Corporate Governance

As Predicted: The SEC and the Further Denial of Shareholder Access

By J. Robert Brown

When the battle raged over the access proposal, the Commission adopted amendments to Rule 14a-8(i)(8) that included extremely broad language.  The release, however, promised that the broad language would not be used to exclude existing types of proposals that had been held by the staff to be consistent with the exclusion.  Specifically, the release  included a list of previously approved proposals, including one that if adopted would require the company to pay the costs of a dissident's proxy solicitation.  

The staff has now embarked on an approach designed to renege on that promise.  In a no action letter to CA, Inc. concerning an attempt to exclude a shareholder proposal submitted by AFSCME that called for the repayment of solicitation expenses, the staff declined to allow it to be excluded.  Nonetheless, for the first time, the staff referred the matter to the Delaware Supreme Court for an opinion.  As the no action letter noted: 

• Under Section 11(8) of Article IV of the Delaware Constitution, the Delaware Supreme Court may hear and determine questions of law certified to it by the Commission. To help us determine whether you have satisfied your burden of demonstrating that CA may exclude the proposal under rule 14a-8(i)(1) or under rule 14a-8(i)(2), at our request, the Commission has certified the state law questions raised by your letter under rule 14a-8(i)(1) and rule 14a-8(i)(2) to the Delaware Supreme Court, specifically, (1) whether the proposal is a proper subject for action by shareholders as a matter of Delaware law, and (2) whether the proposal, if adopted, would cause CA to violate any Delaware law to which it is subject.

This is a very bad idea for so many reasons.  First, as a matter of policy, the Commission should not be in the position of having its interpretation decided by the pro-management Delaware courts. 

Second, it is entirely unnecessary.  There is an alternative mechanism for testing the legality of this type of proposal.  Allow it to be included and if it passes, let the company challenge the proposal in the Delaware courts.  There is absolutely no reason to submit it to the courts now. 

Third, the staff's choice for submission to the Delaware Supreme Court for the first time is curious.  These proposals, if adopted and implemented, would increase the ability of shareholders to elect directors.  Having already squelched shareholder rights in this area through the denial of access, it now looks like a back door effort by the staff to restrict other types of proposals designed to increase the ability of shareholders to elect directors.

With two democrats on the Commission, they should insist on an immediate review of this policy and frankly order the staff to withdraw the request.  Let the proposal go forward and leave it to the parties to sort it out in the Delaware courts if they think it appropriate. 

Full post as published by The Race to the Bottom on July 01, 2008 (boomark / email).