Election impacts, Delaware and shareholder proposals

(upbeat music) - Welcome to "Shareholder Primacy" from free-float media podcast about activist investing securities law in all the ways the financial and legal world's intersect and collide in real life. Here we are, and Lipton and me. And Lipton is a law professor at the University of Colorado who teaches and researches securities and business law. She holds up the legal end of the podcast. - And that's Mike Levin, an activist investor who lives and works in Chicago. He covers the financial side of our podcast. - So I would imagine, Anne, that you're feeling a little good this week. A little of billions, maybe. I know I was. And that's a little bit of a theme for an appetizer. - Yes, correct. I mean, I worry about various things. But given how what all our followers should know at this point, we'd probably be pretty satisfied with how the federal and state elections worked out. - Yes. - At various levels. So in Illinois, of course, where I reside, there was no news. I mean, we had some new statewide offices. There's like five new Congressmen, but it's all like all Democrats. So Colorado had some news. - Yeah, Colorado had some flips. We had some Republican flips. There's one, I guess one race. There's a haven't called but CNN is projecting. It's a flip as well. So like we have one house wrapped, left who's Republican, the rest all went Democrat. - Oh, so it's really, it's like seven or eight to one. At this point, I don't know how many reps on Colorado. - I don't know, but I think it's something like three flips. - And I would guess in Boulder, there's no surprises there. - Yeah. - That would have been eight. - No, no, no, no, no, no, the big fights here, like the big fights in Colorado, you know, like in the Democratic areas like Denver, it was Democrat on Democrat violence. - Okay, cool. Well, that's our theme for today. At least part of today. Because we had this election last week, it's pretty clear that at the federal level, Democrats will control the US Congress, including the Senate and the House are representatives with comfortable majorities. - Yep. - And then there's other things. - And then the states. Like so a lot of state houses flipped and as relevant specifically to us, although some of the other flips are relevant as well. Texas, we saw that state government completely transformed. - Yes, yes. - Texas. - Like overnight, unbelievable. - I think every statewide, I think every single statewide election went from Republican to Democrat, so. - By like big margins. It wasn't even close. - So Democrats are gonna now control the House of Representative, but not the Senate. They have the governor, they have the lieutenant governor, they have, what was it, the railroad planning commission? - Yeah, they have a commission which is, well they regulate oil and gas in the state, which is a big deal. - And the Texas and the attorney general. - That's important to us, yes. - The 15th Circuit Court of Appeals, which was a three judge court, and I mean, it's gonna actually expand, but it's a three judge court. It went completely Republican to Democrat and that is very relevant to us. - Right, and we are gonna talk about that. There's also worth noting that Nevada, another state we've pondered, that a Democrat is governor, and Democrats maintain control there over all the legislature and constitutional offices. So we have some hot takes here, here in Cheryl, their primacy about what all this means are like corporate governance in these states and Texas, and then also a little bit of Delaware. We'll talk, there's some news out of Delaware. - Yeah, some news out of Delaware about Cheryl to propose also. - Right, I mean, at the political level, we didn't see any meaningful changes in Delaware. Delaware's been a democratic state for ever. - Yeah, they're in other place where the primaries are what matter. - Right, Democrats have been in charge of all the significant offices for many years, but possibly echoing some of the political environment, there were some changes that clearly were in the works in Delaware that they announced just yesterday. We're recording this on a Tuesday. So just yesterday, this will be available tomorrow, Wednesday, and yeah, we yesterday they came out with their proposal. - Came out with some really, I would say interesting, but not in the most positive way. - No, not at all. - All right, so we'll talk about both those subjects, the election and Delaware, but first. - But first, mailbag, yes, you can email us, ask questions, give comments, feedback, whatever you like. - Shareholder primacy at freeflute.lc. - All right, let's talk about why any of all of this, the election, which again, it was preoccupying me. Man, last week, I think I worked at the election judge for a day, and then for like three days I was trying to get work done, and all I could do was like. - It was possible. - I was supposed to be at a dinner that night, and I was just like, I'm sorry, I'm really rude, I'm looking at my phone, but then you know what everybody else was too much to say. - So it was fine. - Yeah, so for two days, two to three, I was just preoccupied by all the developments. But let's talk a little more generally, and then we can talk about some of the specifics, really Texas, I think is what we're interested in exploring. - Yeah, well, yeah, the Congress has a piece of this too. So yeah, I mean, so obviously as we said, like several times on our show, the big story from a corporate governance perspective in recent years has been this dexit idea that companies are gonna leave Delaware for jurisdictions like Texas and Nevada that quite frankly are limiting shareholder rights and they give managers more freedom to operate without risking a lawsuit. - Right. - And then Texas, in particular, it rewrote its corporate law to make it much harder for shareholders to sue, and we saw a bunch of big name companies move there, Tesla moved before they changed their law, perhaps occasioned the change in law. Coinbase went there, Dillards, Exxon, and then a bunch of other companies threatened to leave Delaware, Facebook threatened to leave, Walmart threatened to leave, and Delaware was spooked enough that it completely rewrote its law to make it much, much easier for boards and controlling shareholders to engage in conflict transactions. So. - Right, and to avoid lawsuits over those things, and to avoid disclosing material information in books and records demands over there. - Yeah, and also, and also previously, when Delaware fell under threat, and this is also part of the story, they amended their law to dramatically increase shareholder's ability to contract with the company, shareholder agreements. They did that also, all under this pressure that companies will leave to go to other states. But historically, there's also this big role of federal law. So, like, I mean, this has always been Delaware. - Talk about that, talk about that, yes. - Yeah, so Delaware obviously always has to watch its horizontal flanks to see if a state, another state is offering a more attractive corporate law. But federal law matters too. Because whenever there are big scandals, whenever there's a fear that Delaware's corporate governance standards are too lax, that's when Congress steps in with kind of like mandatory regulation. So, after Enron and all the scandals around that time, - Right. - The federal law banned the laws to court. - Exactly, world-come, the internet