ATP, Chevron and the Inevitable Consequences: Bylaws Restricting Shareholder Proposals (Part 4)
This bylaw applies to director nominations and proposals to be considered at an annual meeting of stockholders. The relationship between the bylaw and Rule 14a-8 is not entirely clear. To the extent that the 1% threshold seeks to change the eligibility under Rule 14a-8 for the submission of proposals, it is presumably preempted.
The bylaw does not, however, specifically reference Rule 14a-8. Moreover, a description of the impact of the bylaw appears in a provision that describes proposals "that a stockholder intends to present to stockholders other than by inclusion in our proxy statement for the 2016 annual meeting". The provision does not, therefore, appear to change the eligibility of shareholders to submit proposals under Rule 14a-8 but does will affect what shareholders can do at a meeting.
Of course, the restriction may provide a basis for arguing that proposals submitted by shareholders owning less than 1% can be excluded under Rule 14a-8. The Rule permits the exclusion of proposals that are "[i]mproper under state law." 17 CFR 240.14a-8(c)(1). The argument would be that a proposal is improper because the shareholder lacks the authority to make the proposal. Moreover, Rule 14a-8 requires that the shareholder (or a representative) "attend the meeting to present the proposal." Under the bylaw, however, the shareholder would presumably be prohibited from presenting a proposal that he or she had no authority to make.
Even if the proposal remained in the proxy statement under Rule 14a-8, there is room to argue that the votes need not be counted since the shareholder lacks the authority to make the proposal. Companies are, however, required to disclose voting rules in a Form 8-K for "any matter [that] was submitted to a vote of security holders". See Item 5.07 of Form 8-K. This suggests that matters submitted to shareholders under Rule 14a-8 must be reported.
Despite the uncertain relationship between the bylaw and Rule 14a-8 and issues of legality, the staff does not appear to have made significant comments. The proposal was prefiled. There are differences between the draft and the final version but they are modest and do not look like the types of changes that would arise from a close staff inspection.
For a recent piece on Fee Shifting Bylaws and the approach taken by the Delaware courts to bylaws, see The Future Direction of Delaware Law (Including a Brief Exegesis on Fee Shifting Bylaws).