Source: https://www.professorbainbridge.com/professorbainbridgecom/2017/06/the-case-for-pruning-the-shareholder-proposal-regime.html
Timestamp: 2020-08-09 18:19:01
Document Index: 446925020

Matched Legal Cases: ['§ 240', '§ 240', '§ 240', '§ 240', '§ 240', '§ 240']

The case for pruning the shareholder proposal regime - ProfessorBainbridge.com
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[1] See, e.g., Med. Comm. for Human Rights v. Sec. & Exch. Comm'n, 432 F.2d 659, 674 (D.C. Cir. 1970), vacated as moot, 404 U.S. 403 (1972) (noting “the concepts of corporate democracy embodied in the proxy rules”); Frank D. Emerson & Franklin C. Latcham, Further Insight into More Effective Stockholder Participation: The Sparks-Withington Proxy Contest, 60 Yale L.J. 429, 430 (1951) (citing the proxy contest at The Sparks-Withington Company as providing “examples of how the SEC's proxy rules in general promote ‘corporate democracy’”); Note, Disclosure of Payments to Foreign Government Officials Under the Securities Acts, 89 Harv. L. Rev. 1848, 1855 (1976) (“The Securities Exchange Act also reflects an intent to promote shareholder democracy in its authorizing the SEC to regulate proxy solicitation.”
[2] See Daniel E. Lazaroff, Promoting Corporate Democracy and Social Responsibility: The Need to Reform the Federal Proxy Rules on Shareholder Proposals, 50 Rutgers L. Rev. 33, 37 (1997) (arguing that “the SEC has attempted to strike the difficult balance between enhancing corporate democracy through Rule 14a-8 and preventing undue harassment of, or interference with, the primary profit-making function of American business”); cf. Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Corporate Law 85-86 (1991) (arguing that Rule 14a-8 is actually an “anti-democratic device”).
[3] For a more detailed overview of Rule 14a-8 and its various requirements, see Stephen M. Bainbridge, Corporate Law 294-302 (3rd ed. 2015).
[4] SEC Rule 14a-8(i)(1) allows the corporation to exclude from its proxy statement any proposal that “is not a proper subject for action by shareholders under the laws of the jurisdiction of the company's organization.” 17 CFR § 240.14a-8(i)(1). In a note on that provision of the Rule, however, the SEC takes the position “most proposals that are cast as recommendations or requests that the board of directors take specified action are proper under state law. Accordingly, [the SEC] will assume that a proposal drafted as a recommendation or suggestion is proper unless the company demonstrates otherwise.” Id.
[5] See Thomas Lee Hazen & Lissa Lamkin Broome, Board Diversity and Proxy Disclosure, 37 U. Dayton L. Rev. 39, 45 (2011) (observing that “the shareholder proposal rule has proven a powerful tool for shareholders desiring to voice concerns”).
[6] See Roosevelt v. E.I. DuPont de Nemours & Co., 958 F.2d 416, 421 (D.C. Cir. 1992) (stating that Congress intended that the SEC’s proxy rules “bolster the intelligent exercise of shareholder rights granted by state corporate law”).
[7] See Dooley, supra note 5, at 181 (explaining that shareholders “have no authority to initiate action on such fundamental questions as whether the corporation shall setts its assets, merge with another firm or, under most statutes, even amend its charter”).
[9] See supra notes 6-8 and accompanying text (discussing the board of directors’ governance role).
[10] See supra note 3 and accompanying text (noting the undemocratic nature of the corporation).
[11] See generally Stephen M. Bainbridge, The New Corporate Governance in Theory and Practice (2008) (describing the corporate governance model known as director primacy).
