Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 1 of 65 Piet Mondrian, “Broadway Boogie Woogie” (1943)
Module VI – Corporate Governance Chapter 16 Public Shareholder Activism Bar exam Corporate practice Law profession Citizen of world • Theories of public corporation – Berle-Means: separation of ownership and control – Role of shareholders • Manne: market for corporate control • Easterbrook & Fischel: nexus of contracts • Roe: political product • Stout & Blair: team production • Bainbridge: boardcentric Corporations: A Contemporary Approach • Law of shareholder activism – Rational apathy: collective action problem – Changed calculus: institutional investors – State law: noreimbursement rule – Federal law: shareholder communications • Shareholder proposal rule – Operation: SEC no-action – Proper proposals • Ordinary business exclusion • Proxy access Chapter 16 Public Shareholder Activism Slide 2 of 65
Review: shareholder voting • State law – minimal notice (capable of abuse) • Federal law (Securities Exchange Act of 1934) – Proxy card – Proxy statement (including executive comp) – Annual report • Federal proxy fraud cases (US Sup Ct) – – Material misstatement Reliance presumed Causation shown if vote necessary for transaction Court remedy includes rescissionary damages • State proxy fraud cases (Del Sup Ct) – Same elements as federal proxy fraud – Except reliance not presumed (class actions not possible)
• Annual meeting (rite of spring) – Notice to record shareholders – Election of directors / approval of resolutions – Nominations at meeting Voting in Public Corporations • Proxy voting – Written appointment / authorization of agent – Revocable / limited duration: 11 months (MBCA) • Proxy solicitation – Distribution of proxy materials – Management uses corporate funds – Outsiders must use own funds • Proxy tabulation – Inspector of elections – Look over: signatures, delegated voting, dating of proxy Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 4 of 65
“Shareholder democracy” “The American shareholder as a practical matter cannot nominate directors, he cannot remove them, he cannot – except at the arbitrary pleasure of the SEC – communicate advice to them. “Democracy is a cruelly misleading word to describe the situation of the American shareholder. “ Democracy: government by the people. Corpocracy: government by the corporation. Kleptocracy: government by corporate criminals. Robert Monks Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 5 of 65
Relation of ownership and control … Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 6 of 65
Classic US corporation (unity of ownership and control) Capital Entrepreneur Equipment Land Corporations: A Contemporary Approach Supplies Labor Chapter 16 Public Shareholder Activism Adam Smith “Wealth of Nations” (1776) Slide 7 of 65
Modern US corporation (separation of ownership and control) Capital (from diverse public investors) Professional manager Land Equipment Supplies Creditors Corporations: A Contemporary Approach Consumers Community Public Government Chapter 16 Public Shareholder Activism Adolf Berle & Gardiner Means (1932) Slide 8 of 65
Pop quiz A. Law accepts separation. Shs let corporate boards mediate capital / mgmt / labor disputes B. Law fosters separation. Shs are disempowered by politics, which fears of concentrated money C. Separation is efficient. Shs protected by “control markets” / law should protect markets, scrutinize only “end period” tx D. Separation is anti-capitalist. Shs should have more disclosure rights + mgmt more fiduciary duties (offset mgmt power) E. 1. Reformists Separation empowers board. Shs permit board to be Platonic guardians / law should minimize shareholder activism (Berle & Means, Clark) 2. Contractarians – SH 1 st (Easterbrook/Fischel, Manne) 3. Political realists (Roe, Miller & Macey) 4. “Team” theorists (Stout, Blair) 5. Contractarians - board 1 st (Bainbridge) 1 -D / 2 -C / 3 -B / 4 -A / 5 -E Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 9 of 65
You are the “voting committee” of Probity Investments, a large US mutual fund group. Your committee sets guidelines (and sometimes makes specific decisions) on voting shares in Probity’s equity portfolios. Group hypo Corporate voting “Fund for the American Way” (FAW) is an activist investment pool that has targeted Bloated, Inc. for spending too much on community and social programs (symphonies, youth programs, art museums, adult learning, yecch). FAW plans to put 3 new directors on the seven-person Bloated board. FAW has solicited proxies from other institutional investors, including Probity – which owns 3. 7% of Bloated. Milton Friedman (1) What theory of corporate law (role of shareholders) should Probity follow? (2) How should Probity vote these shares? Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 10 of 65
