On October 9, SEC Chairman Paul Atkins delivered a dinner speech outlining his vision to revitalize U.S. public markets in order to, in his words, “Make IPOs Great Again.” He expressed concern over the declining appeal of U.S. public markets, noting that the number of exchange-listed companies has dropped from 7,800 in 2007 to approximately 4,700 today. The Chairman proposed a three-pillar strategy: simplify SEC disclosure requirements, depoliticize shareholder meetings, and reform securities litigation to curb frivolous lawsuits while preserving shareholder rights. The speech focused on the latter two pillars.
Addressing “Precatory Proposals” Through State Law
The Chairman identified the culprit for the politicization of shareholder meetings: “precatory proposals.” Precatory proposals are non-binding shareholder proposals often focused on social or environmental issues, which are frequently irrelevant to the company’s business but consume management time and impose costs on the company. The Chairman noted that while Rule 14a-8 under the Securities Exchange Act of 1934 permits shareholder proposals in a company’s proxy statement, the proposal must be a “proper subject” for action by shareholders, a question governed by state law. If the proposal is not a “proper subject,” Rule 14a-8(i)(1) allows a company to exclude the proposal from its proxy statement.
If state law does not recognize a shareholder’s right to vote on precatory proposals—and the company’s governing documents do not establish such a right—the company can argue for exclusion of the proposal, with a legal opinion confirming that the proposal is not a proper subject under state law. The Chairman indicated that he had “high confidence” this argument will prevail. In application, a company’s ability to eliminate precatory proposals under Rule 14a-8(i)(1) would materially impact shareholder meetings, as the majority of shareholder proposals today are precatory in nature.
Special Attention to Texas
The Chairman also addressed recent developments in Texas. Effective September 1, Texas amended the Texas Business Organizations Code (TBOC) to permit Texas corporations to require that a shareholder own at least $1 million in market value or three percent of the company’s voting shares, among other requirements, to submit a shareholder proposal. Tex. Bus. Orgs. Code § 21.373. While these thresholds are higher than those under Rule 14a-8, the Chairman expressed support for the view that state laws should not be preempted by Rule 14a-8. Chairman Atkins contends, that if a shareholder submits a proposal without meeting Texas’s threshold requirements, the proposal may be excludable under Rule 14a-8(i)(1). Ultimately, a court will determine the scope of Rule 14a-8 exclusions and whether federal law preempts Texas’s newly introduced threshold requirements.
Texas could also go further by adopting regulations that define, at the state level, what constitutes a “proper subject” for shareholder action—as proposed by Chairman Atkins. Such a move would give Texas issuers clearer grounds to invoke Rule 14a‑8(i)(1) to exclude proposals that fall outside that definition.
Securities Litigation Reform: Emphasizing Optionality
On securities litigation, the Chairman cautioned that the “cost” of being a public company too often includes defending frivolous litigation intended to recover attorneys’ fees in the guise of shareholder recoveries. He signaled openness to reforms, such as mandatory arbitration and fee-shifting bylaws, which could screen out meritless claims without closing the courthouse door to legitimate ones. The goal, he suggested, should be to reduce litigation costs and arm companies with optionality for how best to resolve disputes with their shareholders. The Chairman lamented that recent actions by the Delaware legislature (such as the prohibition on fee shifting for internal corporate claims) “suggest that the state is not only uninterested in reform, but instead, seems to embrace the litigation costs that abusive lawsuits impose on companies franchised in Delaware.” He noted that Delaware’s refusal to address these problems has led to the current “DExit” trend over the last two years, where companies have left Delaware for states, like Texas or Nevada, that they view as providing better resources for companies seeking to avoid vexatious litigation.
Recommendations for Management Teams
Companies should calibrate governance, proxy, and litigation posture now, in advance of further rulemaking.
- Evaluate whether and how to assert state-law “proper subject” arguments to exclude precatory proposals under Rule 14a-8(i)(1).
- Review charter and bylaw frameworks for opportunities to implement proposal submission thresholds and other procedural requirements to re-focus shareholder meetings on material corporate matters.
- For Texas-incorporated or Texas-opt-in entities, consider adopting the heightened submission thresholds for shareholder proposals.
- Reevaluate dispute resolution and forum-selection provisions to determine which state offers the most cost-efficient environment for resolving internal corporate matters.