bursting, federal law banned loans to corporate executives. It regulated analysts after the financial crisis, federal law created the say on payrolls. And we can go back further during the '60s and '70s, federal law started regulating tender offers. We can go back to '34. I mean, that's what federal law basically took over the system for regulating proxy voting. Like, I mean, proxy voting is almost entirely federal regulation, and that's a real issue for Delaware as well. Because the more that the feds take over corporate governance, then it doesn't matter where you incorporate the rules of the same. You may as well incorporate your home state where you're going to pay fewer fees. And if federal law is where all the action is, then Delaware state judges don't all have all that much to do. Any lawsuits are going to be filed in federal court. So, Delaware has always been very aware of this dynamic that if it was perceived as being too lax, it set risk of being preempted. So, in periods of scandal, Delaware courts tend to get a little stricter, and then they get a little less tolerant aboard misbehavior. And corporations too, they also tend to know this. Like, they know that, yeah, we may not like how strict Delaware is being, but we also don't want the federal government to regulate it. So, we'll tolerate like a degree, you know. So, you have the situation where on the one hand, other states can like get lax or, and that pushes Delaware to become more lax. But then the federal government pushes Delaware to become stricter. So, this has always been like the dynamic. - Kind of always in the background for decades. - Yeah, for decades. And then after Trump won reelection, then it became very, very clear that the last thing the federal government was going to do was create stricter rules for corporate boards. And I think that that really contributed to what we saw from Texas and Nevada. There was no pressure from the federal government at all. If anything, the SEC was actually urging states to give more power to-- - Oh, that was all of Atkins' speech making, which was not just in Delaware. He was giving, he was addressing Texas. He was all over the place saying, you people, you take this over and you compete to make it easy. - Exactly, right. - It wasn't just you compete. He was actively telling Delaware to get more lax. Like Atkins was actually yelling at Delaware for not allowing arbitration of securities claims, for not banning precatory shareholder proposals. So, all the pressure on Delaware was flowing in one direction. Become more lax because the federal government isn't going to preempt you and the states are going to-- and Texas and Nevada were competing on-- laxity. But after the election now, after the election last week, yes, last week's court, low election, completely reverses. Well, because there were, there were, we can, we can talk quite quickly about one of these developments, which was at the federal level. Yeah. Um, the person to watch is going to be Elizabeth Warren. And not just no. I mean, yeah, it's certainly Elizabeth Warren, but not just Elizabeth Warren. Oh, no, no, no, no. She just wrote some letter, I think, to the S. It's a way to expand Holland with Chris Van Holland, who is, as I understand it, the junior senator from the, yeah, right. Well, potential presidential contender. So, and also, you know, maybe being like, there's some competition for speak for the, the, the majority leader. So, so, so federal law, obviously, yeah. So Democrats, they are in control of Congress. Now, obviously, they can't pass statutes all by themselves, but they can, for one thing, they can issue subpoenas. They can, they can, they can, they can do ulcers of investigation at the SEC. And they can, and they can make any corporation that seems to be taking advantage of a lack of environment, um, a poster child for hearings and all kinds of things. Oh, I think I have a corporation in mind. They might, yeah, want to talk to it's based in South Texas, but we'll get to that in a minute. Exactly. I'm pretty sure. And at the same time, it is now much more on the table that we have both a Democratic Congress and a Democratic president in two years, at which point federal law could easily swoop in with new governance standards. And that's especially true if the states look particularly relaxed. And it's especially true if the SEC starts, you know, repealing all the regulation that's been building up over the years. So, that threat from federal government preempting Delaware law is like much bigger threat than it used to be. So, that's one thing that the election changed. And then go ahead. And then the other thing, of course, is Texas. Oh, Texas. Okay. Right. Yeah. So that's like, yeah. So then that, let's, let's, let's talk about Texas. All right. Yeah. So, um, so, which was really what was most interesting to us. And you, I think you wrote about this, I think, last week. Um, so as we said earlier, all the state constitutional offices changed hands. Okay. So there's now a government, a new Democratic governor, Democratic Attorney General. And the reason the Attorney General is important is because that's the office that prosecutes wrongdoing under the new Texas Corporation legal system. Right. The text. Yeah. So, Paxton, when Paxton was the Attorney General, he was not only going on essentially a war against anything that suggested ESG, but he was willing to use corporate governance to do it, including, you know, like potentially, you know, suit and potentially suing to have charters dissolved things like that. Right. Yeah. Right. All based on, you know, like essentially, what he viewed as woke capitalism. Um, but also the, so the Attorney General matters for those kinds of reasons. So that pressure is off. And already actually Paxton's already dropped at least one. Right. I saw that he, there were like some suits that he either postponed or he just totally. Yeah. He's like, he's no longer defending their pro, their nutty proxy advisor law. And he's dropped like, you know, presumably the new Attorney General take that over, but I don't know how vigorous he's going to defend it. But like that nutty proxy advisor law that essentially regulates ESG advice, but that was already put on hold as a First Amendment violation. But also Paxton had sued the proxy advisors for fraud. He sued, he sued them for consuming fraud. Right. And those suits got, and that's who it got dropped. At least one, at least one of them got dropped. I assume the other will be if it hasn't already. So. Right. I mean, he's got, he's got like another month or two before. Yeah. Yeah. Exactly. So, so that's changed. And then of course, now we have a new governor and we have a new 15th Circuit Court of Appeals. And the reason this matters is because the governor appoints the business court judges and the business court judges only serve two year terms, which basically means that like they're up like that basically allows the governor to keep a very close eye on them. Oh, you're ruling this way. You know, um, I can, I can swap you out with somebody else. Right, right. If you want to, how badly do you want this job? Exactly. It's presumably a very interesting job to a, but doesn't pay very much. My sense is that the chance, like the vice-chancers don't make a ton either. No, but they make, but they make more than the Texas judges, unless the Texas judges were able to, like that was one of the issues that they needed. Oh, it's really interesting. Commercial