The new SEC proposal rules

Good morning Damien. We're gonna miss you. Sorry. Three, two, one. Welcome to what's this? A free float media crossover? Wow. Hey Ha ha. I love a good crossover. It's an emergency crossover. Yes. So I'm Mike Levin, activist investor. I live and work in Chicago. and we usually would have Damien with us, Damien Rawlis, who's a co founder of Free Float Analytics, but unfortunately he can't make it today. So anyway, instead we have yes, instead we have Anne Lipton, who we haven't heard from yet, but we will shortly. she's a law professor at University of Colorado who researches and teaches securities and business law. He's he's literally stuck on a bus. He's stuck on a bus. Why don't you take over, Ann? and we also we do have Matt Muscarty, the other co-founder of Free Float Analytics, coming to us from Connecticut. So, as listeners who don't usually turn into shareholder primacy, me and Mike Levin are the co-hosts of Shareholder Primacy, a podcast about activist investing securities law, and all the ways the financial and legal worlds intersect and collide in real life. Yes. Yeah, and it's also proxy countdown and business pants. It is like a tri crossover. and Damien's gonna miss it all on a bus. our tri crossover show for the week of September twenty-first, twenty twenty six. I don't have a tag team partner in Damian Rollis, but we this is sort of an emergency because there's big changes at the SEC. The they proposed some And Damien's missing it all to be on a bus. rule changes and we need to talk about it. but before we get into it, I'll I'll just say if you have questions for Ann and Mike, you can email shareholder primacy at freefloat.lc. And if you have questions for me or Damien, who's not here, you can get us at either Matt at freefloat.lc or Damien at freefloat.lc. We'll answer all your questions. Let's just let's jump in. And we do sometimes. Paul Atkins. Well, there's there are two other commissioners. We're missing the Democrats. There are three commissioners. Right. Keep your questions coming so that we can answer them on a future podcast. Ann and I keep promising that. So all right, Matt. Right. So this was your idea. So what's up? Let's jump in. Yeah, so this so the SEC well dude it it might be wrong to say the SEC, Paul Atkins sig s Yes, he's he's the he's the SEC. But yes, we can say this is probably pretty Atkins driven. is the big news is SEC token stocks. No, no, no, wait, wait, wait. That was the news. That was the news that well I saw 400 headlines about. because we tag for business banks, we tag 10,000 stories a month and I saw hundreds of headlines about tokenized stocks. I saw approximately three headlines for the big news, which is the SEC is proposing rescinding No, the different different one. Rule fourteen A dash eight, which to anybody who's not a wonk is the ability of a shareholder to send out a shareholder proposal. at w which i isn't, you know, like actually SEC sort of regulated ish. It's like this is the gray zone and I need I need a take here. Yeah, yeah, yeah. Yeah, so Yeah, so we need An we need Anne to weigh in. So at least to explain to you and me, the two lawyers who the two people in the room who aren't lawyers, a little bit about what they propose. So Anne, what's up? Yeah. Right. So you need to understand what 1488 is. What 1488 is, it's a rule promulgated by the SEC that says if you have a proposal as a shareholder and you meet various procedural conditions, you can have your proposal included in the corporate proxy so that it gets distributed by the corporation. The right, and that way you don't have to pay for it because otherwise you would have to. Print up the proxy statement and circulate your own proxy statement and collect the votes. You can just put it in the corporate proxy for other sheriffs to vote on. The right to actually make a proposal is supposed to come from state law. So if it's a Delaware corporation, then Delaware law is supposed to provide the right to make a proposal. What 1488 does is facilitate that right because you may have the right to make a proposal under Delaware law, but it's still really hard to do if you have to print your own proxy materials. So the SEC created 14AA way back in 1942, which is right after the Exchange Act was passed, using its authority under the Exchange Act. It created this rule that says if you're making a proposal that's essentially legal under state law, then you can have it included in the corporate proxy. And that way it makes it easier for other shareholders to vote on. So that's what the rule does. And it's been in place in SEC lifetime literally forever. Since since the since the dawn of okay. But that yeah go ahead. Yeah, I mean like well yeah I mean the exchange I mean the this SEC was created in nineteen thirty-four with the Exchange Act. By nineteen forty, they were already sort of discussing, you know, things about this rule. It was coming up, and they actually promulgated the rule in 1942. So essentially shortly after the Exchange Act passed, and shortly after the SEC was created, they created 1488, and it's been around ever since. Okay, cool. keep going. So so th the the proposal here is to basically rem remove the burden from companies to print on the proxies that they send out a shareholder proposal, right? That is what the res the rescision is. And force any shareholder proponent who wants to do a proposal based on state law, whatever state you know or jurisdiction Exactly. w allows to have to print out their own proposals, get the list of investors, send them to all investors, and then like I they have to tabulate the proxy votes. Collect the proxy votes, etc. I'll go to all that expense. Yeah, just like just like in director just like in director elections. You got it right, exactly. So so so would for there's there's I have a bajillion questions, one of which is the logistic question of does that mean that like I mean this clearly targets I mean it's designed to sort of target the ability of the as you sows and the sort of environmental activists, right, to to stop g doing proposals at all because they make the burden of paperwork so great. It's like death by bureaucracy. The burden of paperwork is so great and so expensive that they can't do it. Yes. The yeah, the E the ESG community. Right. Yeah, yeah, yeah. Yeah. Yes. combine this with the thirteen D and thirteen G D and the 13G yes. I mean this is yes. So this is like, you know, it's sort of I have i it's it in many ways this is general