Transcript
Counting down. Did you see a countdown here? It's weird. I wasn't looking at the moment now. It seems to be recording though. It's red and everything. So that's strange. Let me look here, hold on a second. dismiss I got yeah, okay. that's weird. I 'cause what I did is I had I know what I was trying to do. God damn it. Hey hey Matt, we're trying to get our shit together here. I'm sorry. I know it 'cause I I put the outline in a separate window. You know and so It's got a percentage going uploading to the cloud. Hmm? so sorry to waste your time Matt on this but we're just really trying to get organized. All right, I think we're there. Yeah, we've already forty five seconds into it. Matt, don't include this first part on our recording. That would be dumb. I don't think he was planning to. I think so. Hey Matt, here we go. Three, two, one. Welcome to Shareholder Primacy from Free Float Media, a podcast about activist investing, securities law, and all the ways the financial and legal roles intersect and collide in real life. Ann Lipton and I have returned with some content for you. Anne, of course, is a law professor at the University of Colorado who teaches and researches securities and business law. And she looks after the legal side of things here at our podcast. And that's Mike Levin, an activist investor who lives and works in Chicago. covers the financial side of our podcast. So so I think you were back to work like a week ago, two weeks ago? I am back to work. Yes. A week ago. Yes. Something like that. Yeah. Two weeks. I don't know. I lose track of time. It's Labor Day today. So I completely discombobulated about what day it is. A week to two weeks, actually two weeks of classes under the belt. So yeah, I'm teaching Introduction to Business Associations. And as we'll talk about on the show, the SEC has decided to make my life very difficult by whacking at the syllabus. Yeah. Back in the classroom. Yes, right. Right. But so you got a week of classes under your belt it appears. two weeks. excellent, great. god, yeah, right. I know. Stuff happens, you have to keep changing it around, right? Every time. Very cool. Yeah, exactly. And you're back to your spreadsheets and your bylaws, your activism-ish things. Yes, yes, yes. we got we got three or four things kinda cooking for the fall, for the for the winter. nothing I unfortunately can talk about right now. And the old one, the old Charles and Colvar jewelry company that went into bankruptcy is starting to come out on the other side of it, but that's just a long process. That'll we'll talk about that another day. But yeah, so I it's this is like kinda planning time now. again, as you're right, reading bylaws, figuring out deadlines. Yeah, I assume. that's Hmm. that's fun. Yeah. Honing messages, recruiting director candidates, all that good kind of stuff. I'm working on all that. It's it's it's great, yeah. So but these are like, you know, active like real life activist situations that eventually may may or be may become public. Who the hell knows? Anyway, so yes, right. So but today we originally were gonna dig through the mailbag and get a bunch of stuff out of the way. And we've gotten a couple, at least a couple. Okay, well, we hope you can talk about them at some point. Yeah. Mailbag questions kind of on the same subject. And so we'll we'll tackle one of those. Go ahead, Ann. Yes, and that... Yeah, no, so in that it turns out there's a lot to talk about with that one subject, so we'll deal with that. Well, the... Yeah, just the rule in general, just how the SEC... Like, we've got, you know, we've gotten variations on, you know, like what is going on with the SEC in Rule 14A8. And that one subject is precatory proposals and SEC Rule fourteen A eight. Yeah. Right. Okay, we'll read one of those. and give several different thoughts about what's ha what kind of what's happening. I I we haven't actually talked about that in in qu a little bit since at least the spring. So it's probably time anyway, given all the news, right? Yeah. So yes, and again, if you would like us to not necessarily immediate schedule, but eventually schedule, if you want us to answer your questions, please email us at shareholderprimacy at freefloat.llc. Yes. Right. So that gets you into the queue to do other mailbag stuff. So anyway, we've got a couple at least a couple of questions as I said about how the SEC will be handling Rule fourteen A eight, which is the one that addresses resolutions and precatory proposals and so forth. And it's been, you know, lots of controversy over many years. We've talked about it before, but we're gonna refresh some of it here because there's been some news. so Mm-hmm. let's so the the one mailbag question from Michael came and it kind of sort of s summarizes everything we heard. let's read it. There's all this talk of Paul Atkins SEC maybe doing away with precatory proposals under fourteen A eight. Well, yeah, that's right. But if it gets pushed down to a state level decision, are there indications of how each state would handle this decision? We can pretty easily guess how Texas and Nevada maybe will handle it, but what about Delaware? And I actually thought that was a really insightful way to kinda ask the question. Not just kind of what's gonna happen or what's you know, the likelihood or something, which we want to talk about, but kinda what are the what's the what's the implications for it at different levels? And I I I got excited about that. So so let's kind of let's kind of tackle that. So Yeah, so yeah, I mean, it's actually I'm going to broaden the question a little bit because now that we have some more regulatory developments on this front. So with the last time we talked about this, I think we were sort of running through like, SEC shenanigans. And the latest was that the SEC is a practical matter just had decided to stop enforcing rule 14A8. If companies said they would intended to exclude a proposal, on the grounds that they didn't think it complied with 14A8, the SEC just really wouldn't weigh in. And if any shareholder objected, all they could do was sue. And we saw a lot of those lawsuits. But now, yeah. And but what the SEC has done now is it put out this regulatory notice and it's sort of this obscure notice because what it is, is just sort of like a list of like rules that they're sending to the White House. And in this one sentence, it says, rescission of 14A8. Now we haven't actually seen what they plan to do. Right. A few. Right. Yeah. Right. So we can't be sure they haven't published it. They haven't published it yet, but the implication from that little tiny sentence is that they plan to rescind the entire rule. So now we're talking about more than precatory proposals. We're talking about any proposal. So I just want to be really clear about like what this rule does and why it's there. yeah. Right. They haven't published an they haven't published anything yet. Right, right, right, right. Alright, let