Keith Paul Bishop notes that:
Phillip Goldstein, the co-founder of Bulldog Investors, has recently begun a campaign against a 2017 staff no-action position that has allowed trusts to exclude shareholder proposals when the trust documents forbid shareholders from voting on a matter “unless the matters covered by the proposal are among the enumerated matters specifically described in the Declaration of Trust or the Board was to declare a proposed action as being advisable and, in its sole discretion, direct that the matter be submitted to the shareholders for approval or ratification". RAIT Financial Trust (March 10, 2017). See Harvard Law School Forum on Corporate Governance, "Can a Public Company Effectively Opt Out of Rule 14a-8?", March 30, 2020.
While acknowledging that all of the no-action letters to date have involved trusts rather than corporations, Mr. Goldstein argues "there is no reason a corporation could not use it, e.g., by adopting a bylaw to limit proposals that shareholders may vote upon to those submitted by the board or mandated by statute".
Keith goes on to note that there would be some question under California law as to the validity of such a bylaw.
But. assuming a state corporation law was deemed to allow such a bylaw, would federal law preempt it? The case that springs to mind is Securities and Exch. Commn. v. Transamerica Corp., 163 F.2d 511, 518 (3d Cir. 1947), in which the court was considering the implications of the company's Bylaw 47:
These by-laws may be altered or amended by the affirmative vote of a majority of the stock issued and outstanding and entitled to vote threat, at any regular or special meeting of the stockholders if notice of the proposed alteration or amendment be contained in the notice of the meeting, or by a resolution adopted by the affirmative vote of a majority of the whole Board at a regular or special meeting, provided that the amendments so adopted shall first have been proposed by a resolution passed by the vote of a majority of the whole Board at its last preceding meeting and that the notice calling the meeting at which said amendments are to be and are adopted shall specify by designated number, the section or sections of the by-laws involved, and embody a copy of the section or sections proposed to be added or deleted, or in case it is proposed to amend any section or sections, ahll embody a copy of such section or sections in proposed amended form.
Transamerica took the position that Rule X-14A-7 (which is now Rule 14a-8) precluded shareholders from using the proposal rule to amend the bylaws. The court rejected that argument:
If this minor provision may be employed as Transamerica seeks to employ it, it will serve to circumvent the intent of Congress in enacting the Securities Exchange Act of 1934. It was the intent of Congress to require fair opportunity for the operation of corporate suffrage. The control of great corporations by a very few persons was he abuse at which Congress struck in enacting Section 14(a). We entertain no doubt that Proxy Rule X-14A-7 represents a proper exercise of the authority conferred by Congress on the Commission under Section 14(a). This seems to us to end the matter. The power conferred upon the Commission by Congress cannot be frustrated by a corporate by-law.
A 1971 Harvard Law Review Note observes that:
To be sure, some commentators have read SEC v. Transamerica Corporation for the broad proposition that the SEC can override state law by means of the shareholder proposal rule.20 In that case a corporate bylaw arguably conferred on management virtually untrammelled discretion to decide which proposed bylaw amendments could be presented at shareholder meetings. The Third Circuit held that the bylaw granting discretionary power to the directors was, at least when applied “in all its strictness,”invalid under state law. But the court also indicated that even if the bylaw provisions had been proper under state law, it would nevertheless be invalidated by federal proxy rule 14a-8. Thus, the court seemed to conclude that where a corporate bylaw gave management power to exclude any proposed bylaw amendment from the shareholder meeting, rule 14a-8 would require inclusion of at least some proposed amendments even if management's power had been sanctioned by state law. The operation of rule 14a-8 could not be vitiated by management action even where that action had received the imprimatur of state law.
20 See Bayne, Caplin, Emerson & Latcham, Proxy Regulation and the RuleMaking Process: The 1954 Amendments, 40 VA.L.REV. 387, 407-08 (1954); Gilbert, The Proxy Proposal Rule of the Securities and Exchange Commission, 33 U. DET. L.J. 191, 195 (1956).
Proxy Rule 14a-8: Omission of Shareholder Proposals, 84 Harv. L. Rev. 700, 704 (1971).
On the other hand, Jill Fisch much more recently has argued that Transamerica should be narrowly interpreted:
The court ... did not expressly find that Congress had authorized the SEC to override a charter provision or bylaw that had been adopted in compliance with state law.73 In addition, the court did not explain whether its conclusion that Transamerica's position was “overnice” and “untenable”was based on its interpretation of Delaware law and, if so, what the basis was for that interpretation.
73 Nor did it explain how this finding, which appears implicit in the court's conclusion, could be squared with the view that federal law deferred to the states to determine what issues were proper subjects for a shareholder vote.
