Electronic Arts Before the Second Circuit: The Amici Curiae Brief of 60 Corporate and Securities Law Professors

Posted by Jeffrey N. Gordon, Columbia Law School, on Tuesday February 24, 2009 at 11:10 am
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Editor’s Note: This post is by Jeffrey N. Gordon of Columbia Law School.

Last week, on behalf of sixty corporate and securities law professors from thirty-eight law schools around the country, I filed an amici curiae brief in the case of Lucian Bebchuk vs. Electronic Arts, Inc.. The case is  now pending before the United States Appeals Court for the Second Circuit. The professors’ amici curiae brief is available here, and the names of the professors joining the brief are listed at the bottom of this post.

The case focuses on a shareholder proposal that was submitted by Lucian Bebchuk to Electronic Arts (EA). The proposal is precatory and recommends that the board submit to a shareholder vote a charter or bylaw amendment that, if adopted, would require the company (to the extent permitted by law) to include in the company’s proxy materials qualified proposals for a bylaw amendment. For a proposal to be qualified, the proposal would have to meet certain significant requirements, including being submitted by a shareholder(s) with more than 5% of the company’s stock. The proposal is available here.

EA excluded the proposal from the company’s ballot, and the case focuses on whether the SEC’s shareholder proposal rule (Rule 14a-8) allows the company to do so.

The case comes before Second Circuit on appeal from the District Court for the southern District of New York. The District Court accepted the position of EA in a brief bench ruling and sent the case to the Second Circuit. The transcript of the District Court’s hearing is available here. The opening brief filed in the appeal by Lucian Bebchuk’s counsel, Grant & Eisenhofer, is available here. A sense of the position that EA can be expected to present in the appeal can be obtained from the opening brief and reply brief EA submitted to the District Court, which are available here and here, as well as from the amicus curiae brief, available here, submitted to the District Court by the Chamber of Commerce.

The professors’ amici curiae brief, filed in support of the appellant’s position, focuses on two central arguments made by EA in defense of excluding the proposal:

(1) Inconsistency with the Proxy Rules Argument:

In its bench ruling, the District Court, accepting the position of EA and the Chamber, held that EA may omit the proposal as inconsistent with Rule 14a-8. The District Court viewed any provision in the certificate of incorporation or the bylaws that would limit the discretion of EA’s directors to control access to the issuer’s proxy statement as inconsistent with Rule 14a-8. The District Court held that Rule 14a-8 mandates that the discretion it provides to companies to omit certain proposals be exercised fully and solely by the company’s board. The Court stated that “it is clear… that the SEC understand[s] the company to be those who act for the company … And that is a small, relatively small group of people, like the board of directors, who have management discretion to run the business and affairs of the company. And it is they that must have this discretion.”

Acceptance of the District Court’s ruling would have far-reaching consequences, invalidating any charter or bylaw provisions that provide shareholders with any access to the company’s proxy. As the amici curiae brief explains, this argument is contrary to the long-standing principles under which state law governs companies’ internal affairs and determines how they exercise their powers. Rule 14a-8 refers only to “the company,” never using the terms “board” or “directors,” and it fully relies on states law to determine how the company will exercise its discretion to omit certain proposals. Indeed, the current authority of EA’s board, which the District Court and EA take for granted, is a product of state law arrangements, and the proposal merely seeks to amend the state law arrangements currently governing the company’s exercise of discretion.

The District Court’s ruling is directly opposite to the view expressed by the Second Circuit in AFSCME vs. AIG. In this case, taking as settled law that a bylaw expanding shareholder access to the company’s proxy beyond Rule 14a-8’s minimum requirements is permissible, the Court stated that such bylaws “are certainly allowed … under the federal securities laws.”

In the reply brief submitted to the District Court, and at the hearing, EA withdrew its initial argument that the recommended charter or bylaw provision would necessarily contradict Rule 14a-8, but the District Court did not accept this concession and ruled that such contradiction would in fact arise. According to EA’s revised position, EA’s board may itself adopt a bylaw prescribing the recommended arrangements, and EA’s shareholders may adopt such a bylaw through an independent proxy solicitation, and in such cases the adopted bylaw would not contradict Rule 14a-8. What would contradict the Rule, EA argued, would be a shareholder proposal under Rule 14a-8 that urges the adoption of the recommended arrangement. As the amici curiae brief explains, however, it is hard to see the logic underlying this position. If the recommended amendment is by itself fully consistent with Rule 14a-8, as EA conceded in its reply brief and in the oral argument, there is no reason to view a shareholder proposal recommending it as inconsistent with the Rule.

