Corporate Governance

Kistefos AS v. Trico Marine Services: A Lesson for the Securities and Exchange Commission

By J. Robert Brown

One of the most anti-shareholder actions taken by the Commission under the prior regime was to refer a shareholder proposal to the Delaware Supreme Court for an advisory opinion.  This occurred in connection with CA v. AFSCME.  The staff confronted a shareholder proposal that required mandatory reimbursement of proxy expenses for shareholders who nominated a short slate of directors and succeeded in electing at least one to the board. 

The Commission submitted the matter to the Delaware Supreme Court, with the Court taking the matter despite a likely violation of its own rules.  The Court issued a poorly reasoned, predictably anti-shareholder opinion.  (The Court ignored meritorious arguments that were raised and discussed at oral argument). 

In doing so, the case provided a legal basis for companies to argue that a wider set of shareholder proposals should be excluded under Rule 14a-8 of the proxy rules as a violation of state law.  It was, on the part of the Commission, a step entirely inconsistent with the Agency's shareholder protection mandate.  We on this Blog have called on the Commission to disavow the authority and commit to leaving it dormant. 

In addition to the philosophical problem of an ostensibly pro-shareholder agency submitting a matter to an anti-shareholder court, the more salient issue was that it was entirley unnecessary.  And that point brings us to Kistefos AS v. Trico Marine Services. 

Plaintiff submitted a shareholder proposal to management to be voted on at the upcoming shareholder meeting (the proposal was a tougher majority vote proposal than what the company had in place).  The board opted to exclude the proposal as inconsistent with the company's articles and under state law.  Plaintiff sought an expedited hearing in order to address the issue before the shareholder vote. 

What did Chancellor Chandler do?  He refused to rule on the merits, allowing the vote to take place.  If the proposal failed, it would moot the issue.  If it passed, the company could implement it.  In other words, the merits might become irrelevant.  As a result, he refused to give an advisory opinion and instructed the parties to return only if there was still a dispute following the vote.  As he wrote:

• The stockholders will vote on Proposal 8 at the annual meeting, and if the proposal receives the required number of votes, then the issue will be preserved and ripe for judicial review. Additionally, pending the stockholder vote on Proposal 8 at Trico's 2009 annual meeting, the issue of the legal validity of Proposal 8 is not ripe because the relevant events that must occur before the issue requires adjudication—namely, the approval of Proposal 8 by Trico's stockholders—may never occur. Absent some compelling reason to do otherwise, this Court should refrain from rendering an advisory opinion where adjudication of the issue is not needed for there to be an informed stockholder vote on the proposal.

This is exactly what the SEC should have done in CA v. AFSCME.  The Agency should have allowed the proposal to be included in the proxy statement and voted on by shareholders.  It might have failed or mangement might have agreed to implement it.  There was no need to submit the matter to the Delaware Supreme Court for an advisory opinion, particularly one likely to be anti-shareholder in its result. 

Should the Commission consider this approach again, it should take advise from Chancellor Chandler and eschew advisory opinions.

Full post as published by The Race to the Bottom on April 24, 2009 (boomark / email).