people. And they weren't willing to pay. Well, I mean, again, nobody does this job because they're trying to get rich. I mean, there are some people in Texas, maybe who thought about getting rich using this job, but that's that's for bad reasons. This is a job that you do because you want the role of being a judge. Right. And, but you want that role in a presumably, you're from Texas, presumably you're interested in Texas developing its business environment in ways that Texas wants to do and, you know, with the new Texas stock exchange and bringing corporate headquarters and so forth. And you want to be a part of forming that jurisprudence. And you don't, you don't want the, the governor threatening you and saying, okay, or maybe the governor will throw it. I mean, so you want to keep that job. It's every two years. That's really interesting. Yeah. And I wouldn't, I mean, I want to be clear on this. Like, it's, it's usually pretty subtle. Like, I mean, maybe the governor appoints pure ideologues, but I think it's really more like, you kind of like you, you, even if you're, you know, you're, the governor appoints people who they think are, who they think are generally simpatico. And then, you know, it's maybe in the back of your mind, you kind of know that like the governor's sort of watching, and I, and that can always just sort of subtly influence decisions, even if you don't, like, even if the judge is acting in good faith. So in this case, though, now the judges are directly accountable for two-year terms to a democratic governor. And it's almost more important that their, their decisions are appealed to the 15th Circuit Court of Appeals. So this is a newly created appellate court that hears all the business appeals. And now it's all Democrats. So even if the business court judges, the ones who are there were appointed by Abbott, even if they reach, you know, whatever Abbott would have wanted them to decide. They can get reversed by the 15th Circuit Court of Appeals. And the thing is though, like, the, the way this works is like Texas' statute is still incredibly unfriendly to shareholder litigation. That's not changing. No one judge is going to like, the judges can't ignore this. Well, I want to come back to that a minute, but, but we'd, there may be, all right, go ahead. So we'll talk about that. They can't ignore, they can't ignore that statute. The statute is still there. But there's a lot of questions about exactly how those get interpreted. And a change in ideology on the courts can change the interpretation of those statutes. And we don't know because they've barely been tested. Right. There's been very few decisions. So I mean, the business court, there has been in business, pardon that pun intended, for one or two years at this point. I mean, so there's, there's really, you know, you could probably count the number of meaningful cases on, like, both hands and feet and very few that have anything to do with these new shareholder provisions. So like, there are all kinds of open questions that simply haven't been tested yet, including things like corporations can adopt bylaws that limit shareholder litigation. But is that itself a breach of fiduciary duty that you can sue over? You can, you can, corporations can limit derivative lawsuits to shareholders who hold 3%. Well, the line between direct and derivative is one that changes, state by state. And I don't think Texas laws particularly developed here. So I mean, there are all kinds of these sort of open, like, shareholders can't sue unless, unless they prove, unless they plead the board acted fraudulently. Well, what do the pleading standards look like? I mean, all these kinds of questions are undecided yet, or at least as far as I know, I haven't like done a deep job into Texas law. But I think they're fairly, you know, they're new statutes. They haven't really been decided. And I think originally, the, when Texas changed its law, the expectation was and also we're going to put a judiciary in that is very, it could be very simple, it's very sympathetic corporations. And they're going to be there interpreting the law. And so the promise to corporations was not just the law, but also a judiciary that was going to be hostile to shareholder litigation. And that, and that, and that off. That's certainly true anymore. Speakers, I mean, so, oh, interesting. All right. Go back to one of the things though. But obviously the statute, which, you know, Texas governor Abbott and on down had lovingly crafted in ways to allow corporations to, you know, adopt this $3 million threshold for submitting shareholder proposal reverend. And, you know, Tesla, our favorite subject here in, in SpaceX, adopt all these bylaws, they totally bought in. I'm guessing there's not much chance that that underlying statutes going to change in. I would be surprised. I mean, because the Democrats have one house, but they don't have the other. And I just like, and as much as it pains me, although the major priorities of the newly elected Democratic Congress and Democratic governor, I don't think changing the goals like this is not a, this is not a big priority. So I mean, I wouldn't expect the statute to change any time soon. But what might start to develop is interpretations of the statute that are less unfriendly to shareholder litigation than was originally expected. Do we know, this is a more of a technical procedure question, the Texas business court judges terms, are they up like in January and the new governor. So they're not going anywhere for two years. And I don't have any reason to think that, like, particular ID blogs reported it. As I said, I think they're going to act in good faith to interpret the statute. But I also think that when you kind of know that this is a completely, that you've got a different appellate court looking over your shoulder, you've got a different Democrat, you've got a different governor. When you know that, like, I think the appellate court, the appellate court selected, yes, isn't it? So the appellate court selected. And then after that, it goes to the Texas Supreme Court, which is majority Republican, but three Democrats on it. Like it was a seven member court, I think, and they got three out of that of 17. So the point is that there's much. So that me. And again, I am in no way imputing the honor of the business court judges. Right. No one's accusing that they're simply saying that they're operating in a different environment and not can suddenly influence how they decide things. And even if it doesn't, there's still it's going to be appealed to this now Democratic court. All right. Let's go back to another question on federal law. And then we'll take a quick break. So in it, we talked a moment ago, just to kind of put a bow on it, that there's probably going to be a lot of pressure on the SEC from in particular, I'm guessing a Democratic Senate, US Senate. We talked about Elizabeth Warren, Chris Van Halen of Maryland. I'm sure Bernie Sanders will figure out how to get involved in this. John also, I heard John also is taking an interest. Oh, no kidding. John is taking an interest in securities on the SEC. Yeah, right. That's what I, you know, we'll see. Oh, wow. Okay. But I'm guessing that it's going to be mostly investigative here at the SEC that there's not going to be much in the way of statute or I say, I will not in the next two years unless they can get Republicans on board. But I think that, but so I think, so, but yeah, so I