[12] Larry Ribstein, Why Corporations?, 1 Berkeley Bus. L.J. 183, 196 (2004). See generally Jean Jacques du Plessis et al. Principles of Contemporary Corporate Governance 9 (2d ed. 2011) (“Until very recently, the ‘shareholder primacy model’ and ‘stakeholder primacy model’ of corporate governance have been the most prominent models, but Stephen Bainbridge, in his excellent work, The New Corporate Governance in Theory and Practice, analyses these theories and provides some exciting new perspectives on corporate governance models by expanding on the ‘director primacy model’ that he developed recently.”); Seth W. Ashby, Strengthening the Public Company Board of Directors: Limited Shareholder Access to the Corporate Ballot vs. Required Majority Board Independence, 2005 U. Ill. L. Rev. 521, 533 (“Although theorists have long debated how to best describe the public company, a new theory of the firm has emerged that appears more complete than its predecessors: Professor Stephen M. Bainbridge’s model of director primacy.”).
[13] Kevin L. Turner, Settling The Debate: A Response To Professor Bebchuk’s Proposed Reform Of Hostile Takeover Defenses, 57 Ala. L. Rev. 907, 927–28 (2006). Turner goes on to note that “the Delaware jurisprudence, while not explicitly affirming ‘director primacy,’ does implicitly leave the directors to make decisions with shareholders expressing their views only in specific and limited situations.” Id. at 928.
[14] As a critic of the director primacy model observed, “the exigencies of law review scholarship entail repeating the same argument in multiple articles before going on to apply that argument to specific topics.” Brett McDonnell, Professor Bainbridge and the Arrowian Moment: A Review of The New Corporate Governance in Theory and Practice, 34 Del. J. Corp. L. 139, 141 (2009). Accordingly, as Michael Paulsen observed in a similar situation, “[t]he result is a certain amount of borderline-self-plagiarism, for which I hereby apologize—and which this general footnote hopefully mitigates to the extent necessary ….” Michael Stokes Paulsen, The Priority of God: A Theory of Religious Liberty, 39 Pepp. L. Rev. 1159 1162 n.5 (2013).
[15] See Kenneth J. Arrow, The Limits of Organization 68-69 (1974) (discussing organizational decision making).
[17] See Michael P. Dooley & E. Norman Veasey, The Role of the Board in Derivative Litigation: Delaware Law and the Current Ali Proposals Compared, 44 Bus. Law. 503, 520 (1989) (arguing that the “decisional default rules of partnership law, which emphasize the partners' equal rights to participate in the management of the business, closely resemble Arrow's Consensus model”).
[18] See Arrow, supra note 60, at 69 (providing examples of authority-based decision-making structures).
[19] See McDonnell, supra note 59, at 154 (“Consensus works where all team members have identical interests and identical information.”).
[20] See id. (“In a large corporation, no major constituency group comes close to achieving identical interests or identical information.”); see also Dooley & Veasey, supra note 62, at 520 (explaining that “the statutory scheme of centralizing corporate authority in the board and relegating the stockholders to a passive role is intended to economize on the costs of decisionmaking within the firm”).
[21] See generally Iman Anabtawi, Some Skepticism About Increasing Shareholder Power, 53 UCLA L. Rev. 561, 579-93 (2006) (setting out a number of ways in which shareholders' interests may conflict). In addition to Arrow’s information and incentive criteria, an Authority-based decision-making structure is essential to the public corporation due to the collective action problems inherent in attempting to involve many thousands of decision makers, which necessarily prevent shareholders from operating the corporation by consensus. See Jana Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335, 340 (Del. Ch. 2008) (noting that, “with ownership diffused among so many holders, there exists a problem of collective action”).
[22] See Anabtawi, supra note 66, at 578 n.76 (explaining that “differences of opinion over how to maximize shareholder value” is a source of “shareholder division”).
[23] See Martin Lipton & William Savitt, The Many Myths of Lucian Bebchuk, 93 Va. L. Rev. 733, 744-46 (2007) (explaining why shareholders often have different time horizons for maximization).
[24] See Anabtawi, supra note 66, at 578 n.76 (explaining that shareholders can have differing “preferences for income versus growth and tax status”).
[25] See Keith N. Hylton, An Economic Theory of the Duty to Bargain, 83 Geo. L.J. 19, 77 (1994) (“Both the excessive cost of keeping all the shareholders informed and the individual shareholders' “free rider” incentive to let the other shareholders bear the costs of participating in corporate affairs induce rationally apathetic shareholder behavior towards corporate decisions.”).
