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Module VI – Corporate Governance
Chapter 16
Public Shareholder Activism
• Theories of public corporation – Law of shareholder activism
– Berle-Means: separation of – Rational apathy: collective
ownership and control action problem
– Role of shareholders – Changed calculus:
• Manne: market for institutional investors
corporate control – State law: no-
• Easterbrook & Fischel: reimbursement rule
nexus of contracts – Federal law: shareholder
• Roe: political product communications
• Stout & Blair: team • Shareholder proposal rule
production – Operation of rule: SEC no-
• Bainbridge: board-centric action review
– Proper proposals
• Ordinary business
exclusion
• Shareholder access
Corporations: Chapter 16 Slide 1
A Contemporary Approach Public Shareholder Activism of 65
Information in shareholder voting
• State law – minimal notice (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)
“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: Chapter 16 Slide 3
A Contemporary Approach Public Shareholder Activism of 65
Separation of
ownership and control …
Corporations: Chapter 16 Slide 4
A Contemporary Approach Public Shareholder Activism of 65
• Annual meeting (rite of spring)
– Notice to record shareholders
– Election of directors / approval of
resolutions
– Nominations at meeting
• Proxies authorized
– 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
– Resolve: signatures, delegated voting,
dating of proxy
Corporations: Chapter 16 Slide 5
A Contemporary Approach Public Shareholder Activism of 65
Corporations: Chapter 16 Slide 6
A Contemporary Approach Public Shareholder Activism of 65
Classic US corporation
Capital
Entrepreneur
Equipment Supplies Adam Smith
“Wealth of Nations”
Land Labor
Corporations: Chapter 16 Slide 7
A Contemporary Approach Public Shareholder Activism of 65
Separation of ownership and control
Capital
(from diverse public investors)
Professional manager
Equipment Supplies Adolf Berle &
Gardiner Means
Land Labor
Corporations: Chapter 16 Slide 8
A Contemporary Approach Public Shareholder Activism of 65
Views on separation of
ownership/control …
Pop quiz
Corporations: Chapter 16 Slide 9
A Contemporary Approach Public Shareholder Activism of 65
__ Reformists A. Law accepts separation. Shs let
corporate boards mediate capital / mgmt
(Berle & Means, Clark) / labor disputes
__ Contractarians – SH 1st B. Law fostered separation. Shs
(Easterbrook/Fischel, Manne) disempowered by politics that fears of
concentrated money
__ Political realists C. Separation is efficient. Shs protected by
(Roe, Miller & Macey) “control markets” / law should protect
markets and review “end period” tax
__ “Team” theorists D. Separation is anti-capitalist. Shs should
(Stout, Blair) have more disclosure rights, mgmt more
fiduciary duties (offset corporate power)
__ Contractarians - board 1st E. Separation empowers board. Shs permit
(Bainbridge) board to be Platonic guardian / law
should minimize shareholder activism
Corporations: Chapter 16 Slide 10
A Contemporary Approach Public Shareholder Activism of 65
A hypothetical …
Corporations: Chapter 16 Slide 11
A Contemporary Approach Public Shareholder Activism of 65
Corporate voting issue
You are the chair of the “voting committee” of Probity
Investments, the largest US mutual fund group. Your
committee sets the guidelines (and sometimes
makes specific decisions) on the voting of Probity’s
equity portfolios.
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). Milton Friedman
FAW plans to put 3 new directors on the seven-person
Bloated board. FAW has actively solicited proxies
from other institutional investors, including Probity.
Probity owns about 5.7% of Bloated. How should Probity
vote these shares? What theory of corporate law (the
role of shareholders) should Probity follow?
Corporations: Chapter 16 Slide 12
A Contemporary Approach Public Shareholder Activism of 65
Class results
Descriptive - What is “theory of firm”?
• Reformist – 1
• Contractarian (“nexus of Ks”) - 3
• Political forces – 0
• Board as “team” mediator - 0
• Board as master - 1
Normative – What should be “theory of firm”
• Reformist – 3
• Contractarian (“nexus of Ks”) - 3
• Political forces – 0
• Board as “team” mediator - 3
• Board as master - 2
How Probity should vote:
• For FAW / “Friedman” slate - 5
• Against FAW / “Friedman” slate – 5
Corporations: Chapter 16 Slide 13
A Contemporary Approach Public Shareholder Activism of 65
Shareholder voting in
public corporations
Corporations: Chapter 16 Slide 14
A Contemporary Approach Public Shareholder Activism 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 Partner stays
confesses quiet
You You – 3 mos
Both get 2 yrs
confess Other – 5 yrs
You stay You – 5 yrs Both get 6 mos
quiet Other – 3 mos (lesser charge)
You cannot cooperate with the other person.