don't, yeah, I can't even predict what's going to happen in the next two years in the SEC. But I do think that if Actions rolls back everything, then two in 2029, we could start to see some federal legislation to restore it. Right. And that would be legislative, not just a new SEC commissioner and new SEC commission, it would almost be easier at that point, like assuming if we have a Democratic Congress and Democratic president, it would be easier at that point to just make legislation because if they SEC reverses, of course, yet again, that's vulnerable to more legal challenges. Right. And so, but similar to the point we just made about Texas, legislative reforms in U.S. securities law is probably about as lower priority as, as leaders, who are speaker Jeffries can possibly. I actually think I actually think that if Actions rolls back and does major changes like to corporate reporting, I can see that coming out of a Democratic Congress in part because there are definitely some senators who are very focused on it in the next two years. No, not my next two. Oh, no, I was talking about the next two years. Yeah, no, my next two years, you can't, you're going to have trouble passing legislation anyway, because Trump is still president. And there's, you know, and they're not going to be able to override a veto. Right. But, but it's certainly that is looming, the potential for new legislation. And that's looming over everybody who acts now. All right. Cool. All right. Let's, let's set this aside for a minute, take a quick break. And then we'll come back and talk a little more about Delaware and some developments there here at shareholder primacy. Shareholder primacy is brought to you by freeflowanelitics.com. The only free database of corporate directors, their influence and their performance. You'll want to stock our retirement plan, go to freeflowanelitics.com and look up which of your elected directors are performing well, which aren't. Use your vote in the alternative democracy and get your data at freeflowanelitics.com now back to the show. Welcome back to shareholder primacy. I'm Ann Lipton here with Mike Levin. Yes. We have been discussing how the SEC, this is previous shows was all their changes around rule 14a8 pertaining to precatory proposal shareholder proposals. We've talked extensively how, what potential responses there are that there's, you know, a whole bunch of proponents that are having existential crises over this as they should. Yeah. Yeah. They're not just regulatory. Like this point, they just want to repeal the whole rule, no more proposals. Yeah. Right. No more proposals. And everybody, everybody, a lot of people, many people, a few people have been wondering, okay, is there, oh, and part of this has to do with what we talked about a little while ago, which is the SEC chair Atkins saying, okay, states, you handle this. Yes. This was, yes. So like part of the justification. I mean, I don't think that's like honestly in their heads, their real justification, the real justifications. They don't like proposals. But the ostensible justification in part for the SEC repealing 14a8 is this should be a state matter. Right. So, okay, now we know we have a glimpse, an initial indication of what one, a very important state thinks how they respond to that imperative, right? And that would be, of course, their favorite Tomas Al Dallowayr. It's just yesterday, though, I guess they'd been working on it for a while. Yeah. They, they, they announced they were going to work on something for a while. Oh, they do. I didn't even know. I, this, okay, when you told me about this over the weekend, that was a little surprised. But yeah. Yeah. A while ago, they announced they were working on something if 14a8 got repealed. Right. Okay. So they, they is the state bar association of Delaware. They have, right. They have proposed the section, you know, the corporate section or whatever. They have a department or a committee. And they have proposed a new law, new statute in Delaware to fill the gap. And again, this was in motion as we talked about for a while. But some of these trends we just saw, even last week, probably have a little bit of impact. Well, it's, it's, yeah, I, yeah, we'll talk about this in my collection. So, so, so procedurally, this is a little curious too. Because normally, my understanding, again, I, you know, don't follow Delaware development of Delaware statute, particularly in the corporate section. But normally, there's a usual process where once a year, the corporate section of the Delaware state bar gets together and they think of usually largely technical changes to the statute. Say, you know, we're going to change these words. We're going to add a little section or something. And then, but they drive the entire process. And my understanding is that the legislature essentially adopts whatever they propose. Yeah. And up until, up until recently, this was viewed as a way of keeping politics out of Delaware's corporate law. We'll have these technocrats of the Delaware state, the corporation law council of the Delaware state bar association. They're the ones who set the amendments. They know all this stuff. They're the experts. They made them a technical stuff. The legislature, they're not necessarily corporate experts. And they'll just adopt it. And for a very long time, it was largely uncontroversial and unpolitical. And that was the point. Yes, until we'll get to the most recent ones in a moment, until what was it wasn't SB 21, a product of this process. Yeah, three and three, well, both. Okay. Well, yeah, 21 was barely a product of it. So three, one three was the one that authorized shareholder agreements. And that was like, you know, one headline was blood on the floor. It was a huge fight. Or maybe SB 21 was the one described as blood on the floor. I'm not even sure anymore. But anyway, it was a huge fight. Professors got involved with 313, but it passed. And then 21 actually sort of evaded this process a little. The governor met with some corporate attorneys and they came out with this and Facebook. And they came out with this proposal. And then everyone was like, Oh, are we skipping Delaware's usual process for making corporate law? And then they sent it back to the corporation law council. Right. The corporation law council essentially blessed. Yeah. Well, that's between when it made some. Yeah, not, but, but didn't have a whole lot of impact. So in one sense, what we saw, which we're going to talk about in a detail at a moment, is kind of the corporation law section trying to like regain some affinity, regain some powers for this process. I don't know how much that was the corporation law council trying to regain power so much it was trying to, you know, technical wash, what had come out of a political process by making it look like it had gone through the normal process. Right. But procedurally, yeah, the corporation law council is like inviting comment or something. Yeah. So this is what's unusual. What they instead of doing that are not what they normally do, which has come out with a statute draft statute, have it all voted within the state bar association the way one normally does that. And then bringing it to the legislature to pass to pass. That's like what they would normally do. But instead, what they're doing is it's not, it hasn't even like past the approval of the Delaware State Bar Association yet. What they've done is they put this up this white paper and the draft