Class Results 3 groups 2 – Y / 1 - N 10 groups 6 – Y / 4 - N 0 groups 0 – Y / 0 - N 2 groups 0 – Y / 2 - N FAW fails to seat its anti-CSR directors s ist m r fo Re t ac a s an ri r nt M) Co W (S di e ns y) s ria ac ist am l a ct rim ea “te tra p l R as on ard ica rd C o lit oa o (b B P ” m Board Centric Shareholder Centric Corporations: A Contemporary Approach r o at Chapter 16 Public Shareholder Activism Slide 11 of 65
Shareholder voting in public corporations Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 12 of 65
Prisoner’s dilemma You have been arrested, along with your buddy. The police lead you to the interrogation room (separate from your partner), and lay out your options: Partner confesses Partner stays quiet You confess Both get 2 yrs You – 3 mos Other – 5 yrs You stay quiet You – 5 yrs Other – 3 mos Both get 6 mos (lesser charge) You cannot cooperate with the other person. What do you do? Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 13 of 65
You own GE stock and you’re convinced Immelt must go … Individual investor: 1, 000 shares Institutional investor: 200 million shares (2%) Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 14 of 65
Institutionalization • Investment companies – Mutual funds – Hedge funds • Pension funds – Private – Public • Banks (trust & estates) • Insurance companies • Securities firms • State/local govt • Endowment funds (“deretailization”) 27% 3% 9% 14% 0. 5% 8% 0. 5% 0. 8% 1. 5% • Foreign institutions 13% TOTAL (institutions) 77% Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 15 of 65
Legal limits on shareholder activism … State reimbursement rule Federal limits on SH communications Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 16 of 65
Rosenfeld v. Fairchild Engine & Airplane (N. Y. 1955) A spirited proxy fight results in a victory for the insurgents (highly unusual). Costs borne by corporation: $134, 000 to defray incumbents’ expenses; $127, 000 to defray insurgents’ (By the way, who approved these? ) Shouldn’t each side bear their electionrelated costs? What is the rule on reimbursement of voting expenses? Why should incumbents be covered essentially always – but insurgents only if they win? Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 17 of 65
NY Court of Appeals: In a contest over policy, as compared to a purely personal power contest, corporate directors have the right to make reasonable and proper expenditures [to overcome stockholder indifference and the difficulty of procuring a quorum] [Shareholder insurgents can] be reimbursed by the corporation for their expenditures … by affirmative vote of the stockholders. …. The stockholders … have the right to reimburse successful contestants for [their] reasonable and bona fide expenses State reimbursement rule NY Court of Appeals Rosenfeld v. Fairchild Engine & Airplane (N. Y. 1955) Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 18 of 65
Long Island Lighting v. Barbash (2 d Cir. 1985) LILCO's shareholders (and customers) are steamed. Management is committed to building a nuclear power plant (Shoreham), and the utility took its time to get power back after Hurricane Gloria. Matthews, a holder of 100 shares, starts a proxy fight. What does the SEC require he do? Shoreham Nuclear Power Plant Corporations: A Contemporary Approach In addition, a "Steering Committee of Citizens to Replace LILCO" formed. It runs the following ad. What does management argue? Chapter 16 Public Shareholder Activism Slide 19 of 65
Replace LILCO More LILCO mismanagement: the utility wants to pass on to ratepayers the needless costs of building the Shoreham nuclear power plant. There's an alternative: sell LILCO to a public power authority. The utility would not have to pay dividends to shareholders. A Long Island Power Authority could buy cheap hydropower, reducing rates to LILCO ratepayers by up to 50%. State law guarantees the right to replace LILCO! Citizens to Replace LILCO Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 20 of 65
Corporate “free speech”? Second Circuit: The question is whether the challenged communication is “reasonably calculated to influence the shareholders’ vote. [Remand to determine whether “Citizens to Replace LILCO” cooperating with Mathews proxy campaign] ****** Winter (dissent): It asks nothing less than that a federal court act as a censor, empowered to determine the truth or falsity of the ad. Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 21 of 65
