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Shareholder proposals were submitted at a blistering pace during the 2023 proxy season and expectations are that this year will be even more active. With the SEC taking a decidedly pro-proponent stance when it comes to some of the key grounds traditionally relied upon by companies to exclude proposals, some companies are looking for alternatives to the no-action letter process to keep proposals out of their proxy materials.

ExxonMobil’s decision to a declaratory judgment action seeking to exclude certain shareholder proposals is the most notable recent effort to bypass the no-action process. However, a new law review article suggests another alternative. Here’s an excerpt from the abstract:

Today, activists pepper corporations with politically divisive proposals in record numbers. While left-leaning groups, organized under the ESG banner, target corporations with proposals focused on progressive priorities, right-leaning outfits submit competing proposals, seeking to undermine ESG initiatives and urging a focus on corporate profits. Caught in the crossfire are America’s largest businesses. Corporate leaders complain that these divisive proposals are costly distractions, and average investors have shown little enthusiasm for them.

This Article offers corporate America a path out of this morass. Under Delaware law, which governs most public companies, a corporation’s charter and bylaws represent a binding contract between the corporation and its shareholders. Moreover, Delaware law affords broad freedom in the corporate contract to regulate shareholders’ governance rights, including the right to make or vote upon a proposal at a shareholder meeting. And because a shareholder’s access to the Rule is itself dependent on these state-law rights, a provision in the corporate contract restricting shareholder proposals is not preempted by the Rule or the Exchange Act.

The author, Oregon Law School Prof. Mohsen Manesh, suggests the use of charter provisions to tighten shareholder eligibility requirements and enhance the grounds for excluding proposals. He acknowledges that some companies won’t want to take this path, due to the political backlash they’re likely to face from advocates of “shareholder democracy” (oy vey!), but says that others may find the ability to escape the SEC’s unpredictable no-action process in favor of the Delaware courts tempting.

A reader pointed me to this related CLS Blue Sky Blog post from Bernard Sharfman & James Copland titled “How to Reestablish the Authority of Corporate Law in the Shareholder Proposal Process.”

– John Jenkins