Transcript MA Section 1b: SH voting - University of Illinois College

Mergers & acquisitions
Section 1b:
Shareholder voting
Prof. Amitai Aviram
[email protected]
University of Illinois College of Law
Copyright © Amitai Aviram. All Rights Reserved
S15
Shareholder voting
Overview of Section 1b
1. Mechanics of SH voting
–
–
–
–
Call
Quorum
Vote
Special rules for certain types of votes
2. Proxy solicitation
3. Controlling the agenda
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Mechanics of SH voting
How do SHs act for the corporation?
• Like other corporate organs, SHs act by approving resolutions:
– Written consent; or
– Meeting
• Call (summoning the meeting)
• Quorum (sufficient shares present at the meeting)
• Vote (sufficient shares support the resolution)
• Hypo
– A majority of Acme’s SHs want to appoint Ella as director
– Oliver the objector disagrees, and wants to speak at a SH meeting to persuade
his fellow SHs not to vote for Ella
– He argues that Acme must hold a physical meeting to debate & vote
– Other SHs don’t want to waste time & money on a meeting
– Can Acme appoint Ella without a SH meeting? [DGCL §211(b), 228(a)]
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Call
• Types of SH meetings
– Annual SH meeting [DGCL §211(b)]: unless it elects directors by written
consent, firm must hold an annual SH meeting
– Special SH meetings [§211(d)]: any meeting other than the annual SH meeting
(the law allows but does not require calling such meetings)
• When are special SH meetings called?
• The ‘call’ element considers two issues
– Who has authority to call a SH meeting?
– What is required for the notice to be appropriate?
• Authority to call a SH meeting
– As stated in bylaws [DGCL §211(b)]
– Court, if no meeting was called for 13 months [§211(c)]
– For special meeting: board + as stated in bylaws/charter [§211(d)]
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Call
Appropriate notice
• DGCL §222(a): Notice must be in writing and specify
– Place of meeting
• DGCL §211(a)(1): By default, place provided in charter or bylaws; if no such
place is specified, meetings held in location determined by board
• What if board, not wanting a particular SH to attend, decides to hold the
meeting on a corporate jet during flight (knowing SH is afraid of flying)?
– Date & hour of meeting
– Means of remote communications, if any
– For special SH meetings: purposes for which the meeting is called
• DGCL §222(b): notice must be given no less than 10 days or more
than 60 days before the meeting
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Quorum
Were enough SHs present?
• The ‘quorum’ element considers whether enough shares were
present to consider the event a valid meeting
– What’s wrong with having only a few votes present?
• How many shares must be present?
– DGCL §216(1): by default, majority of shares entitled to vote
– Charter/bylaws can opt out of default, but never less than ⅓
• Which shares are considered present?
– Shares that are entitled to vote, and are either present (SH is present at
the meeting) or represented (SH gave valid proxy & proxy holder is
present at the meeting)
– If a share is present for any issue at the meeting, it counts towards the
quorum for the entire meeting
• Example: Joe attends the first 10 minutes of a meeting, voting on issue 1,
then leaves to grab lunch and is not present when there’s a vote on issue 2.
Joe’s shares are considered present for establishing a quorum for issue 2.
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Quorum
Who is entitled to vote?
• Hypo: Board sends SHs notice on June 4 that a SH meeting will take
place on August 1. Alice owned a share on June 4, but sold it to Bart
on June 10, so on August 1, Bart owns the share.
– Q: Who gets to vote the share, Alice or Bart?
A: depends on the record date (the date on which the owner is considered
entitled to vote & receive notice of an upcoming SH meeting)
• Suppose the rule is that the record date is the time of the vote
– Would this rule cause problems to the firm in notifying SHs about an upcoming
SH meeting?
– Would such a rule cause problems to someone who is soliciting votes for a
proposal at the SH meeting?
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Quorum
Who is entitled to vote?