![“Shareholder Communication” Rules Rule 14 a-2(b) [Proxy statement delivery requirements]. . . do not](https://present5.com/presentation/d68c53250cf977b12c7cbdbae08baf01/image-22.jpg "“Shareholder Communication” Rules Rule 14 a-2(b) [Proxy statement delivery requirements]. . . do not")
“Shareholder Communication” Rules Rule 14 a-2(b) [Proxy statement delivery requirements]. . . do not apply to the following: (1) Any solicitation by . . . any person who does not. . . seek. . . the power to act as proxy for a security holder and does not furnish or otherwise request. . . a form of revocation, abstention, consent or authorization. Corporations: A Contemporary Approach Rule 14 a-3 (f) The [proxy statement delivery requirements] shall not apply to … speeches in public forums, press releases, published or broadcast opinions, statements, or advertisements appearing in a broadcast media, newspaper, magazine or other bona fide publication …, provided that: (1) No form of proxy, consent or authorization … is provided to a security holder in connection with the communication; and (2) At the time the communication is made, a definitive proxy statement is on file with the Commission …. Chapter 16 Public Shareholder Activism Slide 22 of 65
Pop quiz Shareholder activism Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 23 of 65
1. Shareholders are said to be “passive” because: a. Collective action problems b. Voting rights are limited c. Management engages in voting manipulation 4. Shareholders who undertake a voting insurgency are reimbursed their expenses: a. Under corporate bylaws b. Only if successful c. On same basis as management 2. The institutionalization of US corporations refers to: a. Corporate execs going to jail b. Investments mostly managed by intermediaries c. More shareholders than ever 5. Public company institutional Shs that seek to vote out the board: a. Can communicate freely – remember the 1 st Amendment b. Must abide by the proxy rules c. Are exempt from the proxy rules 3. The prisoner’s dilemma illustrates … a. The value and difficulty of cooperation b. How executives should avoid insider trading laws c. The worthlessness of ISS 6. A hedge fund that places a WSJ ad opposing management a. Violates the proxy rules b. Is ok under the proxy rules, if it’s not soliciting votes c. Is ok under the proxy rules, it it’s already filed a proxy statement Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 24 of 59
Shareholder proposals Nature of Rule 14 a-8 Procedure for submission / SEC review Grounds for exclusion Case studies: “say on pay” and “proxy access” Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 25 of 65
Living with Sarbanes-Oxley THe Wall Street Journal (Oct 17, 2005) Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 26 of 65
What is a shareholder proposal? Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 27 of 65
Shareholder proposal rule (1) (2) (3) (4) (5) (6) (7) What is a proposal? Who is eligible to submit a proposal, and how do I demonstrate to the company that I am eligible? How many proposals may I submit? How long can my proposal be? What is the deadline for submitting a proposal? What if I fail to follow one of the eligibility or procedural requirements explained in answers to Questions 1 through 4 of this section? If I have complied with the procedural requirements, on what other bases may a company rely to exclude my proposal? Corporations: A Contemporary Approach A shareholder proposal is your recommendation or requirement that the company and/or its board of directors take action, which you intend to present at a meeting of the company's shareholders. Chapter 16 Public Shareholder Activism Slide 28 of 65
Shareholder proposal rule (1) (2) (3) (4) (5) (6) (7) What is a proposal? Who is eligible to submit a proposal, and how do I demonstrate to the company that I am eligible? How many proposals may I submit? How long can my proposal be? What is the deadline for submitting a proposal? What if I fail to follow one of the eligibility or procedural requirements explained in answers to Questions 1 through 4 of this section? If I have complied with the procedural requirements, on what other bases may a company rely to exclude my proposal? Corporations: A Contemporary Approach In order to be eligible to submit a proposal, you must have continuously held at least $2, 000 in market value, or I %, of the company's securities entitled to be voted on the proposal at the meeting for at least one year by the date you submit the proposal. You must continue to hold those securities through the date of the meeting. Chapter 16 Public Shareholder Activism Slide 29 of 65
