Bloomberg reports that:
I have argued that the SEC's approach to these CSR proposals is fundamentally wrong headed:
The exemption for matters of social and ethical significance from the exclusionary provisions of Rules 14a-8(i)(5) and 14a-8(i)(7) has long been controversial. For one thing, “shareholders' social policy proposals [occasionally] require a company to include speech in its proxy statements that appears directly adverse to the company's interests.”[1] Setting aside the issue of whether it is sound securities regulation policy to require a corporation to include statements adverse to its interests in its disclosure documents, forcing the corporation to do so implicates the First Amendment rights of both the corporation and its shareholders.[2] In effect, the Rule forces shareholders to subsidize speech that may reduce the value of their investments.[3] This remains true despite the shift towards hedge fund activism, as I have observed elsewhere:
[W]hile there is considerable evidence for the proposition that activist shareholders can profit through private rent seeking, there is little evidence that activism has benefits for investors as a class. Navigant Consulting recently undertook a review of the most basic form of shareholder activism—Rule 14a-8 proposals—and found no evidence that it resulted in either short- or long-term increases in market value. This was true of both social and governance proposals.[4]
Courts therefore should ask whether a reasonable shareholder of this issuer would regard the proposal as having material economic importance for the value of his shares. This standard is based on the well-established securities law principle of materiality.[5] It is intended to exclude proposals made primarily for the purpose of promoting general social and political causes, while requiring inclusion of proposals a reasonable investor would believe are relevant to the value of his investment. Such a test seems desirable so as to ensure that an adopted proposal redounds to the benefit of all shareholders, not just those who share the political and social views of the proponent. Absent such a standard, as we have seen, the shareholder proposal rule becomes nothing less than a species of private eminent domain by which the federal government allows a small minority to appropriate someone else’s property—the company is a legal person,[6] after all, and it is the company’s proxy statement at issue—for use as a soap-box to disseminate their views. Because the shareholders hold the residual claim,[7] and all corporate expenditures thus come out of their pocket, it is not entirely clear why other shareholders should have to subsidize speech by a small minority.[8]
Bainbridge, Stephen M., Revitalizing SEC Rule 14a-8's Ordinary Business Exemption: Preventing Shareholder Micromanagement by Proposal (March 29, 2016). UCLA School of Law, Law-Econ Research Paper No. 16-06. Available at SSRN: https://ssrn.com/abstract=2750153
It seems to me that a much stronger test is required, as I proposed in that article:
This article proposes an alternative standard that is grounded in relevant state corporate law principles, while also being easier to administer than the existing judicial tests. Under it, courts first look to the state law definition of ordinary business matters. The court then determines whether the matter is one of substance rather than procedure. Only proposals passing muster under both standards should be deemed proper.
Under that approach, this proposal would have failed.
[1] Antony Page, Taking Stock of the First Amendment's Application to Securities Regulation, 58 S.C. L. Rev. 789, 804 (2007).
[2] Cf. Lucian A. Bebchuk & Robert J. Jackson, Jr., Corporate Political Speech: Who Decides?, 124 Harv. L. Rev. 83, 114 (2010) (arguing that shareholders have a “First Amendment interest in not being forced to be associated with political speech that they do not support”).
[3] See Patrick J. Ryan, Rule 14a-8, Institutional Shareholder Proposals, and Corporate Democracy, 23 Ga. L. Rev. 97, 121 (1988) (observing that “corporate assets are being spent to subsidize corporate internal debate on proposals that never will be adopted”).
[4] Stephen M. Bainbridge, Corporate Governance After the Financial Crisis 252 (rev. ed. 2016).
[5] See TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976) (“An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”)
[6] See Metro. Life Ins. Co. v. Ward, 470 U.S. 869, 881 n.9 (1985) (“It is well established that a corporation is a “person” within the meaning of the Fourteenth Amendment.”).
[7] See Seth W. Ashby, Strengthening the Public Company Board of Directors: Limited Shareholder Access to the Corporate Ballot vs. Required Majority Board Independence, 2005 U. Ill. L. Rev. 521, 535 (2005) (observing that “shareholders own the residual claim to the company's earnings and assets”).
[8] See Palmiter, supra note 18, at 886 (“By shifting the proposing shareholder's solicitation costs to the company, the rule compels the body of shareholders to subsidize self-appointed corporate reformers.”).