war on ESG, but it's more than that. It's like it's an attack on shareholder rights under the guise of ESG. you know, somewhere it it it's I think part of this is coming from we don't like ESG. We don't and we also don't like the fact that shareholders sometimes favor ESG, and so we'll just quiet the shareholders. I mean, that's you know, so it's coming from a lot of different places and and You know, there's sort of a marriage of people who just want boards to not have to worry about pesky shareholders and people who know are all about I I hate climate change resul resolutions. But like unir unironically, Atkins in his speech like a month and a half ago, maybe, maybe it was two months ago, I basically identified John Chevedon, who is not an ESG proponent. He is a corporate gadfly. He is a very G proponent. It's like ninety-five percent of his proposals are things like, you know, majority voting and the right for shareholders to call a special meeting. I have a quick go ahead, Matt. Yeah removing dual class shares or declassifying boards, like really basic shareholder rights. He c governance reform, right? He he Atkins targeted Chevedin in his speech as a proponent who is like the most prolific proponent and then proposes this rule. So it's like the war on ESG is almost a gaslight on top of a gaslight, right? Lot a lot of governance reforms. That's what he's interested in. Yeah. Yes. It it I mean, these two things these two trends are melding. There, I think, and that's, you know, you see the war on proxy advisors. And it starts with it's about ESG and then it becomes about shareholder rights. And I think that what we're seeing is there's sort of a first of all, you have an alliance between the people who just politically are opposed to ESG and the boards that just don't want to be bothered with shareholders. So you have that that kind of alliance. But there's also just like this idea that if the public if the voting public, and in this case the voting public are shareholders, but the same idea, if the voting public favors ESG, If we've seen that and we see a growing trend, then we'll just silence the voting public across the board. Right. All right. So I have a quick question about w you started saying procedurally kind of. so the SEC, I think it was just last week is when they and we'll talk about the actual process in a moment. But the SEC kind of sent out this it was a draft of these regs, I think is is the current state. It's not like it's official. It's gonna take some time. We can talk about that in minute. The the draft itself is like Yes, it's a draft. They're double spaced. two hundred and thirty or two two hundred and forty pages. Okay, great. I didn't read it yet. I'm probably I d I don't know. So you can save me a little bit of time, at least respect to the fourteen AA part. We'll talk about there's a element of this related to fourteen A four that I think is really interesting. Right. That we can talk about a little later, maybe after a break. But we'll get to that in little bit. But the fourteen the rescinding fourteen A eight part of this. Yeah, there's it is another aspect too, yeah. That that gives the game away, yeah. Without reading all two hundred p goddamn pages, is it basically just rescind, wipe it away? Is there there's nothing more and maybe conform some other parts of the reg to its absence? So it's just just just it's cancel culture for SEC regs. Okay. So it's so it's that it's that straightforward. Just rescind fourteen so it's like it never like let's w let us never speak of it again when th when they're done. Okay. Yes, yes. Yes. Mm-hmm. I mean it's corpor it's it's gerrymandering, right? Yes. go ahead, May. So well, I I've thought like background wise, I have a sort of a constitutional question because Atkins' stated reason for removing rescinding just the deletion, right? Like the stated reason is it was not in what Congress passed in nineteen thirty-four, right? Like that's the stated reason. But like f first of all, shareholder proposals have existed since English joint stock. Right. Companies. you know, like so we're talking like 17th century. Like there's plenty of precedence for this in capital markets. So so that Congress didn't pass it. Congress also didn't pass the over 2,000 other administrative paragraphs. So how do we I mean, like, isn't this on its face already sort of a just a comic gaslight? Like, there's nothing here. Yeah. Yeah. So I can explain so the history. So you have to understand like the I first of all, the SEC can only promulgate rules that are authorized by Congress. We'll start there. So the idea here is that the argument is that it wasn't authorized by Congress. And certainly the rule is it's developed it wasn't authorized by Congress. And remember, they're not claiming that shareholders don't have a right to make proposals. That comes from state law. They're claiming that shareholders shouldn't have a right to have it included in the corporate proxy. And the argument, now I just to give some of the history here. So the Exchange Act, what the actual Exchange Act says, is that it's unlawful for a person to solicit a proxy in contravention of SEC rules that the SEC may prescribe as necessary and appropriate in the public interest. That's really broad. That sounds like the SEC has a lot of authority to make rules in the public interest for proxy solicitation. And there's a Senate report that says, Yeah. That the point of all this is to make sure that the shareholder has adequate knowledge as to the of of of the manner in which his interests are being served, and that it's too often that proxies are solicited without explanation to the stockholder of the nature of the matters on which authority to cast his vote is sought. So the idea was that shareholders are being asked for proxies and they don't know what they're voting on. And the whole point of the rule originally was if a shareholder is gonna go to the meeting and make a proposal. And the company knows that, then the company has sort of an obligation to put that in the proxy material so that everybody knows it. Otherwise, you're kind of misleading shareholders about the nature of the meeting. That was the idea about the agenda. Exactly. So that was the whole idea of 14A8. But now what Atkins and the SEC are saying is that the actual definition of what an exactly a shareholder is allowed to propose, like what state law would authorize. Or ab about the agenda. Right. Is really unclear. The SEC essentially made up the idea that