#11136 - Governance Role Of Public Shareholders - Corporations

Governance Role of Public Shareholders

1. Shareholder Proposals

   1. In General

      1. A shareholder proposal is a recommendation or requirement that the company and/or its board of directors take action. Rule 14a-8(a).

      2. Shareholder proposals are regulated by the SEC under Rule 14a-8

         • ALSO, since a shareholder's right to vote is a matter of state law, the extent of that right is also a matter of state law.

      3. Shareholders can make any proposal they want insofar as it is a proper subject for shareholder action under State Law, that is a subject of which shareholders are entitled to vote - (SEE "IX - Shareholder Voting Rights" above)

         • IF a shareholder proposal meets the requirements of Rule 14a-8, the company must include the proposal in the Proxy Statement

         • IF a shareholder proposal DOES NOT meet the requirements of Rule 14a-8, the shareholder will bear the cost of solicitation

   2. State Law

      1. MAIN ISSUE: whether the proposal is a proper subject for shareholder action under State Law

         • In Auer v. Dressel, the court found that (1) to hear charges against four directors and to remove them if the charges were proven, (2) amending the by-laws so that successor directors would be elected by class A stockholder, and (3) amending the by-laws so that an effective quorum of directors will be made up of no fewer than half of the directors in office and no fewer than one third of the whole authorized number of directors were all matters that were proper subjects for shareholder action.

           • (1) Removing a director: "[T]he stockholders who are empowered to elect directors have the inherent power to remove them for cause." Auer v. Dressel - pg. 505

           • (2)/(3) Amending the by-laws

             • MBCA § 10.20(b): "A corporation's shareholders may amend or repeal the corporation's bylaws."

               • MBCA § 2.06(b): "The bylaws of a corporation may contain any provision that is not inconsistent with law or the articles of incorporation."

             • DGCL § 109(a): "After a corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote . . . however, any corporation may, inits certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors . . . ."

         • BUT EVEN IF it is a proper subject for shareholder action, this does not necessarily mean that the shareholders can call a special meeting to consider the proposal

           • JURIS SPLIT

             • MBCA § 7.02(a)(2): A shareholder can call a special meeting where at least 10 percent of the shareholders entitled to vote on an issue request a special meeting

             • DGCL § 211(d): The default rule is that shareholders cannot call a special meeting.

   3. Federal Law - SEC Rule 14a-8

      1. MAIN ISSUE re Federal Law: Whether a shareholder proposal can properly be excluded from the company's proxy materials

         • Under Rule 14a-8, in order to have a shareholder proposal included in the company's proxy materials, the shareholder must (1) be eligible and (2) follow certain procedures. Rule 14a-8.

           • (1) Eligibility:

             • To be eligible under the rule, the proponent must continuously have held at least 1 percent of $2,000 worth of the company voting shares for at least a year. The proponent must then continue to hold the shares and present the proposal at the meeting. Rule 14a-8(b).

           • (2) Procedures:

             • A proponent may submit no more than one proposal per company for a particular shareholders' meeting. Rule 14a-8(c).

             • The proposal, including any accompanying supporting statement, may not exceed 500 words. Rule 14a-8(d).

             • If the proposal is submitted for a regularly scheduled annual meeting, the proposal must be submitted to the company not less than 120 calendar days before the date of the company's last-year proxy statement. Rule 14a-8(e)(2).

               • The deadline can be found in last year's proxy statement.

             • If the proposal is being submitted for a meeting other than a regulated scheduled annual meeting, the deadline is a reasonable time before the company begins to print and send its proxy materials. Rule 14a-8(e)(3).

           • BUT, the company may exclude your proposal for failure to follow the eligibility or procedural requirements BUT ONLY after it has notified you of the problem, and you failed adequately to correct it. Rule 14a-8(f)(1).

             • HOWEVER, a company need not provide notice of a deficiency if the deficiency cannot be remediated, such as if you fail to submit a proposal by the company's properly determined deadline. Rule 14a-8(f)(1).

