Petition for Writ of Certiorari — Grimes v. Ohio Edison Co.

No. 93-_____

IN THE ;

Supreme Court of the Gnited States

OCTOBER TERM, 1993

C.L. GRIMES,

Petitioner.

Vv.

Ovni0o EDISON COMPANY,

Respondent.

On Petition for a Writ of Certiorari to the United

States Court of Appeals far the Second Circuit

PETITION FOR A WRIT OF CERTIORARI

THADDEUS HOLT

910 16th Street N.W.

Suite 400

Washington, D.C. 20006

(202) 223-9010

Attorney for Petitioner

(Counsel of Record)

August 18, 1993

PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203

¢ . ta a

a

i it

QUESTION PRESENTED

If a stockholder wants to bring up a proposal for

fellow stockholders to vote upon at the corporation’s

annual meeting, the SEC’s rules require management

upon request to include, in the proxy materials for

the meeting, (a) the proposal, (b) a supporting state-

ment, and (c) a proxy ballot. However, these materials

need not be included if, inter alia, the proposal ‘‘deals

with a matter relating to the conduct of the ordinary

business operations” of the corporation.

Did the court below err in holding that stockholder

proposals to change corporate governance—however

major they may be—fall within this exception unless

no corporate action that could be taken pursuant to

the new corporate governance is itself a matter of

“ordinary business’; and that management can there-

fore exclude all mention of such a proposal from the

proxy materials?

PARTIES TO THE PROCEEDING

The names of all parties appear in the caption of

the case.

ill

TABLE OF CONTENTS

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PARTIES TO THE PROCEEDING ..................c00eeeees

TABLE OF AUTHORITIESG. ................0cc000 eaten

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE

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I.

II.

III.

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C. Regulations Involved ................cccccccccecceee

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A. Basis for Federal Jurisdiction in the Court

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B. Facts Material to the Consideration of the

Question Presented ............cccceeeeeeseeeeeeeees

1. A Prefatory Comment .................cc0000

2. The SEC’s Stockholder Proposal Rules

and the “Ordinary Business” Excep-

acai cid snnasnkasssbechinncnss

3. The Factual Background and the Pro-

ceedings Below ........... TOT ROTOT

Reasons for Allowance of the Writ .............

A. The Decision Below Is Wrong ................

B. The Question Presented Is an Important

Question of Federal Law Which Has Not

eter But Should Be, Settled by This

DE MstMMnAdniahabaebtndeouseceenéensseessuncescnrenneses

1. The Implications of the Interpretation

Followed Below Are Devastating to the

Cause of Reform of Corporate

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Page

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14

14

iv

Page

2. It Is Timely and Appropriate for This

Court To Address the Stockholder Pro-

posal Rules and Corporate Governance

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APPENDIX:

A. Opinion of the Court Below .............ccceeeeeeeeeeee la

B. Opinion of the District Court ..............0 cece eeeeee 10a

C. Judgment of the District Court ........000. 17a

D. Order of the Court Below Denying

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E. Regulations Involved. .................ssccccssseccceesssceeees 20a

TABLE OF AUTHORITIES

Cases: Page

Amalgamated Clothing Workers v. Wal-Mart Stores,

Inc., 821 F. Supp. 877 (S.D.N.Y. 1998) ......... 4,6

Business Roundtable v. SEC, 905 F.2d 406 (D.C.

RAs RE Wituiiictea eee ee aoe hee 12 n.8

Grimes v. Centerior Energy Corp., 909 F.2d 529

(D.C. Cir. 1990), cert. denied, 498 U.S. 1073

SN sideeicetiiiecconesaies eer ae 3,10,11 n.6,14,16

Kixmiller v. SEC, 492 F.2d 641 (D.C. Cir. 1972). 8 n.3

Medical Committee for Human Rights v. SEC, 432

F.2d 659 (D.C. Cir. 1970), vacated as moot, 404

as Oe TOD pice ee 5,8 n.3,17

Roosevelt v. E.I. du Pont de Nemours & Co., 958

F.2d 416 (D.C. Cir. 1992) ........ 9 n.3,13 n.9,14 n.10

Statutes:

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Deca i Re eR tay 8 n.3

BP Wm as BRED aids stabiccueh pcos sadicnbostagelles ccs 2

Be ris, © BEE saseseviscavenesoassarendsvicharavavaneccéasecesseccs 2

OHIO REv. Cope ANN. § 1701.04 (Page 1988) ....... 7

Regulations:

17 C.F.R. § 240.14a-8 000... 2,4,9 n.4,11 n.6,13 n.9

17 C.F.R. § 240.14a-8(CX(7) .........ecceccessooseoceseeee.... 5,11 n.6

17 C.F.R. § 240.14a-8(C)(8) o..ceececcccccscsseceeeceeceecec.. 16 n.11

17 C.F.R. § 240.14a-8(CX 13) ooeceeccecceccecceceeeceeceeeee.. 16 n.12

ET UP. GROOT) ovivssccicccccsisivccdcsccccccee ccc. 8

By OCP. SOT... 11 n.6,13 n.9,18 n.13

RE CPB. GOO RAW) cocci ciccsscébccccasosssndece, 2,9 n.4

Table of Authorities Continued

Page

Administrative Materials:

Adoption of Amendments Relating to Proposals by

Security Holders, Exchange Act Release No.

12,999, 41 Fep. REG. 52,994 (December 3,

EP WUD: sutsissnnsnscsusajichivenadensscinraaeeeaaies 6,13

IN THE

Supreme Court of the Gnited States

OCTOBER TERM, 1993

No. 93-___

C.L. GRIMES,

Petitioner,

V.

OHIO EDISON COMPANY,

Respondent.

On Petition for a Writ of Certiorari to the United_ —_

States Court of Appeals for the Second Circuit

PETITION FOR A WRIT OF CERTIORARI

C.L. Grimes respectfully petitions the Court for a

writ of certiorari to review the judgment of the United

States Court of Appeals for the Second Circuit en-

tered in this proceeding on May 8, 1993 (order de-

nying rehearing entered June 7, 1993).

I. PRELIMINARY MATTERS

A. Opinions Below

The opinion of the court below is reported at 992

F.2d 455 (2nd Cir. 1993), and at [1993] Feb. Src. L.

REP. (CCH) 97,440. It is reprinted at p. la of the

Appendix to this Petition (hereinafter cited as ““App.’’)

The order of the :ourt below affirmed a judgment

of the United States District Court. of the Southern

District of New York. That court’s opinion is reported

at [1992] Fep. Sec. L. Rep. (CCH) ¢ 96,840. It is

reprinted at App. 10a. The district court’s order is

reprinted at App. 17a.

B. Jurisdiction

The opinion of the court below was issued on May

3, 1993. App. la. Judgment was entered the same

day. Petitioner, plaintiff below, filed a timely petition

for rehearing. An order denying his petition for re-

hearing was entered on June 7, 1993. App. 19a. This

Court has jurisdiction to review the judgment below

by writ of certiorari under 28 U.S.C. § 1254(1).

C. Regulations Involved

The regulations involved, 17 C.F.R. §§ 240.14a-8

and 240.14a-9(a), are printed at App. 20a.

II. STATEMENT OF THE CASE

A. Basis for Federal Jurisdiction in the Court of First

Instance

The court of first instance was the United States

District Court for the Southern District of New York.

It had jurisdiction of the action under 28 U.S.C.

§ 1331, in that the action is a civil action arising

under the laws of the United States, and under § 27

of the Securities Exchange Act of 1934, 15 U.S.C.

§ 78aa, in that the action is based upon a violation

of that Act and regulations of the SEC issued there-

under.