Shareholder proposal rule (1) (2) (3) (4) (5) (6) (7) What is a proposal? Who is eligible to submit a proposal, and how do I demonstrate to the company that I am eligible? How many proposals may I submit? How long can my proposal be? What is the deadline for submitting a proposal? What if I fail to follow one of the eligibility or procedural requirements explained in answers to Questions 1 through 4 of this section? If I have complied with the procedural requirements, on what other bases may a company rely to exclude my proposal? Corporations: A Contemporary Approach Each shareholder may submit no more than one proposal to a company for a particular shareholders' meeting. Chapter 16 Public Shareholder Activism Slide 30 of 65
Shareholder proposal rule (1) (2) (3) (4) (5) (6) (7) What is a proposal? Who is eligible to submit a proposal, and how do I demonstrate to the company that I am eligible? How many proposals may I submit? How long can my proposal be? What is the deadline for submitting a proposal? What if I fail to follow one of the eligibility or procedural requirements explained in answers to Questions 1 through 4 of this section? If I have complied with the procedural requirements, on what other bases may a company rely to exclude my proposal? Corporations: A Contemporary Approach The proposal, including any accompanying supporting statement, may not exceed 500 words. Chapter 16 Public Shareholder Activism Slide 31 of 65
Shareholder proposal rule (1) (2) (3) (4) (5) (6) (7) What is a proposal? Who is eligible to submit a proposal, and how do I demonstrate to the company that I am eligible? How many proposals may I submit? How long can my proposal be? What is the deadline for submitting a proposal? What if I fail to follow one of the eligibility or procedural requirements explained in answers to Questions 1 through 4 of this section? If I have complied with the procedural requirements, on what other bases may a company rely to exclude my proposal? Corporations: A Contemporary Approach (1) If you are submitting your proposal for the company's annual meeting, you can in most cases find the deadline in last year's proxy statement. (2) The proposal must be received at the company's principal executive offices not less than 120 calendar days before the date of the company's proxy statement released to shareholders in connection with the previous year's annual meeting. Chapter 16 Public Shareholder Activism Slide 32 of 65
Shareholder proposal rule (1) (2) (3) (4) (5) (6) (7) What is a proposal? Who is eligible to submit a proposal, and how do I demonstrate to the company that I am eligible? How many proposals may I submit? How long can my proposal be? What is the deadline for submitting a proposal? What if I fail to follow one of the eligibility or procedural requirements explained in answers to Questions 1 through 4 of this section? If I have complied with the procedural requirements, on what other bases may a company rely to exclude my proposal? Corporations: A Contemporary Approach The company may exclude your proposal, but only after it has notified you of the problem, and you have failed adequately to correct it. Within 14 calendar days of receiving your proposal, the company must notify you in writing of any procedural or eligibility deficiencies, as well as of the time frame for your response. Your response must be postmarked, or transmitted electronically, no later than 14 days from the date you received the company's notification. * * * If the company intends to exclude the proposal, it will later have to make a submission under Rule 14 a-8 and provide you with a copy *** Chapter 16 Public Shareholder Activism Slide 33 of 65
Shareholder proposal rule (1) (2) (3) (4) (5) (6) (7) (1) Improper under state law: If the What is a proposal? proposal is not a proper subject for action by shareholders under Who is eligible to submit a the laws of the jurisdiction of the proposal, and how do I company's organization; demonstrate to the company that I am eligible? (5) Relevance: If the proposal How many proposals may I relates to operations which submit? account for less than 5% of the How long can my proposal be? company's total assets at the end of its most recent fiscal year, and What is the deadline for less than 5% of its net submitting a proposal? earnings and gross sales for its What if I fail to follow one of the most recent fiscal year, and is not eligibility or procedural otherwise significantly related to the company's business; requirements explained in answers to Questions 1 through 4 of this section? (7) Management functions: If the proposal deals with a matter If I have complied with the relating to the company's procedural requirements, on what ordinary business operations; other bases may a company rely to exclude my proposal? Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 34 of 65