• Suppose the rule is that the record date is the time the meeting is
called
• Hypo: Microsoft agrees to merge with Yahoo!, and calls a SH meeting
to approve the merger
– Microsoft sets May 3rd as the record date (both voting & notice)
– Edna owned Microsoft shares until May 5th, when she sold them
– She now has no incentive to bother voting, which makes it harder to establish a
quorum and get an absolute majority of SHs to approve the merger (even if
most SHs who care about MS favor the merger)
– And if Edna does vote, she might not vote in the best interest of Microsoft
(since she no longer has a stake in the company)
• So there are problems with either record date (when meeting is
called/when vote is held)
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Quorum
Who is entitled to vote?
• DGCL §213(a) creates record dates for notice & voting
– Owner of a share on record date is entitled to notice
• Record date can’t be earlier than the day of the resolution fixing it
• No earlier than 60 days before the meeting, no later than 10 days
– Board may set separate record date for voting
• This mitigates the problem of votes by former SHs
• Default record dates
– Notice
• Day before notice is given to the SHs; If notice was waived by SHs,
record date is day before meeting
– Voting
• Same date as notice record date
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Quorum
Who is entitled to vote?
• Example
– Acme will hold its annual SH meeting on May 1
– It sends a notice of the meeting (with the proxy materials) to SHs
on March 5 (<60 days but >10 days from meeting date)
– If Acme’s board does not decide on a different notice record date,
by default the notice record date is March 4
• I.e., anyone owning Acme shares on March 4 is entitled to a notice
– If Acme’s board does not decide on a different voting record date,
by default the voting record date is also March 4
• I.e., anyone owning Acme shares on March 4 is entitled to vote
• But if the board wants to reduce the problem of voting by former SHs, it
can decide on a later voting record date (e.g., April 15)
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Vote
• The ‘vote’ element considers the number of votes that need to
support a resolution for it to pass
– What vote is required to pass?
– How do you count abstentions & withheld votes?
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Vote
Vote required to pass
• Majority of shares present (Default standard: DGCL §216(2))
– Bylaw amendments
– Precatory SH resolutions
• Majority of disinterested shares present
– Ratifying breach of FD (DGCL §144(a)(2))
• Majority of outstanding shares entitled to vote
–
–
–
–
Mergers (DGCL §251(c))
Sale of all or substantially all of C’s assets (DGCL §271)
Charter amendments (DGCL §242(b))
Dissolving the firm (DGCL §275) (unanimity, if by written consent)
• Plurality of shares present
– Electing directors (DGCL §216(3))
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Vote
Vote required to pass: plurality vote
• Plurality: excess of votes cast for one candidate over those cast for
any other candidate
• Example 1: more candidates than available seats
– One board seat open for election; 3 candidates: Al, Beth & Carol
– At SH meeting, Al receives 35% of votes, Beth 40%, Carol 25%
– Beth has the plurality of votes (40%), but not a majority (>50%)
• Example 2: single candidate (2012 elections at Sirius XM Radio, Inc.)
– Leon Black has been on the board since 2001; re-nominated for 2012
– 8 seats open for election; 8 nominees (including Black)
– WSJ reports Black didn’t attend any board meeting for several years
– SH advisory firms recommend to SHs to vote against him
– Of 3.8B outstanding shares, 955M vote against Black, 512M
vote in favor (the rest – about 2.3B (61%) – don’t vote)
– Black is reelected (how was there a quorum?)
• Why do we have a plurality standard for electing directors?
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Vote: how to count abstentions?
Licht v. Storage Technology Corp. [Del. Ch. 2005]
• In a SH meeting of StorageTek, SHs voted on adopting
cumulative voting for the election of directors
– For the proposal:
– Against:
– Abstaining:
42,509,977
36,001,925
9,175,421
~48.5%
~41%
~10.5%
• Why did the proxies offer an option of abstaining? [Note FN 7]
• A fourth category is votes withheld
– SH who (on a given matter) declines to vote at all
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Vote
Licht v. Storage Technology Corp.
• Statutory voting standard
– MBCA: “approved if the votes… favoring the action exceed the
votes cast opposing the action”
• Resolution passes because 48.5% > 41%
– DGCL: “affirmative vote of the majority of shares present...”
• If abstentions do not count as “shares present”: 48.5 out of 89.5
• If abstentions count as “shares present”: 48.5 out of 100
– Are abstentions considered “shares present”?