let's yes, go ahead. Yes. So so so let's talk about I mean, just to provide a little background, what it literally does is requires companies to feature I use that verb, these proposals, obviously at an a meeting, at a shareholder meeting, but then also on the proxy material. So I think that's a yeah. Okay. On the proxy materials, not at the meeting. I really want to be clear on this. That's the really important part. As a legal matter, 14A8 does not grant shareholders the right to make proposals. It grants shareholders the right to have otherwise legal proposals, and when I say legal, mean legal under state corporate law, be included on the corporate proxy ballot. So if the shareholder complies with the procedural requirements of the rule, like a holding period, a financial stake, word count, all that kind of stuff, if the shareholder complies with the rule, then their proposal has to be included in the company proxy materials, where it appears on the company proxy ballot and the company collects the votes the same way, at the same time that it collects votes on all the other items that are up for vote. So imagine a world where this rule doesn't exist. A shareholder has some item, Yeah, right, yeah. they want to propose for other shareholders to vote on any kind of item. He could go to the annual shareholder meeting and stand up and be recognized and move for it. And it's going to fail. It's going to fail even if it's the bestest proposal that anyone ever proposed because nobody's at the meeting. They all voted by proxy. And move it. Move it, right. Right. Why would it fail? Right, because because because because the everybody votes by proxy. The company holds all the proxies and they would not have even provided for this to be on the proxy materials so people knew it was going to be on the agenda and therefore be able to vote for or against. Exactly. Exactly. That's exactly. Yeah. Right. So the then so the issue here is that, you know, like if you imagine like back in the 1800s or something, when shareholder meetings were like everybody went physically, like you usually had to go physically, I think only women were allowed to vote by proxy, a whole nother story. You had to go physically. All the shareholders were there at the meeting. So yes, somebody could stand up and say, Right, right, yeah, right. I make a proposal and everyone would vote on it and it would be fine. But when shareholder became, yeah, exactly. But when shareholding became more dispersed so that now what used to be a relatively small collection of shareholders became like this massive collection of shareholders and nobody goes to the meeting anymore, the right you otherwise would have had under state law that existed substantively for a shareholder to make a proposal disappears as a practical matter because everyone's voting by proxy. Right, because they weren't voting by proxy because everyone was right, yeah, okay, yeah. So way back, so in 1934, Congress passes the Exchange Act, which allows the SEC to regulate proxies in various ways. Proxy solicitations, the 34 act gives the SEC the power to regulate that because the system previously was pretty corrupt. then in 1940, which is just a few years after the Exchange Act passed, the SEC adopted Well r it well r it regulates shareholder communication, which also includes proxy communications. Yes, right. Right. the earlier version of 14-8-8, which requires the corporation to include your proposal on the ballot. And this gets to something you said, which is that if they don't do that, like, because the SEC's theory at the time was, let's say the company knows a shareholder is going to stand up at the meeting and make a proposal. If the company doesn't mention it in their proxy materials, the SEC's view was that's misleading. That's misleading to shareholders because they don't know what's really going to happen at the meeting. So the SEC's view was corporations that know a shareholder is going to be at the meeting and make a proposal have an obligation to indicate that fact in the proxy materials so that the proxy materials are not misleading. And that turned into Rule 14A8. So the rule was always controversial. From the beginning, boards hated it, but the SEC has stuck to its guns. And today, as we've talked about on the show, it's frequently used for precatory proposals. It doesn't have to be, but it frequently is used for precatory proposals. Right. Well yeah, you could you could move bylaw amendments as right. Right, as a fourteen eighty eight matter. Right, yes. bylaw amendments you could and very rarely people do. Yes. What you can't do is a director nomination that's not permitted under 14 a.a. but yeah yeah. There's not a whole lot else. Yeah, that's it. Yeah, there's very little else that shareholders have the binding power to do other than. Right. And then and you know, I could think there's is there there's really not other significant that you could move for at a a bylaw, you could put a by and we'll talk about that. yeah, so they're frequently now used for precatory proposals, frequently on ESG topics. And now we have this regulatory notice that suggests they're moving to rescind the rule, which doesn't surprise me because this administration, the SEC, they're being very diligent about stamping out every expression of shareholder power they possibly can. So yeah. Right, okay. So so so let's so let's go back and recap real quick. So it's been around forever, which we everyone most listeners here know this. Right right, right. And it has basically required companies, if they otherwise were gonna be required to put the item on the agenda to also include it in the proxy materials. And and then a year ago, which people were surprised by a little bit, but not completely, the Almost since the passage of the Exchange Act. exactly. SEC's decided to stop enforcing, in substance, stop enfor and we talked about this. So they basically said, okay, you know, the way we enforce this through this whole no action process, we're gonna just not gonna do that. and interestingly, empirically, at the time there was very diverse opinion about how that was going to affect proposals. it certainly did send a chill over the whole environment. Yeah. Yes, we talked about that. there were substantially fewer, I think a quarter fewer, was that were submitted. Right. There were a lot, there were a lot fewer proposals that yeah, that were made at all, which I don't know if it was just because of this. think it was also the whole environment. Everybody knew that. Yeah. Well yes, right, right. It's to me at least, not as many companies I I thought that companies would universally just jump on this. And that that didn't quite happen. No, there was a divergence. It seems like some companies really got aggressive about not including proposals, but others weren't, and it matters who the proponent was. Right. Right, and there were others that just sort of let yes, and there were others