The Corporate Contract and the Private Ordering of Shareholder Proposals

50 J. Corp. L. (forthcoming 2024)

79 Pages Posted: 16 Feb 2024 Last revised: 23 Mar 2024

See all articles by Mohsen Manesh

Mohsen Manesh

University of Oregon - School of Law

Date Written: January 30, 2024

Abstract

Should Coca-Cola do more to protect abortion rights? Should Mastercard track gun purchases? Should Disney’s workplace DEI trainings be more sensitive to conservative perspectives? Under Exchange Act Rule 14a-8 (the “Rule”), an activist holding only a nominal stake in a public corporation is able to force a shareholder vote on such proposals, focusing attention on whatever hot-button issue they wish to spotlight.

Today, activists pepper corporations with politically divisive proposals in record numbers. While left-leaning groups, organized under the ESG banner, target corporations with proposals focused on progressive priorities, right-leaning outfits submit competing proposals, seeking to undermine ESG initiatives and urging a focus on corporate profits. Caught in the crossfire are America’s largest businesses. Corporate leaders complain that these divisive proposals are costly distractions, and average investors have shown little enthusiasm for them.

This Article offers corporate America a path out of this morass. Under Delaware law, which governs most public companies, a corporation’s charter and bylaws represent a binding contract between the corporation and its shareholders. Moreover, Delaware law affords broad freedom in the corporate contract to regulate shareholders’ governance rights, including the right to make or vote upon a proposal at a shareholder meeting. And because a shareholder’s access to the Rule is itself dependent on these state-law rights, a provision in the corporate contract restricting shareholder proposals is not preempted by the Rule or the Exchange Act.

Importantly, not every public company may want to restrict shareholder proposals through private ordering. The risk of political backlash, resistance among investors, and other practical considerations may lead some, perhaps most, companies, to leave shareholder proposal rights untouched. At the same time, the opportunity to escape the SEC’s unpredictable no-action process, in favor of adjudicating shareholder-proposal disputes before the sophisticated and politically insulated courts of Delaware, could prove tempting. Different companies will weigh these considerations differently. Through private ordering, each corporation may tailor shareholder proposal rights to best meet its needs, and securities markets may efficiently price those rights for the benefit of investors.

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

JEL Classification: K22

Suggested Citation

Manesh, Mohsen, The Corporate Contract and the Private Ordering of Shareholder Proposals (January 30, 2024). 50 J. Corp. L. (forthcoming 2024), Available at SSRN: https://ssrn.com/abstract=4710616 or http://dx.doi.org/10.2139/ssrn.4710616

Mohsen Manesh (Contact Author)

University of Oregon - School of Law ( email )

2800 NE Liberty St.
Portland, OR OR 97211
United States

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