precatory proposals, non-binding proposals, are legal under state law. But it never really consulted the various states to determine that. It just kind of made that up. It just kind of assumed it. And by assuming that precatory proposals are are permitted under state law, they essentially created a right that wasn't necessarily found in state law. And then this whole Apparatus built up around precatory proposals that really isn't rooted to the fundamental question, which is, are you in fact allowed to make this proposal under state law? So the SEC now says, well, let's just get rid of the rule entirely since it's become this edifice for precatory proposals, and we never really check with the states to make sure that precatory proposals are authorized under state law. So that's the theory. Well That that that sounds like he could make four phone calls and actually figure that out. Like it's like Well, I mean th there's there's a there's actually an emerging debate among both practitioners and scholars about what state law provides for for precaution I'm just saying there's a debate. there's there's people on both sides that say Delaware does allow it, Delaware doesn't, Delaware's silent. Yeah. Well, there's there it's there's a debate there did no there there there no there is a practitioner who represents companies that argues who you had on the show who argues who has been very and as I understand it has been sort of publicly you know gone back and forth, but basically he's been making this argument. So he made this argument in an article that precatory proposals are not in fact permitted under state law and under Delaware law. So Atkins Right, who well who and he's been a guest on our he's and he's been a guest on our show, yes. The understand history here. So Atkins seizes on this article and runs with this idea that Delaware does not permit precatory proposals. Atkins goes to Delaware, speaks before like the entire Delaware legal establishment and says, you know, I don't think your law allows precatory proposals, and you should make that clear. Then in the enforcement of 1488, before proposing that Hilber scind it, he makes this he Paul Atkins and the SEC make an announcement essentially g to companies. Come to us. If you get a precatory proposal, come to us and argue. He invites it, argue that it's illegal under Delaware law. And if you do that, we will run with it. We will either decide that you're right, it is illegal under Delaware law, or we'll go to Delaware and advocate for you that it's illegal under Delaware law. Help us, Atkins invites companies, help us come to us. Tell us that this is illegal under Delaware law, and we will help you make sure that Delaware is clear on that. So this is what he invites. You know what happened? Delaware did not say anything, and not a single company, despite this invitation, not a single company came to the SEC and said, you know what? I think precatory proposals are illegal under Delaware law. No one wanted to touch this. So now, without a single company taking Atkins up on this invitation to help the SEC establish that non-binding proposals are illegal under Delaware law, not a single company takes Atkins up on this. Now Atkins says, Wow. Actually, we don't know if non-binding proposals are legal and therefore we'll we'll rescind the whole rule. But here's the thing: you know what actually is legal under I think every state's law? Binding proposals, and specifically bylaws. Those are shareholders have an inherent right under just about every state's law, as far as I know, to make bylaw proposals. Does Atkins propose changing 14A8 so it's just what we know shareholders can do? Bylaws? No. He wants to rescind the entire rule. Right. Right. And that's th th go ahead, Matt. Sorry. I mean what po I mean who's I guess the question is then like who who sues? Because like first of all what's the next you know like I have a question about like you know there there's gotta be activist investors here who are using the process of shareholder proposals in order to actually make a bylaw change to allow them to get a board seat or to change you know like it's it Exactly you you have to couple Yeah. Yeah, w what what's what's the what's the next steps? That's a really good good question. Yeah. Mm-hmm. Absolutely. I did Matt, I did that two years ago. I used fourteen A eight to to try to promulgate a bunch of bylaw amendments, which I was allowed to do. Yeah. And he's effectively using a logistic mechanism to remove shareholder proposals entirely from the corporate suffrage question, right? Like but From from the from the corporate ballot. But it's the same it ends up being the same thing in some ways, right? Because like like the only shareholders like in Texas you can't you know, like they they changed the exempt solicitation rules so that you can't do an exempt solicitation without at least five million I think it's three or five million in in in in assets, right? Like Three. Or three percent. They to get rid of the exempt solicit. Well, th yeah, they wanna change yeah. You can still you can still yeah, you can you can run you can run your own proxy contest with a proposal, with only a proposal, a zero slate contest. We've seen a couple of people do. but it's expensive. It it's several thousand dollars minimum. It's expensive. Yeah. Like so so like you you've removed you've effectively removed like an entire voice of shareholders and class of shareholders from the process, right? Like and you favored like unironically s in some ways, the fact that they are attacking BlackRock for being too ESG. You favored BlackRock and State Street and Vanguard, who are passive indexers who will never ever put a proposal on a ballot anyway, and they're the ones with the massive resources to do it. Yes. Yes. Right. Right. The only ones left then are activists. So so Mike, like this lands kinda in your lap. Is it activists who sue the SEC saying, No, l look, fourteen A eight is is d a primary mechanism by which we make bylaw changes, or do activists just say, No, whatever, we'll send them mail? Right. Well, th that's that's a really interesting question. There's two or three dimensions to this about what and and Anne and I talked about this at one point when we were anticipating this. And I don't think anything has changed, Anne, about what we were speculating based on what we saw from well, one thing has, that's the fourteen A four thing, but we'll talk about that in a little while. But nothing's changed about what