who let through and so on and so forth. So it could I think it's fair to say it contributed to this chilling environment for precordy for precatory proposals. yeah, for any kind of proposals, but mostly precatory. and and you know, there was a lot of of consternation among in the ESG community as a result of this and you know For any kind of proposals. Yeah Well, yeah, because they mostly are we we saw many fewer, particularly ENS proposals, the G proponents, John Chavadin and some others, were still pretty active. though they saw their share of proposals that were also rejected, just, you know, under this this kind of n no enforcement philosophy. Now. Go ahead. Yeah. Yeah. Tony Ellie's paper, she found, think I'm trying to remember, I mean, she did this paper, we mentioned it before, she did this paper, trying to analyze how companies are reacting. she found some kind, it was more like divided by company, some companies being more aggressive than others in not including proposals. And also it mattered who the proponent was. So institutional proponents and anti ESG proponents got their proposals through more. Right. yeah, yes, right, right, right. The ones that that are kinda anti woke or whatever. All right. Or the organizations that were anti-woke. have sort of a weird set of proposals. Now now this would be a good time to talk about some of the regulatory inside ba not really inside baseball, but regulatory toing and froing that's about to happen because all we know other than the rumors that they were going to like get rid of fourteen A eight, what literally happened is that the SEC notified the White House organization OIRA, O I R A office of I can't remember, that reviews regulations before they go out. It's kind of this regulatory kind of toll booth at the White House. Yeah, yeah, just. Yeah. Yeah. that they were planning on re as you said, rescinding fourteen A eight and they also were planning something else related to fourteen A four, which we can talk about in a little while. Yeah. They just said amendments to that. We don't know what those are. Their general agenda is... I'd be really curious. Yeah. So they said they're going to make amendments to 1484, which is what regulates the proxy ballot. And then it said rescind 1484, which we assume means actually rescind the rule. So how does that play out? Yeah. Right. I I talked I'll talk about a little while. I have a couple of friends of mine have some ideas and probably spreading rumors there. Yes. So anyway. Okay, so what's what is the well this is my question. You, how does that look? What is the procedures for like, you know, doing this kind of thing? Okay, so the first at the SEC was going to at some point make public a proposal to rescind rule 14A-8. And they're going to have to accept public comments, probably something like a 60 day period. Public comments are not a vote. It's not like if enough people object the SEC has to change course. The point of the public comments is to raise any substantive considerations or concerns that the SEC may not have recognized in its analysis. But as long as in the final rule, the SEC considers the public comments, it doesn't actually have to follow what the commenters say. It just has to take them under advisement and have like reasoned basis for rejecting them. So here are my predictions. And I usually hate making predictions because I just don't like being publicly wrong. But I'm going to take a whack at what's going to happen. I'm going to throw caution to the winds. And here's what's going to happen. Because we've already seen it happen with every other rule proposal that the SEC has made. Okay. From the SEC. There's been a lot of rule making at various agencies. Right, okay, yeah. A bunch of proposals, right. The SEC has made a lot of proposals and they're all about limiting disclosure requirements for corporations. So I expect the same thing is going play out. Yeah, quarterly reporting and all of that. So first thing that's going to happen is every shareholder rights group and then all the religious and social investors and a bunch of state retirement plans, they're all going to weigh in and say, shareholder proposals are an important source of dialogue with management. this is the this is like the this is like the the quarterly reporting and there's executive comp Right, okay. And then every corporate issuer is gonna lay in and say rescinding the rule is fantastic. The proposal rule never made sense. And then they're all gonna say this. They're gonna say that boards can be trusted to responsibly decide whether and on what term shareholder proposals should be included on the corporate ballot. Like companies are gonna say, some companies can voluntarily choose to include shareholder proposals on the corporate ballot. Each company, each board will choose the system that suits their corporation's needs and we don't need a one size fits all mandate. That's what the companies are going to say. They're not going to say shareholder proposals should never be included on the corporate ballot. They're going to say boards should have discretion to pass their own bylaws that give permission in a way that makes sense for that company. And then we're going to see some conservative groups say that the proposal process has been abused for liberal activists. so that they can advance unrelated political agendas, which to be fair is not entirely untrue. And then somebody is probably gonna say that the proliferation of non-brinding proposals is just busy work for proxy advisors so they can collect additional fees by making recommendation. The large asset managers, the BlackRock, the State Street, they've been silent. Yeah, they've been silent on a lot of this. The investment company Institute occasionally weighs in, but they've been very, very quiet. They're gonna they're not gonna say anything, right. So I think they may not weigh in at all. Maybe we'll see something from the Investment Company Institute, but not the individual asset managers. And then the comment period is gonna expire after maybe 60 days. And the SEC will release a final rule where they will insist they gave careful consideration to all of these comments before going ahead and rescinding 14AA anyway, no matter what anybody says. So that's what happens next. They're going to rescind the rule. Okay, so I have a coup I have one comment for you, which based on your prediction, which I'm not gonna hold you too too seriously. Others oth others may, but at least from the company side, this the the phrase I would remi r return to here is everything is pol everything is private ordering. I'll be very publicly embarrassed if I'm wrong. Mm. Yes, that's what the companies are going to say. They're going to say it's private ordering. This this is this is this this is a this is a matter that they they would assert this is a matter for private ordering and we can handle this and the shareholder proponents that grew comfortable under 14 as much