statute and they're asking for public comment, public comment like anyone. You go, there's a website you can go to and any of your comments like in a form. Very much like the SEC does public comment. I'm asking for public comment on this draft proposal to handle shareholder proposals in light of the looming repeal of 14 and eight. So there's a lot of it's funny. Again, I, you know, I barely read Delaware statute, much less the internal procedures for developing an amending statute. But I did read this white paper and so forth. And it, it looks a lot like what the SEC produces. There's like, there's a, an introductory section. There's an analytical section. There's a Q&A section. A lot of the details in a Q and A format, which is exactly how the SEC works. And then they give like the questions for you, questions for comment, exactly. Exactly. Yes. We would be interested in hearing on comments. Yeah, it looks exactly like an administrative thing, which is deliberate, but yeah. Yes. All right. So, so people have 60 days until probably since this week. Yeah, so it's into January. Yes. Yes. So, um, so maybe- And then after that, they'll come out with a final proposal, which will presumably be part of whatever it is, you know, their annual changes. Of course. Now, do you put- do you plan to comment on this? Is that something you would do? Yeah. I probably not. I'm really lazy, but I've got- Oh, it's not- it's not because you have some sort of a personal policy of not commenting- No. Well, I mean, I tried. I generally don't kind of comment on these things, but, um, I sent letters like the last time around for all the good it do. So- And- And I'm assuming that answer applies to the proposed rescission of 14- No, I'm not moving about that. No, I'm not moving about that. I don't think I have anything really- I mean, just the way I think about it isn't the way- I don't think I have anything useful to comment on. 'Cause somebody asked a couple people ask me if I'm planning on commenting on the rescission of rule 14-A-8, and I've never commented before on any of this stuff. I can't believe that the staff would read my comments in a unique way. They have to read it. Yeah. They're going to read them all, but it's not like they're going to- Oh, man, that live in. He's like a- he's a friggin' genius, why didn't we listen before and we'd draft it? So I'm mixed about it, and I may just as a favor to some people just throw in a comment. It's not that hard. It's useful to the extent that you talk specifically about what you would use 14-A-4 or what you find useful about it, you know, or what you would find, you know, whether the repeal and the full proposal, whether- you know, like how would affect you and what you do as an investor is the part that you- I- I may comment for Delaware about this, because my read of the proposed Delaware Statute on Precordory Shareholder Proposals is that it's a hot mess. It's- it's a very complicated, overly complicated, and in some ways kind of bizarre, so approach to this problem. Let me- let me some- oh, you want some- I can- Yeah, yeah, yeah. I was gonna- well, I mean, like, so first of all, I read this quickly, so hopefully I'm not getting right. So, first, like, let's just start with the- so first of all, what Delaware's proposing are procedures to allow Precordory Proposals and only Precordory Proposals to appear on the corporate proxy just like 14-A-8. But currently, shareholders can use 14-A-8 for binding proposals- Right. By-law-meth, usually. It's what I did. They can. Right. They can use sometimes. But Delaware's proposal would not allow binding proposals like by-law amendments to appear on the corporate proxy. It would only be Precordory once. Second, Delaware says these would be the exclusive means of putting a Precordory Proposal to a vote. So you could not run a zero-slate contest anymore. Right. You could not circulate your own proxy materials with your own Precordory Proposals. And the way they want it is Precordory Proposals have to go on the corporate proxy using these limiting procedures. And if you have any binding proposals, then you have to circulate your own alternative materials. So that's- Right. Second. So the old mineworkers, where you might call thing, would be gone under Delaware law, basically. Okay. Yeah. Yes. And then the final thing is corporations can't adopt new or different procedures. They can't opt out and make it harder to put Precordory Proposals on the ballot, and they can't change their procedures to allow more Precordory Proposals. Right. To make it easier. Yeah. Right. Exactly. It's these procedures, and these procedures only, with three exceptions. There were three exceptions to how you can vary these procedures. Okay. Go ahead. Okay. Is the company can get a shareholder vote on whether to allow Precordory Proposals at all? Yes or no, all are nothing. And if they get a shareholder vote, the shares- they can't- a dual-class share structure can't- you can't use the dual class to swing the vote. So like all the shares, if there are more than one class outstanding, the shares have to vote as a class individually, and all the classes have to agree. Which is a practical matter means, if you've got Facebook with the 10 votes per share, B shares, and the one vote per share, A shares, both sets of shares would have to agree in order to just ban Precordory Proposals entirely. Right. So corporations could opt out assuming all classes of shareholder approve it. Approve it. So, you know, that's nice. I mean, if it's a controlling shareholder, couldn't say, "Hi, I vote to have no per shareholder proposals," "Ah, we're done. You need the one vote shares to also prefer to have no proposals." But it's not like they can't amend the procedures and take it partially. It's all or nothing. You either have Precordory Proposals or you don't. So that's one. Then, and this one I love, boards are allowed to authorize Precordory Proposals to go on the corporate proxy outside these limits. They can, on a case-by-case basis, what they can't do and what shareholders can't ask for is to develop a uniform process for allowing or denying. So, so like, okay, I missed that. I missed that a very little bit. They had to do this idiosyncraticly. Only idiosyncratic decisions allowed. Okay. So, so like, so you could go, so, so like, so some, so my buddy John Chavettin could submit some sort of proposal, you know, which would normally be, I mean, because this shit was interesting in a while, his share holdings are so low, it would be a loser. It would be totally excluded. Right, right. Exactly. But the board could like have a deliberation at their NominCorpGov committee. They're looking at this proposal and say, hmm, we're going to allow this one. And that would be allowed under this statute. That would be allowed. But they can't develop policy. It has to be case-by-case, it has to be idiosyncratic. You are not allowed to do uniform- How does, how does, how do they, I wonder how you, how do you, how do you not violate this law? How do you not have a policy? Exactly. And the whole point of the reason for this, the reason they're not allowing, but it has to be case-by-case. Let's be really clear on why. Because if boards develop to policy, then shareholders could urge boards to develop a policy. And the last thing they want is for shareholders to be able to press your boards. So they make it so that the boards' hands are tied. They can only act case-by-case, and that way shareholders