Jill E. Fisch, From Legitimacy to Logic: Reconstructing Proxy Regulation, 46 Vand. L. Rev. 1129, 1146 (1993).
Susan W. Liebler goes even further, advancing an argument that would explicitly support the proposed bylaw:
I suggest that corporations adopt bylaw provisions placing reasonable restrictions on the ability of security holders to bring matters before a shareholders meeting. Transamerica does not preclude corporations from adopting bylaw provisions, which are valid under state law, to restrict the rights of shareholders to bring matters before the stockholders' meeting. First, the statement that bylaw provisions could not be used to thwart the shareholder proposal rule was dictum. Transamerica should be limited to its holding: rule 14a-8 requires inclusion of those shareholder resolutions which are proper subjects under state law, without regard to bylaw notice provisions. Second, since state law arguably would have prevented Transmerica's management from ruling Gilbert's motions out of order on the basis of a procedural technicality within management's control, Transamerica may stand for the proposition that no action which violates state law can be used to circumvent the rule. Finally, it is clear that the Commission's authority under the rule would not be frustrated by all state restrictions on the right of a shareholder to present resolutions at a shareholders meeting.
Congress did not preempt state corporation law when it enacted the Securities Exchange Act of Rather, the fundamental purpose of the securities laws is disclosure.The Commission cannot exceed the power granted it under section 14(a) of the Act by using its disclosure authority to legislate shareholder voting requirements. Of course, just as the Commission could not lawfully promulgate a rule requiring fifteen percent share ownership in order to call a special shareholders meeting, a state legislature could not enact a law that a corporation need not disclose in its proxy statement the nature of shareholder resolutions which it expects to be presented at the meeting. The latter would conflict with the Commission's lawful authority under section 14(a). Presumably, however, state law could preclude corporations from paying to insurgent groups any of their expenses, thereby requiring the corporation to charge for including shareholder resolutions in the proxy statement. Likewise, state law could impose or authorize minimum ownership requirements in order to bring a matter before the shareholders.
Susan W. Liebeler, A Proposal to Rescind the Shareholder Proposal Rule, 18 Ga. L. Rev. 425, 461–62 (1984).
To the extent that Liebler's argument depends on the SEC lacking authority to adopt Rule 14a-8, I must (regretfully) disagree:
The Commission's authority to adopt both its existing rules, especially the shareholder proposal rule, and the recently proposed reforms has been questioned. The Business Roundtable decision provides potent support for these challenges. It requires courts to determine whether a challenged rule is substantive or procedural. The court recognized the existence of a “murky area between substance and procedure,” which may resist classification. Nonetheless, the opinion offers a few signposts by which to resolve future cases. In particular, consider the distinction the court drew between rule 19c-4 and rule 14a-4(b)(2)'s requirement that proxies give shareholders an opportunity to withhold authority to vote for individual director nominees. In the court's view, the latter “bars a kind of electoral tying arrangement, and thus may be supportable as a control over management's power to set the voting agenda, or, slightly more broadly, voting procedures,” while “Rule 19c-4 much more directly interferes with the substance of what shareholders may enact.”
Rules addressing unfair solicitation procedures thus should pass muster. The rules on the form of a proxy card, discretionary authority, and mailing of insurgent materials, for example, plausibly relate to the Congressional goal of assuring procedural fairness in proxy contests. Each prevents management from using its control of the proxy solicitation process to manipulate the result of shareholder elections. As a means of preventing management coercion of voters, a confidential voting rule might pass muster as relating to the same sort of procedural unfairness.
The shareholder proposal rule presents a somewhat less compelling case. Even though full disclosure of all matters to come before a shareholders meeting was its original justification, at first blush the rule does not seem to advance either purpose of section 14(a). However, absent the rule, shareholders have no practical means of holding management accountable through the voting process or even affecting the agenda. As such, it too may be supportable “as a control over management's power to set the voting agenda.”
Stephen M. Bainbridge, The Short Life and Resurrection of SEC Rule 19c-4, 69 Wash. U.L.Q. 565, 621–22 (1991).
If I rewrote the article today, I'd put the case for Rule 14a-8 somewhat more strongly. For example, with respect to Dodd-Frank section 971's grant of authority to the SEC to mandate proxy access, I wrote that:
Section 971 probably was unnecessary. An SEC rulemaking proceeding on proxy access was well advanced long before Dodd-Frank was adopted, so a shove from Congress was superfluous. Although the SEC lacks authority to regulate the substance of shareholder voting rights, proxy access almost certainly fell within the disclosure and process sphere over which the SEC has unquestioned authority.
Stephen M. Bainbridge, Dodd-Frank: Quack Federal Corporate Governance Round II, 95 Minn. L. Rev. 1779, 1802 (2011).
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