as they hated it, as much as they hated the SEC's no action stuff, it it it did give them something to work with. And I think they'll some of them are gonna regret this and they'll say reg regret some of their hatred of the SEC over the many years. Yeah. Yeah. It doesn't work here and we'll talk about it. It's not going to work here. Yeah, well, not exactly. Well, yeah, but not the way the boards are going to want it. It doesn't work. I don't think it's stable, but yeah. And then they'll say, Look, you know, private ordering is fine, but it doesn't work here because there's it's it's one si it's w it's one sided and so forth. So Right, r right. But importantly, let me go back to one thing about the public comment part. Okay. My understanding and my conversations, which hasn't been that frequent, you've talked to more SEC people than I have, is that the SEC, at least the staff, does take the comments pretty seriously. They read they look at yeah. But right. I think under prior to, well, legally they have to. And well, first of all, legally they have to like, as in it's a grounds for challenging a rule if you don't. And I, but the thing is that I, I'm not casting aspersions on the SEC up until now. I think this SEC, they've hollowed out a lot of staff and I think it doesn't like, regardless of what the staff goes through, I think the commission, which is what? Yeah, yeah. two people now, all Republicans, if she hasn't stepped down yet. Okay, so with two people on it, both of who, I think they're gunning for 1488 and it doesn't matter what the comments say. So it's not about the staff. Yeah. Yeah. Right. And two Republican Hadza Hedgehint is is gone. I think she left September first. Right. Is that is that the Right. It it's so th th they may get lots of comments, really valid comments about how valuable fourteen but i my sense is they're probably gonna end up Yes, and that's when the lawsuits begin. Okay, that was my question. So so l there's a couple other areas to cover, which is legally, what what's gonna happen here? You know, once assuming they do this, is there ways to legally challenge the rescission and so forth of the rule? And then we can start to ask what are some of the second and third order implications. Yeah, so let's do the lawsuits really quickly. then we'll talk about, Yeah, so the lawsuits, various shareholder groups are gonna sue. It's gonna be the Interfaith Council on Corporate Responsibility, maybe As You So, maybe a New York Pension Fund, maybe someone like Trillium. Those groups are gonna sue and they're gonna make two basic arguments. The first argument, and this is what we just hinted at, is gonna be that the SEC didn't follow the proper legal process because it didn't really consider the comments. Okay, and then let's do that and then we'll t then we'll take a quick break. All right, go ahead. Like the SEC is required legally to at least take into account, right, well, they publish the comments, but they have to like, you know, do a rulemaking where they like explain why they rejected various kinds of data or whatever that was offered. So they're gonna say that the SEC acted arbitrarily and capriciously because they didn't really take into account the actual objections that were given. That's one basis for the lawsuit. The other argument though, is that they're gonna say the rule itself was functionally required under the statute. they publish every comment. Yeah, right, yeah. that the 1940 SEC that passed the rule was correct, that proxies are misleading if you don't include this kind of information. And so the SEC didn't have the power to rescind the rule. So that is gonna be litigated. Maybe there are other claims as well, but I think those are the two basic ones. And that's gonna be litigated. And I don't know how that plays out. Let's be clear, wait long enough, maybe we have a democratic administration, maybe they restore the rule, maybe the chamber of commerce is the democratic administration saying they acted arbitrarily, basically for restoring the rule. But. Right. Right, yeah. Right. while all that's going on, that litigation which can take years, my guess is rescission takes effect. That's when we're gonna be in a world where corporations are not obligated to include proposals on the corporate proxy. And it's what happens after that, that's interesting. Right. And so the two bases, one of them is rooted in administrative rule making procedure, which the SEC has had to defend and has failed to defend in the past. Mm-hmm. They failed to do, yes, like under the Biden administration, the fifth circuit struck stuff, I think more than once. Yeah, yeah, and also, the Clay. Exactly, yes, exactly. And so, and the fifth circuit in particular has been very hostile to a lot of the rulemaking that came out of the Biden administration. So the SEC loses on these arguments a lot, whether it'll lose this one is a different question. Right. I mean and you know, there was all sorts of stuff where, you know, and the economic analysis is flawed and so forth. There's there's a lot there's a lot of hoops they have to jump through to make to make rules. Go ahead. Right. And then but then the other basis is that the proxy the interpretation of the forty act. Forty act? Forty act. Thirty four act, sorry. R requ sorry, basically requires this for proxies to not be misleading. That there The 34 Act, the 34 Act, the 34 Act, the rule was passed in 40. Exactly, something like that. Like, I'm sure, like, I haven't delved into this story the way the lawyers will. They'll, you know, come up with other kinds of things. But I'm anticipating something along the lines of that the reason they passed this rule in 1940, so soon after the Exchange Act, was because it was functionally... required to admit it properly administer the act and that the SEC doesn't have the power to simply get rid of it. All right, cool. All right. Now we have all sorts of things to talk about related to how the shareholders react and how the companies are and including our questioners' question was how will estates handle this? And that's where it's going to get interesting, and we will handle all those in a minute after a break. Here we shareholder primacy. That was good. Yeah, that's where it gets fun. Okay. I just have to give me one second. All right, cool. why don't you there's no there's transition in here. We just did material. Yeah, no, I just have to move something around so they can say the transition and... Okay. Welcome back to Cheryl the Primacy. I'm Anne Lipton here with Mike Levin and we are still talking about the SEC's plans for 14A8. That's fine. okay, and then we'll go back to Okay, cool. I I think you have the outline good. All right. why don't you bring us back here, Ann? Yes. And we were going to talk about now all the implications. And I have some thoughts about how various players here will will likely react. and I think we can divide it into a a couple of different important groups. I