• New York – “majority of votes cast” standard
– Votes cast include only “for” and “against” votes
• Delaware – “majority of voting power present” standard
– Shares present or represented at the meeting; and
– Entitled to vote
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Vote
Licht v. Storage Technology Corp.
• The Licht court cites Berlin v. Emerald Partners (Del. 1989): a vote
that was withheld is not considered “voting power present”
– Vote withheld = proxy holder not authorized to vote on a certain matter
– Proxy holder lacks authority to vote the shares, so share is not entitled to vote
• Licht court: An abstention is a SH’s affirmative authorization to
neither vote for nor against
– Proxy holder has authorization to abstain
– Therefore, an abstention counts as part of the “voting power present”
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Special rules for certain votes
Amending the charter (voting groups)
• Acme has two classes of shares. Both classes have the
same rights, except that Class B shares have a $2/share
dividend preference
– Acme issues 200 Class A shares & 100 Class B shares
• A year later, Acme’s board brings to a SH vote a proposal to
amend the charter to reduce B shares’ dividend preference
to $1/share
– What vote is required for the proposal to pass?
• Note DGCL §242(b)(2)
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Special rules for certain votes
Cumulative voting: why have it?
• Ringling Brothers Barnum & Bailey circus, a corporation, has 7
directors. Its SHs are:
John Ringling-North
Robert Ringling
Aubrey Ringling-Haley
370 shares
315 shares
315 shares
• Each faction proposes its candidates for the board
– If each faction votes for its own candidates, how many directors will each
faction have?
– If the Ringling & Ringling-Haley factions form a coalition to elect each other’s
candidates, how many directors will each faction have?
– Is it likely that all three factions will be represented on the board?
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Special rules for certain votes
Cumulative voting: how it works
• To allow for more representative boards, corporations may
adopt cumulative voting in electing directors [DGCL §214]
• In cumulative voting, each SH’s # of votes is multiplied by the
number of directors up for election.
– E.g.: Ann owns 2 Class A shares (entitled to 1 vote each) & 1 Class B
share (entitled to 5 votes each)
– 3 directors are up for election in the today’s SH meeting
– Ann has 21 votes (3 directors x [(2 x 1) + (1 x 5)])
• SHs are then allowed to split their votes on any number of
candidates (or use all votes on a single candidate)
– E.g.: Ann casts 15 votes for Ben & 6 votes for Cheryl (total: 21 votes)
• The candidates with the most votes are elected
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Special rules for certain votes
Cumulative voting
• Strategy behind cumulative voting
– MSHs concentrate all of their votes on one or a small number of
directors, ensuring that those candidates get elected
– Controller has to spread his votes over more directors (to elect a
majority of directors), so votes are spread thin, and some candidates
lose to MSH’s candidates
• Example: electing Ringling Brothers’ directors
–
–
–
–
Ringling-North has 2590 votes [370x7]
Ringling & Ringling-Haley each has 2,205 votes [315x7]
Ringling & Ringling-Haley form a coalition
Candidates:
• Edith Robert Dunn Aubrey James John Woods Griffin
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Special rules for certain votes
Cumulative voting: example
• Election results:
–
Edith Robert Dunn Aubrey James John Woods Griffin
– Ringling 882
882
441
– R-H
– R-N
– Total:
441
882
882
882
882
882
882
882
864
864
863
863
863
863
• The Ringling/R-H coalition has 5 directors, R-N faction has 2
directors
• If there were no coalitions, Dunn would only have 441 votes,
and Griffin would be elected. R-N: 3 directors, R-H: 2 directors,
and R: 2 directors.
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Special rules for certain votes
Staggered (classified) boards
•
U.S. Constitution, Art. I, Sec. 3: Senators are elected for 6-year
terms. Every 2 years, ⅓ of Senate seats are open for election.
–
•
A corporation may have a staggered (classified) board of directors
–
–
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Why stagger the elections? (i.e., why not have all 100 seats elected every 6
years?)