can't demand something in order. All right, all right, all right. Third, third thing, I love this one too, it doesn't make any sense, so it's beautiful. Remember, a while back, as we've just said, Delaware authorized broad shareholder agreements? Right, it contracts with the corporation. Yeah, okay, you said that, by the way, that's nice with some rising then, right, go ahead. The corporation can form a contract with a shareholder that would permit predatory proposals under whatever conditions the contract says. From that shareholder. No, just whatever conditions the contract says. So they can't pass a by-law that would allow predatory proposals on broader terms than the statute, but they could contract with a shareholder to allow predatory proposals. Okay, so wait a minute. I want to turn the terms, then the statute authorized it. So going back, go ahead, yeah, sorry. No, so I mean, look, so boards can allow more shareholder proposals than the rule provides, but only if they act idiosyncratically, or they can contract with a shareholder to allow it, but they can't put it in the by-law. So that company, so a Delaware corporation could contract with some controlling shareholder who says, "You know, I like shareholder proposals." Yes. But it doesn't have to be a controlling shareholder. It can be- Well, that was my next example. So they could be a controlling, I mean, the most likely contracts are usually with controlling children, because there's also some other stuff that they put in the contract, all right? So they could contract with some VC investors, okay, and that investor says, "I'm a supporter of shareholder predatory proposals, and I want you to allow these." And they could put some rules, and the rules could mirror what's in this law, the rules could mirror what's in 14A, right now the rules could be whatever they make up. Exactly. Okay. So I mean, there are just so many things that are crazy about this. So the reason it's- boards can't just change the rules, and they have to act case by case, again, is because if the boards were capable of developing like a uniform rule, I'm going to broadly allow predatory proposals on different terms, then shareholders could demand that boards do that. And I think the whole point here is to make it so boards can tell shareholders, "Whoops, nothing I can do." No. And my hands are tied. My hands are tied. And I said this before that if 14A/8 is repealed, the first thing that's going to happen is shareholders are going to go company to company and demand that boards- And that's happening. There's a bunch of proposals out there, right? There's proposals that are being submitted to proposals about proposals. Exactly. And shareholders trying to spare boards the embarrassment of having to tell shareholders, "I just don't want to." So instead, the dollar is telling boards, "You have to act case by case, but you can't create a new rule about this." But at the same time, Delaware doesn't actually want to limit board power. That would create a lot of problems across the board. So the statute allows boards to flex. expand access to the proxy without developing, without, you know, without telling me institutionalized procedures and then the contract thing, of course, I mean, the contract thing is so bizarre to me because up until now Delaware has been insisting that bylaws or contracts, but now know you can contract. Two foot broader shareholder proposals broader shareholder proposal rule them what's in the statute, but you can pass a bylaw for it. Okay, that just means that instead of asking for a bylaw, shareholders are going to go around saying, okay, can you form a contract with the New York. So, and so here's the example I was going to bring up is that just recently, because their annual meeting is may already taken place, Microsoft is always have these off cycle meetings. Microsoft's AGM is like sometimes soon, I can't remember it's in the winter and they just it was news about how they agreed with I think they conservative think tank and national equal policy. Right. To allow unlimited, you know, some large number of shareholders proposals, contravening what was going on in 1488 recently where they, okay, so I think it was Microsoft. So, actually, the really interesting question is what that counts as a shareholder agreement such that. Yes, that was my question. Suppose they suppose they, suppose they reduce that to writing and it met all the other. I don't know. Attributes attributes attributes of a contract with that. And so, suppose Microsoft said Microsoft, which is a dollar corporation. Yeah, I think they're dollar corporation said said said, okay, we really want to try to get around this new statute that the Delaware. Legislature just approved, we're going to contract with evolved folks, the NLPC to allow and that that would allow them to implement whatever shareholder proposal system. They want rather than what's in this. That is how I understand the statute. I mean, wait, I just checked. They are not affecting corporate and Delaware, so it's not the issue. Oh, never mind, sorry, Washington. But other companies could. Sorry. Okay. All right. Let's talk about a little bit of the detail. Then we can, then we can sort of wrap up some comments about this. So, in some respects, the new Delaware proposed Delaware statute looks a lot like 1488. Okay. There's a 500 word limit, okay? There are ownership requirements under the SEC's current or abandoned 1488 rule. It's, you know, $2,500 worth of shares for three years and $25,000 for one year. This law significantly increases them. Yes. You need to have, if you're a single shareholder moving one of these, you have to have $250,000 worth of shares. And if you're in a group and they allow up to 10 shareholders to form a group, you need a million. Yeah. A million dollars worth of shares. So, the SEC rule, that's a lot more than the SEC rule. Now, technically, the SEC rule does not allow aggregation, so it's different in that it allows aggregation. But, yeah, the numbers are much higher. Right. There is a notice period. So, right now, the SEC is, I think, a little vague in 1488 about what's a notice period? I think that's similar. Oh, no, the new notice period is 180 days. It's six months. Yeah. I don't think that's unusual, actually. Oh, all right. No, usually, usually it's four to four months, something like that. Really? So, there's the same notice period, yeah. The years, there's some, I will talk about the exclusions. There is a resubmission threshold. And the SEC has that. Has that. And this one is, you need to have had 15 approval from 15% of the shareholders. If you haven't had that in either of the past two years, you can't submit a proposal. And that applies to any proposal. So, that applies to the proponent, not the proposal. I'm pretty sure I can go reread that. Okay. But that 15% is could potentially be kind of limiting a lot of the precutory proposals in recent years have, you know, gotten comfortably under 50. There's a bunch of governance ones that are achieving those kind of success. But a lot of the E and S stuff tends to, has been falling under the 15% level. So, there's that. But then there's a very interesting novel relative to the current reg limit, which is the limit on the number. And that varies by size of company. Yeah. Which is really bizarre. Because first, it's in statute. It's not indexed. So, you know, two years from now, market caps are going to change. And it's still going to be the