[26] See Jana Master Fund, Ltd. v. CNET Networks, Inc., 954 A.2d 335, 340 (Del. Ch. 2008) (“Individual investors have too little ‘skin in the game’ to rationally devote the time and energy necessary to keep themselves aware of the details of the corporation’s performance or to campaign for corporate change.”).
[27] Zohar Goshen, Shareholder Dividend Options, 104 Yale L.J. 881, 902 (1995) (observing that “the costs of shareholder voting include the cost of informing shareholders and opportunity costs”).
[28] Patrick J. Straka, Executive Compensation Disclosure: The SEC's Attempt to Facilitate Market Forces, 72 Neb. L. Rev. 804, 835 (1993) (arguing that small shareholders' costs will outweigh the benefits of making an informed decision).
[29] See Jana Master Fund, 954 A.2d at 340 (observing that “most shareholders are rationally apathetic”).
[30] See, e.g., Lee Harris, The Politics of Shareholder Voting, 86 N.Y.U. L. Rev. 1761, 1785-86 (2011) arguing that “institutional investors ... do not need shorthand to sort through information that may be expensive, or otherwise difficult, to procure. Rather, these institutions have the resource, the ability, and the duty to stay apprised of the content of shareholder proposals.”); Joseph W. Yockey, On the Role and Regulation of Private Negotiations in Governance, 61 S.C. L. Rev. 171, 181 (2009) (“Through their large holdings, institutional investors are thought to be able to overcome the rational apathy problem presented by diffuse individual shareholders.”); cf. Jill E. Fisch, Class Action Reform Lessons from Securities Litigation, 39 Ariz. L. Rev. 533, 540-541 (1997) (arguing institutional investors are better situated that retail investors to monitor corporations).
[31] See Pamela Park, Corporate Governance 2013: Shareholder Activists Demand Voices in the Boardroom and Changes to Corporate Strategy, Westlaw Corp. Gov. Daily Briefing, 2014 WL 241758 (Dec. 26, 2013) (“Shareholder activists took an increasingly prominent role in corporate governance this year, as companies in a whole range of industries faced pressure from hedge funds and institutional investors to make leadership and strategic changes.”).
[32] See Roberta Romano, Less Is More: Making Institutional Activism A Valuable Mechanism of Corporate Governance, 18 Yale J. Reg. 174, 179 (2001) (“The fact that in contrast to public pension funds, private pension and mutual funds do not engage in activism has been explained by the competitive nature of the industry, or more pejoratively, as cost-conscious private funds' free-riding on the expenditures of activist public funds.): Anna Sandor, Leveraging International Law to Incentivize Value-Added Shareholding: Why Foreign Sovereign Wealth Funds Still Matter and How They Can Improve Shareholder Governance, 46 Geo. J. Int'l L. 947, 961 (2015) (“Other institutional investors, such as mutual funds, are similarly critiqued for their penchant for passive investment.”).
[33] See Romano, supra note 77, at 231-32 (discussing incentives of managers of such funds to pursue private benefits).
[34] See infra Part II.
[35] Given the collective action problems inherent with such a large number of potential decision makers, the differing interests of shareholders, and their varying levels of knowledge about the firm, it is “cheaper and more efficient to transmit all the pieces of information to a central place” and to have the central office “make the collective choice and transmit it rather than retransmit all the information on which the decision is based.” Arrow, supra note 60, at 68-69.
[36] Id. at 69.
[37] See supra notes 3-6 and accompanying text (discussing allocation of decision-making authority within the corporation).
[38] If the foregoing analysis has explanatory power, it might fairly be asked, why do we observe any shareholder voting rights at all? For a discussion of that question, explaining why corporate law allows only shareholders to participate in corporate decision making (to the limit extent it does so) and not other constituencies, see Stephen M. Bainbridge, The Case for Limited Shareholder Voting Rights, 53 UCLA L. Rev. 601, 603-16 (2006).