DGCL §141(d): Firm may provide in charter or bylaws for a staggered board
(composed of 2 or 3 groups)
Additional motivation for staggered boards: takeover defense
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Shareholder voting
Overview of Section 1b
1. Mechanics of SH voting
2. Proxy solicitation
3. Controlling the agenda
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Proxy solicitation
Effect of SH apathy on voting
• From BA: difficult for beneficiaries to govern when they have – High cost to act collectively
– Unequal access to info/expertise
– Differing business interests
• This is the typical situation with SHs in public firms, which is why we
need delegated control (firm managed by the board)
• SH voting serves as a check on the board, but it is a form of collective
action, so most SHs are likely to be rationally apathetic
– E.g., Acme is worth $10B; Joe owns $10,000 of stock (one-millionth of the firm)
– Voting for the “right” directors adds $1B to the value of the firm
– Joe’s share of the added value is $1,000 – not enough to cover travel & lodging
expenses for the SH meeting
• If we want MSHs to vote, we need to make it very inexpensive for
them to do so
– How? Voting by proxy: cheaper participation at the cost of lower quality of
deliberation
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Proxy solicitation
The proxy card
• SHs can appoint an agent to vote their shares
– Agent is called “proxy holder” (or “proxy”)
– Document appointing the agent is called “proxy card” (or “proxy”)
Microsoft Corp. Proxy Card - Front
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Proxy solicitation
The proxy card
Microsoft Corp. Proxy Card - Back
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Proxy solicitation
Application of §14(a)
• Exchange Act §14(a): “It shall be unlawful for any person… in
contravention of such rules and regulations as the Commission may
prescribe… to solicit or to permit the use of his name to solicit any
proxy or consent or authorization in respect of any [registered security]”
• §14(a) relies on SEC rules to provide it with content
• Applies only to registered securities
• Applies only to solicitations
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Proxy solicitation
Application of §14(a) – “solicitation”
• Rule 14a-1(l)(1): “Solicitation” includes
– Request for a proxy
• Whether or not accompanied by or included in a form of proxy
– Request to execute/not to execute/to revoke a proxy
– Furnishing a form of proxy or other communication to security holders
under circumstances reasonably calculated to result in procurement,
withholding or revocation of a proxy
• Rules 14a-1(l)(2) & 14a-2 exempt certain activities from the definition
of “solicitation” or from some or all of the SEC rules regarding
solicitations
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Proxy solicitation
Proxy statement
• Rule 14a-3(a) – Anyone soliciting a proxy must first provide a written
proxy statement (following a prescribed form)
– Exception (Rule 14a-12) – solicitation may be made before filing proxy statement, if:
• Solicitation identifies the persons soliciting, discloses their interests & advises
SHs to read the proxy statement;
• Solicitation is filed with SEC; and
• Proxy statement is sent to SHs at same time as proxy card
• Electing directors: Rule 14a-3(b) – Board must provide an annual
report before soliciting proxies for the annual meeting
– This determines the timing of the annual meeting; end of the firm’s fiscal year +
time to prepare annual report + advance notice for the SH meeting
• Filing (Rule 14a-6) – Proxy statement must be filed with SEC
– Preliminary proxy statement: 10+ days before sending
• Required unless only issues are electing directors, approving accountant & SH
resolutions, and statement doesn’t comment on an opposing solicitation (Rule 14a-6(a))
– Definitive proxy statement: Filed by day it is sent to SHs
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Proxy solicitation
Additional §14(a) Rules
• SH proposals: Rule 14a-8 requires, under certain circumstances, that
the board include in its own proxy materials proposals that a SH
wants to vote on in the SH meeting
– We will address this rule when we discuss controlling the SH meeting agenda
• Fraud: Rule 14a-9 prohibits false or misleading statements in
connection with soliciting proxies
– We will address now how Rule 14a-9 is enforced
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Proxy solicitation
Enforcement of §14(a)
• Enforcement of §14(a)
– Public enforcement: SEC can sue for violations of §14(a) (only needs to show violation)
– Private enforcement: private parties have a cause of action for §14(a) violations
(J.I. Case Co. v. Borak [US 1964])
• Suit can be direct (e.g., SH’s voting rights infringed by misrepresentation) or
derivative (e.g., corporation harmed by misinformed vote)
• Even when suit is direct, it is usually a class action (MSHs are passive & only
harmed a small amount each, so they won’t sue on their own; suit will occur
only if you give a lawyer an incentive to sue for many SHs together)
• Elements of a §14(a) action
1.