same. Okay. So, if you're a market cap of over 100 billion, that's with a B. Yeah. You can have as many as three. Yeah. So, the maximum is three. And right, if they get more than three, then it's the top three shareholders. Right. And the three largest shareholders or groups, I don't know, submitting. Yeah. Proposals are the winners. Okay. So, if you get six, they just figure out who the top three shareholders are in terms of aggregate shares. And those three are the ones that count. And then if you're between 50 and 100 billion, it's two. If you're between 30 and 50 billion, it's one. Same idea that you're sort of, they call it like this kind of bucket concept. Yeah. Which I thought, and I thought, by the way, just as a comment. Look, I don't know how to draft legislative draft statute. I actually did draft statute in graduate school in the 80s. So, I'm a little familiar how to draft statute. And it doesn't look like anybody here knew what they were doing. It's talking about buckets and stuff. We'll talk about it a little while. I mean, I mean, I again. And then if you're under 30 billion dollars in that bucket, there's none. You're not required to have any. And there's a lot of companies under 30 billion dollars. It's not just that. It's like the reality, though, is that in terms of who gets shareholder proposals, it is large companies that are consumer facing. Those are the ones who get the most proposals. Yeah. The companies get no proposals at all. The ones who do get them are big companies that are consumer facing. And they usually get six, seven or eight, maybe more. They get a lot, right? Yeah. So what. So it's your Amazon's, your Coca-Cola's, your Facebook's, your. McDonald's, right. Those are the ones that get shareholder proposals. So I think it's a practical matter. This is dramatically reducing the number because it. I mean, not just like a maximum of three, but like. Usually it's the biggest companies that get a bunch. And then everybody else gets none or maybe one every five years. So it's a practical matter. This is really just cutting down the number of proposals. Right. Well, to benefit those biggies because. Yeah. Anyway. So, so this was. A little bizarre by size of company. Because, you know, frequently, you know, I may want to. It doesn't happen a lot, but there's a chance I may want to move a precatory proposal on some subject. That at a smaller company and this will eliminate that. Yeah. So, so the other interesting thing we talked about a moment ago was some of the exclusions. Remember the current 14 A8 has this list of like 14 exclusions that apply. The most famous one is ordinary business. Right. And that interestingly isn't here. But there were some others and they were. They were a little, a little looser about the exclusions. They seem to mirror ones that existed 14 A8 become up rarely. Right. So, so 14 A8, like the big one, as you said, is or is the ordinary business exclusion. Right. And it doesn't have anything like that. Basically, these are. Exclusions that are intended for. The. I'll pulmars are put at the crackpot exclusions. Yeah, that's right. Right. And, but so they, they. It's kind of gesture in the direction of some of these because there's one. In this current proposed law that excludes. You can exclude proposals that question the character of a director nominee. Well, that's because they don't want to write partially because they don't want to be used as a stealth way of running a proxy contest. That's not fine. Okay. But yeah, but there's one. There's one. There's one to read. Okay, fine. There's you can. You can't use these proposals to redress a claim or grievance. That's. Yeah, that's in 14th, but there's that no consumer complaints. Right. I mean, like I said, this is the crackpot. He's like, you know, I've seen some like some shoulder proposals are really pretty nutty. They're like, I want free tickets to. Great adventure. So again, you know, and like those. Okay. The last one. This is where this is what caught my attention about. The drafting of the statutory language. The last one is they could exclude any proposal that quote. No rational person would determine that the proposal is relevant to the corporation or its business. End quote. See, I'm not. I don't have a problem with that. In terms of having a judge. What. What it means for a rational shareholder to be rational. I honestly think I honestly think that that is meant like historically when 14 or eight. The predecessors were first drafted. And then the company's got proposals like the antitrust law should be repealed or social security should be extended to. Yeah, right. Like, literally irrelevant. And I honestly think that that is intended to get it that like it's not meant to be. A stealth ordinary business or I don't think Amazon should do that. It's it's meant to be like proposals that are essentially random things that have nothing to do with the business. Okay, I'm sorry the idea of a have a chance to record a chance for your judge trying to determine whether the proponent was rational or what any rash seems to really open a vistas of legal reasoning that hasn't ever been covered. Okay, but I actually don't think it's I mean, I think it's the crackpot. It's an a crackpot exclusion. It's not really. It's not there to say, well, this is only a small part of Amazon's business. It's not that. It's it's meant for the crazy ones. Okay, so what does all this mean? Well, I want to point out another thing that's in the proposal, though, it's not substantively. There's it's in their white paper. Oh, yeah, okay, go ahead. There's this weird and random comment in the draft that I want to highlight. So one thing we already just said it is if the SEC repeals 14 a eight shareholders are going to go company to company and propose bylaws that require companies to accept shareholder proposals on the core prox. Right. Proposes about proposals. We take not just and specifically bylaws. They're going to say I want you to pass a bylaw. You know, this is a shareholder enacted bylaw to to allow for prick. Oh, I'll pay for the draft in a footnote expresses the opinion that it's illegal that those bylaws would are illegal under Delaware law. And in fact, shareholder today, the shareholders cannot today go and enact a bylaw under Delaware law that would permit predatory proposal and just trust me when I say, I am very skeptical of that claim. It's predicated on this one case that was decided in 2008 that left a lot of open questions and a lot of avenues to draft bylaws that would comply with Delaware law. Wow. So I mean, I think that what they're trying to do is suggest that this whole proposal is an expansion of shareholder rights, but I think it's a curtailment and their justification for why it's an expansion is the footnoted claim that shareholders could not today pass a bylaw that allows predatory proposals. And I think that is very doubtful. That footnote is going to get a lot of attention in the next few months. All right. As I started saying, what does this mean for Delaware? For America, for us as activists and legal scholars. Well, and I have a couple of ideas, but I'm going to get yours first. Well, I mean, so the thing is that Delaware's proposing this now where we've just had this election. And the SEC hasn't even changed 14 a eight. That hasn't even happened yet. Where's the comment period still open? This is right. The Delaware's claim is that this is necessary because people have to prepare for annual