(2) The Indirect Consequences Argument

A second argument made by EA is that adoption of the recommended arrangement might one day, after a long sequence of steps, lead to the inclusion of proposals that, but for the recommended arrangement, EA would be free to include or exclude under one of eight provisions of Rule 14a-8. EA is asking to have these provisions read as allowing (or indeed to rewrite these provisions to allow) not only the exclusion of the proposals specified in these sections but also all proposals whose adoption may in some circumstances down the road lead to the inclusion of proposals specified in these provisions.

Acceptance of this argument would lead to a large increase in the power of companies to exclude shareholder proposals. Using EA’s logic, companies would be able to exclude various proposals for governance reform on grounds that their passage might make directors more responsive to shareholders and therefore, following some sequence of events over time, lead directors to include a proposal which under one or more of the eight provisions of Rule 14a-8 the company would be free to include or exclude. The professors’ amici curiae brief explains that the Court should not accept EA’s invitation to deviate from the clear langauge of the Rule and rewrite the provisions of Rule 14a-8 to expand considerably companies’ power to exclude proposals.

The sixty corporate and securities law professors joining the brief as amici, listed alphabetically, are:

Jennifer Arlen
Norma Z. Paige Professor of Law
Director, NYU Center for Law, Economics and Organization
NYU School of Law

Robert Ashford
Professor of Law
Syracuse University College of Law

Ian Ayres
William K. Townsend Professor
Yale Law School

Michal Barzuza
Associate Professor of Law
University of Virginia School of Law

Laura N. Beny
Professor of Law
University of Michigan Law School

Lisa E. Bernstein
Wilson-Dickinson Professor of Law and
Co-Director, Institute for Civil Justice
University of Chicago Law School

Bernard S. Black
Professor of Law
University of Texas Law School
Professor of Finance
McCombs School of Business

J. Robert Brown, Jr.
Professor of Law
University of Denver Sturm College of Law

Victor Brudney
Robert B. and Candice J. Haas Professor in Corporate Finance Law, Emeritus
Harvard Law School

Richard Buxbaum
J.D. Program and Jackson H. Ralston Professor of International Law
Boalt Hall
University of California at Berkeley

William Carney
Charles Howard Candler Professor
Emory Law School

Stephen Choi
Murray and Kathleen Bring Professor of Law
New York University School of Law

John C. Coffee
Adolf A. Berle Professor of Law
Columbia Law School

James D. Cox
Brainerd Currie Professor of Law
Duke University School of Law

Lawrence A. Cunningham
Henry St. George Tucker III Research Professor of Law
The George Washington University Law School

Lynne L. Dallas
Professor of Law
University of San Diego School of Law

Steven Davidoff
Associate Professor of Law
University of Connecticut School of Law

George W. Dent, Jr.
Schott-van den Eynden Professor of Business Organizations Law
Case Western Reserve University School of Law

John J. Donohue
Leighton Homer Surbeck Professor of Law
Yale Law School

Melvin A. Eisenberg
Koret Professor of Law
Boalt Hall
University of California at Berkeley

Charles M. Elson
Edgar S. Woolard, Jr., Chair
Professor of Law
Director of the John L. Weinberg Center for Corporate Governance
Lerner College of Business & Economics
University of Delaware

Lisa M. Fairfax
Professor of Law and Director, Business Law Program
University of Maryland School of Law

James A. Fanto
Professor of Law
Brooklyn Law School

Allen Ferrell
Greenfield Professor of Securities Law
Harvard Law School

Jill E. Fisch
Professor of Law
University of Pennsylvania Law School

Merritt B. Fox
Michael E. Patterson Professor of Law
NASDAQ Professor for the Law and Economics of Capital Markets
Columbia Law School

Tamar Frankel
Professor of Law
Michaels Faculty Research Scholar
Boston University School of Law

Jesse M. Fried
Professor of Law and Co-Director
of the Berkeley Center for Law, Business and the Economy
Boalt Hall
University of California at Berkeley

Jon D. Hanson
Alfred Smart Professor in Law
Harvard Law School

Claire Hill
Professor and Director, Institute for Law and Rationality
Associate Director, Institute for Law and Economics
Vance K. Opperman Research Scholar
University of Minnesota Law School

Peter H. Huang
Harold E. Kohn Chair Professor of Law
Temple University James Beasley School of Law

Lyman Johnson
Robert O. Bentley Professor of Law,
Washington and Lee University School of Law
LeJeune Distinguished Chair in Law,
University of St. Thomas School of Law

Marcel Kahan
George T. Lowy Professor of Law
New York University School of Law

Vikramaditya S. Khanna
Professor of Law
University of Michigan Law School

Reinier H. Kraakman
Ezra Ripley Thayer Professor of Law
Harvard Law School

Donald C. Langevoort
Thomas Aquinas Reynolds Professor of Law
Georgetown University Law Center