we would think the various players will do based on what we saw in the fourteen eight A Hmm. Rescision announcement. So again, financial activists, whatever, this does not trouble them greatly because they don't really submit, they submit very few precatory proposals under 14A, or really any proposals under 14A8. Okay. Right. Though Anne had a very interesting initial take, was that there will potentially be Any proposal. If it's by law change could yeah. a number of proposals about proposals. By l proposed bylaw amendments about proposals. Yeah. I think that yes, so I think that's what's gonna happen. Well, I mean, I think there are gonna be lawsuits, but aside from the lawsuits, I think that you will see shareholders who do have the resources, and there are few, you know, shareholder interest groups, things like that, will circulate their own proxy materials to pass bylaws at companies to require essentially access to the corporate proxy under probably conditions similar to the current 14a8. In other words, Have it be the company voluntarily, I mean voluntarily, not necessarily because the board agrees, but because shareholders pass a bylaw, which they can do, saying we have access to the corporate proxy under XYZ conditions. Right. Though though there's a timing aspect of this, which we'll talk about procedurally in a minute, where there's a chance that the SEC's rescision will take more than like sixty days. Because of litigate whatever, but what r right. Yeah, well it it yeah, there's a sixty-day there's a sixty-day comment period, and then there's gonna be a period where they have to actually, I assume, actually rescind it and they have to put out a release pretending that they took the comment seriously. so it'll take some time. Do we have do we have to lie about this? Right, right, yeah. They I mean th right, so it's good. Yes. Yeah, we talked about that too last time. Is that is that the the SEC the SEC typically does read and they absorb and they deal with the comments, but our feeling is that the SEC is not going to really pay much attention to whatever comments they receive here. So I like the pretend part. Yeah, I mean I I'm sure I'm sure like the analyst Jane in Sector seven G is reading it and like actually takes it seriously. But I'm not sure Paul Atkins, yeah. Yeah, no, no, but not not n I I Paul Atkins has been gunning for this for a while. I mean, i it's just the whole thing is so silly. Like one of the things in the proposal, by the way, is he wants to rescind 1488 for investment companies. You don't you don't talk about it much, but occasionally mutual funds get a proposal on for the mutual fund investors. The thing about that is that that's not governed by state law. Remember, the whole edifice of this is we are interfering with state law share. We are making up a right to submit proposals that doesn't exist in state law. Well, investment companies, it's completely different. Like that voting is completely governed by federal law. It's all federal stuff. Yeah. Right. Sure. And so that you would think, well then we should keep fourteen eighty eight for the investment companies, right? Since it's all federal law. Nope. We're sitting there too. No I I I I have one last before we go to break, I got one last sort of logistic question because you know, and Mike, you mentioned the sort of the the logistic the logistics of this, you know, sixty days of, you know, but you know like how advanced notice bylaws all work and how like the submitting a proposal tak is like you know, n ninety is a months before it actually comes out. No, right. So Yeah. Yeah. Yeah. So there's been there's been a lot of speculation that the whatever rule changes are made, they won't take effect for the next proxy season. I which would mean that if shareholders want to put a save the proposal pot thing on the four on the ballot under 1488, they might be able to slide it in. but I honestly I I I just I don't I doubt very much Atkins wants to see this proposals in the next proxy season, so it wouldn't surprise me. I don't understand Right. Well, the the companies he gave them the no action ability, right? Like they're not gonna they they basically can no action everything if they want. Yeah. And right, so that you can just sue to force it on the ballot. I mean, at this point, I I I think until whatever lawsuits get resolved, which there will be, you know, the shareholder tactic of choice here is gonna have to be circulate your own own alternative proxy materials. And there are some nonprofits that have the money to try, at least once. Yeah. Which w which is which we've seen before. It succeeded wildly for the few proponents that won at least the one that did it. And the SEC in a very, in my view, clever and resourceful for SEC way, in addition to essentially for fourteen A eight, you know, they didn't eliminate They show they just made it a lot more costly for proponents to do it. Well similarly, for the ones where they do want to do a solicitation themselves, they made that really hard too. Yeah. And I'm I and I just wanna throw in just one more thing. I'm so sorry. And we'll talk about that exact change and but there's just one more point I wanna make on this. One of the SEC's justifications is they wanna have private ordering that instead of the SEC forcing all these proposals onto the corporate ballot, they are inter they wanna see corporations right corporations choose, you know, like they'll decide with the if the corporations right if it's right for the corporation, they'll allow proposals on the corporate ballot. Yeah. Now, the problem with that argument is the corporations can do that right now. There is nothing stopping corporations right now from adopting a bylaw that says actually shareholders can only make proposals under XYZ conditions. And there's a really good argument that that would be legal for corporations to do right now. So the SEC's response to that is: but yeah, if they do it right now, they risk backlash from shareholders and proxy advisors. Right. And therefore we have to protect them from that backlash by getting rid of 1488 entirely. Which is w why why is it the NCC's job to protect companies from backlash from their own shareholders? I mean that the Right. Now that's a that's a very good point. And that was th go ahead, man. I mean I I'll I I mean look, you know, finish the thought, Mike. Finish the thought. Well, I was gonna say that so the you mentioned the proxy advisors, because that's also one potential your reaction