meetings far in advance, something something something. But remember, a lot of the SEC's argument in why they're repealing 14 a eight is that they want to make this a state matter. They think this is more appropriately a state matter. They think we've created too much substantive federal law and we should put this in the states by proposing this statute now. Delaware is saying SEC your right. We can take it from here. We'll create our own rules that we think are best. What Delaware is saying with this new statute is SEC, you're correct. This is a state matter states can take care of it. So if the SEC goes ahead and repeals 14 a eight when somebody sues, which they will absolutely do and say that the repeal was arbitrary, was arbitrary and capricious, the SEC is going to be able to say we were right. The state's adapted Delaware passed this law. So Delaware acting now whatever law they pass, whatever law they pass, they're not just acting. They are actively siding with the SEC. They are assisting with the SEC repeal of 14 a eight and actively helping to weaken shareholder rights merely by putting this on the table. So the real question I have is why? I mean, the whole first part of our show we were saying Delaware should be feeling less pressure to protect managers and more pressure to strengthen shareholder rights. So why is the legislature raising to get this out now? And to me, this makes me think there are some attorneys in Delaware who have found in the past few years that they can kind of scare the legislature into passing laws that they want to see passed and they can get legislation that benefits their clients. And they're not willing to give that up just because the legal landscape changed. Oh, or the or the electoral landscape? Exactly. Just because that changed, they're not going to give that up. So like when SB21 and SB313 passed, there were a lot of us, meaning, you know, commenters and academics, we're basically like, look, maybe Delaware does have to change its law, maybe the competition from other states is real, but it's going a lot farther than it necessarily has to just to maintain the franchise. It's going farther, very likely because Ed Rock called them corporate governance entrepreneurs. He called them corporate governance entrepreneurs or kind of have the ear of the legislature and they're making it sound like you need much bigger fixes than you really do because that's what their clients wanted. So I'm afraid that we're seeing something like that here. The pressure on Delaware, I think is actually a lot less than it was before Tuesday, but right. And it was never really significant. They're losing. No, not shareholder proposals. Right. Yeah. Exactly. Yeah. But there are some who have the year of the Delaware legislature who are perhaps not letting a good crisis go to waste. And they want to get this out there now. And you have legislators that are relatively naive about all this because they've spent decades listening to this exact section when the section says you need to do this because it's kind of better for us. They say, cool. We're not, we're not, we're not going to lose our jobs in the next election if we do this. Yeah. So, I mean, this is the thing that like, so if they're telling them, if anyone is telling the Delaware legislature, so first of all, obviously, as we said, the, the, the, the, the landscape has changed the competition to Delaware, I'm not going to say it went away. We don't know how Texas shakes out, but I think the pressure is less than it was. It is materially diminished in like a week's time, which is really unbelievable. But yes. But also, let's think about Texas and shareholder proposals. If you think you need to compete, first of all, as you say, no, no, boards don't like shareholder proposals. They're not re-incorporating over it. But even if they were Texas passed a law that limits shareholder proposals as well. But the Texas law, yeah, it's absolute. It's like $3 million. I mean, you can put it, yeah, you can, well, you can put it in your bylaws. It's, it's voluntary. But here's the thing. It's 1 million in stock or 3%. But here's the thing about the Texas law. It only applies if you're organized in Texas. And also you have headquarters in Texas or trade or you're or you're traded on the Texas stock exchange. Right. You can't just reorganize in Texas and take advantage of their law. No, no, no one is putting your headquarters in Texas because they want to avoid shareholder proposals to escape shareholder proposals. So I mean, the idea that this is a threat to Delaware is just bizarre. But you know who really is a threat? Unless a person Warren. Yes. And Delaware starts looking like it's amending its law just to do whatever boards wanted to do. That's when the federal threat increases. Yes. And I'm not sure that message is getting and and I'm not sure that message is getting through quite quickly. Getting through to the corporate section. Exactly. Or getting through the legislature. So yeah, and go ahead, yeah. No, and that's why they're doing this 60 day comment period. They're trying to signal we're not just beholden to the corporate law sections clients. They're trying to signal this is a technocratic process. We're just like an agency. We're just like the SEC. In fact, there was actually a paper. It was written by Charles Whitehead of Cornell. And he made this exact argument that Delaware should adopt formal agency procedures to amend the corporate law. And that's exactly what it's doing. But I don't good. The substance. Well, fine. But the substance of what you do it. Do it like around SB 21, please. Not our own share of their proposals. So what you were saying. So what were you going to start as my I was going to say that this is this is this feels like a bunch of corporate lawyers carrying their water as we used to say when I worked in the legislature for a select number of corporate clients that said, look, we got some pressure on us to maybe do this. But let's see sort of what we can accomplish here in Delaware that will really meaningfully make this a non-problem for us, even though it wasn't really a problem to start. So because, you know, clearly this is a big solution in search of a very. It said I had rock called it corporate governance entrepreneurs. And I think that's that sounds right that like they're they're not going to they're not going to let the change in election stop. The people are clients that they want to show that they can do something. They're not going to they're not going to let the change. All right. Oh, man. All right. Let's return to this. Maybe when the comments are up. Hopefully this will die. But I unlikely thus far. The last couple of years, the corporation law section has not shown restraints and they're not and the legislature seems inclined to go on. That's cool. All right, cool. All right. Let them go along. All right. Let's let's put this one to bed to this. Yeah, well, let's see what Elizabeth Warren does. This is she'll hold her primacy hosted by Ann Lipton and me, Mike Levin. I'm an independent activist investor and advisor to investors about their activist situations and is professor of law and the Lawrence W. Demeath chair of business law at the University of Colorado law school. You can find me, Mike, at theactivistinvestor.com. You can find Ann at law.colorado.edu. We thank free flow media for producing and distributing our show. Thanks to our followers here for listening and talking. (upbeat music)