An article forthcoming in the Michigan Business & Entrepreneurial Law Review, claims that stockholders lack the inherent power to submit precatory proposals under Delaware law. In a recent speech, Paul Atkins, the Chairman of the Securities and Exchange Commission, cited the unpublished draft and its claim approvingly. On November 17, the SEC issued a statement announcing that it will no longer respond to most no-action requests, and an issuer that seeks to exclude a proposal from its proxy ballot must simply notify the Commission of its decision. The only exception noted in the statement is a request relating to Rule 14a-8(i)(1); presumably the SEC intends that exception to reflect its newfound interpretation that precatory proposals are improper under Delaware law.

As longtime scholars of Delaware corporate law, we are skeptical of the strength of this claim–indeed, we argue that the article’s characterization of Delaware law has it backwards. Because DGCL § 141(a) vests legal authority over the corporation in the board of directors, stockholders may not introduce a resolution that requires the directors or officers to act, except on matters the DGCL formally commits to stockholder authority, such as amending the bylaws. As a result, most stockholder proposals are merely advisory. Indeed, when Congress mandated a stockholder Say-on-Pay vote in the Dodd Frank Act, it described it as “advisory.”

The SEC has long legitimized its proxy rules as creating a procedural vehicle for preserving the substantive rights that exist under corporate state law. Yet, by regulating proxy access, the SEC determines what matters are proper or improper for stockholder voting, often restricting stockholder rights beyond the contours of state law. For example, Rule 14a-8 imposes minimum ownership requirements, holding periods, and limits on successive proposals. No Delaware statute or judicial opinion imposes such restrictions. The latest attempt to restrict precatory stockholder proposals goes much further, threatening a significant disruption to the balance of power between directors and stockholders. (more…)