RECOGNITION
First, the Delaware General Corporation Law (the “DGCL”) does not contemplate (and thus does not expressly authorize) precatory stockholder proposals. Second, under Delaware law, stock ownership confers on stockholders three fundamental rights – to vote, sell and sue – from which flow certain “subsidiary rights.” Precatory stockholder proposals are inherently tied to voting rights (i.e., do stockholders have a right to vote on such proposals). Based on a review of Delaware’s voting rights jurisprudence, I conclude that stockholder voting rights extend to (i) the election of directors, (ii) matters committed to stockholders for approval by law, certificate of incorporation, or bylaw, and (iii) matters that the board determines to submit for a stockholder vote (including pursuant to a board decision to subject the company to a regime requiring certain precatory votes). Absent from this list of voting rights are non-binding proposals on which a stockholder forces a vote. Because no such voting right exists, a “subsidiary right” flowing therefrom to propose precatory stockholder proposals does not exist.
PUBLIC POLICY ALONE DOES JUSTIFY THE RIGHT
In addition, given that stockholders have multiple (and, in some respects, more effective) means of communicating with fellow stockholders and management and for promoting management accountability, the principal public policy justifications in favor of recognizing a precatory proposal right do not affect this lack of statutory or common law authorization. As it relates to Delaware, any ability of stockholders to submit precatory proposals is by virtue of federal law: specifically, Rule 14a-8.
OPPORTUNITY FOR PRIVATE ORDERING
In the absence of an inherent stockholder right, corporations possess broad flexibility to provide for, and regulate, the submission of precatory stockholder proposals by bylaw provision. Facially valid bylaws are consistent with the DGCL and certificate of incorporation and are not otherwise prohibited by law. Because stockholders do not have the inherent right to submit such proposals, and assuming the absence of a charter provision expressly granting that right, a bylaw provision providing for, and regulating, precatory stockholder proposals would be facially valid (i.e., it would not be inconsistent with a non-existent DGCL or other legal pronouncement). A reasonably tailored precatory proposal bylaw would allow a corporation to provide stockholders with what some view as a meaningful ability while also allowing the corporation to impose structure and safeguards with respect to precatory proposals for which a stockholder intends to solicit proxies. There is some uncertainty about whether a corporation can augment the requirements of Rule 14a-8 by bylaw, although SEC Chairman and then-Commissioner Paul Atkins and SEC Commissioner Mark Uyeda have each expressed support for private ordering. Therefore, these types of bylaws may also have the potential to apply to Rule 14a-8 proposals.
BENEFIT OF LEGISLATIVE CERTAINTY
Although a DGCL amendment may not be necessary to validate precatory proposal bylaws, it would nonetheless offer significant benefits – including reducing uncertainty, mitigating litigation risk, and providing an opportunity to legislate reasonable parameters around the terms of such provisions.
This post comes to us from Kyle Pinder, a partner in the Delaware law firm of Morris Nichols Arsht & Tunnell. It is based on his recent article, “The Non-Binding Bind: Reframing Precatory Stockholder Proposals under Delaware Law,” forthcoming in the Michigan Business and Entrepreneurial Law Review and available here.