What do you do?
Corporations: Chapter 16 Slide 15
A Contemporary Approach Public Shareholder Activism 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: Chapter 16 Slide 16
A Contemporary Approach Public Shareholder Activism of 65
Institutionalization
• Investment companies (“deretailization”)
– Mutual funds 27%
– Hedge funds 3%
• Pension funds
– Private 9%
– Public 14%
• Banks (trust & estates) 0.5%
• Insurance companies 8%
• Securities firms 0.5%
• State/local govt 0.8%
• Endowment funds 1.5%
• Foreign institutions 13%
TOTAL (institutions) 77%
Corporations: Chapter 16 Slide 17
A Contemporary Approach Public Shareholder Activism of 65
Legal limits on
shareholder activism …
State reimbursement rule
Federal limits on SH communications
Corporations: Chapter 16 Slide 18
A Contemporary Approach Public Shareholder Activism 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 election-
related costs? What is the rule on
reimbursement of voting expenses?
Why should incumbents be covered
essentially always – but insurgents
only if they win?
Corporations: Chapter 16 Slide 19
A Contemporary Approach Public Shareholder Activism of 65
Long Island Lighting v. Barbash
(2d 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?
In addition, a "Steering Committee of
Citizens to Replace LILCO"
formed. It runs the following ad.
What does management argue?
Shoreham Nuclear Power Plant
Corporations: Chapter 16 Slide 20
A Contemporary Approach Public Shareholder Activism 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: Chapter 16 Slide 21
A Contemporary Approach Public Shareholder Activism 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: Chapter 16 Slide 22
A Contemporary Approach Public Shareholder Activism of 65
“Shareholder Communication” Rules
Rule 14a-2(b) Rule 14a-3
[Proxy statement (f) The [proxy statement delivery
delivery requirements] shall not apply to …
requirements]... do speeches in public forums, press
not apply to the releases, published or broadcast
following: opinions, statements, or advertisements
appearing in a broadcast media,
(1) Any solicitation by newspaper, magazine or other bona
... any person who fide publication …, provided that:
does not ... seek ... (1) No form of proxy, consent or
the power to act as authorization … is provided to a
proxy for a security security holder in connection with
holder and does not the communication; and
furnish or otherwise (2) At the time the communication is
request ... a form of made, a definitive proxy statement
revocation, is on file with the Commission ….
abstention, consent
or authorization.
Corporations: Chapter 16 Slide 23
A Contemporary Approach Public Shareholder Activism of 65
Shareholder proposals
Purpose of Rule 14a-8?
Procedure for submission?
Basis for exclusion?
SEC’s role?
Corporations: Chapter 16 Slide 24
A Contemporary Approach Public Shareholder Activism of 65
Living with Sarbanes-Oxley
Wall Street Journal (Oct 17, 2005)
Corporations: Chapter 16 Slide 25
A Contemporary Approach Public Shareholder Activism of 65
What is a shareholder proposal?
Corporations: Chapter 16 Slide 26
A Contemporary Approach Public Shareholder Activism of 65
Shareholder proposal rule
(1) What is a proposal?
(2) Who is eligible to submit a A shareholder proposal is
proposal, and how do I your recommendation or
demonstrate to the company that I requirement that the
am eligible? company and/or its board of
(3) How many proposals may I directors take action, which
submit? you intend to present at a
(4) How long can my proposal be? meeting of the company's
(5) What is the deadline for submitting shareholders.
a proposal?
(6) What if I fail to follow one of the
eligibility or procedural
requirements explained in answers
to Questions 1 through 4 of this
section?
(7) If I have complied with the
procedural requirements, on what
other bases may a company rely to
exclude my proposal?
Corporations: Chapter 16 Slide 27
A Contemporary Approach Public Shareholder Activism of 65
Shareholder proposal rule
(1) What is a proposal?
