TheCorporateCounsel.net

The primary justification put forth by the SEC for repealing Rule 14a-8 is that the agency lacked the authority to promulgate the rule in the first place. The SEC argues that because Section 14(a) of the Exchange Act authorizes it to regulate the proxy solicitation process but does not authorize it to decide what matters must be submitted to shareholders, Rule 14a-8 exceeds the SEC’s statutory authority. The group of academics who call themselves the “Shadow SEC” argue that the SEC is simply wrong on this point. Here’s an excerpt from their recent CLS Blue Sky Blog post on the SEC’s proposal:

Rule 14a-8 does not create any substantive right enforceable under state corporate law, and it displaces nothing that state law otherwise governs. Proposals included under the rule are precatory; they bind no one, alter no charter, and effect no corporate action that state law does not already fully control. What the rule actually regulates is the content of a federal disclosure document—the company’s own proxy statement—a subject squarely within the Commission’s Section 14(a) authority since 1934.

A shareholder has always been free to raise the identical resolution from the floor of a meeting; Rule 14a-8 only concerns whether that proposal may also appear in the company’s proxy materials. That is a question about the scope of a federal communications channel, not an intrusion into state corporate governance. The fact that in-person attendance at meetings had ceased to be a meaningful way for shareholders to exercise voting rights was evident in 1934 and is not a change that can justify a rescission of a long-standing rule on any ground, much less legal authority.

I’m uncomfortable with the SEC’s assertion that it never had the authority to promulgate Rule 14a-8 in the first place, but I find this argument unpersuasive. At its heart is the contention that “what the rule actually regulates is the content of a federal disclosure document,” and that this fits squarely within the SEC’s authority under Section 14(a). That argument begs the question by essentially asserting that because the rule requires a company to include something in the proxy statement it’s consistent with the SEC’s authority to require a company to include something in the proxy statement.

This approach has the advantage of avoiding engagement with the substance of the SEC’s argument, but if you accept it, it’s difficult to discern any limiting principle for when permissible federal regulation of proxy solicitations crosses the line and becomes impermissible regulation of matters governed by state law.

– John Jenkins