Oe

B. Facts Material To the Consideration of the Questions

Presented

1. A Prefatory Comment

The decision of the Second Circuit below, inter-

preting the SEC’s stockholder proposal rules, ex-

pressly follows the interpretation of them in Judge

Buckley’s opinion for the District of Columbia Circuit

in an earlier case involving the same petitioner, as

to which this Court denied certiorari. Grimes v. Cen-

terior Energy Corp., 909 F.2d 529 (D.C. Cir. 1990),

cert. denied, 498 U.S. 1073 (1991).

No other circuit has addressed the question.

The unreflecting conventional “wisdom” would ac-

cordingly suggest that there is no point in filing this

petition.

We respectfully submit that in this instance the

conventional wisdom would be wrong. The interpre-

tation of the SEC’s stockholder proposal rules enun-

ciated by Centerior and followed in this case will not

withstand examination. Yet if it is generally accepted

it will be devastating to the cause of corporate gov-

ernance reform. We respectfully submit that this

Court’s intervention is warranted and needed.

2. The SEC’s Stockholder Proposal Rules and the

“Ordinary Business’’ Exception to Them

The 1933 and 1934 reforms of the Securities and

Securities Exchange Acts introduced the regulated

proxy statement issued with respect to a stockholders’

meeting as a means by which stockholders of widely-

held corporations would be given full information

about corporate events and management intentions.

But management still controlled the proxy statement;

stockholders had no access to it as a matter of right.

Management thus had total control over the agendas

of corporate meetings. So beginning in 1942 the SEC

issued its stockholder proposal rules, codified as SEC

Rule 14a-8, 17 C.F.R. § 240.14a-8 (text at App. 20a).

They provide that if a stockholder proposal and sup-

porting statement are presented to management un-

der prescribed conditions, management must include

them in the proxy statement, and provide space on

the proxy for stockholders to indicate their vote, un-

less the proposal falls within one or more of 13 spe-

cified excluded categories.

The proxy statement remains the only feasible

means for stockholders to communicate with each

other effectively. And with respect to matters that

fall within one of the 13 exclusions, stockholders can

actually be worse off than they were before 1933, in

light of various restrictions on other methods of stock-

holder communication. To prevent rules that were

meant to facilitate stockholders’ exercising their state

law rights from effectively narrowing those rights,

the 13 exclusions are construed narrowly and the bur-

den is on management to show that a proposal is

caught by one of them. See the authorities cited in

Amalgamated Clothing Workers v. Wal-Mart Stores,

Inc., 821 F. Supp. 877, 883 (S.D.N.Y. 1998).

The 138 exceptions are a one-way street: they do

not apply to management proposals. Management can

introduce ‘‘poison pills,’ “‘golden parachutes,” and all

the rest of modern corporate gimmickry—and stock-

holders will be helpless to eliminate them if they are

caught by any of the 13 exceptions.

Only one of the 18 exceptions to the stockholder

proposal rules, Exception 7, SEC Rule 14a-8(cX7), 17

C.F.R. § 240.14a-8(cX7), App. 24a, is here involved.

It provides that a proposal and associated material

can be omitted from proxy materials—

“{iJf the proposal deals with a matter relating to

the conduct of the ordinary business operations

of the [corporation].”’

Two aspects of this exception are important here.

First, the policy behind it. The ‘‘ordinary business”’

exception was adopted so that the Commission would

not be in the position of forcing management and the

body of stockholders to spend time on individual

stockholders’ attempts to ‘dictate the minutiae of

daily business decisions.” Medical Committee for Hu-

man Rights v. SEC, 482 F.2d 659, 679 (D.C. Cir.

1970), vacated as moot, 404 U.S. 403 (1972). Nothing

in it precludes the stockholders themselves from vol-

untartily changing their corporate governance so as

to provide that they will consider particular subjects,

be they “minutiae” or not.

Second, the SEC’s own explanation of the ‘ordinary

business” exception. When it adopted the exception

in its present form, the SEC explained that it applies

only to (a) “‘mundane”’ matters that (b) have no major

implications or substantial policy or other considera-

tions:

“{P]roposals ... that have major implications,

. will in the future be considered beyond the

realm of an issuer’s ordinary business operations

.... [W]here proposals involve business matters

that are mundane in nature and do not involve

any substantial policy or other considerations, the

subparagraph may be relied upon to omit them.”