Violation
• For Rule 14a-9: Material misleading statement or material omission
• Standard for materiality (TSC Industries [US 1976]): Substantial likelihood that a
reasonable shareholder would consider the statement/omission important in
deciding how to vote
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2.
3.
Injury
Causation (injury caused by violation)
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Proxy solicitation
Elements of §14(a): causation
• Mills v. Electric Auto-Lite Co. [US 1970]
–
–
–
–
Merganthaler owned 54% of EAL; nominated entire board
EAL’s board approved freezeout merger by Merganthaler
Proxy statement didn’t mention Merganthaler dominated EAL’s board
SH sued to rescind the merger, alleging a misleading omission in the proxy
material, in violation of Rule 14a-9
– Issue is proving causation: normally this means showing that plaintiffs relied on
the misrepresentation; but this is impossible to show for thousands of SHs, so if
we insist on such proof we rule out class actions
• CA7: to prove causation, show that merger was unfair
– If unfair, SHs presumed to have opposed it but for misrepresentation
– But if fair, SHs presumed to have approved it anyway
• S.Ct. reverses: CA7 turns the action into an appraisal proceeding
– S.Ct. presumes that any material misrepresentation affects the vote
– Therefore, causation exists if:
• There was a material misrepresentation; and
• The solicited proxies were essential to approve the merger
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Proxy solicitation
Elements of §14(a): causation
• What about a situation where solicited proxies are not essential to
approve the merger?
• Virginia Bankshares, Inc. v. Sandberg [US 1991]
–
–
–
–
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VBI owned 85% of a bank & executed freezeout merger
Merger required approval by vote of 2/3 of the SHs
Since VBI owned 85% it didn’t need to solicit proxies, but did
S.Ct.: Even if there was a misleading statement in the proxy materials, plaintiff
can’t show causation because transaction would have been approved even
without the proxies
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Shareholder voting
Overview of Section 1b
1. Mechanics of SH voting
2. Proxy solicitation
3. Controlling the agenda
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Controlling the agenda
The self-perpetuating board
• Acme’s directors are Larry, Curly & Moe (who each own one of
Acme’s 100 shares)
• Carla, who owns 4 shares, disagrees with the way LCM manage Acme
& wants to replace them
– Carla launches a campaign against LCM,
urging SHs to vote against them
– She is successful: All SHs (other than LCM) send
their proxy cards, voting against LCM
– Outcome: LCM get 3 votes in favor, 97 votes
against: they are elected because they have a
plurality of the votes (DGCL §216(3))
Acme’s directors
pose for a picture
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Controlling the agenda
The self-perpetuating board
• Suppose Acme has majority voting for directors: LCM election fails
– But directors hold office until successor is elected (DGCL §141(b)), so LCM stay
– If Curly dies or resigns, who appoints a replacement director? (DGCL §223(1))
• Suppose Carla asks SHs to boycott (not sign the board’s proxy card)
– If successful, outcome is no quorum (only 3% of shares represented), so no new
directors elected. Again, LCM stay in office.
– Carla needs a valid meeting (w/quorum), in which other candidates are proposed
• Meeting showdown: Carla shows up at SH meeting
– Carla persuaded all other SHs (except LCM) to vote against LCM on the board’s
proxy cards; Carla plans to vote her shares for Alvin, Simon & Theodore
– To do this, she must first amend the SH meeting agenda to vote on them
• Agency law: proxy holders may use discretionary authority to vote the shares
on issues on which they were not instructed how to vote
– At the meeting, Carla moves to amend agenda & vote on electing AST as
directors. LCM vote against the amendment their 3 shares + the 93 shares to
which they hold proxies. Motion is defeated 96-4.
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Controlling the agenda
What can a SH do?
