October 21, 2010
Improvements to the Federal Proxy Rules — Suggestions and Comments — 20 October 2010 (Submitted on Wednesday, 20th, Alaska Daylight Time):
1. The proxy rules should recognize a basic principle of corporate law: Shareholders are the owners of the corporation and they are the equitable owners of all the information about the enterprise. (Ftn #1) Information is a right of share ownership. (Ftn #2)
2. The common law proxy rules should be codified and included in the federal proxy rules. (Ftn #3)
3. The proxy rules should adopt the judicial definition of "proxy" from the two famous 2nd Cir cases, SEC v. Okin, (L. Hand J., 1943) and Studebaker Corp. v. Gitlin (Friendly,J. 1966). (Ftn #4)
4. The proxy rules should incorporate the fiduciary Duty of Candor (Ftn #5), Duty of Disclosure, and Duty of Completeness -- these fiduciary duties should be subsumed in the proxy rules.
5. The proxy rules should require inclusion in management's proxy statement of the names and information about ALL candidates for the board of directors — adopting the rule of Chambers v. Briggs and Stratton, and Bertoglio v. Texas International cases. Likewise, the management proxy (voting form) should include names of ALL the candidates, not just those who are sponsored or endorsed or favored by management (i.e., usually the incumbents). (Ftn #6)
6. All contestants in a proxy contest should have equal access to the corporation's list of its shareholders' postal mailing addresses and its list of shareholders' E-mail addresses. The same principle should apply to NOBO lists and other such data, especially when stored in an electronic format or in a way that would allow all users to communicate with proxy givers (voting shareholders) in an inexpensive and efficient manner. (Ftn #7)
7. Overcoming entrenchment — the pathology of corporate incumbents. The proxy rules should seek to balance and to make level the playing field by refusing advantages to incumbents that are not afforded to minority, dissenting, or dissident shareholders and to their board candidates. To protect the civil rights and economic rights of all shareholders and of the investing public who depend upon an orderly and reliable securities market, the proxy rules should create and impose SYMMETRY: Whatever privilege, advantage, or perquisite is available to management and to the incumbents in a proxy battle . . . should also be available to the opponents (i.e., to the independent or minority shareholders, sometimes described as insurgents or dissidents). For example, the payment of costs of proxy statements, mailings, and solicitations should be borne by the corporation. Usually the minority or insurgents have to pay their own election costs but the corporation pays the expenses of the favored, pro-management candidates. (Ftn #8)
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Shareholders are the equitable owners of all the information about corporate governance and corporate finance. In re Ivan F. Boesky Securities Litigation, 36 F.3d 255, 262 (2nd Cir. 1994). They are entitled to know how the corporation is being managed and who are their managers. Guthrie v. Harkness, 199 U.S. 148, 155, 50 L.Ed. 130, 132 (1905) (The books are not the private property of the directors or managers, but are the records of their transactions as trustees for the stockholders. Managers are merely the agents of the stockholders who are the real owners of the property.).
"All shareholders are entitled to equal access to information from the corporation when it deals with them. The premise of homogeneity precludes differential treatment of shareholders of the same class." Victor Brudney, Insiders, Outsiders, and Informational Advantages Under the Federal Securities Laws, 93 HARV.L.REV. 322, 347 (1979).
Shaw v. Agri-Mark, Inc., 663 A.2d 464, 467 (Del. 1995) (As an equitable owner of the corporations assets, a stockholder possessed a right to reasonable information concerning the conduct of corporate management) Malone v. Brincat, 722 A.2d 5, 11-12 n.26 (Del. 1998) (directors are required to disclose fully and fairly all material information within the boards control when it seeks shareholder action).
The five common law proxy rules are:
#1 Clear Statement Rule
#2 Anti-Bundling Rule
#3 Buried Facts Rule
#4 Equal Prominence Rule
#5 Balanced Proxy Rule
(The first rule is partially codified in current SEC Rule 14a-5(a).)
However, not all rules in the arena of corporate law and securities law should be codified. For a counter-example, see, Fred W. Triem, Judicial Schizophrenia in Corporate Law: Confusing the Standard of Care with the Business Judgment Rule, 24 Alaska L.Rev. 23 (2007) (arguing against codification of the BJR). Available at SSRN at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=975775
SEC v. Okin, 132 F.2d 784, 786 (2nd Cir. 1943) (L.Hand, J.) ("extends to any other writings that are part of a continuous plan ending in solicitation and that prepare the way for its success") AND
Studebaker Corp. v. Gitlin, 360 F.2d 692, 695-96 (2nd Cir. 1966) (Friendly,J.) (extending and applying Okin to demand for inspection of stockholders list).
See, e.g., Lawrence Hamermesh, "Calling Off the Lynch Mob" in 49 VAND.L.REV. 1087 (1996). See generally, ARTHUR R. PINTO AND DOUGLAS M. BRANSON, UNDERSTANDING CORPORATE LAW, Shareholders, Sec. 5.05 (2nd ed. 2004) (explaining voting rights, proxy voting, the shareholder democracy, vote buying, and shareholders right of expression and right to information).
Chambers v. Briggs and Stratton Corp., 863 F. Supp. 900, 903-04 (E.D. Wis. 1995) (corporation bears obligation to disclose in its proxy statement existence of opposition candidate omission of name of opposition candidate is a material omission).
Bertoglio v. Texas Intern. Co. 488 F.Supp. 630, 655 n.21 (D.Del., 1980) (materiality of actual opposition to the election of directors cannot be questioned).
Courts do not allow management to impede their critics or foil insurgents:
"Because of the obvious importance of the nomination right in our system of corporate governance, Delaware courts have been reluctant to approve measures that impede the ability of stockholders to nominate candidates. . . The right of shareholders to participate in the voting process includes the right to nominate an opposing slate." Harrahs Entertainment, Inc. v. JCC Holding Co., 802 A.2d 294, 310-311 (Del. Ch. 2002).
"This court is vigilant in policing fiduciary misconduct that has the effect of impeding or interfering with the effectiveness of a stockholder vote." Openwave Systems Inc. v. Harbinger Capital, 924 A.2d 228, 239 (Del.Ch. 2007).
For a discussion of equitable principles in corporate proxy disputes, see Douglas M. Branson, The Chancellor's Foot In Delaware: Schnell And Its Progeny, 14 J. CORP. L. 515, 519-20 (1989). See generally, Frank H. EASTERBROOK Daniel R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW, 80 - 89 (1991) (discussing federal regulation of the proxy machinery and need for reform of the proxy system).