Omitted Shareholder Proposals and the Anti-Fraud Provisions

Michican apparently has a unique provision with respect to shareholder proposals.  The Corporate Code in the state required companies to provide notice of meetings to shareholders (not the unusual part) and to include notice of any shareholder proposal that is a proper subject for shareholder action (the unusual part).  As the provision provides: 

  • Unless the corporation has securities registered under section 12 of title I of the securities exchange act of 1934, chapter 404, 48 Stat. 892, 15 U.S.C. 78l, notice of the purposes of a meeting shall include notice of shareholder proposals that are proper subjects for shareholder action and are intended to be presented by shareholders who have notified the corporation in writing of their intention to present the proposals at the meeting. The bylaws may establish reasonable procedures for the submission of proposals to the corporation in advance of the meeting. 

In GWYN R. HARTMAN REVOCABLE LIVING TRUST v. SOUTHERN MICHIGAN BANCORP, INC., the Sixth Circuit allowed a suit to go forward that notified shareholders only that a "shareholder planned to propose a resolution urging the board to amend the company’s bylaws."  There was no actual description of the proposal.  

The shareholder challenged the sufficiency of the notice and the Sixth Circuit agreed that a claim had been stated.   

  • We are hard-pressed to understand how mere acknowledgement of the existence of a proposal—without describing even its subject matter—amounts to “notice” under the statute. By Bancorp’s lights, “notice of a shareholder proposal” requires only a statement that there will be a shareholder proposal. By our lights, that is not “notice.”

The case turned entirely on Michigan law.  But this brings up an interesting aside with respect to Rule 14a-8 and shareholder proposals under the federal system.

The holding may turn on state law but implicates concepts under the federal proxy rules.  Rule 14a-8 no doubt at first blush looks like an example of administrative support for shareholders, allowing them to include in some cases their proposal in the company's proxy statement.  The actual exegesis of the provision, however, was quite different.  The rule was largely designed to eliminate a problem confronted by issuers with respect to disclosure under the antifraud provisions.   

  • One of the earliest disclosure problems [under the proxy rules] concerned the failure by management to disclose shareholder proposals that it knew would be made at an upcoming meeting. The problem of nondisclosure was particularly acute when management sought discretionary voting authority in order to oppose the proposal. The Commission responded by amending the proxy rules. Management was required to disclose any proposal that it knew would be made at the meeting and to provide shareholders with an opportunity to vote on the matter. . . . While mostly solving the concern under the antifraud provisions, the requirement left management in the uncomfortable position of having to craft a description of a proposal that it was not making.  Amendments proposed two years later sought to lift the obligation from management. Shareholders would be allowed to include their proposal in the company’s proxy statement and, whenever opposed by management, could insert a one hundred word statement of support.

The SEC, Corporate Governance, and Shareholder Access to the Board Room  The effect of the changes? "[T]hey solved a serious problem, providing ground rules for the disclosure of shareholder proposals but shifting the burden from management back to the proposing shareholders."

Rule 14a-8 fixed things for proposals included in the proxy statement.  What about those omitted?  A proxy proposal omitted under Rule 14a-8 may still, in some cases, be presented at the shareholder meeting.  Rule 14a-4 allows a company to seek discretionary voting authority for "[a]ny proposal omitted from the proxy statement and form of proxy pursuant to § 240.14a-8".  Nonetheless, it would presumably be material to shareholders to know in deciding whether to grant the discretionary authority that the authority was going to be used to vote down specific proposals at the meeting.  A failure to disclose the possibility would at least in some cases vioate the antifraud provisions.  

The federal proxy rules have no express requirement like the one in Michigan but the antifraud provisions arguably have the same effect.  

J Robert Brown Jr.