• To replace the board, it’s not enough to have sufficient SH votes;
Carla needs to control the SH meeting agenda
• Proxy contest: solicit from other SHs proxies to vote their shares on
the desired issue or for the desired candidate
• Proxy access: ask the board to include the desired issue/candidate on
the agenda (and on the board’s proxy card)
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Controlling the agenda
Proxy contest
• Proxy contests are expensive
– Example: In May 2009 Pershing Square launched a proxy contest
to appoint its nominees to the board of Target
• Estimated cost to Pershing Square: $15M
• Each additional mailing to SHs cost $1.6M
(according to Financial Times, May 11, 2009)
• Insurgents don’t capture all the value from the contest
– Suppose that a proxy contest cost Carla $15M, and electing AST
instead of LCM will increase Acme’s value by $100M
– How much does Carla profit from the change?
• But Carla bears the entire $15M cost
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Controlling the agenda
Proxy contest
• Should the firm be required to reimburse proxy contest costs?
– Suppose that Carla’s doesn’t have a better strategy, but she launches a
proxy contest anyway
– Suppose also that the proxy contest costs Acme $15M, and Carla
another $15M (if uncontested, cost to Acme is $10M)
• If Carla wins, she gets control of Acme (and gets reimbursed)
• If she loses, she doesn’t pay anything (expenses are reimbursed), and
Acme might pay her up to $20M to withdraw from the contest, in order
to save Acme the costs of the proxy contest ($30M-10M)
– So Carla has an incentive to always contest the board (to extort a side
payment), even if she doesn’t have a better strategy
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Controlling the agenda
Proxy contest
• No affirmative right to be reimbursed contest costs
– But firm can authorize a reimbursement, if:
• Contest involved a question of policy, not personnel; and
• Expenses are reasonable in amount & reasonably necessary to inform SHs
• Reimbursing insurgents
– If insurgents won, same rules as reimbursing incumbents
• Case law suggests SHs need to authorize insurgent reimbursement
– If insurgents lost, same rules but board is unlikely to authorize reimbursement,
or bring it to SH vote
– DGCL §113: Bylaws may create other reimbursement arrangements
• Why is it significant that §113 authorizes doing this in bylaws?
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Controlling the agenda
Proxy access
• Ask board to include the issue on the agenda (& on proxy card)
• Such requests are typically regulated by an advance notice bylaw
– Bylaw specifying how SHs can add issues to the agenda
– Such bylaws often restrict which SHs can do so & requires SHs to disclose info
beyond federal securities laws requirements
– JANA v. CNet [Del.Ch. 2008]
• Ambiguity in these bylaws is interpreted in favor of SHs’ electoral rights
• Void if it unduly restrict SH franchise or applied inequitably
• When is the board forced to include an issue on the proxy card?
– Electing directors (proxy access) – limited access
• DGCL §112: Bylaws may contain a proxy access provision, allowing SHs to
nominate their candidates for directors on the board’s proxy card, and
create certain limitations on this right
– Other SH decisions (SH proposals) – broader access
• Why distinguish electing directors from other decisions?
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Controlling the agenda
SH proposals
• Rule 14a-8: When must board include SH proposal on its proxy?
– Qualifying SHs
• Own at least $2K or 1% of shares
• Owned shares for at least 1 year & hold the shares through the date of
the SH meeting
• Submitted no more than 1 proposal per SH meeting
– SH or her agent must appear at meeting to present proposal
– Proposal (including supporting statement) may not exceed 500
words
– Firm may write in proxy statement an objection to the SH proposal
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SH proposals
Procedure for exclusion
• Rule 14a-8(i) allows firm to exclude certain proposals
• Procedure for exclusion – minimum requirements
– Firm must notify SH of defect within 14 days (unless defect cannot be remedied
– e.g., submitting proposal after deadline); SH then has 14 days to respond
– Firm must notify SEC (& copy SH) of intent to exclude a proposal at least 80
days before filing the definitive proxy statement
• Typical practice: When firm notifies SEC, it requests a “no-action
letter” in which SEC’s staff states that based on information provided,
it doesn’t intend to challenge exclusion
– If either side doesn’t like the outcome, they can appeal to the SEC
commissioners
– Letter doesn’t prevent SHs from suing in court, nor binds court if SHs sue
– So why do firms ask for a no-action letter?
