Rule 14a-8 Permits Precatory Proposals, and the SEC Can't Just Say It Ain't So

Precatory (advisory) shareholder proposals under Rule 14a-8 are a major part of the corporate governance landscape for American public corporations. Most proposals are advisory because of the SEC's longstanding understanding that such proposals are generally "a proper subject for action by shareholders under the laws of the jurisdiction of the company's organization." That understanding has now come under extreme pressure. Based on an interpretation of Delaware corporate law, the SEC has suggested that it may re-interpret the Rule to allow companies to exclude precatory proposals as not a proper subject for shareholder action. This paper argues that the proposed re-interpretation of Rule 14a-8 misunderstands how the Rule's current language applies given a correct understanding of Delaware law. The Rule's language is clear enough that were the SEC to try to re-interpret the Rule, courts should reject that mistaken novel interpretation. If the SEC wants to allow companies to implement rules that limit or eliminate precatory proposals, it must do so by going through notice-and-comment rulemaking to amend the Rule, not by re-interpreting it in a speech or no-action letter. The paper also argues that making it too easy for companies to exclude shareholder proposals would be a policy mistake. Although allowing variation in corporate governance mechanisms through state law and private ordering is valuable up to a point, the SEC needs to continue playing an assertive role allowing shareholders to intervene in the governance rules surrounding shareholder proposals in order to counterbalance managerialist incentives that drive state law and private ordering. Thus, if the SEC does amend Rule 14a-8 to allow board bylaws to restrict or eliminate precatory proposals, it must ensure that shareholders remain effectively able to respond with bylaws of their own to resuscitate the precatory bylaw processor even expand it beyond what Rule 14a-8 allows, e.g. by eliminating the ability of a company to exclude proposals under the ordinary business exclusion.