Adoption of Amendments Relating to Proposals by Se-

curity Holders, Exchange Act Release No. 12,999

(hereinafter cited as ‘‘Interpretive Release’), 41 FED.

REG. 52,994 at 52,998 (December 3, 1976) (emphasis

added). Plainly, only ‘‘mundane’’ proposals are ex-

cludable. And even a ‘‘mundane” matter is not ex-

cludable unless it involves no ‘‘substantial policy or

other considerations.’ A proposal that deals with both

“ordinary” and “‘non-ordinary’ matters is thus not

excludable. In Amalgamated Clothing Workers v. Wal-

Mart Stores, Inc., supra, 821 F. Supp. at 890

(S.D.N.Y. 1993), Judge Kimba Wood called this a

“conjunctive standard.’’ As she there said, the In-

terpretive Release—

“explicit[ly] recogni{zes] that all [emphasis orig-

inal] proposals could be seen as involving some

aspect of day-to-day business operations. That

recognition underlay the Release’s statement that

the SEC’s determination of whether a company

may exclude a proposal should not depend on

whether the proposal could be characterized as

involving some day-to-day business matter.

Rather, the proposal may be excluded only after

the proposal is also [emphasis original] found to

raise no [emphasis added] substantial policy con-

sideration. See 1976 Interpretive Release, 41 FED.

REG. at 62,998 ....”

3. The Factual Background and the Proceedings Below

Petitioner Grimes is a stockholder in respondent

Ohio Edison, an Ohio electric utility holding company.

Under Ohio Edison’s Amended Articles of Incor-

poration and by-laws as they presently stand, the au-

thority to make capital expenditures is vested solely

in the board of directors except in circumstances not

applicable here.

The General Corporation Law of Ohio provides that

the articles of incorporation of a corporation may set

forth “[aJny lawful provision for the purpose of de-

fining, limiting, or regulating the exercise of the au-

thority of ... the directors, the officers, the

shareholders, or the holders of any class of shares.”’

OHIO REV. CODE ANN. § 1701.04 (Page 1988). Con-

sistently with this provision, in October 1990 Grimes

advised management that he intended at the next

meeting of the stockholders (the 1991 annual meeting)

to offer an amendment to Ohio Edison’s Articles of

Incorporation that would transfer the authority to

make certain decisions—specifically, capital expendi-

tures above a defined threshold amount—from the

board of directors acting alone, to the board and the

stockholders jointly.!

A company that has been properly notified by a

stockholder that he wishes to present a proposal, and

1 The text of the proposal in its original form was as follows:

“The Company (or in the aggregate any combina-

tion of the Company and/or its subsidiaries) shall not

without the formal prior consent of the common share-

holders in each instance, expend in any calendar year

any monies by way of capital or construction expend-

itures in excess of $300,000,000; provided, however,

that the consent of such shareholders shall not be

required unless the amount of such expenditures ex-

ceeds the cash amount paid to the common share-

holders as dividends in the preceding calendar year.’’

App. 3a.

which takes the position that the proposal falls within

one or more of the 18 excluded categories in the

stockholder proposal rules, must make required filings

with the SEC setting forth why it contends that the

proposal falls within one of the 13 categories. SEC

Rule 14a-8(d), 17 C.F.R. § 240.14a-8(d), App. 25a. Ohio

Edison made such filings in this instance, contending

that Grimes’s proposal fell within the ‘‘ordinary busi-

ness’’ exception.”

In response to Ohio Edison’s filing, the SEC staff

issued a “‘no-action’’ letter, advising that the proposal

appeared to deal with a matter relating to the com-

pany’s ordinary business operations, and that accord-

ingly it would not recommend enforcement action to

the Commission if the proposal were omitted from

the proxy materials. App. 4a. Grimes suggested a

2It also contended that the proposal fell within three addi-

tional exceptions. Neither the SEC’s staff nor the district court

nor the court below addressed these contentions.