[39] See John D. Donovan, Jr., Derivative Litigation and the Business Judgment Rule in Massachusetts: Houle v. Low, Boston B.J., Nov./Dec. 1990, at 22, 27 (observing that “the power to review constitutes the power to decide”).
[40] Arrow, supra note 60, at 78.
[41] Med. Comm. for Human Rights v. SEC, 432 F.2d 659, 679 (D.C. Cir. 1970), vacated as moot, 404 U.S. 403 (1972).
[42] See generally Palmiter, supra note 18, at 886 (“Many of the rule’s access conditions seek to ensure an orderly solicitation process so that shareholder proposals do not choke the company-funded proxy mechanism or interfere with management’s solicitation efforts.”). For example, Rule 14a-8(b)(1) limits eligibility to use the rule to shareholders who have owned at least 1% or $2,000, whichever is less, of the issuer’s voting securities for at least one year prior to the date on which the proposal is submitted. 17 CFR § 240.14a-8(b)(1) (2015). Rule 14a-8(c) provides that a shareholder may only submit one proposal per corporation per year. 17 CFR § 240.14a-8(c) (2015). There is no limit to the number of companies to which a proponent can submit proposals in a given year, however, nor is there any limit on the number of proposals a company may be obliged to include in its proxy statement. See Bainbridge, supra note 48, at 296 (discussing eligibility requirements under the Rule).
[43] See 17 CFR § 240.14a-8(i) (2015) (setting out substantive bases for excluding a proposal); see generally Palmiter, supra note 1812, at 888 (explaining that the substantive exemptions “of Rule 14a-8 filter out vexatious, illegal, deceptive, and unintelligible proposals.”). If the registrant believes the proposal can be excluded from its proxy statement, it must notify the SEC that the registrant intends to exclude the proposal. See 17 C.F.R. § 240.14a-8(j)(1) (2015) (“If the company intends to exclude a proposal from its proxy materials, it must file its reasons with the Commission no later than 80 calendar days before it files its definitive proxy statement and form of proxy with the Commission.”). A copy of the notice must also be sent to the proponent. Id. If the SEC staff agrees that the proposal can be excluded, it issues a so-called no action letter, which states that the staff will not recommend that the Commission bring an enforcement proceeding against the issuer if the proposal is excluded. See generally Donna M. Nagy, Judicial Reliance on Regulatory Interpretations in SEC No-action Letters: Current Problems and a Proposed Framework, 83 Cornell L. Rev. 921 (1998) (describing the no action process). On the other hand, if the staff determines that the proposal should be included in management’s proxy statement, the staff notifies the issuer that the SEC may bring an enforcement action if the proposal is excluded. Whichever side loses at the staff level can ask the Commissioners to review the staff’s decision. After review by the Commissioners, the losing party can seek judicial review by the United States Circuit Court of Appeals for the District of Columbia, but these reviews are very rare. See Med. Comm. for Human Rights v. SEC, 432 F.2d 659, 666 (D.C. Cir. 1970) (discussing appellate review of SEC review of a staff determination). If management is the losing party at the staff level, it typically acquiesces in the staff’s decision. If the proponent loses at the staff level, the proponent typically seeks injunctive relief in federal district court. See, e.g., Amalgamated Clothing and Textile Workers Union v. SEC, 15 F.3d 254, 257 (2d Cir. 1994) (holding that a proponent who believes that the registrant improperly excluded a proposal may seek judicial in a federal district court).
[44] 17 CFS § 240.14a-8(i)(7) (2015) (permitting exclusion of a “proposal [that] deals with a matter relating to the company's ordinary business operations”).
[45] Notice of Proposed Amendments to Proxy Rules, Exchange Act Release No. 4950, (Oct. 9, 1953).
[46] Apache Corp. v. New York City Employees’ Ret. Sys., 621 F. Supp. 2d 444, 451 (S.D. Tex. 2008) (quoting Amendments to Rules on Shareholder Proposals, 63 Fed. Reg. 29106, 29108 (May 28, 1998)).