to this, is that potentially potentially proxy pro proxy advisors may take I saw somebody say what's what are proxy advisors gonna do? Are they gonna start to oppose directors? Are they gonna recommend votes against companies in if if if they if they kinda handle shareholder proposals too roughly? And they may, I don't know. So Well not if the SEC regulates them out of existence. Finally. That would be lovely. Let's do it. Yeah. Well I I they might but don't forget like the SEC right now and ev the entire federal government and every conservative state is is trying to legally destroy the proxy advisor industry. So we'll see whether that happens. Right. Right. But but there there there's like a final sort of logistic thought that I have, which is like, let's say 14A8 gone entirely. We're two years from now. There's no shareholder proposals except via mail, right? The process by which you do a shareholder proposal is still like months in advance. You need to go through, jump through hoops. It's there's like a whole process. You have to comply with all the bylaws, you have to do all the stuff, right? Which means the company is aware that what exactly is gonna be proposed. They know everything that's coming. Yeah. You have to you'd have to comply with the advanced notice bylaws of the company. Well, no, no, that this is this gets this gets to the change that the SEC is proposing to make. Right. Right. Right. The it's all. So so when they print their proxy without the shareholder ballot, they're gonna print something like, you know, a shareholder has submitted a proposal for the meeting. Right. Yeah, the fourteen eighty four, right. And and to to be to be I mean, just to mention it though, the ESG proponents that submit proposals under fourteen eighty eight today have to submit them four to five months in advance. Yeah. And so the companies, you know, obviously know what's going on 'cause they put it in their proxy. So th the the advanced notice bylaw hurdles to get it onto a annu annual meeting agenda in a proxy tend to be a little more detailed, but not that much more than what they have to submit f under fourteen A eight. Well, I mean, right now they're designed for direct Yeah, well right now they're designed to for director contests. So they're like, who else are you invested in and so forth? They'll they'll write a whole they'll whole write a whole separate bylaw that's designed specifically to make it difficult for ESG because things like what are your other interests don't really count for, you know, if it's not a hedge fund. Right. Well and there's this y usually under the bylaws there's a separate Conceivably, yes. Conceivably they may do that. Right. Alrighty, we c go ahead, man. Yes. But but to to take us into the break, right? the the then so they put on the proxy and I'm like fascinated by this from a purely like cause I just read proxies like all day, like this is what I end up doing. They're gonna write something there. and the shareholder proposals are always driven me nuts because they are precatory and I always feel like, you know, like I like w and they they could be binding. What are we doing? This is so dumb. Even director votes I feel like are dumb because it's like half the time they you submit a resignation, it gets rejected anyway, like Yeah. Yeah. Right, yeah, right. They don't have to be, they can be pilots. So th my mind I'm thinking like what's gonna be in the pro what am I gonna read? And Well well I that is what that's what comes to the other change that they're making. And that's and and and that's what I wanna know. So let's go to a break and we'll talk about that. Right. Okay. And we're tak here here at shareholder primacy and proxy countdown and business pants, our crossover. we'll be back shortly to talk about the other big change the SEC proposed in shareholder proposals. This is great. Man, that gets me all fired up. I know. Alrighty. do you want to bring us back in, Matt? Right here? Sure. all right. Welcome back to Proxy Countdown, Shareholder Primacy, and Business Pants. I'm Matt Muscardy. I'm here with Ann Lipton and Mike Levin. Damian Rollis is on a bus missing the greatest wonky law-ish. I would call my s my part of the conversation law adjacent, but I'm getting a schooling from Anne. let's talk about the other big change. We ended the last segment by talking of like I had the question of All right. Lay, lay law, lay attorney. What am I gonna see in the proxy now that they've rescinded the thing? But there was another big change to rule fourteen A four. So let's start Anne, can you explain what the change was and how I should understand it? Yeah, so this so this the way the rules work before so what the SEC is anticipating is that a lot of the energy that or at least they're claiming this is what's gonna happen, that a lot of the energy that goes into fourteen eight proposals now is gonna go into these zero slate proposal only proxy contests. We've only seen a couple of them, but that's what the SEC is saying, that like all these shareholders can now run their own alternative proxy contest. Well, right now, under current rules, the way it works is I'm a shareholder running an an ul a proxy contest just for a proposal, like the United mine workers. My right. Right. So no d no director elections. Right. You're not you're not voting for directors, right. So I put out my own proxy materials and my own proxy card. And on my proxy card, I list everything that's on the company ballot, the directors that are up for election, the auditor ratification, all those items. And then I also list on my ballot the proposals that I want shareholders to vote on, and I send that around. The company, theoretically, has none of the has all the normal stuff on their ballot, but not the proposal. It's not on their ballot. That means I'm a shareholder. I have to return one ballot or the other. If I want to vote on the proposal, the only ballot I can return is the proponent's ballot. Even if I want to vote no, if I return the company ballot, there's the proposal's not on it. So the company can't vote my shares no, even if I want them to. I have to submit the card to the proponent if I want to vote on this proposal, yay or nay. And that gives. It's not there, right. Now that is that that is an unbelievable advantage to the shareholder that's proposing. That's a big and that Mike is talking about that that is an advantage to the proponent. Why is that a pr advantage to the proponent? You know who's voting. You know you