Did Harvard Violate Federal Securities Law?

Joseph A. Grundfest is the W. A. Franke Professor of Law and Business at Stanford University Law School.

SEC Commissioner Daniel Gallagher and I just posted on SSRN a new paper, titled Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors. The abstract of the paper summarizes it as follows:

The Harvard Shareholder Rights Project (“Harvard SRP”) has, on more than 120 occasions, invoked SEC Rule 14a-8 to propose precatory shareholder resolutions calling for the de-staggering of corporate boards of directors (the “Harvard Proposal”), and claims to have contributed to de-staggering at approximately 100 of America’s largest publicly traded corporations. The Harvard Proposal relies on a summary of academic research that portrays staggered boards as categorically detrimental to shareholder interests, and cites only one study reaching a contrary conclusion, while dismissing that study’s analysis.

The academic research contradicting the Harvard Proposal is, however, far more substantial, but the Proposal omits any mention of that larger body of opposing research. The opposing research concludes that studies relied on by the Harvard Proposal are in error because of flawed analytic techniques. This research also documents heterogeneous effects indicating that classified boards are more likely to be beneficial for identifiable categories of corporations.

Rule 14a-8 requires that shareholder proposals not be materially false or misleading in violation of Rule 14a-9. The Harvard Proposal’s failure accurately to describe the current state of the academic literature can be characterized as a material omission that violates Rule 14a-9. Companies should therefore be able to exclude the Harvard Proposal from the corporate proxy either by seeking no-action relief or through motions for declaratory judgment. Under the principle of respondeat superior, the SEC could bring enforcement proceedings against Harvard University alleging violations of Rule 14a-9. Private party plaintiffs should also be able to prevail in 14a-9 actions against Harvard. Courts have the authority to void prior votes that caused boards to de-stagger, but it is a matter of judicial discretion—and a subject for conjecture—as to whether such a remedy would be imposed as a cure for the material omissions in the Harvard Proposal.

The full paper is available for download here.


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