What’s excludable? Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 35 of 65
Lovenheim v. Iroquois Brands (D DC 1985) Facts: Iroquois Brands – annual revenue = $141 million – Annual profits = $6 million – Assets = $78 million Pate de foie gras – Annual sales = $79, 000 – Annual profits = ($3, 212) – Assets = $34, 000 Issue: How is pate “relevant” to company’s business? Holding: According to SEC (1976) “not hinge solely on economic relativity” / relevance “not limited to economic significance” Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 36 of 65
Submitted to Iroquois Brands, Ltd. by Peter C. Lovenheim, Esq. 1545 18 th St. , NW Washington, DC 20036 December 5, 1983 WHEREAS, Iroquois Brands, Ltd. distributes in the United States the Edouard Artzner brand of pate de foie gras (goose liver pate), manufactured by the Edouard Artzner Co. of Strasbourg, France, and WHEREAS, the prevailing method of producing pate de foie gras in France involves the force-feeding of geese until their livers become enlarged, and WHEREAS, in the opinion of many individuals expert in animal care, this practice can cause undue pain and distress to the animals involved, and WHEREAS, Iroquois Brands, Ltd. strives to maintain a reputation as a distributor of wholesome foods, a reputation that enhances its ability to market successfully its entire line of health foods, vitamins, and other food products, therefore BE IT RESOLVED: that in order to assure that the Corporation is not inadvertently promoting cruelty to animals and does not risk damaging its reputation as a distributor of wholesome foods, the shareholders request that the Directors form a committee to study the methods by which its French supplier produces pate de foie gras, and report to the shareholders its findings, together with its opinion, based on expert consultation, as to whether or not this production method causes undue distress, pain, or suffering to the animals involved and, if [*4]so, whether future distribution of this product should be discontinued until a more humane production method is developed. SUPPORT STATEMENT Force-feeding is done to enlarge the liver and thus produce a large quantity of pate. As described in French agricultural journals, force-feeding begins when geese are four months old. On some farms where feeding is mechanized, the bird's body and wings are placed in a metal brace and its neck stretched. Through a funnel inserted 10 -12 inches down its throat, a machine pumps up to 400 grams of corn-based mash into its stomach. An elastic band around the goose's throat prevents regurgitation. When feeding is manual, a handler uses a funnel and stick to force the mash down. Feeding is repeated two to four times a day for 28 days, until the animal's liver has been enlarged six times -- from 150 to about 900 grams. After slaughter, the liver is made into pate. This is not just raising animals for food; this is an aberrant and unethical practice. For this reason, the American Society for the Prevention of Cruelty to Animals, the nation's oldest and largest animal protection organization, supports this resolution. In 1983, management told you to vote against a similar resolution. Nevertheless, shareholders cast more than 50, 000 votes in favor. This year has been a profitable one for our company. Yet profits made at the expense of animal suffering are tainted. They mar our reputation and prevent us from becoming as good and as proud a company as can be. This year, let's send an even stronger message to management to demonstrate our concern. Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism January 23, 1984 RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF CORPORATION FINANCE Re: Iroquois Brands, Ltd. Incoming letter dated December 13, 1983 The proposal relates to the establishment of a committee to study the methods by which the Company's French supplier produces pate de foie gras. There appears to be some basis for your opinion that the proposal may be omitted from the Company's proxy material under Rule 14 a-8 (c)(5). Under the circumstances, this Division will not recommend any enforcement action to the Commission if the Company omits the subject proposal from its proxy material. Sincerely, John J. Gorman Special Counsel Slide 37 of 65
