Saturday, January 13, 2018

A modest proposal about proposals

As Joan and Josh previously posted, Stefan organized an excellent AALS panel on Rule 14a-8. We covered a number of topics, including the appropriate role of retail and employee shareholders, the proper sphere of activity for shareholders vis a vis managers, the true audience for shareholder proposals, and how to construct Rule 14a-8 so that frivolous and improper proposals can be easily weeded out.

In my remarks, I focused on the fact that shareholder proposals are usually precatory, even when they don’t have to be.  For example, shareholders have the right to pass bylaws, but even the Boardroom Accountability Project typically sponsors proposals that merely request that directors use their power to craft proxy access bylaws.  (I assume that’s at least in part because a good bylaw must address administrative matters that shareholders are ill-equipped to manage – for example, see management’s response to Proposal Ten, for a majority-rule bylaw at Netflix).

Because shareholder proposals are precatory, their main function is informational: they allow shareholders to communicate with management, with each other, and with the market more generally.  I suspect that this function may become especially important as passive investing’s popularity increases; absent the ability to sell, votes – and votes on specific governance matters – may be the most effective ways for shareholders to signal their views to management.

Given that, I believe that one fairly easy way of enhancing that signal would be to require that companies with multi-class shares disclose the class vote breakdown on shareholder proposals – and other votes as well – when they disclose the vote totals.  I’d also potentially recommend a breakdown that distinguishes the votes of the management group from other shareholders.

Right now, unless a class vote is held separately, companies are only required to release the vote totals.  This can cause some misleading reports.  For example, when Google’s shareholders proposed elimination of the multi-class share structure in 2017 (as they have done in prior years), Google reported that there were 191,712,790 votes for, and 472,583,246 votes against the proposal.

This, of course, obscured the fact that the public shareholders apparently mostly favored the proposal; it was only defeated because Larry Page and Sergey Brin, with their high-vote shares, voted against it. 

Now, obviously, even without a clear disclosure of this type, clever analysts might be able to glean the approximate breakdown from publicly reported information – as the above linked article indicates – but depending on the class structure, it may not always be that obvious.  Moreover, as I recently posted, the SEC’s Investor as Owner Subcommittee of the Investor Advisor Committee thinks clearer disclosures regarding multi-class share structures would benefit the market, even when some of that information might be deducible from a close reading of SEC filings.

There is also evidence that management may intentionally exercise in-the-money options to vote against shareholder proposals that are in danger of passing; because of these and other close-vote scenarios, a vote breakdown would be helpful.

And I think this is useful information to have.  It may assist with pricing of the public shares, and it may assist with pricing of shares of other companies with multi-class structures.  It could also assist with companies and underwriters trying to decide whether to go public with multi-class share structures in the first place.

In other words, I think this is a pretty cheap intervention, and one that would provide real informational benefits.

https://lawprofessors.typepad.com/business_law/2018/01/a-modest-proposal-about-proposals.html

Ann Lipton | Permalink

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