In a bombshell speech last night, SEC Chair Paul Atkins stated that one of his top priorities is to make being a public company an attractive proposition – and he noted that these are the three primary obstacles:
- Simplify and scale the SEC’s disclosure requirements to reduce the costs of preparing SEC filings and, at the same time, make them more comprehensible.
- De-politicize shareholder meetings and return their focus to voting on director elections and significant corporate matters.
- Reform the litigation landscape for securities lawsuits to eliminate frivolous complaints, while maintaining an avenue for shareholders to continue to bring meritorious claims.
His speech then focused on how the SEC might be able to help overcome the last two of these obstacles. On securities litigation reform, Chair Atkins took issue with recent Delaware amendments prohibiting mandatory arbitration and fee shifting for federal securities law claims. And then the big news was a bevy of comments aimed at Rule 14a-8 as follows:
Are Precatory Shareholder Proposals Proper Under Delaware Law?
In the speech, Chair Atkins indicated that there’s no firm basis under Delaware law for a shareholder right to submit non-binding proposals and that if a “company obtains an opinion of counsel that the proposal is not a ‘proper subject’ for shareholder action under Delaware law, this argument should prevail, at least for that company. I have high confidence that the SEC staff will honor this position.”
The Chair pointed to Morris Nichols’ Kyle Pinder’s upcoming paper — as well as statements from former Chancellor Leo Strine — for the proposition that there’s no firm Delaware law basis for a shareholder to submit non-binding proposals.
To get into the nitty gritty of this, the ‘proper subject’ exclusion basis (ie. Rule 14a-8(i)(1)) permits companies to exclude shareholder proposals from proxy statements “[i]f the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company’s organization.” When making this argument in a no-action request, companies are required to include supporting opinions from state law counsel as to whether the proposal is not proper under state law.
Rule 14a-8(i)(1) historically hasn’t been relied upon much because it has a note that states: “In our experience, most proposals that are cast as recommendations or requests that the board of directors take specified action are proper under state law. Accordingly, we will assume that a proposal drafted as a recommendation or suggestion is proper unless the company demonstrates otherwise.” This note has placed a burden on the company and its supporting opinion that in the past was difficult to overcome.
Based on Chair Atkins’ speech, that burden might not be so difficult to be overcome going forward – although this likely will end up being decided ultimately in a Delaware court in the near future as the Chair noted in the speech that the SEC may certify this question to the Delaware Supreme Court for declaratory judgment — since the SEC used this option back in 2008 in the CA v. AFSCME case when Corp Fin was confronted with two conflicting Delaware opinions. The Chair also noted that the Delaware court acted fast when the SEC certified in ‘08.
Should the SEC Permit State Law to Supersede Rule 14a-8?
Chair Atkins also addressed the legality of the recent Texas legislation that permits Texas companies to opt in to ownership and procedural conditions for submitting a shareholder proposal that are more onerous than the federal Rule 14a-8 standard. The Chair stated that state law provisions should be respected by the SEC under Rule 14a-8(i)(1), as would any restrictions imposed by a company’s governing documents.
The SEC Will Reconsider Rule 14a-8’s Fundamental Premise
As reflected in the recent Reg Flex Agenda, Chair Atkins stated that the fundamental premise of the shareholder proposal rule may need to be reconsidered since over 80 years has passed since that rule was first adopted.
Authored by
Broc Romanek