– Practice point: when considering whether a proposal is excludable, look not
only at caselaw, but also at prior no-action letters
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SH proposals
Example of a no-action letter
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SH proposals
Rule 14a-8(i): grounds for exclusion
1. Improper under state law
2. Violation of state, federal or foreign law
3. Violation of proxy rules
4.
5.
6.
7.
8.
– E.g., 14a-8 (compliance w/formalities); 14a-9 (material misrepresentation)
Personal grievance or personal interest
Relevance (issue has very minor impact on the firm)
Absence of power/authority
Management functions
Director elections
– Can exclude proposals that affect outcome of a particular director election, but
not proposal affecting general election process
9. Conflicts with company’s proposal
10. Proposal already substantially implemented
11. Duplication with an included proposal
12. Resubmissions (Proposal submitted in past & received little support)
13. Specific amount of dividends
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SH proposals
14a-8(i)(1): Improper under state law
• Typically applies when SHs aren’t authorized to make this decision
• Hypo 1: SH proposal that: “Yahoo will merge with Microsoft”
– Excludable under 14a-8(i)(1): SHs don’t have authority to order board to do this
• Hypo 2 (recommendation): SH proposal that “Shareholders
recommend that Yahoo will merge with Microsoft”.
– Not excludable under 14a-8(i)(1), since SHs can recommend. But board is not
obligated to follow the recommendation
• Hypo 3 (bylaw): SH proposal that “Shareholders amend the bylaws to
add bylaw 9.87: The board will present every merger proposal it
receives to the shareholders, and will execute the merger if
shareholders vote in favor of it.”
– Excludable under 14a-8(i)(1): SHs have authority to amend bylaws, but is this a
valid bylaw under Boilermakers? Valid subject matter (rights/powers of SHs),
but bylaws only dictate process (not substantive decisions) & bylaws may not
force directors to violate FDs (e.g., agree to what they think is a bad merger)
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SH proposals
14a-8(i)(5): Relevance
• Proposal relates to operations which account for <5% of total assets,
net earnings & gross sales, and is “not otherwise significantly related
to the company’s business”
• Hypo: SH proposes that “SHs request that Acme will investigate
whether its supplier Ajax is involved in organized crime”
– Suppose that Acme’s purchases from Ajax are far less than 5% of assets,
earnings or sales
– Best argument against exclusion under 14a-8(i)(5)?
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SH proposals
14a-8(i)(6): Absence of authority
• Firm lacks power/authority to implement proposal
• Hypo: “SHs recommend that Acme form a committee to report on
the benefits to Acme from a national health-care system”
– Recommendation, so likely not excludable under 14a-8(i)(1)
– Probably not excludable under 14a-8(i)(5) if Acme’s health plan costs are
significant
– 14a-8(i)(6): Acme claims that it has no power to determine whether the US
legislates national health-care
• But forming a committee is within the power of Acme, so proposal probably not
excludable
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SH proposals
14a-8(i)(7): Management functions
• Proposal deals with a matter relating to the firm’s ordinary business
operations
• Example (based on Austin v. ConEd)
– “SHs recommend that Acme offer employees a more generous retirement plan”
– Court finds this excludable under 14a-8(i)(7)
• Example (social/political issues)
– “SHs recommend that Acme will add sexual orientation to its nondiscrimination policy”
– Acme claims employment policies are part of its ordinary business operations;
SHs claim it’s a social policy issue that goes beyond ordinary business
– In 1992, SEC sides with the firm (Cracker Barrel), in 1998 SEC reverses course
and sides with SHs; trend is towards less exclusion of social issue proposals
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Controlling the agenda
Summary
Proxy contest
(multiple proxies)
State law (Del.)
Federal law
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Proxy access
(single proxy)
SH can control agenda, but
a contest is expensive.
By default, board controls
reimbursement; bylaws
may opt out of default
---
Proxy access
SH proposals
(for electing directors)
(anything but electing directors)
Default: board controls agenda;
bylaws may opt out of default
[Perhaps in the future]
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Default: board controls agenda;
Regulated in most firms by an
advance notice bylaw
Mandatory SH access, subject to
board’s limited ability to exclude