• Medical Committee (DC Cir 1972) – Mgmt can’t treat corp. as “personal satrapies” – Must include proposal on napalm sales • SEC Interpretive Release (1976) – Significant policy, economic implications – Beyond ordinary business Social/political proposals • SEC no-action letters (1976 -1991) – Requests for EEO reports includable (1983) – EEO policies includable (through 1991) • Cracker Barrel (1992) – SEC affirms staff: EEO “ordinary” – Even though tied to social issue • Reversal of Cracker Barrel (1998) – Resubmission by NYCERS – Majority/ISS support -- 58% shareholders Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 38 of 65
History and use of 14 a-8 … Shareholder proposals submitted (2006 -13) Source: Proxy. Monitor. org Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 39 of 65
History and use of 14 a-8 … Process and SEC role … Source: Proxy. Monitor. org Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 40 of 65
Shareholder proposes Proposals "excluded" by management Type of proposal 1991 -92 2001 -02 2011 -12 Governance 26. 5% 35. 4% 47. 3% 43. 5% Operational Mgmt excludes 1981 -82 44. 6% 30. 2% 33. 1% 30. 1% Social/politic al 28. 9% 34. 4% 19. 6% 26. 4% TOTAL 100% Proposals found "includable" by SEC Type of proposal 1981 -82 1991 -92 2001 -02 2011 -12 Governance 18. 2% 41. 2% 55. 7% 23. 7% Operational 18. 9% 3. 4% 49. 0% 20. 0% Social/political 37. 5% 18. 2% 41. 4% 30. 4% AVERAGE 24. 1% 21. 9% 48. 7% 24. 1% Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism SEC reviews Slide 41 of 65
“There’s not a bright line distinction between what used to be social policy issues and straight shareholder-value concerns” Nell Minow “The Corporate Library” Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 42 of 65
Who proposes? GE - Shareowner Proposal No. 1 Evelyn Y. Davis, Watergate Office Building, 2600 Virginia Avenue, N. W. , Suite 215, Washington, D. C. 20037, has notified us that she intends to present the following proposal at this year’s meeting: “RESOLVED: That the stockholders of General Electric, assembled in Annual Meeting in person and by proxy, hereby request the Board of Directors to take the necessary steps to provide for cumulative voting in the election of directors, which means each stockholder shall be entitled to as many votes as shall equal the number of shares he or she owns multiplied by the number of directors to be elected, and he or she may cast all of such votes for a single candidate, or any two or more of them as he or she may see fit. “REASONS: Many states have mandatory cumulative voting, so do National Banks. “In addition, many corporations have adopted cumulative voting. Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 43 of 65
2005 Governance proposals Board leadership (independent chair) Cumulative voting 22 (50%) Declassify board / term limits 51 (63%) Director elections (majority voting) 67 (44%) Independent directors 4 (29%) Rescind supermajority voting 15 (62%) Shareholder approval of poison pills Have shareholder proposals been successful? 31 (30%) 25 (58%) Operational proposals Option expensing Performance-based pay 36 (30%) SHs approve golden parachutes Corporations: A Contemporary Approach 12 (60%) 21 (55%) Chapter 16 Public Shareholder Activism Slide 44 of 65
All shareholders Mutual funds Declassify board 61. 3% 86. 8% Majority vote for directors 44. 3% 58. 9% Sh vote on poison pills 54. 4% 68. 4% Separate CEO/Chair 26. 5% 32. 7% Proposal type Who is supporting shareholder proposals? Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 45 of 65
Case study: “Say on pay” Ragan Adamson & Daniel Lumm Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 46 of 65
Proxy access N S ew 11 D 2 G (2 CL 00 9) 2005: Allows exclusion of proxy access bylaw -- “relates to election” 2 2003: Proposes Dodd-Frank Act (2010) 1 Proxy Access Rule 14 a-11 2010: Revises 14 a-8 to permit proposals for proxy-access bylaws 5 3 2007: Revises 14 a-8 to exclude proposals that “relate to nominations” 4 2010: Adopts 14 a-11 for short-slates nominated by 1/3/5% shareholder/groups Business Roundtable v SEC (DC Cir 2011) Corporations: A Contemporary Approach AFSCME v AIG (2 d Cir 2006) Chapter 16 Public Shareholder Activism Slide 47 of 65
