Shareholder Proposal Regulation is Grounded in Fair Notice of Items to Be Voted Upon

During the United States’ first century, corporations had small numbers of investors and were largely controlled by shareholders through deliberations and voting that took place at in-person shareholder meetings. As the US economy grew, and corporations had to bring in large amounts of capital from thousands of investors, shareholder meetings went from in-person affairs to being conducted by proxy, and management solicited blanket voting authority based on little or no information. Ownership and control were largely divorced, and corporate abuse of the proxy, which frustrated the free exercise of the voting rights of stockholders, was rampant. Section 14 of the Securities Exchange Act of 1934 addressed this concern by authorizing the SEC to regulate proxy solicitation.

The SEC adopted the predecessor to SEC Rule 14a-8 in 1942, recognizing that shareholders need notice of proposals to be made by fellow shareholders. One court explained that, “the rationale underlying this development was the Commission’s belief that the corporate practice of circulating proxy materials which failed to refer to the fact that a shareholder intended to present a proposal at the annual meeting rendered the solicitation inherently misleading.” SEC Staff reiterated this purpose, explaining that “[t]he Senate Banking and Currency Committee recognized the need to provide not only for disclosure of matters management planned to present, but also for shareholders to be given ‘reasonable opportunity to present their own proposals and views to fellow security holders.”

Thus, SEC Rule 14a-8 advances the overall Securities Exchange Act’s goal of shareholder democracy—a central purpose of the 1934 Act in reaction to weakening shareholder control and increasingly concentrated corporate power in professional managers. Shareholder democracy stands for the principle that, in return for access to the securities exchanges, the law provides that corporations would incur a corresponding duty to give the shareholders fair suffrage. Referring to 14a-8, one recent judicial decision noted that “[t]he Commission enshrined this edict in its regulations, believing that “fair corporate suffrage” required that all shareholders receive notice of such matters when their proxies are solicited.”