Shareholder Proposals | Brian JM Quinn | November 15, 2013

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Shareholder Proposals

Original Creator: Brian JM Quinn Current Version: Brian JM Quinn Show/Hide

At the annual stockholder meeting, directors ask stockholders to vote on certain matters, including the election of directors and other matters, like the ratification of the board's selection of a corporate auditor.  But, directors do not have exclusive control over the agenda at a stockholder meeting.  Stockholders also have the right to put proposals and questions before the meeting. Some matters that are proposed by stockholders, including amendments to bylaws are expressly permitted by the state corporate law. Others are governed by bylaws, for example stockholder nomination of candidates for the position of director.  

Other proposals put forward by stockholders, however, are not expressly contemplated by the corporate law. For these stockholder proposals, the SEC has developed a series of rules to govern when a board is required to put a shareholder proposal on the corporate proxy statement, or to be more precise rules governing when a board is permitted to exclude a shareholder proposal from the corporation's proxy materials sent to stockholders.

Although many shareholder proposals are focused on tradtional corporate governance issues, there is a long history of social activists using the shareholder proposal process to put important social issues on the agendas of corporate America. For example, during the 1970s and 1980s, the anti-Apartheid movement used the shareholder proposal process to raise awareness of the evils of Apartheid in South Africa.  

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  1. 1 Show/Hide More 14a-8 - Shareholder Proposals
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    A “proxy statement” is a required disclosure document that publicly traded companies must send to all beneficial stockholders prior to any meeting of the stockholders. The proxy statement lays describes for beneficial stockholders the business of the upcoming meeting and include a voting proxy that a beneficial stockholder can return to the record holder. The most common business at a meeting is the annual election of directors. However, a board can bring any business or question to the stockholders for consideration and a vote.

    The contents of this document are laid out in a series of rules under the ‘34 Act. The rules governing how a stockholder can get access to a corporation's proxy statement for the purpose of presenting proposals to fellow shareholders for their consideration at annual shareholder meetings are presented below in a unique FAQ format. 

    The default rule is that any proposal put forward by an eligible stockholder in a timely manner must be included in the corporate proxy.  However, the board is not required to include all proposals in the proxy. There are a number of very important exceptions to the inclusion requirement, and they are laid out in the 14a-8 rules that follow.

  2. 2 Show/Hide More Lovenheim v. Iroquois Brands Ltd.
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    When a stockholder presents a proposal to a board of directors, the default rule is that such proposals shall be included in the proxy unless the board of the subject company has a legitimate reason to exclude the proposal.  

    In the case that follows, animal rights activists sought to include a proposal relating to the inhumane treatment of animals in the preparation of food products sold by the subjct company.  The board of subject company sought to exclude the proposal.  In seeking an no-action letter from the SEC, the board Iroquois argued that the stockholder's proposal lacked relevance and thus could properly be excluded.

    In this opinion, the court provides guidance on how the SEC will typically treat these kinds of social proposals.  

  3. 3 Show/Hide More CA INC. v. AFSCME Employees Pension Plan
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
    In the CA case, stockholders sought to include a shareholder question in the corporate proxy. CA's board took the position – by way of a letter from Delaware counsel – that the question was illegal under state law, so consequently the board should not be required to include the proposal. Plaintiff stockholders provided the SEC with their own legal opinion from Delaware counsel that the proposal was not illegal under the Delaware corporate statute. When presented with a question of conflicting interpretation of Delaware corporate law, the SEC can find itself asea. The Delaware Supreme Court permits, in these circumstances administrative units like the SEC to certify questions to the court. In the opinion that follows, the Delaware Supreme Court provides an answer to the SEC's certified question. The CA case is an example of the Delaware Supreme Court's regular interaction with the SEC.
  4. 4 Show/Hide More Bylaw Amendments and Shareholder Proposals
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    Stockholders have a statutory right to amend the bylaws. In public corporations, stockholders can put forward bylaw amendment proposals via the shareholder proposal process. A bylaw amendment included as a shareholder proposal in the company's proxy statement that receives sufficient votes in favor is binding on the corporation and becomes a valid bylaw of the corporation.

    Because a stockholder bylaw amendment that is binding on the corporation is permitted by law, one of the most common avenues for blocking shareholder proposals (that the proposal is contrary to the law) is usually not available for companies seeking to exclude such proposals.

    The court in CA opined that the bylaw amendment as offered was not permissible under Delaware law. However, the court offered up in dictum that if the stockholders did not like the result announced by the court that stockholders had the option of causing the corporation to amend its certificate of incorporation, or alternatively, working with the legislature to amend the DGCL to permit the proposed amendment.  In the wake of CA, the Delawarenlegislature amended the corporate statute to make bylaws such at the one proposed by shareholders in CA permissible under the Delaware law.

    1. 4.1 Show/Hide More DGCL Sec. 113 - Expense reimbursement
      Original Creator: Brian JM Quinn Current Version: Brian JM Quinn
      Expense Reimbursement following Proxy Contest
  5. 5 Show/Hide More Say on Pay Vote [Frank-Dodd, Sec 951]
    Original Creator: Brian JM Quinn Current Version: Brian JM Quinn

    In the wake of the Financial Crisis of 2008, Congress adopted the Frank-Dodd bill.  Section 951 of Frank-Dodd requires regular votes by shareholders to approve executive compensation. 

    Note that the structure and effect of the vote are sensitive to the 14a-8 process and comport with what one might expect of other shareholder proposals. When approving the “say on pay” votes, Congress was sensitive to the traditional preeminance of the state corporate law.  Consequently, “say on pay” votes are precatory in nature. 

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June 24, 2017

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