(2) Who is eligible to submit a
proposal, and how do I In order to be eligible to
demonstrate to the company that I submit a proposal, you
am eligible? must have continuously
(3) How many proposals may I held at least $2,000 in
submit? market value, or I %, of the
(4) How long can my proposal be? company's securities
(5) What is the deadline for submitting entitled to be voted on the
a proposal? proposal at the meeting for
(6) What if I fail to follow one of the
at least one year by the
eligibility or procedural date you submit the
requirements explained in answers proposal. You must
to Questions 1 through 4 of this continue to hold those
section? securities through the date
(7) If I have complied with the of the meeting.
procedural requirements, on what
other bases may a company rely to
exclude my proposal?
Corporations: Chapter 16 Slide 28
A Contemporary Approach Public Shareholder Activism of 65
Shareholder proposal rule
(1) What is a proposal?
(2) Who is eligible to submit a
proposal, and how do I Each shareholder may
demonstrate to the company that I submit no more than one
am eligible? proposal to a company for
(3) How many proposals may I a particular shareholders'
submit? meeting.
(4) How long can my proposal be?
(5) What is the deadline for submitting
a proposal?
(6) What if I fail to follow one of the
eligibility or procedural
requirements explained in answers
to Questions 1 through 4 of this
section?
(7) If I have complied with the
procedural requirements, on what
other bases may a company rely to
exclude my proposal?
Corporations: Chapter 16 Slide 29
A Contemporary Approach Public Shareholder Activism of 65
Shareholder proposal rule
(1) What is a proposal?
(2) Who is eligible to submit a The proposal, including any
proposal, and how do I accompanying supporting
demonstrate to the company that I statement, may not exceed
am eligible? 500 words.
(3) How many proposals may I
submit?
(4) How long can my proposal be?
(5) What is the deadline for submitting
a proposal?
(6) What if I fail to follow one of the
eligibility or procedural
requirements explained in answers
to Questions 1 through 4 of this
section?
(7) If I have complied with the
procedural requirements, on what
other bases may a company rely to
exclude my proposal?
Corporations: Chapter 16 Slide 30
A Contemporary Approach Public Shareholder Activism of 65
Shareholder proposal rule
(1) What is a proposal?
(2) Who is eligible to submit a
proposal, and how do I (1) If you are submitting your
demonstrate to the company that I proposal for the company's
am eligible? annual meeting, you can in
(3) How many proposals may I most cases find the
submit? deadline in last year's proxy
(4) How long can my proposal be? statement.
(5) What is the deadline for submitting
a proposal? (2) The proposal must be
(6) What if I fail to follow one of the received at the company's
eligibility or procedural principal executive offices
requirements explained in answers not less than 120 calendar
to Questions 1 through 4 of this days before the date of the
section? company's proxy statement
(7) If I have complied with the released to shareholders in
procedural requirements, on what connection with the
other bases may a company rely to
exclude my proposal? previous year's annual
meeting.
Corporations: Chapter 16 Slide 31
A Contemporary Approach Public Shareholder Activism of 65
Shareholder proposal rule
(1) What is a proposal? The company may exclude
(2) Who is eligible to submit a your proposal, but only after it
proposal, and how do I has notified you of the
demonstrate to the company that I problem, and you have failed
am eligible? adequately to correct it. Within
(3) How many proposals may I 14 calendar days of receiving
submit? your proposal, the company
(4) How long can my proposal be? must notify you in writing of
any procedural or eligibility
(5) What is the deadline for submitting deficiencies, as well as of the
a proposal? time frame for your response.
(6) What if I fail to follow one of the Your response must be
eligibility or procedural postmarked, or transmitted
requirements explained in answers electronically, no later than 14
to Questions 1 through 4 of this days from the date you
section? received the company's
(7) If I have complied with the notification. * * * If the company
procedural requirements, on what intends to exclude the
other bases may a company rely to proposal, it will later have to
exclude my proposal? make a submission under Rule
14a-8 and provide you with a
copy ***
Corporations: Chapter 16 Slide 32
A Contemporary Approach Public Shareholder Activism of 65
Shareholder proposal rule
(1) Improper under state law: If the
(1) What is a proposal? proposal is not a proper subject
(2) Who is eligible to submit a for action by shareholders under
proposal, and how do I the laws of the jurisdiction of the
demonstrate to the company that I company's organization;
am eligible?