8’ The SEC itself (as opposed to its staff employees) never, or

almost never, acts in individual stockholder proposal cases, and

it declines to review staff determinations. This refusal to inter-

pret its own rules reflects continuing Commission resistance,

after more than twenty years, to the decision of the District of

Columbia Circuit in Medical Committee for Human Rights v.

SEC, supra, that a Commission ruling that a proposal need not

be included in proxy materials was reviewable in the court of

appeals under § 25(a) of the Securities Exchange Act of 1934,

15 U.S.C. § 78y. Subsequently, the District of Columbia Circuit

held, in Kixmiller v. SEC, 492 F.2d 641 (D.C. Cir. 1972), that

a staff no-action letter on a stockholder proposal, as opposed to

a ruling by the Commission itself, was not reviewable under the

Securities Exchange Act. Accordingly, to avoid judicial review

the Commission has left shareholder proposal matters to the

staff ever since. And the staff earefully includes with every no-

revision to his proposal addressing some of the ob-

jectings expressed by the staff, but the staff reiter-

ated its conclusion. App. 4a.

Ohio Edison proceeded to distribute proxy materials

for the 1991 annual meeting that omitted any mention

whatever of Grime’s proposal. App. 4a.

Grimes accordingly filed the present action in the

district court, requesting a declaration that his pro-

posal was one that must be included (together with

his supporting statement and an opportunity for

stockholders to direct how their shares were to be

voted on the proposal) in Ohio Edison’s proxy ma-

terials upon proper request, and fell within no ex-

ception to the mandatory requirements.‘

action letter on a shareholder proposal a disclaimer which dis-

claims any attempt to “‘adjudicate’’ the merits of a company’s

position with respect to a proposal, and ‘‘passes the buck’’ to

the courts. See generally the discussion of the Commission’s

policy and procedures in Roosevelt v. E.J. du Pont de Nemours

& Co., 958 F.2d 416, 423-24 (D.C. Cir. 1992).

*He also sought a declaration based on SEC Rule 14a-9%(a),

17 C.F.R. § 240.14a-9(a), App. 27a, which forbids the use of

————proxy materials which omit to state ‘‘any material fact necessary

in order to make the statements therein not false or misleading.”

Taking the position that proxy materials which omitted to inform

stockholders of the fact, known to management, that Grimes

would offer at the meeting a major amendment to the articles

of incorporation would be inherently misleading—whether or not

the proposal fell within one or more of the excluded categories—

Grimes contended that even if his proposal fell within a 14a-8

exception, so that full-text presentation, a supporting statement,

and a special voting provision on the proxy were not required,

management must under Rule 14a-9 at least apprise the stock-

holders that such a major proposal would be raised at the meet-

ing.

10

Ohio Edison moved to dismiss the complaint for

failure to state a claim on which relief could be

granted. The district court granted the motion on the

ground that Grimes’s proposal fell within the “‘ordi-

nary business’ exemption because it ‘‘would involve

shareholders in decisions which have typically been

the province of corporate management.”’ App. 15a.°

On appeal, the court below affirmed in an opinion

by District Judge Zampano (sitting by designation).

The opinion applied (without articulating) the same

test as that applied in Judge Buckley’s Centerior opin-

ion. Rather than asking whether the proposal to re-

form corporate governance actually before it dealt

with a matter relating to ordinary business opera-

tions, it considered whether an ordinary business ac-

tion might subsequently be taken under the revised

form of corporate governance if it were adopted. As

to this it said:

“The problem with Grimes’ proposal is that it

does not target a particular capital expenditure,

thereby precluding a determination as to whether

any expenditure subject to his proposal has sig-

nificant economic, policy or other implications.

Once Grimes’ spending threshold of $300 million

is reached, each capital expenditure thereafter by

Ohio Edison, including such routine expenditures

as the purchase of a typewriter or a new desk,

which are clearly matters of ordinary business

operations, would require shareholder approval.

