November 14, 2008
Earlier this week a federal court in New York dismissed a test case by a prominent corporate law scholar who is seeking to use SEC rules to establish new procedures for shareholders to use the company proxy to put forward shareholder proposals, including alternate director candidates. Appeal to the Second Circuit is expected. If the case is appealed, it is possible that companies will receive similar proposals for the 2009 proxy season.
Gibson Dunn filed an amicus brief in the case, on behalf of the U.S. Chamber of Commerce.
During the 2008 proxy season, Professor Lucian Bebchuk of Harvard Law School submitted a shareholder proposal to Electronic Arts, Inc. The proposal sought to amend the company bylaws to establish a new procedure for the placement of shareholder proposals into the company’s proxy materials.
Under the proposal, a shareholder owning at least 5% of the company’ s outstanding common stock and having a $2,000 investment would be able to place proposals for changing the bylaws into the proxy materials, provided the proposed changes were not contrary to law and did not deal with the company’ s ordinary business operations. The proposal would deprive company directors and officers of the ability they have under current SEC regulations to exclude certain proposals from the company’ s proxy materials. (Professor Bebchuk had previously submitted, but withdrawn, similar shareholder proposals to eleven other corporations.)
Professor Bebchuk’ s proposal is significant, in part, because it would enable a company’ s shareholders to amend the bylaws to permit shareholders to submit director nominees for inclusion in the company’ s proxy statement, even though proposals relating to the election of directors are excludable under Rule 14a-8, the SEC’ s shareholder proposal rule. Accordingly, the proposal represents an effort to gain "proxy access" – that is, access to a company’ s proxy statement for the purpose of nominating directors.
Electronic Arts sought to exclude Professor Bebchuk’ s proposal through the SEC’ s no-action letter process. Professor Bebchuk filed suit in the Southern District of New York, seeking a court order to compel Electronic Arts to include the proposal in its proxy materials. (Because of the pending litigation, the SEC staff declined to address the no-action request. Electronic Arts did not include the proposal in the proxy statement for its July 2008 annual meeting.)
The Court’ s Ruling
Electronic Arts moved to dismiss the suit, arguing that its exclusion of Professor Bebchuk’ s proposal was permissible because Rule 14a-8 is the exclusive channel for shareholder access to the company’ s proxy materials, and Bebchuk’ s proposal would displace that mechanism. Electronic Arts also argued that the proposal, if adopted, would require the company proxy to include shareholder proposals concerning EA’ s board election procedures, thereby conflicting with the SEC’ s 2007 amendment to Rule 14a-8 concerning proposals relating to elections. Finally, Electronic Arts argued that shareholders would be confused by the proposal’ s vague and ambiguous terms and unclear consequences.
On Wednesday, November 12, the district court granted the company’ s motion to dismiss, ruling immediately after hearing oral argument. (The case is Bebchuk v. Electronic Arts, Inc. , No. 08-cv-3716.)
A team at Gibson Dunn, led by Eugene Scalia, represented the U.S. Chamber of Commerce in filing a friend-of-the-court brief supporting Electronic Arts.
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