Rule 14a-8 – which is the Exchange Act rule about shareholder proposals in company proxy statements – seems to be facing a “make or break” moment. Last week, Dave shared that the House Financial Services Committee recently held a hearing on whether the shareholder proposal process continues to fulfill its intended purpose – and as John flagged, the SEC’s latest Reg Flex Agenda includes proposed rulemaking on “Shareholder Proposal Modernization.”

Even investors seem to be somewhat sympathetic to the resources that some companies spend to respond to large volumes of shareholder proposals. 43% of the investor respondents to ISS’s recent policy survey said that shareholder proponents should make a detailed, company-specific case for each proposal.

We’ve pondered a few times whether there could be a way to use state law to make shareholder proposals more manageable – not only in this blog, but at our Conferences and more than a few happy hour convos with members of this site! Now, more people are noting that the answer seems to be “yes” – at least in Delaware. Kyle Pinder of Morris Nichols Arsht & Tunnell is publishing this article that says there’s no firm basis under Delaware law for a shareholder right to submit non-binding proposals. Here’s an excerpt from the short-form version:

First, the Delaware General Corporation Law (the “DGCL”) does not contemplate (and thus does not expressly authorize) precatory stockholder proposals. Second, under Delaware law, stock ownership confers on stockholders three fundamental rights—to vote, sell and sue — from which flow certain “subsidiary rights.” Precatory stockholder proposals are inherently tied to voting rights (i.e., do stockholders have a right to vote on such proposals).

Based on a review of Delaware’s voting rights jurisprudence, this article concludes that stockholder voting rights extend to (i) the election of directors, (ii) matters committed to stockholders for approval by law, certificate of incorporation, or bylaw, and (iii) matters that the board determines to submit for a stockholder vote (including pursuant to a board decision to subject the company to a regime requiring certain precatory votes). Absent from this list of voting rights are non-binding proposals on which a stockholder forces a vote.

Because no such voting right exists, a “subsidiary right” flowing therefrom to propose precatory stockholder proposals does not exist.

Kyle points out that this gives companies a pretty huge practical advantage:

In the absence of an inherent stockholder right, corporations possess broad flexibility to provide for, and regulate, the submission of precatory stockholder proposals by bylaw provision. Facially valid bylaws are consistent with the DGCL and certificate of incorporation and are not otherwise prohibited by law.

Because stockholders do not have the inherent right to submit such proposals, and assuming the absence of a charter provision expressly granting that right, a bylaw provision providing for, and regulating, precatory stockholder proposals would be facially valid (i.e., it would not be inconsistent with a non-existent DGCL or other legal pronouncement). A reasonably tailored precatory proposal bylaw would allow a corporation to provide stockholders with, what some view as, a meaningful ability while also allowing the corporation to impose structure and safeguards with respect to precatory proposals for which a stockholder intends to solicit proxies.

There is some uncertainty regarding whether a corporation can augment the requirements of Rule 14a-8 by bylaw, although SEC Chairman (then-Commissioner) Paul Atkins and SEC Commissioner Mark Uyeda have each expressed support for private ordering. Therefore, these types of bylaws may also have the potential to apply to Rule 14a-8 proposals.

Kyle goes on to note that while a DGCL amendment may not be necessary to pave the way for these bylaws, an amendment would reduce uncertainty and mitigate litigation risks. As anyone following the “DExit” drama knows, Texas passed a law earlier this year that would allow companies to impose significantly tougher eligibility requirements on shareholder proponents.

– Liz Dunshee