RESOLVED, pursuant to the AIG Bylaws and DGCL 109(a), stockholders amend the Bylaws: "The Corporation shall include in its proxy materials … the name, together with the Disclosure and Statement, of any person nominated for election to the Board of Directors by a stockholder or group … Each Nominator may nominate one candidate for election at a meeting. “To be eligible, a Nominator must: (a) have beneficially owned 3% or more of the Corporation's outstanding common stock for at least one year; (b) provide written notice [about the nominee]; and Maurice "Hank" Greenberg (c) [undertake to assume any liability and comply with law]. ” Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 48 of 65
Del GCL § 109. Bylaws. (a) … The power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote …; provided, however, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors …. The fact that such power has been so conferred upon the directors or governing body, as the case may be, shall not divest the stockholders …, nor limit their power to adopt, amend or repeal bylaws. (b) The bylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees. (8 Del. C. 1953, § 109; 56 Del. Laws, c. 50; 59 Del. Laws, c. 437, § 1. ) Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 49 of 65
Del GCL § 112. Access to proxy solicitation materials. The bylaws may provide that if the corporation solicits proxies with respect to an election of directors, it may be required …. to include in its proxy solicitation materials. . . 1 or more individuals nominated by a stockholder. Such procedures or conditions may include any of the following: (1) A provision [relating to qualified nominating stockholder] (2) A provision requiring [disclosures about nominating stockholder and nominees] (3) A provision conditioning eligibility [based on number of directors or prior nominations] (4) A provision precluding nominations by [hostile bidders / acquirors] (5) A provision requiring [indemnification for false/misleading statements] 77 Del. Laws, c. 14, § 1 (2009) Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 50 of 65
The End Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 51 of 65
Group 14 a-8 hypos … Click on Ch 16 - overview Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 52 of 65
Theory of the Firm Labor Capital Firm Supplies Equipment Adam Smith “Wealth of Nations” Land Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 53 of 65
Theory of the Firm Capital Labor Entrepreneur Supplies Equipment Ronald Coase “Nature of the Firm” Land Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 54 of 65
Second Circuit: Because the interpretation of Rule 14 a 8(i)(8) that the SEC advances in its amicus brief … conflicts with the 1976 Statement, it does not merit the usual deference we would reserve for an agency's interpretation of its own regulations. AFSCME v. AIG, Inc (2 d Cir. 2006) In its amicus submission, the SEC fails to so much as acknowledge a changed position [in its no-action letters], let alone offer a reasoned analysis of the change. Accordingly, we deem it appropriate to defer to the 1976 Statement … There might be perfectly good reasons for permitting companies to exclude proposals like AFSCME's, just as there may well be valid policy reasons for rendering them nonexcludable. However, Congress has determined that such issues are appropriately the province of the SEC, not the judiciary. Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 55 of 65
Who has the last word? Second Circuit (footnote 8): Proposed Rule 14 a-11 would entitle a holder of at least 5% of the corporation's voting stock to place a nominee on the corporate ballot but only if the proxy access rule had been "activated" by one of two triggering events, including the adoption, by majority vote, of a shareholder proposal submitted by a holder of more than 1% of the corporation's voting stock. We recognize that our holding facilitates a process … for adopting non-uniform proxy access rules that are less restrictive than that created by Proposed Rule 14 a-11. Accordingly, if the Commission ultimately decides to adopt Proposed Rule 14 a-11, then such an action, although certainly not necessary, would likely be sufficient to modify the interpretation of Rule 14 a-8(i)(8) that we have adopted here. Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 56 of 65
The Securities and Exchange Commission … is adopting an amendment to Rule 14 a-8(i)(8) to provide certainty regarding the meaning of this provision in response to a recent court decision. [November 27, 2007] § 240. 14 a-8 Shareholder proposals. * * * (i) * * * (8) Relates to election: If the proposal relates to a nomination or an election for membership on the company's board of directors or analogous governing body or a procedure for such nomination or election; Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 57 of 65
