Let me add my welcome. In recent years, UCLA law school has redoubled its efforts in business law and this program is a good example of how committed we are to this field of study.
When we planned this program some months ago, shareholder activism looked to be one of the hot button issues this fall during the run up to the 2009 proxy season.
Today, of course, the elephant in the room is the seemingly ever-broadening financial crisis.
The two are closely related, however.
Reuters recently reported, for example, that:
For U.S. investor advocates, the financial crisis could be the opportunity to rally more shareholders around a slew of long-sought corporate reforms -- with a big bull's-eye on executive payouts and board independence. ?
AFSCME plans to introduce resolutions at an array of companies that would require top managers to hold all of their stock options and restricted stock awards for two years past their tenure with the company.
[Activists also plan] to press some ? perennial issues, such as "say on pay" votes to give shareholders a greater voice on executive pay as well as advocating bans on tax "gross-ups" that use shareholder money to help pay the tax obligations of top executives.
Where then do we stand on shareholder activism?
Back in 2006, the US Second Circuit appeals court ruled in AFSCME v. AIG that shareholders could use Rule 14a-8?the shareholder proposal rule, which allows shareholders to put a proposal on the company?s proxy and a short supporting statement in the proxy statement?to put forward for a shareholder vote an amendment to the bylaws that would ?establish a procedure by which shareholder-nominated candidates may be included on the corporate ballot.?
In 2008, the SEC adopted rules making clear that a shareholder proposal may be excluded from the proxy statement if it results in an immediate election contest by making or opposing a director nomination for a particular meeting or establishes a process for a shareholder to conduct an election contest in the future by requiring the company to include the shareholders? director nominees in the company?s proxy materials for future meetings.
The SEC, however, has indicated that it has ongoing interest in this area. Many observers, including myself, expect that the SEC will revisit this issue next year. Chairman Cox has announced that he will be leaving the SEC regardless of who wins the Presidency. If Senator Obama wins, of course, the partisan balance will shift to a Democratic majority. In general, Democrats have been more favorable to shareholder activism than have Republicans.
Although director nominations are currently barred, not all election-related proposals have been precluded. Over the summer, we had a very important development in the CA v. AFSCME fight.
In this case, the SEC made use for the first time of a newly adopted provision of the Delaware constitution that allows the SEC to certify questions of state law to the Delaware Supreme Court for an advisory opinion, just as federal courts long have had the power to do.
In CA v. AFSCME, the shareholder proposal would have amended the bylaws to require the CA board of directors to reimburse the reasonable fees of any stockholder that sought to elect less than half of the board (a so-called short slate) and succeeded in electing at least one director.
The SEC certified two questions of law to the Supreme Court: (i) whether the Proposal is a proper subject for action by stockholders as a matter of Delaware law and (ii) whether the Proposal, if adopted, would cause CA to violate any Delaware law to which it is subject.
The Supreme Court answered the first question?whether the Proposal was a proper subject for action by stockholders?in the affirmative.
The Supreme Court, however, also went on to answer the second question?whether the Proposal, if adopted, would cause CA to violate any Delaware law?in the affirmative. The Court found that the Proposal could require the board to reimburse dissident stockholders in circumstances where a proper application of fiduciary principles would preclude them from doing so (such as when a proxy contest was undertaken for ?personal or petty concerns, or to promote interests that do not further, or are adverse to, those of the corporation"). Accordingly, the Supreme Court held that the proposed bylaw, as written, would violate Delaware law if enacted by stockholders.
Despite these modest constraints on the options available to activist shareholders, there remains a wide array of permissible proposal types. Accordingly, the 2009 proxy season promises to be an exciting one.