mean obviously shareholders and and and companies. the shareholder one's a lot more interesting. So let's let's deal with the companies for now. really? OK. Yeah. Mm-hmm. Yeah. my guess is that we're going to see some version of what we saw this past year, but somewhat more emphatically. There will still be companies that do not want to deal with the headache of trying to oppose sort of shareholder sentiment here. That they're sort of used to this. you gotta remember not all that muk many companies, you know, out of three thousand Yeah. Yeah. or so publicly traded companies get these. It's all the bigger ones. And there's gonna be some obstinate ones. You know, ExxonMobil is, you know, well, they didn't get any this year anyway, or that didn't put any on the on the agenda and on the proxy statement. there'll be many there'll be a number like that that are just going to say, okay, we don't have to, so we're not gonna bother. But there'll be others that are willing to put a couple. I mean they're gonna have so much more judgment about how this works and so yeah. Well, yeah, that's exactly the issue, I think. So yeah, so like, let's start with state corporate law. Whatever state corporate law does, I am really confident that there isn't like, we don't, the thing about the fact that rule 14A8 was there for so long means that state corporate law didn't have much chance to develop on these issues. Like Delaware law didn't develop because it wasn't a Delaware law issue, it was all handled in the federal law. But yeah, well. Right. Yeah, d d yeah, Delaware Delaware is I say is essentially silent about I mean at least in statute. Yeah, right. Yeah. Yeah. They're almost all silent except for Texas is one little rule. We'll talk about that in a minute. well, but here's the thing. So what no state currently affirmatively does and I can't imagine them affirmatively doing is allowing shareholders to include proposals on the corporate proxy ballot. Remember now we're not talking about the right to make proposals at all. We're talking about the right to have them included on the corporate proxy ballot. And I there is no state I believe. that would currently like allow that currently allows that like, think that's like, yeah, current, there's nothing in any of the state corporate law as far as I know that require I mean, you know, I haven't gone through all 50 states, but they all have bare resemblance. None of them say anything about shareholder proposals on the corporate ballot. It's always been a federal rule. And I find it very hard to think that any state or certainly not any state that has a whole lot of public companies is going to opt in affirmatively by replacing 1488. So there is no state that is going to Currently requires it. Currently requires. say companies you must include shareholder proposals on the corporate proxy. But I agree with you that some boards probably to demonstrate good faith, good corporate citizenship, something like that, are going to allow it. And the way they'll do that is the board will pass a bylaw that says shareholders who comply with XYZ rules can include their proxies on the corporate ballot. maybe they have to do it that way. Yeah, I think it'll be a bylaw. I you think you think it'll be a bylaw? You think it'll be a bylaw? And I think that they'll have to, because I'll have to lay out the conditions that they're willing to entertain it and they can't, and otherwise they're going to get sued or flack for why this one and not that one. They're going to lay it out. We will allow it under these circumstances. And probably some of them will imitate the SEC rule. Like they might just to begin with, essentially just plop 14A8 as it exists currently into their bylaws. Yeah. Exactly. Okay. All right. like with with with the dozen exclusions and so forth and okay, yeah. Or maybe they'll be even more exclusionary, you know, like they'll add a couple of their own exclusions. But then they'll say something like, under these bylaws, if the shareholder complies with these bylaws, we can include them on the corporate law. Maybe they'll add like a maximum, like no more than six, the first six who come, you know, something like that. But I think that's so, and, even, but think how that plays out. I think that that's unstable because at some point a shareholder is going to offer a proposal and their company is going to reject it saying, you didn't comply with the bylaw. Like we said clearly, no ordinary business and your proposal is ordinary business. And the shareholder is going to say, but I did comply with the bylaw, this isn't ordinary business. And the shareholders going to sue. And they're going to sue saying you violated your own bylaw, which is functionally a contract. You made a contract with the shareholders. You would include shareholder proposals on the proxy if they met certain conditions and you violated that contract. But here's the thing. I think the boards that voluntarily agree, the boards that put this in their bylaws and they say shareholders can make proposals, I think they're doing it as a sort of gesture of good faith, but as soon as it, yeah. yeah, right. It's like it's like yeah, they're yeah, they're they're not doing it because they're 'cause they're trying to, you know, curry a lot of favor. They're doing it just to kind of make the headache go away. Yeah. Yeah, they want to make the headache cut away or look good, but they don't like actually think anything valuable is coming out of it. And as soon as shareholders start suing to actually enforce the bylaws, they're gonna say, the hell with it. And they're gonna get rid of it. And every other company will as well. So I think it's like an unstable equilibrium because either the bylaw, whatever it says becomes just the board's ability to just say that no, and no one never dares sue them because they'll just get rid of the bylaw entirely. or somebody eventually sues and the board says, I don't wanna deal with the lawsuit and they get rid of it. Like I think that that kind of voluntary opt-in from the company is unstable. Right. Is right, isn't is not sustainable. See and I and I'm not sure it's gonna be a bylaw. I I I've always thought that share that companies could, you know, if in a world where there's no fourteen AA, you know, hypothetically, which now is potentially more realistic, would have just whatever discretion and they and they could they could publish a guideline the same way that they publish corporate governance policies, you know, about how we you know, organize our board and so forth. They could pr they yeah, go ahead. Okay. Yeah, but anything they say, they don't, yeah, but any guideline they publish, there's gonna be vulnerable to attack that you're not following your own guideline. And then it becomes a lawsuit again, or it becomes a headache again. And it's not even a derivative lawsuit, because they can't bar it in Texas with a 3 % holding. And, yeah, and. Right. no, that's right