5 As to Grimes’s second contention, the court simply made the

conclusory observation that “i]t is also true that the failure to

mention plaintiff's proposal does not render defendant’s proxy

materials false or misleading.” App. 15a-16a.

Sr ll

11

Thus, the district court correctly determined that

the Grimes’ proposal fell within Rule 14a-8(c)7).”

App. 8a (footnote omitted).

In other words, a proposal to change corporate gov-

ernance—however drastic or significant the change

may be—is exempt from the stockholder proposal rules

unless no action that might be taken pursuant to the

change is a matter of “‘ordinary business operations.’’6

III. Reasons for Allowance of the Writ

A. The Decision Below Is Wrong

This not the place to argue the merits, but we point

out that this interpretation both contradicts the plain

language of the rule and is inconsistent with the

SEC’s own interpretation.

It contradicts the plain language of the rule because

it overlooks the crucial fact that Grimes’s proposal

deals only with the distribution of authority among

the organs of the corporation. Manifestly, such dis-

tribution of authority among the organs of the cor-

poration itself has “‘significant ... policy

implications,”’ and hence itself is not an ordinary busi-

ness operation—whatever might be the status of mat-

* As to Grimes’s second contention, the court below again

followed Centerior, saying: “If Grimes’ interpretation of Rule

14a-9 were adopted, it effectively would nullify the specific ex-

emptions in Rule 14a-8 by compelling corporations to give notice

in their proxies of proposals qualifying for a Rule 14a-8(c\7)

exemption. This, if the proposal itself need not be disclosed

because it qualifies for an exemption under Rule 14a-8(cX7), the

failure to disclose the fact that the proposal will be presented

at the next shareholders’ meeting cannot render the proxy ma-

terials misleading under Rule 14a-9.” App. 9a.

12

ters to be considered in the future. The proposal does

i not place before the stockholders for their decision

any question of capital expenditure or other business

operations at all, ordinary or otherwise—as the opin-

ion below recognizes in pointing out that it does not

“target a particular capital expenditure.” It does not

place before the stockholders for their consideration

any item of day-to-day ‘‘minutiae.”’ A proposal to

take such major action as amending the distribution

of authority among the organs of the company is not

a “minutia.” And whether Grimes’s proposal, if

adopted, would thereafter involve stockholders in

“minutiae” is trrelevant to a determination under the

“ordinary business”’ exception. For that would not be

a situation forced on them by the SEC—which is what

the exception 1s meant to guard against—, but one

freely chosen by them through amendment of the cor-

— porate charter. And free choice by the stockholders—

freedom to experiment, to make mistakes, to adopt

whatever lawful corporate governance they may

choose, whether or not management or the SEC or

the courts think it is wise or foolish*—is what stock-

holder democracy, corporate responsibility, and the

stockholder proposal rules are all about.

Even if the proper test were not whether the pro-

posal itself was “ordinary business,’”’ but rather

7 We note the logical inconsistency between faulting a proposal

for failing to “target a particular capital expenditure” on the

one hand, and lip-service to a policy against including “‘minutiae”’

in a proxy statement on the other hand.

® The SEC has no authority to define the proper subjects of

stockholder action, or, as one court has put it, to “‘step beyond

control of voting procedure and into the distribution of voting

power ....” Business Roundtable v. SEC, 905 F.2d 406, 410

(D.C. Cir. 1990).

|

13

whether some item of ordinary business might there-

after be transacted pursuant to it, the holding below

(and in Centerior) is also inconsistent with what Judge

Wood called the SEC’s ‘‘conjunctive standard.” (This

is the more singular in that the opinion below actually

quoted the relevant language of the Interpretive Re-

lease.) The opinion does not suggest that every sub-

sequent action that might be taken pursuant to

Grimes’s proposed corporate reform will necessarily

be a matter of “ordinary business.’’ Yet that is what

the language of the Interpretive Release would de-

mand even under the test applied below. Moreover,

since the burden is on the corporation to demonstrate

that a proposal is excludable, rather than on the pro-

ponent to demonstrate that it is not, any uncertainty

‘‘as to whether any expenditure subject to his pro-

posal has significant economic, policy or other impli-

cations,” App. 8a, should fall not on Grimes but on

the company. Yet the court below put it on Grimes.