(3) How many proposals may I (5) Relevance: If the proposal
submit? relates to operations which
(4) How long can my proposal be? account for less than 5% of the
(5) What is the deadline for submitting company's total assets at the end
a proposal? of its most recent fiscal year, and
(6) What if I fail to follow one of the for less than 5% of its net
eligibility or procedural earnings and gross sales for its
requirements explained in answers most recent fiscal year, and is
to Questions 1 through 4 of this not otherwise significantly
section? related to the company's
business;
(7) If I have complied with the
procedural requirements, on what
other bases may a company rely to (7) Management functions: If the
exclude my proposal? proposal deals with a matter
relating to the company's
ordinary business operations;
Corporations: Chapter 16 Slide 33
A Contemporary Approach Public Shareholder Activism of 65
What’s excludable?
Corporations: Chapter 16 Slide 34
A Contemporary Approach Public Shareholder Activism 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 this “relevant” to
company’s business?
Holding: According to SEC (1976) “not
hinge solely on economic relativity” /
relevance “not limited to economic
significance”
Corporations: Chapter 16 Slide 35
A Contemporary Approach Public Shareholder Activism of 65
Submitted to Iroquois Brands, Ltd.
by Peter C. Lovenheim, Esq.
1545 18th 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 January 23, 1984
wholesome foods, a reputation that enhances its ability to market
successfully its entire line of health foods, vitamins, and other food RESPONSE OF THE OFFICE OF CHIEF
products, therefore COUNSEL
BE IT RESOLVED: that in order to assure that the Corporation is not inadvertently DIVISION OF CORPORATION FINANCE
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 Re: Iroquois Brands, Ltd. Incoming letter dated
produces pate de foie gras, and report to the shareholders its findings, December 13, 1983
together with its opinion, based on expert consultation, as to whether or not
this production method causes undue distress, pain, or suffering to the The proposal relates to the establishment of a
animals involved and, if [*4]so, whether future distribution of this product committee to study the methods by which the
should be discontinued until a more humane production method is Company's French supplier produces pate de
developed. foie gras.
SUPPORT STATEMENT There appears to be some basis for your opinion
Force-feeding is done to enlarge the liver and thus produce a large quantity of that the proposal may be omitted from the
pate. As described in French agricultural journals, force-feeding begins Company's proxy material under Rule 14a-8
when geese are four months old. On some farms where feeding is (c)(5). Under the circumstances, this Division will
mechanized, the bird's body and wings are placed in a metal brace and its not recommend any enforcement action to the
neck stretched. Commission if the Company omits the subject
Through a funnel inserted 10-12 inches down its throat, a machine pumps up to proposal from its proxy material.
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 Sincerely,
uses a funnel and stick to force the mash down. John J. Gorman
Feeding is repeated two to four times a day for 28 days, until the animal's liver has Special Counsel
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: Chapter 16 Slide 36
A Contemporary Approach Public Shareholder Activism of 65
History and use of 14a-8 …
Corporations: Chapter 16 Slide 37
A Contemporary Approach Public Shareholder Activism of 65
• Medical Committee (DC Cir 1972)
– Mgmt can’t treat corp. as “personal satrapies”
– Must include proposal on napalm sales
Social/political
• SEC Interpretive Release (1976) proposals
– Significant policy, economic implications
– Beyond ordinary business
• 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: Chapter 16 Slide 38
A Contemporary Approach Public Shareholder Activism of 65
Proposals "excluded" by management
Type of proposal 1981-82 1991-92 2001-02
Governance 26.5% 35.4% 47.3%
Operational 44.6% 30.2% 33.1%
Social/political 28.9% 34.4% 19.6%
TOTAL 100% 100% 100%
Corporations: Chapter 16 Slide 39
A Contemporary Approach Public Shareholder Activism of 65
Proposals found "includable" by SEC
Type of proposal 1981-82 1991-92 2001-02
Governance 18.2% 41.2% 55.7%
Operational 18.9% 3.4% 49.0%
Social/political 37.5% 18.2% 41.4%
AVERAGE 24.1% 21.9% 48.7%
Corporations: Chapter 16 Slide 40
A Contemporary Approach Public Shareholder Activism 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: Chapter 16 Slide 41
A Contemporary Approach Public Shareholder Activism of 65
Have shareholder proposals
been successful?
