TheCorporateCounsel.net

If the SEC repeals Rule 14a-8, the states are going to have some big shoes to fill when it comes to establishing rules governing stockholder proposals.  Yesterday, the Delaware Corporation Law Council took the first step in that direction when it issued a White Paper on the controversial topic of precatory stockholder proposals along with draft legislation setting forth the limited circumstances under which those proposals would be permitted.

This Gibson Dunn blog summarizes the key provisions of the draft legislation, which would add a new Section 214 to the DGCL:

– Covered companies. Section 214 would apply only to listed companies with a market capitalization of at least $30 billion, measured as of the tenth day before the notice record date for the prior year’s annual meeting. Stockholders of smaller listed companies and of private companies would not be able to submit precatory proposals, and newly public companies would have a five-year grace period before precatory proposals would be permitted.

– Number of precatory proposals. Companies would be required to allow stockholders to submit and include in the company’s proxy materials (i) up to three precatory proposals in the aggregate at companies with a market capitalization of $100 billion or more, (ii) up to two precatory proposals at companies between $50 billion and $100 billion, and (iii) one precatory proposal at companies between $30 billion and $50 billion.

– Eligible proponents. A proponent would need to beneficially own (i) at least $250,000 in market value of voting stock individually, or (ii) together with up to nine co-filers, at least $1 million in market value of company stock, in each case held continuously for 365 days as of a date 30 days before the submission deadline. A stockholder could be the proponent or co-filer of only one proposal per meeting.

Directors, officers and persons acting for them would not be eligible for proponent or co-filer roles for these purposes (meaning their ownership would not count toward the caps). If more than the permissible number of precatory proposals are submitted and not otherwise excluded, the eligible proponents (together with their respective co-filers) owning the greatest number of shares would be allowed, with ties broken by random selection.

– Timing and content. Proposals would need to be received at least 180 days before the anniversary of the prior year’s annual meeting (subject to adjustment if the meeting date is advanced by more than 30 days), and, consistent with current Rule 14a-8, the proposal and any supporting statement together could not exceed 500 words. Again, similar to the current Rule 14a-8 process, a proponent would receive a single 14-day opportunity to cure deficiencies in its submission materials or word count.

– Bases for exclusion. The Discussion Draft lists 12 bases for exclusion, most of which are borrowed from Rule 14a-8’s procedural or substantive requirements, including (i) late or incomplete submissions, (ii) excess length, (iii) failure to meet the ownership requirements, (iv) a proposal that expressly questions the character of a director nominee, (v) a proposal that primarily seeks to redress a personal grievance, and (vi) a proposal that “no rational person would determine” is relevant to the company.

A resubmission bar would apply to a proponent where the same proponent submitted a proposal at either of the two preceding annual meetings at which precatory proposals could be presented and that proposal received less than 15% of the votes cast. The Discussion Draft does not authorize exclusion based on ordinary business, substantial implementation, violation of law or the lack of power to implement, or false and misleading statements.

– Proxy placement and presentation. If the company solicits proxies, up to the number of permissible proposals would be required to be included in the company’s proxy materials and on the company’s form of proxy. The company could include a statement in response or opposition and would be required to state that the proposal and supporting statement are solely the responsibility of the proponent.

The White Paper also provides that the company and its directors and officers would not be responsible under Delaware law for the proponent’s statements. As under Rule 14a-8, no vote would be taken on a precatory proposal unless the proponent or its proxy holder attends the meeting and requests a vote or the person presiding over the meeting submits the precatory proposal for a vote.

– Disputes. Only the proponent, and not a co-filer, could challenge the company’s determination that a proponent or proposal fails to satisfy Section 214’s requirements.

– Private ordering. Charters and bylaws could neither add to nor reduce the statutory requirements. In addition, a stockholder proposal could not request that the company adopt a charter or bylaw provision or policy that would provide for the inclusion of precatory proposals in company proxy materials outside Section 214.

Binding proposals would not be subject to the limits set forth in Section 214. Stockholders could continue to present and solicit proxies in support of any binding proposal addressing proper subject matter under Delaware law. Binding proposals could be subject to reasonable advance notice bylaws, and the company would not be required to include them in its proxy materials unless required by federal law. The draft legislation provides that it would become effective upon repeal of Rule 14a-8.

Be sure to check out Davis Polk’s memo on the White Paper as well.

– John Jenkins