         • EVEN WHERE the shareholder was eligible and followed proper procedure, under Rule 14a-8(i), a company may exclude the proposal if:

           • (1) Improper under state law: If the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company's organization;

             • IF the shareholder proposal is in the form of a mandatory resolution, and addresses a matter upon which shareholders do not have the authority to bind the corporation or the directors, the proposal can properly be excluded.

             • IF the shareholder proposal is in the form of a recommendation, the Note to (i)(1) states that it is a proper subject for shareholder action under state law UNLESS the corporation shows otherwise.

             • PRINCIPLE CASE: In Auer v. Dressel, the court found that (1) to hear charges against four directors and to remove them if the charges were proven, (2) amending the by-laws so that successor directors would be elected by class A stockholder, and (3) amending the by-laws so that an effective quorum of directors will be made up of no fewer than half of the directors in office and no fewer than one third of the whole authorized number of directors were all matters that were proper subjects for shareholder action.

               • (1) Removing a director: "[T]he stockholders who are empowered to elect directors have the inherent power to remove them for cause." Auer v. Dressel - pg. 505

               • (2)/(3) Amending the by-laws

                 • MBCA § 10.20(b): "A corporation's shareholders may amend or repeal the corporation's bylaws."

                 • MBCA § 2.06(b): "The bylaws of a corporation may contain any provision that is not inconsistent with law or the articles of incorporation."

                 • DGCL § 109(a): "After a corporation has received any payment for any of its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote . . . however, any corporation may, inits certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors . . . ."

           • (2) Violation of law: If the proposal would, if implemented, cause the company to violate any state, federal, or foreign law to which it is subject;

           • (3) Violation of the proxy rules: If the proposal or supporting statement is contrary to any of the Commission's proxy rules, including Rule 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials;

           • (4) Personal grievance; special interest: If the proposal relates to the redress of a personal claim or grievance against the company or any other person, or if it is designed to result in a benefit to the shareholder, to further the shareholder's personal interest, which is not shared by the other shareholders at large;

           • (5) Relevance: If the proposal relates to operations which account for less than 5 percent of the company's total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and it not otherwise significantly related to the company's business.

             • The principle purpose of (i)(5) is to exclude proposals whose economic significance to the corporation would be de minimis.

               • BUT, some proposals may be significant even though they are not significant under the statistical test, either because they relate to corporate structure (e.g. cumulative voting) or because they raise public policy issues that relate directly to the corporation's business. Such proposals cannot be excluded under (i)(5).

               • The "significantly related" standard set forth in (i)(5) is analytically very similar to the "ordinary business" standard of (i)(7).

             • CASES:

               • In Lovenheim v. Iroquois Brands, LTD., the court determined that it was not proper to exclude a shareholder proposal relating to the procedure of feeding geese for production of fois gras, of which is made from the liver of geese, notwithstanding the fact that fois gras represented only a de minimis contribution to the company's sales and only 0.05% of the company's assets were implicated, because the proposal had ethical and social significance such that the proposal could not be excluded.

                 • The court stated that the meaning of "significantly related" is not limited to economic significance.

               • In Medical Committee for Human Rights v. SEC, the court determined that a shareholder proposal, of which would bar the sale of napalm made by the company unless the buyer gave reasonable assurance that the napalm would not be used on or against human beings, could not be excluded notwithstanding the fact that napalm represented a small and not very profitable part of DOW's business.

           • (6) Absence of power/authority: If the company would lack the power or authority to implement the proposal;

           • (7) Management functions: If the proposal deals with a matter relating to the company's ordinary business operations;

             • The antithesis to "ordinary business" is "public policy"

               • If a proposal that otherwise might be considered public policy also implicates questions of public policy, the proposal cannot be excluded under (i)(7).

               • The "ordinary business" standard of (i)(7) is analytically...