Yeah. Yeah, you see and it's more than that actually. There's another aspect to this. I don't understand the technicalities of it, but apparently there are some weird rules about what happens for mismarked ballots. And if a ballot is mismarked Because you c you control you know who's voted, you know how they're voted, you know whether they're voting on the direct I mean you you you basically grabbing some control of the proxy solicitation from the company. Yeah. You become your own proxy solicitor, right? Like you be Yeah. Yeah. Yes. You get some discretion in how you vote the card. So whoever has the card has control. So it's a real advantage if all if the shareholders are essentially being funneled to a proponent away from the company. So what the SEC wants to do is make it so that if the shareholder returns the company card, the company can vote on the proposal. In other words, vote no. But they want to come up with a way of doing it without. Mm. Actually, having the company describe the proposal in the materials or give the shareholder an actual vote. Because if they do that, like one way the company can do that and has done that in the past, is say, all right, fine, we'll put your proposal in our ballot after all. But then you've just replicated 1488. You've put the proponent's ideas in the company proxy. Right. And you've done it in a in a broader way than what fourteen A eight provides for. This is a good time to mention what happened to remind everybody what happened at Warrior Met Cole with the mine workers. So the mine workers said we're gonna go solicit our own proxies, not for one, but for for five different proposals. The SEC under fourteen eight eight limits you to one. And they were right, and then they said we're going to Yeah. For just for proposals, right. Right, fourteen eighty eight? Yeah. Right. Yeah. If you're per proponent, you can only have one. w the mine workers were able to put in detailed descriptions, not limited to five hundred words the way fourteen eight eight limits you. Okay. And they could put in whatever five proposals they wanted without any of the exclusionary threat from the SEC. So they and and Warrior McCole was kind of cornered. And they said, okay, either the mine workers are gonna collect all these proxies, or we have to include all five proposals as written on our proxy. And they chose the latter path. And that's exact right, exactly. So to prevent companies from feeling like they have to include the proponents' proposals in their in the company proxy materials, which just ends up replicating 1488, but broader, the SEC is trying to come up with a way so that if you return the company card, that gives the company the ability to vote no on the proposal. But they want to do it without the company actually having to describe the proposal or give the shareholders an actual chance to vote. So the rule they came up with was this is what they're proposing, and this would be the amendment to the amendment at 14A4, is that if the company gives a bare bones description, there will be at the meeting a non-binding proposal on climate change. And then if the company says, if you return the company card, we're gonna vote no, but you have a checkbox on the company card where the shareholder can say, Don't vote no. Not vote yes, but just don't vote no, then Right. Right. Right. The company can take the shareholders' return of the company card as permission for the company to vote no on the proposals. And the best part about this is it gets to exactly the heart of why the Exchange Act was passed in the first place. Remember that Senate report I quoted? The whole point was that they didn't want shareholders returning company cards without knowing what they were voting on. So now the SEC is trying to come up with a way that to include just enough information in the corporate proxy. Right. That you can't say the shareholder is completely in the dark about what they're voting on, but not having full information either. I but that like that that's like the opposite of fourteen A. Like the the the entire intention exists, correct? Right. Okay, Carmen. It's the opposite of ex it it's why fourteen eighty eight was passed in the first place. It's why fourteen eighty eight was passed in the first place so that shareholders would know what was going to be at the meeting and what they were returning their cards about. Yeah, so so th I mean this there's like the it's very clearly that ac like Atkins sat down with like I I I I don't even know, like some, you know, some legal evil legal genius and said, How do I circumvent every possible law to empower companies to ignore shareholders? I mean that's what it th that's the end state, right? Like and and this is very much a boon for both Well, the business round table people, probably. Oil companies and Texas. The number one and number two US companies by shareholder proposals are Exxon Mobil and Chevron. And it's not close, right? Exxon, like in the last twenty-six years, has had over two hundred proposals just at Exxon, right? So this is very much a gift to a few oil giants, but otherwise all SP five hundred companies, right? Like it's Right. But to yeah, to be fair with the oil giants, they're reincorporating in Texas, where Texas passed it rem is passed its law to regulate shareholder proposals. Now that law is weird and it's hard to understand, but read the way I think corporations want you to, this was Texas saying. Remember, you can only make a proposal if it's legal under state law. So Texas was basically saying, well, you know, we're gonna make it ill not illegal, but much harder under state law. Hard, yeah, really hard. Which means it's a boon for the oil companies and a boon for Texas because of Dexit, right? Like the like trying to force companies out of Delaware where you might have a ver it's a race to the bottom. You might have slightly more rights. ja Well, right. I mean remember, you throw this on state law, like leaving aside that shareholders have to write their own proxy materials and circulate them and so forth, then now we get it the hope, the SEC's hope, is that states will start actual and By states, they mean Delaware, will start actually saying, Well, you know, I don't know if these shareholder proposals are allowed. Because remember, when the SEC invited companies and invited Delaware to say shareholder proposals are not allowed, or but non-binding proposals are not allowed, no one took them up on this invitation. So now he's gonna force the