The Role of Delaware Counsel in Responding to Shareholder Proposals
Public companies often receive shareholder proposals for inclusion in their proxy statements pursuant to Rule 14a-8 under the Securities Exchange Act of 1934 (the "Exchange Act"). Companies may seek to exclude shareholder proposals from their proxy statements by requesting a no-action letter from the Securities and Exchange Commission (the "Commission"). A company may assert various reasons to exclude a shareholder proposal, including those based on matters of state law. When seeking to exclude a shareholder proposal based on matters of state law, a company must support its request with an opinion of counsel. When Delaware corporate law is at issue, companies sometimes submit an opinion of counsel who is not licensed to practice law in Delaware.
The Division of Corporate Finance (the "Division") of the Commission recently indicated in a Staff Legal Bulletin that, when determining whether to issue a no-action letter, it would take into consideration whether the counsel providing the opinion is licensed to practice law in the jurisdiction where the law is at issue. Accordingly, upon receipt of a shareholder proposal, companies and their advisors should consider whether the shareholder proposal implicates state law. If Delaware law is implicated, the ability to obtain a no-action letter to exclude the shareholder proposal may be enhanced if the company receives a legal opinion from counsel licensed to practice law in Delaware.
Rule 14a-8 of the Securities Exchange Act of 1934 - Shareholder Proposals
Rule 14a-8 ("Rule 14a-8" or the "Rule") under the Exchange Act "addresses when a company must include a shareholder's proposal in its proxy statement and identify the proposal in its form of proxy when the company holds an annual or special meeting of shareholders." A shareholder must be eligible to make a proposal for inclusion in a company's proxy materials, and in making the proposal the shareholder must follow the procedures set forth in the Rule.
Even if a shareholder follows the proper procedures for submitting a proposal, a company may nevertheless oppose the inclusion of a shareholder proposal in its proxy materials provided that the company demonstrates one of the specific circumstances set forth in the Rule in support of excluding the proposal. In doing so, a company must submit a letter to the Commission setting forth its reasons for excluding the proposal. In most cases, the company bears the burden of persuading the Commission that a shareholder proposal should be excluded for a particular reason or reasons.
The Rule sets forth thirteen separate bases upon which a company may seek to exclude a shareholder proposal. For example, a company may seek to exclude a shareholder proposal if: (i) the proposal is not a proper subject for shareholder action under state law, (ii) the implementation of the proposal would cause the company to violate state law, or (iii) the company lacks the power or authority to implement the proposal. To the extent a company seeks to exclude a shareholder proposal on the basis of state or foreign law, the Rule requires that the company obtain an opinion from counsel supporting that basis for exclusion.
On September 15, 2004, the Division issued Staff Legal Bulletin No. 14B (CF) (the "Bulletin"). The Bulletin provides further guidance regarding issues that commonly arise under Rule 14a-8, such as the use of opinions of counsel under Rule 14a-8(j)(2)(iii). In the Bulletin, the Division addressed, among other things, when a company (and shareholder proponents) should provide a supporting opinion of counsel as well as the issues that counsel should consider when drafting such opinions. The Division began by noting that subsections (1), (2) and (6) of Rule 14a-8(i) implicate state law bases for excluding shareholder proposals, and that pursuant to Rule 14a-8(j)(2)(iii) a company seeking to exclude a shareholder proposal on the basis of one of those subsections is required to submit an opinion of counsel addressing the state law reasoning for excluding the proposal.
The Division stressed that "[i]n submitting such an opinion of counsel, the company and its counsel should consider whether the law underlying the opinion of counsel is unsettled or resolved and…the opinion of counsel should also cite relevant legislative authority or judicial precedents regarding the opinion of counsel." Moreover, the Division explained that when analyzing an opinion of counsel submitted pursuant to Rule 14a-8(j)(2)(iii), it will "consider whether counsel is licensed to practice law in the jurisdiction where the law is at issue." The Division's guidance on this issue strongly suggests that Rule 14a-8(j)(2)(iii) not only requires an opinion of counsel under certain circumstances, but that the opinion should be rendered by one who is licensed to practice law in the relevant jurisdiction.
The Role of Delaware Counsel
Delaware corporate law may be at issue when a Delaware company seeks to exclude a shareholder proposal. Indeed, Delaware counsel over the years have rendered numerous legal opinions in support of no-action letter requests, many of which have been viewed favorably by the Commission. Generally, the types of shareholder proposals that may implicate Delaware corporate law include the following:
- Shareholder proposals requesting a board of directors to seek a shareholder vote prior to the adoption or modification of a shareholder rights plan;
- Shareholder proposals seeking an amendment to a company's charter in order to address certain issues of corporate governance;
- Shareholder proposals seeking an amendment to a company's by-laws in order to address certain issues of corporate governance; and
- Shareholder proposals addressing the nomination and/or election of directors.
Companies would be well-served to continue to seek the advice of Delaware counsel on such issues, and to keep in mind the advantages of using counsel licensed to practice law in a particular jurisdiction when seeking to obtain no-action letters from the Commission. Indeed, in light of the Bulletin, public companies and their advisers should keep in mind that:
- Rule 14a-8(j)(2)(iii) requires an opinion of counsel whenever a company seeks to exclude a shareholder proposal on the basis of state or foreign law;
- Delaware counsel are uniquely positioned to keep pace with emerging developments in the General Corporation Law of the State of Delaware and the rich body of common law developed in the Court of Chancery;
- Delaware counsel are able to recognize trends in shareholder proposals (indeed, often the same shareholder will submit the same proposal to more than one company), and therefore can provide sound advice in an efficient manner; and
- As the Bulletin indicates, the Commission, when reviewing no-action request citing a state law basis for excluding a shareholder proposal, will consider whether counsel rendering the opinion in support thereof is licensed to practice law in the relevant state.
