69 Pages Posted: 10 Dec 2014
Date Written: December 10, 2014
The Harvard Shareholder Rights Project ("Harvard SRP") has, on more than 120 occasions, invoked SEC Rule 14a-8 to propose precatory shareholder resolutions calling for the de-staggering of corporate boards of directors (the "Harvard Proposal"), and claims to have contributed to de-staggering at approximately 100 of America's largest publicly traded corporations. The Harvard Proposal relies on a summary of academic research that portrays staggered boards as categorically detrimental to shareholder interests, and cites only one study reaching a contrary conclusion, while dismissing that study's analysis.
The academic research contradicting the Harvard Proposal is, however, far more substantial, but the Proposal omits any mention of that larger body of opposing research. The opposing research concludes that studies relied on by the Harvard Proposal are in error because of flawed analytic techniques. This research also documents heterogeneous effects indicating that classified boards are more likely to be beneficial for identifiable categories of corporations.
Rule 14a-8 requires that shareholder proposals not be materially false or misleading in violation of Rule 14a-9. The Harvard Proposal's failure accurately to describe the current state of the academic literature can be characterized as a material omission that violates Rule 14a-9. Companies should therefore be able to exclude the Harvard Proposal from the corporate proxy either by seeking no-action relief or through motions for declaratory judgment. Under the principle of respondeat superior, the SEC could bring enforcement proceedings against Harvard University alleging violations of Rule 14a-9. Private party plaintiffs should also be able to prevail in 14a-9 actions against Harvard. Courts have the authority to void prior votes that caused boards to de-stagger, but it is a matter of judicial discretion -- and a subject for conjecture -- as to whether such a remedy would be imposed as a cure for the material omissions in the Harvard Proposal.
Keywords: Harvard Shareholder Rights Project, Rule 14a-8, Rule 14a-9, proxy solicitations, shareholder proposals, classified boards, staggered boards, declassification, destaggering, proxy advisers, institutional investors, Janus Capital, respondeat superior
JEL Classification: K22, K42
Suggested Citation: Suggested Citation
Gallagher, Daniel M. and Grundfest, Joseph, Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors (December 10, 2014). Rock Center for Corporate Governance at Stanford University Working Paper No. 199. Available at SSRN: https://ssrn.com/abstract=2536586 or http://dx.doi.org/10.2139/ssrn.2536586
By Leo Strine