We note finally that the interpretation here in-

volved is in no sense that of the SEC.® Not only has

it never been passed on by the Commission itself: it

did not even originate with the Commission’s staff,

but with the court of appeals in Centerior. Both the

staff and the district court in that case had ruled on

wholly different grounds. See 909 F.2d at 530-31.

Only after the holding of the court of appeals in Cen-

terror did the staff—presumably feeling itself bound

by that decision—apply the principle.’

* Only if it had reflected formal adjudication or rulemaking by

the Commission itself would it be entitled to the deference ac-

corded to agency interpretations. Roosevelt, supra, 958 F.2d at

427 n. 19.

© The opinion below is also wrong as to Rule 14a-9. Rule 14a-

14

B. The Question Presented Is an Important Question of

Federal Law Which Has Not Been, But Should Be, Settled

by This Court

1. The Implications of the Interpretation Followed Below

Are Devastating to the Cause of Reform of Corporate

Governance

Even given that the court below (and in Centerior)

was wrong, does this case involve more than just one

individual application of the stockholder proposal

rules?

The answer to that, we respectfully submit, is a

resounding Yes. For the effect of the principle in-

volved—that management can exclude a proposed re-

form of corporate governance from proxy materials

if any action that might be taken pursuant to the

reform might involve ‘‘ordinary business’’—is to de-

prive the stockholders of the power to initiate and

effectuate changes in their charter affecting corporate

governance. And, paradoxically, the more sweeping

and ‘‘non-ordinary’’ the proposed change, the more

likely it is to affect “ordinary” as well as ‘“‘non-or-

8 is ‘‘complementary to, although distinct from, the Rule 14a-9

ban on misleading statements in proxy solicitations ....’’ Roo-

sevelt, supra, 958 F.2d at 421 (emphasis added). Rule 14a-8 does

not deal with whether proposals need be “‘disclosed’’; it requires

that the verbatim text of the proposal be set forth in the proxy

statement, together with a statement by the proponent in its

support (and by management in opposition, if it wishes); and

requires that the proxy itself provide for instructions to the

proxy-holder as to how the shares are to be voted. In turn, Rule

14a-9 does not deal with “giv[ing] notice in ... proxies’; it deals

with what disclosures must be made in proxy statements. In no

sense would the mere inclusion of a general disclosure in the

proxy statement “‘nullify’’ an exemption from the requirement

of verbatim text, statement pro and con, and voting instructions.

15

dinary’’ matters and hence to be excluded under the

principle followed below.

Thus, a proposai for cumulative voting for the board

of directors would be excludable from the proxy ma-

terials, for the cumulatively-elected board would ob-

viously vote on many ordinary business matters.

A proposal to require that management compen-

sation_be overseen by a committee of disinterested

outside directors would be excludable from the proxy

materials, on the ground that setting salaries—other

than those of senior executives, at any rate—is an

ordinary business activity.

A proposal to introduce the perfectly conventional

requirement that the preferred stockholders be au-

thorized to elect the board if three successive divi-

dends are passed would be excludable from the proxy

materials, on the ground that the board so elected

would pass on ordinary business matters.

Many proponents of corporate responsibility oppose

“classified boards,’’ under which directors are elected

for staggered terms to forestall clean-sweep replace-

ment of unsatisfactory management by the share-

holders. But a proposal to abolish a classified board

will evidently be caught by the test applied below,

since the ordinary business of any corporation is con-

ducted by its board.

Many proponents of corporate responsibility sup-

port confidential proxy voting, to eliminate abuses

flowing from management’s knowledge of how every

stockholder votes. But, absurd as it may seem, under

the test applied below, any effort to put confidential

voting on a corporate ballot is likely to be blocked

16

on the ground that one result might be confidential

voting on some ordinary business matter.