issue. Right. So so he's got what he's basically doing some sort of v vague legal jiu-jitsu like karate kid moves, to figure out how to empower companies Right. To put some information on a proxy with no like ability to actually know what the information is so that the company can vote, to push companies to redomest domicile in Texas over Delaware, unless Delaware changes their rules so that you know all of this is more difficult for investors to begin with. I but he's doing it all under the gaslight of all of the all of this was never passed by Congress in the first place. So it's all vague. Exactly. doesn't answer the question of how every other rule wasn't passed by Congress. When you read the actual like Securities and Exchange Act Well, th there there because well, the argument is that the Exchange Act proxy regulations was supposed to be about disclosure and 1488 ended up being conferring a substantive right on shareholders. and that I mean that's and that's why it now to be fair, right after the SEC adopted the rule. There were objections even at the time that this went further than just disclosure. There were congressional hearings on that. A couple of conservatives proposed a new statute that would overrule 14AA, what was then 14A8, and it never even reached a vote. And the chair of the SEC went and testified and basically said, no, this is a disclosure rule. This is a disclosure about what's gonna happen at the meeting. And the whole point is to make sure that management can't. Take more rights than they have under state law by controlling the meeting agenda, even when state law would allow shareholders to put items on the agenda. But the argument that somehow this is a that this is more substantive than anything else the SEC does under the Exchange Act. I I I mean that's just, you know, we have the universal proxy rule, which is very substantive in terms of how directors are getting elected substantively. We have, as you said, the 13D, 13G interpretations, which were meant to stamp out. ESG engagements. I mean the SEC is making rules that end up having a lot of substantive impact all the time. So the idea that 14A8 is somehow special in this regard, it's it let's just say that it is especially because remember, shareholders absolutely can pass bylaws, and they're not proposing that as that 1488 be limited to bylaws. It's not quite it But I I mean fourteen eighty eight in and of itself, and this is where it gets like so head spinning, has like there it's been litigated, right? Like the like so it it was in front of Congress, SEC versus Trans America, they upheld it, right? Like and that was nineteen forty seven. Yeah. Yes, and so right. So that was in 47. You're exactly that's what well the SEC's argument, and I'm honestly not sure they're wrong. I don't know, is that it wasn't squarely presented. So there's this line understand 148's been litigated. Most of the time when it gets litigated is arguments about whether a proposal was okay. There aren't that many cases, and the vast majority of them are just, is this proposal meet the rule? Not is this rule in general authorized. So in SEC versus Trans America, that was again most of what was going on, like whether or not the proposal was proper under the rule. And in that context, the S the court, the Third Circuit, said, we have no doubt that it was within the SEC's power to promulgate this rule. They said that. But the SEC's argument, and I'm not sure they're wrong, is that no one was really making the argument for it. Like that's just a thing they said off but nobody was actually presenting evidence that this rule was unauthorized at the time. So therefore, we can revisit the whole thing. All right. So now it's worth noting w how how will this s this this one's gonna go through too. It's gonna have to. I mean if the if fourteen eighty eight happens, this one's gonna happen. Though there's another th th this one is more concerning in my view, even than the change in fourteen eighty eight. Which the fourteen the fourteen A four, the vote on things that yeah, thing vote on things that aren't actually yeah. If they give a bare minimum description of what the alternative proposal is and they give you a checkbox that says, Don't vote no on my behalf. Yeah, and and and also it would be one checkbox. So if there's more than one proponent out there, you can either Yeah, fourteen eighty four. Yes. The d basically the con conferring discretionary authority on companies where they don't have it right now. Yes. I I or don't or don't don't give me the discretionary authority. I d don't want to give discretionary. give discretionary authority for all of them, in which case they're all gonna get voted no by the management, or none, but you can't, I like this one and not that one. Well Well no one's gonna understand what's going on. And point here is also to make it as hard as possible like he if you assume that somebody who's running a proposal only contest, a zero slate contest, Right. Right. And and I think that the the checkbox thing is is absurd. No one's gonna I mean, no one's gonna understand what's going on. So Right, yes. Is not necessarily gonna try to solicit everybody. They're not gonna go after every tiny retail holder. They're gonna, you know, they're they're gonna only have the money to really publicize to a limited extent. So I think part of the hope here is that your average, you know, retail holder or small shareholder won't necessarily realize that this proponent is out there and not realize what's going on. And another change that they're proposing feeds into that. They wanna make sure that if the company knows that there is a zero slate contest. The company doesn't have to file a preliminary proxy. It only files the definitive. Because if you file a preliminary proxy, that's another signal to shareholders: by the way, there's something contested out here, and they want to make it so that for zero slate, for zero slate contest, they don't have to file a preliminary proxy. And that will again essentially make it harder for anyone running a zero slate contest to get their message out. Right. So here's here's my big problem with this. Well, I have two. First is I th I don't like what it says about how the SEC is kind of working here, but that's a broader question. Okay. Here's here's the here's the issue for as we'll say financial activists. Okay. Plenty of times you'll start to do a project for like a proxy contest for directors. And the only thing that you're advocating is vote for