Corporations: Chapter 16 Slide 42
A Contemporary Approach Public Shareholder Activism of 65
GE shareholder proposals
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: Chapter 16 Slide 43
A Contemporary Approach Public Shareholder Activism of 65
2005
Governance proposals
Board leadership (independent chair) 31 (30%)
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 25 (58%)
Operational proposals
Option expensing 12 (60%)
Performance-based pay 36 (30%)
SHs approve golden parachutes 21 (55%)
Corporations: Chapter 16 Slide 44
A Contemporary Approach Public Shareholder Activism of 65
All Mutual
Proposal type
shareholders 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%
Corporations: Chapter 16 Slide 45
A Contemporary Approach Public Shareholder Activism of 65
Case study: Say on Pay
(2006-2008)
Corporations: Chapter 16 Slide 46
A Contemporary Approach Public Shareholder Activism of 65
Say on pay
Ragan Adamson & Daniel Lumm
Corporations: Chapter 16 Slide 47
A Contemporary Approach Public Shareholder Activism of 65
Case study:
Shareholder-nomination proposals
Corporations: Chapter 16 Slide 48
A Contemporary Approach Public Shareholder Activism of 65
1
7 8
2
9
3 6 5
10
11 4
Corporations: Chapter 16 Slide 49
A Contemporary Approach Public Shareholder Activism 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
(c) [undertake to assume any liability and comply
with law].” Maurice "Hank" Greenberg
Corporations: Chapter 16 Slide 50
A Contemporary Approach Public Shareholder Activism of 65
Rule 14a-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 14a-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 14a-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: Chapter 16 Slide 51
A Contemporary Approach Public Shareholder Activism of 65
Second Circuit:
Because the interpretation of Rule 14a-
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
(2d 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 non-
excludable. However, Congress has
determined that such issues are
appropriately the province of the SEC, not
the judiciary.
Corporations: Chapter 16 Slide 52
A Contemporary Approach Public Shareholder Activism of 65
Who has the last word?
Second Circuit (footnote 8):
Proposed Rule 14a-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 14a-11.
Accordingly, if the Commission ultimately
decides to adopt Proposed Rule 14a-11, then
such an action, although certainly not
necessary, would likely be sufficient to modify
the interpretation of Rule 14a-8(i)(8) that we
have adopted here.
Corporations: Chapter 16 Slide 53
A Contemporary Approach Public Shareholder Activism of 65
The Securities and Exchange Commission … is
adopting an amendment to Rule 14a-8(i)(8) to
provide certainty regarding the meaning of this
provision in response to a recent court
decision. [November 27, 2007]
§ 240.14a-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;
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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.)
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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 14a-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.
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The End
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GE’s shareholder proposals …
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GE shareholder proposals
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.
• How would you vote?
• Was it worthwhile that proposal included?
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GE shareholder proposals
Proxy statement
• 2008 GE proxy statement
• http://www.sec.gov/ (go to EDGAR, search DEF 14A)
• Form DEF 14A
SEC filings
• 2dQ 2008 GE quarterly report (p. 45)
• EDGAR (search 10-Q)
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Proposals "excluded" by management
Type of proposal 1981-82 1991-92 2001-02
Governance 26.5% 35.4% 47.3%
Operational 44.6% 30.2% 33.1%
Social/political 28.9% 34.4% 19.6%
TOTAL 100% 100% 100%
100%
80%
60% Social/political
Operational
40%
Governance
20%
0%
1981-82 1991-92 2001-02
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Proposals found "includable" by SEC
Type of proposal 1981-82 1991-92 2001-02
Governance 18.2% 41.2% 55.7%
Operational 18.9% 3.4% 49.0%
Social/political 37.5% 18.2% 41.4%
AVERAGE 24.1% 21.9% 48.7%
60.00%
50.00%
40.00% Governance
Operational
30.00%
Social/political
20.00% AVERAGE
10.00%
0.00%
1981-82 1991-92 2001-02
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What is the “firm” …
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Theory of the Firm
Labor
Capital
Firm
Equipment Supplies
Adam Smith
“Wealth of Nations”
Land
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Theory of the Firm
Capital Labor
Entrepreneur
Supplies
Equipment
Ronald Coase
“Nature of the Firm”
Land
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BEFORE AFTER
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A Contemporary Approach Public Shareholder Activism
http://proxydemocracy.org/
of 65