When presented with a shareholder proposal, companies and their advisors should assess whether the shareholder proposal raises issues of Delaware law that may be addressed by counsel in a legal opinion. If Delaware law is implicated, companies and their advisors should consider whether, in light of the Bulletin, they should seek an opinion of counsel licensed to practice law in Delaware.
1 Michael K. Reilly and Charles T. Williams, III are associates in the Corporate Practice Group of the Wilmington, Delaware law firm of Potter Anderson & Corroon LLP. The views expressed herein are solely those of the authors and do not necessarily represent the views of the firm or its clients.
2 The vast majority of publicly held companies are incorporated in the State of Delaware. See Michael P. Dooley and Michael D. Goldman, Some Comparisons Between the Model Business Corporation Act and the Delaware General Corporation Law, 56 BUS. LAW. 737, 737-38 (2001) (noting that Delaware has been chosen as the state of incorporation by more than half of all Fortune 500 companies and more than 45 percent of all New York Stock Exchange listed companies); see also, Bradley R. Aronstam, R. Franklin Balotti & Timo Rehbock, Delaware's Going-Private Dilemma: Fostering Protections for Minority Shareholders in the Wake of Siloconix and Unocal Exploration, 58 BUS. LAW. 519, 519 n.1 (2003) (stating that Delaware is the preeminent jurisdiction for corporate law). Accordingly, the laws of the State of Delaware will govern issues related to the internal corporate governance of such companies, and are often at issue when a Delaware company seeks to exclude a shareholder proposal.
3 Although many corporate practitioners are not licensed to practice law in the State of Delaware, practitioners who represent Delaware corporations on a regular basis and follow developments in the law customarily provide legal advice, and render legal opinions, on routine matters of Delaware corporate law. Given the constantly evolving landscape of Delaware law, however, those practitioners must proceed with caution. Thus, non-Delaware lawyers typically seek the advice of Delaware counsel on more complex issues of Delaware law. See DONALD W. GLAZER, ET AL., GLAZER AND FITZGIBBON ON LEGAL OPINIONS § 2.7.3 (2d ed. 2001).
4 17 C.F.R. § 240.14a-8 (2004) (hereinafter "Rule 14a-8").
5 In general, to be eligible to submit a proposal a shareholder "must have continuously held at least $2,000 in market value, or 1%, of the company's securities entitled to be voted on the proposal at the meeting for at least one year by the date [the shareholder] submit[s] the proposal" and the shareholder "must continue to hold those securities through the date of the meeting." Rule 14a-8(b)(i).
7 Id. It is interesting to note that the format of Rule 14a-8 is different from the traditional format of the rules promulgated under the Exchange Act. Because rule 14a-8 is a tool to be utilized by shareholders, the Rule is crafted in a question and answer format, and it addresses the shareholder directly.
9 Rule 14a-8(g). The Rule specifies certain circumstances where the shareholder bears the burden of persuasion.
10 Rule 14a-8(i).
11 Rule 14a-8(i)(1).
12 Rule 14a-8(i)(2).
13 Rule 14a-8(i)(6).
14 Rule 14a-8(j)(2)(iii).
15 SLB No. 14B (CF) (Sept. 15, 2004) (hereinafter "Bulletin").
16 Bulletin § E.
17 Id. See also, Rule 14a-8(j)(2)(iii).
18 Bulletin § E.
19 Id. (emphasis added). The Division also indicates that shareholder proponents whose proposals are resisted upon state law grounds may also wish to submit an opinion of counsel in support of the proposal. Id. ("Shareholder proponents who wish to contest a company's reliance on an opinion of counsel as to matters of state or foreign law may, but are not required to, submit an opinion of counsel supporting their position."); see also, e.g., Time Warner Inc., SEC No-Action Letter, 2003 WL 942784 (Feb. 28, 2003) (counsel for shareholder American Federation of State, County and Municipal Employees ("AFSCME") Employees Pension Plan submitted opinion in support of its position).
20 See, e.g., General Motors Corp., SEC No-Action Letter, 2004 WL 422893 (Mar. 3, 2004) (proposal concerning adoption, maintenance or extension of rights plan); Hewlett Packard Co., SEC No-Action Letter, 2003 WL 23148894 (Dec. 24, 2003) (same).
21 See, e.g., Burlington Resources Inc., SEC No-Action Letter, 2003 WL 354930 (Feb. 7, 2003) (proposal to amend the company's certificate of incorporation to permit shareholders to take action by written consent and to call special meetings of shareholders); PLM International, Inc., SEC No-Action Letter, 1997 WL 219918 (Apr. 28, 1997) (proposal requiring company to amend its certificate of incorporation to "opt out" of Section 203 of the DGCL).
22 See, e.g., Time Warner Inc., SEC No-Action Letter, 2003 WL 942784 (Feb. 28, 2003) (proposal to amend the bylaws to require AOL Time Warner to include the name, and certain other disclosures concerning shareholder nominees to the board of directors).
23 See, e.g., Mattel Inc., SEC No-Action Letter, 2003 WL 457999 (Feb. 21, 2003) (proposal requesting that the company remove the word "Except" and replace with the word "Against" in the vote for directors column of the company's proxy card).