my directors, not for the companies. And that universal proxy kinda equalized that. And as we've talked about and you and me on the show, that universal proxy has made some meaningful chang meaningful improvements in how shareholders are able to work there. Okay. Also it in Well, right. They this they they and let me clear the the SEC distinguishes that rule on the ground that well shareholders have an unquestioned right to elect directors, but they also have an unquestioned right to pass bylaws. And they're not putting anyway. But an SEC administrative rule that wasn't in the original text of fourteen A. no, no, right, absolutely. Right. Right. Well, so here's here's the problem, okay? Frequently I'll work on a project or I'll do an engagement, or there'll be other activists that are not only nominating directors, but also putting other proposals, bylaw amendments, precatory proposals, whatever, on the same proposal, the s the same notice or the same AGM as the director. They're doing them all at the same time. Okay. Ballot, yeah. Same ballot, yeah. nominations. So like, you know, we'll say we want to remove these three dire I I I'm I don't want to go into the it's not important to it. But frequently an activist will want to move other proposals, precatory bylaw amendments, whatever, in the same AGM and therefore using the same proxy materials as the director nominations. And I think this will confer discretionary authority on the company for the proposals unless you check that box, okay, which will then make life a lot somewhat harder for the proponent. Yeah, okay, you know, 'cause it's possible that you know, we're doing a bylaw amendment to expand the board and therefore our you know, we're nominating four people when or something. You know, so anyway, so you sort of get the idea that this will make th th this is this is one of the first instances I can think of in the past couple of years. yeah. Yeah. For e for even people who are running, yeah. Where a lot of what the SEC is trying to do is not to try to go after, you know, individual ESG proponents or the whole ESG community where this'll have some sort of blowback to you know, me and others. Mm. Yeah, well we'll see. I mean the comments they've got six people people have 60, there are already a couple comments out up there. There's 60 day, yeah, there are 60 day I and there are comments I know they've gotten that haven't gone up yet. I mean, because it takes time to post them. they've got a 60-day comment period, and usually the serious players who are like heavily lawyered come in at the very end of the 60 days. there are? interesting. Yeah, okay. Okay. Yeah. So so this is th this is this is some cause for concern, at least where I sit. So it Yeah, Mike, would you be concerned if I mean, hypothetically, right? Like if i universal proxy access allows for a proponent, even if it we think of it as we I mean, look, every norm that we think of seems to be up for grabs at this point. So if we think of it as a right, an unalienable right for you to you know, submit and elect a director, but universal proxy rules are Sort of, yeah. Yeah. Just an administrative rule here. And if you are putting forth directors, what's to say that a company couldn't write on their prox on their proxy? there's a shareholder who has nominated several directors that are not included on this proxy and give you the check the box. It doesn't, it it's like not the intended thing that they're doing with 14a8 and 14a4. Right. Right. Yes, they could there there could be an amendment to fourteen A nineteen, which is the universal proxy card rule, that starts to go in this direction. So far they haven't shown any sign of it, but it's But isn't it just an extension? One clever company tries it? Right. Yeah, I mean, they haven't they haven't shown any sign of d yeah, I mean, like that's the thing. Like that administer controlling what's on the ballot, which is what proxy regulation does, does have this effect, and which is why this idea that, well, 1488 is somehow more substantive than anything else is just, you know, it th the substance procedure distinction, and this is something that Steve Bainbridge, by the way, just recently posted so I should Toss that out on his blog that this substance procedure decision is not an obvious one, the line that they're trying to draw. interesting. All right. Cool. All right. So between between yeah, me too. Between rescinding fourteen A eight and changing the other back I'm not gonna say it's a back door, but the whole way of trying to solicit your own proxy, spend your own money in a way that's gonna give companies a lot more authority over this gives us a lot to think about. And and and for the first time, like I said in a little bit, I got I I'm exhausted. really kind of more directly concerned about how it's gonna affect some of the some of the ac other activism out there. So You know, for all of my angst over it, I'm gonna end with this thought. Like, our business at FreeFloat is we do director analytics. We do like moneyball for directors. And it and and pretty soon we are moving in the direction that shareholders will have nothing to vote on on any t given proxy except the directors. So at long last, someone might have to pay attention to the people they're hiring to be their fiduciaries over the asset. Yeah. Yes. Right. right. So so so y Maybe maybe maybe the pressure point will be on on directors rather than on the proposals. And the directors may may may may regret this. Yeah, I think that that's a good I think that's a good way to end. So how about that? All right? All right. This is Shareholder Primacy, hosted by Ann Lipton and me, Mike Levin. It's also say it Matt Bring on the money. Gimme a call, everybody. Give us a call. Ha ha ha. Okay. Proxy Catdown and Business Pants, hosted by me, Matt Muscarty, and the absentee Damian Rollis. And I'm I'm I mean Mike, I'm an activist independent activist investor, advisor to investors about their activist situations. Anne is professor of law and the Lawrence W. Demuth Chair of Business Law at the University of Colorado Law School. Matt and Damien, of course, run Free Float Analytics, which whose cousin Free Float Media is our producer, produce and distribute our podcast. Yes, we are. That's right. We're all the things. We're all the things. You can find me, Mike, at the activistsinvestor.com, and at law.colorado.edu, and free float media and free float analytics at freefloat. L c. Thanks for listening. We'll talk again soon.