Indeed, it is not easy to devise a proposal for re-

form of corporate governance that would pass muster

under the test applied below.

There is an even wider ground for concern. The

basic reasoning of Judge Buckley’s opinion in Cen-

terior—with which the opinion below in this case, with

its explicit reliance on Centerior, is wholly consist-

ent—was that to be includable in proxy materials a

proposal must be “‘limited in reach,” 909 F.2d at 532,

solely and exclusively to matters that fall totally out-

side the 13 exceptions, and that if under any set of

hypothetical circumstances some connection can be

made between the proposal and one of the 13 excep-

tions, then the proposal is exempt and can be omitted

by management. On this logic, a proposal for confi-

dential proxy voting could arguably be excludable un-

der the exception for proposals that relate to an

election to office.!! On this logic, since one side effect

of a “‘poison pill’”’ plan will be to dilute the dividends

of existing shares in proportion to the amount of new

stock issued, a proposal requiring shareholder ap-

proval of such plans could be excludable under the

exception for proposals dealing with specific amounts

of dividends.’ Such a niggardly interpretation of the

stockholder proposal rules is diametrically opposed to

their remedial intent and spirit, and we do not sug-

11 A proposal is exempted “‘if the proposal relates to an elec-

tion to office.’”” SEC Rule 14a-8(cX8), 17 C.F.R. § 240.14a-8(c\8).

12 A proposal is exempted “‘if the proposal relates to specific

amounts of cash or stock dividends.”” SEC Rule 14a-8(c\13), 17

C.F.R. § 240.14a-8(cX13).

ee |

17

gest that such interpretations would ultimately be

adopted. But they illustrate the kind of obstacles to

corporate reform which the reasoning of the opinion

below (and of Centerior) affords to any management

resolved upon a last-ditch defense.

It is simply impossible to believe that the SEC in-

tended such bizarre results to follow from the adop-

tion of rules designed to promote management

accountability.

2. It Is Timely and Appropriate for This Court To Address

the Stockholder Proposal Rules and Corporate Governance

Reform

The stockholder proposal rules—which this Court

has never examined in depth—are the cornerstone of

corporate accountability, affected, as the District of

Columbia Circuit long ago said in another case, with

an ‘‘overriding’’ public interest “‘in assuring share-

holders the right to control the important decisions

which affect corporations.”’ Medical Committee for

Human Rights v. SEC, supra, 4382 F.2d at 680-81.

Corporate governance is a topic of intense current

interest (having, for example, been the subject of close

and controversial scrutiny by the American Law In-

stitute for much of the past decade); in the age of

hostile takeovers, poison pills, golden parachutes, and

all the rest, no “decisions which affect corporations’’

are more important than those dealing with Corporate

governance. Yet the reasoning of the court below

would substantially foreclose consideration of stock-

holder proposals on that subject.

For the decision below, together with Centerior, to

remain on the books is doubly pernicious because few

cases under the stockholder proposal rules reach the

courts of appeals; obviously this is because the SEC

forces proposers to resort to the district courts\in the

first instance, see footnote 3 supra, and many\pro-

posers will abandon their efforts if they fail to secure

preliminary relief against distribution of the proxy

materials. The issue is thus not one as to which prud-

ence suggests that this Court await the further rip-

ening of a developed jurisprudence at the court of

appeals level. We respectfully submit that this Court’s

consideration of this question now is timely and much

needed.'®

IV. Conclusion

The petition for certiorari should be granted. We

also respectfully suggest that the views of the SEC

be invited.

Respectfully submitted,

THADDEUS HOLT

910 16th Street, N.W.

Suite 400

Washington, D.C. 20006

202-223-9010

Attorney for Petitioner

August 18, 1993

13 While the implications of the second element of the opinion

below, dealing with Rule 14a-9, are not of the same magnitude

as those of the primary issue, it presents a question of great

practical significance in the administration of the stockholder

proposal rules which should also be settled by this Court.