The SEC promulgated the shareholder proposal rule, 14a-8, over 80 years ago, less than a decade after the Securities Exchange Act of 1934 was enacted. Shareholder proposals have become a major part of American corporate governance, advancing reforms such as non-staggered boards, majority voting for directors, and proxy access for nominating directors. Yet the SEC is proposing to rescind Rule 14a-8. Its leading argument is that it has been wrong all these decades and Section 14(a) of the ‘34 Act does not authorize the rule after all. Today’s SEC is wrong. Its best argument points not to rescinding the rule but rather to modifying how it treats precatory (advisory) proposals, which constitute a large majority of shareholder proposals.
Rule 14a-8 allows shareholders who are bringing a matter to be voted on at a shareholder meeting to have their proposal included in the corporate proxy. This saves them the expense and effort of soliciting proxies on their own, though they may still solicit themselves if they want to or if the rule allows the company to refuse to include the proposal in the corporate proxy. Rule 14a-8 was first promulgated by the SEC in 1942, pursuant to the SEC’s authority under Section 14(a) of the ’34 Act.
Section 14(a) provides a person may not solicit any proxy in contravention of rules prescribed by the SEC. The SEC begins its new statutory argument with a true premise: Section 14(a) gives the Commission authority to regulate the proxy process, whereby companies solicit shareholders and ask for authorization to vote on their behalf at a shareholder meeting. It does not purport to regulate what matters shareholders can vote on, leaving that to state corporate law. For instance, were the SEC to use 14(a) to attempt to give shareholders the power to amend corporate charters on their own, that would be an invalid use of the Commission’s 14(a) authority, since state law allows shareholders to vote on amending the charter only after the board has approved the proposed amendment. The SEC has accepted this state law premise since the origins of Rule 14a-8. The current Commission thus has a tall task to show that it has failed to follow its own stated intentions.
The SEC contends Rule 14a-8 is both too broad and too narrow. It claims the rule is too broad because it can force companies to enable votes where state law does not allow shareholders to act. The rule’s first basis upon which companies may exclude a proposal aims to prevent this error. Companies may exclude any proposal that is not “a proper subject for action by shareholders under the laws of the jurisdiction of the company’s organization.”[i] This basis for exclusion has been present in some form from the very beginning of Rule 14a-8. The second basis for exclusion backs this up, allowing exclusion for any proposal that if implemented would violate any state, federal, or foreign law. So long as the SEC properly applies these two parts of the rule (more on that qualifier shortly), companies will be able to exclude any proposal that would allow shareholders to vote on matters that state law does not authorize them to vote on.
The SEC claims the rule is too narrow because it restricts shareholders from acting where state law does empower them to act. That is wrong because the rule does not restrict the underlying voting authority of shareholders, it simply limits when they can use the corporate proxy to invoke that authority. The SEC’s argument rests on the proliferation of bases for excluding proposals. Consider for instance a proposal to amend the bylaws that shareholders have authority under state law to enact, but which received less than 5% shareholder support when first proposed two years earlier. The resubmission basis for exclusion would allow the company to exclude that proposal, a limitation not present in state law. There are many other bases for exclusion beyond the first two, all of which may sometimes function to allow exclusion of proposals state law says shareholders may make.
The SEC claims this runs afoul of state law: “[B]y establishing standards not found in State law for whether a shareholder proposal must be included in a company’s proxy materials, the Commission effectively dictates the scope of shareholder voting rights and, therefore, exceeds its authority.”[2]
That is wrong. In the resubmission example, for instance, the SEC has not changed the underlying state rule at all. Shareholders may still make the proposal in person at a meeting, they may still solicit proxy authority on their own to vote others’ shares in favor of their proposal, they may still ask the company to include the proposal in its proxy, and the company may still say yes to doing that. All that the exclusion does is say that shareholders may not use Rule 14a-8 to force inclusion of their proposal in the company’s proxy. The shareholder proponents are no worse off than if Rule 14a-8 didn’t exist. For prudential reasons the SEC has chosen not to go as far as it could under Section 14(a). But this does not mean that the SEC is thereby overruling state law. The SEC has misunderstood its own core premise—the distinction between state law defining shareholder voting power and SEC authority to regulate the proxy process.
Thus, the many ways in which Rule 14a-8 restrains itself by allowing exclusion of proposals that may be valid under state law does not at all imply that Rule 14a-8 goes beyond the SEC’s authority under Section 14(a). But I have yet to address the SEC’s best argument based on statutory authority. Perhaps the SEC has been mis-applying the “proper subject for shareholder action” basis for exclusion. Maybe it has been forcing companies to include proposals that are in fact not authorized under state law. That brings us to the puzzle of precatory proposals.