Rule 14 a-8(i)(8) (amended in 1976, rephrased in 1998). Question 9: On what bases may a company rely to exclude my proposal? … If the proposal relates to an election for membership on the company's board of directors … 1976 Interpretive Release: "with respect to corporate elections, Rule 14 a-8 is not the proper means for conducting campaigns or effecting reforms in elections of that nature [i. e. , "corporate, political or other elections to office"], since other proxy rules, including Rule 14 a-11, are applicable thereto. " Release (accompanying 1976 rule change): Rule avoids "the erroneous belief that SEC intended to expand the existing exclusion to cover proposals dealing with matters previously held not excludable by SEC, such as cumulative voting rights, general qualifications for directors …" Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 58 of 65
Dear Chairman Cox, We are writing on behalf of the … International Corporate Governance Network (the “ICGN”) [whose institutional members hold $10 trillion in financial assets]. We are writing with respect to the Commission’s upcoming review of Rule 14 a-8(i)(8) in light of the recent Second Circuit decision in AFSCME vs. AIG, Inc. We strongly endorse the Second Circuit’s decision and urge the Commission to take steps to interpret the Rule consistent with that decision. We believe one of the basic assumptions of corporate governance is that shareholders should have the right to exercise a meaningful role in the election of directors and that the election process should thereby function as a means to ensure board accountability. This right has not been fully realized in the United States. Critics of the Court of Appeals’ decision have expressed concern that shareholders would abuse procedures … establishing the right to access. It clearly makes no sense for shareholders to undermine the enterprises in which they have invested. We do know that where comparable rights exist in jurisdictions outside the U. S. , there have been no abuses of the type feared by opponents of shareholder access. We also believe that a market-based approach to the design of access procedures would be more effective than a regulatory or legislative solution. Based on our global perspective, the United States system clearly lags behind other major markets where the rights of shareholders to participate in and influence director elections are already well established. Giving shareholders a stronger voice in the nomination and election process would bring the U. S. market in closer conformity to international best practices and election standards. Strengthening shareholders’ rights with respect to director selection would encourage more dialogue, negotiation and constructive engagement, and would help reduce the confrontational nature of shareholder activism in the United States. For all of these reasons, the ICGN urges the Commission to accept the decision of the Court of Appeals and to permit shareholders to submit access proposals under the Rule. Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 59 of 65
Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 60 of 65
1. Shareholders are said to be “passive” because: a. Collective action problems b. Voting rights are limited c. Management engages in voting manipulation 4. Shareholders who undertake a voting insurgency are reimbursed their expenses: a. Under corporate bylaws b. Only if successful c. On same basis as management 2. The institutionalization of US corporations refers to: a. Corporate execs going to jail b. Investments mostly managed by intermediaries c. More shareholders than ever 5. Public company institutional Shs that seek to vote out the board: a. Can communicate freely – remember the 1 st Amendment b. Must abide by the proxy rules c. Are exempt from the proxy rules 3. The prisoner’s dilemma illustrates … a. The value and difficulty of cooperation b. How executives should avoid insider trading laws c. The worthlessness of ISS 6. A hedge fund that places a WSJ ad opposing management a. Violates the proxy rules b. Is ok under the proxy rules, if it’s not soliciting votes c. Is ok under the proxy rules, it it’s already filed a proxy statement Answers: 1 -a / 2 -b / 3 -a / 4 -b / 5 -b / 6 -b&c Corporations: A Contemporary Approach Chapter 16 Public Shareholder Activism Slide 61 of 59
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