right. This is this is direct harm to the shareholder. Yeah. So then they don't publish a guideline, but then that's gonna be worse Why this proposal not that proposal and now shareholders are headlining? Did you see the proposal that they rejected? They're only rejecting, you know, they're only rejecting they're only accepting proposals that say boards We love you shareholders. Let's vote to see how much you love the boards best board or the bestest board You know, those are the only proposals all now So, I mean, I think they have to do something publicly about what they plan to do and that puts them in a position to be Challenged on a claim that they're not actually doing it Right. Yeah, much right. which is why it becomes a problem. Right. All right. Let's talk about shareholder reaction. When we talk about shareholder reaction, I'm not talking about just ordinary shareholders voting shareholders. my sense is that they're mo most of the ones we've talked about this, you know, big funds, indexes, stewardship departments and so forth. they like some, a few precatory ENS or ESG proposals. they're generally Yeah. not a huge fan of some of the ones that they've seen, at least the stewardship folks that I've talked. We've interviewed some stewardship folks here and I've talked a bunch. The voting shareholders, I think, are secretly okay with Well, you mean when you don't mean voting shoulders, you mean big, you know, passive index, those. Yeah, but I mean, but the pension funds are gonna be the pension funds are not going to be happy. They're all I mean, are that Yeah, right, right. The ones that the ones that vote on proposals on fourteen AA. well no the the th they're not gonna be happy as proposers, but as v there there's there's others be happy as voters. You don't think the New York City Pension Fund is going to be upset that it gets to... Think yeah, o right. There's gonna be yes, there are gonna be a few of those, yes, that like to express their views about companies through votes. But I'm talking more about the indexers. I'm talking about hedge funds. I'm talking of the the larger right, yeah. Yeah, right. Okay. Okay, right, okay. Yeah. Now the indexes, no, those, no, those, no, I agree. Those are not going to jump fall on their swords. But yeah, there are the pension funds, the union funds, you know, the state, a lot of the state pension funds, yeah. And some of the, so the same ones who filed the comments, the social responsibility funds, the religious funds, there are even going to be a few conservative-ish funds that like to use the proposal process and they're going to object to. There's a few institutions that yes, right. Right. Again, they like voting on this stuff. Right. Okay. Let's talk about what the ESG proponents are gonna do. Cause they're at least if you listen to them, they're in a world of hurt. This is this is this is an existential in the truest sense of the word, crisis for them because this is their lifeblood. If they can't submit fourteen A eight proposals to companies and have some assurance that they're going to Yeah. Mm-hmm. Mm-hmm. you know, be able to vote on them, they have nothing to work with. Or very little to work with. They could try to advocate and so forth, for, you know, one or another policy position. but they'll they're they'll really have a lot, especially if we get to this uncertain equilibrium. I like the way you put that. And they you know companies start to just not do this. They're gonna sort of take advan take advantage of this SEC rescission and just Yeah. and just stop entertaining the stuff. So so they have couple two, three choices here. Okay. one of them is is they could start to take their activism a step further, okay, and focus on boards or focus on bylaw amendments. Yeah. Yeah. Yes. Yeah. Well, actually before that, but yeah, I do want to talk about bylaws, but even before that, mean, because bylaws is really where I think you're right. That's where the action is. But the more minor things are like things like vote no campaigns. like they'll start. Yeah. Yeah. I I was getting there. That that's that's a for that's a form of a proxy contest where you're trying to but focusing on the board of directors and bo board elections. Right. Yeah, like they could go to the board and urge the board to voluntarily adopt bylaws that permit it and then vote no campaigns for boards that reject it. Or go to boards and say, I think you oughta just privately, you know, privately th or publicly, I don't know, they just they don't get shareholders' votes. Say, Look, I think you ought to do this this environmental report just to pick on something. And then when they d and then when they don't, they could say, We've asked, you're not doing it, so we're gonna start a vote no or we're going to campaign to actually replace one or another director because of their failure to listen to the stuff. well yeah, I mean they can. Yeah. But I think, yeah, but I think it's not going to be, mean, anybody can do anything, but I think that the, will be the best action, the most coordinated action will not be around, I want an environmental report at this company and I will make a noise if they don't get it. What they want is for these companies to restore access to the ballot. So that's like, yeah. yeah, yes. R right right. They they th th they may they may focus a lot of these ENS ones may take a year or two to focus on peer governance and this is a peer governance matter and start to advocate for this, right. Yeah, they're going to advocate for companies to adopt bylaws voluntarily that allow access to the corporate proxy and the boards that refuse to. That's when you have the vote no, maybe even an actual proxy contest. So they'll so they'll set aside their particular ENS policy stuff for a while while they're advocating for this. that's that's interesting. Yeah, right. Right. Okay. So there's and then so there's one other choice which I've heard a little bit about, which is doing a direct solicitation under fourteen A four. So well it's something I heard. Well, I mean I look I didn't invent it. It was invented many years ago. I I I I brought it to people's attention and Yeah, I mean, this is closely related. think that's what they're going to do. Yes. Right, and this is your thing. You're the one who first. You didn't invent it, but you were the first called the world's attention to. Because I thought it was cool when the mine workers went after Warrior Met Cole and then there were others that followed a couple hedge funds. We've talked about this in several pods. Okay. and that's a choice. That's something that I was v I was very curious why activists, ES ENS activists hadn't done more of this. It's you know, war the mine workers showed you don't have to spend a lot of money, you could be very effective, and they just didn't do it. And I kept thinking that a lot of these ENS Yeah. Yeah. Yeah. So. activists, ENS proponents were just kind of in a rut. That they that