Bebchuk v. Electronic Arts

Jeff Gordon posts at the Harvard blog on his professors' amicus brief in Bebchuk’s proxy access case. The post has links to all the briefs.

Bebchuk's proposal would require EA to have its shareholders vote on a governance change requiring greater shareholder access to the proxy process than 14a-8 currently mandates. EA and the Chamber of Commerce basically argue that the proposal (1) illegally circumvents 14a-8’s proscription on proposals relating to director elections; and (2) is preempted by 14a-8 because that rule federally regulates proxy access.

If the proposal is facially ok under 14a-8 (on which I don't opine here), then what’s the problem? The answer is that, as EA and the CoC argue, it would essentially undermine the careful limitations on mandated proposals under 14a-8. This strikes me as really an argument that the proposal is substantially inconsistent with 14a-8 even if it doesn’t fall within a specific exclusion category. And that argument makes some sense.

On principle, regarding 14a-8, I've suggested:

[T]he SEC should not opine on the merits of proposals, including whether they are permitted under state law: that should be determined by the state courts and legislatures. So the SEC should get out of the business of determining whether a proposal concerns ordinary business, or significant social policy, or even whether it is consistent with state law.

In other words, I would prefer that 14a-8 be reduced back to its essence as a disclosure rule. If state law allows a type of proposal, then arguably the proxy rules require disclosure that a proposal is pending just as they require disclosure of other matters connected with shareholder meetings. But firms should be able to decide which proposals can be made, subject solely to state law.

Part of the problem here is that we do have a broader 14a-8, and as suggested above Bebchuk's proposal exposes its basic ambiguity:  where in the complex realm of corporate internal governance does the federal regime end and the state regime begin? 

More broadly, this case obviously concerns the allocation of state and federal power. As illustrated by the CoC’s position, firms often turn to the feds when they think they can get a better deal than from the states. This position often makes sense when a state law approach involves compliance with 51 different laws. But as long as we have the internal affairs doctrine that’s not a problem. See my article with O’Hara, Corporations and the Market for Law. And watch for our treatment of this topic in the broader jurisdictional competition context in The Law Market, forthcoming this fall from Oxford University Press.

Bottom line: revise 14a-8 so that it just requires disclosure of agenda items permitted by state law. That would eliminate the ambiguity that gives rise to this case.

Even better yet, let firms choose their disclosure laws too.  But that's beyond this little post.

Comments

[Steve Bainbridge]

But what about the substantive merits of the proposal? Bebchuk's proposal might be a good idea if you think, as Gordon wrote, that "shareholders have the potential to play an important role in the corporate governance system." But if you don't, you might think is just so much gadflyism. You can probably guess which side I come down on.