As expected.
Really quick stuff:
First, Mike Levin and I did a whole podcast on what would happen if the SEC proposed to rescind 14a-8, and one thing we speculated on was whether the SEC would try to tweak the rules to block “zero slate” proxy contests at the same time.
Interestingly, they are not proposing to do that, and in fact, they’re leaning in to the zero-slate contest as a viable option that partially justifies the loss of 14a-8. They even go out of their way to note that a shareholder could run a zero-slate contest without the 14a-19 requirement that they solicit 67% of the shareholders (except in Texas; Texas adopted the 67% requirement in its local shareholder proposal law), which would minimize costs.
What they are proposing to do is amend Rule 14a-4, to make zero-slate contests less procedurally threatening to the company. As I understand it, under the current rule, if there is a zero-slate contest, but the company does not include the proposal in its own proxy materials (as it is entitled to do), then, if a shareholder returns the company proxy card, they are functionally abstaining on the proposal – the company has no authority to vote no on the shareholder’s behalf. If the shareholder wants to vote “no,” the shareholder has to return the proponent’s card, which, among other things, means the company doesn’t collect or see those proxies. As a result, companies facing zero-slate contests have voluntarily included the proposals in their proxy materials, so as not to encourage shareholders to return the proponent’s card.
So, the SEC proposes to amend 14a-4 to give the company authority to vote proposals that do not appear on the company proxy statement or ballot, so long as the proxy statement includes a brief description of the subject of the proposal and how the company intends to vote (i.e., “no”). And, so shareholders don’t have to fear they’re returning ballots and giving the company unrestricted authority to vote on unknown items, the shareholders can check a box that says “you don’t have discretionary authority for anything that doesn’t appear on the ballot.” On first glance and without deep analysis (and without commenting on the broader proposal to rescind 14a-8) I can’t say the 14a-4 amendment strikes me as unfair.
I’ll go even further: the SEC is attempting to be so scrupulously fair in its 14a-4 amendments on this point (and its solicitation of comments) that it suggests to me that the SEC really really wants to defend the 14a-8 rescission by presenting zero-slate contests as a very viable option on which the SEC has not placed any kind of management-favorable thumb.
Update added upon further reflection: As I think further about the Rule 14a-4 amendments – the problem for the SEC is that, it isn’t wrong: procedurally, if the company has no discretionary authority to vote “no” on zero-slate proxy contests, that puts the company at a bit of a structural disadvantage as compared to the proponent with respect to collecting proxy cards.
On the other hand, it’s very difficult to come up with a rule that gives the company the authority to vote “no” on behalf of shareholders who return the company proxy card, without simultaneously having the company actually describe the proposal in its materials and give shareholders a chance to vote on it – which ends up just recreating Rule 14a-8. So, right now, the SEC is trying to square that circle by having the company put bare bones information about a zero-slate contest its in proxy materials, while giving shareholders a chance to opt-out of having the company vote their shares against the proposal.
In its release, the SEC devotes a whole footnote to simply rejecting the idea that proxy materials are misleading if they don’t describe all items on the agenda (n.175), but the Commission’s struggle to come up with a 14a-4 rule that (1) allows the company to vote a shareholder’s shares against a proposal without (2) actually describing the proposal in the proxy materials, suggests the old justification for 14a-8 had merit.
And another thing. I have a new paper up! Which, I must admit, kind of compiles a bunch of arguments I’ve made in this blog over the past several years, so it may be old hat for regular readers.
Supreme Amnesia: The Shifting Standards for Fraud-on-the-Market Class Certification
In a series of cases, beginning with Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011), and concluding with Goldman Sachs Group, Inc. v. Arkansas Teacher Retirement System, 594 U.S. 113 (2021), the U.S. Supreme Court has offered shifting and conflicting understandings of the fraud-on-the-market presumption and its role in class certification. The confusion has filtered down to the lower courts, where class certification determinations have become wide-ranging inquiries into the merits, untethered from the fundamental question whether class treatment is appropriate. This Essay, written for the ILEP 30th Anniversary of the PSLRA Symposium, explores how the Supreme Court has created an impossible class certification maze for parties to navigate, and recommends that courts no longer adjudicate fraud-on-the- market at class certification.