Editor’s Note: This post is from Jeffrey N. Gordon of Columbia Law School.
I filed earlier this week an amici curiae brief — on behalf of forty-six corporate and securities law professors from twenty-eight law schools around the country — in the case of Lucian Bebchuk vs. Electronic Arts, Inc.. The case is pending before the United States District Court for the Southern District of New York. The professors’ amici curiae brief is available here.
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 U.S. Chamber of Commerce weighed in, filing an amicus curiae brief in support of EA. The Chamber’s amicus brief is available here and EA’s brief is available here. The response brief filed by Bebchuk’s counsel is available here.
The professors’ amici curiae brief, filed in support of Bebchuk’s position, focuses on two central arguments made in defense of excluding the proposal whose acceptance could have significant implications far beyond the current case:
(1) Preemption Argument: EA and the Chamber argue that Rule 14a-8 preempts the field in determining access to the issuer’s proxy statement and thus would invalidate an internal corporate governance arrangement otherwise permissible under state law that would require a company to include some proposals that the Rule permits the company to include or exclude.
Acceptance of the preemption argument would have far-reaching consequences, invalidating any charter or by-law provisions that provide shareholders with access to the company’s proxy materials. As the professors’ brief points out, this argument is directly opposite to the Chamber’s position in its submission to the SEC last year that “state law defines the rights of shareholders, including…the extent to which they have access to the company’s proxy…” This argument is also 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.”
The professors’ brief explains that Rule 14a-8 sets minimum requirements as to which proposals must be included, leaving companies with discretion whether to include other proposals, and that state law arrangements may regulate how companies use this discretion. Furthermore, the brief explains that, rather than preempt state law in this area, Rule 14a-8 in fact co-exists with and critically relies on state law to regulate how issuers operate within the zone of discretion the Rule leaves them.
(2) Indirect Consequences Argument: EA argues that the proposal may be excluded under the election exclusion provision of Rule 14a-8(i)(8) because the recommended charter or by-law provision, if adopted, could one day, after a sequence of steps which may or may not occur, lead to the inclusion of a bylaw related to director nomination or election.
Acceptance of the indirect consequences argument would lead to substantial expansion in companies’ ability to exclude shareholder proposals. EA essentially asks the Court to rewrite the election exclusion to apply not only to proposals that relate to director election and nomination procedures but also to proposals related to by-law amendment procedures. The professors’ brief explains that the Court should not accept this invitation to expand considerably companies’ power to exclude proposals.
The corporate and securities law professors joining this brief as amici, listed alphabetically, are:
Professor of Law
Syracuse University College of Law
William K. Townsend Professor
Yale Law School
Laura N. Beny
Assistant 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
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
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
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
…continue reading: The Corporate and Securities Professors’ Brief in Bebchuk vs. Electronic Arts