# Petition for Writ of Certiorari — Grimes v. Ohio Edison Co. > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_0669%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1993 - **Citation:** 510 U.S. 976 ## Text 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 SEROUS BRMMAEO ET? saccsasscessssncesscccsvccscssasescccsace 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 sain rclkasenssedeecancshaausssbsesdipichesconess I. II. III. PEE MRUIEE occ cccrcnsecsssssanscscnnsseconsnces ass cs cnawssahiocbincendnnsneeksons a cckn cc donynaceusdaebninniaadencds C. Regulations Involved ................cccccccccecceee RIS OE GENO GORD oo. ssccccncccescececececessncs A. Basis for Federal Jurisdiction in the Court Re MEI coca ncscncMBbcccccusacocoacocccoose 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 Le RE Page meow Ne KY KS eS 14 14 iv Page 2. It Is Timely and Appropriate for This Court To Address the Stockholder Pro- posal Rules and Corporate Governance PNDOUTD ccccesesecsess osecenscensosessesnsonsonssenssass 17 Ee x: RAINE rscaninceisednianhssnsnenstsassibuntindditinakanennes 18 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 II scichesisuvieiincteduigteiesunanetieceaanbensenmenibcnics 18a 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: PF WN TIN cine inadycadcarstccasiccscamea ect 2 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. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386004_0669%3A1. Public record. Not legal advice.