Corporate Governance and Shareholder Proposals: The Role of Delaware Law

As the proxy season approaches, corporate America faces an influx of politically charged shareholder proposals. Activists from both the left and right have increasingly utilized the shareholder proposal process to address issues ranging from climate change to diversity, equity, and inclusion (DEI) and abortion policy. Despite the rising number of proposals, their success rate has significantly declined, with average support for environmental, social, and political proposals plummeting from 33 percent in 2021 to just 11 percent in the previous year. This trend has led to increased board attention, heightened legal costs, and a deeper entrenchment of companies in the culture wars.

The Hill

The Trump administration has responded to this situation by issuing an executive order in December, directing the Securities and Exchange Commission (SEC) to review its shareholder proposal rules, particularly concerning ESG-related resolutions. SEC Chair Paul Atkins has indicated that revising or even repealing Rule 14a-8, which governs shareholder proposals, is under consideration. However, the SEC's authority operates within the framework of state corporate law, particularly Delaware law, which governs two-thirds of Fortune 500 companies.

The Hill

Delaware law allows companies to customize their governance rules through their charters and bylaws, creating a binding contract with shareholders. This customization can include provisions that impose ownership thresholds, limit repetitive proposals, or exclude matters unrelated to the company's business. Such tailored bylaws can provide significant advantages over federal regulations, accommodating the diverse needs of companies based on their size, industry, and shareholder base.

The Hill

The ability to adopt company-specific bylaws offers a means for corporations to navigate the politically charged environment surrounding shareholder proposals. By doing so, companies can avoid the unpredictable nature of federal regulations that shift with political administrations. Under the Biden administration, the SEC relaxed rules to allow proposals on topics with "broad societal impact," while the Trump administration has sought to reverse these changes.

The Hill

Companies that establish their own bylaws can achieve greater stability and predictability, resolving disputes through Delaware's sophisticated court system rather than relying on the SEC's no-action process, which is often seen as unpredictable. This approach is not intended to silence shareholders but to restore order to a process perceived as being exploited by activists with minimal economic stakes.

The Hill

Critics argue that restricting shareholder proposals through tailored bylaws could undermine shareholder rights and limit the ability of investors to influence corporate governance on critical social issues. They contend that the shareholder proposal process serves as a vital mechanism for accountability and transparency in corporate decision-making.

The Hill

As the proxy season looms, corporate directors are encouraged to consider adopting reasonable bylaw provisions to manage shareholder proposals effectively. While the SEC's future actions remain uncertain, companies possess the tools to regain control over the proposal process. By leveraging Delaware law, corporations can tailor their governance structures to better align with their specific circumstances and shareholder interests.

The Hill