The SEC Chairman indicates a policy shift for public companies, inviting them to take action to exclude precatory shareholder proposals from their proxy materials.
In a recent keynote address at the Weinberg Center for Corporate Governance’s 25th Anniversary Gala, SEC Chairman Paul Atkins singled out precatory shareholder proposals as the key source of recent “politicization of shareholder meetings” and signaled the SEC’s willingness to side with companies who wish to exclude them from shareholder consideration.
Precatory proposals are non-binding resolutions that shareholders submit for a public company to include in its proxy materials ahead of an upcoming shareholder meeting (where such proposals would be voted on), unless certain exemptions are met allowing the company to exclude the proposal from the proxy statement. Although the company is not bound to the outcome of the vote on such a proposal, precatory proposals allow shareholders to express their views on a variety of issues, including environmental, social, and governance issues.
Chairman Atkins criticizes precatory proposals as frequently involving “issues not material to the company’s business” but which “consume a significant amount of management’s time and impose costs on the company.” He suggested that the SEC will be likely to provide relief to any company that sought to exclude precatory proposals from its proxy materials.
The Shareholder Rights at Issue
Under SEC rules, shareholders may submit proposals for inclusion in a company’s proxy materials. See Rule 14a-8 under the Securities Exchange Act of 1934. In turn, the company must include properly submitted proposals in its proxy materials unless the shareholder proposal falls within one of the criteria enumerated in Rue 14a-8(i), in which case the company may, subject to certain conditions, exclude the proposal from its proxy statement. Of relevance here, Rule 14a-8(i)(1) stipulates that a company may exclude the proposal if it “is not a proper subject for action by shareholders under the laws of the jurisdiction of the company’s organization.” Rule 14a-8(i)(1) (emphasis added). Because most corporations are incorporated in Delaware, the inquiry under Rule 14a-8(i)(1) typically turns on whether precatory proposals are a “proper subject” under Delaware law.
Due in part to views that the SEC has previously expressed, it has long been assumed that Delaware law permits precatory proposals. However, Chairman Atkins has taken direct aim at that assumption.
Chairman Atkins’ Invitation to Public Companies
Chairman Atkins has charted a potential path for eliminating precatory proposals from shareholder meetings by recommending that Delaware companies obtain an opinion of counsel that precatory proposals are not a “proper subject” under Delaware law. Subsequently, the company may submit a corresponding no-action request to the SEC under Rule 14a-8(j) asking that the SEC Division of Corporation Finance agree not to recommend enforcement action against the company if it excludes that proposal from its proxy statement based on Rule 14a-8(i)(1). Such a no-action letter essentially informs that company that it may exclude the subject proposal without fear of reprisal from the SEC. Chairman Atkins expressed his “high confidence that the SEC staff will honor [the company’s] position.”
Alternatively, the SEC could certify the question of whether the precatory proposal at issue constitutes a “proper subject” under Delaware law to the Delaware Supreme Court.
Expectations Moving Forward
As noted above, in view of the Chairman’s position, it is now increasingly likely that the SEC staff would be willing to acquiesce, through a no-action letter, in the company request to exclude such proposals from its proxy. However, a no-action letter from the SEC—while insulating the company from SEC enforcement actions—would not insulate the company from potential private litigation, namely a shareholder lawsuit.
The stakes would be significant if the SEC certifies the propriety of a given precatory proposal to the Delaware Supreme Court. The Court could either codify (absent contrary legislation) the right of shareholders to have precatory proposals included in proxy materials or create a safe harbor for every Delaware corporation to exclude precatory proposals.
The full text of Chairman Atkins’ keynote address is available here: SEC.gov | Keynote Address at the John L. Weinberg Center for Corporate Governance’s 25th Anniversary Gala.
