As a parting shot in departing from the SEC, now former commissioner Paul Atkins gave a speech on Rule 14a-8, the shareholder proposal rule. Most of it was a warning about allowing shareholders access to the proxy statement and a self complementary discussion of the decision to refer the CA case to the Delaware Supreme Court. That decision in fact may be Atkin's longest lasting legacy since the anti-shareholder decision will make it easier for companies to exclude categories of shareholder proposals under the rule.
The speech also devoted time to another anti-shareholder issue. Atkins does not like precatory shareholder proposals. His dislike, however, is not truly rooted in a desire to have a properly functioning system of shareholder proposals. This can be seen from his refusal to acknowledge the role played by the Commission in encouraging these proposals. See Note to paragraph (i)(1) of Rule 14a-8, 17 CFR 240.14a-8 (“some proposals are not considered proper under state law if they would be binding on the company if approved by shareholders. In our experience, most proposal that are cast a recommendations or requests that the board of directors take specific action are proper under state law. Accordingly we will assume that a proposal drafted as a recommendation or suggestion is proper unless the company demonstrates otherwise.”).
In fact, the solution is to eliminate SEC encouragement of precatory proposals. This was suggested by VC Strine. Let shareholders include mandatory proposals and if they pass the companies can let the Delaware courts resolve their legality. As he noted at a roundtable held by the Commission:
- "I think those of us from Delaware would say one of the things the Commission could do to facilitate this is to make clear that if it's uncertain under state law and it's a by-law proposal, then it shouldn't be excluded and they should be able to put it on absent some showing, and then leave it to us, hold us accountable, and if we make the wrong decisions, you can bet we are going to hear about it from the institutional investor community and from the management community."
Atkins quotes Strine but omits this portion of the testimony. He uses Strine's testimony to suggest the need to eliminate precatory proposals but does not add the portion that instructs the Commission to stop excluding mandatory proposals.
His real concern, therefore, is not precatory proposals per se but the use of Rule 14a-8 by activist shareholders. Thus, his only evidence of an unnecessary burden imposed on companies is the singular example of Exxon-Mobile, which confronted 17 shareholder proposals in its proxy statement. Atkins omitted to mention that Exxon was in many ways unique because of its obstinate resitance in addressing enviornmental issues and seeking to develop alternative energy sources. Thus, most of the 17 proposals dealt with enviornmental/alternative energy issues. He also failed to mention that many of the proposals received heavy shareholder support, with a proposal to separate chairman and CEO receiving 39.5% and say on pay receiving 40.7%. Nonetheless, Atkins would prefer to cut off this avenue of communication between shareholders and managers.
The one example aside, his true objection can be seen from the data he uses. Relying on an ICI study of the 2006-2007 proxy season, he notes that "there were 186 proposals sponsored by unions or affiliates of unions, but just three unions accounted for 94 of the proposals. So the data shows that a relatively small number of investors are responsible for a significant portion of the shareholder proposals." He then notes that the "abusive use of the shareholder proposal process by some institutional investors is troubling." In other words, the sole evidence of abuse is the number of proposals submitted by a small number of shareholders. He makes no mention of the percentage that pass or the use of proposals to largely implement a system of majority voting among large public companies.
During his tenure, he was unable to accomplish the goal of restricting the scope of Rule 14a-8 and limiting the use of precatory proposals. Attention hereafter will shift not to limiting Rule 14a-8 but expanding its reach to include access.