they're so used to, you know, pursuing fourteen A eight and they understand how the no action process works. They it just it's just a it's just a force of habit that trying to get them to do a fourteen A four something different was just just was they they they wouldn't they wouldn't look at it because they still have four well without fourteen A eight they I I'm thinking maybe they'd start to do this. Well this is Hmm. Yeah. Yeah. a potential change as well is I talked to at least one at least two lawyers I know who are cl know a lot of people as one of them used to work at the SEC and they've said that they're that the fourteen A four the proxy s solicitation notice has to do with precluding ENS proponents from using fourteen A four by essentially returning to some Fort of some form of the old bona fide director rule. See, but that's the part that occurred to me. But that's not the rule. The rudiversal proxy rule is not 14A4. right. No, I understand it's fourteen eighty nineteen. But but but but when they when they passed it, they basically made you know relieved any proponent under fourteen eighty four of like a precordatory proposal of needing to obtain consent from incumbent directors to appear on their own proxy. Yeah. Yeah, but that's right, but I don't think that, I mean, you would know better that the rule that says that is 14A19. It doesn't say, it's not 14A4. Right. Well th the and I see and so the the ch So what I'm saying is that like, mean, look, they can do anything they want. And it did occur to me that they would mess with 14A4 to make it so that shareholders couldn't do a proposal only proxy contest. But the reason I find that weird is because the note I would have thought if they were planning on messing with essential universal proxy by limiting who could use it, it would have been a notice about 14A19. That's the only reason I'm not certain because that did occur to me that like, there, because 14A4 has a lot of just Yes. They would have talked about fourteen eighty nineteen right. Okay. basic regulatory stuff about proxy solicitations, that is exactly the kind of thing that the SEC has been gunning for just to remove regulatory burdens. And since the SEC's argument is gonna be for removing 14A8, it's gonna be some version of if shareholders wanna do this, proposal, they should bear the expense, then it's very hard to square with, I'm willing to bear the expense and you're making it impossible by putting additional weird regulatory roadblocks in my way. Yeah. yeah. Maybe it could be that. Yeah. Like like like needing to get consent from the incumbent directors, yeah. Exactly. So it's antithetical to what will be the rationale. Shareholders who want to make other shareholders vote on this should bear the expense of it. I would have expected if they were planning on messing with that, that they would change 14-8-19. Yeah, but we don't know. But you may be right, because I worried about that too, that they're going to... That's how it would have been in it would have been in the regulatory notice. Well so anyway, so th that so and that's the rumor. That's what I at least two different people have told me. decap this alternative method. So let's just be clear, the alternative thing would be shareholders advancing a proposal only proxy contest. And the thing is, if they do that, if they limit ability to do that, they can't just do it for ENS. This would be a governance proposal. Let's be really clear what this proposal would be. But if you do that, also you anger the hedge funds, the real hedge funds who have actually used this a couple of times for financial. So it just strikes me as yeah, any any any proposal or any bylaw amendment. Right, yeah. Financial activists, yes. unnecessary because not a whole lot of shareholders are going to shell out the $15,000 or so for this kind of contest. They haven't historically, or more, haven't historically, and then when legally shareholders challenge the repeal of 14.08, the first thing they'll say is the SEC is lying about its reasonings. They claim they want to make shareholders bear the costs of their own proposals, and here they are taking away the one avenue shareholders had to actually bear the costs of their own proposals. Or more. Yeah. Yes. So it's just, could, absolutely, I'm not gonna put anything past this SEC to propose, but I find that I'm not convinced that's what's going to happen. It could happen, but I'm not convinced. So. All right. All right. Well so so so but if it doesn't, fourteen A four I think will be will be a lot more vibrant. Yeah. It doesn't. Yes. And that's where it gets interesting. Because here's what shareholders do under 14A4. They run a proposal only proxy contest, but what they're proposing specifically is a bylaw. It's a bylaw that once again allows shareholders access to the corporate proxy. They pass their... And now it's not precatory, it's binding. It's because every state, every state allows shareholders to propose and pass binding bylaws without... I don't want to say it. Okay. I haven't checked all 50 states, but the vast majority. Assuming assuming assuming the by assuming the bylaws assuming the the company's bylaws allow shareholders to move bylaws, which not all companies do. Yeah. No, no, no, no, no, no, Companies can't take it away. It is inherent in state law. Like the company's bylaws doesn't have to allow it. company can make a higher threshold, like a two thirds voting threshold or something. Like there might be limits on, I'm not even sure whether you can put that in the bylaws, you have to put it in the charter. But what state corporate codes do, and I shouldn't say every state corporate code because I haven't checked every state, but like what is a standard thing is to say shareholders have an inherent power to pass bylaws. Right. Yes. Right. What impedes shareholders ability to pass bylaws are one, that you have to like get it to shareholders some way, either through 14A8 or for the corporate board by running your own proxy contest. That's the first thing that impedes. And the other is that some shareholder proposed bylaws may not be legal under state law, but otherwise shareholders have a legal right to pass bylaws in general. So what shareholders are gonna do is they're gonna run proxy contests. where they propose a bylaw that will be passed by the shareholders that will require the company to include shareholder proposals on the corporate ballot under certain circumstances, replicating 1488, maybe even more restrictive than 1488, something like that. But here's the thing. But here's the thing. I think they'll start with how 1488 actually is now because that's how they get more shareholder votes. Like the institutions that otherwise don't want to weigh in or whatever, they're going to be very conservative. They're not going to be all shareholder proposed. They'll be very, very limited. Or less. Right, yeah. Yeah. Sometimes shareholders get access to the corporate proxy