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In the keynote address at the John L. Weinberg Center for Corporate Governance's 25th Anniversary Gala, Securities and Exchange Commission ("SEC") Chair Paul Atkins noted that the number of exchange-listed companies has declined in recent years and outlined a three-part agenda aimed at making the US public markets more attractive to companies, including (1) simplifying and scaling disclosure requirements, (2) de-politicizing shareholder meetings, and (3) reforming securities litigation. His statements with regard to precatory shareholder proposals and Rule 14a-8 marks a potentially significant departure from the current approach, with the potential to dramatically change the shareholder proposal landscape even in the absence of regulatory reform.
Potential Exclusion of Precatory Shareholder Proposals under Rule 14a-8(i)(1)
A central focus of Chair Atkins' remarks was the increasing "politicization" of shareholder meetings through precatory, or non-binding, shareholder proposals. To this end, Chair Atkins cited the increasing frequency of precatory proposals focused on social and environmental issues that, in his view, "frequently involve issues that may not be material to a company's business," but still require substantial management time and attention. Continuing, he questioned whether Rule 14a-8(i)(1) of the Securities Exchange Act of 1934, as amended, actually permits companies to exclude such proposals, and concluded that this is likely the case, at least with regard to Delaware companies.
Specifically, Rule 14a-8(1)(i) permits a company to exclude a proposal that is not a "proper subject" for shareholder action under state law, which raises a question as to whether precatory proposals are, indeed, "proper subjects." In the notes to Rule 14a-8(1)(i), the SEC Staff states that it "will assume that a proposal drafted as a recommendation or suggestion is proper unless the company demonstrates otherwise," creating a presumption that a precatory proposal is a "proper subject." Taking the opposite view, Chair Atkins argued that, under Delaware law, precatory proposals might not be "proper subjects" because Delaware law does not explicitly provide shareholders with the right to vote on non-binding matters. Chair Atkins suggested that a company could, on advice of counsel that a proposal is not a "proper subject" under state law, seek to rely on Rule 14a-8(i)(1) to exclude such a proposal, expressing his "high confidence" that the SEC Staff would "honor" this position, at least with regard to that specific company. However, this would not prohibit a proposal proponent from submitting an opposite opinion. As such, Chair Atkins raised an open question as to whether the SEC would take the issue to the Delaware Supreme Court, should the SEC have to reconcile this argument between a company and a proponent.
Chair Atkins then turned to the operation of Rule 14a-8(1)(i) under other state law, pointing to new legislation in Texas that allows companies to require shareholders to meet higher ownership thresholds in order to be eligible to submit a shareholder proposal. Aligning with Commissioner Uyeda's 2023 remarks, Chair Atkins noted that if a company opted for different state-level thresholds, such as those under the new Texas law, "or has otherwise properly established conditions in its governing documents," and subsequently receives a proposal from a proponent that does not satisfy the Texas law requirements or the relevant governing documents, then the proposal might be excludable under Rule 14a-8.
Chair Atkins concluded his Rule 14a-8 remarks by calling for a "fundamental reassessment" of the rule's premise, especially given that the Exchange Act itself is intended to govern disclosure. Should shareholders be able to "force companies" to solicit for their proposals at minimal cost to the shareholder, and what role does the rule play in today's capital markets?
Securities Litigation Reform
Chair Atkins also discussed the need for federal securities litigation reform, expressing concern that meritless lawsuits increase costs and discourage companies from going public in the United States. He criticized Delaware's recent Senate Bill ("SB") 95, which prohibits mandatory arbitration and fee-shifting for federal securities law claims, calling these provisions "two giant steps backward" in efforts to modernize Delaware corporate law. In closing, Chairman Atkins acknowledged the SEC's recent statement on mandatory arbitration (read about it here), which is not consistent with the provisions of SB 95, stating that "with the benefit of clarity under the federal securities laws, I hope that the Delaware legislature will revisit the prohibition of both mandatory arbitration and fee shifting with respect to federal securities law claims. Doing so can help Delaware be a leader in the reform of securities litigation."
Read Chair Atkins' remarks here.
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