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Corporate Governance

: The Race to the Bottom

Shareholder Participation in Governance and Precatory Proposals

By J. Robert Brown

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The entire SEC approach under Rule 14a-8 needs revision, a task that should be taken up quickly by the new Chairman. On Friday, the staff of the Division of Corporation Finance issued Legal Bulletin No. 14D, informing market participants of, among other things, a new email address for submitting no action requests under the rule. In addition, however, the bulletin also set out some of the staff's positions on assorted shareholder proposals. Essentially, the staff indicated that proposals calling for the elimination of classified boards and the reduction in the size of the board from 21 to 14 directors could be deleted unless unless the proponent revised the proposal "to urge" the board to take the steps necessary to effect the proposals. In other words, they would only be permitted if precatory.

The effect of the staff action is to essentially force shareholders to use precatory proposals. There are a number of problems with the approach. First, even the SEC has noted concern over an excessive use of precatory proposals without having acknowledged that it is the principal culprit for their use.

Second the emphasis on pracatory proposals severely weakens shareholder leverage. Even if they pass, companies can and often do ignore them. Thus, they falsely create the appearance of shareholder involvement in the governance process.

Third, and most importantly, the staff is acting as a gatekeeper for state law issues, mostly by interfering with governance by limiting shareholder rights. To the extent that the proposals mentioned in the bulletin raise legal concerns, the better way to handle them is to allow them into the proxy statement as mandatory requirements and then let the parties sort out the legal issues them in court. Indeed, VC Strine in the Delaware Chancery Court has encouraged the SEC to take this approach.

Shareholders may sometimes opt for precatory proposals as a matter of strategy, an approach designed to win over additional shareholders. But the staff's decision to make precatory proposals mandatory for certain types of provision is simply an interference with state law rights and ought to be stopped.

Company	Proposal	Date of our response	Our response
SBC Communications Inc.	Resolved that as of December 31, 2005 the number of SBC Board of Director seats will be reduced from twenty one (21) to fourteen (14).	Jan. 11, 2004	We concurred in the company’s view that the proposal could be excluded under rules 14a-8(i)(2) and 14a-8(i)(6), unless the proponent revised the proposal as a recommendation or request that the board of directors take the steps necessary to implement the proposal.
Gyrodyne Co. of America, Inc.	It is proposed that the classified board be abolished and all Directors, effective after the election of Directors in 1999, be elected annually.	Aug. 18, 1999	We concurred in the company’s view that the proposal could be excluded under rule 14a-8(i)(1), unless the proponent revised the proposal as a recommendation or request that the board of directors take the steps necessary to implement the proposal.
Sears, Roebuck and Co.	Resolved: That the stockholders . . . urge the Board of Directors to amend the Company’s Restated Certificate of Incorporation to declassify the Board of Directors for the purpose of Director elections.	Feb. 17, 1989	We concurred in the company’s view that the proposal could be excluded under rules 14a-8(c)(2) and 14a-8(c)(6) [now rules 14a-8(i)(2) and 14a-8(i)(6)], unless the proponent revised the proposal to urge that the board of directors take the steps necessary to effect the proposed amendment to the certificate of incorporation.