What is a proper subject for shareholder action under state law, anyway? Most important, shareholders elect directors. Other SEC rules address voting on directors. As noted above, shareholders vote on charter amendments, but only after the board approves. The same structure applies for a few other major decisions, including mergers, sales of substantially all assets, and dissolution. Since shareholders cannot initiate any of these actions themselves, they cannot use Rule 14a-8 to initiate binding votes on those actions. One sort of binding action shareholders can initiate on their own is changes to the bylaws. In Delaware, the leading case analyzing what shareholders may do in bylaws is CA, Inc. v. AFSCME,[3] which says that shareholders may enact bylaws governing procedural matters. It is notable that CA, Inc.reached the Delaware Supreme Court via certification from the SEC for clarification as to whether the bylaw in that case was a proper subject for shareholder action.
And then there are precatory proposals, which have no binding effect. Focusing on law in the leading state for public corporations, Delaware’s General Corporation Law does not speak directly on the subject. A recent article by a Delaware lawyer[4] helped prod the SEC’s attack on Rule 14a-8 by arguing that shareholders have no right to have a precatory proposal voted on. In an article posted earlier this year, I considered the statutory and case law on point, and argued that while precatory proposals are not a shareholder right, they are also not prohibited. That is, they are permitted. In a corporation that has not attempted to restrict or prohibit precatory proposals, they are therefore a propersubject for shareholder action,[5] and should not be excludable on that basis. Although I think that is pretty clearly the best answer, the SEC can and should certify the question to the Delaware Supreme Court. That would yield highly useful precedent, as happened with CA, Inc. So used, Rule 14a-8 would be a form of collaborative federalism, using the rule to help Delaware develop its law.
A harder case is presented where a company restricts or prohibits precatory proposals in its bylaws or certificate. Under state law, it can probably do this. How that interacts with the current version of Rule 14a-8 is rather unclear. The note added to the end of the rule’s proper-subject-for-action exclusion suggests that precatory proposals are generally valid, which might lead to no exclusion even where a limiting bylaw applies. Here the current rule may be in tension with state law. But a modest fix would be to eliminate or amend the note to recognize that state law may allow corporate provisions to limit precatory proposals, and if so, proposals in those circumstances should be excludable. Here again certification to the state courts would yield helpful clarity. Also, states may clarify their statutory language, as Texas has done in providing that shareholders must hold at least $1,000,000 worth or 3% of shares to submit a matter for a vote.[6] And note: If bylaws may limit precatory proposals, they may also promote them, including providing for inclusion in the corporate proxy even where they are excludable under Rule 14a-8. Moreover, shareholders may enact bylaws governing shareholder proposals, since such bylaws concern the procedure for voting at shareholder meetings and are thus valid under CA, Inc., as noted above.
Thus, close inspection of Section 14a-8 and its relationship to state law shows no need to rescind Rule 14a-8. The rule’s structure fundamentally respects a state-law definition of shareholder voting rights and invokes Section 14(a)’s authority to regulate proxy solicitation to make those voting rights easier to exercise in some circumstances. Uncertainty surrounding the state-law basis for precatory proposals suggests some adjustment to the rule. The SEC should seek state court guidance on precatory proposals where it can, as in Delaware, and should give effect to corporate bylaws limiting precatory proposals if that state guidance or statutory language provides that such bylaws are valid. If the bylaws are valid, shareholders can then use Rule 14a-8 to propose and possibly enact bylaws expanding their ability to include precatory proposals in the company proxy.
That approach would not only respect state law, but also strike an appealing policy balance. It would create plenty of room for state action and private ordering. However, it would also create a pro-shareholder default rule[7](precatory proposals are presumptively not excludable) and provide an altering rule[8] allowing shareholders to respond to board bylaws limiting precatory proposals with bylaws of their own re-establishing shareholder power to propose precatory bylaws using the company proxy. This balanced mix of state and federal rules would provide room for experimentation and variation while still protecting the ability of shareholders to help shape the governance framework within companies.
ENDNOTES
[i] 15 U.S.C. § 78n(a)(i)(1).
[2] Rescission of Rule 14a-8’s Federal Regulation of Shareholder Proposals and Amendments to Rule 14a-4, Exchange Act Release No. 106,383, 91 Fed. Reg. 59,901-2, (proposed Sept. 21, 2026).
[3] 953 A.2d 227 (Del. 2008).
[4] Kyle A. Pinder, The Non-Binding Bind: Reframing Precatory Stockholder Proposals Under Delaware Law, 15 Mich. Bus. & Entrepreneurial L. Rev. 1 (2025).
[5] Del. Code tit. 8, § 211(b).s
[6] Tex. Bus. Org. Code. Ann. § 21.373.
[7] Lucian Arye Bebchuk & Assaf Hamdani, Optimal Defaults for Corporate Law Evolution, 96 Nw. U.L. Rev. 489 (2002).
[8] Brett H. McDonnell, Sticky Defaults and Altering Rules in Corporate Law, 60 SMU L. Rev. 3838 (2007).
Brett McDonnell holds the Dorsey & Whitney Chair and is a professor at the University of Minnesota Law School,