The Non-Binding Bind: Reframing Precatory Stockholder Proposals under Delaware Law

Abstract

Rule 14a-8 under the Securities Exchange Act of 1934 allows stockholders to submit proposals for inclusion in a company’s proxy materials. The rule assumes that Delaware law provides stockholders with the right to submit non-binding proposals for stockholder approval. But as many have observed, this assumption lacks a firm basis in state law, particularly in Delaware. If such a right exists, a stockholder conducting its own proxy solicitation could submit numerous precatory proposals, including those advancing narrow or special interests. This article concludes that, under Delaware law, stockholders do not have an inherent right to submit precatory proposals. Accordingly, a corporation may adopt bylaws to provide for, and regulate, the submission of such proposals. Although others have advocated for regulating precatory proposals through private ordering, they have generally done so on the assumption that stockholders possess a baseline right to submit them. That assumption creates uncertainty: if such a right exists, it is unclear how far a bylaw may go in restricting or conditioning its exercise.

This article examines the potential sources of an inherent precatory proposal right—specifically, the Delaware General Corporation Law and case law on fundamental and subsidiary stockholder rights—and concludes that Delaware law does not provide such a right. That conclusion supports broad flexibility to adopt bylaws governing precatory proposals. Such a bylaw would be meaningful to Delaware corporations, regardless of whether it applies only to stockholders soliciting their own proxies or also to Rule 14a-8 proponents, to the extent the Securities and Exchange Commission permits augmenting Rule 14a-8 by bylaw.

Keywords: Corporate Governance, Shareholder Proposals, Shareholder Rights, Delaware Corporate Law, Corporate Law, Securities Regulation