Katherine V. Litvak
Assistant Professor
The University of Texas School of Law

Stephen Marks
Professor of Law
Boston University School of Law

Brett McDonnell
Professor of Law
Associate Dean for Academic Affairs
University of Minnesota Law School

Curtis J. Milhaupt
Fuyo Professor of Japanese Law
Prof. of Comparative Corporate Law
Director, Japanese Legal Studies Center
Columbia Law School

Dale A. Oesterle
J. Gilbert Reese Chair in Contract Law
The Ohio State University, Michael E. Moritz College of Law

Richard W. Painter
S. Walter Richey Professor of Corporate Law
University of Minnesota Law School

Frank Partnoy
Professor of Law
University of San Diego School of Law

Arthur R. Pinto
Professor of Law and Co-Director of the Dennis J. Block Center
for the Study of International Business Law
Brooklyn School of Law

Katharina Pistor
Michael I. Sovern Professor of Law
Columbia Law School

Norman S. Poser
Professor of Law Emeritus
Brooklyn Law School

Robert A. Ragazzo
University of Houston Law Foundation Professor of Law
University of Houston Law Center

Hillary A. Sale
F. Arnold Daum Chair in Corporate Finance and Law and
Professor of Law
University of Iowa College of Law

D. Gordon Smith
Glen L. Farr Professor of Law
J. Reuben Clark Law School
Brigham Young University

James C. Spindler
Associate Professor of Law and Business
University of Southern California – Gould School of Law

Marc I. Steinberg
Rupert and Lillian Radford Professor of Law and
Senior Associate Dean for Research
Dedman School of Law
Southern Methodist University

Guhan Subramanian
Joseph Flom Professor of Law and Business
Harvard Law School
Douglas Weaver Professor of Business Law
Harvard Business School

Eric Talley
Professor of Law and Faculty Co-Director of the
Berkeley Center for Law, Business and the Economy
Boalt Hall
University of California at Berkeley

Randall S. Thomas
John S. Beasley II Professor of Law and Business
Vanderbilt University Law School

Samuel C. Thompson
Professor of Law, Arthur Weiss Distinguished Faculty Scholar, and Director
Center for the Study of Mergers and Acquisitions
The Pennsylvania State University
Dickinson School of Law

Frederick Tung
Professor of Law
Emory University School of Law

J.W. Verret
Assistant Professor of Law
George Mason University School of Law

David I. Walker
Professor of Law
Boston University School of Law

William K.S. Wang
Professor of Law
University of California, Hastings College of Law

Elliott J. Weiss
Charles E. Ares Professor Emeritus
Rogers College of Law
University of Arizona

  1. So many brief and so many words to make such a simple argument.
    Given the correct premise that a corporation is free to adopt a bylaw to establish its policy to allow shareholder proposals in its proxy statement that are optionally excludable under rule 14a-8, it matters not (in Delaware) whether the bylaw is proposed by the shareholders or the board. If the judge asks EA’s lawyer whether Lucian’s proposal could be presented by the board for a shareholder vote, what would he say? A “no,” would undermine the board’s authority. If he says “yes,” then he is acknowledging the validity of Lucian’s proposal. Since Delaware law allows shareholders to amend the bylaws, this is an easy case. (The other arguments against inclusion of the proposal are too silly to get any traction.)
    Of course, all this assumes 14a-8 is a valid rule. But it is hard to justify it legally. All the rules adopted pursuant to section 14 are supposedly designed to do one thing: as much as possible, to provide shareholders that do not attend the meeting in person with the same information as those do attend. Rule 14a-8 goes way beyond that goal by prescribing conditions on who can submit a proposal and on the content of the proposal. While the goal may be noble, the balancing act the SEC has done for many years, e.g., limiting a shareholder to one proposal has no basis in the law itself.
    Rule 14a-8 has been around a long time. You might say it institutionalized. Or like AIG, GM and Citigroup, etc., too important to fail. I don’t buy it. My favorite fairy tale is “The Emperor’s New Clothes.” If something is wrong, time does not make it less wrong. I don’t agree that shareholders would be worse off of 14a-8 were invalidated. An easy way for the SEC to make a better – and legal –rule and to get out of the business of dealing with no action requests would be to adopt a rule that says companies must include in their proxy statements any proposal that they know will be presented at the meeting including shareholder nominations. See the blog I posting wrote on this subject at http://www.icahnreport.com/report/2008/12/change-the-rule.html. I also think Blasius, a post-14a-8 opinion, would prevent boards from adopting unduly restrictive proxy access bylaws. But if I am wrong, Congress can deal with that problem in an honest and direct way. I am more fearful of conceding to unelected and unaccountable regulators – even well-meaning ones — powers they do not have under the Constitution than of shareholders losing their ability to submit proposals.

    Comment by Phillip Goldstein — February 24, 2009 @ 1:49 pm

 

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