for proposals. But here's the thing. So then there's the question. Let's say shareholders circulate this. They pass a bylaw. The shareholders vote in favor and they pass a bylaw. Directors have the power to pass and amend bylaws. Now, I want to be clear because in Delaware, directors only have the power to pass or amend bylaws if the charter gives them that power, but every public company gives that power to directors, obviously. right. Right, yeah. In a lot of other states, directors have the inherent power to pass bylaws. So here's the question then. Shareholders pass a bylaw. The bylaw says, you must allow shareholder proposals on the corporate ballot. Can the directors just turn around and say, and get rid of it? They can amend bylaws too. It has happened before at Bank of America. This right, this has happened before though, because we're we're share we're we're the we're the we're the right, I was I was gonna say that, where the board reversed shareholder will and I believe there was litigation to th I th well I don't remember what happened, but I don't know about the litigation. Well, no, what happened was, don't know if shareholders ever did sue, the, okay, this is, shareholders passed a bylaw requiring separation of the chair and CEO rule. Later, a few years later, the board decided to get rid of it and combine them. Shareholders put up a fight, think some of them said, you may be right that some set in litigation, and then the company voluntarily agreed to put it to a shareholder vote again, and it passed. Right, yes. Fine. Right. putting the CEO and share back together. So we never, so here's my point. We never got an answer in Delaware, for example, of whether boards can just unilaterally get rid of any bylaw shareholder passes. In Delaware, there's a statute that says that directors can't amend a shareholder bylaw if the bylaw concerns the number of votes necessary to elect directors. So if I pass a shareholder bylaw for like majority voting, Yes. Directors can't say, and just get rid of that. But Delaware law is otherwise silent. So we don't know whether Delaware companies, like whether shareholders could theoretically pass a bylaw that says access to the corporate proxy, but also directors can't touch this bylaw. Like we don't know if Delaware allows that, but here's where it gets good. The Model Business Corporation Act, it's not a real statute, it's a model act that was You have to include you have to include pr proposal. wow. Yeah. Yeah. Yes. Right, it's it's right. It's created by, yeah, it's created by state commissioners as sort of a template that state legislatures can use. And more than 30 states have used some version of the Model Business Corporation Act. It's very popular. It creates a sort of very similar corporate codes across over 30 states. The Model Business Corporation Act says shareholders can pass a bylaw that prohibits directors from messing with it. And guess what state has that version of the law? Texas! Mm-hmm. okay. Probably Texas. Because when Texas went on this tear about anti-ESG, they did it very sloppily, as I like to repeat over and over. And one of the things they never touched was the fact that their own corporate code says shareholders can pass a bylaw, where the shareholders write in the bylaw, directors can't undo the bylaw. Now, we don't know how that interacts with Texas's new rule that if you're making any kind of proposal, not just any kind of shareholder proposal, you have to have wow. a million dollar stake or 3 % and you have to solicit 67%, we don't know whether that can be undone with a shareholder bylaw. Like it's very possible that if a shareholder passes a bylaw that says directors can't touch this, they could prohibit directors from adopting those limits that Texas allows them to adopt on shareholder proposals. Or maybe a Texas court would say, actually that supersedes shareholders bylaw. I have no idea, but it'll be funny. Yeah, three percent, yeah. wow. Right. I I ca I can't I I'd love to find out. Exactly, because the thing is that depending, like Delaware has a lot of public companies, but it doesn't have all of them. And in Texas specifically, shareholders can pass bylaws where it says in the code. They can put in the bylaw, directors can't touch our beautiful bylaw. So that's what's going to play out. Okay. And and well and that's and that's another answer to the question about how states are gonna handle this. All right. interesting. Assuming that, assuming that, yeah, but it's assuming again that I'm wrong and the SEC does try to get rid of universal proxy so that shareholders can't run proposal only proxy contests. Right. Now now let's let's be clear. That's a different podcast. I don't think universal proxy is going away. I Right, not in general. would be limited to, you have to... But if th th they may be changing the right, they may change universal proxy to limit this. But all right, go ahead. Yeah, to limit it so that you can you have to run a director camp contest. Although then I think how do you do that exactly? let's say the rule were changed. You have to actually be contesting directors. Does that mean that if I run it that let's say I care about bylaws? I don't care about directors. Okay, fine I'll put a director nominee on the ballot too. Like it just doesn't seem practical, right? Like so what what I care about is that you vote for my proxy but vote for my bylaw and then I'll run a director candidate so that I have comply with what it like it just they may Why not? Right. So I think you're right that like it's a real possibility that the SEC will try to make it so you can't run a proposal only proxy contest and use the universal proxy rules. But that seems like a lot of hoops to jump through for something that it seems like it would be more difficult than simply rescinding 1488. But I don't know. We'll Who knows? Right. So, God, this was this is a very thorough look at Michael's question. So Michael, if you're listening, I hope I hope you like the answer. Because we really kinda handle it from many different perspectives. So all right, but importantly we have to and we may be back here soon on this subject once the actual reg comes out, I suppose. And it and that could be could be in the next few weeks, I'm guessing. All right, cool. All right. once we see the actual proposal, right? And yeah, I mean, we'll see whether they... Yep. Let's let's let's look for that and in the meantime we will move on to other subjects. How about that, shall we? All right, cool. This is Shareholder Primacy, hosted by Ann Lipton and me, Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations. Anne is professor of law and Lawrence W. Demuth, Chair of Business Law at the University of Colorado Law School. You can find me, Mike, at the activistinvestor.com and Anne at law.colorado.edu. Okay. Thanks for putting up with our stuff here and listening to our answers to the mailbag questions and we will talk again soon. Let us